-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DApwBsxTuy2JBd86wnZVUOYRFntZaWyn10kgPUASU3MIBn6WXQqQzneaHk3HPA5m G1SLyXVpYDNjpYNESzKh2w== 0000950129-04-009050.txt : 20041115 0000950129-04-009050.hdr.sgml : 20041115 20041115172424 ACCESSION NUMBER: 0000950129-04-009050 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POWER 3 MEDICAL PRODUCTS INC CENTRAL INDEX KEY: 0001063530 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 650565144 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24921 FILM NUMBER: 041146958 BUSINESS ADDRESS: STREET 1: 8374 MARKET STREET STREET 2: SUITE 439 CITY: BRADENTON STATE: FL ZIP: 34202 BUSINESS PHONE: 9413603039 MAIL ADDRESS: STREET 1: 8374 MARKET STREET STREET 2: SUITE 439 CITY: BRADENTON STATE: FL ZIP: 34202 FORMER COMPANY: FORMER CONFORMED NAME: SURGICAL SAFETY PRODUCTS INC DATE OF NAME CHANGE: 19980924 10QSB 1 h20162e10qsb.txt POWER 3 MEDICAL PRODUCTS, INC. - DATED 9/30/2004 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-QSB ------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ Commission file no. 0-24921 POWER 3 MEDICAL PRODUCTS, INC. (Exact name of small business issuer as specified in its charter) NEW YORK 65-0565144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3400 RESEARCH FOREST DRIVE, SUITE B2-3 WOODLANDS, TEXAS 77381 (Address of principal executive offices) (281) 466-1600 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 15, 2004, there were 62,252,930 shares of voting common stock of the registrant issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] ================================================================================ INDEX PART I. FINANCIAL INFORMATION.................................................. 1 Item 1. Financial Statements................................................. 1 Condensed Consolidated Balance Sheet (unaudited).......................... 1 Condensed Consolidated Statements of Operations (unaudited)............... 2 Condensed Consolidated Statements of Cash Flows (unaudited)............... 3 Notes to Condensed Consolidated Financial Statements (unaudited).......... 4 Item 2. Management's Discussion and Analysis or Plan of Operation............ 9 Item 3. Controls and Procedures.............................................. 17 PART II. OTHER INFORMATION...................................................... 19 Item 1. Legal Proceedings................................................... 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......... 19 Item 3. Defaults Upon Senior Securities..................................... 19 Item 4. Submission of Matters to a Vote of Security Holders................. 19 Item 5. Other Information................................................... 19 Item 6. Exhibits............................................................ 19 SIGNATURES...................................................................... 21 EXHIBIT INDEX................................................................... 22
i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS POWER 3 MEDICAL PRODUCTS, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2004 ------------------ (unaudited) ASSETS Current Assets: Cash ................................................................................ $ 13,042 Accounts receivable (net of allowance for doubtful accounts of $0.00) ............... 13,600 Other current assets ................................................................ 9,811 ------------ Total Current Assets ............................................................. $ 36,453 Furniture and equipment - net ........................................................... 100,409 Intangible assets - net ................................................................. 111,393 ------------ TOTAL ASSETS ..................................................................... $ 248,255 ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable and accrued liabilities ............................................ $ 363,798 Notes payable ....................................................................... 20,000 ------------ Total Current Liabilities ........................................................ 383,798 Stockholders' Equity (Deficit): Series A convertible preferred stock, $0.001 par value; 4,000,000 shares authorized, 3,870,000 shares outstanding; liquidation preference of $387,000............... 3,870 Common stock, $0.001 par value; 150,000,000 shares authorized, 62,412,930 shares issued and outstanding.......................................................... 62,413 Common stock subscribed (242,157 shares)............................................ 722,735 Common stock issuable ..................... ........................................ 70,000 Additional paid-in capital ......................................................... 32,596,777 Deferred compensation .............................................................. (23,012,907) Deficit accumulated during the development stage ................................... (10,578,431) ------------ Total Stockholders' Equity (Deficit) ............................................. (135,543) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ............................. $ 248,255 ============
See the accompanying notes to the condensed consolidated financial statements. POWER 3 MEDICAL PRODUCTS, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
POWER 3 MEDICAL PRODUCTS, INC. PREDECESSOR BUSINESS ------------------------------ ----------------------------------------------------------- FOR THE PERIOD FOR THE THREE MAY 18, 2004 FOR THE FOR THE NINE FOR THE FOR THE THREE MONTHS (DATE OF PERIOD MONTHS PERIOD MONTHS ENDED ACQUISITION) TO APRIL 1, 2004 ENDED JANUARY 1, ENDED SEPTEMBER 30, SEPTEMBER 30, TO MAY 17, SEPTEMBER 30, 2004 TO SEPTEMBER 30, 2004 2004 2004 2003 MAY 17, 2004 2003 ------------ --------------- ------------- ------------- ------------ ------------- Revenues ..................... $ 0 $ 13,600 $ 3,525 $ 221,066 $ 141,362 $ 26,504 ------------ ------------ ------------ ----------- ------------ ----------- Costs and Expenses: Stock based compensation .. 3,609,437 9,799,090 Interest .................. 4,498 152,194 56,440 53,903 Other selling, general and administrative expenses 574,133 792,941 168,285 1,903,185 333,942 1,297,806 ------------ ------------ ------------ ----------- ------------ ----------- Total costs and expenses .. 4,183,570 10,592,031 172,783 2,055,379 390,382 1,351,709 ------------ ------------ ------------ ----------- ------------ ----------- Net (loss) ................... $ (4,183,570) $(10,578,431) $ (169,258) $(1,834,313) $ (249,020) $(1,325,205) ============ ============ ============ =========== ============ =========== Per share information - basic and fully diluted Net (loss) per share ......... $ (0.07) $ (0.17) $ (0.01) $ (0.20) $ (0.02) $ (0.13) ============ ============ ============ =========== ============ =========== Weighted average shares outstanding .................. 62,412,930 62,412,930 13,247,801 8,992,764 12,179,564 10,079,492 ============ ============ ============ =========== ============ ===========
See the accompanying notes to the condensed consolidated financial statements. 2 POWER 3 MEDICAL PRODUCTS, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
POWER 3 MEDICAL PRODUCTS, INC. PREDECESSOR BUSINESS --------------------- ------------------------------------ FOR THE PERIOD FOR THE NINE MAY 18, 2004 (DATE OF FOR THE PERIOD MONTHS ENDED ACQUISITION) TO JANUARY 1, 2004 TO SEPTEMBER 30, SEPTEMBER 30, 2004 MAY 17, 2004 2003 --------------------- ------------------ ------------- Net cash provided by (used in) operating activities (755,731) $(510,880) (539,930) Net cash provided by (used in) investing activities (94,059) 13,847 1 Net cash provided by financing activities 862,735 508,430 555,007 -------- --------- -------- Increase (decrease) in cash 12,945 11,397 15,078 18 Cash (cash overdraft), beginning of period 97 (7,498) 19,175 -------- --------- -------- Cash, end of period 13,042 $ 3,899 34,253 ======== ====== ======
See the accompanying notes to the condensed consolidated financial statements. 3 POWER 3 MEDICAL PRODUCTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2004 (1) NATURE OF OPERATIONS AND BACKGROUND Prior to May 18, 2004, Power 3 Medical Products, Inc. (the "Company" or "Power 3"), formerly known as Surgical Safety Products, Inc., was engaged in product development, sales and distribution and services for the healthcare industry. The Company had limited business activity during 2003 and 2002. Subsequent to the business combination on May 18, 2004 (as described below), the overall business strategy of Power 3 was changed. Power 3 is currently engaged in the early detection, monitoring, and targeting of diseases through the analysis of proteins. The Company's business objective is to focus on disease diagnosis, protein and biomarkers identification, and drug resistance in the areas of cancers, neurodegenerative and neuromuscular diseases. During the period July 1, 2004 to September 30, 2004, Power 3 had the following significant transactions: - On August 1, 2004, the Company entered into an exclusive license agreement with The University of Texas M.D. Anderson Cancer Center which grants the Company an exclusive, worldwide, sublicensable license to patents and technologies for early detection screening tests, identified protein biomarkers and drug targets for cancer patient's resistance to drug therapy. The licensed technology was developed through joint collaboration between the scientific team of Power 3 Medical and The University of Texas M.D. Anderson Cancer Center. Under the terms of the agreement, the Company paid The University of Texas M.D. Anderson Cancer Center initial license fee and has the obligation to pay further royalties and additional licensing fees upon certain milestones. The Company and The University of Texas M.D. Anderson Cancer Center filed a joint patent application on this technology during the third quarter, which is covered by the license. - On August 4, 2004, the Company announced the filing of a provisional patent on proteomic testing and biomarker discovery methods using its protein biomarker footprints for early detection, monitoring and staging of a broad range of diseases including breast cancer and neurodegenerative disease. - On August 31, 2004 the Company announced that it entered into a research agreement with Baylor College of Medicine for the purpose of discovering biomarkers in serum and plasma that are of particular utility in the diagnosis and drug targeting for metabolic syndrome and associated disorders including diabetes, cardiovascular disease, hypertension and stroke. 4 - During the period, the Company received approval from the Women's Hospital of Texas, Mercy Women's Center of Oklahoma City, and the New York University Medical Center to begin clinical validation studies for the Company's NAF(TM) test for the early detection of breast cancer. This three site clinical validation trial utilizes the Company's NAF Test which analyzes fluid from the breast milk ducts, called nipple aspirate fluid (NAF), to monitor groups of breast cancer related protein biomarkers. Since Power 3's planned principal operations have not yet commenced, it is considered to be in the development stage as defined in Financial Accounting Standards Board Statement No. 7. Accordingly, some of its accounting policies and procedures have not yet been established. Advanced Bio/Chem, Inc. Transaction On May 18, 2004, Power 3 purchased all of the assets of Advanced Bio/Chem, Inc. (the "Predecessor") and assumed certain of its liabilities in exchange for the issuance of 15,000,000 shares of its common stock pursuant to an Asset Purchase Agreement of even date therewith. For financial statement purposes, the transaction has been accounted for as a recapitalization of the equity structure rather than a business combination; therefore the accumulated deficits of Power 3 and the Predecessor prior to the date of the transaction were eliminated and the accompanying consolidated statement of operations is for the period May 18, 2004 to September 30, 2004. Also, no stock based expenses were recorded as a result of this transaction, and the assets and liabilities of Power 3 and the Predecessor were combined based on their historical costs. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Power 3 and its wholly owned subsidiary Power 3 Medical, Inc., a Nevada corporation, which are collectively referred to as the Company. All inter-company transactions and balances have been eliminated in consolidation. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements of the Predecessor as of and for the years ended December 31, 2003 and 2002, including notes thereto included in the Company's Form 8-K/A dated May 18, 2004, and/or the consolidated financial statements of the Company as of December 31, 2003 and for the years ended December 31, 2003 and 2002, including notes thereto included in the Company's Form 10-KSB. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions management is required to make. Actual results could differ from those estimates. Going Concern The Company's consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company is in the development stage and has primarily been involved in research and development activities and capital raising activities. This has resulted in 5 stockholder and working capital deficits of $135,543 and $347,345 respectively as of September 30, 2004. The Company will require a significant amount of capital to proceed with its business plan. The Company's ability to continue as a going concern is contingent upon its ability to attain profitable operations by securing financing and implementing its business plan. In the absence of positive cash flows from operations the Company is and will remain highly dependent on its ability to secure additional funding through the issuance of debt or equity instruments or corporate partnering arrangements. If adequate funds are not available, the Company may be forced to significantly curtail or terminate its operations or to obtain funds by entering into other arrangements that may be on unfavorable terms. The initial phase of the financing component of the Company's business plan was implemented on October 28, 2004 when the Company completed the initial closing under the Securities Purchase Agreement as described in Note 8, "Subsequent Events," below. The Company's September 30, 2004 financial statements do not reflect the effect of the initial closing and the Company's issuance of the $1,000,000 aggregate principal amount of convertible debentures, the warrants and additional investment rights. The Company's ability to continue as a going concern must be considered in light of the problems, expenses and complications often encountered by entrance into the competitive environment in which the Company operates. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The Company's financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should it be unable to continue as a going concern. Stock Based Compensation The Company has adopted Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends FASB statement No. 123, "Accounting for Stock Based Compensation." It provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for employee stock based compensation. It also amends the disclosure provision of FASB statement No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. As permitted by SFAS No. 123 and amended by SFAS No. 148, the Company continues to apply the intrinsic value method under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its stock-based employee compensation arrangements. (2) NET LOSS PER SHARE The Company calculates net income (loss) per share as required by SFAS No. 128, "Earnings per Share." Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they would be anti-dilutive common stock equivalents, if any, are not considered in the computation. (3) INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes", which requires use of the liability method. FAS 109 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled, or realized. The Company's deferred tax asset resulting primarily from net operating loss carryforwards is fully offset by a valuation allowance. The Company has recorded a valuation allowance to state its deferred tax assets at estimated net realizable value due to the uncertainty related to realization of these assets through future taxable income. 6 (5) COMMITMENTS Lease On June 1, 2004, the Predecessor entered a lease having a term of sixty-three months and requiring base monthly minimum lease payments ranging from approximately $6,000 to $9,600 (exclusive of the first three months for which no rent was stipulated). The Company assumed this lease in the third quarter of calendar 2004. The lease contains a provision which allows the Company to extend the lease for two additional terms of sixty months. Employment Agreements Effective May 18, 2004, the Company entered two five year employment agreements with certain officers and on July 1, 2004, the Company entered a three year employment agreement with its Chief Financial Officer. The employment agreements require total minimum base compensation of approximately $500,000 per annum for the first three years, and $380,000 for the remaining two years, as well as other benefits and opportunities for bonuses as defined in the agreements. In addition to this base compensation, the officers received (in total) 26,640,000 shares of common stock and are ultimately expected to receive 3,000,000 shares of Series B preferred stock (which shares are initially convertible into a like number of common shares - see Note 6). The Company anticipates that it will recognize total stock based compensation expense of $26,676,000 as a result of the issuance of these shares. However, because the shares do not vest until the second anniversaries of the respective employment agreements, such amount was initially deferred and is being amortized on a straight line basis over the vesting period. During the period May 18, 2004 (date of acquisition) to September 30, 2004, the Company recognized stock based compensation expense of $5,001,750 as a result of these arrangements. (6) PREFERRED STOCK At September 30, 2004, the Company had 3,870,000 shares of Series A Preferred Stock, $0.001 par value, issued and outstanding. As amended by a Certificate of Amendment of the Certificate of Incorporation providing for the amendment of the powers, designations and relative rights of the Series A Preferred Stock filed and effective November 1, 2004, the conversion ratio at which the Series A Preferred Stock is convertible into common stock is .7752 shares of common stock for each share of Series A Preferred Stock, subject to antidilution adjustments. The Series A Preferred Stock is entitled to a liquidation preference of $.10 per share, plus an amount equal to the dividends accrued and unpaid thereon. Each holder of Series A Preferred Stock is entitled to receive, on an as-converted basis, dividends declared on the Company's common stock. Except as provided by law or specifically set forth in the Certificate of Amendment, holders of the Series A Preferred Stock are not entitled to vote. Pursuant to two employment agreements with two officers, the Company has agreed to issue to such officers an aggregate of 3,000,000 shares of Series B Preferred Stock. The Company has not filed the Certificate of Amendment necessary to designate the Series B Preferred Stock and the powers, designations and relative rights of the Series B Preferred Stock and has not issued the shares of the Series B Preferred Stock. As a result of certain restrictions agreed upon by the Company in its recent financing (see "Subsequent Event," Note 8 below), the Company may not issue the shares of the Series B Preferred Stock to such officers for a period of at least 90 days after the effective date of the registration statement to be filed by the Company covering the resale of the shares of common stock issuable upon the conversion or exercise of the securities issued by the Company in such recent financing. The Company intends to issue such shares of the Series B Preferred Stock at such time as it is permitted. (7) OTHER EQUITY TRANSACTIONS The Company entered into a securities purchase agreement with an institutional investor covering the purchase of up to $1,500,000 of restricted common stock at various prices. Since May 18, 2004, the investor has advanced $722,735 for which the Company is obligated to issue 242,157 shares of common stock. The $722,735 is reflected as common stock subscribed in the accompanying consolidated balance sheet. During the second quarter, certain liabilities to IBM and Sarasota Memorial Hospital were settled for $20,000 and $50,000, respectively. An affiliate of an existing Series A Preferred Stockholder provided the funds to the Company for such settlement. Because the number of shares that will ultimately be issued as a result of these infusions of capital is indeterminate, the total infusion of $70,000 has been reflected as common stock issuable in the accompanying consolidated balance sheet. 