Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(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, 2007
OR
¨
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE
TRANSITION PERIOD
FROM TO
COMMISSION
FILE NUMBER 001-09727
PATIENT
SAFETY TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-3419202
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification Number)
|
|
|
|
27555
Ynez Road, Suite 330, Temecula, CA 92591
|
(Address
of principal executive offices) (Zip
Code)
|
Registrant’s
telephone number, including area code:
(951) 587-6201
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
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 ¨.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2) of the Act. Yes ¨ No x.
There
were 11,972,710 shares of the registrant's common stock outstanding as of
November 13, 2007.
PATIENT
SAFETY TECHNOLOGIES, INC.
FORM
10-Q FOR THE QUARTER
ENDED
SEPTEMBER 30, 2007
TABLE
OF CONTENTS
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
Item
1. Financial Statements
|
1
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
18
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
29
|
Item
4. Controls and Procedures
|
30
|
|
|
PART
II - OTHER INFORMATION
|
|
|
Item
1. Legal Proceedings
|
30
|
Item
1A. Risk Factors
|
30
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
30
|
Item
3. Defaults Upon Senior Securities
|
31
|
Item
4. Submission of Matters to a Vote of Security Holders
|
31
|
Item
5. Other Information
|
31
|
Item
6. Exhibits
|
31
|
|
|
SIGNATURES
|
32
|
"SAFE
HARBOR" STATEMENT UNDER
THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We
believe that it is important to communicate our plans and expectations about
the
future to our stockholders and to the public. Some of the statements in this
report are forward-looking statements about our plans and expectations of what
may happen in the future, including in particular the statements about our
plans
and expectations in Part I of this report under the heading “Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.” Statements that are not historical facts are forward-looking
statements. These forward-looking statements are made pursuant to the
“safe-harbor” provisions of the Private Securities Litigation Reform Act of
1995. You can sometimes identify forward-looking statements by our use of
forward-looking words like “may,” “should,” “expects,” “intends,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”
or the negative of these terms and other similar expressions.
Although
we believe that the plans and expectations reflected in or suggested by our
forward-looking statements are reasonable, those statements are based only
on
the current beliefs and assumptions of our management and on information
currently available to us and, therefore, they involve uncertainties and risks
as to what may happen in the future. Accordingly, we cannot guarantee you that
our plans and expectations will be achieved. Our actual results and stockholder
values could be very different from and worse than those expressed in or implied
by any forward-looking statement in this report as a result of many known and
unknown factors, many of which are beyond our ability to predict or control.
These factors include, but are not limited to, those contained in Part II of
this report under “Item 1A. Risk Factors.” All written and oral forward-looking
statements attributable to us are expressly qualified in their entirety by
these
cautionary statements.
Our
forward-looking statements speak only as of the date they are made and should
not be relied upon as representing our plans and expectations as of any
subsequent date. Although we may elect to update or revise forward-looking
statements at some time in the future, we specifically disclaim any obligation
to do so, even if our plans and expectations change.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements.
PATIENT
SAFETY TECHNOLOGIES, INC. AND
SUBSIDIARIES
|
Consolidated
Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
83,515
|
|
$
|
3,775
|
|
Accounts
receivable
|
|
|
63,482
|
|
|
65,933
|
|
Inventories
|
|
|
27,491
|
|
|
42,825
|
|
Prepaid
expenses
|
|
|
176,556
|
|
|
78,834
|
|
Other
current assets
|
|
|
13,420
|
|
|
13,125
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
364,464
|
|
|
204,492
|
|
|
|
|
|
|
|
|
|
Restricted
certificate of deposit
|
|
|
87,500
|
|
|
87,500
|
|
Notes
receivable
|
|
|
153,668
|
|
|
153,668
|
|
Property
and equipment, net
|
|
|
561,282
|
|
|
328,202
|
|
Assets
held for sale, net
|
|
|
—
|
|
|
3,189,674
|
|
Goodwill
|
|
|
1,762,527
|
|
|
1,687,527
|
|
Patents,
net
|
|
|
3,845,143
|
|
|
4,088,850
|
|
Long-term
investments
|
|
|
1,430,563
|
|
|
1,441,533
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
8,205,147
|
|
$
|
11,181,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, current portion - net
|
|
$
|
1,293,286
|
|
$
|
3,517,149
|
|
Accounts
payable
|
|
|
843,091
|
|
|
1,295,849
|
|
Accrued
liabilities
|
|
|
661,823
|
|
|
824,466
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,798,200
|
|
|
5,637,464
|
|
|
|
|
|
|
|
|
|
Notes
payable, less current portion - net
|
|
|
2,530,558
|
|
|
2,527,562
|
|
Deferred
tax liabilities
|
|
|
1,385,331
|
|
|
1,473,066
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1.00 par value, cumulative 7% dividend:
|
|
|
|
|
|
|
|
1,000,000
shares authorized; 10,950 issued and outstanding
|
|
|
|
|
|
|
|
at
September 30, 2007 and December 31, 2006
|
|
|
|
|
|
|
|
(Liquidation
preference of $1,229,138 at September 30, 2007 and $1,190,813
at
|
|
|
|
|
|
|
|
December
31, 2006)
|
|
|
10,950
|
|
|
10,950
|
|
Common
stock, $0.33 par value: 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
10,643,686
shares issued and outstanding as of September 30, 2007;
7,489,026
|
|
|
|
|
|
|
|
shares
issued and 6,874,889 shares outstanding at December 31,
2006
|
|
|
3,512,416
|
|
|
2,471,379
|
|
Additional
paid-in capital
|
|
|
32,629,842
|
|
|
29,654,341
|
|
Accumulated
deficit
|
|
|
(34,662,150
|
)
|
|
(29,483,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
1,491,058
|
|
|
2,652,760
|
|
|
|
|
|
|
|
|
|
Less:
614,137 shares of treasury stock, at cost, at December 31,
2006
|
|
|
—
|
|
|
(1,109,406
|
)
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
1,491,058
|
|
|
1,543,354
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
8,205,147
|
|
$
|
11,181,446
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated interim
financial statements.
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
The Three Months Ended September 30,
|
|
For
The Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
212,999
|
|
$
|
18,514
|
|
$
|
833,618
|
|
$
|
122,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
111,975
|
|
|
101,478
|
|
|
513,645
|
|
|
101,478
|
|
Salaries
and employee benefits
|
|
|
620,014
|
|
|
524,994
|
|
|
1,911,077
|
|
|
3,411,191
|
|
Professional
fees
|
|
|
140,361
|
|
|
445,430
|
|
|
610,367
|
|
|
1,573,450
|
|
Rent
|
|
|
13,022
|
|
|
27,022
|
|
|
59,392
|
|
|
91,085
|
|
Insurance
|
|
|
60,184
|
|
|
57,846
|
|
|
160,716
|
|
|
130,782
|
|
Taxes
other than income taxes
|
|
|
3,260
|
|
|
25,909
|
|
|
68,160
|
|
|
79,577
|
|
Amortization
of patents
|
|
|
81,235
|
|
|
81,235
|
|
|
243,706
|
|
|
243,706
|
|
General
and administrative
|
|
|
322,398
|
|
|
280,289
|
|
|
917,518
|
|
|
842,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,352,449
|
|
|
1,544,203
|
|
|
4,484,581
|
|
|
6,473,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,139,450
|
)
|
|
(1,525,689
|
)
|
|
(3,650,963
|
)
|
|
(6,351,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
dividend income and other
|
|
|
—
|
|
|
1,141
|
|
|
4,287
|
|
|
2,250
|
|
Realized
gain (loss) on investments, net
|
|
|
—
|
|
|
(1,387,328
|
)
|
|
22,394
|
|
|
(1,437,481
|
)
|
Interest
expense
|
|
|
(810,415
|
)
|
|
(1,940,653
|
)
|
|
(1,418,354
|
)
|
|
(2,930,850
|
)
|
Unrealized
gain (loss) on marketable securities, net
|
|
|
—
|
|
|
(27,682
|
)
|
|
—
|
|
|
16,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(1,949,865
|
)
|
|
(4,880,211
|
)
|
|
(5,042,636
|
)
|
|
(10,700,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
29,245
|
|
|
29,245
|
|
|
87,735
|
|
|
87,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,920,620
|
)
|
|
(4,850,966
|
)
|
|
(4,954,901
|
)
|
|
(10,612,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(18,922
|
)
|
|
(767,866
|
)
|
|
(165,851
|
)
|
|
(1,497,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,939,542
|
)
|
|
(5,618,832
|
)
|
|
(5,120,752
|
)
|
|
(12,110,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends
|
|
|
(19,163
|
)
|
|
(19,162
|
)
|
|
(57,488
|
)
|
|
(57,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders
|
|
$
|
(1,958,705
|
)
|
$
|
(5,637,994
|
)
|
$
|
(5,178,240
|
)
|
$
|
(12,167,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.18
|
)
|
$
|
(0.75
|
)
|
$
|
(0.53
|
)
|
$
|
(1.70
|
)
|
Discontinued
operations
|
|
$
|
—
|
|
$
|
(0.12
|
)
|
$
|
(0.02
|
)
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.18
|
)
|
$
|
(0.87
|
)
|
$
|
(0.55
|
)
|
$
|
(1.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and
diluted
|
|
|
10,625,697
|
|
|
6,499,929
|
|
|
9,501,249
|
|
|
6,258,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,939,542
|
)
|
$
|
(5,618,832
|
)
|
$
|
(5,120,752
|
)
|
$
|
(12,110,097
|
)
|
Other
comprehensive (loss) gain, unrealized gain (loss) on
available-for-sale
investments
|
|
|
—
|
|
|
(176,168
|
)
|
|
—
|
|
|
(2,408,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$
|
(1,939,542
|
)
|
$
|
(5,795,000
|
)
|
$
|
(5,120,752
|
)
|
$
|
(14,518,708
|
)
|
|
The
accompanying notes are an integral part of these consolidated
interim
financial statements.
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
The Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,120,752
|
)
|
$
|
(12,110,097
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
133,478
|
|
|
68,807
|
|
Amortization
of patents
|
|
|
243,706
|
|
|
243,706
|
|
Non-cash
interest
|
|
|
1,044,560
|
|
|
2,879,603
|
|
Goodwill
impairment
|
|
|
—
|
|
|
971,036
|
|
Realized
(gain) loss on investments, net
|
|
|
(32,561
|
)
|
|
1,437,481
|
|
Unrealized
gain on marketable securities
|
|
|
—
|
|
|
(16,901
|
)
|
Stock-based
compensation to employees and directors
|
|
|
843,310
|
|
|
2,399,269
|
|
Stock-based
compensation to consultants
|
|
|
57,249
|
|
|
604,445
|
|
Income
tax benefit
|
|
|
(87,735
|
)
|
|
(87,734
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,451
|
|
|
901,428
|
|
Marketable
securities, net
|
|
|
—
|
|
|
809,260
|
|
Inventories
|
|
|
15,334
|
|
|
10,271
|
|
Prepaid
expenses
|
|
|
402,278
|
|
|
(26,815
|
)
|
Other
current assets
|
|
|
(295
|
)
|
|
(33,730
|
)
|
Assets
held for sale, net
|
|
|
21,818
|
|
|
—
|
|
Accounts
payable
|
|
|
(452,758
|
)
|
|
721,876
|
|
Accrued
liabilities
|
|
|
344,833
|
|
|
|
|
Due
to broker
|
|
|
—
|
|
|
(801,863
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,585,084
|
)
|
|
(2,029,958
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(386,764
|
)
|
|
(2,289,355
|
)
|
Proceeds
from sale of property and equipment
|
|
|
42,600
|
|
|
—
|
|
Proceeds
from sale of assets held for sale, net
|
|
|
3,178,023
|
|
|
249,585
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,833,859
|
|
|
(2,039,770
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
3,051,100
|
|
|
250,000
|
|
Proceeds
from notes payable
|
|
|
100,000
|
|
|
6,939,119
|
|
Payments
and decrease on notes payable
|
|
|
(3,300,974
|
)
|
|
(3,172,442
|
)
|
Payments
of preferred dividends
|
|
|
(19,162
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(169,036
|
)
|
|
4,016,677
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
79,739
|
|
|
(53,051
|
)
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
3,775
|
|
|
79,373
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
83,514
|
|
$
|
26,322
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated interim
financial statements.
