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

**Washington, D.C. 20549**

 

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**Form 10-QSB**

** **

**Amendment No. 1**

** **

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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 March 31,2005**

 

**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 whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  o  No  ý

 

Indicate by check mark whether the registrant is ashell company(as defined in Rule 12b-2 of theExchange Act).  Yes o  No ý

 

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

 

Transitional Small Business Disclosure Format (checkone): 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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**EXPLANATORY NOTE**

 

This Form 10-QSB/A is being filed to amend thePower3 Medical Products, Inc. (the “Company” or “Power3”) Quarterly Reporton Form 10-QSB for the quarter ended March 31, 2005.  The amendment arises out of management’sreview and redetermination of the proper 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.

 

After completing an interim revue in preparation forthe issuance of the Form 10-QSB for the six month period ending June 30,2005, the management and Board of Directors of Power3 concluded, on August 5th,2005, that the Company’s consolidated financial statements contained within theCompany’s quarterly reports filed on Form 10-QSB and 10-QSB/A for thequarterly periods ended June 30, 2004, September 30, 2004 and March 31,2005, should be restated, and that such previously filed financial statementsshould no longer be relied upon, as previously presented.

 

The restatement of the financial statements for thethree month period ending March 31, 2004, as described in the 8-K/A filedfor May 18, 2004, results in the presentation of Power3’s financialcondition as of March 31, 2004, rather than the presentation of AdvancedBioChem, as was required under the pervious accounting treatment.  This restatement results in differentbeginning balances in the balance sheet for March 31, 2004.  Other than the difference in the beginningbalance, the restatement results in a recognition ofthe previously existing Retained Earnings deficit which had been eliminatedunder 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.

 

The restatement requires recognition, in the restatedStatement of Operations, of the difference in the historical cost of the assetsacquired in the asset purchase transaction minus the liabilities assumed in thetransaction.  In addition, therestatement results in a reclassification of the values reported within theStockholder’s Deficit section of the Company’s balance sheet.  However, the restatement does not materiallychange the Net Loss reported for the Company for the three month period ending March 31,2005.

 

The management of Power3 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 purchase transaction which occurred on May 18,2004 and for the financial statements for the three month period ending March 31,2005.

 

Generally, no attempt hasbeen made in this Form 10-QSB/A to modify or update other disclosurespresented in the original report on Form 10-QSB except as required torestate the financial statements for the three month period ended March 31,2005.  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 withthe Securities and Exchange Commission on May 24, 2005.  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.** FinancialStatements

** **

**POWER3 MEDICAL PRODUCTS,INC. **

**(A Development Stage Enterprise)**

**CONDENSEDBALANCE SHEET AS OF MARCH 31, 2005**

**(unaudited)**

 
| ASSETS                                                                                                    |   |        |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------|--------|
| CURRENT ASSETS:                                                                                           |   |        |   |
| Cash and cash equivalents                                                                                 |   | 38,377      |   |
| Prepaid expenses and other current assets                                                                 |   | 6,701       |   |
| Total current assets                                                                                      |   | 45,078      |   |
|                                                                                                      |   |        |   |
| LAB EQUIPMENT (net of accumulated depreciation of $60,588)                                                |   | 85,025      |   |
| INTELLECTUAL  PROPERTY                                                                                    |   | 156,859     |   |
|                                                                                                      |   |        |   |
| OTHER ASSETS:                                                                                             |   |        |   |
| Debt issuance costs - net                                                                                 |   | 174,380     |   |
|                                                                                                      |   |        |   |
| Deposits                                                                                                  |   | 25,900      |   |
|                                                                                                      |   |        |   |
| TOTAL ASSETS                                                                                              |   | 487,242     |   |
|                                                                                                      |   |        |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                |   |        |   |
| CURRENT LIABILITIES:                                                                                      |   |        |   |
| Accounts payable                                                                                          |   | 827,868     |   |
| Other Liabilities                                                                                         |   | 169,213     |   |
| Notes payable                                                                                             |   | 125,000     |   |
| Convertible debentures (net of unamortized discounts  of $1,238,899)                                      |   | 161,112     |   |
| Total liabilities                                                                                         |   | 1,283,193   |   |
|                                                                                                      |   |        |   |
| STOCKHOLDERS’ DEFICIT:                                                                               |   |        |   |
|                                                                                                      |   |        |   |
| Common stock - $0.001 par value: 150,000,000 shares  authorized; 65,345,121 shares issued and outstanding |   | 65,345      |   |
| Capital Stock Additional paid-in capital                                                                  |   | 63,631,428  |   |
| Deferred Compensation                                                                                     |   | (14,692,150 | )      |
| Deficit accumulated before entering development  stage                                                    |   | (11,681,500 | )      |
| Deficit accumulated during the development stage                                                          |   | (38,119,074 | )      |
|                                                                                                      |   |        |   |
| Total Stockholder’s Deficit                                                                          |   | (795,951    | )      |
|                                                                                                      |   |        |   |
| TOTAL LIABILITIES & STOCKHOLDERS DEFICIT                                                         |   | 487,242     |   |

 

SEENOTES 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  March 31, 2005** | ** ** | **For the Three  Months Ended  March 31, 2004** | ** ** | **Development  Stage Results  May 18, 2004 to  March 31, 2005** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| REVENUES                                      |       | —                                               |       | 11,490                                               |       | 4,000                                                                     |       |
| Cost of Goods Sold                            |       | —                                               |       | (5,173                                               | )          |                                                                      |       |
| Gross Profit                                  |       | —                                               |       | 6,317                                                |       | 4,000                                                                     |       |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| OPERATING EXPENSES:                           |       |                                                 |       |                                                 |       |                                                                      |       |
| Consulting Fees                               |       | —                                               |       | 2,130,000                                            |       | 7,180,003                                                                 |       |
| Stock based compensation                      |       | 3,609,438                                            |       | 225,000                                              |       | 11,824,679                                                                |       |
| Other operating expenses                      |       | 786,980                                              |       | 131,557                                              |       | 2,202,689                                                                 |       |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| Total operating expenses                      |       | 4,396,418                                            |       | 2,486,557                                            |       | 21,207,371                                                                |       |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| LOSS FROM OPERATIONS                          |       | (4,396,418                                           | )          | (2,480,240                                           | )          | (21,203,371                                                               | )          |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| INTEREST AND FINANCING EXPENSE                |       | 123,685                                              |       | 1,514                                                |       | 162,952                                                                   |       |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| NET LOSS                                      |       | (4,520,103                                           | )          | (2,481,754                                           | )          | (21,366,323                                                               | )          |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| NET LOSS PER SHARE -  Basic and diluted       |       | (0.07                                                | )          | (0.36                                                | )          | (0.34                                                                     | )          |
|                                          |       |                                                 |       |                                                 |       |                                                                      |       |
| Weighted average number of shares Outstanding |       | 65,345,121                                           |       | 6,976,163                                            |       | 63,468,549                                                                |       |

 

SEENOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

5

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**POWER 3 MEDICAL PRODUCTS, INC**