7 (8) SUBSEQUENT EVENTS On October 17, 2004, the Company reached agreement with Alan B. Hollingsworth, M. D. by which Dr. Hollingsworth would join the Company's Scientific Advisory Board. Under the terms of the agreement, Dr. Hollingsworth will receive 10,000 shares of common stock upon the completion of each year served, fees for attendance at each Scientific Advisory Board Meeting and warrants to purchase 50,000 shares of common stock of the Company. The Company has entered into a Securities Purchase Agreement, dated as of October 28, 2004, with certain accredited investors. Pursuant to the Securities Purchase Agreement, the purchasers 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 Securities Purchase Agreement also provides for the issuance to the purchasers of warrants to purchase shares of the Company's common stock and additional investment rights to purchase additional convertible debentures. In connection with the Securities Purchase Agreement, the Company also entered into a registration rights agreement with the purchasers, which requires that the Company file a registration statement with the SEC registering on behalf of the purchasers the resale of the shares of common stock issuable upon conversion of the debentures (including the debentures issuable upon exercise of the additional investment rights) and the exercise of the warrants. Effective October 28, 2004, the Company issued and sold to the purchasers the first $1,000,000 in aggregate principal amount of such debentures at the initial closing under the Securities Purchase Agreement. Subject to the conditions set forth in the Securities Purchase Agreement, the purchasers are required to purchase the remaining $2,000,000 in aggregate principal amount of such debentures at the second closing, which is to occur on or before the fifth trading day after the effective date of the registration statement. Pursuant to the registration rights agreement, the Company is required to file a registration statement within 45 days after the initial closing. The debentures issued in the initial closing will be due and payable in full on October 28, 2007, and will not bear interest. The debentures issuable at the second closing will be due and payable in full three (3) years after the date of their issuance, and will not bear interest. The aggregate cash purchase price for the debentures will be $3,000,000, which is equal to the full face amount of the debentures. At any time from the closing date until the maturity date of the debentures, the Purchasers have the right to convert the debentures, in whole or in part, into common stock of the Company at the then effective conversion price. The conversion price for the initial $1,000,000 aggregate principal amount of debentures is $0.90 but is subject to adjustment at the time of the second closing. The $2,000,000 aggregate principal amount of debentures issuable at the second closing will have a conversion price equal to the lesser of (1) $0.90, (2) the 75% average of the daily volume weighted average price of the common stock for the five (5) consecutive days preceding the effective date of the registration statement, or (3) the daily volume weighted average price of the common stock on the effective date of the registration statement. The conversion price shall be subject to anti-dilution adjustments under circumstances set forth in the debentures. Under the securities purchase agreement, the purchasers also received at the first closing warrants to purchase an aggregate of up to 2,500,000 shares of common stock and additional investment rights to purchase up to an additional $2,500,000 principal amount of convertible debentures. The warrants are exercisable at a price of $1.44 per share (subject to adjustment), for a period of five years from the date of issuance. The additional investment rights are exercisable at a price equal to the principal amount of the debentures to be purchased, for (1) a period of nine months following the effective date of the registration statement to be filed pursuant to the registration rights agreement, or (2) a period of 18 months from the date of issuance of the additional investment rights, whichever is shorter. The debentures to be purchased upon the exercise of the additional investment rights will have the same terms as the debentures described above, except that the conversion price will be equal to $1.08 (subject to adjustment). In connection with such financing, the Company became obligated to issue to its placement agent a warrant to purchase 100,000 shares of common stock at an exercise price of $3.00. If any investor shall exercise its additional investment rights and purchases additional debentures, the placement agent will be entitled to receive additional warrants to purchase up to a number of shares of common stock equal to ten percent (10%) of the exercise price paid upon exercise of the additional investment rights divided by ninety percent (90%) of the market price as of the initial closing. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements of the intentions, hopes, beliefs, expectations, strategies, and predictions of the Company or its management with respect to future activities or other future events or conditions within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are usually identified by the use of words such as "believes," "will," "anticipates," "estimates," "expects," "projects," "plans," "intends," "should," "could," or similar expressions. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including, without limitation: - our history of operating losses; - our need and ability to raise significant capital; - the ability to successfully develop and complete validation studies for our products; - development by competitors of new or competitive products or services; - the entry into the market by new competitors; - the ability of the Company to retain management, implement its business strategy, assimilate and integrate any acquisitions; and - the ability of the Company to successfully commercialize its products. Although the Company believes that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Except for its ongoing obligation to disclose material information as required by the federal securities laws, the Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Accordingly, the reader should not rely on forward-looking statements, because they are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements. OVERVIEW The Company's overall mission is to engage in the early detection, monitoring, and targeting of diseases through the analysis of proteins. Power 3's business objective is to focus on disease diagnosis, protein and biomarkers identification, and drug resistance in the areas of cancers, neurodegenerative and neuromuscular diseases. We have established a Scientific Advisory Board to assist in the research and development of our products. The members of this Scientific Advisory Board are recognized leaders in their chosen fields and we are working with them to find effective therapeutics and novel predictive medicine for important human diseases. We were incorporated in 1993 in the State of New York as Sheffeld Acres Inc. Prior to the transaction in the second quarter of this year with Advanced Bio/Chem, Inc., we were primarily engaged in the production and distribution of surgical safety devices through the operations of our subsidiary, Power Medical, Inc., a Nevada corporation. On May 18, 2004, the Company completed an asset purchase agreement with Advanced Bio/Chem, Inc. d/b/a ProtcEx ("Advanced Bio/Chem"). As part of the agreement, the Company purchased all assets and intellectual properties of 9 Advanced Bio/Chem and assumed certain liabilities in exchange for the Company's issuance of 15,000,000 shares of the Company's common stock. As a result of this transaction, the Company established the new business direction described above. The accounting for the transaction was treated as a capital transaction rather than a business combination and the Company effectively became a new entity from an accounting perspective on such date. Accordingly, the accompanying consolidated statements of operations reflect activity for the period May 18, 2004 (date of acquisition) to September 30, 2004 for Power 3, and the periods January 1 and April 1, 2004 to May 17, 2004 for the Predecessor's business. As a result of the Company acquiring the assets and certain liabilities of Advanced Bio/Chem, the Company has transformed itself into an advanced proteomics company that applies existing proprietary methodologies to discover and identify protein biomarkers associated with diseases. By discovery and development of protein-based disease biomarkers, the Company has begun the development of tools for diagnosis, prognosis, early detection and finally new target drugs in cancer, neurodegenerative and neuromuscular diseases such as ALS, Alzheimer's, Parkinson's. The Company's scientific team is headed by its Chief Scientific Officer, Dr. Ira L. Goldknopf, who was a pioneer in the science of clinical proteomics in the 1970s and 1980s and in so doing made a significant biochemistry discovery - the ubiquitin conjugation of proteins. The team has leveraged these significant insights and has made progress in the discovery of unique disease protein footprints of biomarkers in breast cancer, neurodegenerative disease, and drug resistance to chemotherapeutic agents. Proteomics is the study and analysis of proteins. Through proteomics, scientists can more accurately understand the functioning of a healthy body and therefore identify the proteins associated with specific diseases. Proteins that change in the course of disease are the building blocks for new screening and diagnostic tests being developed by the Company to provide earlier disease detection, enhanced treatment and monitoring assistance. CORPORATE DEVELOPMENTS With the acquisition of the assets of Advanced Bio/Chem, the Company changed its management team and is focused on bringing the acquired technology to the forefront of the scientific/medical community. The strategy will concentrate on attaining a leading position in the protein-based diagnostic and drug targeting markets utilizing the Company's portfolio of proprietary biomarker disease footprints. During the quarter ending September 30, 2004, the Company continued to accurately identify patterns of proteins associated with disease and apply them to screening diagnostics and drug targets. In the area of neurodegenerative disease, the Company has demonstrated an ability to discriminate between normal individuals and those with neurodegenerative diseases at a level of 86-99%. When evaluated on a mixed pool of blinded sera from the patients, preliminary results indicated an accurate differential diagnosis of ALS, Alzheimer's and Parkinson's diseases at a level of 60-70%. By testing patient body fluids and tissues, such as serum, breast ductal fluid, and bone marrow, the Company has discovered unique snapshots of protein patterns in diseases including, but not limited to: cancers such as breast, leukemia, prostate, bladder, stomach, and esophageal; neurodegenerative diseases such as Alzheimer's, ALS, and Parkinson's; and lymphatic diseases and kidney ailments. The discovery platform uses proprietary methodologies owned by or licensed to the Company to discover biomarkers in clinical samples. Following sample preparation, the 2D Gel system is used for the separation of protein. The gels are stained, imaged and analyzed with unprecedented sensitivity for differences in the diseased vs. normal samples. The significance of these differences is evaluated relative to the status of the health of the individual. The proteins of interest are removed from the gel matrix, taken apart and analyzed on a mass spectrometer. This information is then cross-referenced on a worldwide database to identify the protein of origin. This process requires a great deal of proteomics experience and expertise to make the end-data interpretable. In addition, all of the procedures are scaleable. The Company's biomarker Discovery Platform delivers significant discoveries that: detect up to 20X as many proteins in NAF as Mud Pit or SELDI TOF (competing technologies); exhibit reproducible and reliable identification; and display broad dynamic range and linearity of disease protein footprints. 10 To date, the Company has successfully identified more than 300 specific proteins by developing its proprietary protein technologies gained from over 50 years of combined experience in research in protein biochemistry. Power 3 is transitioning from a research and development company to one of demonstrating "proof of concept" of its technology in route to the commercialization of its technology, products and services. The Company is engaged in the process of developing a portfolio of products including the NAF (TM) Test (for early detection of breast cancer), NuroPro(TM) test (for neurodegenerative screening for Alzheimer's, Parkinson's and Amytrophic Lateral Sclerosis diseases) and drug resistance screening in chemotherapeutics. On June 25, 2004, the Company entered into an exclusive license agreement with the Baylor College of Medicine which grants to the Company an exclusive, worldwide, sublicensable license for serum proteomics methods under certain patent rights for all biomarkers for both diagnostic and therapeutic use in neurodegenerative disease. Under the terms of the agreement the Company paid Baylor an initial license fee and has the obligation to pay future royalties and additional licensing fees upon certain milestones. The term of the agreement is established on a country by country basis and expires on the date of expiration of the last patent rights to expire in that country or the tenth anniversary of the first commercial sale of licensed products in countries where no patents exist in such country. After such expiration the Company will have a perpetual paid in full license in such country. On August 1, 2004, the Company entered into an exclusive license agreement with The University of Texas M.D. Anderson Cancer Center which grants the Company an exclusive, worldwide, sublicensable license to patents and technologies for early detection screening tests, identified protein biomarkers and drug targets for cancer patient's resistance to drug therapy. The licensed technology was developed through joint collaboration between the Company's scientific team and The University of Texas M.D. Anderson Cancer Center. Under the terms of the agreement, the Company paid The University of Texas M.D. Anderson Cancer Center an initial license fee and has the obligation to pay further royalties and additional licensing fees upon certain milestones. The term of the agreement is established on a country by country basis and expires on the date of expiration of the last patents rights to expire in that country or for a term of fifteen years if no patent rights are applicable. The Company and The University of Texas M.D. Anderson Cancer Center filed a joint patent application on this technology in the third quarter, which is covered by the license. On August 4, 2004, the Company filed a provisional patent on proteomic testing and biomarker discovery methods using its protein biomarker footprints for early detection, monitoring and staging of a broad range of diseases including breast cancer and neurodegenerative disease. On August 31, 2004 the Company entered into a research agreement with Baylor College of Medicine for the purpose of discovering biomarkers in serum and plasma that are of particular utility in the diagnosis and drug targeting for metabolic syndrome and associated disorders including diabetes, cardiovascular disease, hypertension and stroke. THE BREAST CANCER SCREENING TEST An important factor in surviving cancer is early detection and treatment. According to the American Cancer Society, when breast cancer is confined to the breast, the five-year survival rate is close to 100%. Breast cancer is the second leading cause of cancer deaths in women, with over $7 billion spent on breast cancer diagnosis annually. Due to the limitations of the current diagnostic techniques of mammograms and self-examination, diagnosis of cancer is often missed or inconclusive. The Company's Proteomic Discovery Platform covered by pending patent applications and trade secrets for identifying proteins which signal pre-mammography stages of breast cancer has led to what the Company believes to be the first test of its type that may detect breast cancer earlier than current technology allows. These discoveries establish the basis of a very sensitive, non-invasive, early detection breast cancer-screening test. The Company is a party to a license agreement with The University of Texas M.D. Anderson Cancer Center which grants to the Company an exclusive, royalty bearing license to certain patent rights and technology rights for the detection of breast cancer. Under the terms of the agreement, the Company has an obligation to pay The University 11 of Texas M.D. Anderson Cancer Center a license fee which includes the initial license fee previously paid by the Company and a subsequent installment of the license fee is currently payable. The Company has the obligation to pay future annual license maintenance fees, royalties and additional licensing fees upon first sale of FDA approved products by the Company or any sublicense. The term of the agreement is based on the date of expiration of the last patent rights to expire, or in the case of licensed technology rights for a term of fifteen years. NAF (TM) TEST The Breast Cancer NAF (TM) Test analyzes fluids from the breast called nipple aspirates fluid (NAF). Initial success yielded the identification of groups of breast cancer proteins in the aspirates. The procedure utilizes a breast pump to obtain a drop of fluid from the nipple. The aspirate is analyzed to identify specific breast cancer protein snapshots. The Company has completed the initial proof-of concept stage and is currently prepared to move forward with clinical validation studies. In the third quarter of 2004, the Company entered the clinical validation phase for the NAF test. During the period, the Company received approval from the Women's Hospital of Texas, Mercy Women's Center of Oklahoma City, and the New York University Medical Center to begin clinical validation studies for the Company's NAF test for the early detection of breast cancer. This three site clinical validation trial will be based on four hundred patient samples utilizing the Company's NAF Test which analyzes the NAF to monitor groups of breast cancer related protein biomarkers. THE NEURODEGENERATIVE SCREENING TEST Early detection of neurodegenerative disease results in better patient outcomes. Three diseases of particular interest are Alzheimer's disease, Parkinson's disease and amyotrophic lateral sclerosis (commonly known as Lou Gehrig's disease or ALS). Alzheimer's disease is the most common form of dementia affecting over 4 million Americans. People as young as 30 years old can contract the disease and one in ten people age 65 and over have Alzheimer's disease. In addition, more than one million people in the U.S. have Parkinson's disease, affecting about 1 in 100 Americans over the age of 60. On a smaller scale, an average of approximately 30,000 Americans are afflicted with ALS (Lou Gehrig's disease), with 5,000 new cases diagnosed annually. The members of the scientific team at Power 3 have developed a method for the differential diagnosis of neurodegenerative diseases utilizing blood serum, which was co-developed with neurologist, Dr. Stan Appel, Chairman of Neurology and his team at Baylor College of Medicine in Houston. With this test, which involves monitoring the concentration of 8 proteins the Company has demonstrated unique markers whose profiles appear to distinguish patients from those with other motor neuron and neurological disorders. The Company is continuing its ongoing clinical validation programs in collaboration with Dr. Stan Appel. The Company believes that the initial phase of this clinical validation study was successfully completed. In the area of neurodegenerative disease, the Company has demonstrated an ability to discriminate between normal individuals and those with neurodegenerative diseases at a level of 86-99%. When evaluated on a mixed pool of blinded sera from the patients, preliminary results indicated an accurate differential diagnosis of ALS, Alzheimer's and Parkinson's diseases at a level of 60-70%. In addition, the Company has secured the exclusive worldwide licensing rights from Baylor College of Medicine for serum proteomics methods and biomarkers for the diagnosis of neurodegenerative diseases, differential diagnosis of Alzheimer's, Parkinson's, ALS diseases, and other motor neuron and neurological disorders. The technology encompassing this agreement was co-developed by the scientific team at Power 3 Medical under the leadership of Dr. Ira L. Goldknopf and the team at Baylor College of Medicine under the direction of Dr. Stan Appel. The test employs the proteomics methods to monitor the concentrations of a panel of proteins in the blood, to distinguish patients with Alzheimer's, Lou Gehrig's (ALS), and Parkinson's diseases from each other as well as from normal individuals and patients with other neurological disorders. 