Unassociated Document
As
filed with the Securities and Exchange Commission on April 28,
2008
Registration
No. 333-147484
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
POST-EFFECTIVE
AMENDMENT
NO. 1
TO
REGISTRATION
STATEMENT ON FORM S-1
UNDER
THE
SECURITIES ACT OF 1933
PATIENT
SAFETY TECHNOLOGIES, INC.
(Exact
Name registrant as specified in its charter)
Delaware (State
or other jurisdiction of
Incorporation
or organization)
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13-3419202 (I.R.S.
Employer
Identification
No.)
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43460
Ridge Park Dr., Suite 140, Temecula, CA 92590
(951)
587-6201
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
William
B. Horne
Chief
Executive Officer
Patient
Safety Technologies, Inc.
43460
Ridge Park Dr., Suite 140
Temecula,
CA 92590
(951)
587-6201
(Name,
address, including zip code, and telephone number, including area code, of
agent
for service)
WITH
COPIES TO:
John
M. Iino, Esq.
Reed
Smith LLP
355
South Grand Avenue, Suite 2900
Los
Angeles, California 90071
(213) 457-8000
Approximate
date of commencement of proposed sale to the public:
From
time to time after this Registration Statement becomes effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
The
registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a) may determine.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
Subject
to Completion, dated April 28, 2008
Patient
Safety Technologies, Inc.
5,950,171
Shares of
Common
Stock
This
prospectus relates to an aggregate of up to 5,950,171 shares of our common
stock
which may be offered by the selling stockholders identified in this prospectus
for their own account. Of such shares, 1,254,200 shares are issuable upon
exercise of warrants that we issued to the selling stockholders and 81,971
shares are issuable upon conversion of a convertible promissory note. Our filing
of the registration statement, of which this prospectus is a part, is intended
to satisfy our obligations to certain of the selling stockholders to register
for resale the shares issued to them and the shares issuable upon exercise
of
the warrants issued to them. The selling stockholders may sell common stock
from
time to time in the principal market on which our stock is traded at the
prevailing market price or in negotiated transactions.
We
will
not receive any proceeds from the sale of the shares by these selling
stockholders. We will, however, receive proceeds in the event that some or
all
of the warrants held by the selling stockholders are exercised.
Unless
the context otherwise requires, the terms “Patient Safety Technologies,” “we,”
“us,” “our” or the “Company” refer to Patient Safety Technologies,
Inc.
Our
common stock is listed on the Over the Counter Bulletin Board under the symbol
“PSTX.OB.” The last reported sales price per share of our common stock, as
reported by the Over the Counter Bulletin Board on April 25, 2008, was
$1.20.
Investing
in our common stock involves a high degree of risk.
See
“ Risk
Factors”
beginning on page 5.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is April 28, 2008
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Page
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PROSPECTUS
SUMMARY
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1
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3
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4
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FORWARD-LOOKING
STATEMENTS
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12
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12
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BUSINESS
OF PATIENT SAFETY TECHNOLOGIES, INC.
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12
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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22
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SELECTED
CONSOLIDATED FINANCIAL DATA
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23
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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23
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MANAGEMENT
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38
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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48
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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51
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53
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60
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DESCRIPTION
OF SECURITIES
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61
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64
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64
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WHERE
YOU CAN FIND MORE INFORMATION
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64
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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You
should rely only on the information contained in this prospectus. We have not
authorized any other person to provide you with different information or
represent anything not contained in this prospectus. If anyone provides you
with
different or inconsistent information, you should not rely on it. We are not
making an offer to sell these securities in any jurisdiction where the offer
or
sale is not permitted. You should assume the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
This
prospectus contains product names, trade marks and trade names of our company
and other organizations.
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus and all documents incorporated by reference
carefully. On April 1, 2005 we changed our name from Franklin Capital
Corporation to Patient Safety Technologies, Inc. As used throughout this
prospectus, the terms “Company”, “we,” “us,” and “our” refer to Patient Safety
Technologies, Inc., together with its consolidated subsidiaries.
Patient
Safety Technologies, Inc.
Organizational
History
Patient
Safety Technologies, Inc. (referred to in this report as the “Company,”
“we,”
“us,”
and
“our”)
(formerly known as Franklin Capital Corporation) is a Delaware corporation.
Currently we conduct our operations through a single wholly-owned operating
subsidiary: SurgiCount Medical, Inc. (“SurgiCount”),
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, 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 Securities and Exchange Commission. At December 31, 2007,
8.1%
of our assets, consisting of our investment in Alacra Corporation, on a
consolidated basis were comprised of investment securities within the meaning
of
the 1940 Act (“Investment
Securities”).
We
continue to evaluate ways in which we can dispose of these Investment
Securities.
Our
operations currently focus on the research and development of products and
services in the health care and medical products field, particularly the patient
safety markets, and the acquisition of controlling interests in companies in
the
medical products field. 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,
developer of the Safety-Sponge™ System, a wholly-owned operating subsidiary, 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 few remaining non-patient safety
related assets (the “non-core
assets”).
SurgiCount
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.
Investments
Our
investment portfolio, also known as our non-core assets, which is valued at
$666,667, is reflected below. At December 31, 2007, our investment portfolio
includes our investment in Alacra Corporation, our only significant investment
security. At December 31, 2006, our investment portfolio also consisted of
certain real property located in Arkansas and Tennessee. At December 31, 2007
the real property met the “held for sale” criteria and was classified as such.
The investment portfolio securities, which are described below, are classified
on our balance sheet as long-term investments.