**(A Development Stage Enterprise)**

**CONDENSED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 
| ** **                                                               | ** **        | **For the Three  Months Ended  March 31, 2005** | ** ** | **For the Three  Months Ended  March 31, 2004** | ** ** | **Cumulative During Development  Stage  May 18, 2004 to  March 31, 2005** | ** ** |
|--------------------------------------------------------------------------|-------------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Operating activities:                                                    |              |                                                 |       |                                                 |       |                                                                                |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Net Loss                                                                 |              | (4,520,103                                           | )          | (2,481,754                                           | )          | (21,366,323                                                                         | )          |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Stock based compensation - issued common stock                           |              | 3,609,438                                            |       | 2,130,000                                            |       | 19,100,454                                                                          |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Adjustments to reconcile net cash used in  operations:                   |              |                                                 |       |                                                 |       |                                                                                |       |
| Depreciation                                                             |              | 15,564                                               |       |                                                 |       | 243,025                                                                             |       |
| Expenses incurred in exchange for common stock                           |              |                                                 |       |                                                 |       |                                                                                |       |
| Increase in receivables                                                  |              |                                                 |       | 11,356                                               |       | (2,350                                                                              | )          |
| Increase in accounts payable                                             |              | 85,128                                               |       | (16,346                                              | )          | 594,366                                                                             |       |
| Increase in accrued liabilities                                          |              | 237,350                                              |       | 83,062                                               |       | (427,443                                                                            | )          |
| Other adjustments                                                        |              |                                                 |       | 2,038                                                |       | 46,977                                                                              |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Net cash used in operations                                              |              | (572,623                                             | )          | (271,644                                             | )          | (1,811,294                                                                          | )          |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Investing activities:                                                    |              |                                                 |       |                                                 |       |                                                                                |       |
| Purchase of equipment                                                    |              | 12,742                                               |       |                                                 |       | 11,486                                                                              |       |
| Advances to subsidiary                                                   |              |                                                 |       | (7,137                                               | )          |                                                                                |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Net cash used in investing activities                                    |              | 12,742                                               |       | (7,137                                               | )          | 11,486                                                                              |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Financing activities:                                                    |              |                                                 |       |                                                 |       |                                                                                |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Sale of common stock                                                     |              |                                                 |       |                                                 |       | 449,807                                                                             |       |
| Other                                                                    |              | 439,476                                              |       | 278,340                                              |       | 1,385,781                                                                           |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Net cash from financing activities                                       |              | 439,476                                              |       | 278,340                                              |       | 1,835,588                                                                           |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Net Increase(Decrease) during period                                     |              | (120,405                                             | )          | (441                                                 | )          | 35,780                                                                              |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Cash at beginning of period                                              |              | 158,782                                              |       | 547                                                  |       | 2,597                                                                               |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Cash at end of period                                                    |              | 38,377                                               |       | 105                                                  |       | 38,377                                                                              |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND  FINANCING ACTIVITIES: |              |                                                 |       |                                                 |       |                                                                                |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Interest Paid                                                            |              | 105,856                                              |       | 1,514                                                |       |                                                                                |       |
|                                                                     |              |                                                 |       |                                                 |       |                                                                                |       |
| Shares Issued (market price, date of effective  agreement):              |              |                                                 |       |                                                 |       |                                                                                |       |
| For consulting contracts                                                 | 15,831,466 shares |                                                 |       |                                                 |       |                                                                                | 10,218,102 |   |
| For acquisition                                                          | 15,000,000 shares |                                                 |       |                                                 |       |                                                                                | 13,500,000 |   |
| For compensation                                                         | 27,945,000 shares |                                                 |       |                                                 |       |                                                                                | 25,451,500 |   |
| For conversion of Preferred shares to common shares                      | 3,000,324 shares  |                                                 |       |                                                 |       |                                                                                | 3,380,975  |   |

 

SEE NOTES TO THECONDENSED FINANCIAL STATEMENTS..

 

6

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**POWER3 MEDICAL PRODUCTS, INC******

**(A Development Stage Enterprise)**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**(unaudited)**

 

1.ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OFPRESENTATION

 

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 as ProteEx, that provided contract-for-fee lab services. At theconclusion of negotiations with Advanced BioChem, Power3 entered into an AssetPurchase Agreement dated May 18, 2004, whereby it purchased substantiallyall the assets and intellectual properties of Advanced BioChem, and assumedcertain liabilities, as scheduled in the agreement, from Advanced BioChem. Asconsideration in the Asset Purchase Agreement, Power3 issued 15,000,000 sharesof 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 became adevelopment stage company.  Power3 beganto commercialize the intellectual property acquired in the transaction, withits focus being in the early detection, monitoring and targeting of diseasesthrough the analysis of proteins.  Power3’scurrent developmental stage business objective, and activity, is to develop itsintellectual properties by focusing on disease diagnosis, protein and biomarkeridentification and early detection indicators in the areas of cancers,neurodegenerative and neuromuscular diseases, as well as other scientific areasof interest associated with protein biomarkers.

 

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 as President and CEO and Dr. IraGoldknopf 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, howeverthe shares of Tenthgate were transferred to a trustee for distribution to theshareholders of Power3 on May 17, 2004, before the Advanced BioChemtransaction.  Previous management ofPower3 and Tenthgate have been independently operatingTenthgate since the Advanced BioChem transaction.  As a result, Power3 does not now control theoperations or activities of Tenthgate. As a result, Tenthgate’s activities are no longer controlled by, nor aretheir activities associated with Power3 in any manner whatsoever.  Power3 intends to divest itself of itssubsidiary due to the differences in business activity between Tenthgate andPower3 operating under its current business model.  Some of the principal reasons for thedivestiture of Tenthgate and its subsidiary are that the disposition ofTenthgate will allow the Company’s management to focus exclusively on itsbusiness objectives and permit management of Tenthgate more flexibility in itsoperations and the disposition will allow the market to separately identify andevaluate each business.  The Company iscontinuing its efforts to 

 

7

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completethe disposition of Tenthgate; however current management of Tenthgate hasadvised the Company that Tenthgate has issued a significant number of shares ofits common stock purportedly reducing the Company’s ownership interest to lessthan 1%.  The Company believes this stockissuance to be invalid, however the Company does nothave access to the records of Tenthgate and is considering its alternativeswith respect to these actions.  TheCompany still 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.

 

During2003, Power3 was an operating company marketing surgical products to the healthcare industry.  At the time of the assetpurchase transaction on May 18, 2004, with Advanced BioChem, Power3transitioned into the development stage with its principal business activitybeing the commercialization of its intellectual properties in the area ofdiagnosis and treatment of breast cancer, ALS, Alzheimer’s disease andParkinson’s disease. During this development stage, shares of common stockissued for other than cash have been assigned amounts equivalent to the fairvalue of the service or assets received in the exchange, as of the effectivedate of the agreement, per SEC requirement.

 

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.

 

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 the issuance of 15,000,000 shares of commonstock of Power3.  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’s filed for thenine months ended September 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 restatementis to replace the results of Advanced BioChem’s balance sheet, statement ofoperations and cash flows with Power3’s results for the three month periodended March 31, 2004.  Thisrestatement results in a restated beginning balance as the balance sheet is nowthat of Power3, for March 31, 2004. This difference in beginning balance flows through the Company’s laterfinancial statements, including its effects on the restated financialstatements in this amended 10-QSB for the three month period ending March 31,2005.

 

8

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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 to various shareholders.  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 andthe audited ending balances for December 31, 2004 represent the beginningbalances for the financial statements presented herein.

 

Asa result of the restated accounting treatment, the Statement of Operations, forPower3 during the three months ended March 31, 2005, is not materiallydifferent with that previously presented in the 10-QSB for the same three monthperiod.

 

Theeffect of the restatement on the previously presented Statements of Cash Flowis not materially different from that previously presented in the 10-QSB forthe same three month period.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

Theaccompanying financial statements include only the accounts of Power3. Asstated above, the operations of Tenthgate have been excluded for consolidationand the assets have been expensed as abandoned, discontinued operations.

 

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 

 

9

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debentures (see Note8) as well as estimating depreciation and amortization periods of tangible andintangible assets, and long-lived impairments, among others.  The markets for the Company’s products arecharacterized by intense competition, evolving standards and price competition,all of which could impact the future realizability of the Company’sassets.  Estimates and assumptions arereviewed periodically and the effects of revisions are reflected in thefinancial statements in the period they are determined to be necessary.

 

FinancialInstruments and Concentrations of Credit Risk 

 

Management believes thebook value of the Company’s cash and cash equivalents, accounts payable andaccrued liabilities approximates their fair values due to their short-termnature.  Management has used certainvaluation techniques to estimate the fair value of the convertible debentures,loans notes and stockholder receivables because of the lack of similar typearrangements in the marketplace and because of uncertainty surrounding the datethe receivables will be recovered.

 

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

 

Furniture,Fixtures and Lab Equipment

 

Furniture, fixtures andlab equipment are stated at cost.  Majoradditions are capitalized, while minor additions and maintenance and repairs,which do not extend the useful life of an asset, are expensed as incurred.Depreciation and amortization are provided using the straight-line method overthe assets’ estimated useful lives.  At March 31,2005, certain lab equipment having a net book value of approximately $39,500serves as security for certain liabilities.

 

Debt Acquisition Costs 

 

Debtacquisition costs are being amortized over the maximum term of the convertibledebentures of three years using the straight line method.

 

Unamortized Discount

 

Unamortizeddiscount resulting from the allocation of value to warrants and the beneficialconversion feature embedded in the convertible debentures (see Note 8) is beingamortized to interest expense over the contractual lives of the debenturesusing the interest method.

 

OtherIntangibles 

 

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

 

Long-LivedAssets 

 

Statementof Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” requires that long-lived assets, includingcertain identifiable intangibles, be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying value of the assets inquestion may not be recoverable. The Company evaluated its long-lived assets atDecember 31, 2004 and determined that certain impairment losses werenecessary. As a result, operations were charged for $60,589 during the period May 18,2004 (date of acquisition) to March 31, 2005.  Management believes that the remainingbalances of the Company’s long-lived assets are recoverable.