12 Under the terms of the agreement, the Company has paid Baylor College of Medicine a licensing fee and will make additional payments upon the achievement of certain developmental milestones. Power 3 Medical is responsible for the continuing costs associated with research and development including the filing of patents for the technology and will pay Baylor College of Medicine royalties on the worldwide product sales resulting from the commercialization of this technology. DRUG RESISTANCE TO CHEMOTHERAPEUTIC AGENTS By the time development of resistance to chemotherapeutic agents is detected, it is often too late to revise treatment or otherwise save the patient. The Company completed an initial "proof of concept," which addresses drug resistance to a major chemotherapy agent. Determining that a cancer patient is sensitive or detecting a development of resistance during the early stages of treatment may eliminate toxic effects from the treatment drugs, and the need for trial-and-error treatment regimens. These findings may ultimately provide the pharmaceutical industry with the technology to screen patients, on a molecular level, prior to clinical trials and design new drugs to overcome resistance. METABOLIC SYNDROME On August 31, 2004 the Company announced that it entered into a research agreement with Baylor College of Medicine for the purpose of discovering biomarkers in serum and plasma that are of particular utility in the diagnosis and drug targeting for metabolic syndrome and associated disorders including diabetes, cardiovascular disease, hypertension and stroke. PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY The Company's current portfolio of pending intellectual property, in conjunction with secured licensed agreements, provides the Company with an opportunity to grow through the licensing of biomarkers. Power 3 pursues an aggressive intellectual property strategy to protect its inventions and discoveries made on its own and with its collaborators. Power 3 works with key physician scientists at major medical research and treatment centers. With access to decisive human clinical samples and trade secret proteomics methodologies, the Company is developing solutions to many pressing challenges in diagnosis and treatment of patients. This research and development has resulted in the Company's execution of research agreements, technology license agreements, and the filing of provisional and utility patents. Power 3 is also adding additional layers of research and license agreements, patent filings and trade secrets, as its technology and product portfolio develops, to cover: - Processes - Manner in which discoveries are made and tests developed - Discoveries - Protein disease footprints and biomarkers - Assays - Screening and diagnostic assays During the third quarter ended September 30, 2004, the Company filed five patent applications focusing on the Company's biomarker discovery technologies and biomarkers for breast cancer. These patent applications include the following: - a provisional application on July 13, 2004 for Antibody-based system for detection of differential Protein Expression Patterns, - a provisional application on July 27, 2004 for differential protein expression patterns related to disease states, - a utility application on September 1, 2004 for a biomarker for breast cancer, - a provisional application on September 29, 2004 for a proteotic discovery process, and 13 - a utility application on September 29, 2004 for a Proteomic Platform patent and on the differential protein expression patterns related to disease states. In addition, the Company is preparing to file additional patent applications on biomarkers for the differential diagnosis of neurodegenerative disease. Also during the third quarter of 2004, the Company filed four trademark applications. STRATEGIC PARTNERS INITIATIVE The Company continues to seek synergistic strategic partners to license and develop our growing portfolio of protein biomarker disease footprints. The Company's business plan includes the development of these strategic partnerships which the Company anticipates will assist in the Company's evolution over the next several years including the commercialization of our proprietary technologies. The Company recognizes that the licensing of our proprietary technologies to industry leaders is one of the most expedient approaches to develop our technology into important diagnostic tools for the detection of diseases. This focused positioning of our products and services will enable the Company to capture not only clinical and public awareness of its proprietary technologies, but a major porting of that technology to the early detection and screening markets. RESULTS OF OPERATIONS Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003 There were no revenues for the three months ended September 30, 2004 with a resulting $26,504 negative variance versus revenues for the corresponding three months ended in the prior year. Total costs and expenses of $4,183,570 increased in the current period versus the corresponding prior period expenses of $1,351,709 as a result of increased stock compensation expense of $3,609,437 in the current period due to the issuance of common stock to management and other employees as well as consultants and advisors. The loss from operations for the current period of $4,183,570 is greater than the loss of $1,325,205 in the corresponding prior period due to reduced revenues and the increase in operating expenses due to increased stock compensation expense in the current period. Period Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003 There were no significant revenues for the period ended September 30, 2004 with a resulting $207,466 negative variance versus the corresponding nine months ended in the prior year. Total costs and expenses of $10,592,031 increased in the current period versus the corresponding prior period expenses of $2,055,379 as a result of increased stock compensation expense of approximately $9,799,090 in the current period due to the issuance of shares of common stock to management and other employees as well as consultants and advisors. The loss from operations for the current period of $10,578,431 is greater than the loss of $1,834,313 in the corresponding prior period due to reduced revenues and the increase in operating expenses due to increased stock compensation expense. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004 the Company had $36,453 in current assets which included $13,042 in cash. During the three months ended September 30, 2004 we incurred a loss of $4,183,570 and at September 30, 2004, we had a stockholders' deficit of $135,543. 14 We have financed our operations since the date of the Advanced Bio/Chem transaction primarily through the net proceeds generated from the sale of our common stock. Our liquidity and capital needs relate primarily to working capital, research and development and other general corporate requirements. We have not received any cash from operations. Net cash used by the Company during the period May 18, 2004 (date of acquisition) to September 30, 2004 for investing and financing activities was approximately $850,000 compared to approximately $540,000 for the nine months ended September 30, 2003. The cash used in operations is primarily general and administrative expenses incurred in maintaining our administrative infrastructure and funding research and development. As of September 30, 2004, our principal sources of liquidity were approximately $36,453 in current assets which included approximately $13,042 in cash, an agreement with an institutional investor providing for the issuance of up to $1,500,000 in common stock (of which $722,735 has already been infused at September 30, 2004). The Company has entered into a Securities Purchase Agreement, dated as of October 28, 2004, with certain accredited investors. Pursuant to the Securities Purchase Agreement, the purchasers 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 Securities Purchase Agreement also provides for the issuance to the purchasers of warrants to purchase shares of the Company's common stock and additional investment rights to purchase additional convertible debentures. In connection with the Securities Purchase Agreement, the Company also entered into a registration rights agreement with the purchasers, which requires that the Company file a registration statement with the SEC registering on behalf of the purchasers the resale of the shares of common stock issuable upon conversion of the debentures (including the debentures issuable upon exercise of the additional investment rights) and the exercise of the warrants. Effective October 28, 2004, the Company issued and sold to the purchasers the first $1,000,000 in aggregate principal amount of such debentures at the initial closing under the Securities Purchase Agreement. Subject to the conditions set forth in the Securities Purchase Agreement, the purchasers are required to purchase the remaining $2,000,000 in aggregate principal amount of such debentures at the second closing, which is to occur on or before the fifth trading day after the effective date of the registration statement. Pursuant to the registration rights agreement, the Company is required to file a registration statement within 45 days after the initial closing. The debentures issued in the initial closing will be due and payable in full on October 28, 2007, and will not bear interest. The debentures issuable at the second closing will be due and payable in full three (3) years after the date of their issuance, and will not bear interest. The aggregate cash purchase price for the debentures will be $3,000,000, which is equal to the full face amount of the debentures. At any time from the closing date until the maturity date of the debentures, the Purchasers have the right to convert the debentures, in whole or in part, into common stock of the Company at the then effective conversion price. The conversion price for the initial $1,000,000 aggregate principal amount 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 common stock for the five (5) consecutive trading days preceding the date that the initial registration statement filed by the Company pursuant to the registration rights agreement is declared effective by the SEC or (2) the daily volume weighted average price of the common stock on such date is less than $0.90 per share. In such event, the conversion price will be adjusted down to equal the lower of (1) the 75% average of the daily volume weighted average price of the common stock for the five (5) consecutive days preceding the effective date of the registration statement or (2) the daily volume weighted average price of the common stock on the effective date of the registration statement. The $2,000,000 aggregate principal amount of debentures issuable at the second closing will have a conversion price equal to the lesser of (1) $0.90, (2) the 75% average of the daily volume weighted average price of the common stock for the five (5) consecutive days preceding the effective date of the registration statement, or (3) the daily volume weighted average price of the common stock on the effective date of the registration statement. The conversion price shall be subject to adjustment under circumstances set forth in the debentures. 15 The debenture contains covenants that will limit the ability of the Company to, among other things: incur or guarantee additional indebtedness; incur or create liens; amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the holders of the debentures; and repay or repurchase more than a de minimis number of shares of common stock other than as permitted in the debentures and other documents executed with the Purchasers. The debentures include customary default provisions and an event of default includes, among other things, a change of control of the Company, the sale of all or substantially all of the Company's assets, the failure to have the registration statement declared effective on or before the 180th day after the initial closing date, and the lapse of the effectiveness of the registration statement for more than 30 consecutive trading days during any 12-month period (with certain exceptions), the failure of the Company to timely deliver certificates to holders upon conversion and a default by the Company in any obligations under any indebtedness of at least $150,000 which results in such indebtedness being accelerated. Upon the occurrence of an event of default, each debenture may become immediately due and payable, either automatically or by declaration of the holder of such debenture. The aggregate amount payable upon an acceleration by reason of an event of default shall be equal to the greater of 130% of the principal amount of the debentures to be prepaid or the principal amount of the debentures to be prepaid, divided by the conversion price on the date specified in the debenture, multiplied by the closing price on the date set forth in the debenture. Under the Securities Purchase Agreement, the purchasers will also receive warrants to purchase an aggregate of up to 2,500,000 shares of common stock and additional investment rights to purchase up to an additional $2,500,000 principal amount of convertible debentures. The warrants are exercisable at a price of $1.44 per share (subject to adjustment), for a period of five years from the date of issuance. The additional investment rights are exercisable at a price equal to the principal amount of the debentures to be purchased, for (1) a period of nine months following the effective date of the registration statement to be filed pursuant to the Registration Rights Agreement, or (2) a period of 18 months from the date of issuance of the additional investment rights, whichever is shorter. The debentures to be purchased upon the exercise of the additional investment rights will have the same terms as the debentures described above, except that the conversion price will be equal to $1.08 (subject to adjustment). Each purchaser has contractually agreed to restrict its ability to convert the debentures, exercise the warrants and additional investment rights and receive shares of the Company's common stock such that the number of shares of the Company's common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the number of shares of the Company's common stock outstanding immediately after giving effect to such conversion or exercise. PLAN OF OPERATIONS AND CASH REQUIREMENTS The Company currently does not have operating revenues from product sales and we continue to experience net operating losses. We are actively pursuing third party licensing agreements, collaboration agreements and similar business arrangements in order to establish a revenue base utilizing the Company's capabilities in disease diagnosis based on protein and biomarker identification, and drug resistance in the areas of cancers, neurodegenerative and neuromuscular diseases. This initiative has included negotiations and technical meetings with potential strategic partners in which the Company has provided an overview of its scientific capability for the purpose of identifying those partners interested in establishing working relationships to serve as a platform for commercialization the Company's biomarker portfolio. The Company has undertaken clinical validation studies to demonstrate its diagnostic capability. However, there can be no assurances that revenue generating agreements will be in place in the next twelve months. Absent a source of revenues, the Company will require funding in order to carry out its business plan until such time as it is able to generate sustained revenues. Currently, the Company's cash requirements are approximately $200,000 per month and we anticipate that we will require approximately $2,400,000 for the twelve months ended September 30, 2005 to continue our research and development activities, undertake and perform clinical validation studies, continue our marketing efforts and maintain our administrative infrastructure. The Company has no significant capital expenditure requirements and does not plan to increase its monthly expenditure rate absent an increase in revenues or additional funding. 16 As noted in "Liquidity and Capital Resources" above, the Company has entered into a Securities Purchase Agreement dated October 28, 2004. Pursuant to the Securities Purchase Agreement, the purchasers agreed to purchase convertible debentures in the aggregate principal amount of $3,000,000. The Securities Purchase Agreement also provides for the issuance of warrants to purchase shares of the Company's common stock and additional investment rights to purchase additional convertible debentures. On the initial closing under the Securities Purchase Agreement, which occurred effective as of October 28, 2004, the purchasers purchased the first $1,000,000 in aggregate principal amount of the convertible debentures. Subject to the conditions set forth in the Securities Purchase Agreement, the purchasers are required to purchase the remaining $2,000,000 in aggregate principal amount of such convertible debentures on or before the fifth trading day after the effective date of the registration statement required to be filed by the Company registering on behalf of the purchasers the resale of the shares of common stock issuable upon conversion and exercise of the securities. Assuming the completion of the second closing and sale and issuance of the remaining $2,000,000 in aggregate principal amount of the convertible debentures, the Company estimates it will have adequate cash to allow it to meet its funding requirements through the third quarter of 2005. In addition to the convertible debenture, the Company also issued on the initial closing date, warrants to purchase up to 2,500,000 shares of common stock, with an exercise price equal to $1.44. Full exercise of the warrants would generate funds in excess of $3,500,000 for the Company. The Company also issued additional investment rights, which give the purchasers the right to purchase up to an aggregate of $2,500,000 of convertible debentures at the conversion price thereof of $1.08. However, the exercise of these warrants and additional investment rights is at the discretion of the purchasers and there are no assurances that the purchasers will exercise their rights under such securities. We will continue to require additional debt or equity financing for our operations which may not be readily available. Our ability to continue as a going concern is subject to our ability to generate a profit or obtain necessary funding from outside sources. Our management believes that even though we currently have limited cash resources and liquidity, the funds available from the recent financing will allow the Company to continue operations through January 2005 and, assuming the sale and issuance of the additional $2,000,000 of convertible debentures, through the third quarter of 2005. However, actual results may differ materially from such estimate, and no assurance can be given that additional funding will not be required sooner than anticipated or that such additional funding will be available when needed or on terms acceptable to the Company. Insufficient funding will require the Company to curtail or terminate operations. ITEM 3. CONTROLS AND PROCEDURES In connection with certain recent transactions and the preparation and review of our consolidated financial statements for the quarterly period ended September 30, 2004, management discovered that certain stock grants made by the Company during the second quarter and relating to the Advanced Bio/Chem transaction were improperly documented. As a result, and after discussing the misstatements with our independent registered public accounting firm, management determined that stock based compensation expense and related financial information in our financial statements for the quarterly period ended June 30, 2004 were incorrect. In addition, management discovered that certain documentation relating to the issuance of its capital stock had not been properly completed and, as a result, the Company had not properly accounted for its issued and outstanding shares of common stock and its authorized preferred stock. We have filed an amended Quarterly Report on Form 10-QSB as of the date of this Quarterly Report to reflect such restatement. Subsequent to management's identification of the misstatements in our financial statements and after discussing the misstatements with our independent registered public accounting firm, we have identified certain deficiencies and issues with our internal controls. These deficiencies and issues include: - Deficiencies related to inadequate or ineffective policies for documenting transactions. We identified deficiencies in our controls relating to certain non-accounting documentation. We discovered instances where certain corporate documents were not filed or otherwise properly processed. We also discovered that certain documentation following the Advanced Bio/Chem transaction was not properly completed. 17 - Deficiencies related to execution of processes relating to accounting for transactions. We identified deficiencies in accounting for certain aspects of our operations, such deficiencies primarily attributable to improper documentation referenced above. These deficiencies related to determining and disclosing the fair value of stock based compensation. - Deficiencies related to the internal control environment. We have determined that for the quarterly period ended June 30, 2004, we had deficiencies due to inadequate staffing in our accounting department and the lack of a full-time chief financial officer. While we hired a chief financial officer and added personnel in our accounting department during the third quarter, the transition in accounting resulting from the accounting treatment of the Advanced Bio/Chem transaction remained substantial through the third quarter and issues remained due to inadequate staffing. Based on their evaluation of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-QSB, the Chief Executive Officer and Chief Financial Officer have determined that they cannot reasonably conclude that the disclosure controls and procedures are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the required time periods. The Company believes that such deficiencies are attributable to many factors with the principal factors resulting from the quality of the Company's disclosure controls and procedures at the time of the Advanced Bio/Chem transaction and the transition following that transaction. Management has experienced certain issues during the integration process and is continuing its efforts to complete the process. As a result of the findings above, we have implemented and will continue to implement the following actions: - We hired a full-time chief financial officer at the beginning of the third quarter. - We hired an additional accountant in the accounting department. - We have engaged outside resources to supplement our financial and accounting personnel to support the preparation of financial statements and reports to be filed with the SEC. - We are establishing procedures to improve our review and processing of non-accounting documentation and contracts. - We intend to engage outside consultants to advise our management on additional enhancements to our internal controls. Our management is committed to a sound internal control environment. We have committed considerable resources to the aforementioned reviews and remedies. We believe that we have addressed the issues identified above, and we believe that we are in the process of further improving our infrastructure, personnel, processes and controls to help ensure that we are able to produce accurate financial statements on a timely basis. As described above, during the quarterly period ended September 30, 2004, we hired a full-time chief financial officer and increased personnel in our accounting department. Since the discovery of the issues and deficiencies described above, we also began implementing the changes above. These actions have materially affected, or are reasonably likely to materially affect, our internal controls over financial accounting. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company knows of no significant legal proceedings to which it is a party or to which any of its property is the subject or any unsatisfied judgments against the Company and knows of no other material legal proceedings which are pending, threatened or contemplated. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Effective April 1, 2004, the Company entered into a securities purchase agreement with an institutional investor covering the purchase of up to $1,500,000 of restricted common stock at various prices. During the three month period ended September 30, 2004, the Company received net advances of $627,735 under the arrangement. As of September 30, 2004, the Company was obligated to issue approximately 199,899 additional shares of common stock to the investor for the advances received during such period. In return for arranging the financing, the Company agreed to pay a fee of 3% of the gross funding and to issue 100,000 shares of the Company's common stock. On July 13, 2004, the Company entered into a media agreement pursuant to which the Company issued 125,000 shares of common stock in consideration for the services to be provided thereunder to the Company. These shares were issued in private placements exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither we nor any person acting on our behalf offered or sold the foregoing securities by means of any form of general solicitation or general advertising. A resale legend has been provided for the stock certificates stating that the securities have not been registered under the Securities Act of 1933 and cannot be resold or otherwise transferred without registration or an exemption. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 2.5 to the Company's Form 10-SB filed on September 28, 1998). 3.2 Certificate of Merger (incorporated by reference to Exhibit 2.7 to the Company's Form 10-SB filed on September 28, 1998). 3.3 Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 2.9 to the Company's Form 10-SB filed on September 28, 1998). 3.4 Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.(I).10 to the Company's Form S-3 filed on March 2, 2000). 3.5 Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1