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
The Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
222,230
|
|
$
|
216,779
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non cash investing and financing activities:
|
|
|
|
|
|
|
|
Dividends
accrued
|
|
$
|
38,325
|
|
$
|
57,487
|
|
Issuance
of common stock in connection with prepaid legal services
|
|
$
|
—
|
|
$
|
50,000
|
|
Issuance
of common stock in connection with contingent payment with Surgicount
acquisition
|
|
$
|
75,000
|
|
$
|
—
|
|
Issuance
of common stock in payment of notes payable and accrued
interest
|
|
$
|
579,801
|
|
$
|
—
|
|
Issuance
of common stock for inventory
|
|
$
|
500,000
|
|
$
|
—
|
|
Payment
of accrued liability with long-term investments
|
|
$
|
10,969
|
|
$
|
—
|
|
Reclassification
of accrued interest to notes payable, less current portion -
net
|
|
$
|
348,614
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Purchase
of the remaining 50% interest in ASG, through issuance of common
stock,
resulting in the following asset acquired and liabilities assumed
during
the quarter ended March 31, 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
$
|
357,008
|
|
Common
stock issued
|
|
|
|
|
$
|
(610,000
|
)
|
Minority
interest
|
|
|
|
|
$
|
252,992
|
|
Liabilities
assumed
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated interim
financial statements.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
September
30, 2007
1.
DESCRIPTION OF BUSINESS
Patient
Safety Technologies, Inc. ("PST"
or the
"Company")
is a
Delaware corporation. The Company’s principal operations are conducted at its
wholly-owned operating subsidiary, SurgiCount Medical, Inc. (“SurgiCount”),
a
California corporation.
The
Company’s primary focus is development, manufacturing and distribution of
products and services focused primarily in the health care and medical products
field, particularly the patient safety markets. SurgiCount is a developer and
manufacturer of patient safety products and services. The SurgiCount
Safety-SpongeTM
System
is
a patented turn-key array of modified surgical sponges, line-of-sight scanning
SurgiCounters, and printPAD printers integrated together to form a comprehensive
counting and documentation system.
Until
June 29, 2007, the Company also operated a car wash through Automotive Services
Group, Inc. (“Automotive
Services Group”),
which
held the Company’s investment in Automotive Services Group, LLC (“ASG”),
its
wholly-owned subsidiary. As discussed in Note 4, during the fourth quarter
of
2006 the Company began marketing the assets held in ASG for sale and on June
29,
2007, the sale of ASG’s one operating car wash was completed. In addition, the
Company holds various other unrelated investments including investments in
real
estate and in a financial services company, which it is in the process of
liquidating as part of a strategic plan adopted during 2006 to dispose of all
of
the Company’s non patient safety related assets.
2.
LIQUIDITY AND GOING CONCERN
The
accompanying unaudited consolidated interim financial statements have been
prepared assuming that the Company will continue as a going concern. At
September 30, 2007, the Company has an accumulated deficit of approximately
$34.7 million and a working capital deficit of approximately $2.4 million.
For
the nine months ended September 30, 2007, the Company incurred a loss of
approximately $5.2 million and has used approximately $2.6 million in cash
in
its operations. Further, as of September 30, 2007 the Company has only generated
minimal revenues from its medical products and healthcare solutions segments.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. The Company has relied on liquidating investments and
short-term debt financings to fund a large portion of its operations. In order
to ensure the continued viability of the Company, equity financing must be
obtained and profitable operations must be achieved in order to repay the
existing short-term debt and to provide a sufficient source of operating
capital. Although the Company has received equity financing during the nine
months ended September 30, 2007, the Company is currently seeking additional
financing and believes that it will be successful. However, no assurances can
be
made that it will be successful obtaining a sufficient amount of equity
financing to continue to fund its operations or that the Company will achieve
profitable operations and positive cash flow from its medical products segment.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated interim financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and do not include all the information and disclosures required
by accounting principles generally accepted in the United States of America.
The
consolidated interim financial information is unaudited but reflects all normal
adjustments that are, in the opinion of management, necessary to provide a
fair
statement of results for the interim periods presented. The consolidated balance
sheet as of December 31, 2006 was derived
from the Company’s audited financial statements. The consolidated interim
financial statements should be read in conjunction with the consolidated
financial statements in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006. Results of the three and nine months ended September
30, 2007 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2007. All intercompany transactions have been
eliminated in consolidation.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
Revenue
Recognition
The
Company complies with SEC Staff Accounting Bulletin (“SAB”)
101,
Revenue
Recognition in Financial Statements,
amended
by SAB 104, Revenue
Recognition.
Consulting service contract revenue is recognized when the service is performed.
Consequently, the recognition of such consulting service contract revenue is
deferred until each phase of the contract is complete. Revenues generated by
the
Company’s previously owned automated car wash subsidiary, Automotive Services
Group were recognized at the time of service. Revenues from sales of the
Safety-SpongeTM
System
are recorded upon shipment.
Goodwill
and Intangible Assets
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment in accordance with SFAS
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which
requires impairment evaluation on long-lived assets used in operations when
indicators of impairment are present. Reviews are performed to determine
whether the carrying value of an asset is impaired, based on a comparison to
undiscounted expected future cash flows. If this comparison indicates that
there is impairment, the impaired asset is written down to fair value, which
is
typically calculated using discounted expected future cash flows and a discount
rate based upon the Company’s weighted average cost of capital adjusted for
risks associated with the related operations. Impairment is based on the
excess of the carrying amount over the fair value of those assets.
Stock-Based
Compensation
The
Company adopted SFAS No. 123(R), Share-Based
Payment,
as of
January 1, 2005 using the modified retrospective application method as provided
by SFAS 123(R) and accordingly, financial statement amounts for the prior
periods in which the Company granted employee stock options have been restated
to reflect the fair value method of recognizing expenses from stock options
prescribed by SFAS 123(R). During the three and nine months ended September
30,
2007, the Company had stock-based compensation expense of $207,000 and $843,000,
respectively, related to issuances to the Company’s employees and directors,
included in reported net losses for these periods. The total amount of
stock-based compensation for the nine months ended September 30, 2007 of
$843,000 included expenses related to restricted stock grants valued at $421,000
and stock options valued at $422,000. During the three and nine months ended
September 30, 2006, the Company had stock-based compensation expense, from
issuances to the Company’s employees and directors, included in reported net
loss of $274,000 and $2,399,000, respectively. The total amount of stock-based
compensation for the nine months ended September 30, 2006, of $2,399,000,
included restricted stock grants valued at $1,102,000 and stock options valued
at $1,297,000.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
During
the three and nine months ended September 30, 2007, the Company had stock-based
compensation expense from issuances of restricted stock and warrants to
consultants of the Company included in reported net loss of nil and $57,000,
respectively. During the three and nine months ended September 30, 2006, the
Company had stock-based compensation expense, from issuances of restricted
stock
and warrants to consultants of the Company included in reported net loss of
$56,000 and $604,000, respectively. Additionally, during the three and nine
months ended September 30, 2006, the Company issued restricted stock valued
at
$50,000 for prepaid legal expenses.
A
summary
of stock option activity for the nine months ended September 30, 2007 is
presented below:
|
|
|
|
Outstanding
Options
|
|
|
|
Shares
Available for Grant
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
26,026
|
|
|
1,704,000
|
|
$
|
4.50
|
|
|
8.73
|
|
|
|
|
Restricted
Stock Awards
|
|
|
(79,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
(125,000
|
)
|
|
125,000
|
|
$
|
1.66
|
|
|
9.59
|
|
|
|
|
Cancellations
|
|
|
599,000
|
|
|
(599,000
|
)
|
$
|
4.59
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
420,990
|
|
|
1,230,000
|
|
$
|
4.17
|
|
|
8.19
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
832,625
|
|
$
|
4.90
|
|
|
8.54
|
|
$
|
—
|
|
September
30, 2007
|
|
|
|
|
|
701,250
|
|
$
|
4.74
|
|
|
7.87
|
|
$
|
—
|
|
All
options that the Company granted during the nine months ended September 30,
2007
and 2006 were granted at the per share fair market value on the grant date.
Vesting of options differs based on the terms of each option. The Company
utilized the Black-Scholes option pricing model and the assumptions used for
each period are as follows:
|
|
Nine
Months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
Weighted
average risk free interest rate
|
|
|
4.50
|
%
|
|
3.75
|
%
|
Weighted
average life (in years)
|
|
|
5.00
|
|
|
3.00
|
|
Volatility
|
|
|
98
- 100
|
%
|
|
87
- 89
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Weighted
average grant-date fair value per share of options granted
|
|
$
|
1.22
|
|
$
|
3.78
|
|
As
of
September 30, 2007, total unrecognized compensation cost related to unvested
stock options was $672,000. This cost is expected to be recognized over a
weighted average period of 1.40 years.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
Beneficial
Conversion Feature of Convertible Notes Payable
The
convertible feature of certain notes payable provides for a rate of conversion
that is below market value. Such feature is normally characterized as a
Beneficial Conversion Feature (“BCF”).
Pursuant to EITF Issue No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio,
EITF No.
00-27, Application
of EITF Issue No. 98-5 To Certain Convertible Instruments
and APB
14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants,
the
estimated fair value of the BCF is recorded in the consolidated financial
statements as a discount from the face amount of the notes. Such discounts
are
amortized to accretion of convertible debt discount over the term of the notes
(or conversion of the notes, if sooner).
Earnings
per Common Share
Loss
per
common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, Earnings
Per Share,
which
requires dual presentation of basic and diluted earnings per share on the face
of the consolidated statements of operations. Basic loss per common share
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted loss per common share reflects the potential dilution that could occur
if convertible preferred stock or debentures, options and warrants were to
be
exercised or converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity.
Since
the
effects of outstanding options, warrants and the conversion of convertible
preferred stock and convertible debt are anti-dilutive in all periods presented,
shares of common stock underlying these instruments have been excluded from
the
computation of loss per common share.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The actual results may differ from
management’s estimates.
Recent
Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”)
issued
FASB Interpretation Number 48 (“FIN
48”),
Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position that an entity takes
or
expects to take in a tax return. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Under FIN 48, an entity may only
recognize or continue to recognize tax positions that meet a “more likely than
not” realization threshold. The
Company adopted FIN 48 on January 1, 2007 and in
connection with its adoption, no liability for unrecognized income tax benefits
was recorded and no interest and penalties related to uncertain tax positions
was recognized. The tax years 2003 - 2006 remain open to examination by the
major taxing jurisdictions.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair
Value Measurements
(“SFAS
157”).
SFAS
157 does not require new fair value measurements but rather defines fair value,
establishes a framework for measuring fair value and expands disclosure of
fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are
currently assessing the impact of SFAS 157 on our consolidated financial
position and results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
amendment to FASB Statement No. 115 (“SFAS
159”).
This
statement permits companies to choose to measure many financial instruments
and
other items at fair value. The objective is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This statement is expected
to expand the use of fair value measurement of accounting for financial
instruments. The fair value option established by this statement permits all
entities to measure eligible items at fair value at specified election dates.
This statement is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. We are currently assessing the impact
adoption of SFAS No. 159 will have on our consolidated financial
statements.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
4.
DISCONTINUED OPERATIONS
As
part
of a strategic plan to dispose of all the Company’s non-patient safety related
assets, during the fourth quarter of 2006 the Company began marketing for
sale the assets of ASG,
located
in Alabama. The Company completed the sale of one operating car wash on June
29,
2007 and two parcels of undeveloped land during the three months ended September
30, 2007. The assets of ASG
met the
“held for sale” and “discontinued operations” criteria in accordance with SFAS
144.