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December 31,
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December 31,
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2007
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2006
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Alacra
Corporation
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$
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666,667
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$
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1,000,000
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Investments
in Real Estate
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—
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430,563
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Digicorp
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—
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10,970
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$
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666,667
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$
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1,441,533
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Alacra
Corporation
At
December 31, 2007, we had an investment in Alacra Corporation (“Alacra”),
valued
at $667,000, which represents 8.2% of our total assets. On April 20, 2000,
we
purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
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. Alacra had a sufficient
amount of cash to redeem our preferred stock and in December 2007 completed
the
initial redemption of one-third of our preferred stock. We received proceeds
of
$333,000 which accounted for the entire amount of the decrease in value of
our
Alacra investment. We continue to exercise our right to put back our remaining
preferred stock to Alacra.
Real
Estate Investments
At
December 31, 2006, we had two real estate investments, valued in the aggregate
at $431,000. During the quarter ended December 31 2007 these real estate
investments were reclassified as assets held for sale. 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. In March 2008, we completed the sale
of
the undeveloped land in Heber Springs for net proceeds of $226,000, which
resulted in a realized loss of $25,000. During the year ended December 31,
2006,
we received payment on loans that were secured by real estate of $50,000. During
the year ended December 31, 2005, we liquidated properties with a cost basis
of
$113,000, which resulted in a gain of $28,000. We expect that any future gain
or
loss recognized on the liquidation of our final real estate holding would be
insignificant primarily due to the value paid for the real estate combined
with
the absence of any significant changes in property values in the real estate
market where the real estate is located.
Our
principal executive offices are located at 43460 Ridge Park Drive,
Suite
140, Temecula, CA 92590.
Our
telephone number is (951)
587-6201.
Our
website is located at http://www.patientsafetytechnologies.com.
THE
OFFERING
Common
stock outstanding before the offering
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11,972,710
shares as of November 16, 2007
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Common
stock offered by selling stockholders
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Up
to 5,950,171 shares, based on current market prices and assuming
full
conversion of outstanding common stock purchase warrants and full
conversion of a convertible promissory note by the selling stockholders.
This number represents approximately 49.7% of our current outstanding
stock and includes
up to 1,254,200 shares of common stock issuable upon exercise of
outstanding common stock purchase warrants
and up to 81,971 shares of common stock issuable upon the conversion
of a
convertible promissory note.
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Common
stock to be outstanding after the offering
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Up
to 11,972,710 shares
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Use
of proceeds
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We
will not receive any proceeds from the sale of the common stock hereunder.
We will, however, receive the sale price of any common stock we sell
for
cash to the selling stockholders upon exercise of warrants. See “Use of
Proceeds” for a complete description.
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OTCBB
Symbol
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PSTX.OB
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An
investment in our securities involves a high degree of risk. Before you invest
in our securities you should carefully consider the risks and uncertainties
described below and the other information in this prospectus. Each of the
following risks may materially and adversely affect our business, results of
operations and financial condition. These risks may cause the market price
of
our common stock to decline, which may cause you to lose all or a part of the
money you paid to buy our securities. We provide the following cautionary
discussion of risks, uncertainties and possible inaccurate assumptions relevant
to our business and our products. These are factors that we think could cause
our actual results to differ materially from expected results.
RISKS
RELATING TO OUR BUSINESS AND STRUCTURE
WE
HAVE JUST BEGUN TO GENERATE SALES FROM OUR SAFETY-SPONGE SYSTEM AND THE REVENUES
HAVE JUST NOW BEGUN TO REPRESENT A SIGNIFICANT SOURCE OF
CASH..
We
have
just begun to generate a significant amount of revenue from our Safety-Sponge
System. During the year ended December 31, 2007, sales from our Safety-Sponge
System amounted to $1,089,000. Further, of our $245,000 of revenue during fiscal
2006, only $141,000 was generated from our Safety-Sponge System. Our future
success is dependent on our ability to develop our patient-safety related assets
into a successful business, which depends upon wide-spread acceptance of and
commercializing our Safety-Sponge System. None of these factors is demonstrated
by our historic performance to date and there is no assurance we will be able
to
accomplish them in order to sustain our operations. As a result, you should
not
rely on our historical results of operations as an indication of the future
performance of our business.
WE
RECENTLY RESTRUCTURED OUR BUSINESS STRATEGY AND OBJECTIVE AND HAVE LIMITED
OPERATING HISTORY UNDER OUR NEW STRUCTURE. IF WE CANNOT SUCCESSFULLY IMPLEMENT
OUR NEW BUSINESS STRUCTURE THE VALUE OF YOUR INVESTMENT IN OUR BUSINESS COULD
DECLINE.
Upon
the
change of control that occurred in October 2004, we restructured our business
strategy and objective to focus on the medical products, healthcare solutions,
financial services and real estate industries instead of the radio and
telecommunications industries. Although we still own certain real estate assets,
we are no longer focusing on the financial services and real estate industries.
As of March 29, 2006, our Board of Directors determined to focus our business
exclusively on the patient safety medical products field. We have a limited
operating history under this new structure. Historically, we have not operated
in the patient safety medical products field and therefore our historical
results of operations should not be relied upon as an indication of our future
financial performance. If we do not successfully implement our new business
structure the value of your investment in our business could decline
substantially.
WE
INTEND TO UNDERTAKE ADDITIONAL FINANCINGS TO MEET OUR GROWTH, OPERATING AND/OR
CAPITAL NEEDS, WHICH MAY RESULT IN DILUTION TO YOUR OWNERSHIP AND VOTING
RIGHTS.