19
EXHIBIT NO. DESCRIPTION to the Company's Form 8-K filed on November 5, 2004). 3.6 Bylaws (incorporated by reference to Exhibit 3.(II).2 to the Company's Amendment No. 1 to Form 10-SB filed on April 6, 1999). 4.1 Form of Convertible Debenture Due October 28, 2007 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on November 3, 2004). 4.2 Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed on November 3, 2004). 4.3 Form of Additional Investment Right (incorporated by reference to Exhibit 4.3 to the Company's Form 8-K filed on November 3, 2004). 10.1*+ Exclusive License Agreement dated effective as of June 28, 2004 by and between Baylor College of Medicine and Power 3 Medical Products, Inc. 10.2*+ Patent and Technology License Agreement dated August 1, 2004 by and between The Board of Regents of The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center, and Power 3 Medical Products, Inc. 10.3*+ Patent and Technology License Agreement dated September 1, 2003 by and between The Board of Regents of The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center, and Advanced Bio/Chem, Inc. (d/b/a ProteEx). 31.1* Certification 31.2* Certification 32.1** Certification Pursuant to Section 906 32.2** Certification Pursuant to Section 906
- ------------------------ * Filed with this report. ** Furnished with this report. + Portions of this exhibit have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment. 20 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Power 3 Medical Products, Inc. (Registrant) Date: November 15, 2004 By: /s/ Steven B. Rash ------------------------------------------ Steven B. Rash Chief Executive Officer Date: November 15, 2004 By: /s/ Michael J. Rosinski ------------------------------------------ Michael J. Rosinski Chief Financial Officer 21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 2.5 to the Company's Form 10-SB filed on September 28, 1998). 3.2 Certificate of Merger (incorporated by reference to Exhibit 2.7 to the Company's Form 10-SB filed on September 28, 1998). 3.3 Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 2.9 to the Company's Form 10-SB filed on September 28, 1998). 3.4 Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.(I).10 to the Company's Form S-3 filed on March 2, 2000). 3.5 Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on November 5, 2004). 3.6 Bylaws (incorporated by reference to Exhibit 3.(II).2 to the Company's Amendment No. 1 to Form 10-SB filed on April 6, 1999). 4.1 Form of Convertible Debenture Due October 28, 2007 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on November 3, 2004). 4.2 Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed on November 3, 2004). 4.3 Form of Additional Investment Right (incorporated by reference to Exhibit 4.3 to the Company's Form 8-K filed on November 3, 2004). 10.1*+ Exclusive License Agreement dated effective as of June 28, 2004 by and between Baylor College of Medicine and Power 3 Medical Products, Inc. 10.2*+ Patent and Technology License Agreement dated August 1, 2004 by and between The Board of Regents of The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center, and Power 3 Medical Products, Inc. 10.3*+ Patent and Technology License Agreement dated September 1, 2003 by and between The Board of Regents of The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center, and Advanced Bio/Chem, Inc. (d/b/a ProteEx). 31.1* Certification 31.2* Certification 32.1** Certification Pursuant to Section 906 32.2** Certification Pursuant to Section 906
- ------------------------ * Filed with this report. ** Furnished with this report. + Portions of this exhibit have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment. 22 EX-10.1 2 h20162exv10w1.txt EXCLUSIVE LICENSE AGREEMENT - BALOR COLLEGE OF MEDICINE EXHIBIT 10.1 Confidential Treatment Requested. *** indicates material has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. A complete copy of this agreement has been filed separately with the Securities and Exchange Commission. EXCLUSIVE LICENSE AGREEMENT Re: Baylor OTA # 04-107 Entitled "Serum Proteomic Methods and Biomarkers for Diagnosis of Neurodegenerative Disease and Differential Diagnosis of Alzheimer's, Parkinson's Lou Gehrig's (ALS) Diseases, and other Motor Neuron and Neurological Disorders" This Exclusive License Agreement (hereinafter called "Agreement"), to be effective as of the 28th day of June, 2004 (hereinafter called "Agreement Date"), is by and between Baylor College of Medicine (hereinafter called "BAYLOR"), a Texas nonprofit corporation having its principal place of business at One Baylor Plaza, Houston, Texas 77030, and Power3 Medical Products, Inc., a corporation organized under the laws of New York and having a principal place of business at 3400 Research Forest Drive, Suite B2-3, The Woodlands, Texas 77381, and its Affiliates (hereinafter, collectively referred to as "LICENSEE"). WITNESSETH: WHEREAS, BAYLOR and LICENSEE each own an undivided interest in and to the Patent Rights as defined below; and WHEREAS, BAYLOR is willing to grant a royalty bearing, worldwide, exclusive license to the Patent Rights to LICENSEE on the terms set forth herein; and WHEREAS, LICENSEE desires to obtain said exclusive license under the Patent Rights. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto expressly agree as follows: 1. DEFINITIONS AS USED HEREIN 1.1 The term "Affiliates" shall mean any corporation, partnership, joint venture or other entity of which the common stock or other equity ownership thereof is twenty five percent (25%) or more owned by LICENSEE. 1.2 The term "Confidential Information" shall mean all information relating to the business of a Party that is not available to the general public, including but not limited to its technical and business information, products, assets, inventions, know-how, research programs, biological materials, software, trade secrets, designs, personnel, financial condition, business plans or prospects, protocols, clinical parameters or markers and other information associated with this Agreement, whether or not patentable or copyrightable, delivered or communicated to the other Party. Confidential Information includes not only written information, but information transferred orally, visually, electronically or by any other means, that is designated as being confidential. Confidential Information also includes any copies, notes or summaries prepared from the Confidential Information provided by either Party. 1.3 The term "Field" shall mean all fields. -1- EXHIBIT 10.1 1.4 The term "Inventors" shall mean Stanley Appel, Ericka Simpson and Albert Yen, employees of BAYLOR, and Ira Goldknopf and Essam Sheta, employees of LICENSEE. 1.5 The term "Legal Costs" shall mean all legal fees and expenses, filing or maintenance fees, assessments and all other costs and expenses related to prosecuting, obtaining and maintaining patent protection on the Patent Rights in the United States and foreign countries. 1.6 The term "Licensed Product(s)" shall mean any product, process or service that incorporates, utilizes or is made with the use of the Patent Rights. 1.7 The term "Net Sales" shall mean the gross amount of monies or cash equivalent or other consideration which is paid by unrelated third parties to LICENSEE or sublicensees for the Licensed Products by sale or other mode of transfer, less all trade, quantity and cash discounts actually allowed, credits, and allowances actually granted on account of rejections, returns or billing errors, duties, transportation and insurance, taxes and other governmental charges actually paid. The term "Net Sales" in the case of non-cash sales, shall mean the fair market value of all equivalent or other consideration received by LICENSEE for the Licensed Products. 1.8 The term "Party" shall mean either LICENSEE or BAYLOR, and "Parties" shall mean LICENSEE and BAYLOR. 1.9 The term "Patent Rights" shall mean United States Patent Application Serial No. TBA, entitled "Biomarkers for Neurodegenerative Disease," filed TBA, which was developed by the Inventors, the inventions described and claimed therein, and all other pending United States patent applications or parts thereof and any United States patent which issues from any such pending applications and any and all divisions, reissues, re-examinations, renewals, continuations, continuations-in-part to the extent the claims are directed to subject matter specifically described in the aforementioned patent application and are dominated by the claims of the existing Patent Rights, and extensions thereof, and all other counterpart, pending or issued patents in all other countries. 1.10 The term "Sublicensing Revenue" shall mean all (i) cash, (ii) sublicensing fees and (iii) all other payments and the cash equivalent thereof, which are paid to LICENSEE by the sublicensees of its rights hereunder, other than research and development money paid to LICENSEE to conduct research. 2. GRANT OF LICENSE 2.1 Subject to the reservations of rights set forth in Paragraph 2.2, BAYLOR hereby grants to LICENSEE an exclusive, worldwide, sublicensable license under the Patent Rights to make, have made, use, market, sell, offer to sell, lease and import Licensed Products in the Field. 2.2 The grant in Section 2.1 shall be further subject to, restricted by and non-exclusive with respect to: (i) the making or use of the Patent Rights by BAYLOR for non-commercial research, patient care, teaching and other educationally related purposes; (ii) the making or use of the Patent Rights by the BAYLOR Inventors for non-commercial research purposes at academic or research institutions; (iii) any non-exclusive license of the Patent Rights that BAYLOR grants to other academic or research institutions for non-commercial research purposes; and -2- EXHIBIT 10.1 (iv) any non exclusive license of the Patent Rights that BAYLOR is required by law or regulation to grant to the United States of America or to a foreign state pursuant to an existing or future treaty with the United States of America. 2.3 Government Reservation. Rights under this Agreement are subject to rights required to be granted to the Government of the United States of America pursuant to 35 USC Section 200-212, including a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject inventions throughout the world. 3. MARKETING EFFORTS LICENSEE shall use reasonable efforts, as defined herein, to effect assiduously the introduction of Licensed Products into the commercial market as soon as practicable. Such efforts shall include, but not be limited to: (i) diligence in the patent filings and prosecution as described in Section 8 and (ii) working with Dr. Stan Appel to increase the clinical data and relevance of the diagnostic processes. 4. PAYMENTS 4.1 As partial consideration for the rights conveyed by BAYLOR under this Agreement, LICENSEE shall pay BAYLOR a license fee of *** upon execution of this Agreement. 4.2 In addition to the foregoing, LICENSEE shall pay BAYLOR a royalty of ***. Such royalties shall be payable as provided in Section 5. 4.3 After the first commercial sale, if the royalties paid in any calendar year do not reach the minimum amount of ***, LICENSEE shall pay an additional amount with the payment due for the period ending December 31 of such year, so that the total amount paid for such year shall reach such minimum amount. 4.4 LICENSEE shall also pay BAYLOR the following milestone payment set forth below: (i) *** LICENSEE shall notify BAYLOR in writing within thirty (30) days upon the achievement of the milestone, such notice to be accompanied by payment of the appropriate milestone payment. Milestones are to be paid regardless of whether LICENSEE or LICENSEE's sublicensee attains such milestone. 4.5 In addition to the foregoing fees and royalties, LICENSEE agrees to pay to BAYLOR ***. 4.6 LICENSEE will be responsible for all Legal Costs incurred after the Agreement Date. 4.7 Should LICENSEE fail to make any payment whatsoever due and payable to BAYLOR hereunder, BAYLOR may, at its sole option, terminate this Agreement as provided in Section 10. -3- EXHIBIT 10.1 5. REPORTING 5.1 No later than sixty (60) days after December 31 of each calendar year, LICENSEE shall provide to BAYLOR a written annual Progress Report describing progress on research and development, regulatory approvals, manufacturing, sublicensing, marketing and sales during the most recent twelve (12) month period ending December 31 and plans for the forthcoming year. If multiple technologies are covered by the license granted hereunder, the Progress Report shall provide the information set forth above for each technology. LICENSEE shall also provide any reasonable additional data BAYLOR requires to evaluate LICENSEE's performance. 5.2 LICENSEE shall report to BAYLOR the date of first sale of Licensed Products in each country within thirty (30) days of occurrence. 5.3 LICENSEE shall submit to BAYLOR within thirty (30) days after March 31, June 30, September 30 and December 31, a Royalty Report setting forth for such calendar quarter at least the following information: (i) the number of Licensed Products sold by LICENSEE and sublicensees in each country; (ii) total billings for such Licensed Products; (iii) deductions applicable to determine the Net Sales thereof; (iv) the amount of Sublicensing Revenue received by LICENSEE; (v) the amount of royalty due thereon, or, if no royalties are due to BAYLOR for any reporting period, the statement that no royalties are due; and (vi) the amount of other payments due BAYLOR, including but not limited to, milestone payments and minimum royalty payments. Such report shall be certified as correct by an officer of LICENSEE and shall include a detailed listing of all deductions from royalties and other payments. After termination or expiration of this Agreement, a final payment shall be made by LICENSEE covering the whole or partial calendar quarter. 5.4 LICENSEE shall pay to BAYLOR with each such Royalty Report the amount of royalties and other payments due with respect to such calendar quarter. If multiple technologies are covered by the license granted hereunder, LICENSEE shall specify which Patent Rights are utilized for each Licensed Product included in the Royalty Report by citing the applicable OTA NUMBER listed on the front page of the Agreement. 5.5 All payments due hereunder shall be deemed received when funds are credited to BAYLOR's bank account and shall be payable by check or wire transfer in United States dollars. For sales of Licensed Products in currencies other than the United States, LICENSEE shall use exchange rates published in The Wall Street Journal on the last business day of the calendar quarter that such payment is due. No transfer, exchange, collection or other charges, INCLUDING ANY WIRE TRANSFER FEES, shall be deducted from such payments. 5.6 Late payments shall be subject to a charge of one and one-half percent (1.5%) per month, the interest being compounded annually, or two hundred fifty dollars ($250.00), whichever is greater. LICENSEE shall calculate the correct late payment charge, and shall add it to each such late payment. -4- EXHIBIT 10.1 Said late payment charge and the payment and acceptance thereof shall not negate or waive the right of BAYLOR to seek any other remedy, legal or equitable, to which it may be entitled because of the delinquency of any payment. 5.7 If payments are sent by check, they shall be sent to the address listed in Paragraph 14.1. If payments are sent by wire transfer, they shall be sent using the wiring instructions sent by BAYLOR. 5.8 In the event of acquisition, merger, change of corporate name, or change of make-up, organization, or identity, LICENSEE shall notify BAYLOR in writing within thirty (30) days of such event. 5.9 If LICENSEE or sublicensee (or optionee) does not qualify as a "small entity" as provided by the United States Patent and Trademark Office, LICENSEE must notify BAYLOR immediately. 6. RECORDS AND INSPECTION LICENSEE shall maintain or cause to be maintained a true and correct set of records pertaining to the Net Sales of Licensed Products by LICENSEE under this Agreement. During the term of this Agreement and for a period of two (2) years thereafter, LICENSEE agrees to permit an accountant selected and paid by BAYLOR and reasonably acceptable to LICENSEE to have access during ordinary business hours to such records as are maintained by LICENSEE as may be necessary, in the opinion of such accountant, to determine the correctness of any report and/or payment made under this Agreement. In the event that the audit reveals an underpayment of royalty by more than five percent (5%), the cost of the audit shall be paid by LICENSEE. If the underpayment is less than five percent (5%) but more than two percent (2%), LICENSEE and BAYLOR shall each pay fifty percent (50%) of the cost of the independent audit. Such accountant shall maintain in confidence, and shall not disclose to BAYLOR, any information concerning LICENSEE or its operations or properties other than information directly relating to the correctness of such reports and payments. BAYLOR will be entitled to no more than one examination per year without LICENSEE's written consent. 7. SUBLICENSES All sublicensee granted by LICENSEE of its rights hereunder shall be subject to the terms of this Agreement. LICENSEE shall be responsible for its sublicensees and shall not grant any rights which are inconsistent with the rights granted to and obligations of LICENSEE hereunder. Any act or omission of a sublicensee which would be a breach of this Agreement if performed by LICENSEE shall be deemed to be a breach by LICENSEE of this Agreement. Each sublicense agreement granted by LICENSEE shall include an audit right by BAYLOR of the same scope as provided in Section 6 hereof with respect to LICENSEE. No such sublicense agreement shall contain any provision which would cause it to extend beyond the term of this Agreement. LICENSEE shall give BAYLOR prompt notification of the identity and address of each sublicensee with whom it concludes a sublicense agreement and shall supply BAYLOR with a copy of each such sublicense agreement. 8. PATENTS AND INFRINGEMENT 8.1 From the Agreement Date and for the term of this Agreement, LICENSEE shall have primary responsibility using patent counsel of its choice reasonably acceptable to BAYLOR for filing, prosecuting and maintaining all patent applications and patents included in the Patent Rights licensed hereunder, except that BAYLOR may assume responsibility at its sole expense for pursuing any protection which LICENSEE declines to prosecute pursuant to Paragraph 8.2 of this Agreement. -5- EXHIBIT 10.1 8.2 During the term of this Agreement, if LICENSEE decides not to file any or all United States and foreign applications or to continue prosecution of a patent application to issuance or maintain any United States or foreign patent application or patent, LICENSEE shall timely notify BAYLOR in writing in order that BAYLOR may file the United States and foreign applications and continue the prosecution or maintenance of such patent applications at its own expense. If LICENSEE fails to notify BAYLOR in sufficient time for BAYLOR to assume the cost, LICENSEE shall be considered in default of this Agreement. 8.3 During the term of this Agreement, LICENSEE agrees to prosecute with good faith and due diligence all such patent applications and to take all actions reasonably necessary to maintain and enforce the patents and proprietary rights in and to the Patent Rights. 8.4 During the term of this Agreement LICENSEE shall instruct counsel for LICENSEE to keep BAYLOR reasonably informed, at LICENSEE's expense, of prosecutions pursuant to this Section 8 including submitting to BAYLOR copies of all official actions and responses thereto. 8.5 BAYLOR agrees to cooperate with LICENSEE to whatever extent is necessary to procure patent protection of any rights, including fully agreeing to execute any and all documents to give LICENSEE the full benefit of the licenses granted herein. 8.6 During the term of this Agreement, each Party shall promptly inform the other of any suspected infringement of any claims in the Patent Rights or the misuse, misappropriation, theft or breach of confidence of other proprietary rights in the Patent Rights by a third party, and with respect to such activities as are suspected. Any action or proceeding against such third party shall be instituted as following: (i) BAYLOR and LICENSEE may agree to jointly institute an action for infringement, misuse, misappropriation, theft or breach of confidence of the proprietary rights against such third party. Such joint action shall be brought in the names of both BAYLOR and LICENSEE. If BAYLOR or LICENSEE decide to jointly prosecute an action or proceeding after it has been instituted by one Party, the action shall be continued in the name or names they both agree is expedient for efficient prosecution of such action. LICENSEE and BAYLOR shall agree to the manner in which they shall exercise control over any joint action or proceeding, providing however that if they cannot agree BAYLOR shall have the right to unilaterally decide on control. In such joint action or proceeding, the out-of-pocket costs shall be borne equally, and any recovery or settlement shall be shared equally. (ii) If LICENSEE does not agree to participate in a joint action or proceeding then BAYLOR shall have the right, but not the obligation, to institute an action for infringement, misuse, misappropriation, theft or breach of confidence of the proprietary rights against such third party. If BAYLOR elects to institute action, it does so at its own cost. If BAYLOR fails to bring such an action or proceeding within a period of three (3) months after receiving notice or otherwise having knowledge of such infringement, then LICENSEE shall have the right, but not the obligation, to prosecute the same at its own expense. Should either BAYLOR or LICENSEE commence suit under the provisions of this Paragraph 8.6 and thereafter elect to abandon the same, it shall give timely notice to the other Party who may, if it so desires, continue prosecution of such action or proceeding. All recoveries, whether by judgment, award, decree or settlement, from infringement or misuse of Patent Rights shall be apportioned as follows: (a) the Party bringing the action or proceeding shall first recover an amount equal the costs and expenses incurred by such Party directly related to the prosecution of such action or proceeding, (b) the Party cooperating in such action or proceeding shall then recover costs and expenses incurred by such Party directly related to its cooperation in the prosecution of such action or proceeding and (c) the remainder shall be divided equally between LICENSEE and BAYLOR. -6- EXHIBIT 10.1 8.7 Neither BAYLOR nor LICENSEE shall settle any action covered by Paragraph 8.6 without first obtaining the consent of the other Party, which consent will not be unreasonably withheld. 