 

10

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

 

The Company has adoptedStatement of Financial Accounting Standards No. 148 “Accounting forStock-Based Compensation - Transition and Disclosure” (SFAS No. 148). Thisstatement amends FASB Statement No. 123, “Accounting for Stock BasedCompensation”. It provides alternative methods of transition for an entity thatvoluntarily changes to the fair value based method of accounting for employeestock based compensation. It also amends the disclosure provision of FASBstatement No. 123 to require prominent disclosure about the effects onreported net income of an entity’s accounting policy decisions with respect tostock-based employee compensation. The Company continues to apply the market valuemethod under Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” to account for its stock-based employeecompensation arrangements.

 

IncomeTaxes 

 

The Company computesincome taxes in accordance with Financial Accounting Standards Statement No. 109“Accounting for Income Taxes” (“SFAS 109”). The Company also prepares itsincome taxes in accordance with this standard. Under SFAS 109, deferred taxesare recognized for the tax consequences of temporary differences by applyingenacted statutory rates applicable to future years to differences between thefinancial statement carrying amounts and the tax basis of existing assets andliabilities. Also, the effect on deferred taxes of a change in tax rates isrecognized in income in the period that included the enactment date. There wereno significant temporary differences at March 31, 2005.

 

Researchand Development 

 

Researchand development costs are expensed as incurred.

 

CashEquivalents

 

For purposes of the statements of cash flows, theCompany considers all highly liquid debt instruments purchased with a maturityof three months or less to be cash equivalents.

 

11

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Investments

 

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

 

Basis ofPresentation 

 

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 March 31, 2005 are not necessarily indicative ofthe results to be expected for the full year ended December 31, 2005.

 

(2) Going Concern

 

The Company’s financialstatements are presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness. The Company is in the development stage and has primarily beeninvolved in research and development and capital raising activities; as suchthe Company has incurred significant losses from operations and has asignificant stockholders’ deficit at March 31, 2005.  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:

 

•                  The extent to which the Companyenters into licensing arrangements, collaborations or joint ventures;

•                  The progress and results of researchand product development;

•                  The costs and timing of obtaining newpatent rights;

•                  The extent to which the Companyrequires or licenses other technologies; and

•                  Regulatory changes and competitionand technological developments in the market.

 

A current possibilityavailable to management is to raise the remaining funds of $1,600,000potentially available to the Company pursuant to the Securities PurchaseAgreement dated October 28, 2004 (the “Agreement”). These funds will beimmediately reduced by the payment of certain delinquent payables ofapproximately $251,000 of certain bridge financing received in April 2005,the $396,500 of bridge loan financing and the two Officer Advances that are tobe repaid upon the receipt of the $1,600,000. The Company is in immediate needfor capital to continue its operations and as such its ability to continue as agoing concern is subject to its ability to generate a profit or obtainnecessary funding from outside sources.  Management believes that even though theCompany currently has limited cash resources and liquidity, assuming exerciseof the warrants and additional investment rights specified in the Agreement,that the net funds available from the final closing under such Agreement willallow the Company to continue operations through December 2005.  In the event the final closing and sale of$1,600,000 in aggregate principal amount of debentures occurs, but the warrantsand additional investment rights are not exercised, the Company anticipatesthat it will need to raise additional capital prior to December 2005 tomeet its operating costs. However, the Company is currently in default underthe conditions set forth in the Agreement as well as the debentures andregistration rights agreement and consequently, there is no assurance that theCompany will be successful in completing the sale and issuance of the remaining$1,600,000 aggregate principal amount of debentures and/or the additionalinvestments rights pursuant to 

 

12

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theAgreement.  If the Company isunsuccessful in the closing of the sale and issuance of the $1,600,000aggregate principal amount of debentures at the final closing, the Company willbe required to obtain alternative financing, sell or license some of itstechnology, and/or to curtail or cease its operations. Any such funding maysignificantly further dilute existing shareholders or may limit the Company’srights to its technology.  Moreover, theincrease in the number of shares available in the public marketplace may reducethe market price for the Company’s common stock, and consequently, the priceinvestors may receive at the time of sale. The financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from the possibleinability of the Company to continue as a going concern.

 

(3) Loss Per Share

 

The following commonequivalent shares have been excluded from the fully diluted loss per sharecalculations because the effects would be anti-dilutive;

 

•                  2,500,000 warrants, and additionalinvestment rights having a value of $2,500,000, which were issued to certainaccredited investors on October 28, 2004 under the Agreement. Inaddition, pursuant to the Agreement, the investors purchased certainconvertible debentures that if exercised, will result in the issuance of anindeterminate number of shares of common stock.

 

•                  333,333 warrantswhich were issued to certain accredited investors on January 26, 2005under the Agreement. In addition, pursuant to the Agreement, the investors purchasedcertain convertible debentures that if exercised, will result in the issuanceof an indeterminate number of shares of common stock

 

•                  580,000 shares of warrants which wereissued to members of the Company’s Scientific Advisory Board and various otherconsultants in 2004 (including 100,000 to the agent that placed the convertibledebentures discussed above).  Thewarrants, which expire three to five years from the dates of the respectivegrants and were issued at no cost to such personnel, may be converted to a likenumber of shares of the Company’s common stock at any time prior to theirexpiration(s).  As a result, during theperiod May 18, 2004 (date of acquisition) to December 31, 2004, theCompany recorded $626,100 of stock based compensation as a result of theissuance of these warrants, which amounts represent the fair value of thewarrants on the dates they were granted.

 

(4)  Income Taxes

 

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

 

At March 31, 2005the Company had net operating loss carryforwards for income tax purposes ofapproximately $9,551,000 arises primarily from stock based expenses that areconsidered to be permanent differences. These net operating loss carryforwards expire at various times throughthe period ended March 31, 2005 however because the Company hasexperienced changes in control and has incurred significant operating losses,utilization of the income tax loss carryforwards are not assured. As a result,the non-current deferred income tax asset arising from these net operating losscarryforwards is not recorded in the accompanying balance sheet because theCompany established a valuation allowance to fully reserve such assets as theirrealization did not meet the required asset recognition standard established bySFAS 109.

 

13

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(5) Related PartyTransactions

 

 During the three months ended March 31,2005 the chief financial officer advanced $35,000 to the Company.  The advance, which is due on demand andunsecured, bears interest at 6% per annum. At March 31, 2005, the balance of the advance is included inaccounts payable and included in Other Liabilities in the accompanyingcondensed balance sheet.

 

(6) Notes Payable

 

Certain notes payableexisting at March 31, 2005 bear interest at a fixed rate of 6% and werescheduled to mature on December 31, 2004. However, the Company has enteredinto agreements with the note holders to extend the maturity of the notesthrough June 30, 2005.  In addition,the Company has the option to convert 75% of the notes into its common stock ata mutually agreeable conversion ratio.

 

 (7) Other Commitments and Contingencies

 

Operating Lease

 

In August 2004, theCompany entered into a new lease which expires on August 31, 2009, has aninitial term of sixty-three months, and requires base monthly minimum leasepayments ranging from approximately $6,000 to $9,600 (plus utilities andoperating expenses) over the lease term. The lease contains a provision which allows the Company to extend thelease for two additional terms of sixty months.

 

EmploymentAgreements 

 

The Company is obligatedunder amended and restated employment agreements with its Chief ExecutiveOfficer, Chief Scientific Officer and Chief Financial Officer.  The significant terms of the agreements areas follows:

 

Chief Executive Officer –The amended and restated employment agreement is effective as of May 18,2004 and has an initial term of five years, subject to each party’s terminationrights.  The agreement provides for abase salary of $250,000 per year and the opportunity to receive cash bonusesbased on performance upon the discretion of the board of directors.  The agreement also includes participation inemployee benefit plans offered to employees, as well as a grant of 13,250,000 sharesof restricted common stock and 1,500,000 shares of restricted Series Bpreferred stock (the Series B preferred shares have not yet beenissued).  Either party may terminate theChief Executive Officer’s employment under the contract, either with or withoutcause upon giving the other party at least thirty days notice.  If the Company terminates the chief executiveofficer’s employment at any time during the initial term without cause, he willbe entitled to receive compensation provided under the agreement for theremaining initial term of employment.  Inaddition, in the event of a change in control as defined in the agreement, theCompany may waive, in whole or in part, any and all remaining restrictions onthe restricted shares of common stock and Series B preferred stock grantedto him.