We
anticipate that revenue from our operations for the foreseeable future will
not
be sufficient to meet our growth, operating and/or capital requirements. We
believe that in order to have the financial resources to meet our operating
requirements for the next twelve months we will need to undertake additional
equity or debt financings to allow us to meet our future growth, operating
and/or capital requirements. We currently have no commitments for any such
financings. Any equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictive covenants or other adverse
terms with respect to raising future capital and other financial and operational
matters. We may not be able to obtain additional financing in sufficient amounts
or on acceptable terms when needed, which could adversely affect our operating
results and prospects. If we fail to arrange for sufficient capital in the
future, we may be required to reduce the scope of our business activities until
we can obtain adequate financing.
WE
MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE WHICH MAY RESULT IN DILUTION
TO
YOUR OWNERSHIP AND VOTING RIGHTS OR MAY RESULT IN THE INCURRENCE OF SUBSTANTIAL
DEBT.
We
may
decide to raise additional funds from investors. If we determine that we need
to
raise additional funds, additional financing may not be available on favorable
terms, if at all. Furthermore, if we do sell any such securities it will result
in dilution to your ownership and voting rights and/or possibly result in our
incurring substantial debt. Any such equity financing would result in dilution
to existing stockholders and may involve securities that have rights,
preferences, or privileges that are senior to our common stock. Any such debt
financing may be convertible into common stock which would result in dilution
to
our stockholders and would have rights that are senior to our common stock.
Further, any debt financing must be repaid regardless of whether or not we
generate profits or cash flows from our business activities, which could strain
our capital resources.
SHOULD
THE VALUE OF OUR PATENTS BE LESS THAN THEIR PURCHASE PRICE, WE COULD INCUR
SIGNIFICANT IMPAIRMENT CHARGES.
At
December 31, 2007, patents received in the acquisition of SurgiCount Medical,
Inc., net of accumulated amortization, represented $3,764,000, or 46%, of our
total assets. We perform an annual review in the fourth quarter of each year,
or
more frequently if indicators of potential impairment exist to determine if
the
recorded amount of our patents is impaired. This determination requires
significant judgment and changes in our estimates and assumptions could
materially affect the determination of fair value and/or impairment of patents.
We may incur charges for the impairment of our patents in the future if sales
of
our patient safety products, in particular our Safety-Sponge System, fail to
achieve our assumed revenue growth rates or assumed operating margin
results.
WE
MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITION TARGETS, WHICH WOULD
BE
DETRIMENTAL TO OUR BUSINESS.
On
February 25, 2005, we purchased SurgiCount Medical, Inc., which at the time
of
the purchase was a holding company for intellectual property rights relating
to
our Safety-Sponge System. We anticipate seeking other acquisitions in
furtherance of our plan to acquire assets and businesses in the patient safety
medical products industry. Acquisitions involve numerous risks, including
potential difficulty in integrating operations, technologies, systems, and
products and services of acquired companies, diversion of management's attention
and disruption of operations, increased expenses and working capital
requirements and the potential loss of key employees and customers of acquired
companies. In addition, acquisitions involve financial risks, such as the
potential liabilities of the acquired businesses, the dilutive effect of the
issuance of additional equity securities, the incurrence of additional debt,
the
financial impact of transaction expenses and the amortization of goodwill and
other intangible assets involved in any transactions that are accounted for
by
using the purchase method of accounting, and possible adverse tax and accounting
effects. Any of the foregoing could materially and adversely affect our
business.
FAILURE
TO PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR
BUSINESS.
Any
growth in our operations will place a significant strain on our resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employee base and
maintain close coordination among our technical, accounting, finance, marketing,
and sales staffs. We cannot guarantee that we will be able to do so, or that
if
we are able to do so, we will be able to effectively integrate them into our
existing staff and systems. We may fail to adequately manage our anticipated
future growth. We will also need to continue to attract, retain and integrate
personnel in all aspects of our operations. Failure to manage our growth
effectively could hurt our business.
IF
THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS IS INADEQUATE, OUR ABILITY
TO
COMPETE SUCCESSFULLY COULD BE IMPAIRED.
In
connection with our purchase of SurgiCount Medical, Inc., we acquired one
registered U.S. patent and one registered international patent of the
Safety-Sponge System. We regard our patents, copyrights, trademarks, trade
secrets and similar intellectual property as critical to our business. We rely
on a combination of patent, trademark and copyright law and trade secret
protection to protect our proprietary rights. Nevertheless, the steps we take
to
protect our proprietary rights may be inadequate. Detection and elimination
of
unauthorized use of our products is difficult. We may not have the means,
financial or otherwise, to prosecute infringing uses of our intellectual
property by third parties. Further, effective patent, trademark, service mark,
copyright and trade secret protection may not be available in every country
in
which we will sell our products and offer our services. If we are unable to
protect or preserve the value of our patents, trademarks, copyrights, trade
secrets or other proprietary rights for any reason, our business, operating
results and financial condition could be harmed.
Litigation
may be necessary in the future to enforce our intellectual property rights,
to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims that our products
infringe upon the proprietary rights of others or that proprietary rights that
we claim are invalid. Litigation could result in substantial costs and diversion
of resources and could harm our business, operating results and financial
condition regardless of the outcome of the litigation.
Other
parties may assert infringement or unfair competition claims against us. We
cannot predict whether third parties will assert claims of infringement against
us, or whether any future claims will prevent us from operating our business
as
planned. If we are forced to defend against third-party infringement claims,
whether they are with or without merit or are determined in our favor, we could
face expensive and time-consuming litigation, which could distract technical
and
management personnel. If an infringement claim is determined against us, we
may
be required to pay monetary damages or ongoing royalties. Further, as a result
of infringement claims, we may be required, or deem it advisable, to develop
non-infringing intellectual property or enter into costly royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms that are acceptable to us, or at all. If a third party
successfully asserts an infringement claim against us and we are required to
pay
monetary damages or royalties or we are unable to develop suitable
non-infringing alternatives or license the infringed or similar intellectual
property on reasonable terms on a timely basis, it could significantly harm
our
business.