8.8 BAYLOR shall not be liable for any losses incurred as the result of an action for infringement brought against LICENSEE as the result of LICENSEE's exercise of any right granted under this Agreement. The decision to defend or not defend shall be in LICENSEE's sole discretion. 9. TERM AND EXPIRATION Unless sooner terminated as otherwise provided in Section 10, the license to employ Patent Rights granted herein as part of Section 2 shall expire on a country-by-country basis, on the later of (i) the date of expiration of the last of the Patent Rights to expire or (ii) in the event no patents included within the Patent Rights issue in such country, the first date following the tenth (10th) anniversary of the first commercial sale of Licensed Products by LICENSEE in such country. After such expiration, LICENSEE shall have a perpetual, paid-in-full (i.e., royalty free) license in such country. 10. TERMINATION 10.1 In the event of default or failure by LICENSEE to perform any of the terms, covenants or provisions of this Agreement, LICENSEE shall have thirty (30) days after the giving of written notice of such default by BAYLOR to correct such default. If such default is not corrected within the said thirty (30) day period, BAYLOR shall have the right, at its option, to cancel and terminate this Agreement. The failure of BAYLOR to exercise such right of termination, for non-payment of royalties/fees or otherwise, shall not be deemed to be a waiver of any right BAYLOR might have, nor shall such failure preclude BAYLOR from exercising or enforcing said right upon any subsequent failure by LICENSEE. 10.2 BAYLOR shall have the right, at its option, to cancel and terminate this Agreement in the event that LICENSEE shall (i) become involved in insolvency, dissolution, bankruptcy or receivership proceedings affecting the operation of its business or (ii) make an assignment of all or substantially all of its assets for the benefit of creditors, or in the event that (iii) a receiver or trustee is appointed for LICENSEE and LICENSEE shall, after the expiration of thirty (30) days following any of the events enumerated above, have been unable to secure a dismissal, stay or other suspension of such proceedings. 10.3 LICENSEE shall have the right in its sole discretion to terminate this Agreement upon sixty (60) days' written notice to BAYLOR. 10.4 In the event of termination of this Agreement, all rights in the Patent Rights conveyed by BAYLOR to LICENSEE shall automatically revert to BAYLOR, and BAYLOR shall be free to license such rights to third parties. 10.5 LICENSEE shall provide, in all sublicenses granted by it under this Agreement, that LICENSEE's interest in such sublicenses shall, at BAYLOR's option, terminate or be assigned to BAYLOR upon termination of this Agreement. 10.6 In the event this Agreement is terminated pursuant to this Section 10, or expires as provided for in Section 9, BAYLOR is under no obligation to refund any payments made by LICENSEE to BAYLOR, as set forth in Section 4, prior to the effective date of such termination or expiration. -7- EXHIBIT 10.1 10.7 No termination of this Agreement shall constitute a termination or a waiver of any rights of either Party against the other Party accruing at or prior to the time of such termination. The obligations of Sections 6, 7, 13, 15 and 16 shall survive termination of this Agreement. 11. ASSIGNABILITY LICENSEE may assign this Agreement as part of: (i) A sale or other transfer of LICENSEE's entire business; or (ii) A sale or other transfer of that part of LICENSEE's business to which the license granted hereby relates; and upon payment by LICENSEE to BAYLOR of an assignment fee of ***. LICENSEE shall give BAYLOR thirty (30) days prior written notice of such assignment, including the new contact information of assignee. BAYLOR, however, shall not be deemed to have approved such assignment and transfer unless and until such assignee has agreed in writing to BAYLOR to be bound by all the terms and provisions of this Agreement and BAYLOR has received the assignment fee as specified above, in which event LICENSEE shall be released of liability hereunder. Upon such assignment of this Agreement by such assignee, the term " LICENSEE" as used herein shall include such assignee. 12. GOVERNMENTAL COMPLIANCE 12.1 LICENSEE shall at all times during the term of this Agreement and for so long as it shall use the Patent Rights, or sell Licensed Products, comply and cause its sublicensees to comply with all laws that may control the import, export, manufacture, use, sale, marketing, distribution and other commercial exploitation of the Patent Rights, Licensed Products or any other activity undertaken pursuant to this Agreement. 12.2 LICENSEE agrees that Licensed Products leased or sold in the United States shall be manufactured substantially in the United States. 13. ARBITRATION 13.1 Amicable Resolution. The Parties shall attempt to settle any controversy between them amicably. To this end, a senior executive from each Party shall consult and negotiate to reach a solution. The Parties agree that the period of amicable resolution shall toll any otherwise applicable statute of limitations. However, nothing in this clause shall preclude any Party from commencing mediation if said negotiations do not result in a signed written settlement agreement within thirty (30) days after written notice that these amicable resolution negotiations have commenced. 13.2 Mediation. If a controversy arises out of or relates to this agreement, or the breach thereof, and if the controversy cannot be settled through amicable resolution, the Parties agree to try in good faith to settle the controversy by mediation before resorting to final and binding arbitration. The Party seeking mediation shall propose five mediators, each of whom shall be a lawyer licensed to practice by the state of Texas, having practiced actively in the field of commercial law for at least fifteen (15) years, to the other Party who shall select the mediator from the list. The Parties shall split the cost of the mediator equally. The Parties agree that the period of mediation shall toll any otherwise applicable statute of limitations. However, nothing in this clause shall preclude any Party from commencing arbitration if said negotiations do not result in a signed written settlement agreement within sixty (60) days after written notice that amicable resolution negotiations have commenced. -8- EXHIBIT 10.1 13.3 Arbitration. Any dispute, controversy, or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, including claims for tortious interference or other tortious or statutory claims arising before, during or after termination, providing only that such claim touches upon matters covered by this Agreement shall be finally settled by arbitration administered by the American Arbitration Association pursuant to the Commercial Arbitration Rules in force at the time of the commencement of the arbitration, except as modified by the specific provisions of this Agreement. It is the specific intent of the Parties that this arbitration provision is intended to be the broadest form allowed by law. 13.4 Parties to Arbitration. This agreement to arbitrate is intended to be binding upon the signatories hereto, their principals, successors, assigns, subsidiaries and affiliates. This agreement to arbitrate is also intended to include any disputes, controversy or claims against any Party's employees, agents, representatives, or outside legal counsel arising out of or relating to matters covered by this Agreement or any agreement in which this Agreement is incorporated. 13.5 Consolidation Permitted. The Parties expressly agree that any court with jurisdiction may order the consolidation of any arbitrable controversy under this Agreement with any related arbitrable controversy not arising under this Agreement, as the court may deem necessary in the interests of justice or efficiency or on such other grounds as the court may deem appropriate. 13.6 Entry of Judgment. The Parties agree that a final judgment on the arbitration award may be entered by any court having jurisdiction thereof. 13.7 Appointing Arbitrators. The American Arbitration Association shall appoint the arbitrator(s) from its Large, Complex Claims Panel. If such appointment cannot be made from the Large, Complex Claims Panel, then from its Commercial Panel. The Parties hereby agree to and acquiesce in any appointment of an arbitrator or arbitrators that may be made by such appointing authority. 13.8 Qualifications of the Arbitrator(s). The arbitrator(s) must be a lawyer, having practiced actively in the field of commercial law for at least fifteen (15) years. 13.9 Governing Substantive Law. The arbitrator(s) shall determine the rights and obligations of the Parties according to the substantive laws of the State of Texas (excluding conflicts of law principles) as though acting as a court of the State of Texas. 13.10 Governing Arbitration Law. The law applicable to the validity of the arbitration clause, the conduct of the arbitration, including any resort to a court for provisional remedies, the enforcement of any award and any other question of arbitration law or procedure shall be the Federal Arbitration Act. 13.11 Governing Convention. The Parties elect to have the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (instead of the Inter-American New York Convention on International Commercial Arbitration of August 15, 1990) govern any and all disputes that may be the subject of arbitration pursuant to this Agreement. 13.12 Preliminary Issues of Law. The arbitrator(s) shall hear and determine any preliminary issue of law asserted by a Party to be dispositive of any claim, in whole or part, in the manner of a court hearing a motion to dismiss for failure to state a claim or for summary judgment, pursuant to such terms and procedures as the arbitrator(s) deems appropriate. 13.13 Confidentiality. The Parties and the arbitrator(s) shall treat all aspects of the arbitration proceedings, including without limitation discovery, testimony and other evidence, briefs and the award, -9- EXHIBIT 10.1 as strictly confidential. Further, except as may be required by law, neither Party nor the arbitrator(s) may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both Parties. 13.14 Place of Arbitration. The seat of arbitration shall be Houston, Texas, USA. 13.15 Language. The arbitration shall be conducted in the English language. All submissions shall be made in English or with an English translation. Witnesses may provide testimony in a language other than English, provided that a simultaneous English translation is provided. Each Party shall bear its own translation costs. 13.16 Punitive Damages Prohibited. The Parties hereby waive any claim to any damages in the nature of punitive, exemplary, or statutory damages in excess of compensatory damages, or any form of damages in excess of compensatory damages, and the arbitrator(s) is/are specially divested of any power to award any damages in the nature of punitive, exemplary, or statutory damages in excess of compensatory damages, or any form of damages in excess of compensatory damages. 13.17 Costs. The Party prevailing on substantially all of its claims shall be entitled to recover its costs, including attorneys' fees, for the arbitration proceedings, as well as for any ancillary proceeding, including a proceeding to compel or enjoin arbitration, to request interim measures or to confirm or set aside an award. 13.18 Survival. The provisions of this Section 13 shall survive expiration or termination of this Agreement. 14. ADDRESSES 14.1 All payments shall be made payable to "Baylor College of Medicine" and shall be sent to the address below, and shall reference OTA # 04-107. BAYLOR Tax ID #: 74-1613878 Director, Baylor Licensing Group Baylor College of Medicine One Baylor Plaza, BCM210-600D Houston, TX 77030 14.2 All notices, reports or other communication pursuant to this Agreement shall be sent to such Party via (i) United States Postal Service postage prepaid, (ii) overnight courier, or (iii) facsimile transmission, addressed to it at its address set forth below or as it shall designate by written notice given to the other Party. Notice shall be sufficiently made, or given and received (a) on the date of mailing or (b) when a facsimile printer reflects transmission. -10- EXHIBIT 10.1 In the case of BAYLOR: Patrick Turley Associate General Counsel Baylor College of Medicine One Baylor Plaza, BCM210-600D Houston, TX 77030 Facsimile No. 713-798-1252 In the case of LICENSEE: Power3 Medical Products, Inc. 3400 Research Forest Drive, Suite B2-3 The Woodlands, TX 77381 Facsimile No. 281-395-0881 14.3 Each such report, notice or other communication shall reference OTA # 04-107. 15. INDEMNITY, INSURANCE & WARRANTIES 15.1 INDEMNITY. EACH PARTY SHALL NOTIFY THE OTHER OF ANY CLAIM, LAWSUIT OR OTHER PROCEEDING RELATED TO THE PATENT RIGHTS. LICENSEE AGREES THAT IT WILL DEFEND, INDEMNIFY AND HOLD HARMLESS BAYLOR, ITS FACULTY MEMBERS, SCIENTISTS, RESEARCHERS, EMPLOYEES, OFFICERS, TRUSTEES AND AGENTS AND EACH OF THEM (THE "INDEMNIFIED PARTIES"), FROM AND AGAINST ANY AND ALL CLAIMS, CAUSES OF ACTION, LAWSUITS OR OTHER PROCEEDINGS (THE "BAYLOR CLAIMS") FILED OR OTHERWISE INSTITUTED AGAINST ANY OF THE INDEMNIFIED PARTIES RELATED DIRECTLY OR INDIRECTLY TO OR ARISING OUT OF THE DESIGN, PROCESS, MANUFACTURE OR USE BY ANY PERSON OR PARTY OF THE PATENT RIGHTS, LICENSED PRODUCTS OR ANY OTHER EMBODIMENT OF THE PATENT RIGHTS EVEN THOUGH SUCH BAYLOR CLAIMS AND THE COSTS (INCLUDING, BUT NOT LIMITED TO, THE PAYMENT OF ALL REASONABLE ATTORNEYS' FEES AND COSTS OF LITIGATION OR OTHER DEFENSE) RELATED THERETO RESULT IN WHOLE OR IN PART FROM THE NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES OR ARE BASED UPON DOCTRINES OF STRICT LIABILITY OR PRODUCT LIABILITY; PROVIDED, HOWEVER, THAT SUCH INDEMNITY SHALL NOT APPLY TO ANY BAYLOR CLAIMS ARISING FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF ANY INDEMNIFIED PARTY. LICENSEE WILL ALSO ASSUME RESPONSIBILITY FOR ALL COSTS AND EXPENSES RELATED TO SUCH BAYLOR CLAIMS FOR WHICH IT IS OBLIGATED TO INDEMNIFY THE INDEMNIFIED PARTIES PURSUANT TO THIS PARAGRAPH 15.1, INCLUDING, BUT NOT LIMITED TO, THE PAYMENT OF ALL REASONABLE ATTORNEYS' FEES AND COSTS OF LITIGATION OR OTHER DEFENSE. -11- EXHIBIT 10.1 15.2 Insurance. (i) LICENSEE shall, for so long as LICENSEE manufactures, uses or sells any Licensed Product(s) for research applications, maintain in full force and effect policies of (a) worker's compensation insurance within statutory limits, (b) employers' liability insurance with limits of not less than one million dollars ($1,000,000) per occurrence and (c) general liability insurance with limits of not less than two million dollars ($2,000,000) per occurrence with an annual aggregate of two million dollars ($2,000,000). (ii) During any period in which LICENSEE manufactures, uses or sells any Licensed Product(s) for clinical applications, LICENSEE shall immediately notify BAYLOR in writing, and LICENSEE shall maintain in full force and effect policies of (i) worker's compensation insurance within statutory limits, (b) employers' liability insurance with limits of not less than one million dollars ($1,000,000) per occurrence, (c) general liability insurance (with Broad Form General Liability endorsement) with limits of not less than five million dollars ($5,000,000) per occurrence with an annual aggregate of ten million dollars ($10,000,000) and (d) products liability insurance, with limits of not less than ten million dollars ($10,000,000) per occurrence with an annual aggregate of twenty million dollars ($20,000000). (iii) During any period in which LICENSEE manufactures or uses any Licensed Product(s) in clinical trials, LICENSEE shall immediately notify BAYLOR in writing, and LICENSEE shall maintain in full force and effect a clinical trial insurance policy with limits of not less than five million dollars ($5,000,000) per occurrence with an annual aggregate of ten million dollars ($10,000,000). (iv) Such coverage(s) shall be purchased from a carrier or carriers having an A. M. Best rating of at least A- (A minus) and shall name BAYLOR as an additional insured. LICENSEE shall provide to BAYLOR copies of certificates of insurance within thirty (30) days after execution of this Agreement. Upon request by BAYLOR, LICENSEE shall provide to BAYLOR copies of said policies of insurance. It is the intention of the Parties hereto that LICENSEE shall, throughout the term of this Agreement, continuously and without interruption, maintain in force the required insurance coverages set forth in this Paragraph 15.2. Failure of LICENSEE to comply with this requirement shall constitute a default of LICENSEE allowing BAYLOR, at its option, to immediately terminate this Agreement. (v) BAYLOR reserves the right to request additional policies of insurance where appropriate and reasonable in light of LICENSEE's business operations and availability of coverage. 15.3 DISCLAIMER OF WARRANTY. BAYLOR AND LICENSEE MAKE NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF FITNESS OR MERCHANTABILITY, REGARDING OR WITH RESPECT TO THE PATENT RIGHTS OR LICENSED PRODUCTS AND BAYLOR AND LICENSEE MAKE NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, OF THE PATENTABILITY OF THE PATENT RIGHTS OR LICENSED PRODUCTS OR OF THE ENFORCEABILITY OF ANY PATENTS ISSUING THEREUPON, IF ANY, OR THAT THE PATENT RIGHTS OR LICENSED PRODUCTS ARE OR SHALL BE FREE FROM INFRINGEMENT OF ANY PATENT OR OTHER RIGHTS OF THIRD PARTIES. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS CONFERRING BY IMPLICATION, ESTOPPEL OR OTHERWISE ANY LICENSE OR RIGHTS UNDER ANY PATENTS OF BAYLOR OTHER THAN THE PATENT RIGHTS, REGARDLESS OF WHETHER SUCH PATENTS ARE DOMINANT OR SUBORDINATE TO THE PATENT RIGHTS. -12- EXHIBIT 10.1 16. ADDITIONAL PROVISIONS 16.1 Use of BAYLOR Name. LICENSEE agrees that it shall not use in any way the name of "Baylor College of Medicine" or any logotypes or symbols associated with BAYLOR or the names of any of the scientists or other researchers at BAYLOR without the prior written consent of BAYLOR. 16.2 Confidentiality. (i) Because BAYLOR and LICENSEE will be cooperating with each other, and because each may reveal to the other certain Confidential Information, BAYLOR and LICENSEE agree to hold any Confidential Information that is obtained in connection with this Agreement as confidential. (ii) A Party receiving Confidential Information shall use its best efforts to ensure that all Confidential Information of the disclosing Party is kept confidential. Thus, for example, neither Party will disclose Confidential Information to any third party without the express written consent of the disclosing Party and no receiving Party will use such Confidential Information except pursuant to this Agreement. A receiving Party also agrees to notify the disclosing Party immediately upon discovery of any unauthorized use or disclosure of Confidential Information and, in every reasonable way, to cooperate and to assist the disclosing Party to regain possession of the Confidential Information and to prevent its further unauthorized use. (iii) Each Party's confidentiality obligations and the limitations upon the right to use the Confidential Information shall not apply to the extent that the receiving Party can demonstrate that the same: (a) was already known by the receiving Party prior to the disclosure by the disclosing Party; (b) becomes patented, published or otherwise part of the public domain through no fault or omission of the receiving Party; (c) is disclosed to the receiving Party by a third party that has the right to make such disclosure; (d) is independently developed by the receiving Party without any use of the Confidential Information and otherwise in a manner not inconsistent with this Agreement; (e) is authorized to be disclosed by the disclosing Party in writing; or (f) is required to be disclosed by applicable law, rule or regulation, by order of governmental or judicial authority; provided that the receiving Party shall use reasonable efforts to obtain confidential treatment of such information and notifies the disclosing Party prior to making such disclosure. 16.3 BAYLOR's Disclaimers. Neither BAYLOR, nor any of its faculty members, scientists, researchers, employees, officers, trustees or agents assume any responsibility for the manufacture, product specifications, sale or use of the Patent Rights or Licensed Products which are manufactured by or sold by LICENSEE. 16.4 Independent Contractors. The Parties hereby acknowledge and agree that each is an independent contractor and that neither Party shall be considered to be the agent, representative, master or servant of the other Party for any purpose whatsoever, and that neither Party has any authority to enter into a contract, to assume any obligation or to give warranties or representations on behalf of the other Party. Nothing in this relationship shall be construed to create a relationship of joint venture, partnership, fiduciary or other similar relationship between the Parties. 16.5 Non-Waiver. The Parties covenant and agree that if a Party fails or neglects for any reason to take advantage of any of the terms provided for the termination of this Agreement or if a Party, having the right to declare this Agreement terminated, shall fail to do so, any such failure or neglect by such Party shall not be a waiver or be deemed or be construed to be a waiver of any cause for the termination of this Agreement subsequently arising, or as a waiver of any of the terms, covenants or -13- EXHIBIT 10.1 conditions of this Agreement or of the performance thereof. None of the terms, covenants and conditions of this Agreement may be waived by a Party except by its written consent. 