 

Chief Scientific Officer– The amended and restated employment agreement is effective as of May 18,2004 and has an initial term of five years, subject to each party’s terminationrights.  The agreement provides for acurrent base salary of $125,000 through December 18, 2004 and $100,000thereafter and the opportunity to receive cash bonuses based on performanceupon the discretion of the board of directors. The agreement also includes participation in employee benefit plansoffered to employees, as well as a grant of 13,250,000 shares of restrictedcommon stock and 1,500,000 shares of restricted Series B preferred stock(the Series B preferred shares have not yet been issued).  Either party may terminate the chief scientificofficer’s employment under the contract, either with or without cause upongiving the other party at least thirty days notice.  If the Company terminates the ChiefScientific Officer’s employment at any time during the initial term withoutcause, he will be entitled to receive compensation provided under the agreementfor the remaining initial term of employment. In addition, in the event of a 

 

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changein control as defined in the agreement, the Company may waive, in whole or inpart, any and all remaining restrictions on the restricted shares of commonstock and Series B preferred stock granted to him.

 

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

 

On June 3,2005, Mr. Michael Rosinski, Chief Financial Officer of Power3, resignedand terminated his employment at the Company as of that date. In accordancewith his resignation, the employment agreement with Mr. Rosinski hasterminated on June 5, 2005, and the stock grant of 140,000 shares ofRestricted Stock to Mr. Rosinski is terminated.  The stock shares covered in this agreementhave been returned to the Company.

 

Other Common StockGrants

 

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

 

As mentioned above, theCompany has agreed to issue a total of 3,000,000 shares of Series BPreferred Stock to two of its officers. However, for various reasons, including certain restrictions required bythe indebtedness (which preclude the shares from being issued for at least 90days after the effective date of the registration statement that has been filedto cover the resale of the shares of common stock that will be issued upon theconversion or exercise of the securities issued by the Company for suchindebtedness), the shares have not yet been issued.  The Company intends to issue such shares ofthe Series B Preferred Stock at such time as it is permitted. The shareswill be convertible into a like number of common shares as vesting occurs overa period which is expected to be two years.

 

Future required paymentsfor base compensation under all of the employment agreements discussed aboveare approximately as follows:

 

| **Periods Ending  December 31,** | ** ** | **Amounts** | ** ** |
|---------------------------------------|------------|-------------|------------|
|                                  |       |        |       |
| 2005 (nine months)                    |       | $           | 352,500    |   |
| 2006                                  |       | 470,000     |       |
| 2007                                  |       | 410,000     |       |
| 2008                                  |       | 350,000     |       |
| 2009                                  |       | 175,000     |       |
|                                  |       |        |       |
| Total                                 |       | $           | 1,757,500  |   |

 

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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

 

Convertible Debentures 

 

The Company entered into a Securities Purchase Agreement, dated October 28,2004 (the “Agreement”) with certain accredited investors, and an Amendment tosuch Securities Purchase agreement on January 19, 2005 in which fourinvestors accelerated the purchase of debentures in exchange for additionalwarrants.  Pursuant to the Agreement, thepurchasers agreed to purchase from the Company convertible debentures due three(3) years from the date of issuance in the aggregate principal amount of$3,000,000. The Agreement also provides for the issuance to the purchasers, atno additional cost to the purchasers, warrants to purchase shares of theCompany’s common stock and additional investment rights to purchase additionalconvertible debentures.  In connectionwith the Agreement, the Company also entered into a registration rightsagreement with the purchasers, which requires that the Company file aregistration statement with the SEC registering on behalf of the purchasers theresale of the shares of common stock issuable upon conversion of the debenturesand the exercise of the warrants. The Company will also file an additionalregistration statement for the resale of the shares issuable upon conversion ofthe debentures issuable upon exercise of the additional investment rightspreviously issued by the Company.

 

Effective October 28, 2004, the Company issued and sold to thepurchasers the first $1,000,000 in aggregate principal amount of suchdebentures at the initial closing under the Agreement. Effective January 26,2005, the Company issued and sold to certain investors$400,000 aggregate principal amount of debentures.  Subject to the conditions set forth in theAgreement, as amended, the purchasers are required to purchase the remaining$1,600,000 in aggregate principal amount of such debentures at the finalclosing, which is to occur on or before the fifth trading day after theeffective date of the registration statement. The Company is currently indefault under the Agreement and the previously issued debentures and relatedregistration rights agreement, and therefore the conditions of the Agreementwill not be satisfied or otherwise met on a timely basis. Consequently, thereare no assurances that the investors will purchase all or any portion of theremaining $1,600,000 aggregate principal amount of debentures. The $1,000,000aggregate principal amount of debentures issued in the initial closing and the$400,000 aggregate principal amount of debentures issued on January 26,2005 are due and payable in accordance with their original terms in full threeyears after the date of issuance and will not bear interest. The debentureswhich may be issued at the final closing will be due and payable in full three (3) yearsafter the date of their issuance, and will not bear interest. The aggregatecash purchase price for the debentures will be $3,000,000, which is equal tothe full face amount of the debentures. At any time from the closing date untilthe maturity date of the debentures, the purchasers have the right to convertthe debentures, in whole or in part, into common stock of the Company at thethen effective conversion price. The conversion price for the previously issued$1,400,000 aggregate principal amount of debentures and the 1,600,000 aggregateprincipal amount of debentures issuable at the final closing is equal to thelesser of (1) $0.90, (2) the 75% average of the daily volume weightedaverage price of the common stock for the five (5) consecutive dayspreceding the effective date of the registration statement or (3) thedaily volume 

 

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weighted averageprice of the common stock on the effective date of the registration statement.The conversion price shall be subject to adjustment under circumstances setforth in the debentures.

 

Under the Agreement, thePurchasers also received at the first closing warrants to purchase an aggregateof up to 2,500,000 shares of common stock and additional investment rights topurchase up to an additional $2,500,000 principal amount of convertibledebentures.  Pursuant to the Amendment tothe agreement, concurrent with the Company’s issuance of the $400,000 aggregateprincipal amount of debentures on January 26, 2005, the Company issuedadditional warrants to purchase an aggregate of up to 333,333 shares of commonstock.  The warrants are exercisable at aprice of $1.44 per share (subject to adjustment), for a period of five (5) yearsfrom October 28, 2004.

 

The additional investment rights are exercisable at a price equal tothe principal amount of the debentures to be purchased, for (1) a periodof nine months following the effective date of the registration statement to befiled pursuant to the registration rights agreement, or (2) a period of 18months from the date of issuance of the additional investment rights, whicheveris shorter. The debentures to be purchased upon the exercise of the additionalinvestment rights will have the same terms as the debentures described above,except that the conversion price will be equal to $1.08 (subject toadjustment).

 

The debentures contain covenants that will limit the Company’s abilityto, among other things: incur or guarantee additional indebtedness; incur orcreate liens; amend the Company’s certificate of incorporation, bylaws or othercharter documents so as to adversely affect any rights of the holders of thedebentures; and repay or repurchase more than a de minimis number of shares ofcommon stock other than as permitted in the debentures and other documentsexecuted with the purchasers.

 

The debentures include customary default provisions and an event ofdefault includes, among other things, a change of control of the Company, thesale of all or substantially all of the Company’s assets, the failure to havethe registration statement declared effective on or before the 180th day afterthe initial closing date, and the lapse of the effectiveness of theregistration statement for more than 30 consecutive trading days during any12-month period (with certain exceptions), the Company’s failure to timelydeliver certificates to holders upon conversion and a default by the Company inany obligations under any indebtedness of at least $150,000 which results insuch indebtedness being accelerated. Upon the occurrence of an event ofdefault, each debenture may become immediately due and payable, eitherautomatically or by declaration of the holder of such debenture. The aggregateamount payable upon an acceleration by reason of an event of default shall beequal to the greater of 130% of the principal amount of the debentures to beprepaid or the principal amount of the debentures to be prepaid, divided by theconversion price on the date specified in the debenture, multiplied by theclosing price on the date set forth in the debenture.

 

As mentioned above, theCompany is in default under the provisions of the Agreement, registrationrights agreement and previously issued debentures.  The events of default now principally relatesto the Company’s inability to have its registration statement declaredeffective within the time period required by the agreements.  Although the Company intends to seek waiversor forbearance agreements from the holders of its debentures, there is noassurance that the Company will receive such concessions.  As such, the indebtedness has been classifiedas a current liability in the accompanying balance sheet.  If the Company is unable to obtain suchconcessions, the aggregate amount payable under the outstanding debentures dueto the acceleration thereof by reason of the default is equal to the “MandatoryPrepayment Amount” as specified in the debentures.  The Mandatory Prepayment Amount equals the sumof (i) the greater of:  (a) 130%of the principal amount of the debentures to be prepaid, or (b) theprincipal amount of the debentures to be prepaid, divided by the conversionprice on (x) the date the payment is demanded or otherwise due, or(y) the date the payment is paid in full, whichever is less, multiplied bythe closing price of the Company’s common stock on (x) the date thepayment is demanded or otherwise due, or (y) the date the payment is paidin full, whichever is greater, and (ii) all other amounts, costs, expensesand liquidated damages due in respect of the debentures.  In addition to the foregoing, pursuant to theterms of the registration rights agreement, the Company is required to pay eachholder of the debentures 

 

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liquidated damages since the registration statement wasnot declared effective on or before February 25, 2005.  The amount of liquidated damages shall equaltwo percent (2%) of the aggregate purchase price paid by the holders for thedebentures and shall be payable on each monthly anniversary of such date untilthe registration statement is declared effective.  