The
following sets forth the discontinued operations for the three and nine months
ended September 30, 2007 and 2006 related to the held for sale assets
of
Automotive Services Group:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
— |
|
$
|
103,735
|
|
$
|
309,455
|
|
$
|
235,351
|
|
Operating
expenses
|
|
|
— |
|
|
760,997
|
|
|
262,323
|
|
|
1,357,212
|
|
Depreciation
and amortization
|
|
|
— |
|
|
10,955
|
|
|
21,819
|
|
|
21,378
|
|
Interest
expense
|
|
|
— |
|
|
99,649
|
|
|
201,331
|
|
|
353,988
|
|
Gain
(loss) on sale of assets
|
|
|
(18,922 |
) |
|
—
|
|
|
10,167
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$ |
(18,922 |
) |
$
|
(767,866
|
)
|
$
|
(165,851
|
)
|
$
|
(1,497,227
|
)
|
The
following sets forth the assets that are held for sale that are related to
the
discontinued operations:
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Property
and equipment, net
|
|
$ |
— |
|
$ |
3,189,674 |
|
Goodwill
|
|
|
— |
|
|
— |
|
Other
assets
|
|
|
— |
|
|
— |
|
Total
assets of discontinued operations
|
|
$ |
— |
|
$ |
3,189,674 |
|
On
June
29, 2007, ASG completed the sale of its express car wash and underlying real
estate in Birmingham, Alabama for $1,500,000, which
resulted in a realized gain of $29,000. The purchase of the express car wash
and
underlying real estate was made by Charles H. Dellaccio and Darrell Grimsley.
Mr. Grimsley is the Chairman of the Board and Chief Executive Officer of
Automotive Services Group.
On
July
3, 2007, ASG completed the sale of real property located in Tuscaloosa, Alabama
(the “Tuscaloosa Undeveloped Land”) to Twin Properties, LLC. Pursuant to the
agreement, ASG was responsible for obtaining title insurance, all required
taxes
related to the transaction and providing a marketable title in fee simple to
Twin Properties, LLC. ASG sold the Tuscaloosa Undeveloped Land for $965,000,
which resulted in a realized loss of $72,000.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
On
August
13, 2007, ASG completed the sale of real property located in Birmingham,
Alabama
(the “Birmingham Undeveloped Land”) to Mr. Dellaccio and Mr. Grimsley. ASG sold
the Birmingham Undeveloped Land for $750,000,
which
resulted in a realized gain of $53,000. The sales of the Tuscaloosa and
Birmingham Undeveloped Land represent the remaining assets held for sale
by
ASG.
5.
OTHER CURRENT ASSETS
At
September 30, 2007 and December 31, 2006, the Company had other current assets
of $13,000 consisting primarily of security deposits.
6.
GOODWILL AND PATENTS
The
Company’s goodwill relates to its SurgiCount subsidiary. As discussed in Note
10, the Company recorded an additional $75,000 of goodwill as a result of the
issuance of 50,000 shares of the Company’s common stock to the SurgiCount
founders. Patents, net, as of September 30, 2007 and December 31, 2006 are
composed of patents:
|
|
Septemer
30,
2007
|
|
December
31,
2006
|
|
Patents
|
|
$
|
4,684,576
|
|
$
|
4,684,576
|
|
Accumulated
amortization
|
|
|
(839,433 |
) |
|
(595,726 |
) |
|
|
$
|
3,845,143
|
|
$
|
4,088,850
|
|
7.
LONG-TERM INVESTMENTS
Long-term
investments at September 30, 2007 and December 31, 2006 are comprised of the
following:
|
|
September
30,
2007
|
|
December
31,
2006
|
|
Alacra
Corporation
|
|
$
|
1,000,000
|
|
$
|
1,000,000
|
|
Investments
in Real Estate
|
|
|
430,563
|
|
|
430,563
|
|
Digicorp
|
|
|
—
|
|
|
10,970
|
|
|
|
$
|
1,430,563
|
|
$
|
1,441,533
|
|
Alacra
Corporation
At
September 30, 2007, the Company had an investment in shares of Series F
convertible preferred stock of Alacra Corporation (“Alacra”),
recorded at its cost of $1,000,000, and classified as an available-for-sale
investment. The Company has the right, to the extent that Alacra has sufficient
available capital, to have the Series F convertible preferred stock redeemed
by
Alacra for face value plus accrued dividends beginning on December 31, 2006.
Alacra, based in New York, is a global provider of business and financial
information.
Investments
in Real Estate
At
September 30, 2007, the Company’s real estate investments consist of
approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
0.61
acres of undeveloped land in Springfield, Tennessee, which are recorded at
their
cost of $430,563
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
8.
NOTES PAYABLE
Notes
payable at September 30, 2007 and December 31, 2006 are comprised of the
following:
|
|
September
30,
2007
|
|
December
31,
2006
|
|
Note
payable to Winstar Radio Networks, LLC (a)
|
|
$
|
—
|
|
$
|
450,000
|
|
Notes
payable to Ault Glazer Capital Partners, LLC (b)
|
|
|
2,530,558
|
|
|
2,575,528
|
|
Note
payable to Steven J. Caspi (c)
|
|
|
—
|
|
|
1,000,000
|
|
Note
payable to Steven J. Caspi (d)
|
|
|
—
|
|
|
1,495,281
|
|
Notes
payable to Herb Langsam (e)
|
|
|
600,000
|
|
|
600,000
|
|
Note
payable to Charles Kalina III (f)
|
|
|
400,000
|
|
|
400,000
|
|
Other
notes payable
|
|
|
332,539
|
|
|
598,232
|
|
Total
notes payable
|
|
|
3,863,097
|
|
|
7,119,041
|
|
Less:
debt discount on beneficial conversion feature
|
|
|
(39,253
|
)
|
|
(1,074,330
|
)
|
|
|
|
3,823,844
|
|
|
6,044,711
|
|
Less:
current portion
|
|
|
(1,293,286
|
)
|
|
(3,517,149
|
)
|
Notes
payable - long-term portion
|
|
$
|
2,530,558
|
|
$
|
2,527,562
|
|
Aggregate
future required principal payments on these notes during the twelve month period
subsequent to September 30, 2007 are as follows:
|
|
|
|
2007
|
|
$
|
761,241
|
|
2008
|
|
|
571,298
|
|
2009
|
|
|
—
|
|
2010
|
|
|
2,530,558
|
|
|
|
$
|
3,863,097
|
|
(a)
|
On
August 28, 2001, the Company made an investment in Excelsior Radio
Networks, Inc. (“Excelsior”)
which was completely liquidated during 2005. As part of the purchase
price
paid by the Company for its investment in Excelsior, the Company
issued a
$1,000,000 note to Winstar Radio Networks, LLC, a Delaware limited
liability company (“Winstar”).
This note was due February 28, 2002 with interest at 3.54% per annum
but
in accordance with the agreement the Company had a right of offset
against
certain representations and warranties made by Winstar. The Company
applied offsets of $215,000 against the principal balance of the
note
relating to legal fees attributed to our defense of certain lawsuits
filed
against us. The Company has consistently asserted that the due date
of the
note was extended until the lawsuit discussed in Note 13 is settled.
However, on February 3, 2006, Winstar Global Media, Inc. (“WGM”)
filed a lawsuit against the Company in an attempt to collect upon
the
$1,000,000 note between the Company and Winstar. On September 5,
2006, the
Company reached a settlement agreement with WGM whereas the Company
agreed
to pay Winstar $750,000, pursuant to an agreed upon payment schedule,
on
or before July 2, 2007. On November 7, 2006, The United States Bankruptcy
Court for the District of Delaware, approved the Company’s settlement
agreement with WGM. Pursuant to the settlement agreement, the Company
made
payments of $300,000 during 2006 and the remaining $450,000 during
the
three months ended March 31, 2007. The Company recorded a gain during
2006
of $191,000 on the elimination of principal and interest in excess
of the
settlement amount which is included in gain on debt extinguishment
in the
accompanying statement of
operations.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
(b)
On February 8, 2006, Ault Glazer Capital Partners, LLC (formerly AGB Acquisition
Fund) (the “Fund”),
a
related party, loaned $687,000 to ASG. As consideration for the loan, ASG issued
the Fund a secured promissory note in the principal amount of $687,000 (the
“ASG
Note”)
and
granted a real estate mortgage in favor of the Fund relating to certain real
property located in Jefferson County, Alabama (the “ASG
Property”).
The
ASG Note, as amended, had an interest rate of 10% per annum and was due on
September 15, 2006. The Fund received warrants to purchase 20,608 shares of
the
Company’s common stock at an exercise price of $3.86 per share as additional
consideration for entering into the loan agreement. The Company recorded debt
discount in the amount of $44,000 as the estimated value of the warrants. The
debt discount was amortized as non-cash interest expense over the initial term
of the debt using the effective interest method. The entire amount of the debt
discount was amortized as interest expense. As security for the performance
of
ASG’s obligations pursuant to the ASG Note, ASG had granted the Fund a security
interest in all personal property and fixtures located at the ASG Property.
During the nine months ended September 30, 2007 and 2006, the Company incurred
interest expense, excluding amortization of debt discount, of $28,000 and
$44,000, respectively, on the ASG Note.
As
of
December 31, 2006, the Fund loaned $1,495,000 to ASG in addition to the ASG
Note. The loans were advanced to ASG, pursuant to the terms of a Real Estate
Note dated July 27, 2005, as amended (the "Real
Estate Note").
The
Real Estate Note had an interest rate of 3% above the Prime Rate as published
in
the Wall Street Journal. All unpaid principal, interest and charges under the
Real Estate Note were due in full on July 31, 2010. The Real Estate Note was
collateralized by a mortgage on certain real estate owned by ASG pursuant to
the
terms of a Future Advance Mortgage Assignment of Rents and Leases and Security
Agreement dated July 27, 2005 between ASG and the Fund. During the nine months
ended September 30, 2007 and 2006, the Company incurred interest expense of
$70,000 and $118,000, respectively, on the Real Estate Note.
Effective
June 1, 2007, the entire unpaid principal and interest under the ASG Note and
Real Estate Note were restructured into a new Convertible Secured Promissory
Note (the "AG
Partners Convertible Note")
in
the
principal amount of $2,530,558 with an effective date of June 1, 2007.
The
AG
Partners Convertible Note bears interest at the rate of 7% per annum and is
due
on the earlier of December 31, 2010, or the occurrence of an event of default.
In the event that the average closing price of the Company’s common stock is in
excess of $5.00 per share for thirty (30) consecutive trading days, the Company
will have the right to redeem the promissory note in shares or in cash. In
the
event of redemption in shares, the principal is convertible into shares of
the
Company’s common stock at a conversion price of $2.50. The promissory note is
secured by all of the Company’s assets. Should the Company raise up to
$2,000,000 in a new credit facility, including any replacement credit
facilities, the Fund is required to subordinate its security interest in favor
of the new credit facility. During the nine months ended September 30, 2007,
the
Company incurred interest expense of $59,000 on the AG Partners Convertible
Note.
From
March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
of
$524,000, of which $130,000 was repaid during 2006. The loans were advanced
to
the Company pursuant to a Revolving Line of Credit Agreement (the “Revolving
Line of Credit”)
entered
into with the Fund on March 7, 2006. The Revolving Line of Credit allowed the
Company to request advances of up to $500,000 from the Fund. Each advance under
the Revolving Line of Credit was evidenced by a secured promissory note and
a
security agreement. The secured promissory notes issued pursuant to the
Revolving Line of Credit required repayment with interest at the Prime Rate
plus
1% within 60 days from issuance. The outstanding principal balance of $394,000
and accrued interest of $28,000, which
was
in default, was converted into 337,439 shares of the Company’s common stock at a
conversion price of $1.25 per share.
During
the nine months ended September 30, 2007 and 2006, the Company incurred interest
expense of $15,000 and $8,000, respectively, on the Revolving Line of Credit.
(c)
|
On
January 12, 2006, Steven J. Caspi loaned $1,000,000 to ASG. As
consideration for the loan, ASG issued Mr. Caspi a promissory note
in the
principal amount of $1,000,000 (the “Caspi
Note”)
and granted Mr. Caspi a mortgage on certain real estate owned by
ASG and a
security interest on all personal property and fixtures located on
such
real estate as security for the obligations under the Caspi Note.