16.6 Reformation. The Parties hereby agree that neither Party intends to violate any public policy, statutory or common law, rule, regulation, treaty or decision of any government agency or executive body thereof of any country or community or association of countries, and that if any word, sentence, paragraph or clause or combination thereof of this Agreement is found, by a court or executive body with judicial powers having jurisdiction over this Agreement or any of the Parties hereto, in a final, unappealable order to be in violation of any such provision in any country or community or association of countries, such words, sentences, paragraphs or clauses or combination shall be inoperative in such country or community or association of countries, and the remainder of this Agreement shall remain binding upon the Parties hereto. 16.7 Force Majeure. No liability hereunder shall result to a Party by reason of delay in performance caused by force majeure, that is circumstances beyond the reasonable control of the Party, including, without limitation, acts of God, fire, flood, war, terrorism, civil unrest, labor unrest, or shortage of or inability to obtain material or equipment. 16.8 Entire Agreement. The terms and conditions herein constitute the entire agreement between the Parties and shall supersede all previous agreements, either oral or written, between the Parties hereto with respect to the subject matter hereof. No agreement of understanding bearing on this Agreement shall be binding upon either Party hereto unless it shall be in writing and signed by the duly authorized officer or representative of each of the Parties and shall expressly refer to this Agreement. IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement in multiple originals by their duly authorized officers and representatives on the respective dates shown below, but effective as of the Agreement Date. POWER3 MEDICAL PRODUCTS, INC. BAYLOR COLLEGE OF MEDICINE Name: /s/ Steven B. Rash Name: /s/ W. Dalton Tomlin ------------------------------ ----------------------------- W. Dalton Tomlin Title: Chairman/CEO Title: Senior Vice President & General Counsel Date: 6-28-04 Date: 6/21/04 6/11/04 LICENSEE OTA # 04-107 -14- EX-10.2 3 h20162exv10w2.txt PATENT AND TECHNOLOGY LICENSE AGREEMENT DATED 8/1/2004 EXHIBIT 10.2 Confidential Treatment Requested. *** indicates material has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. A complete copy of this agreement has been filed separately with the Securities and Exchange Commission. PATENT AND TECHNOLOGY LICENSE AGREEMENT This twenty-two (22) page AGREEMENT ("AGREEMENT") is made on this 1st day of August, 2004, by and between THE BOARD OF REGENTS ("BOARD") of THE UNIVERSITY OF TEXAS SYSTEM ("SYSTEM"), an agency of the State of Texas, whose address is 201 West 7th Street, Austin, Texas 78701, on behalf of THE UNIVERSITY OF TEXAS M. D. ANDERSON CANCER CENTER ("UTMDACC"), a component institution of SYSTEM, and Power3 Medical Products, Inc., a corporation organized under the laws of Nevada and having a principal place of business at 3400 Research Forest Drive, The Woodlands, Texas 77381 ("LICENSEE"). TABLE OF CONTENTS RECITALS....................................................................... 2 I. EFFECTIVE DATE.......................................................... 2 II. DEFINITIONS............................................................. 2 III. LICENSE................................................................. 4 IV. CONSIDERATION, PAYMENTS AND REPORTS...................................... 6 V. SPONSORED RESEARCH...................................................... 10 VI. PATENTS AND INVENTIONS................................................... 10 VII. INFRINGEMENT BY THIRD PARTIES............................................ 10 VIII. PATENT MARKING.......................................................... 12 IX. INDEMNIFICATION......................................................... 12 X. USE OF BOARD AND UTMDACC'S NAME......................................... 12 XI. CONFIDENTIAL INFORMATION AND PUBLICATION................................. 13 XII. ASSIGNMENT............................................................... 14 XIII. TERM AND TERMINATION.................................................... 14 XIV. WARRANTY: SUPERIOR-RIGHTS................................................ 17 XV. GENERAL................................................................... 18 SIGNATURES..................................................................... 21
1 RECITALS A. BOARD owns certain PATENT RIGHTS and TECHNOLOGY RIGHTS related to LICENSED SUBJECT MATTER developed at UTMDACC. B. BOARD, through UTMDACC, desires to have the LICENSED SUBJECT MATTER and any DERIVED PRODUCTS developed in the LICENSED FIELD and used for the benefit of LICENSEE, BOARD, SYSTEM, UTMDACC, the inventor(s), and the public as outlined in BOARD's Intellectual Property Policy. C. LICENSEE wishes to obtain a license from BOARD to practice LICENSED SUBJECT MATTER. NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained, the parties agree as follows: I. EFFECTIVE DATE 1.1 This AGREEMENT is effective as of the date written above ("EFFECTIVE DATE"). II. DEFINITIONS As used in this AGREEMENT, the following terms have the meanings indicated: 2.1 AFFILIATE means any business entity more than fifty percent (50%) owned by LICENSEE, any business entity which owns more than fifty percent (50%) of LICENSEE, or any business entity that is more than fifty percent (50%) owned by a business entity that owns more than fifty percent (50%) of LICENSEE. 2.2 DERIVED PRODUCT means any service or product, whether or not a LICENSED PRODUCT, that utilizes or is based on biological markers, proteins or other proteomic information (including, but not limited to, protein fractions, protein patterns and protein profiles) identified, discovered, analyzed, developed or otherwise derived or made 2 possible using LICENSED SUBJECT MATTER, PATENT RIGHTS and/or TECHNOLOGY RIGHTS. 2.3 LICENSED FIELD means all fields of use. 2.4 LICENSED PRODUCTS means any product or service sold by LICENSEE comprising LICENSED SUBJECT MATTER pursuant to this AGREEMENT. 2.5 LICENSED SUBJECT MATTER means inventions and discoveries covered by PATENT RIGHTS or TECHNOLOGY RIGHTS within LICENSED FIELD. 2.6 LICENSED TERRITORY means the entire world. 2.7 NET SALES means the gross revenues received by LICENSEE or its sublicensee, as appropriate, from a SALE less sales discounts actually granted, sales and/or use taxes actually paid, import and/or export duties actually paid, outbound transportation actually prepaid or allowed, and amounts actually allowed or credited due to returns (not exceeding the original billing or invoice amount)("DEDUCTIONS"). NET SALES shall also include the gross revenues less DEDUCTIONS received by LICENSEE or any sublicensee, as appropriate, for any DERIVED PRODUCTS. All gross revenues and DEDUCTIONS shall be recorded by LICENSEE or sublicensee, as appropriate, in their respective official books and records in accordance with generally accepted accounting practices and consistent with LICENSEE's or sublicensee's, as appropriate, published financial statements and/or regulatory filings with the United States Securities and Exchange Commission. 2.8 PATENT RIGHTS means BOARD's rights in information or discoveries claimed in the patents, and/or patent applications and any letters patent that issue thereon, whether domestic or foreign, listed on Exhibit I attached hereto. 3 2.9 SALE OR SOLD means the transfer or disposition of a LICENSED PRODUCT or DERIVED PRODUCT for value to a party other than LICENSEE or AFFILIATE. 2.10 TECHNOLOGY RIGHTS means BOARD's rights in any technical information, know-how, processes, procedures, compositions, devices, methods, formulae, protocols, techniques, software, designs, drawings or data created by the inventor(s) listed in Exhibit I at UTMDACC before the EFFECTIVE DATE, which are not claimed in PATENT RIGHTS but that are necessary for practicing PATENT RIGHTS. III. LICENSE 3.1 BOARD, through UTMDACC, hereby grants to LICENSEE a royalty-bearing, exclusive license under LICENSED SUBJECT MATTER to manufacture, have manufactured, use, import, offer to sell and/or sell LICENSED PRODUCTS within LICENSED TERRITORY for use within LICENSED FIELD. The foregoing grants are subject to Sections 14.2 and 14.3 hereinbelow, the payment by LICENSEE to UTMDACC of all consideration as provided herein, the timely payment of all amounts due under any related sponsored research agreement between UTMDACC and LICENSEE in effect during this AGREEMENT, and is further subject to the following rights retained by BOARD and UTMDACC to: (a) Publish the general scientific findings from research related to LICENSED SUBJECT MATTER, subject to the terms of Article XI - Confidential Information and Publication; and (b) use LICENSED SUBJECT MATTER for research, teaching, patient care, and other educationally related purposes. 4 3.2 LICENSEE may extend the license granted herein to any AFFILIATE provided that the AFFILIATE consents in writing to be bound by this AGREEMENT to the same extent as LICENSEE. LICENSEE agrees to deliver such contract to UTMDACC within thirty (30) calendar days following execution thereof. 3.3 LICENSEE may grant sublicenses under LICENSED SUBJECT MATTER for any lawful purpose. Sublicenses may be granted consistent with the terms of this AGREEMENT provided that LICENSEE is responsible for its sublicensees relevant to this AGREEMENT, and for diligently collecting all amounts due LICENSEE or UTMDACC from sublicensees. If a sublicensee pursuant hereto becomes bankrupt, insolvent or is placed in the hands of a receiver or trustee, LICENSEE, to the extent allowed under applicable law and in a timely manner, agrees to use its best reasonable efforts to collect all consideration owed to LICENSEE and to have the sublicense agreement confirmed or rejected by a court of proper jurisdiction. 3.4 LICENSEE must deliver to UTMDACC a true and correct copy of each sublicense granted by LICENSEE, and any modification or termination thereof, within thirty (30) calendar days after execution, modification, or termination. 3.5 If this AGREEMENT is terminated pursuant to Article XIII - Term and Termination, BOARD and UTMDACC agree to accept as successors to LICENSEE, existing sublicensees in good standing at the date of termination provided that each such sublicensee consents in writing to be bound by all of the terms and conditions of this AGREEMENT. 5 IV. CONSIDERATION, PAYMENTS AND REPORTS 4.1 In consideration of rights granted by BOARD to LICENSEE under this AGREEMENT, LICENSEE agrees to pay UTMDACC each of the following: (a) All out-of-pocket expenses incurred by UTMDACC in filing, prosecuting, enforcing and maintaining the PATENT RIGHTS, and all such future expenses incurred by UTMDACC, for so long as, and in such countries as this AGREEMENT remains in effect. UTMDACC will invoice LICENSEE within thirty (30) calendar days of the EFFECTIVE DATE for expenses billed as of that time and on a quarterly basis thereafter. The billed amount for expenses incurred prior to the EFFECTIVE DATE will be due and payable by LICENSEE within ninety (90) calendar days of invoice. The invoiced amounts for expenses billed after the EFFECTIVE DATE will be due within thirty (30) calendar days of invoice; and (b) A nonrefundable license documentation fee in the amount of ***, payable in two payments of $***. This fee will not reduce the amount of any other payments provided for in this ARTICLE IV. UTMDACC will invoice LICENSEE for the first payment of $*** after the AGREEMENT is fully executed by all parties. Said first payment shall be due and payable within thirty (30) days of invoice. The second payment of $*** shall be due and payable to UTMDACC on ***; and (c) A nonrefundable annual license maintenance fee of $***. This maintenance fee is due to UTMDACC beginning on the first anniversary of the EFFECTIVE DATE and annually thereafter until ***. This fee will not reduce any other payment provided for in this ARTICLE IV; and 6 (d) A running royalty equal to ***. LICENSEE shall be responsible for diligently collecting and paying UTMDACC any royalties due for any sublicensee's NET SALES; and (e) After ***, minimum annual royalties of $***. Any royalties payable under Section 4.1(d) will be credited toward this amount for each Sales Year. For purposed of this AGREEMENT, Sales Year means a year measured from the first SALE or anniversary of such first SALE to the subsequent anniversary of first SALE. If royalties payable under Section 4.1(d) exceed *** nothing shall be owed under this Section 4.1(e); and (f) A $*** milestone payment, payable in two installments, which shall become payable upon ***. The first installment of $*** shall be due ***, and a second installment of $*** shall be due ***; and (g) *** (***%) of all consideration, other than research and development money and NET SALES, received by LICENSEE, from either (i) any sublicensee pursuant to Sections 3.3 and 3.4, or (ii) any assignee pursuant to Section 12.1, including, but not limited to, minimum royalties, up-front payments, bonuses, milestones, marketing fees, distribution fees, franchise fees, option fees, license fees, documentation fees, and equity securities. 4.2 Unless otherwise provided, all such payments are payable within thirty (30) calendar days after March 31, June 30, September 30, and December 31 of each year during the term of this AGREEMENT, at which time LICENSEE will also deliver to UTMDACC a true and accurate report, giving such particulars of the business conducted by LICENSEE and its sublicensees, if any exist, during the preceding three (3) calendar months under 7 this AGREEMENT as necessary for UTMDACC to account for LICENSEE's payments hereunder. This report will include pertinent data, including, but not limited to: (a) the accounting methodologies used to account for and calculate the items included in the report and any differences in such accounting methodologies used by LICENSEE since the previous report; and (b) a list of LICENSED PRODUCTS and DERIVED PRODUCTS produced for the three (3) preceding calendar months; and (c) the total quantities of LICENSED PRODUCTS and DERIVED PRODUCTS produced; and (d) the total SALES; and (e) the calculation of NET SALES; and (f) the royalties so computed and due UTMDACC and/or minimum royalties; and (g) all consideration received by each sublicensee or assignee and payments due UTMDACC; and (h) all other amounts due UTMDACC herein. Simultaneously with the delivery of each such report, LICENSEE agrees to pay UTMDACC the amount due, if any, for the period of such report. These reports are required even if no payments are due. 4.3 During the term of this AGREEMENT and for one (1) year thereafter, LICENSEE agrees to keep complete and accurate records of its and its sublicensees' SALES and NET SALES in sufficient detail to enable the royalties and other payments due hereunder to be determined. LICENSEE agrees to permit UTMDACC or its representatives, at UTMDACC's expense, to periodically examine LICENSEE's books, ledgers, and records 8 during regular business hours for the purpose of and to the extent necessary to verify any report required under this AGREEMENT. If any amounts due UTMDACC are determined to have been underpaid in an amount equal to or greater than five percent (5%) of the total amount due during the period so examined, then LICENSEE will pay the cost of the examination plus accrued interest at the highest allowable rate. 4.4 Within thirty (30) calendar days following each anniversary of the EFFECTIVE DATE, LICENSEE will deliver to UTMDACC a written progress report as to LICENSEE's (and any sublicensee's) efforts and accomplishments during the preceding year in diligently commercializing LICENSED SUBJECT MATTER and DERIVED PRODUCTS in the LICENSED TERRITORY and LICENSEE's (and sublicensees') commercialization plans for the upcoming year. 4.5 All amounts payable hereunder by LICENSEE will be paid in United States funds without deductions for taxes, assessments, fees, or charges of any kind. Checks are to be made payable to The University of Texas M. D. Anderson Cancer Center, and sent by United States mail to Box 297402, Houston, Texas 77297, Attention Manager, Sponsored Programs or by wire transfer to: BANK ONE TEXAS 910 TRAVIS HOUSTON, TEXAS 77002 SWIFT: BONEUS44HOU ABA ROUTING NO: 11000614 ACCOUNT NAME: UNIV. OF TEXAS M. D. ANDERSON CANCER CENTER ACCOUNT NO: 1586838979 REFERENCE: include title and EFFECTIVE DATE of AGREEMENT and type of payment (e.g., license documentation fee, milestone payment, royalty [including applicable patent/application identified by UTMDACC reference number and patent number or application serial number], or maintenance fee, etc.). 9 4.6 No payments due or royalty rates owed under this AGREEMENT will be reduced as the result of co-ownership of LICENSED SUBJECT MATTER and DERIVED PRODUCTS by BOARD and another party, including, but not limited to, LICENSEE. V. SPONSORED RESEARCH 5.1 If LICENSEE desires to sponsor research for or related to the LICENSED SUBJECT MATTER or DERIVED PRODUCTS, and particularly where LICENSEE receives payments for sponsored research pursuant to a sublicense under this AGREEMENT, LICENSEE (a) will notify UTMDACC in writing of all opportunities to conduct this sponsored research (including clinical trials, if applicable), (b) solicit research and/or clinical proposals from UTMDACC for this purpose, and (c) will give good faith consideration to funding the proposals at UTMDACC. VI. PATENTS AND INVENTIONS 6.1 All decisions regarding prosecution, maintenance and enforcement of PATENT RIGHTS shall be within the sole discretion of UTMDACC. VII. INFRINGEMENT BY THIRD PARTIES 7.1 LICENSEE, at its expense, must enforce any patent exclusively licensed hereunder against infringement by third parties and is entitled to retain recovery from such enforcement. After reimbursement of LICENSEE's reasonable legal costs and expenses related to such recovery, LICENSEE agrees to pay UTMDACC either: (a) if any award or damages awarded to LICENSEE constitutes lost profits on sales of LICENSED PRODUCTS or DERIVED PRODUCTS, such award or damages shall be considered as NET SALES for purposes of calculating royalties due UTMDACC; and (b) if any award or damages awarded to LICENSEE constitute "reasonable royalties" pursuant to 35 USC 10 Section 284 or punitive damages, LICENSEE agrees to pay UTMDACC ***. LICENSEE must notify UTMDACC in writing of any potential infringement within thirty (30) calendar days of knowledge thereof. If LICENSEE does not file suit against a substantial infringer within six (6) months of knowledge thereof, then BOARD or UTMDACC may, at its sole discretion, enforce any patent licensed hereunder on behalf of itself and LICENSEE, with UTMDACC retaining all recoveries from such enforcement, and/or reduce the license granted hereunder to non-exclusive. 7.2 In any suit or dispute involving an infringer of any PATENT RIGHTS, the parties agree to cooperate fully with each other. At the request and expense of the party bringing suit, the other party will permit access during regular business hours, to all relevant personnel, records, papers, information, samples, specimens, and the like in its possession. 11 VIII. PATENT MARKING 8.1 LICENSEE agrees that all packaging containing individual LICENSED PRODUCT(S), documentation therefor, and when possible for actual LICENSED PRODUCT(S) SOLD by LICENSEE, AFFILIATES, and/or sublicensees of LICENSEE will be permanently and legibly marked with the number of any applicable patent(s) licensed hereunder in accordance with each country's patent laws, including Title 35, United States Code. IX. INDEMNIFICATION 9.1 LICENSEE agrees to hold harmless and indemnify BOARD, SYSTEM, UTMDACC, its Regents, officers, employees, students, and agents from and against any claims, demands, or causes of action whatsoever, costs of suit and reasonable attorney's fees, including without limitation, those costs arising on account of any injury or death of persons or damage to property caused by, or arising out of, or resulting from, the exercise or practice of the rights granted hereunder by LICENSEE, its officers, its AFFILIATES or their officers, employees, agents or representatives. X. USE OF BOARD AND UTMDACC'S NAME 10.1 LICENSEE will not use the name of (or the name of any employee of) UTMDACC, SYSTEM or BOARD in any advertising, promotional or sales literature, on its Web site, or for the purpose of raising capital without the advance express written consent of BOARD secured through: M. D. Anderson Services Corporation 7505 S. Main, Suite 500, Unit 0525 Houston, TX 77030 ATTENTION: Natalie Wright Email: nwright@mdanderson.org 12 Notwithstanding the above, LICENSEE may use the name of (or name of employee of) UTMDACC, SYSTEM or BOARD in routine business correspondence, or as needed in appropriate regulatory submissions without express written consent. XI. CONFIDENTIAL INFORMATION AND PUBLICATION 11.1 UTMDACC and LICENSEE each agree that all information contained in documents marked "confidential" and forwarded to one by the other (i) are to be received in strict confidence, (ii) used only for the purposes of this AGREEMENT, and (iii) not disclosed by the recipient party (except as required by law or court order), its agents or employees without the prior written consent of the other party, except to the extent that the recipient party can establish competent written proof that such information: (a) was in the public domain at the time of disclosure; or (b) later became part of the public domain through no act or omission of the recipient party, its employees, agents, successors or assigns; or (c) was lawfully disclosed to the recipient party by a third party having the right to disclose it; or (d) was already known by the recipient party at the time of disclosure; or (e) was independently developed by the recipient without use of the other party's confidential information; or (f) is required by law or regulation to be disclosed. 11.2 Each party's obligation of confidence hereunder will be fulfilled by using at least the same degree of care with the other party's confidential information as it uses to protect its own confidential information, but always at least a reasonable degree of care. This 13 obligation will exist while this AGREEMENT is in force and for a period of three (3) years thereafter. 