 

The Company has receivednotice from one of the purchasers of the debentures informing the Company thatit is in default under the debentures and demanding payment of the MandatoryPrepayment Amount, together with the liquidated damages, to which it isentitled pursuant to the agreement.

 

Upon filing its Form 10-KSBfor 2004, the Company intends to file an amendment to its previously filedregistration statement and will endeavor to have it declared effective as soonas practicable.  The Company is indiscussion with its debenture holders regarding a resolution of this matter.

 

Inconnection with such financing, the Company became obligated to issue to itsplacement agent a warrant to purchase 100,000 shares of common stock at anexercise price of $3.00. If any investor exercises their additional investmentrights and purchases additional debentures, the placement agent will beentitled to receive additional warrants to purchase up to a number of shares ofcommon stock equal to ten percent (10%) of the exercise price paid uponexercise of the additional investment rights divided by ninety percent (90%) ofthe market price as of the initial closing.

 

In accordance with the provisions of Emerging Issues Task Force Issue98-5 (“EITF 98-5”), discounts have been recorded for the entire face amount ofthe convertible debentures on the dates the debentures were sold (i.e. October 28,2004 and January 25, 2005) of the first closing to allocate value to theembedded beneficial conversion feature and the 2,500,000 warrants.

 

Similarly, a discount for the entire face amount of the convertibledebentures was recorded on the date of the first closing to allocate value tothe embedded beneficial conversion feature and the 2,500,000 warrants.

 

Since there is no assurance that the Company will receive the remainingfunds due at the time of the final closing and/or through the exercise ofadditional investment rights, no effect has been given to any value that mayresult from the issuance of securities in the accompanying financialstatements.

 

(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 as determinedby a committee on the date of grant, which will not exceed ten years from thedate of grant, or five years in cases of a grantee who owns more than 10% ofthe total combined voting power of all classes of stock (10% Stockholder). Theexercise period of any options or warrants granted will also be determined bythis committee at the date of grant. The exercise price shall be determined bythe committee at the time of grant except that in the case of incentive stockoptions, the exercise price shall not be less than 100% of the fair marketvalue of the shares on the date of 

 

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grant, and in cases of a 10% Stockholder,for which the exercise price shall not be less than 110% of fair market valueon the date of grant.

 

In addition to the above, in January 2004,the Company’s Board of Directors approved the 2004 Directors, Officers andConsultants Stock Option, Stock Warrant, and Stock Award Plan (the 2004Plan).  Pursuant to the 2004 Plan,initially 10,000,000 shares of common stock, warrants, options, preferred stockor any combination 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 be increased.  The number of shares of such increase shallbe an amount such that immediately following such increase, the total number ofshares issuable under this plan and reserved for issuance upon exercise ofoptions, warrants, or conversion of shares of preferred stock will equal 15% ofthe total number of issued and outstanding shares of the Company’s commonstock.

 

Pro forma information regarding net incomeand earnings per share is required by SFAS 123, and has been determined as ifthe Company had accounted for all of its options and warrants (the “Warrants”)  under the fairvalue method of that Statement. The fair value for the Warrants was estimatedat the date of grant using a Black-Scholes option pricing model with thefollowing assumptions for Warrants granted in 2000: risk-free interest rate of6.03%; dividend yield of 0%; volatility factor of the expected market price ofthe Company’s common stock of .34; and a weighted-average expected life of theoptions of 2.7 years. The following assumptions were used for Warrants grantedin 2004: risk-free interest rate of 5.0%; dividend yield of 0%; volatilityfactor of the expected market price of the Company’s common stock of 1.86 and aweighted-average expected life of the options of -0- years (as all were immediatelyvested). The Black-Scholes option valuation model was developed for use inestimating the fair value of traded Warrants that have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including the expected stock pricevolatility. Because the Company’s Warrants have characteristics significantlydifferent from those of traded Warrants, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its Warrants.

 

Allof the Company’s warrants were recorded at their fair values; accordingly stockbased compensation actually recorded and stock based compensation that would berecorded using a fair value based method are identical.

 

Asummary of the Company’s warrant activity and related information for theperiod January 1, 2004 to December 31, 2004 is as follows: 

 

| ** **                             | ** ** | ** **   | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                             | ** ** | ** **   | ** ** | **Average**  | ** ** |
| ** **                             | ** ** | ** **   | ** ** | **Exercise** | ** ** |
| ** **                             | ** ** | **Warrants** | ** ** | **Price**    | ** ** |
|                                   |       |         |       |         |       |
| Outstanding  at January 1, 2004   |       | 6,360        |       | $            | 12.50      |   |
|                                   |       |         |       |         |       |
| Cancelled                              |       | —       |       | $            | —     |   |
|                                   |       |         |       |         |       |
| Granted                                |       | 3,080,000    |       | $            | 1.44       |   |
|                                   |       |         |       |         |       |
| Exercised                              |       | —       |       | $            | —     |   |
|                                   |       |         |       |         |       |
| Outstanding  at December 31, 2004 |       | 3,086,360    |       | $            | 1.46       |   |
|                                   |       |         |       |         |       |
| Exercisable  at the end of the year    |       | 3,086,360    |       | $            | 1.46       |   |

 

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The following table summarizes information about the Company’s Warrantsoutstanding at December 31, 2004:

 

| ** **         | ** ** | ** **      | ** ** | ** **                | ** ** | **Weighted** | ** ** |
|--------------------|------------|-----------------|------------|---------------------------|------------|--------------|------------|
| ** **         | ** ** | ** **      | ** ** | **Weighted Average**      | ** ** | **Average**  | ** ** |
| ** **         | ** ** | **Number**      | ** ** | **Remaining Contractual** | ** ** | **Exercise** | ** ** |
| **Exercise Price** | ** ** | **Outstanding** | ** ** | **Life (in years)**       | ** ** | **Price**    | ** ** |
| $                  | .98        |            | 300,000    |                      | 2.4        |         | $          | .98 |   |
| $                  | 1.00       |            | 100,000    |                      | 2.4        |         | $          | 1.00 |   |
| $                  | 1.43       |            | 50,000     |                      | 2.8        |         | $          | 1.43 |   |
| $                  | 1.44       |            | 2,500,000  |                      | 4.8        |         | $          | 1.44 |   |
| $                  | 2.77       |            | 30,000     |                      | 2.6        |         | $          | 2.77 |   |
| $                  | 3.00       |            | 100,000    |                      | 4.8        |         | $          | 3.00 |   |
| $                  | 6.50       |            | 5,460      |                      | 6.0        |         | $          | 6.50 |   |
| $                  | 50.00      |            | 900        |                      | 3.0        |         | $          | 50.00 |   |
|               |       |            |       |                      |       |         |       |
|               |       | 3,086,360       |       |                      |       | $            | 1.46       |   |

 

(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, Consolidated FinancialStatements, to certain entities (called variable interest entities) in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. The disclosure requirements of this Interpretation are effective forall financial statements issued after January 31, 2003. The consolidationrequirements apply to all variable interest entities created after January 31,2003. In addition, public companies must apply the consolidation requirementsto variable interest entities that existed prior to February 1, 2003 andremain in existence as of the beginning of annual or interim periods beginningafter June 15, 2003. The adoption of FIN 46R had no impact on thefinancial statements of the Company as the Company has no variable interests invariable 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 withCharacteristics of Both Liabilities and Equity,” was issued to establish newstandards for how an entity classifies and measures certain financial instrumentswith characteristics of both liabilities and equity.  It requires that an entity classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  Many of theseinstruments were previously classified as equity.  This statement was effective when issued forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective for calendar year public companies for the third quarterof 2003.  The adoption of SFAS 150 had noimpact on the financial statements of the Company.

 

*SFAS 132 - Employers’ 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 thoseplans.  The Statement retains and revisesthe disclosure requirements contained in the original Statement 132.  It also requires additional disclosures aboutthe 

 

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assets,obligations, cash flows, and net periodic benefit cost of defined benefitpension 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 tochange significantly as a result of the exchange.  The provisions of this statement areeffective for non-monetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005.  Theadoption of this statement did not have a material impact on the Company’sfinancial statements.