In
addition, the Company entered into an agreement guaranteeing ASG’s
obligations pursuant to the Caspi Note and Mr. Caspi received warrants
to
purchase 30,000 shares of the Company’s common stock at an exercise price
of $4.50 per share. The Company recorded debt discount in the amount
of
$92,000 based on the estimated fair value of the warrants. The debt
discount was amortized as non-cash interest expense over the initial
term
of the debt using the effective interest method. The entire amount
of the
debt discount was amortized as interest expense. The Caspi Note initially
accrued interest at the rate of 10% per annum, which together with
principal, was due to be repaid on July 13, 2006. The Caspi Note
was not
repaid until June 29, 2007. During the period of time that the Caspi
Note
was in default interest accrued at the rate of 18% per annum. During
the
nine months ended September 30, 2007 and 2006, the Company incurred
interest expense of $89,000 and $87,000, respectively, on the Caspi
Note.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
(d)
|
From
September 8, 2006 through September 19, 2006, Mr. Caspi loaned the
Company
a total of $1,495,281. As consideration for the loan, the Company
issued
Mr. Caspi a Convertible Promissory Note in the principal amount of
$1,495,281 (the “Second
Caspi Note”).
The Second Caspi Note accrued interest at the rate of 12% per annum
and
was due upon the earlier of March 31, 2008 or, the occurrence of
an event
of default. As security for the performance of the Company’s obligations
pursuant to the Second Caspi Note, the Company granted Mr. Caspi
a
security interest in certain real property. Mr. Caspi received warrants
to
purchase 250,000 shares of the Company’s common stock at an exercise price
of $1.25 per share as additional consideration for entering into
the loan
agreement. The Second Caspi Note was repaid on August 13, 2007. During
the
nine months ended September 30, 2007 and 2006, the Company incurred
interest expense, excluding amortization of debt discount, of $109,000
and
$11,000, respectively, on the Second Caspi
Note.
|
As
the
effective conversion price of the Second Caspi Note on the date of issuance
was
below the fair market value of the underlying common stock, the Company recorded
debt discount in the amount of $769,000 based on the intrinsic value of the
beneficial conversion feature of the note.
The
warrant issued to Mr. Caspi in conjunction with the Second Caspi Note will
expire after September 8, 2011. The Company recorded debt discount in the amount
of $231,000 based on the estimated fair value of the warrants. The debt discount
as a result of the beneficial conversion feature of the note and the estimated
fair value of the warrants was amortized as non-cash interest expense over
the
term of the debt using the effective interest method. During the nine months
ended September 30, 2007 and 2006, interest expense of $877,000 and $95,000
has
been recorded from the debt discount amortization.
(e)
On May 1, 2006, Herbert Langsam, a Class II Director of the Company, loaned
the
Company $500,000. The loan is documented by a $500,000 Secured Promissory Note
(the “Langsam
Note”)
payable
to the Herbert Langsam Irrevocable Trust. The Langsam Note accrues interest
at
the rate of 12% per annum and had a maturity date of November 1, 2006. This
note
was not repaid by the scheduled maturity and to date has not been extended,
therefore the Langsam Note is recorded in current liabilities. Accordingly,
the
note is currently in default and therefore accruing interest at the rate of
16%
per annum. Pursuant to the terms of a Security Agreement dated May 1, 2006,
the
Company granted the Herbert Langsam Revocable Trust a security interest in
all
of the Company’s assets as collateral for the satisfaction and performance of
the Company’s obligations pursuant to the Langsam Note.
On
November 13, 2006, Mr. Langsam, loaned the Company an additional $100,000.
The
loan is documented by a $100,000 Secured Promissory Note (the “Second
Langsam Note”)
payable
to the Herbert Langsam Irrevocable Trust. The Second Langsam Note accrues
interest at the rate of 12% per annum and has a maturity date of May 13, 2007.
Mr. Langsam received warrants to purchase 50,000 shares of the Company’s common
stock at an exercise price of $1.25 per share as additional consideration for
entering into the loan agreement. The Company recorded debt discount in the
amount of $17,000 as the estimated value of the warrants. The debt discount
was
amortized as non-cash interest expense over the term of the debt using the
effective interest method. During the nine months ended September 30, 2007,
interest expense of $12,000 has been recorded from the debt discount
amortization. Pursuant to the terms of a Security Agreement dated November
13,
2006, the Company granted the Herbert Langsam Revocable Trust a security
interest in all of the Company’s assets as collateral for the satisfaction and
performance of the Company’s obligations pursuant to the Second Langsam Note.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
During
the nine months ended September 30, 2007 and 2006, the Company incurred interest
expense, excluding amortization of debt discount, of $64,000 and $24,000,
respectively, on the Langsam Notes. At September 30, 2007 and December 31,
2006
accrued interest on the Langsam Notes totaled $114,000 and $50,000,
respectively.
(f)
On July 12, 2006 the Company, executed a Convertible Promissory Note in the
principal amount of $250,000 (the “Kalina
Note”)
and a
warrant for the purchase of 85,000 Shares of the Company’s Common Stock (the
“Kalina
Warrant”)
in
favor of Charles J. Kalina, III, an existing shareholder of the Company. The
Kalina Note accrued interest at the rate of 12% per annum throughout the term
of
the loan. The principal amount of the Kalina Note and any accrued but unpaid
interest was due to be paid on October 10, 2006. Principal and interest on
the
Kalina Note was convertible into shares of the Company’s common stock at a
conversion price of $3.00 per share.
The
Kalina Warrant has an exercise price of $ 2.69 per share and will expire on
July
11, 2011. The Company recorded debt discount in the amount of $161,000 based
on
the estimated fair value of the Kalina Warrants. The debt discount was amortized
as non-cash interest expense over the initial term of the debt using the
effective interest method.
|
On
November 3, 2006 the balance due under the Kalina Note was added
to a new
Convertible Promissory Note in the principal amount of $400,000 (the
“Second
Kalina Note”),
pursuant to which the Company received proceeds of approximately
$150,000.
The Second Kalina Note bears interest at the rate of 12% per annum
and is
due on January 31, 2008 or, the occurrence of an event of default.
Mr.
Kalina received warrants to purchase 250,000 shares of the Company’s
common stock at an exercise price of $1.25 per share as additional
consideration for entering into the loan agreement. During the nine
months
ended September 30, 2007, the Company incurred interest expense,
excluding
amortization of debt discount of $34,000 on the Second Kalina Note.
At
September 30, 2007 and December 31, 2006 accrued interest on the
Second
Kalina Note totaled $8,000 and $10,000,
respectively.
|
As
the
effective conversion price of the Second Kalina Note on the date of issuance
was
below the fair market value of the underlying common stock, the Company recorded
debt discount in the amount of $77,000 based on the intrinsic value of the
beneficial conversion feature of the note.
The
warrant issued to Mr. Kalina in conjunction with the Second Kalina Note will
expire after November 3, 2011. The Company recorded debt discount in the amount
of $29,000 based on the estimated fair value of the warrants. The debt discount
as a result of the beneficial conversion feature of the note and the estimated
fair value of the warrants will be amortized as non-cash interest expense over
the term of the debt using the effective interest method. During the nine months
ended September 30, 2007, interest expense of $68,000 has been recorded from
the
debt discount amortization.
9.
ACCRUED LIABILITIES
Accrued
liabilities at September 30, 2007 and December 31, 2006 are comprised of the
following:
|
|
September
30,
2007
|
|
December
31,
2006
|
|
Accrued
interest
|
|
$
|
318,370
|
|
$
|
520,114
|
|
Accrued
professional fees
|
|
|
—
|
|
|
10,000
|
|
Accrued
dividends on preferred stock
|
|
|
134,138
|
|
|
95,812
|
|
Accrued
salaries
|
|
|
123,604
|
|
|
197,495
|
|
Other
|
|
|
85,711
|
|
|
1,045
|
|
|
|
$
|
661,823
|
|
$
|
824,466
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
10.
EQUITY TRANSACTIONS
On
January 29, 2007, the Company entered into a subscription agreement with A
Plus,
pursuant to which the Company sold to A Plus 800,000 shares of its common stock
and warrants to purchase an additional 300,000 shares of its common stock.
The
Company received gross proceeds of $500,000 in cash and will receive $500,000
in
product over the course of the next twelve (12) months. As of September 30,
2007, the Company had received $401,000 in product and the remaining $99,000
is
included in prepaid expenses. The warrants have a term of five (5) years and
an
exercise price equal to $2.00 per share.
Between
January 29, 2007 and June 7, 2007, the Company entered into a subscription
agreement with several accredited investors in a private placement exempt from
the registration requirements of the Securities Act of 1933, as amended (the
“Securities
Act”).
The
Company issued and sold to the investors an aggregate of 2,152,000 shares of
its
common stock and warrants to purchase an additional 1,076,000 shares of its
common stock. The warrants are exercisable for a period of three to five years,
have an exercise price equal to $2.00, and 50% of the warrants are callable
upon
the occurrence of any one of a number of specified events when, after any such
specified occurrence, the average closing price of the Company’s common stock
during any period of five consecutive trading days exceeds $4.00 per share.
These issuances resulted in aggregate gross proceeds to the Company of
$2,690,000.
Pursuant
to the February 2005 Agreement and Plan of Merger and Reorganization (the
“Merger”) between the Company and SurgiCount, in the event that prior to the
fifth anniversary of the closing of the Merger the cumulative gross revenues
of
SurgiCount exceed $500,000, the Company is obligated to issue an additional
50,000 shares of the Company’s common stock to certain SurgiCount founders.
Should the cumulative gross revenues exceed $1,000,000 during the five-year
period ended February 2010, the additional shares would be increased by 50,000,
for a total of 100,000 additional shares. During the quarter ended June 30,
2007, cumulative gross revenues of SurgiCount exceeded $500,000 and as such
the
Company issued 50,000 shares to the SurgiCount founders. The Company recorded
$75,000 of goodwill as a result of these issuances, based on the estimated
fair
value of the shares.
11.
WARRANTS
During
the nine months ended September 30, 2007, a total of 1,508,920 warrants, at
an
average exercise price of $2.00 per share were issued primarily in connection
with the various subscription agreements entered into by the Company as well
as
payment for services and accrued interest. The warrants were valued using the
Black-Scholes valuation model assuming expected dividend yield, risk-free
interest rate, expected life and volatility of 0%, 4.50%, five years and 63%
-
97%, respectively. Warrants granted during the year ended December 31, 2006
were
valued using an expected dividend yield, risk-free interest rate, expected
life
and volatility of 0%, 3.75% - 4.50%, three to five years and 63% - 88%,
respectively. As of September 30, 2007, a total of 4,751,321 warrants, at
exercise prices ranging from $1.25 to $6.05 remain outstanding.
12.
RELATED PARTY TRANSACTIONS
During
the three months ended March 31, 2007 and year ended December 31, 2006, the
Company paid approximately 25% of the base rent on the corporate offices and
The
Ault Glazer Group, Inc. ("Ault
Glazer")
paid
the remaining base rent based upon their respective usage of the facilities.
Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
Officer of the Company, and Louis Glazer, a Class I Director of the Company,
and
Melanie Glazer, the former Manager of our real estate segment, (together, the
“Glazers”)
own a
controlling interest in the outstanding capital stock of Ault Glazer. As of
September 30, 2007 and December 31, 2006, Ault Glazer, Mr. Ault and the Glazers
indirectly beneficially own or control approximately 26% and 40%, respectively,
of the outstanding common stock of the Company and beneficially own
approximately 98.2% of the outstanding preferred stock of the Company.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
IPEX,
Inc.
During
the three and nine months ended September 30, 2006, the Company recognized
revenue of nil and $104,000, respectively, in connection with consulting
services provided to IPEX. The Company’s former Chairman and Chief Executive
Officer and significant beneficial owner of the Company served as a director
of
IPEX during that period. Further, the Chief Executive Officer of ASG served
as
an IPEX director and member of IPEX’s Audit Committee from August 2005 through
January 2006.
Digicorp
At
December 31, 2006, the Company had an investment in Digicorp recorded in
long-term investments. The Company’s Chief Executive Officer and Chief Financial
Officer was also Chief Financial Officer of Digicorp and remains a director
of
the Company. Further, certain Company officers and directors, both past and
present, served in various management and director roles at Digicorp.