THERE
ARE POTENTIAL CONFLICTS OF INTEREST WITH OUR PRESIDENT AND OUR EXCLUSIVE
MANUFACTURING PARTNER WHICH COULD ADVERSELY AFFECT OUR RESULTS FROM
OPERATIONS.
Mr.
Adams, our President and Chief Executive Officer of SurgiCount has provided,
and
continues to provide, consulting services to A Plus, our exclusive manufacturing
partner. Mr. Adams devotes approximately 85% of his time to our business, based
on a 60-hour, 6-day workweek. Accordingly, certain conflicts of interest may
arise from time to time with our President.
Because
of this possible conflict of interest, such individual may direct potential
business opportunities to other entities rather than to us, which may not be
in
the best interest of our stockholders. We will attempt to resolve any such
conflicts of interest in our favor. Our Board of Directors does not believe
that
we have experienced any losses due to any conflicts of interest, other than
Mr.
Adams responsibility to devote his time to provide services to other entities
from time-to-time. These related party transactions may raise conflicts of
interest and, although we do not have a formal policy to address such conflicts
of interest, our Audit Committee intends to evaluate relationships and
transactions involving conflicts of interest on a case-by-case basis and the
approval of our Audit Committee is required for all such transactions. The
Audit
Committee intends that any related party transactions will be on terms and
conditions no less favorable to us than terms and conditions reasonably
obtainable from third parties and in accordance with applicable
law.
WE
HAVE EXPERIENCED TURNOVER IN OUR CHIEF EXECUTIVE OFFICER POSITION IN RECENT
MONTHS AND IF WE ARE NOT ABLE TO RETAIN OUR CURRENT CHIEF EXECUTIVE OFFICER,
WILLIAM HORNE, AND PRESIDENT, WILLIAM ADAMS, WE MAY HAVE DIFFICULTY IMPLEMENTING
OUR BUSINESS STRATEGY.
Milton
"Todd" Ault, III resigned as our Chairman and Chief Executive Officer on January
9, 2006. On January 7, 2006, our Board of Directors appointed Louis Glazer,
M.D., Ph.G. as Chairman and Chief Executive Officer in anticipation of Mr.
Ault's resignation. During March 2006, Dr. Glazer had indicated his intent
to
resign as Chairman and Chief Executive Officer at such time that we retain
a
suitable candidate for the position of Chief Executive Officer. Due to health
concerns, Dr. Glazer resigned his position as Chief Executive Officer on July
11, 2006 and Milton "Todd" Ault, III was re-appointed Chief Executive Officer
and a Director of the Company. On January 5, 2007, Milton “Todd” Ault, III
resigned as our Chief Executive Officer and on January 9, 2007, Milton “Todd”
Ault, III resigned as our Chairman. On January 9, 2007, our Board of Directors
appointed William B. Horne as our Chief Executive Officer. On February 28,
2007,
our Board of Directors appointed William Adams, the Chief Executive Officer
of
SurgiCount Medical, as our President. Our future success is dependent on our
ability to retain both our Chief Executive Officer and our President. Although
we do not believe we have experienced any losses or negative effects from Mr.
Ault's and Dr. Glazer's resignations and we do not expect any adverse
consequences in the future, if we are not able to retain our current Chief
Executive Officer and our current President we may have difficulty implementing
our business strategy.
RISKS
RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
BUSINESS
WE
RELY ON A THIRD PARTY MANUFACTURER AND SUPPLIER TO MANUFACTURE OUR SAFETY-SPONGE
SYSTEM, THE LOSS OF WHICH MAY INTERRUPT OUR OPERATIONS.
On
January 29, 2007, SurgiCount entered into an agreement for A Plus International
Inc. to be the exclusive manufacturer and provider of SurgiCount's Safety-Sponge
products and granted A Plus the exclusive, world-wide license to manufacture
and
import SurgiCount's products including the right to sublicense to the extent
necessary to carry out the grant. A Plus was previously engaged in the
manufacturing of SurgiCount's products under a Supply Agreement dated August
17,
2005, but was not previously granted the exclusive, world-wide license to
manufacture and import the products. In the event A Plus International Inc.
does
not meet the requirements of the agreement, SurgiCount may seek additional
providers of the Safety-Sponge products. While our relationship with A Plus
International Inc. is currently on good terms, we cannot assure you that we
will
be able to maintain our relationship with A Plus International Inc. or secure
additional suppliers and manufacturers on favorable terms as needed. Although
we
believe the raw materials used in the manufacture of the Safety-Sponge System
are readily available and can be purchased and/or produced by multiple vendors,
the loss of our agreement with A Plus International Inc., the deterioration
of
our relationship with A Plus International Inc., changes in the specifications
of components used in our products, or our failure to establish good
relationships with major new suppliers or manufacturers as needed, could have
a
material adverse effect on our business, financial condition and results of
operations.
THE
UNPREDICTABLE PRODUCT CYCLES OF THE MEDICAL DEVICE AND HEALTHCARE-RELATED
INDUSTRIES AND UNCERTAIN DEMAND FOR PRODUCTS COULD CAUSE OUR REVENUES TO
FLUCTUATE.
Our
target customer base includes hospitals, physicians, nurses and clinics. The
medical device and healthcare-related industries are subject to rapid
technological changes, short product life cycles, frequent new product
introductions and evolving industry standards, as well as economic cycles.