 

*FIN- 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, a liabilityfor the fair value of the obligation undertaken in issuing the guarantee. Theinitial recognition and initial measurement provisions of this Interpretationare applied prospectively to guarantees issued or modified after December 31,2002. The adoption of these recognition provisions will result in recordingliabilities associated with certain guarantees provided by us. The disclosurerequirements of this Interpretation are effective for financial statements ofinterim or annual periods ending after December 15, 2002. FIN 45 has noimpact on the Company’s financial statements

 

(12) Subsequent Events

 

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**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 fileits 2004 10-KSB within the extended filing deadline ending April 15, 2005and has remained unable to make its filing of that report up to now.  Under the previous accounting treatment ofrecapitalization, as in a reverse acquisition, the Company was required todisplay the financial statements of Advanced BioChem for the interim period of January 1,2004 to 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 doesnot materially change the Power3 financial statements, other than to recognizethe acquisition costs incurred in the May 18, 2004 transaction.  The restatement requires arecognition, in the restated Statement of Operations for the period, ofthe difference in the historical cost of the assets acquired in the assetpurchase transaction minus the liabilities assumed in the transaction 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 Net (Loss)reported for the Company for the three month period ending March 31, 2005,nor is it expected to materially change the Total Assets or Total Liabilitiesreported for the Company, other than as to the beginning balance restatementreported 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.  The amount ofsuch liabilities is approximately $2,700,000. The terms of the Asset Purchase Agreement are not clear and are subjectto different interpretations.  TheCompany had confidential and non-binding discussions and negotiations withAdvanced BioChem in an effort to resolve this disagreement.  At this time, Advanced BioChem has ceaseddiscussions with the Company indicating that it will take action to enforce anyrights and remedies it may have with respect to the Power3 sale and theliabilities.  Notwithstanding this,because the 

 

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Company had offered to assume certain liabilities in the amount ofapproximately $425,000 in an effort to resolve this disagreement and inaccordance with Financial Accounting Standards Board Statement Number 5, “Accountingfor Contingencies”, the Company had increased the purchase price by $425,000(which amount represents the minimum amount of the range of additionalliabilities that may ultimately be assumed upon resolution 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 addressing the claims of the creditors of Advanced BioChemthat remain unpaid.  The Company remainscontingently liable for the remaining liabilities of approximately $2,700,000.  However, the purchase price and relatedfinancial statements have not been adjusted for these liabilities as the fairvalue of this contingency cannot be reasonably estimated at this time.

 

Results of Operation

 

Three Months Ended March 31, 2005 as Compared to Three MonthsEnded March 31, 2004

 

There were no revenues for the quarter ended March 31, 2005compared to $11,490 in revenues for the quarter ended March 31, 2004.  Due to the lack of revenue, there were noGross Profits for the quarter ended March 31, 2005 compared to $6,317 forthe quarter ended March 31, 2004.

 

Operating expenses were $4,396,418 for the quarter ended March 31,2005, primarily due to stock-based compensation expense of $3,609,438.  The stock based compensation results from thequarterly amortization of the non-cash stock compensation valued at marketprice on the effective date of the agreement. In addition, all other operating expenses for the quarter ended March 31,2005 were $786,980 as compared to $131,557 for the quarter ended March 31,2004, representing an increase of $655,423, primarily resulting from increasedpayroll and increased research and development costs, compared to the reducedoperations ongoing at the Company during the 1st quarter of 2004,prior to the May 18, 2004 acquisiton of a set of assets from AdvancedBioChem.

 

Interest expense in the quarter ended March 31, 2005 was $123,685as compared to $1,514 for the same period in 2004.  The increase in interest expense is primarilyattributable to the non-cash interest expense recorded to amortize the debtissue expense and the debt discount associated with the issuance of theconvertible debentures.

 

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 developmentalstage.  This financing is discussedspecifically in “Notes Payable” and “Convertible Debentures” section ofthis report.

 

Net cash used in operating activities approximated ($572,623) for thequarter ended March 31, 2005.  Asignificant portion of this is represented in the negative Net Income reportedfor the period.

 

Net cash provided by investing activities was ($12,742), primarilyconsisting of payments, to vendors, on equipment obtained in the AdvancedBioChem transaction.

 

Net cash provided by financing activities amounted to $439,476, mainlyconsisting of the sale of convertible debenture.  During the period, the Company experienced anet cash decrease for the period of ($120,405.)

 

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Recent Financing

 

The Company entered into a securities purchase agreement, dated as of October 28,2004, with certain investors.  Pursuantto the securities purchase agreement, the investors agreed to purchase from theCompany convertible debentures due three (3) years from the date ofissuance in the aggregate principal amount of $3,000,000.  Effective January 19, 2005, the Companyentered into an amendment to the securities purchase agreement with each of theinvestors.  The securities purchaseagreement, as amended, also provides for the issuance to the investors ofwarrants to purchase shares of the Company’s common stock and additionalinvestment rights to purchase additional convertible debentures. In connectionwith the securities purchase agreement, the Company entered into a registrationrights agreement which requires the Company to file a registration statementregistering on behalf of the investors the resale of the shares of common stockissuable upon conversion of the debentures and the exercise of thewarrants.  The Company will also file aregistration statement registering on behalf of the investors the resale ofshares of common stock issuable upon conversion of the debentures issued uponexercise of the additional investment rights previously issued by the Company.

 

Effective October 28, 2004, the Company issued and sold to theinvestors the first $1,000,000 in aggregate principal amount of such debenturesat the initial closing under the securities purchase agreement.  Pursuant to the securities purchaseagreement, as amended, effective January 26, 2005 the Company issued andsold to certain investors $400,000 aggregate principalamount of convertible debentures. Subject to the Company’s satisfaction of the conditions set forth in thesecurities purchase agreement, as amended, the investors are required topurchase the remaining $1,600,000 in aggregate principal amount of suchdebentures at the final closing, which is to occur on or before the fifthtrading day after the effective date of the registration statement. The Companyis currently in default under the Securities Purchase Agreement, the previouslyissued debentures and related registration rights agreement and therefore theconditions of the Securities Purchase Agreement will not be satisfied orotherwise met on a timely basis. Consequently, there are no assurances that the investors will purchaseall or any portion of the remaining $1,600,000 aggregate principal amount of debentures.The securities purchase agreement provides that the $1,000,000 aggregateprincipal amount of debentures issued on October 28, 2004 and the $400,000aggregate principal amount of debentures issued January 26, 2005 are dueand payable in accordance with their original terms in full three (3) yearsafter issuance and do not bear interest. The $1,600,000 aggregate principalamount of debentures, or portion thereof, which may be issued at the finalclosing will be due and payable in full three (3) years after the date oftheir issuance, and will not bear interest. The aggregate cash purchase pricefor the debentures will be $3,000,000, which is equal to the full face amountof the debentures. At any time from the closing date until the maturity date ofthe debentures, the purchasers have the right to convert the debentures, inwhole or in part, into common stock at the then effective conversion price. Theconversion price for the previously issued $1,400,000 aggregate principalamount of debentures is $0.90 but is subject to adjustment if either (1) 75%of the average of the daily volume weighted average price of the Company’scommon stock for the five (5) consecutive trading days preceding the datethat the registration statement is declared effective by the SEC or (2) thedaily volume weighted average price of the common stock on such date is lessthan $0.90 per share. In such event, the conversion price will be adjusted downto equal the lower of (1) the 75% average of the daily volume weightedaverage price of the common stock for the five (5) consecutive dayspreceding the effective date of the registration statement or (2) thedaily volume weighted average price of the common stock on the effective dateof the registration statement. The $1,600,000 aggregate principal amount ofdebentures issuable at the final closing will have a conversion price equal tothe lesser of (1) $0.90, (2) the 75% average of the daily volumeweighted average price of the common stock for the five (5) consecutivedays preceding the effective date of the registration statement of which thisprospectus forms a part, or (3) the daily volume weighted average price ofthe common stock on the effective date of the registration statement. It isanticipated that the conversion price of the previously issued $1,400,000 aggregateprincipal amount of debentures, as well as the conversion price of any 

 

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remainingdebentures issued by the Company, will be adjusted and reduced below thecurrent adjustment price of $0.90.

 

The debentures contain covenants that will limit the Company’s abilityto, among other things: incur or guarantee additional indebtedness; incur orcreate liens; amend the Company’s certificate of incorporation, bylaws or othercharter documents so as to adversely affect any rights of the holders of thedebentures; and repay or repurchase more than a de minimus number of shares ofcommon stock other than as permitted in the debentures and other documentsexecuted with the purchasers.