Loans
During
the nine months ended September 30, 2007 and the year ended December 31, 2006,
the Company received loans from Ault Gazer Capital Partners, LLC (the
“Fund”).
Ault
Glazer & Company Investment Management, LLC (“AG
& Company IM”)
is the
managing member of the Fund. The managing member of AG & Company IM is Ault
Glazer. Mr. Ault is Chairman, Chief Executive Officer and President of Ault
Glazer. Until June 8, 2006, the Company’s current Chief Executive Officer, Chief
Financial Officer and Director was also Chief Financial Officer of Ault
Glazer.
ASG
During
the period from June 29, 2007 to August 13, 2007, Automotive Services Group
sold
its express car wash and underlying
real estate and a parcel of undeveloped land located in Birmingham, Alabama
to
Charles
H. Dellaccio and Darrell Grimsley. Mr. Grimsley is the Chairman of the Board
and
Chief Executive Officer of Automotive Services Group.
13.
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit (the “Leve
Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
On
February 25, 2003, the case against the Company and Sunshine was dismissed,
however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
that the Winstar defendants conspired to commit fraud and breached their
fiduciary duty to the plaintiffs in connection with the acquisition of the
plaintiff's radio production and distribution business. The complaint further
alleged that the Company and Sunshine joined the alleged conspiracy. On June
1,
2005, the United States Court of Appeals for the Second Circuit affirmed the
February 25, 2003 judgment of the district court dismissing the claims against
the Company.
On
July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
new
lawsuit (the “new
Leve Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
The
new Leve Lawsuit attempts to collect a federal default judgment of $5,014,000
entered against only two entities, i.e., Winstar Radio Networks, LLC and Winstar
Global Media, Inc., by attempting to enforce the judgment against a number
of
additional entities who are not judgment debtors. Further, the new Leve Lawsuit
attempts to enforce the plaintiffs default judgment against entities who were
dismissed on the merits from the underlying action in which plaintiffs obtained
their default judgment. An unfavorable outcome in the lawsuit, may have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes the lawsuit is without merit and
intends to vigorously defend itself. These consolidated interim financial
statements do not include any adjustments for the possible outcome of this
uncertainty.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Interim Financial Statements - Unaudited
(continued)
14.
SEGMENT REPORTING
The
Company reports segment information in accordance with SFAS No. 131,
Disclosures
about Segments of an Enterprise and Related Information.
The
segment information previously provided reflected the three distinct lines
of
business within the Company’s past organizational structure: medical
products, financial services and real estate, and
car
wash services.
The
Company has restructured its operations such that its only continuing operations
are related to the medical products segment. Accordingly, since the Company
only
operates within a single industry, segment information is no longer
reported.
15.
SUBSEQUENT EVENTS
On
October 17, 2007, the Company sold, in a private placement exempt from the
registration requirements of the Securities Act, 1,270,000 shares of its common
stock (“Common Stock”) at $1.25 price per share and issued five-year warrants to
purchase 763,000 shares of Common Stock (the “Warrants”) at an exercise price of
$1.40 per share, pursuant to a Securities Purchase Agreement (the “Agreement”)
entered into with Francis Capital Management, LLC, an accredited investor.
The
investor paid $1,500,000 in cash and agreed to extinguish $90,000 in existing
debt owed to it by the Company. Pursuant to the terms of the Agreement, the
Company may sell up to an aggregate of $3,000,000 in common stock and warrants
under the Agreement by no later than November 16, 2007.
Francis
Capital Management was granted, along with other potential investors in the
offering, the right to designate up to two individuals for appointment to the
Company’s Board of Directors, subject to approval of the Company’s Board of
Directors, which approval shall not be unreasonably withheld. In order to
provide for the new Board designees, William B. Horne intends to resign from
the
Board of Directors.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes thereto contained elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve risks and
uncertainties. All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing
plans
are forward-looking statements. In many cases, you can identify forward-looking
statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
statements are only predictions. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those
projected in any forward-looking statements. In evaluating these statements,
you
should specifically consider various factors, including, but not limited to,
those set forth in Part II of this report under “Item 1A. Risk Factors” and
elsewhere in this report on Form 10-Q.
The
following “Overview” section is a brief summary of the significant issues
addressed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”).
Investors should read the relevant sections of the MD&A for a complete
discussion of the issues summarized below. The entire MD&A should be read in
conjunction with Item 1 of Part I of this report, “Financial
Statements.”
Overview
Patient
Safety Technologies, Inc. (referred to herein as the “Company,”
“we,” “us,”
and
“our”)
currently conducts its operations through a single wholly-owned operating
subsidiary: SurgiCount Medical, Inc., a California corporation. Beginning in
July 2005 through August 2007, the Company’s wholly-owned subsidiary, Automotive
Services Group, Inc. (formerly known as Ault Glazer Bodnar Merchant Capital,
Inc.), a Delaware corporation, held the Company’s investment in Automotive
Services Group, LLC (“ASG”),
its
wholly-owned express car wash subsidiary. During
the period from June 29, 2007 to August 13, 2007, Automotive Services Group
sold
all the assets held by ASG.
The
Company, including SurgiCount Medical Inc. (“SurgiCount”),
is
engaged in the acquisition of controlling interests in companies and research
and development of products and services focused primarily in the health care
and medical products field, particularly the patient safety markets. SurgiCount
is a developer and manufacturer of patient safety products and services. In
addition, the Company holds various other unrelated investments which it is
in
the process of liquidating. The unrelated investments are recorded on the
Company’s balance sheet in “long-term investments”.
The
Company was incorporated on March 31, 1987, under the laws of the state of
Delaware. Beginning in July 1987 until March 31, 2005 we operated as an
investment company registered pursuant to the Investment Company Act of 1940,
as
amended (the “1940
Act”).
In or
about August 1997 our Board of Directors determined it would be in the best
interest of the Company and our stockholders to elect to become a registered
business development company (a “BDC”)
under
the 1940 Act. On September 9, 1997 our shareholders approved the proposal to
be
regulated as a BDC and on November 18, 1997 we filed a notification of election
to become a BDC with the Securities and Exchange Commission (“SEC”).
On
March
30, 2005, stockholder approval was obtained to withdraw our election to be
treated as a BDC and on March 31, 2005 we filed an election to withdraw our
election with the SEC. At September 30, 2007, 12.2% of our assets, consisting
primarily of our investment in Alacra Corporation, on a consolidated basis
with
our subsidiary were comprised of investment securities within the meaning of
the
1940 Act (“Investment
Securities”).
If the
value of our assets that consist of Investment Securities were to exceed 40%
of
our total assets (excluding government securities and cash items) on an
unconsolidated basis we could be required to re-register as an investment
company under the 1940 Act unless an exemption or exclusion applies. We continue
to evaluate ways in which we can dispose of these Investment Securities and
do
not believe that the value of our Investment Securities will increase in an
amount that would require us to re-register as a BDC. Registration as an
investment company would subject us to restrictions that are inconsistent with
our fundamental business strategy of equity growth through creating, building
and operating companies in the patient safety medical products industry.
Registration under the 1940 Act would also subject us to increased regulatory
and compliance costs, and other restrictions on the way we operate and would
change the method of accounting for our assets under GAAP.
Our
operations currently focus on the acquisition of controlling interests in
companies and research and development of products and services in the health
care and medical products field, particularly the patient safety markets. In
the
past we also focused on the financial services and real estate industries.
On
October 2005 our Board of Directors authorized us to evaluate alternative
strategies for the divesture of our non-healthcare assets. As an extension
on
our prior focus on real estate, in March 2006 we acquired the remaining 50%
equity interest in ASG and upon doing so we entered the business of developing
properties for the operation of automated express car wash sites. However,
on
March 29, 2006, our Board of Directors determined to focus our business
exclusively on the patient safety medical products field. The Board of Directors
established a special committee in January 2007 to evaluate potential
divestiture transactions for ASG and our other real estate assets. The
divestiture of ASG was completed on August 13, 2007.
SurgiCount
Medical, Inc., developer of the Safety- Sponge™ System
was acquired to enhance our ability to focus our efforts in the health care
and
medical products field, particularly the patient safety markets. Currently,
we
are evaluating ways in which to monetize our remaining non-patient safety
related assets (the “non-core
assets”).
SurgiCount’s
Safety-Sponge System helps reduce the number of retained sponges and towels
in
patients during surgical procedures and allows for faster and more accurate
counting of surgical sponges. The SurgiCount Safety-Sponge System
is
a patented turn-key array of modified surgical sponges, line-of-sight scanning
SurgiCounters, and printPAD printers integrated together to form a comprehensive
counting and documentation system. The Safety-Sponge System works much like
a
grocery store checkout process: Every surgical sponge and towel is affixed
with
a unique inseparable two-dimensional data matrix bar code and used with a
SurgiCounter to scan and record the sponges during the initial and final counts.
Because each sponge is identified with a unique code, a SurgiCounter will not
allow the same sponge to be counted more than one time. When counts have been
completed at the end of a procedure, the system will produce a printed report,
or can be modified to work with a hospital's paperless system. By scanning
the
surgical dressings in at the beginning of a surgical procedure and then scanning
them out at the end of the procedure, the sponges can be counted faster and
more
accurately than traditional methods which require two medical personnel manually
counting the used and un-used sponges. The Safety-Sponge System is the only
FDA
510k approved computer assisted sponge counting system. SurgiCount is the
first acquisition in our plan to become a leader in the patient safety
market.
Our
principal executive offices are located at 27555 Ynez Road, Suite 330, Temecula,
CA 92591. Our telephone number is (951) 587-6201. Our website is located at
http://www.patientsafetytechnologies.com
.
Critical
accounting policies and estimates
The
below
discussion and analysis of our financial condition and results of operations
is
based upon the accompanying financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Critical
accounting policies are those that are both important to the presentation of
our
financial condition and results of operations and require management's most
difficult, complex, or subjective judgments, often as a result of the need
to
make estimates of matters that are inherently uncertain. Our most critical
accounting policy relates to the valuation of our investments in non-marketable
equity securities, valuation of our intangible assets and stock based
compensation.
Valuation
of Non-Marketable Equity Securities
In
the
past we invested in illiquid equity securities acquired directly from issuers
in
private transactions. These investments are generally subject to restrictions
on
resale or otherwise are illiquid and generally have no established trading
market. Additionally, our investment in Alacra, our only remaining investment
in
a privately held company, will not be eligible for sale to the public without
registration under the Securities Act of 1933. Because of the type of
investments that we made and the nature of our business, our valuation process
requires an analysis of various factors.
Investments
in non-marketable securities are inherently risky and the one remaining
privately held company that we have invested in may fail. Its success (or lack
thereof) is dependent upon product development, market acceptance, operational
efficiency and other key business success factors. In addition, depending on
its
future prospects, it may not be able to raise additional funds when needed
or it
may receive lower valuations with less favorable investment terms than in
previous financings, thus causing our investments to become
impaired.
We
review
all of our investments quarterly for indicators of impairment; however, for
non-marketable equity securities, the impairment analysis requires significant
judgment to identify events or circumstances that would likely have a material
adverse effect on the fair value of the investment. The indicators that we
use
to identify those events or circumstances includes as relevant, the nature
and
value of any collateral, the portfolio company’s ability to make payments and
its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted value of the cash flows of the
portfolio company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of fair
value may differ materially from the values that would be assessed if a liquid
market for these securities existed.
Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which
case
we write the investment down to its impaired value. When a portfolio company
is
not considered viable from a financial or technological point of view, we write
down the entire investment since we consider the estimated fair market value
to
be nominal. If a portfolio company obtains additional funding at a valuation
lower than our carrying amount or requires a new round of equity funding to
stay
in operation and the new funding does not appear imminent, we presume that
the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise.
Security
investments which are publicly traded on a national securities exchange or
over-the-counter market are stated at the last reported sale price on the day
of
valuation or, if no sale was reported on that date, then the securities are
stated at the last quoted bid price. We may determine, if appropriate, to
discount the value where there is an impediment to the marketability of the
securities held.