If
the market for our products does not grow as rapidly as our management expects,
our revenues could be less than expected. We also face the risk that changes
in
the medical device industry, for example, cost-cutting measures, changes to
manufacturing techniques or production standards, could cause our manufacturing,
design and engineering capabilities to lose widespread market acceptance. If
our
products do not gain market acceptance or suffer because of competing products,
unfavorable regulatory actions, alternative treatment methods or cures, product
recalls or liability claims, they will no longer have the need for our products
and we may experience a decline in revenues. Adverse economic conditions
affecting the medical device and healthcare-related industries, in general,
or
the market for our products in particular, could result in diminished sales,
reduced profit margins and a disruption in our business.
WE
ARE SUBJECT TO CHANGES IN THE REGULATORY AND ECONOMIC ENVIRONMENT IN THE
HEALTHCARE INDUSTRY, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
The
healthcare industry in the United States continues to experience change. In
recent years, the United States Congress and state legislatures have introduced
and debated various healthcare reform proposals. Federal, state and local
government representatives will, in all likelihood, continue to review and
assess alternative healthcare delivery systems and payment methodologies, and
ongoing public debate of these issues is expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices,
the
relative costs associated with doing business and the amount of reimbursement
by
both government and third-party payors to persons providing medical services.
In
particular, the healthcare industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on healthcare companies
to
reduce healthcare costs. Managed care and other healthcare provider
organizations have grown substantially in terms of the percentage of the
population in the United States that receives medical benefits through such
organizations and in terms of the influence and control that they are able
to
exert over an increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow, increasing the
ability of these organizations to influence the practices and pricing involved
in the purchase of medical devices, including our products, which is expected
to
exert downward pressure on product margins. Both short-and long-term cost
containment pressures, as well as the possibility of continued regulatory
reform, may have an adverse impact on our business, financial condition and
operating results.
WE
ARE SUBJECT TO GOVERNMENT REGULATION IN THE UNITED STATES AND ABROAD, WHICH
CAN
BE TIME CONSUMING AND COSTLY TO OUR BUSINESS.
Our
products and operations are subject to extensive regulation by numerous
governmental authorities, including, but not limited to, the FDA and state
and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. The FDA administers the Food, Drug
and
Cosmetics Act (the "FDC ACT"). Under the FDC Act, most medical devices must
receive FDA clearance through the Section 510(k) notification process ("510(K)")
or the more lengthy premarket approval ("PMA") process before they can be sold
in the United States. All of our products, currently consisting only of the
Safety-Sponge System, must receive 510(k) clearance or PMA approval. The
Safety-Sponge System has received 501(k) clearance to market and sell its
patented Safety-Sponge System from the FDA. To obtain 510(k) marketing
clearance, a company must show that a new product is "substantially equivalent"
in terms of safety and effectiveness to a product already legally marketed
and
which does not require a PMA. Therefore, it is not always necessary to prove
the
actual safety and effectiveness of the new product in order to obtain 510(k)
clearance for such product. To obtain a PMA, we must submit extensive data,
including clinical trial data, to prove the safety, effectiveness and clinical
utility of our products. The process of obtaining such clearances or approvals
can be time-consuming and expensive, and there can be no assurance that all
clearances or approvals sought by us will be granted or that FDA review will
not
involve delays adversely affecting the marketing and sale of our products.
FDA's
quality system regulations also require companies to adhere to certain good
manufacturing practices requirements, which include testing, quality control,
storage, and documentation procedures. Compliance with applicable regulatory
requirements is monitored through periodic site inspections by the FDA. In
addition, we are required to comply with FDA requirements for labeling and
promotion. The Federal Trade Commission also regulates most device
advertising.
In
addition, international regulatory bodies often establish varying regulations
governing product testing and licensing standards, manufacturing compliance,
such as compliance with ISO 9001 standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. Our inability or failure
to
comply with the varying regulations or the imposition of new regulations could
restrict our ability to sell our products internationally and thereby adversely
affect our business, financial condition and operating results.
Failure
to comply with applicable federal, state or foreign laws or regulations could
subject us to enforcement actions, including, but not limited to, product
seizures, injunctions, recalls, possible withdrawal of product clearances,
civil
penalties and criminal prosecutions, any one or more of which could have a
material adverse effect on our business, financial condition and operating
results. Federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes, as are
administrative interpretations of regulatory requirements. Any such changes
may
have a material adverse effect on our business, financial condition and
operating results.
WE
ARE SUBJECT TO INTENSE COMPETITION IN THE MEDICAL PRODUCTS AND HEALTH-CARE
RELATED MARKETS, WHICH COULD HARM OUR BUSINESS.
The
medical products and healthcare solutions industry is highly competitive. We
compete against other medical products and healthcare solutions companies,
some
of which are much larger and have significantly greater financial resources,
management resources, research and development staffs, sales and marketing
organizations and experience in the medical products and healthcare solutions
industries than us. In addition, these companies compete with us to acquire
technologies from universities and research laboratories. We also compete
against large companies that seek to license medical products and healthcare
solutions technologies for themselves. We cannot assure you that we will be
able
to successfully compete against these competitors in the acquisition,
development, or commercialization of any medical products and healthcare
solutions, funding of medical products and healthcare solutions companies or
marketing of our products and solutions. If we cannot compete effectively
against our competitors, our business, financial condition and results of
operations may be materially adversely affected.
WE
MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND IF OUR INSURANCE IS NOT
SUFFICIENT TO COVER PRODUCT LIABILITY CLAIMS OUR BUSINESS AND FINANCIAL
CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.