 

The debentures include customary default provisions and an event ofdefault includes, among other things, a change of control of the Company, thesale of all or substantially all of the Company’s assets, the failure to havethe registration statement declared effective on or before the 180th day afterthe initial closing date, and the lapse of the effectiveness of theregistration statement for more than 30 consecutive trading days during any12-month period (with certain exceptions), the Company’s failure to timelydeliver certificates to holders upon conversion and a default by the Company inany obligations under any indebtedness of at least $150,000 which results insuch indebtedness being accelerated. Upon the occurrence of an event ofdefault, each debenture may become immediately due and payable, eitherautomatically or by declaration of the holder of such debenture. The aggregateamount payable upon an acceleration by reason of an event of default shall beequal to the greater of 130% of the principal amount of the debentures to beprepaid or the principal amount of the debentures to be prepaid, divided by theconversion price on the date specified in the debenture, multiplied by theclosing price on the date set forth in the debenture.

 

The Company is in default under the provisions of the SecuritiesPurchase Agreement, registration rights agreement and previously issueddebentures.  The events of defaultprincipally relate to the Company’s inability to timely file its Annual Reporton Form 10-KSB and the Company’s resulting inability to have theregistration statement declared effective. Although the Company intends to seek waivers or forbearance agreementsfrom the holders of its debentures, there is no assurance that the Company willreceive such concessions.  If the Companyis unable to obtain such concessions, the aggregate amount payable under theoutstanding debentures due to the acceleration thereof by reason of the defaultis equal to the “Mandatory Prepayment Amount” as specified in the debentures.

 

The Mandatory Prepayment Amount equals the sum of (i) the greaterof:  (a) 130% of the principalamount of the debentures to be prepaid, or (b) the principal amount of thedebentures to be prepaid, divided by the conversion price on (x) the datethe payment is demanded or otherwise due, or (y) the date the payment ispaid in full, whichever is less, multiplied by the closing price of the Company’scommon stock on (x) the date the payment is demanded or otherwise due, or(y) the date the payment is paid in full, whichever is greater, and (ii) allother amounts, costs, expenses and liquidated damages due in respect of thedebentures.  In addition to theforegoing, pursuant to the terms of the registration rights agreement, theCompany is required to pay each holder of the debentures liquidated damagessince the registration statement was not declared effective on or before February 25,2005.  The amount of liquidated damagesshall equal two percent (2%) of the aggregate purchase price paid by theholders for the debentures and shall be payable on each monthly anniversary ofsuch date until the registration statement is declared effective.

 

Concurrent with the issuance of the initial $1,000,000 aggregateprincipal amount of debentures dated October 28, 2004, the purchasers alsoreceived warrants to purchase an aggregate of up to 2,500,000 shares of commonstock and additional investment rights to purchase up to an additional$2,500,000 principal amount of convertible debentures.  Pursuant to the terms of the amendment to thesecurities purchase agreement, concurrent with the issuance of the $400,000aggregate principal amount of convertible debentures, the Company issuedadditional warrants to purchase an aggregate of up to 333,333 shares of itscommon stock.  The warrants are exercisableat a price of $1.44 per share (subject to adjustment), for a period of five (5) yearsfrom October 28, 2004. The additional investment rights are 

 

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exercisable at a price equal to the principal amount of the debenturesto be purchased, for (1) a period of nine months following the effectivedate of the registration statement, or (2) April 28, 2006.

 

The debentures to be purchased upon the exercise of the additionalinvestment rights will have the same terms as the debentures described above,except that the conversion price will be equal to $1.08 (subject toadjustment).

 

Each selling shareholder has contractually agreed to restrict itsability to convert the debentures, exercise the warrants and additionalinvestment rights and receive shares of the Company’s common stock such thatthe number of shares of common stock held by them and their affiliates aftersuch conversion or exercise does not exceed 4.99% of the number of shares ofthe Company’s common stock outstanding immediately after giving effect to suchconversion or exercise.

 

In accordance with generally accepted accounting principles, thedifference between the total cost of the debentures on October 28, 2004(the date of the securities purchase agreement) and the total fair value of thecommon shares that will be received by the debenture holders at the time ofconversion (which amount cannot be determined until the conversion price isestablished) will be reflected as a debt discount and amortized to stock basedinterest expense over the lesser of three years or the period of time thedebentures are outstanding.  With respectto the warrants, the difference between the fair value of the shares of theCompany’s common stock on the date the respective warrants are issued and theamount determined by multiplying the exercise price of the warrants by thenumber of shares issuable under the warrants will also be reflected as a debtdiscount and amortized to interest expense over the lesser of five years or theperiod of time the warrants are outstanding. Similar treatment will be accorded to benefits accruing to the debentureholders as a result of any purchase of the additional investment rightsdiscussed above.

 

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 agreements andsimilar business arrangements in order to establish a revenue base utilizingits 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 |   |

 

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

 

As noted in “Recent Financing” above, the Company entered into asecurities purchase agreement and an amendment to the securities purchaseagreement pursuant to which certain investors agreed to purchase, subject tothe satisfaction of certain conditions, convertible debentures in the aggregateprincipal amount of $3,000,000.

 

The securities purchase agreement, as amended, also provides for theissuance of warrants to purchase shares of the Company’s common stock andadditional investment rights to purchase additional convertible debentures. Onthe initial closing under the securities purchase agreement, which waseffective as of October 28, 2004, the investors purchased the first$1,000,000 in aggregate principal amount of the convertible debentures of whichthe Company received approximately $860,000 after payment of fees andexpenses.  Pursuant to the securitiespurchase agreement, as amended, certain investors have purchased an additional$400,000 aggregate principal amount of convertible debentures on January 26,2005.  Subject to the Company’ssatisfaction of the conditions set forth in the securities purchase agreement(which includes the effectiveness of the registration statement), the investorsare required to purchase the remaining $1,600,000 in aggregate principal amountof such convertible debentures on or before the fifth trading day after theeffective date of the registration statement. The Company is currently indefault under the Securities Purchase Agreement, the previously issueddebentures and related registration rights agreement and therefore theconditions of the Securities Purchase Agreement will not be satisfied orotherwise met on a timely basis. Consequently, there are no assurances that the investors will purchaseall or any portion of the remaining $1,600,000 aggregate principal amount ofdebentures.

 

Assuming thecompletion of the remaining closing and sale and issuance of the remaining$1,600,000 in aggregate principal amount of the convertible debentures, theCompany estimates that, after repayment of the bridge note of $251,000immediately following the sale and issuance of such debentures, the Companywill have adequate cash to allow it to meet its current funding requirements throughthe third quarter of 2005.  In the eventthe sale and issuance of such debentures occurs and the investors exercisetheir warrants and additional investment rights, the Company anticipates itwill have adequate cash to meet its current funding requirements through thefirst quarter of 2007. The foregoing is based upon current estimated cashrequirements and may be affected by the Company’s current dispute with AdvancedBioChem regarding the liabilities assumed under the May 2004 transaction.

 

In addition to the convertible debentures, the Company also issuedwarrants to purchase up to 2,500,000 shares of common stock, with an exerciseprice equal to $1.44.  The Company issuedadditional warrants to purchase up to 333,333 shares of common stock concurrentwith its issuance of the $400,000 aggregate principal amount ofdebentures.  Full exercise of thewarrants would generate funds in excess of $4,000,000.  The Company also issued additional investmentrights, which give the investors the right to purchase up to an aggregate of$2,500,000 of convertible debentures with a conversion price of $1.08. However,the exercise of these warrants and additional investment rights is at thediscretion of the purchasers and there are no assurances that the purchaserswill exercise their rights under such securities.

 

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The Companywill continue to require additional debt or equity financing for itsoperations, which may not be readily available. The Company’s ability to continue as a going concern is subject to itsability to generate a profit or obtain necessary funding from outside sources.If the Company is successful in completing the sale and issuance of theremaining $1,600,000 aggregate principal amount of debentures, of which noassurances can be given due to the Company’s default under the SecuritiesPurchase Agreement and related documents, management believes that the netfunds available, after repayment of the bridge note of $251,000 immediatelyfollowing the sale and issuance of such debentures, will provide adequate cashto allow the Company to meet its funding requirements through the third quarterof 2005.  In the event the final closingand sale of $1,600,000 in aggregate principal amount of debentures occurs butthe warrants and additional investment rights are not exercised, the Companyanticipates that it will need to raise additional capital prior to October 2005to meet its operating costs. The foregoing projections are based upon currentestimated cash requirements and may be affected by the Company’s currentdispute with Advanced BioChem.  Inaddition to the uncertainties resulting from the Company’s dispute withAdvanced BioChem, the Company’s actual results may differ materially from theseestimates, and no assurance can be given that additional funding will not berequired sooner than anticipated or that such additional funding will beavailable when needed or on terms acceptable to the Company.  Insufficient funding will require the Companyto curtail or terminate operations.