Valuation
of Intangible Assets
We
assess
the impairment of intangible assets when events or changes in circumstances
indicate that the carrying value of the assets or the asset grouping may not
be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of a product line in relation
to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of
intangible assets that will continue to be used in our operations is measured
by
comparing the carrying amount of the asset grouping to our estimate of the
related total future net cash flows. If an asset grouping’s carrying value is
not recoverable through the related cash flows, the asset grouping is considered
to be impaired. The impairment is measured by the difference between the asset
grouping’s carrying amount and its fair value, based on the best information
available, including market prices or discounted cash flow analysis. Impairments
of intangible assets are determined for groups of assets related to the lowest
level of identifiable independent cash flows. Due to our limited operating
history and the early stage of development of some of our intangible assets,
we
must make subjective judgments in determining the independent cash flows that
can be related to specific asset groupings. To date we have not recognized
impairments on any of our intangible assets related to the Safety Sponge™
System.
Stock-Based
Compensation
We
have
adopted the provisions of SFAS No. 123(R), Share-Based
Payment,
effective January 1, 2005 using
the
modified retrospective application method as provided by SFAS 123(R) and
accordingly, financial statement amounts for the prior periods in which the
Company granted employee stock options have been restated to reflect the fair
value method of expensing prescribed by SFAS 123(R). The
fair
value of each option grant, nonvested stock award and shares issued under the
employee stock purchase plan were estimated on the date of grant using the
Black-Scholes option pricing model and various inputs to the model. Expected
volatilities were based on historical volatility of our stock. The expected
term
represents the period of time that grants and awards are expected to be
outstanding. The risk-free interest rate approximates the U.S. treasury
rate corresponding to the expected term of the option, and dividends were
assumed to be zero. These inputs are based on our assumptions, which include
complex and subjective variables. Other reasonable assumptions could result
in
different fair values for our stock-based awards.
Stock-based
compensation expense, as determined using the Black-Scholes option pricing
model, is recognized on a straight line basis over the service period, net
of
estimated forfeitures. Forfeiture estimates are based
on
historical data. To the extent actual results or revised estimates differ from
the estimates used, such amounts will be recorded as a cumulative adjustment
in
the period that estimates are revised.
New
Accounting Pronouncements
In
June
2006, the Financial
Accounting Standards Board (“FASB”)
issued
FASB Interpretation No. (FIN) 48, Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109,
which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in an income tax return. The
Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not
have a material impact on our financial position, results of operations or
cash
flows.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair
Value Measurements
(“SFAS
157”).
SFAS
157 does not require new fair value measurements but rather defines fair value,
establishes a framework for measuring fair value and expands disclosure of
fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are
currently assessing the impact of SFAS 157 on our consolidated financial
position and results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
amendment to FASB Statement No. 115 (“SFAS
159”).
This
statement permits companies to choose to measure many financial instruments
and
other items at fair value. The objective is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement is expected
to expand the use of fair value measurement of accounting for financial
instruments. The fair value option established by this statement permits all
entities to measure eligible items at fair value at specified election dates.
This statement is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. We are currently assessing the impact
adoption of SFAS No. 159 will have on our consolidated financial
statements.
Financial
Condition, Liquidity and Capital Resources
Our
cash
balance was $84,000 at September 30, 2007, versus $4,000 at December 31, 2006.
Total current liabilities were $2,798,000 at September 30, 2007, versus
$5,637,000 at December 31, 2006. The minor amount of cash, combined with
relatively insignificant amounts of other current assets, resulted in working
capital deficit of approximately $2,434,000 at September 30, 2007. Since we
continue to have recurring losses we have relied upon private placements of
equity and debt securities and we may rely on private placements to fund our
capital requirements in the future. From August 2006 through the date of this
report we have sold to accredited investors in our private placements, as
reflected below, $5,828,000 in equity securities.
2006
private placements
Between
August 17, 2006 and December 15, 2007, we entered into various subscription
agreements with accredited investors in private placements exempt from the
registration requirements of the Securities Act. We issued and sold to these
accredited investors an aggregate of 438,000 shares of our common stock and
warrants to purchase an additional 119,000 shares of our common stock. The
warrants are exercisable for a period of three years with an exercise price
equal to $2.00. These issuances resulted in gross cash proceeds to us of
$548,000. We used the net proceeds from these private placement transactions
primarily for general corporate purposes and repayment of existing
liabilities.
2007
private placements
Between
January 29, 2007 and June 8, 2007, we entered into various subscription
agreements with accredited investors in private placements exempt from the
registration requirements of the Securities Act. We issued and sold to these
accredited investors an aggregate of 2,952,000 shares of our common stock and
warrants to purchase an additional 1,376,000 shares of our common stock. The
warrants are exercisable for a period of three to five years with an exercise
price equal to $2.00. These issuances resulted in aggregate gross proceeds
to us
of $3,690,000, of which $3,190,000 was in cash and $500,000 was in product
which
we will receive over the course of a twelve (12) month period. We used the
net
proceeds from these private placement transactions primarily for general
corporate purposes and repayment of existing liabilities
On
October 17, 2007, we entered into a securities purchase agreement with Francis
Capital Management, LLC (“Francis
Capital”),
an
accredited investor, in a private placement exempt from the registration
requirements of the Securities Act. We issued and sold to Francis Capital an
aggregate of 1,270,000 shares of our common stock and warrants to purchase
an
additional 763,000 shares of our common stock. The warrants are exercisable
for
a period of five years at an exercise price equal to $1.40 per share. These
issuances resulted in aggregate gross proceeds to us of $1,500,000 in cash
and
the extinguishment of $90,000 in existing debt owed to Francis Capital by us.
Pursuant to the terms of the securities purchase agreement, the Company may
sell
up to an aggregate of $3,000,000 in common stock and warrants under the
securities purchase agreement by no later than November 16, 2007. We intend
to
use the net proceeds from this private placement transaction primarily for
general corporate purposes and repayment of existing liabilities.
In
addition to our private placements, we have also received a significant amount
of funding from Ault Glazer Capital Partners, LLC (formerly AGB Acquisition
Fund) (the “Fund”).
AG
Management is the managing member of the Fund. The managing member of AG
Management is The Ault Glazer Group, Inc. (“The
AG Group”)
(f/k/a
Ault Glazer Bodnar & Company, Inc.). The Company’s former Chairman and
former Chief Executive Officer, Milton “Todd” Ault, III, is Chairman, Chief
Executive Officer and President of The AG Group. At September 30, 2007 the
outstanding principal balance of the loan that we entered into with the Fund
was
$2,531,000. At September 30, 2007 we also had outstanding promissory notes
primarily to two additional lenders in the principal amount of
$1,000,000.
On
May 1,
2006, Herbert Langsam, a Class II Director of the Company, loaned the Company
$500,000. The loan is documented by a $500,000 Secured Promissory Note (the
“Langsam
Note”).
The
Langsam Note accrues interest at the rate of 12% per annum and had a maturity
date of November 1, 2006. The Langsam Note is in default and classified with
current liabilities on the balance sheet. As a result of the default, the
interest rate increased to 16% per annum.
On
November 13, 2006, Mr. Langsam loaned the Company an additional $100,000. The
loan is documented by a $100,000 Secured Promissory Note (the “Second
Langsam Note”).
The
Second Langsam Note accrues interest at the rate of 12% per annum and had a
maturity date of May 13, 2007. The Second Langsam Note is in default and
classified with current liabilities on the balance sheet. As a result of the
default the interest rate increased to 16% per annum.
Pursuant
to the terms of Security Agreements dated May 1, 2006 and November 13, 2006,
the
Company granted the Herbert Langsam Revocable Trust a security interest in
all
of the Company’s assets as collateral for the satisfaction and performance of
the Company’s obligations under the terms of the Langsam Note and the Second
Langsam Note.
On
November 3, 2006, we entered into a convertible promissory note in the principal
amount of $400,000 with Charles J. Kalina, III (the “Kalina
Note”).
The
Kalina Note bears interest at the rate of 12% per annum, is due to be paid
on
January 31, 2008, and is convertible into shares of the Company’s common stock
at $1.25 per share.
During
the period from June 29, 2007 to August 13, 2007, Automotive Services Group
sold
all the assets held by ASG thereby completing the liquidation of Automotive
Services Group. We received net proceeds, after expenses of the sales, of
$3,178,000 which resulted in a gain of $10,000. The majority of the proceeds
from the sales were used to repay existing debt. By selling these assets the
Company has positioned itself to aggressively pursue the market for surgical
sponges in the United States and Europe, which we believe represents a market
opportunity equal to or in excess of $650 million in annual sales.
Management
is currently seeking additional financing and believes that it will be
successful. However, in the event management is not successful in obtaining
additional financing, existing cash resources, together with proceeds from
investments and anticipated revenues from operations, may not be adequate to
fund our operations for the twelve months subsequent to September 30, 2007.
However, ultimately long-term liquidity is dependent on our ability to attain
future profitable operations. We intend to undertake additional debt or equity
financings to better enable us to grow and meet future operating and capital
requirements.
As
of
September 30, 2007, other than our office lease and employment agreements with
key executive officers, we had no commitments as liabilities not reflected
in
our consolidated financial statements.
Cash
increased by $80,000 to $84,000 during the nine months ended September 30,
2007,
compared to a decrease of $53,000 during the nine months ended September 30,
2006.
Operating
activities used $2,585,000 of cash during the nine months ended September 30,
2007, compared to $2,030,000 during the nine months ended September 30,
2006.
Operating
activities for the nine months ended September 30, 2007, exclusive of changes
in
operating assets and liabilities, used $2,919,000 of cash, as the Company's
net
cash used in operating activities of $2,585,000 included non-cash charges for
depreciation and amortization of $377,000, debt discount of $1,045,000 and
stock
based compensation of $901,000. For the nine months ended September 30, 2006,
operating activities, exclusive of changes in operating assets and liabilities,
used $3,610,000 of cash, as the Company's net cash used in operating activities
of $2,030,000 included non-cash charges for depreciation and amortization of
$313,000 and interest of $2,880,000, realized losses of $1,437,000 and stock
based compensation of $3,004,000.
Changes
in operating assets and liabilities used cash of $334,000 during the nine months
ended September 30, 2007, principally due to decreases in the level of accounts
payable which were partially offset by an increase in accrued liabilities and
a
decrease in prepaid expenses. During the nine months ended September 30, 2006,
changes in operating assets and liabilities produced cash of $1,580,000 during
the nine months ended September 30, 2006, principally due to net proceeds
received from marketable securities, decreases in our receivables from
investments and increases in the level of accounts payable and accrued
liabilities which were partially offset by decreases in the amounts due to
our
broker. The amount due to our broker was directly attributable to purchases
of
marketable investment securities that were purchased on margin or to securities
that were margined subsequent to their purchase. During the three months ended
March 31, 2006, we invested our cash balances in the public equity and debt
markets in an attempt to maximize the short-term return on such assets. The
amount due to our broker varied throughout the year depending upon the aggregate
amount of marketable investment securities held by us and the level of borrowing
against our available-for-sale securities. The actual amount of marketable
investment securities held was influenced by several factors, including but not
limited to, our expectations of potential returns available from what we
considered to be mispriced securities as well as the cash needs of our operating
activities. During times when we were heavily invested in marketable investment
securities, our liquidity position was significantly reduced. We no longer
make
a practice of investing in marketable investment securities.
The
principal factor in the $2,834,000 of cash provided by investing activities
during the nine months ended September 30, 2007 was the
sale
of our express car wash and undeveloped land in Alabama for $3,178,000.
This
was
partially offset by capitalized costs of $286,000 related to the ongoing
development of purchased software related to our Safety-Sponge System.
The principal factor in the $2,040,000 of cash used in investing activities
during the nine months ended September 30, 2006 was the purchase of land of
$1,697,000, capitalized construction costs of $383,000 related to ASG, and
capitalized costs of $159,000 related to the ongoing development of software
related to our Safety-Sponge System
offset by proceeds from the sale of long-term investments of
$250,000.
Cash
used
by financing activities during the nine months ended September 30, 2007 of
$169,000 resulted primarily from net proceeds from the issuance of common stock
and warrants of $3,051,000 offset by the repayment of the Winstar Note in the
amount of $450,000 and other notes in the amount of $2,851,000. Cash provided
by
financing activities during the nine months ended September 30, 2006, of
$4,017,000 resulted from the net proceeds from notes payable of $3,767,000
and
the proceeds from the issuance of common stock for $250,000.