The
nature of our business exposes us to potential product liability risks, which
are inherent in the distribution of medical equipment and healthcare products.
We may not be able to avoid product liability exposure, since third parties
develop and manufacture our equipment and products. If a product liability
claim
is successfully brought against us or any third party manufacturer then we
would
experience adverse consequences to our reputation, we might be required to
pay
damages, our insurance, legal and other expenses would increase, we might lose
customers and/or suppliers and there may be other adverse results.
Through
our subsidiary SurgiCount Medical, Inc. we have general liability insurance
to
cover claims up to $3,000,000. In addition, A Plus International, Inc., the
manufacturer of our surgical sponges, maintains general liability insurance
for
claims up to $4,000,000. These general liability insurance policies cover
product liability claims against SurgiCount Medical, Inc. There can be no
assurance that one or more liability claims will not exceed the coverage limits
of any of such policies. If we or our manufacturer are subjected to product
liability claims, the result of such claims could harm our reputation and lead
to less acceptance of our products in the healthcare products market. In
addition, if our insurance or our manufacturer's insurance is not sufficient
to
cover product liability claims, our business and financial condition will be
materially adversely affected.
RISKS
RELATED TO OUR INVESTMENTS
WE
MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS DUE TO THE SUCCESS RATE
OF
INVESTMENTS WE HOLD.
We
may
experience fluctuations in our quarterly operating results due to a number
of
factors, including the success rate of our current investments, variations
in
and the timing of the recognition of realized and unrealized gains or losses,
and general economic conditions. As a result of these factors, results for
any
period should not be relied upon as being indicative of performance in future
periods.
WE
HAVE INVESTED IN NON-MARKETABLE INVESTMENT SECURITIES WHICH MAY SUBJECT US
TO
SIGNIFICANT IMPAIRMENT CHARGES.
We
have
invested in illiquid equity securities acquired directly from issuers in private
transactions. At December 31, 2007, 8.2% of our assets on a consolidated basis
with our subsidiary were comprised of investment securities, which are illiquid
investments. Investments in illiquid, or non-marketable, securities are
inherently risky and a number of the companies we invest in are expected to
fail. 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
we
use to identify those events or circumstances include 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 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 ready 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 company in which we hold investments 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. We recognized impairment charges of nil and $1,445,000 for the fiscal
years ended December 31, 2007 and 2006, respectively. Since a significant amount
of our assets are comprised of non-marketable investment securities, any future
impairment charges from the write down in value of these securities will most
likely have a material adverse affect on our financial condition.
ECONOMIC
RECESSIONS OR DOWNTURNS COULD IMPAIR INVESTMENTS AND HARM OUR OPERATING
RESULTS.
Many
of
the companies in which we have made investments may be susceptible to economic
slowdowns or recessions. An economic slowdown may affect the ability of a
company to engage in a liquidity event such as a sale, recapitalization, or
initial public offering. Our nonperforming assets are likely to increase and
the
value of our investments is likely to decrease during these periods. These
conditions could lead to financial losses in our investments and a decrease
in
our revenues, net income, and assets. Our investments also may be affected
by
current and future market conditions. Significant changes in the capital markets
could have an effect on the valuations of private companies and on the potential
for liquidity events involving such companies. This could affect the amount
and
timing of gains or losses realized on our investments.
INVESTING
IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK.
Our
assets include an investment in a private company, a 1.6% equity interest in
Alacra Corporation. Investments in private businesses involve a high degree
of
business and financial risk, which can result in substantial losses and
accordingly should be considered speculative. Because of the speculative nature
and the lack of a public market for this investment, there is significantly
greater risk of loss than is the case with traditional investment securities.
We
expect that some of our 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. During the year ended December 31, 2005, we
wrote
off our investment in the private company China Nurse LLC. The amount of the
loss was $50,000. We have in the past relied, and we continue to rely to a
lesser extent, upon proceeds from sales of investments rather than revenue
generated from operating activities to defray a significant portion of our
operating expenses.
THE
LACK OF LIQUIDITY IN OUR INVESTMENT IN ALACRA MAY ADVERSELY AFFECT OUR
BUSINESS.
Our
investment in Alacra was acquired directly from the issuer in private
transactions. Accordingly, the securities that we received from out investment
in Alacra is subject to restrictions on resale and/or otherwise is illiquid.
These securities are not eligible for sale to the public without registration
under the Securities Act of 1933, which could prevent or delay any sale by
us of
such investments or reduce the amount of proceeds that might otherwise be
realized therefrom. Restricted securities generally sell at a price lower than
similar securities not subject to restrictions on resale. The illiquidity of
our
investment in Alacra may adversely affect our ability to dispose of debt and
equity securities at times when it may be otherwise advantageous for us to
liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of our investment, the proceeds of such liquidation may
be
significantly less than the value at which we acquired those
investments.
WE
MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENT.
In
the
past, our investments have primarily been in equity securities of other
companies. The equity interest in Alacra, our only remaining equity investment,
may not appreciate in value and, in fact, may decline in value. Accordingly,
we
may not be able to realize gains from our equity interest, and any gains that
we
do realize on the disposition of our equity interest may not be sufficient
to
offset any other losses we experience.
THERE
IS UNCERTAINTY REGARDING THE VALUE OF OUR INVESTMENTS THAT ARE NOT PUBLICLY
TRADED SECURITIES, WHICH COULD ADVERSELY AFFECT THE DETERMINATION OF OUR ASSET
VALUE.
The
fair
value of investments that are not publicly traded securities is not readily
determinable. Therefore, we value these securities at fair value as determined
in good faith by our Board of Directors. The types of factors that our Board
of
Directors takes into account include, 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 ready market
for
these securities existed.