11.3 UTMDACC reserves the right to publish the general scientific findings from research related to LICENSED SUBJECT MATTER or DERIVED PRODUCTS, with due regard to the protection of LICENSEE's confidential information. UTMDACC will submit the manuscript of any proposed publication to LICENSEE at least thirty (30) calendar days before publication, and LICENSEE shall have the right to review and comment upon the publication in order to protect LICENSEE's confidential information. Upon LICENSEE's request, publication may be delayed up to sixty (60) additional calendar days to enable LICENSEE to secure adequate intellectual property protection of LICENSEE's confidential information that would otherwise be affected by the publication. XII. ASSIGNMENT 12.1 Except in connection with the sale of all of LICENSEE's assets to a third party, this AGREEMENT may not be assigned by LICENSEE without the prior written consent of UTMDACC, which will not be unreasonably withheld. XIII. TERM AND TERMINATION 13.1 Subject to Sections 13.3, 13.4 hereinbelow, the term of this AGREEMENT is from the EFFECTIVE DATE to the full end of the term or terms for which PATENT RIGHTS have not expired, or if only TECHNOLOGY RIGHTS are licensed and no PATENT RIGHTS are applicable, for a term of fifteen (15) years. 13.2 Any time after one (1) year from the EFFECTIVE DATE, BOARD or UTMDACC have the right to terminate this license in any national political jurisdiction within the 14 LICENSED TERRITORY if LICENSEE, within ninety (90) calendar days after receiving written notice from UTMDACC of the intended termination, fails to provide written evidence satisfactory to UTMDACC that LICENSEE or its sublicensee(s) has commercialized or is actively and effectively attempting to commercialize a licensed invention in such jurisdiction(s). The following definitions apply to Section 13.2: (a) "commercialize" means having SALES in such jurisdiction; (b) "active attempts to commercialize" means having an effective, ongoing and active research, development, manufacturing, marketing or sales program as appropriate, directed toward obtaining regulatory approval, and/or production and/or SALES in any jurisdiction, and has provided plans acceptable to UTMDACC, in its sole discretion, to commercialize licensed inventions in the jurisdiction(s) that UTMDACC intends to terminate. 13.3 Subject to any rights herein which survive termination, this AGREEMENT will earlier terminate in its entirety: (a) automatically, if LICENSEE becomes bankrupt or insolvent and/or if the business of LICENSEE shall be placed in the hands of a receiver, assignee, or trustee, whether by voluntary act of LICENSEE or otherwise; or (b) upon thirty (30) calendar days written notice from UTMDACC, if LICENSEE breaches or defaults on the payment or report obligations of ARTICLE IV, or use of name obligations of ARTICLE X, unless, before the end of the such thirty (30)-calendar day notice period, LICENSEE has cured the default or breach to UTMDACC's satisfaction, and so notifies UTMDACC, stating the manner of the cure; or 15 (c) upon ninety (90) calendar days written notice from UTMDACC if LICENSEE breaches or defaults on any other obligation under this AGREEMENT, unless, before the end of the such ninety (90) calendar-day notice period, LICENSEE has cured the default or breach to UTMDACC's satisfaction and so notifies UTMDACC, stating the manner of the cure; or (d) at any time by mutual written agreement between LICENSEE, UTMDACC or BOARD, upon one hundred eighty (180) calendar days written notice to all parties and subject to any terms herein which survive termination; or (e) if Section 13.2 is invoked; or (f) if LICENSEE has defaulted or been late on its payment obligations pursuant to the terms of this AGREEMENT on any two (2) occasions in a twelve (12) month period. 13.4 Upon termination of this AGREEMENT: (a) nothing herein will be construed to release either party of any obligation maturing prior to the effective date of the termination; and (b) LICENSEE covenants and agrees to be bound by the provisions of Articles IX (Indemnification), X (Use of Board and UTMDACC's Name) and XI (Confidential Information and Publication) of this AGREEMENT; and (c) LICENSEE may, after the effective date of the termination, sell all LICENSED PRODUCTS and DERIVED PRODUCTS and parts therefor that it has on hand at the date of termination, if LICENSEE pays the earned royalty thereon and any other amounts due pursuant to Article N of this AGREEMENT; and 16 (d) LICENSEE grants to BOARD and UTMDACC a nonexclusive royalty bearing license with the right to sublicense others with respect to improvements made by LICENSEE in the LICENSED SUBJECT MATTER and DERIVED PRODUCTS. LICENSEE and UTMDACC agree to negotiate in good faith the royalty rate for the nonexclusive license. BOARD's and UTMDACC's right to sublicense others hereunder is solely for the purpose of permitting others to develop and commercialize the entire technology package; and (e) if this AGREEMENT is terminated by UTMDACC, LICENSEE agrees to cease and desist all use and sale of LICENSED SUBJECT MATTER and DERIVED PRODUCTS immediately upon termination. XIV. WARRANTY: SUPERIOR-RIGHTS 14.1 Except for the rights, if any, of the Government of the United States of America as set forth below, BOARD represents and warrants its belief that (a) it is the owner of the entire right, title, and interest in and to LICENSED SUBJECT MATTER, (b) it has the sole right to grant licenses thereunder, and (c) it has not knowingly granted licenses thereunder to any other entity that would restrict rights granted hereunder except as stated herein. 14.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have been developed under a funding agreement with the Government of the United States of America and, if so, that the Government may have certain rights relative thereto. This AGREEMENT is explicitly made subject to the Government's rights under any such agreement and any applicable law or regulation, including P.L. 96-517 as amended by P.L. 98-620. To the extent that there is a conflict between any such agreement, 17 applicable law or regulation and this AGREEMENT, the terms of such Government agreement, applicable law or regulation shall prevail. 14.3 LICENSEE understands and agrees that BOARD and UTMDCC, by this AGREEMENT, make no representation as to the operability or fitness for any use, safety, efficacy, approvability by regulatory authorities, time and cost of development, patentability, and/or breadth of the LICENSED SUBJECT MATTER or DERIVED PRODUCTS. BOARD and UTMDACC, by this AGREEMENT, also make no representation as to whether any patent covered by PATENT RIGHTS is valid or as to whether there are any patents now held, or which will be held, by others or by BOARD or UTMDACC in the LICENSED FIELD, nor does BOARD and UTMDACC make any representation that the inventions contained in PATENT RIGHTS do not infringe any other patents now held or that will be held by others or by BOARD. 14.4 LICENSEE, by execution hereof, acknowledges, covenants and agrees that LICENSEE has not been induced in any way by BOARD, SYSTEM, UTMDACC or employees thereof to enter into this AGREEMENT, and further warrants and represents that (a) LICENSESE has conducted sufficient due diligence with respect to all items and issues pertaining to this AGREEMENT; and (b) LICENSEE has adequate knowledge and expertise, or has used knowledgeable and expert consultants, to adequately conduct such due diligence, and agrees to accept all risks inherent herein. XV. GENERAL 15.1 This AGREEMENT constitutes the entire and only agreement between the parties for LICENSED SUBJECT MATTER and all other prior negotiations, representations, agreements, and understandings are superseded hereby. No agreements altering or 18 supplementing the terms hereof will be made except by a written document signed by both parties. 15.2 Any notice required by this AGREEMENT must be given by prepaid, first class, certified mail, return receipt requested, and addressed in the case of UTMDACC to: The University of Texas M. D. Anderson Cancer Center Office of Technology Commercialization 7515 S. Main, Suite 490, Unit 0510 Houston, Texas 77030 ATTENTION: William J. Doty with copy to BOARD: BOARD OF REGENTS The University of Texas System 201 West Seventh Street Austin, Texas 78701 ATTENTION: Office of General Counsel or in the case of LICENSEE to: Power3 Medical Products, Inc. 3400 Research Forest Drive The Woodlands, Texas 77381 ATTENTION: Steven Rash or other addresses as may be given from time to time under the terms of this notice provision. 15.3 LICENSEE must comply with all applicable federal, state and local laws and regulations in connection with its activities pursuant to this AGREEMENT. 15.4 LICENSEE covenants and agrees that it will not file any patent applications which claim priority, directly or indirectly, to any patent or patent application included in PATENT RIGHTS, without the advance express written consent of UTMDACC. 15.5 This AGREEMENT will be construed and enforced in accordance with the laws of the United States of America and of the State of Texas, without regard to its conflict of law 19 provisions. The Texas State Courts of Harris County, Texas (or, if there is exclusive federal jurisdiction, the United States District Court for the Southern District of Texas) shall have exclusive jurisdiction and venue over any dispute arising out of this AGREEMENT, and LICENSEE consents to the jurisdiction of such courts; however, nothing herein shall be deemed as a waiver by BOARD, SYSTEM or UTMDACC of its sovereign immunity. 15.6 Failure of BOARD or UTMDACC to enforce a right under this AGREEMENT will not act as a waiver of right or the ability to later assert that right relative to the particular situation involved. 15.7 Headings included herein are for convenience only and will not be used to construe this AGREEMENT. 15.8 If any part of this AGREEMENT is for any reason found to be unenforceable, all other parts nevertheless will remain enforceable. 20 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this AGREEMENT. BOARD OF REGENTS OF THE POWER3 MEDICAL PRODUCTS, INC. UNIVERSITY OF TEXAS SYSTEM By:/s/ John Mendelsohn, M.D. By: /s/ Steven Rash ---------------------------------- ----------------------------- John Mendelsohn, M.D. Steven Rash President Chief Executive Officer The University of Texas M.D. Anderson Cancer Center Date: 7/27/04 Date: 6/30/04 THE UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER By:/s/ Leon Leach ---------------------------------- Leon Leach Executive Vice President The University of Texas M.D. Anderson Cancer Center Date: 7/23/04 Approved as to Content: By:/s/ William J. Doty ---------------------------------- William J. Doty Managing Director, Technology Commercialization M.D. Anderson Cancer Center Date: 7/19/04 21 EXHIBIT I MDA03-127 (UTSC:874) entitled "Using Plasma Proteomic Pattern for Diagnosis, Prediction of Response to Therapy and Clinical Behavior, and Monitoring Disease in Hematologic Malignancies," invented by: Albitar, Maher, Ph.D.; Estey, Elihu H., M.D.; Kantarjian, Hagop, M., M.D.; Giles, Francis J., M.D.; Keating, Michael J., M.D.; and Goldknopf, Ira. 22 EX-10.3 4 h20162exv10w3.txt PATENT AND TECHNOLOGY LICENSE AGREEMENT DATED 9/1/2003 EXHIBIT 10.3 Confidential Treatment Requested. *** indicates material has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. A complete copy of this agreement has been filed separately with the Securities and Exchange Commission. PATENT AND TECHNOLOGY LICENSE AGREEMENT This twenty-three (23) page AGREEMENT ("AGREEMENT") is made on this 1st day of September, 2003, by and between THE BOARD OF REGENTS ("BOARD") of THE UNIVERSITY OF TEXAS SYSTEM ("SYSTEM"), an agency of the State of Texas, whose address is 201 West 7th Street, Austin, Texas 78701, on behalf of THE UNIVERSITY OF TEXAS M. D. ANDERSON CANCER CENTER ("UTMDACC"), a component institution of SYSTEM, and Advanced Biochem, Inc. (dba ProteEx), a corporation organized under the laws of Nevada and having a principal place of business at 4800 Research Forest Drive, The Woodlands, Texas 77381. ("LICENSEE"). TABLE OF CONTENTS RECITALS Page 2 I. EFFECTIVE DATE Page 2 II. DEFINITIONS Page 2 III. LICENSE Page 4 IV. CONSIDERATION, PAYMENTS AND REPORTS Page 6 V. SPONSORED RESEARCH Page 12 VI. PATENTS AND INVENTIONS Page 12 VII. INFRINGEMENT BY THIRD PARTIES Page 12 VIII. PATENT MARKING Page 13 IX. INDEMNIFICATION Page 13 X. USE OF BOARD AND UTMDACC'S NAME Page 14 XI. CONFIDENTIAL INFORMATION AND PUBLICATION Page 14 XII. ASSIGNMENT Page 16 XIII. TERM AND TERMINATION Page 16 XIV. WARRANTY: SUPERIOR-RIGHTS Page 18 1 EXHIBIT 10.3 XV. GENERAL Page 20 SIGNATURES Page 22 RECITALS A. BOARD owns certain PATENT RIGHTS and TECHNOLOGY RIGHTS related to LICENSED SUBJECT MATTER developed at UTMDACC. B. BOARD, through UTMDACC, desires to have the LICENSED SUBJECT MATTER developed in the LICENSED FIELD and used for the benefit of LICENSEE, BOARD, SYSTEM, UTMDACC, the inventor(s), and the public as outlined in BOARD's Intellectual Property Policy. C. LICENSEE wishes to obtain a license from BOARD to practice LICENSED SUBJECT MATTER. NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained, the parties agree as follows: I. EFFECTIVE DATE 1.1 This AGREEMENT is effective as of the date written above ("EFFECTIVE DATE"). II. DEFINITIONS As used in this AGREEMENT, the following terms have the meanings indicated: 2.1 AFFILIATE means any business entity more than fifty percent (50%) owned by LICENSEE, any business entity which owns more than fifty percent (50%) of LICENSEE, or any business entity that is more than fifty percent (50%) owned by a business entity that owns more than fifty percent (50%) of LICENSEE. 2.2 DERIVED PRODUCT means any service or product, whether or not a LICENSED PRODUCT, that utilizes or is based on biological markers, proteins or other proteomic information (including, but not limited to, protein fractions, protein patterns and protein 2 EXHIBIT 10.3 profiles) identified, discovered, analyzed, developed or otherwise derived or made possible using LICENSED SUBJECT MATTER, PATENT RIGHTS and/or TECHNOLOGY RIGHTS 2.3 LICENSED FIELD means all fields of use. 2.4 LICENSED PRODUCTS means any product or service sold by LICENSEE comprising LICENSED SUBJECT MATTER pursuant to this AGREEMENT. 2.5 LICENSED SUBJECT MATTER means inventions and discoveries covered by PATENT RIGHTS or TECHNOLOGY RIGHTS within LICENSED FIELD. 2.6 LICENSED TERRITORY means the entire world. 2.7 NET SALES means the gross revenues received by LICENSEE or its sublicensee from a SALE less sales discounts actually granted, sales and/or use taxes actually paid, import and/or export duties actually paid, outbound transportation actually prepaid or allowed, and amounts actually allowed or credited due to returns (not exceeding the original billing or invoice amount)("DEDUCTIONS"). NET SALES shall also include the gross revenues less DEDUCTIONS received by LICENSEE or any sublicensee for any DERIVED PRODUCTS. All gross revenues and DEDUCTIONS shall be recorded by LICENSEE in LICENSEE's official books and records in accordance with generally accepted accounting practices and consistent with LICENSEE's published financial statements and/or regulatory filings with the United States Securities and Exchange Commission. 2.8 PATENT RIGHTS means BOARD's rights in information or discoveries claimed in the patents, and/or patent applications and any letters patent that issue thereon, whether domestic or foreign, listed on Exhibit I attached hereto. 3 EXHIBIT 10.3 (a) `512 PATENT RIGHTS means BOARD'S rights in information or discoveries claimed in U.S. Patent Application No. 10/301,512 and any letters patent that issue thereon. (b) `027 PATENT RIGHTS means BOARD's rights in information or discoveries claimed in U.S. Patent Application No. 10/236,027 and any letters patent that issue thereon. 2.9 SALE OR SOLD means the transfer or disposition of a LICENSED PRODUCT for value to a party other than LICENSEE or AFFILIATE. 2.10 TECHNOLOGY RIGHTS means BOARD's rights in any technical information, know-how, processes, procedures, compositions, devices, methods, formulae, protocols, techniques, software, designs, drawings or data created by the inventor(s) listed in Exhibit I at UTMDACC before the EFFECTIVE DATE, which are not claimed in PATENT RIGHTS but that are necessary for practicing PATENT RIGHTS. III. LICENSE 3.1 BOARD, through UTMDACC, hereby grants to LICENSEE a royalty-bearing, exclusive license under LICENSED SUBJECT MATTER to manufacture, have manufactured, use, import, offer to sell and/or sell LICENSED PRODUCTS covered by the `512 PATENT RIGHTS within LICENSED TERRITORY for use within LICENSED FIELD. BOARD, through UTMDACC, hereby grants to LICENSEE a royalty-bearing, non-exclusive license under LICENSED SUBJECT MATTER to manufacture, have manufactured, use, import, offer to sell and/or sell LICENSED PRODUCTS covered by the `027 PATENT RIGHTS within LICENSED TERRITORY for use within LICENSED FIELD. To the extent a LICENSED PRODUCT is covered by both the `512 PATENT RIGHTS and the 4 EXHIBIT 10.3 `027 PATENT RIGHTS, the license granted hereunder shall be non-exclusive. The foregoing grants are subject to Sections 14.2 and 14.3 hereinbelow, the payment by LICENSEE to UTMDACC of all consideration as provided herein, the timely payment of all amounts due under any related sponsored research agreement between UTMDACC and LICENSEE in effect during this AGREEMENT, and is further subject to the following rights retained by BOARD and UTMDACC to: (a) Publish the general scientific findings from research related to LICENSED SUBJECT MATTER, subject to the terms of Article XI - Confidential Information and Publication; and (b) Use LICENSED SUBJECT MATTER relating to the `512 PATENT RIGHTS for research, teaching, patient care, and other educationally-related purposes. Nothing herein shall be construed as in any way limiting UTMDACC's rights under `027 PATENT RIGHTS, including, but not limited to, the right to use LICENSED SUBJECT MATTER relating to the `027 PATENT RIGHTS for any purpose whatsoever. 3.2 LICENSEE may extend the license granted herein to any AFFILIATE provided that the AFFILIATE consents in writing to be bound by this AGREEMENT to the same extent as LICENSEE. LICENSEE agrees to deliver such contract to UTMDACC within thirty (30) calendar days following execution thereof. 3.3 LICENSEE may grant sublicenses under LICENSED SUBJECT MATTER for any lawful purpose except that LICENSEE may not grant sublicenses to any entity for the identification of biological markers. Sublicenses may be granted consistent with the terms of this AGREEMENT provided that LICENSEE is responsible for its sublicensees 5 EXHIBIT 10.3 relevant to this AGREEMENT, and for diligently collecting all amounts due LICENSEE or UTMDACC from sublicensees. If a sublicensee pursuant hereto becomes bankrupt, insolvent or is placed in the hands of a receiver or trustee, LICENSEE, to the extent allowed under applicable law and in a timely manner, agrees to use its best reasonable efforts to collect all consideration owed to LICENSEE and to have the sublicense agreement confirmed or rejected by a court of proper jurisdiction. 3.4 LICENSEE must deliver to UTMDACC a true and correct copy of each sublicense granted by LICENSEE, and any modification or termination thereof, within thirty (30) calendar days after execution, modification, or termination. 3.5 If this AGREEMENT is terminated pursuant to Article XIII - Term and Termination, BOARD and UTMDACC agree to accept as successors to LICENSEE, existing sublicensees in good standing at the date of termination provided that each such sublicensee consents in writing to be bound by all of the terms and conditions of this AGREEMENT. IV. CONSIDERATION, PAYMENTS AND REPORTS 4.1 In consideration of rights granted by BOARD to LICENSEE under this AGREEMENT, LICENSEE agrees to pay UTMDACC each of the following: (a) All out-of-pocket expenses incurred by UTMDACC in filing, prosecuting, enforcing and maintaining `512 PATENT RIGHTS, and all such future expenses incurred by UTMDACC, for so long as, and in such countries as this AGREEMENT remains in effect. UTMDACC will invoice LICENSEE within thirty (30) calendar days of the EFFECTIVE DATE for expenses incurred as of that time and on a quarterly basis thereafter. The invoiced amount for expenses 6 EXHIBIT 10.3 incurred prior to the EFFECTIVE DATE will be due and payable by LICENSEE within ninety (90) calendar days of invoice. The invoiced amounts for expenses incurred after the EFFECTIVE DATE will be due within thirty (30) calendar days of invoice; and (b) A non-refundable fee of $*** for ***. UTMDACC will invoice LICENSEE within thirty (30) calendar days of the EFFECTIVE DATE and payment is due to UTMDACC within ninety (90) days of the EFFECTIVE DATE; and (c) A nonrefundable license documentation fee in the amount of $***, payable in two payments of $***. This fee will not reduce the amount of any other payments provided for in this ARTICLE IV. UTMDACC will invoice LICENSEE for the first payment of $*** after the AGREEMENT is fully executed by all parties. Said first payment shall be due and payable within ninety (90) days of the EFFECTIVE DATE. The second payment of $*** shall be due and payable to UTMDACC on ***;and (d) A nonrefundable annual license maintenance fee of $***. This maintenance fee is due to UTMDACC beginning on the first anniversary of the EFFECTIVE DATE and annually thereafter until ***. This fee will not reduce any other payment provided for in this ARTICLE IV; and (e) A running royalty equal to ***. LICENSEE shall be responsible for diligently collecting and paying UTMDACC any royalties due for any sublicensee's NET SALES; and (f) Minimum annual royalties of $***; and 7 EXHIBIT 10.3 (g) A $*** milestone payment upon ***. A first payment of $*** shall be due and payable *** and a second payment of $*** shall be due and payable ***; and (h) An adjusted share of TOTAL SUBLICENSEE CONSIDERATION as defined below, wherein the adjusted share shall be calculated by taking *** percent (***%) of the TOTAL SUBLICENSEE CONSIDERATION and multiplying the result by a fraction comprising the greater of (1) *** or (2) ***, divided by ***, e.g., as follows: 8 EXHIBIT 10.3 *** Adjusted TOTAL ____________________ share = *** X SUBLICENSEE X CONSIDERATION *** As used in this Section, TOTAL SUBLICENSEE CONSIDERATION means all consideration, other than research and development money and NET SALES, received by LICENSEE, from either (i) any sublicensee pursuant to Sections 3.3 and 3.4, or (ii) any assignee pursuant to Section 12.1, including, but not limited to, minimum royalties, up-front payments, bonuses, milestones, marketing fees, distribution fees, franchise fees, option fees, license fees, documentation fees, and equity securities. 