 

Off-Balance Sheet Arrangements

 

At March 31, 2005, with the exception of the lease for itsoperating facility, and employment agreements entered with its three principalofficers, the Company did not have any significant off balance sheetcommitments.

 

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 ofshare-based payments 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 

 

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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. Controlsand 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.

 

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 September 30, 2004. The Companyhas undertaken steps and implemented actions as disclosed in its previous Form 10-QSBin an effort to resolve these deficiencies.  While the actions identified in thepreviously filed Form 10-QSB and the actions identified below haveaddressed many of these deficiencies, the Company continued to havedeficiencies with respect to its disclosure controls and procedures at March 31,2005 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 and discussed in “Item 3.  Defaults Upon Senior Securities” above, theCompany’s inability to timely file its 2004 Form 10-KSB was caused by itsinability to include the audit report of Advanced BioChem’s previous auditor inthe Company’s 2004 Form 10-KSB.  TheCompany has also encountered deficiencies arising from a lack of supportingdocumentation and records relating to periods prior to the Advanced BioChemtransaction and a lack of communication between the Company, its auditors and theprevious auditors of Advanced BioChem. The lack of this supporting documentation and failure either to obtainthe prior auditor’s consent or make alternative arrangements for the 2003Advanced BioChem audit report have resulted in the Company’s inability to fileits Annual Report on Form 10-KSB. Although the Company has hiredaccounting personnel as reported in its previous Form 10-QSB, the Company’slimited financing and available capital have restricted the Company’s abilityto fully implement its procedures for the improvement of its internal controlover financial reporting and to engage outside professionals and advisors tothe extent the Company has desired to support the Company’s accountingpersonnel in the preparation and/or audit of financial statements and reportsto be filed with the SEC.

 

•                  The Company continues to faceunexpected issues relating to the integration of the Advanced BioChemtransaction such as the dispute described in this quarterly report and suchissues have caused the Company’s accounting personnel to devote significant andunanticipated time and attention to these matters.

 

The Company continues to believe that the deficiencies are attributableto many factors including issues relating to the quality of the Company’sdisclosure controls and procedures at the time of the Advanced BioChemtransaction and the transition following the transaction.  Management is committed to a sound disclosurecontrol and internal control environment and is continuing its efforts toimprove the 

 

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Company’s infrastructure, personnel,processes and controls to help ensure that the Company is able to produceaccurate financial statements on a timely basis.

 

*Changesin Internal Control Over Financial Reporting*

* *

During the firstquarter of 2005, the Company continued the implementation of more rigorouspolicies with respect to its disclosure and financial reporting review processincluding improvements of its infrastructure and processes to improve itsinternal control over financial reporting. The Company also is continuing its implementation of procedures toimprove its review and processing of non-accounting documentation andcontracts.  Other than the changesdescribed above, there were no changes in the Company’s internal control overfinancial reporting that occurred during the three months ended March  31,2005 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

 

# **PART II.** OTHER INFORMATION

# ** **

Item 1. LegalProceedings

 

In November 2004, Chapman Spira & Carson, LLC (“ChapmanSpira”), an investment banking firm, filed a lawsuit in the Supreme Court ofthe State of New York for the County of New York against Advanced BioChem (thePredecessor), Power3 and Steven Rash. The suit alleges that Advanced BioChem and Power3 are liable to ChapmanSpira for damages allegedly resulting from the breachof a letter agreement between Chapman Spira and Advanced BioChem relating to theperformance of strategic and investment banking services.  The suit further alleges that Mr. Rashmade false statements regarding the performance of services by ChapmanSpira.  Chapman Spira is seeking damagesin the amount of $1,522,000 plus interest. The Company has filed an answer in the lawsuit.  The Company believes that Chapman Spira’sclaims are without merit; however, the Company does not know if it willultimately prevail or if the outcome of the action will adversely affect theCompany’s business, financial position or results of operations.  Inquiries to resolve this matter have beenundertaken by the attorneys representing each party in this matter, but noresolution has been achieved thus far.

 

An equipment vendor filed a complaint against the Advanced BioChem in April of2002 in a California court alleging breach of contract and seeking damages.Advanced BioChem reached a settlement agreement in April of 2003 underwhich Advanced 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. UnregisteredSale of Equity Securities and use of Proceeds

 

(a)                Not applicable.

 

(b)               Under the terms ofthe $400,000 aggregate principal amount of convertible debentures issued by theCompany as of January 26, 2005, as well as the terms of the $1,000,000aggregate principal amount of convertible debentures issued by the Company asof October 28, 2004, the Company is prohibited from taking certain actionswithout the approval of the holders of a two-thirds majority of thethen-outstanding principal amount of the debentures.  Specifically, the Company has agreed not to,and not to permit its subsidiary to, so long as any portion of the debenturesare outstanding, (1) amend it certificate of incorporation, bylaws orother charter documents so as to adversely affect any rights of the holders ofthe debentures, or (2) repurchase more than a de minimus number of sharesof its 

 

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commonstock or other equity securities other than as to the shares of common stockissuable upon conversion of the debentures described above.

 

(c)                Not applicable.

 

(d)               Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

The Company is in default under the provisions of the SecuritiesPurchase Agreement, registration rights agreement and previously issueddebentures.  The events of defaultprincipally relate to the Company’s inability to timely file its Annual Reporton Form 10-KSB and the Company’s resulting inability to have theregistration statement declared effective within the time period required bythe agreements.  As previously disclosedby the Company, the Company has been unable to file its 2004 Annual Report on Form 10-KSBdue to its inability to include the audited financial statements of thePredecessor for fiscal year 2003.  Fitts,Roberts & Co., P.C. (“Fitts, Roberts”) audited the financialstatements of Advanced BioChem for the year ended December 31, 2003 andhas previously issued its audit opinion in Advanced BioChem’s Annual Report on Form 10-KSBfor 2003.  Fitts, Roberts previously gavethe Company its consent to the inclusion of Fitts, Roberts’ audit report in theCompany’s previous filings.  Fitts,Roberts has refused to give its consent to the inclusion, in the Company’sAnnual Report on Form 10-KSB for 2004, of Fitts, Roberts’ audit report onthe financial statements of Advanced BioChem for fiscal year 2003.  The Company has requested guidance from theSEC concerning the accounting treatment of its transaction with AdvancedBioChem, which may resolve this issue. Management of Power3 has now decided against obtaining an additionalaudit of Advanced BioChem as it has now properly recharacterized the purchasetransaction with Advanced BioChem as purchase accounting and the financialstatements of Advanced BioChem are no longer required as a predecessor.  Power3 is taking steps immediately to fileits Form 10-KSB for the year ended December 31, 2004contemporaneously with this report.

 

Although the Company intends to seek waivers or forbearance agreementsfrom the holders of its debentures, there is no assurance that the Company willreceive such concessions.  If the Companyis unable to obtain such concessions, the aggregate amount payable under theoutstanding debentures due to the acceleration thereof by reason of the defaultis equal to the “Mandatory Prepayment Amount” as specified in thedebentures.  The Mandatory PrepaymentAmount equals the sum of (i) the greater of:  (a) 130% of the principal amount of thedebentures to be prepaid, or (b) the principal amount of the debentures tobe prepaid, divided by the conversion price on (x) the date the payment isdemanded or otherwise due, or (y) the date the payment is paid in full,whichever is less, multiplied by the closing price of the Company’s commonstock on (x) the date the payment is demanded or otherwise due, or(y) the date the payment is paid in full, whichever is greater, and (ii) allother amounts, costs, expenses and liquidated damages due in respect of thedebentures.  In addition to theforegoing, pursuant to the terms of the registration rights agreement, theCompany is required to pay each holder of the debentures liquidated damagessince the registration statement was not declared effective on or before February 25,2005.  The amount of liquidated damagesshall equal two percent (2%) of the aggregate purchase price paid by theholders for the debentures and shall be payable on each monthly anniversary ofsuch date until the registration statement is declared effective.  The Company has received notice from one ofthe purchasers of the debentures informing the Company that it is in defaultunder the debentures and demanding payment of the Mandatory Prepayment Amount,together with the liquidated damages, to which it is entitled pursuant to theagreement.

 

Filing of the Company’s Form 10-KSB will be made as soon as theissues concerning the inclusion of the 2003 financial statements of AdvancedBioChem have been resolved.  Promptlythereafter, the Company intends to file an amendment to its previously filedregistration statement and will endeavor to have it declared effective as soonas practicable.  The Company is indiscussion with its debenture holders regarding a resolution of this matter.

 

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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 March 31, 2004.

 

Item 5. OtherInformation

 

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 with this report. 

**Furnished with thisreport.

 

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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