RISKS
RELATED TO OUR REAL ESTATE HOLDINGS
OUR
CURRENT REAL ESTATE HOLDINGS ARE CONCENTRATED IN HEBER SPRINGS, ARKANSAS AND
SPRINGFIELD, TENNESSEE. ADVERSE CIRCUMSTANCES AFFECTING THESE AREAS GENERALLY
COULD ADVERSELY AFFECT OUR BUSINESS.
Our
remaining real real estate investment in Springfield, Tennessee is affected
by
the economic cycles and risks inherent to that region. Like other real estate
markets, the real estate market in this area has experienced economic downturns
in the past, and we cannot predict how the current economic conditions will
impact this market in both the short and long term. Further declines in the
economy or a decline in the real estate market in this area could hurt our
financial performance and the value of our property. The factors affecting
economic conditions in this region include: business layoffs or downsizing;
industry slowdowns; relocations of businesses; changing demographics; and any
oversupply of or reduced demand for real estate.
RISKS
RELATED TO OUR COMMON STOCK
OUR
HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
COMMON STOCK MAY CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET FOR OUR
SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU
TO
SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR
INVESTMENT.
The
public market for our common stock has historically been very volatile. Over
the
past two fiscal years and the subsequent interim quarterly periods, the market
price for our common stock has ranged from $0.57 to $4.70. Any future market
price for our shares may continue to be very volatile. This price volatility
may
make it more difficult for you to sell shares when you want at prices you find
attractive. We do not know of any one particular factor that has caused
volatility in our stock price. However, the stock market in general has
experienced extreme price and volume fluctuations that often are unrelated
or
disproportionate to the operating performance of companies. Broad market factors
and the investing public's negative perception of our business may reduce our
stock price, regardless of our operating performance. Further, the market for
our common stock is limited and we cannot assure you that a larger market will
ever be developed or maintained. Our common stock is currently on the OTC
Bulletin Board under the symbol PSTX. Prior thereto, the Company’s common stock
was traded on the American Stock Exchange ("AMEX") under the symbol “PST.” As of
April 11, 2008, the average daily trading volume of our common stock over the
past three months was approximately 24,000 shares. The last reported sales
price
for our common stock on April 11, 2008, was $1.35 per share. Market fluctuations
and volatility, as well as general economic, market and political conditions,
could reduce our market price. As a result, this may make it difficult or
impossible for you to sell our common stock.
OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC, WHICH WOULD
MAKE
TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN
INVESTMENT IN OUR STOCK.
The
SEC
has adopted Rule 3a51-1 which establishes the definition of a "penny stock,"
for
the purposes relevant to us, as any equity security that has a market price
of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, Rule 15g-9 require:
· that
a
broker or dealer approve a person's account for transactions in penny stocks;
and
· the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be
purchased.
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
· obtain
financial information and investment experience objectives of the person;
and
· make
a
reasonable determination that the transactions in penny stocks are suitable
for
that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny
stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
· sets
forth the basis on which the broker or dealer made the suitability
determination; and
· that
the
broker or dealer received a signed, written agreement from the investor prior
to
the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to
the
"penny stock" rules. This may make it more difficult for investors to dispose
of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
FORWARD-LOOKING
STATEMENTS
This
prospectus, any prospectus supplement and the documents incorporated by
reference in this prospectus contain “forward-looking” statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements can be identified by the use of words such as “believes,”
“estimates,” “could,” “possibly,” “probably,” “anticipates,” “projects,”
“expects,” “may,” “will,” or “should” or other variations or similar words. No
assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to those
forward-looking statements, including certain risks and uncertainties that
could
cause actual results to vary materially from the future results anticipated
by
those forward-looking statements. Among the key factors that have a direct
bearing on our results of operations are the effects of various governmental
regulations, the fluctuation of our direct costs and the costs and effectiveness
of our operating strategy. Unless we are required to do so under U.S. federal
securities laws or other applicable laws, we do not intend to update or revise
any forward-looking statements.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any proceeds
from the sale of shares of common stock in this offering. However, we will
receive the sale price of any common stock we sell to the selling stockholders
upon exercise of outstanding warrants for cash. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes.
Organizational
History
Patient
Safety Technologies, Inc. (referred to in this report as the “Company,”
“we,”
“us,”
and
“our”)
(formerly known as Franklin Capital Corporation) is a Delaware corporation.
Currently we conduct out operations through a single wholly-owned operating
subsidiary: SurgiCount Medical, Inc. (“SurgiCount”),
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, 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 Securities and Exchange Commission. At December 31, 2007,
8.1%
of our assets, consisting of our investment in Alacra Corporation, on a
consolidated basis were comprised of investment securities within the meaning
of
the 1940 Act (“Investment
Securities”).
We
continue to evaluate ways in which we can dispose of these Investment
Securities.
Our
operations currently focus on the research and development of products and
services in the health care and medical products field, particularly the patient
safety markets, and the acquisition of controlling interests in companies in
the
medical products field. 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,
developer of the Safety-Sponge™ System, a wholly-owned operating subsidiary, 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 few remaining non-patient safety
related assets (the “non-core
assets”).
SurgiCount
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.
The
Medical Products and Healthcare Solutions Industry
We
believe that the healthcare delivery system is under tremendous pressure to
identify and commercialize simple medical solutions quickly to lower costs,
control infections, reduce liability and eliminate preventable errors. Increased
litigation and a renewed focus on patient safety by regulators is spurring
demand for new innovative medical devices. With the convergence of scientific,
electronic and digital technologies, new breakthroughs in medical devices will
play a critical role in solving problems in healthcare and enhancing patient
safety in the future.