Investments
Our
financial condition is partially dependent on the success of our existing
investments. On March 29, 2006 our Board of Directors directed us to liquidate
all of our investments and other assets that do not relate to the patient safety
medical products business. Some of our investments are subject to restrictions
on resale under federal securities laws and otherwise are illiquid, which will
make it difficult to dispose of the securities quickly. Since we will be forced
to liquidate some or all of the investments on an accelerated timeline, the
proceeds of such liquidation may be significantly less than the value at which
we acquired the investments. The following is a discussion of our most
significant investments at September 30, 2007.
A
summary
of our investment portfolio, which is valued at $1,431,000 and represents 17.4%
of our total assets, is reflected below. Excluding our real estate investments,
our investment portfolio represents 12.2% of our total assets. The investment
portfolio is classified as long-term investments.
|
|
|
|
Alacra
Corporation
|
|
$
|
1,000,000
|
|
Real
Estate
|
|
|
430,563
|
|
|
|
$
|
1,430,563
|
|
At
September 30, 2007, we had an investment in Alacra Corporation ( “Alacra”
),
valued at $1,000,000, which represents 12.2% of our total assets. On April
20,
2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
Stock. Alacra has recorded revenue growth in every year since the Company’s
original investment. Further, Alacra is forecasting that 2007 revenues will
be
approximately $19.2 million, which would represent an increase of 22% over
2006
unaudited revenues and result in net income of approximately $750,000. At
December 31, 2006, Alacra reported in their unaudited financial statements,
total assets of approximately $4.7 million with total liabilities of
approximately $7.4 million. Deferred revenue, which represents subscription
revenues that are amortized over the term of the contract, which is generally
one year, represented approximately $3.7 million of the total liabilities.
We
have the right, subject to Alacra having the available cash, to have the
preferred stock redeemed by Alacra over a period of three years for face value
plus accrued dividends beginning on December 31, 2006. Pursuant to this right,
in December 2006 we informed management of Alacra that we were exercising our
right to put back one-third of our preferred stock. If Alacra has a sufficient
amount of cash to redeem our preferred stock, which we believe it has, we would
expect the redemption to occur in December 2007. In connection with this
investment, the Company was granted observer rights on Alacra board of directors
meetings.
Alacra,
a
privately held company based in New York, is a global provider of business
and
financial information. Alacra provides a diverse portfolio of fast,
sophisticated online services that allow users to quickly find, analyze, package
and present business information. Alacra’s customers include more than 750
leading financial institutions, management consulting, law and accounting firms
and other corporations throughout the world. Currently, Alacra’s largest
customer segment is investment and commercial banking, followed closely by
management consulting, law and multi-national corporations.
Alacra’s
online service allows users to search via a set of tools designed to locate
and
extract business information from the Internet and from Alacra’s library of
content. Alacra’s team of information professionals selects, categorizes and
indexes more than 45,000 sites on the Web containing the most reliable and
comprehensive business information. Simultaneously, users can search more than
100 premium commercial databases that contain financial information, economic
data, business news, and investment and market research. Alacra provides
information in the required format, gleaned from such prestigious content
partners as Thomson Financial™, Barra, The Economist Intelligence Unit, Factiva,
Mergerstat® and many others.
The
information services industry is intensely competitive and we expect it to
remain so. Although Alacra has been in operation since 1996, they are
significantly smaller in terms of revenue than a large number of companies
offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
revenues that range anywhere from $100 million to several billion dollars,
as
reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
range of products and services, greater financial and marketing resources,
larger customer bases, greater name recognition, greater global reach and more
established relationships with potential customers than Alacra has. These larger
and better capitalized competitors may be better able to respond to changes
in
the financial services industry, to compete for skilled professionals, to
finance investment and acquisition opportunities, to fund internal growth and
to
compete for market share generally.
Investments
in Real Estate
At
September 30, 2007, we had real estate investments valued at $431,000, which
represents 5.2% of our total assets. In the past we held our real estate
investments in Ault Glazer Bodnar Capital Properties, LLC (“AGB
Properties”).
AGB
Properties, which was closed during 2006, was a Delaware limited liability
company and a wholly owned subsidiary. The real estate investments, consisting
of approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
0.61 acres of undeveloped land in Springfield, Tennessee, are currently being
marketed for sale. During the year ended December 31, 2006, we received payment
on loans that were secured by real estate of $50,000. We expect that any future
gain or loss recognized on the liquidation of some or all of our real estate
holdings would be insignificant primarily due to the short period of time that
the properties were owned combined with the absence of any significant changes
in property values in the real estate markets where the real estate holdings
are
located.
Results
of Operations
We
account for our operations under accounting principles generally accepted in
the
United States. The principal measure of our financial performance is captioned
“Loss available to common shareholders,” which is comprised of the
following:
|
§
|
"Revenues,"
which is the amount we receive from sales of our
products;
|
|
§
|
“Operating
expenses,” which are the related costs and expenses of operating our
business;
|
|
§
|
“Interest,
dividend income and other, net,” which is the amount we receive from
interest and dividends from our short term investments and money
market
accounts;
|
|
§
|
“Realized
gains (losses) on investments, net,” which is the difference between the
proceeds received from dispositions of investments and their stated
cost;
and
|
|
§
|
“Unrealized
gains (losses) on marketable securities, net,” which is the net change in
the fair value of our marketable securities, net of any (decrease)
increase in deferred income taxes that would become payable if the
unrealized appreciation were realized through the sale or other
disposition of the investment
portfolio.
|
Revenues
We
recognized revenues of $213,000 and $19,000 during the three months and $834,000
and $122,000 during the nine months ended September 30, 2007 and 2006,
respectively. All of the revenues generated during the three and nine months
ended September 30, 2007 related to sales of our Safety-Sponge System.
Revenues during the three and nine months ended September 30, 2007 from sales
of
our Safety-Sponge System
consisted of sales from the safety sponge of $213,000 and $728,000,
respectively, and sales from hardware and supplies of $106,000 during the nine
months ended September 30, 2007. Although hardware sales are not considered
a
recurring item, we expect that once an institution adopts our system, they
will
be committed to its use and therefore provide a recurring source of revenues
for
sales of the safety sponge.
We
attribute a significant amount of the increase in sales generated by our
Safety-Sponge System
to
increased product awareness and demand. The Safety-Sponge System
is
currently being evaluated by more than 10 medical institutions, the adoption
by
any one of which would have a material impact on our revenues. We expect that
small medical institutions which adopt the Safety-Sponge System will represent
approximately $100,000 in annual revenue whereas the larger institutions could
represent annual recurring revenues of $600,000 or more. The adoption by the
University
of California San Francisco Medical Center in February 2007 of our Safety-Sponge System
reflects current demand which we expect will begin to accelerate.
On
November 14, 2006, SurgiCount entered into a Supply Agreement with Cardinal
Health 200, Inc., a Delaware corporation ("Cardinal").
Pursuant to the agreement, Cardinal shall act as the exclusive distributor
of
SurgiCount's products in the United States, with the exception that SurgiCount
may sell its products to one other hospital supply company, named in the
agreement, solely for the sale and distribution to its hospital customers.
The
term of the agreement is 36 months, unless earlier terminated as set forth
therein. Otherwise, the agreement automatically renews for successive 12 month
periods. Although we cannot reasonably predict or estimate the financial impact
of the agreement with Cardinal we believe it will have a material impact on
our
results of operations due to the coordination of our sales efforts with Cardinal
and their significant presence in the major medical institutions.
Excluding
the $19,000 of revenues earned during the three months ended September 30,
2006,
all of the revenues earned during the nine months ended September 30, 2006
were
the result of a consulting agreement, consented to by IPEX, whereby the majority
shareholder of IPEX and former President, former Chief Executive Officer and
former director of IPEX (“Majority
Shareholder”),
retained us to serve as a business consultant to IPEX. In consideration for
the
services, during December 2005 the Majority Shareholder personally transferred
us 500,000 shares of common stock of IPEX as a non-refundable consulting fee.
This consulting agreement reflected our prior focus in the financial services
and real estate industries. Since we now only focus our efforts on the patient
safety markets, we do not expect to recognize revenue from these types of
consulting agreements in the future.
Expenses
Operating
expenses were $1,352,000 and $1,544,000 for the three months and $4,485,000
and
$6,474,000 for the nine months ended September 30, 2007 and 2006, respectively.
The
decrease in operating expenses of $1,989,000, for the nine months ended
September 30, 2007 when compared to the nine months ended September 30, 2006,
was primarily the result of salaries and employee benefits, which decreased
by
$1,500,000. Our Compensation Committee, currently comprised of two independent
directors, determines and recommends to our Board the cash and stock based
compensation to be paid to our executive officers and also reviews the amount
of
salary and bonus for each of our other officers and employees. The most
significant component of employee compensation is stock based compensation
expense.
For
the
nine months ended September 30, 2007, we recorded $422,000 related to grants
of
nonqualified stock options and $295,000 related to restricted stock awards
to
our employees and $126,000 related to restricted stock awards to our
non-employee directors. During the nine months ended September 30, 2006, we
recorded $1,297,000 relating to grants of nonqualified stock options and
$1,102,000 related to restricted stock awards to our employees and non-employee
directors. The issuance of stock options and restricted stock awards to our
employees and non-employee directors, adjusted for the $126,000 in restricted
stock awards to our non-employee directors which is recorded in general and
administrative expenses, resulted in a decrease in stock based compensation
expense of $1,682,000 for the nine months ended September 30, 2007. Therefore,
excluding stock based compensation, salaries and employee benefits increased
by
$182,000.
At
September 30, 2007, two of our executives were covered under employment
agreements. Our Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams
is covered under a three year employment agreement with annual base compensation
of $300,000 and; our President of Sales and Marketing of SurgiCount Medical,
Inc., Richard Bertran, is covered under a three year employment agreement with
annual base compensation of $250,000. None of our other executives our currently
covered under an employment agreement, therefore, we are under no financial
obligation, other than monthly salaries, for our other executive officers.
Currently, monthly gross salaries for all of our employees are $135,000.
However, prior to the elimination of three positions, monthly gross salaries
for
all of our employees were $155,000 at September 30, 2007 as opposed to $110,000
at September 30, 2006. We believe, as with all our operating expenses, that
our
existing cash resources, together with proceeds from investments, anticipated
financings and expected revenues from our operations, should be adequate to
fund
our salary obligations.
The
second largest component of our operating expenses is professional fees which
decreased by $963,000 during the nine months ended September 30, 2007 compared
to the amount reported during the nine months ended September 30, 2006. This
decrease is primarily comprised of decreases in stock based compensation to
outside consultants of $547,000. During the nine months ended September 30,
2006, stock based compensation expense of $604,000 was the most significant
component of professional fees. The majority of the $604,000 that was recorded
in stock based compensation related to a consulting agreement that we entered
into in February 2006 with Analog Ventures, LLC (“Analog
Ventures”)
whereby
Analog Ventures agreed to consult with us on matters relating primarily to
the
divestiture of our non-core assets and assist us in our efforts to focus our
business exclusively on the patient safety medical products field. As an
incentive for entering into the agreement, we agreed to issue Analog Ventures
a
warrant to purchase 175,000 shares of our common stock at an exercise price
of
$3.95, exercisable for 3 years. We recognized an expense of $405,000 related
to
these warrants.
The
remaining decrease in professional fees, of $359,000, is primarily attributed
to
our clinical trial agreement with Brigham and Women's Hospital, the teaching
affiliate of Harvard Medical School, relating to SurgiCount's
Safety-Sponge System.
The clinical trial is the result of an on-going collaboration between Harvard
and SurgiCount to refine the Safety-Sponge System in a clinical optimization
study. Under terms of the agreement, Brigham and Women's Hospital collected
data
on how the Safety-Sponge System saves time, reduces costs and increases patient
safety in the operating room. The study also assisted in refining the system's
technical processes in the operating room to provide clear guidance and
instruction to hospitals, easily integrating the Safety-Sponge System
into operating rooms. Brigham and Women's Hospital received a non-exclusive
license to use the Safety-Sponge System,
while we will own all technical innovations and other intellectual properties
derived from the study. We provided a research grant to Brigham and Women’s
Hospital over the course of the clinical trial in the aggregate amount of
$431,000 of which $280,000 was expensed during the nine months ended September
30, 2006. The clinical trials were completed around September 2006.