4.2 Unless otherwise provided, all such payments are payable within thirty (30) calendar days after March 31, June 30, September 30, and December 31 of each year during the term of this AGREEMENT, at which time LICENSEE will also deliver to UTMDACC a true and accurate report, giving such particulars of the business conducted by LICENSEE and its sublicensees, if any exist, during the preceding three calendar months under this AGREEMENT as necessary for UTMDACC to account for LICENSEE's payments hereunder. This report will include pertinent data, including, but not limited to: (a) the accounting methodologies used to account for and calculate the items included in the report and any differences in such accounting methodologies used by LICENSEE since the previous report; and 9 EXHIBIT 10.3 (b) a list of LICENSED PRODUCTS produced for the three (3) preceding calendar months categorized by the technology it relates to under PATENT RIGHTS (including a breakdown of whether the it is covered by the `512 PATENT RIGHTS, the `027 PATENT RIGHTS, or both); and (c) the total quantities of LICENSED PRODUCTS produced by the category listed in Section 4.2(b); and (d) the total SALES by the category listed in Section 4.2(b); and (e) the calculation of NET SALES by the category listed in Section 4.2(b); and (f) the royalties so computed and due UTMDACC by the category listed in Section 4.2(b) and/or minimum royalties; and (g) all consideration received by each sublicensee or assignee and payments due UTMDACC; and (h) all other amounts due UTMDACC herein. Simultaneously with the delivery of each such report, LICENSEE agrees to pay UTMDACC the amount due, if any, for the period of such report. These reports are required even if no payments are due. 4.3 During the term of this AGREEMENT and for one year thereafter, LICENSEE agrees to keep complete and accurate records of its and its sublicensees' SALES and NET SALES in sufficient detail to enable the royalties and other payments due hereunder to be determined. LICENSEE agrees to permit UTMDACC or its representatives, at UTMDACC's expense, to periodically examine LICENSEE's books, ledgers, and records during regular business hours for the purpose of and to the extent necessary to verify any report required under this AGREEMENT. If any amounts due UTMDACC are 10 EXHIBIT 10.3 determined to have been underpaid in an amount equal to or greater than five percent (5%) of the total amount due during the period so examined, then LICENSEE will pay the cost of the examination plus accrued interest at the highest allowable rate. 4.4 Within thirty (30) calendar days following each anniversary of the EFFECTIVE DATE, LICENSEE will deliver to UTMDACC a written progress report as to LICENSEE's (and any sublicensee's) efforts and accomplishments during the preceding year in diligently commercializing LICENSED SUBJECT MATTER in the LICENSED TERRITORY and LICENSEE's (and sublicensees') commercialization plans for the upcoming year. 4.5 All amounts payable hereunder by LICENSEE will be paid in United States funds without deductions for taxes, assessments, fees, or charges of any kind. Checks are to be made payable to The University of Texas M. D. Anderson Cancer Center, and sent by United States mail to Box 297402, Houston, Texas 77297, Attention: Manager, Sponsored Programs or by wire transfer to: BANK ONE TEXAS 910 TRAVIS HOUSTON, TEXAS 77002 SWIFT: BONEUS44HOU ABA ROUTING NO: 111000614 ACCOUNT NAME: UNIV. OF TEXAS M. D. ANDERSON CANCER CENTER ACCOUNT NO: 1586838979 REFERENCE: include title and EFFECTIVE DATE of AGREEMENT and type of payment (e.g., license documentation fee, milestone payment, royalty [including applicable patent/application identified by MDA reference number and patent number or application serial number], or maintenance fee, etc.). 4.6 No payments due or royalty rates owed under this AGREEMENT will be reduced as the result of co-ownership of LICENSED SUBJECT MATTER by BOARD and another party, including, but not limited to, LICENSEE. 11 EXHIBIT 10.3 V. SPONSORED RESEARCH 5.1 If LICENSEE desires to sponsor research for or related to the LICENSED SUBJECT MATTER, and particularly where LICENSEE receives payments for sponsored research pursuant to a sublicense under this AGREEMENT, LICENSEE (a) will notify UTMDACC in writing of all opportunities to conduct this sponsored research (including clinical trials, if applicable), (b) solicit research and/or clinical proposals from UTMDACC for this purpose, and (c) will give good faith consideration to funding the proposals at UTMDACC. VI. PATENTS AND INVENTIONS 6.1 All decisions regarding prosecution, maintenance and enforcement of PATENT RIGHTS shall be within the sole discretion of UTMDACC. VII. INFRINGEMENT BY THIRD PARTIES 7.1 LICENSEE, at its expense, must enforce any patent exclusively licensed hereunder against infringement by third parties and is entitled to retain recovery from such enforcement. After reimbursement of LICENSEE's reasonable legal costs and expenses related to such recovery, LICENSEE agrees to pay UTMDACC either: (a) the royalty detailed in Section 4.1(d) for any monetary recovery that is for sales of LICENSED PRODUCTS lost due to the infringement and related punitive damages; or (b) *** in any recovery in which the award is for reasonable royalties. LICENSEE must notify UTMDACC in writing of any potential infringement within thirty (30) calendar days of knowledge thereof. If LICENSEE does not file suit against a substantial infringer within six (6) months of knowledge thereof, then BOARD or UTMDACC may, at its sole discretion, enforce any patent licensed hereunder on behalf of itself and LICENSEE, with 12 EXHIBIT 10.3 UTMDACC retaining all recoveries from such enforcement, and/or reduce the license granted hereunder to non-exclusive. 7.2 In any suit or dispute involving an infringer of any PATENT RIGHTS, the parties agree to cooperate fully with each other. At the request and expense of the party bringing suit, the other party will permit access during regular business hours, to all relevant personnel, records, papers, information, samples, specimens, and the like in its possession. VIII. PATENT MARKING 8.1 LICENSEE agrees that all packaging containing individual LICENSED PRODUCT(S), documentation therefor, and when possible for actual LICENSED PRODUCT(S) SOLD by LICENSEE, AFFILIATES, and/or sublicensees of LICENSEE will be permanently and legibly marked with the number of any applicable patent(s) licensed hereunder in accordance with each country's patent laws, including Title 35, United States Code. IX. INDEMNIFICATION 9.1 LICENSEE agrees to hold harmless and indemnify BOARD, SYSTEM, UTMDACC, its Regents, officers, employees, students, and agents from and against any claims, demands, or causes of action whatsoever, costs of suit and reasonable attorney's fees, including without limitation, those costs arising on account of any injury or death of persons or damage to property caused by, or arising out of, or resulting from, the exercise or practice of the rights granted hereunder by LICENSEE, its officers, its AFFILIATES or their officers, employees, agents or representatives. X. USE OF BOARD AND UTMDACC'S NAME 10.1 LICENSEE will not use the name of (or the name of any employee of) UTMDACC, SYSTEM or BOARD in any advertising, promotional or sales literature, on its Web site, 13 EXHIBIT 10.3 or for the purpose of raising capital without the advance express written consent of BOARD secured through: M. D. Anderson Services Corporation 7505 S. Main, Suite 500, Unit 0525 Houston, TX 77030 ATTENTION: Natalie Wright Email: nwright@mdanderson.org Notwithstanding the above, LICENSEE may use the name of (or name of employee of) UTMDACC, SYSTEM or BOARD in routine business correspondence, or as needed in appropriate regulatory submissions without express written consent. XI. CONFIDENTIAL INFORMATION AND PUBLICATION 11.1 UTMDACC and LICENSEE each agree that all information contained in documents marked "confidential" and forwarded to one by the other (i) are to be received in strict confidence, (ii) used only for the purposes of this AGREEMENT, and (iii) not disclosed by the recipient party (except as required by law or court order), its agents or employees without the prior written consent of the other party, except to the extent that the recipient party can establish competent written proof that such information: (a) was in the public domain at the time of disclosure; or (b) later became part of the public domain through no act or omission of the recipient party, its employees, agents, successors or assigns; or (c) was lawfully disclosed to the recipient party by a third party having the right to disclose it; or (d) was already known by the recipient party at the time of disclosure; or (e) was independently developed by the recipient without use of the other party's confidential information; or 14 EXHIBIT 10.3 (f) is required by law or regulation to be disclosed. 11.2 Each party's obligation of confidence hereunder will be fulfilled by using at least the same degree of care with the other party's confidential information as it uses to protect its own confidential information, but always at least a reasonable degree of care. This obligation will exist while this AGREEMENT is in force and for a period of three (3) years thereafter. 11.3 UTMDACC reserves the right to publish the general scientific findings from research related to LICENSED SUBJECT MATTER, with due regard to the protection of LICENSEE's confidential information. UTMDACC will submit the manuscript of any proposed publication to LICENSEE at least thirty (30) calendar days before publication, and LICENSEE shall have the right to review and comment upon the publication in order to protect LICENSEE's confidential information. Upon LICENSEE's request, publication may be delayed up to sixty (60) additional calendar days to enable LICENSEE to secure adequate intellectual property protection of LICENSEE's confidential information that would otherwise be affected by the publication. XII. ASSIGNMENT 12.1 Except in connection with the sale of all of LICENSEE's assets to a third party, this AGREEMENT may not be assigned by LICENSEE without the prior written consent of UTMDACC, which will not be unreasonably withheld. XIII. TERM AND TERMINATION 13.1 Subject to Sections 13.3, 13.4 hereinbelow, the term of this AGREEMENT is from the EFFECTIVE DATE to the full end of the term or terms for which PATENT RIGHTS 15 EXHIBIT 10.3 have not expired, or if only TECHNOLOGY RIGHTS are licensed and no PATENT RIGHTS are applicable, for a term of fifteen (15) years. 13.2 Any time after one (1) year from the EFFECTIVE DATE, BOARD or UTMDACC have the right to terminate this license in any national political jurisdiction within the LICENSED TERRITORY if LICENSEE, within ninety (90) calendar days after receiving written notice from UTMDACC of the intended termination, fails to provide written evidence satisfactory to UTMDACC that LICENSEE or its sublicensee(s) has commercialized or is actively and effectively attempting to commercialize a licensed invention in such jurisdiction(s). The following definitions apply to Section 13.2: (a) "commercialize" means having SALES in such jurisdiction; (b) "active attempts to commercialize" means having an effective, ongoing and active research, development, manufacturing, marketing or sales program as appropriate, directed toward obtaining regulatory approval, and/or production and/or SALES in any jurisdiction, and has provided plans acceptable to UTMDACC, in its sole discretion, to commercialize licensed inventions in the jurisdiction(s) that UTMDACC intends to terminate. 13.3 Subject to any rights herein which survive termination, this AGREEMENT will earlier terminate in its entirety: (a) automatically, if LICENSEE becomes bankrupt or insolvent and/or if the business of LICENSEE shall be placed in the hands of a receiver, assignee, or trustee, whether by voluntary act of LICENSEE or otherwise; or (b) upon thirty (30) calendar days written notice from UTMDACC, if LICENSEE breaches or defaults on the payment or report obligations of ARTICLE IV, or use of name obligations of ARTICLE X, unless, before the end of the such thirty (30)- 16 EXHIBIT 10.3 calendar day notice period, LICENSEE has cured the default or breach to UTMDACC's satisfaction, and so notifies UTMDACC, stating the manner of the cure; or (c) upon ninety (90) calendar days written notice from UTMDACC if LICENSEE breaches or defaults on any other obligation under this AGREEMENT, unless, before the end of the such ninety (90) calendar-day notice period, LICENSEE has cured the default or breach to UTMDACC's satisfaction and so notifies UTMDACC, stating the manner of the cure; or (d) at any time by mutual written agreement between LICENSEE, UTMDACC or BOARD, upon one hundred eighty (180) calendar days written notice to all parties and subject to any terms herein which survive termination; or (e) if Section 13.2 is invoked; or (f) if LICENSEE has defaulted or been late on its payment obligations pursuant to the terms of this AGREEMENT on any two (2) occasions in a twelve (12) month period. 13.4 Upon termination of this AGREEMENT: (a) nothing herein will be construed to release either party of any obligation maturing prior to the effective date of the termination; and (b) LICENSEE covenants and agrees to be bound by the provisions of Articles IX (Indemnification), X (Use of Board and UTMDACC's Name) and XI (Confidential Information and Publication) of this AGREEMENT; and (c) LICENSEE may, after the effective date of the termination, sell all LICENSED PRODUCTS and parts therefor that it has on hand at the date of termination, if 17 EXHIBIT 10.3 LICENSEE pays the earned royalty thereon and any other amounts due pursuant to Article IV of this AGREEMENT; and (d) LICENSEE grants to BOARD and UTMDACC a nonexclusive royalty bearing license with the right to sublicense others with respect to improvements made by LICENSEE in the LICENSED SUBJECT MATTER. LICENSEE and UTMDACC agree to negotiate in good faith the royalty rate for the nonexclusive license. BOARD's and UTMDACC's right to sublicense others hereunder is solely for the purpose of permitting others to develop and commercialize the entire technology package. XIV. WARRANTY: SUPERIOR-RIGHTS 14.1 Except for the rights, if any, of the Government of the United States of America as set forth below, BOARD represents and warrants its belief that (a) it is the owner of the entire right, title, and interest in and to LICENSED SUBJECT MATTER, (b) it has the sole right to grant licenses thereunder, and (c) it has not knowingly granted licenses thereunder to any other entity that would restrict rights granted hereunder except as stated herein. 14.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have been developed under a funding agreement with the Government of the United States of America and, if so, that the Government may have certain rights relative thereto. This AGREEMENT is explicitly made subject to the Government's rights under any such agreement and any applicable law or regulation, including P.L. 96-517 as amended by P.L. 98-620. To the extent that there is a conflict between any such agreement, 18 EXHIBIT 10.3 applicable law or regulation and this AGREEMENT, the terms of such Government agreement, applicable law or regulation shall prevail. 14.3 LICENSEE understands and agrees that BOARD and UTMDACC, by this AGREEMENT, make no representation as to the operability or fitness for any use, safety, efficacy, approvablity by regulatory authorities, time and cost of development, patentability, and/or breadth of the LICENSED SUBJECT MATTER. BOARD and UTMDACC, by this AGREEMENT, also make no representation as to whether any patent covered by PATENT RIGHTS is valid or as to whether there are any patents now held, or which will be held, by others or by BOARD or UTMDACC in the LICENSED FIELD, nor does BOARD and UTMDACC make any representation that the inventions contained in PATENT RIGHTS do not infringe any other patents now held or that will be held by others or by BOARD. 14.4 LICENSEE, by execution hereof, acknowledges, covenants and agrees that LICENSEE has not been induced in any way by BOARD, SYSTEM, UTMDACC or employees thereof to enter into this AGREEMENT, and further warrants and represents that (a) LICENSEE has conducted sufficient due diligence with respect to all items and issues pertaining to this AGREEMENT; and (b) LICENSEE has adequate knowledge and expertise, or has used knowledgeable and expert consultants, to adequately conduct such due diligence, and agrees to accept all risks inherent herein. XV. GENERAL 15.1 This AGREEMENT constitutes the entire and only agreement between the parties for LICENSED SUBJECT MATTER and all other prior negotiations, representations, agreements and understandings are superseded hereby. No agreements altering or 19 EXHIBIT 10.3 supplementing the terms hereof will be made except by a written document signed by both parties. 15.2 Any notice required by this AGREEMENT must be given by prepaid, first class, certified mail, return receipt requested, and addressed in the case of UTMDACC to: The University of Texas M. D. Anderson Cancer Center Office of Technology Commercialization 7515 S. Main, Suite 490, Unit 0510 Houston, Texas 77030 ATTENTION: William J. Doty with copy to BOARD: BOARD OF REGENTS The University of Texas System 201 West Seventh Street Austin, Texas 78701 ATTENTION: Office of General Counsel or in the case of LICENSEE to: ProteEx 4800 Research Forest Drive The Woodlands, Texas 77381 ATTENTION: Joseph Skip Marks or other addresses as may be given from time to time under the terms of this notice provision. 15.3 LICENSEE must comply with all applicable federal, state and local laws and regulations in connection with its activities pursuant to this AGREEMENT. 15.4 LICENSEE covenants and agrees that it will not file any patent applications which claim priority, directly or indirectly, to any patent or patent application included in PATENT RIGHTS, without the advance express written consent of UTMDACC. 15.5 This AGREEMENT will be construed and enforced in accordance with the laws of the United States of America and of the State of Texas, without regard to its conflict of law 20 EXHIBIT 10.3 provisions. The Texas State Courts of Harris County, Texas (or, if there is exclusive federal jurisdiction, the United States District Court for the Southern District of Texas) shall have exclusive jurisdiction and venue over any dispute arising out of this AGREEMENT, and LICENSEE consents to the jurisdiction of such courts; however, nothing herein shall be deemed as a waiver by BOARD, SYSTEM or UTMDACC of its sovereign immunity. 15.6 Failure of BOARD or UTMDACC to enforce a right under this AGREEMENT will not act as a waiver of right or the ability to later assert that right relative to the particular situation involved. 15.7 Headings included herein are for convenience only and will not be used to construe this AGREEMENT. 15.8 If any part of this AGREEMENT is for any reason found to be unenforceable, all other parts nevertheless will remain enforceable. 21 EXHIBIT 10.3 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this AGREEMENT. BOARD OF REGENTS OF THE PROTEEX, INC. UNIVERSITY OF TEXAS SYSTEM By /s/ John Mendelsohn, M.D. By /s/ Joseph Skip Marks --------------------------------- ------------------------------- John Mendelsohn, M.D. Joseph Skip Marks President President The University of Texas M. D. Anderson Cancer Center Date: 10/8/03 Date: 9/15/03 THE UNIVERSITY OF TEXAS M. D. ANDERSON CANCER CENTER By /s/ Leon Leach --------------------------------- Leon Leach Executive Vice President The University of Texas M. D. Anderson Cancer Center Date: 10/8/03 Approved as to Content: By /s/ William J. Doty --------------------------------- William J. Doty Managing Director, Technology Commercialization M. D. Anderson Cancer Center Date: 9/16/03 22 EXHIBIT 10.3 EXHIBIT I MDA02-085 (UTSC:764) entitled "Methods and Compositions for Detection of Breast Cancer". Inventors: Herbert A. Fritsche and Henry M. Kuerer Serial No.: 10/236,027 Filing Date: September 5, 2002 MDA03-098 (UTSC:828US) entitled Proteomic Methods for Diagnosis and Monitoring of Breast Cancer". Inventors: Herbert A. Fritsche, Henry M. Kuerer, Ira L. Goldknopf and Helen R. Park. Serial No.: 10/301,512 Filing Date: November 20, 2002 23 EX-31.1 5 h20162exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Steven B. Rash, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Power 3 Medical Products, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in the this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including the consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize, and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting; and Date: November 15, 2004 By: /s/ Steven B. Rash ----------------------------- Name: Steven B. Rash Title: Chief Executive Officer EX-31.2 6 h20162exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Michael J. Rosinski, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Power 3 Medical Products, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in the this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including the consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize, and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting; and Date: November 15, 2004 By: /s/ Michael J. Rosinski ---------------------------- Name: Michael J. Rosinski Title: Chief Financial Officer EX-32.1 7 h20162exv32w1.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 BY CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Power 3 Medical Products, Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven B. Rash, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully compiles with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven B. Rash ------------------------------- Steven B. Rash Chief Executive Officer, Power 3 Medical Products, Inc. November 15, 2004 EX-32.2 8 h20162exv32w2.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 BY CFO CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Power 3 Medical Products, Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Rosinski, Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully compiles with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael J. Rosinski --------------------------------- Michael J. Rosinski Chief Financial Officer, Power 3 Medical Products, Inc. November 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----