All
of
our stock based compensation issued to employees, non-employee directors and
consultants were expensed in accordance with SFAS 123(R). We valued the
nonqualified stock options and warrants using the Black-Scholes valuation model
assuming expected dividend yield, risk-free interest rate, expected life and
volatility of 0%, 3.00% to 4.50%, three to five years and 63% to 102%,
respectively. The restricted stock awards were valued at the closing price
on
the date the restricted shares were granted.
The
increase in cost of sales of $412,000 reflects a shift in our revenue mix from
revenue generated primarily through consulting services which do not have any
costs of sales to that of sales of our Safety-Sponge System.
General
and administrative expenses experienced an increase of $75,000 during the nine
months ended September 30, 2007 over the prior year. During the nine months
ended September 30, 2007, we recorded restricted stock awards to our
non-employee directors
of
$126,000
in general and administrative expenses. After adjusting for these non-cash
expenses general and administrative expenses reflected a decrease of $51,000.
As
discussed above, in Financial Condition, Liquidity and Capital Resources, we
have a
working
capital deficit of $2,404,000 and have experienced continued losses. These
financial constraints have required us to be selective in the expenses that
we
incur and where possible delay or forego an expense. This overall condition
has
resulted in a slight decrease in our cash based general and administrative
expense. General and administrative expenses are comprised of a combination
of a
several types of expenses, none of which are significant
individually.
Interest,
dividend income and other, net
We
had
interest income of $4,000 and $2,000 for the nine months ended September 30,
2007 and 2006, respectively.
The
increase in interest income for the nine months ended September 30, 2007 when
compared to September 30, 2006 was primarily the result of an overall increase
in cash during the nine months ended September 30, 2007.
Realized
gains (losses) on investments, net
During
the nine months ended September 30, 2007 we realized a net gain of $22,000
compared to a loss of $1,437,000 during the nine months ended September 30,
2006. Realized gains (losses) during the nine months ended September 30, 2007
reflect the sale of certain non-operating assets. The realized loss during
the
nine months ended September 30, 2006 was primarily due to our write down of
950,000 shares of IPEX common stock with a cost base of $1,458,000.
Interest
expense
We
had
interest expense of $1,418,000 and $2,931,000 for the nine months ended
September 30, 2007 and 2006, respectively.
The
decrease in interest expense for the nine months ended September 30, 2007 when
compared to September 30, 2006 is primarily attributable to the non-cash
interest charges incurred as a result of the debt discount associated with
our
short-term debt financings. During the nine months ended September 30, 2007
and
2006, we recorded $1,045,000 and $2,880,000, respectively, in non-cash interest
charges. The non-cash interest charges that were incurred during the nine months
ended September 30, 2006 included $136,000 that were attributed to our car
wash
segment and recorded in loss from discontinued operations. Thus, non-cash
interest charges recorded in interest expense decreased $1,699,000 and
represented the primary cause of the decrease in interest expense from 2006
to
2007. These non-cash charges resulted from the issuance of debt that either
had
conversion prices on the date of issuance that were below the fair market value
of the underlying common stock or required the issuance of warrants to purchase
shares of our common stock, which required us to record an expense based on
the
estimated fair value of the warrants. The remaining increase in interest expense
is attributable to the overall increased level of borrowings during the nine
months ended September 30, 2007 over the prior year.
Unrealized
gains (losses) on marketable securities, net
During
the nine months ended September 30, 2006, unrealized appreciation of investments
was $17,000. Due to the absence of any material amount of marketable securities
during the nine months ended September 30, 2007, the Company did not recognize
any unrealized appreciation. The increase in unrealized appreciation during
the
nine months ended September 30, 2006, was primarily due to the sale of 108,200
shares of Tuxis Corporation common stock, which at December 31, 2005 had
unrealized depreciation of approximately $134,000. When we exit an investment
and realize a loss, we make an accounting entry to reverse any unrealized
depreciation we had previously recorded to reflect the depreciated value of
the
investment.
Loss
from discontinued car was segment
The
loss
from our discontinued car was segment decreased by $1,331,000 to $166,000 during
the nine months ended September 30, 2007 from a loss of $1,497,000 during the
nine months ended September 30, 2006. ASG’s
first site, developed in Birmingham, Alabama, had its grand opening on March
8,
2006. Thus, the nine months ended September 30, 2006 reflected slightly less
than seven full months of operations whereas, due to the sale of our express
car
wash on June 29, 2007, the nine months ended September 30, 2007 reflected
approximately six full months of operations. Further, at
September 30, 2006, a goodwill impairment
charge
of $971,000 was recorded in the car wash services operating segment. This
goodwill impairment
related
to goodwill that resulted from the Company’s acquisitions of ASG in March 2006.
During
the nine months ended September 30, 2007, as a result of a more established
business presence from a more mature business, revenues increased by $73,000
and
operating costs decreased by $1,237,000. However, excluding goodwill impairment
of $971,000, operating costs decreased by $266,000. The remaining operating
cost
decrease of $266,000 is primarily attributed to a $153,000 decrease in interest
expense, of which $136,000 is non-cash interest charges incurred as a result
of
debt discount, and the incurrence of only six months of operating expenses
during the nine months ended September 30, 2007 as opposed to nine months of
operating expenses during the nine months ended September 30, 2006.
Accumulated
other comprehensive income
Unrealized
gains (losses) on our investments designated as available-for-sale are recorded
in accumulated other comprehensive income. At September 30, 2007 and December
31, 2006, our remaining investments were carried at cost and therefore we did
not record any unrealized gains (losses) on these investments. At September
30,
2006, our restricted holdings in Digicorp were classified as available-for-sale.
At September 30, 2006, the unrealized gains (losses) on our restricted holdings
in Digicorp amounted to ($34,000), whereas at December 31, 2005, the unrealized
gains (losses) on our restricted holdings in IPEX and Digicorp amounted to
($328,000) and $2,703,000, respectively. The cumulative decrease in net
unrealized gains amounts to $2,409,000.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Our
business activities contain elements of market risk. We consider a principal
type of market risk to be valuation risk. Investments and other assets are
valued at fair value as determined in good faith by our Board of Directors.
We
have
invested a substantial portion of our assets in private development stage or
start-up companies. These private businesses tend to be thinly capitalized,
unproven, small companies that lack management depth and have not attained
profitability or have no history of operations. Because of the speculative
nature and the lack of public market for these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. Although we are optimistic about the progress of our one remaining
investment in a privately held company, we understand that some venture capital
investments will be a complete loss or will be unprofitable and that some will
appear to be likely to become successful but never realize their potential.
Because
there is no public market for the equity interest in the one remaining privately
held small company in which we have invested, the valuation of such equity
interest is subject to estimation. In making our determination, we may consider
valuation information provided by an independent third party or the portfolio
company itself. In the absence of a readily ascertainable market value, the
estimated value of our equity investment may differ significantly from the
value
that would be placed on it if a liquid market for the equity interest existed.
Any changes in valuation are recorded in our consolidated statements of
operations as either "Unrealized losses on marketable securities, net” or “Other
comprehensive income."
Item
4. Controls and Procedures.
As
of the
end of the period covered by this report, we conducted an evaluation, under
the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in
Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that all information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is: (1)
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure;
and (2)
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. There was no change in our internal
controls or in other factors that could affect these controls during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
As
of the
date this report was filed, there have been no material developments in the
legal proceedings previously reported in our annual report on Form 10-K for
the
fiscal year ended December 31, 2006, which was filed with the Securities and
Exchange Commission on May 16, 2007.
Item
1A. Risk Factors.
There
have been no material changes from risk factors previously disclosed in
Item 1A included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2006, which was filed with the SEC on May 16, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Between
August 1, 2007 and October 12, 2007, the Company issued 102,024 shares of Common
Stock to an employee, director, and creditors of the Company. The Common Stock
was issued for services and payment of accrued interest. The Common Stock was
valued at approximately $133,000. These shares were issued in reliance upon
the
exemption provided by Section 4(2) of the Securities Act.
On
October 17, 2007, the Company entered into a securities purchase agreement
with
Francis Capital Management, LLC (“Francis
Capital”),
an
accredited investor, in a private placement exempt from the registration
requirements of the Securities Act. The Company issued and sold to Francis
Capital an aggregate of 1,270,000 shares of its common stock and warrants to
purchase an additional 763,000 shares of its common stock. The warrants are
exercisable for a period of five years at an exercise price equal to $1.40
per
share. These issuances resulted in aggregate gross proceeds to the Company
of
$1,500,000 in cash and the extinguishment of $90,000 in existing debt owed
to
Francis Capital by the Company. Pursuant to the terms of the securities purchase
agreement, the Company may sell up to an aggregate of $3,000,000 in common
stock
and warrants under the securities purchase agreement by no later than November
16, 2007. We are required to use our best efforts to cause the registration
statement to become effective within 120 calendar day from November 16, 2007
(the “Filing
Date”)
or, in
the event of a full review by the Securities and Exchange Commission, within
150
calendar days from the Filing Date (collectively the “Effectiveness
Date”).
If the
registration statement has not been declared effective by the Effectiveness
Date, we will pay in cash, as liquidated damages, to the purchaser of the
1,270,000 shares of our Common Stock and the warrants to purchase 763,000 shares
of our Common Stock, an amount equal to 1.5% of the aggregate purchase price
paid by the purchaser. We intend to use the net proceeds from this private
placement transaction primarily for general corporate purposes and repayment
of
existing liabilities. These securities were sold in reliance upon the exemption
provided by Section 4(2) of the Securities Act and the safe harbor of Rule
506
under Regulation D promulgated under the Securities Act. No advertising or
general solicitation was employed in offering the securities, the sales were
made to a limited number of persons, all of whom represented to the Company
that
they are accredited investors, and transfer of the securities is restricted
in
accordance with the requirements of the Securities Act.
On
May 1,
2006, the Company entered into a secured promissory note with Herbert Langsam,
a
Class II Director of the Company, in the principal amount of $500,000 (the
“Langsam
Note”).
The
Langsam Note was due to be repaid on November 1, 2006.
On
November 13, 2006, the Company entered into secured promissory note with Mr.
Langsam in the principal amount of $100,000 (the “Second
Langsam Note”).
The
Second Langsam Note was due to be repaid on May 13, 2007. The Company is in
the
process of restructuring the debt that is owed to Mr. Herbert
Langsam
On
December 26, 2006, the Company entered into a promissory note with Maroon Creek
Capital, LP, a California limited partnership, in the principal amount of
$81,241 (the “Maroon
Creek Note”),
of
which $10,000 was repaid. The Maroon Creek Note was due to be repaid in its
entirety on April 26, 2007. The Company expects to repay the debt that is owed
to Maroon Creek Capital, LP during 2007.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibit
Number
|
|
Description
|
10.1
|
|
Securities
Purchase Agreement entered into October 17, 2007 between Patient
Safety
Technologies, Inc. and Francis Capital Management, LLC (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on October 22,
2007).
|
10.2
|
|
Registration
Rights Agreement entered into October 17, 2007 between Patient Safety
Technologies, Inc. and Francis Capital Management, LLC (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on October 22,
2007).
|
10.3
|
|
Form
of Warrant entered into October 17, 2007 between Patient Safety
Technologies, Inc. and Francis Capital Management, LLC (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on October 22,
2007).
|
31.1*
|
|
Certification
of Chief Executive and Financial Officer required by Rule 13a-14(a)
or
Rule 15d-14(a)
|
32.1*
|
|
Certification
of Chief Executive and Financial Officer required by Rule 13a-14(b)
or
Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United
States Code
|
*
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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PATIENT
SAFETY TECHNOLOGIES, INC.
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Date:
November 14, 2007
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By: |
/s/ William
B. Horne |
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William
B. Horne
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Chief
Executive and Chief Financial Officer and
Principal
Accounting Officer
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