The
medical community recognizes the importance of improving patient safety, not
only to enhance the quality of care, but also to help manage medical costs
and
related litigation costs. We are confident the medical profession and healthcare
professionals will rise to the occasion and help develop the medical solutions
to revolutionize health care.
We
are
dedicated to leading this effort through the development and introduction of
ground-breaking patient safety products such as our lead product, the patented
Safety-Sponge™ System, which management believes will allow us to capture a
significant portion of the United States and European surgical sponge sales.
Based upon assumptions by our management that take into consideration factors
such as the approximate number of hospitals and operating rooms in the United
States and Europe, the approximate number of surgeries performed annually,
and
estimates for the average cost of surgical sponges per surgery, we believe
that
the existing market for surgical sponge sales in the United States and Europe
represents a market opportunity equal to or in excess of $650 million in annual
sales. Such estimate assumes approximately 61 million surgeries performed
annually in the United States and Europe, and an average cost of surgical
sponges of $10.60 per surgery. In addition, we believe that our Safety-Sponge™
System could save up to an estimated $1.0 billion annually in retained sponge
litigation. The estimated size of the surgical sponge market and actual savings
derived from utilizing the Safety-Sponge™ System from retained sponge litigation
is based on management’s estimates and assumptions made by management. Although
management took into consideration statistics from research and published
articles by the American Hospital Association and New England Journal of
Medicine, as well as various articles located through a search of retained
sponge verdicts, the specific assumptions are management’s interpretation of
multiple sources. Further, management believes that a large amount of the
litigation relating to medical malpractice claims are settled under the terms
of
confidential agreements, thus the actual amount of many settlements are never
disclosed and therefore subject to speculation.
We
are
targeting hospitals, physicians, nurses and clinics as our initial source of
customers. In addition, we plan to develop strategic alliances with
universities, medical facilities and notable medical researchers around the
United States that will provide research, development and promotional support
for our products and services.
Customers
and Distribution
On
April
5, 2005, we entered into a consulting agreement with Health West Marketing
Incorporated, a California corporation (“Health
West”),
pursuant to which Health West agreed to help us establish a comprehensive
manufacturing and distribution strategy for the Safety-Sponge™ System worldwide.
The initial term of the agreement was for a period of two years; however, the
agreement was terminated with the appointment of Bill Adams, Health West’s Chief
Executive Officer, to the position of Chief Executive Officer of SurgiCount
effective April 21, 2006. In consideration for Health West's services, we agreed
to issue Health West 42,017 shares of our common stock. We issued 26,261 shares,
valued at $156,000, primarily for Health West’s assistance in structuring a
comprehensive manufacturing agreement with A Plus International Inc.
(“A
Plus”),
which
was entered into on August 17, 2005. We issued the remaining 15,756 shares,
valued at $94,000, for Health West’s services in assisting with the development
of a regional distribution network to integrate the Safety-Sponge™ System into
the existing acute care supply chain. As an additional incentive, in 2005 we
granted Health West warrants to purchase a total of 175,000 shares of our common
stock with an exercise price of $5.95 per share.
On
November 14, 2006, SurgiCount entered into a Supply Agreement with Cardinal
Health 200, Inc. ("Cardinal").
Pursuant to the agreement, Cardinal became the exclusive distributor of
SurgiCount's products in the United States, with the exception that SurgiCount
may sell its products to one other specified hospital supply company, solely
for
its sale/distribution to its hospital customers. Under the agreement, SurgiCount
agrees to maintain a specified fill rate on all orders for products. 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
If
Cardinal receives an offer from another supplier to purchase any or all of
the
products supplied by SurgiCount under the agreement on more favorable terms
and
conditions, of better grade or quality, at a more favorable net price or with
new or improved technology, Cardinal must provide SurgiCount with written notice
of such offer. SurgiCount will have 15 days following the date of the notice
to
notify Cardinal that it agrees to meet or improve upon such offer. If SurgiCount
fails to so notify Cardinal in writing that it will meet or improve upon such
offer within such 15 day period, Cardinal may terminate the agreement with
respect to the product in question upon written notice to SurgiCount, without
further obligation or liability. SurgiCount's notice to Cardinal that it agrees
to meet or improve upon such offer shall constitute an amendment to the
agreement with respect to those products.
SurgiCount
may not assign its interest under the agreement without Cardinal's prior written
consent. Further as part of the agreement, SurgiCount executed a Continuing
Guaranty agreeing, among other things, to indemnify Cardinal for any loss or
claim a) for property damage on account of any SurgiCount product except as
may
be caused by gross negligence or reckless disregard on the part of Cardinal
or
any of its employees, or b) arising on account of any infringement by any
SurgiCount product of any patent, trademark or other proprietary right of any
other party
In
addition, the agreement provides that if we decide to divest, spin-off or
otherwise sell SurgiCount or any material assets of SurgiCount (such as
intellectual property) during the term of the agreement, Cardinal shall have
a
right of first refusal to purchase SurgiCount.
Geographic
Areas
We
currently market and sell our patient safety products and services in the United
States. Eventually we also intend to market and sell our products in Europe.
However, the principal markets, products and methods of distribution will vary
by country based on a number of factors, including healthcare regulations,
insurance coverage and customer demographics. Business activities in some
countries outside the United States are subject to higher risks than comparable
U.S. activities because the business and commercial climate is influenced by
restrictive economic policies and political uncertainties.
Product
Development
Our
Safety-Sponge System
allows for faster and more accurate counting of surgical sponges compared to
traditional methods. The Safety-Sponge System
is
a two-part system consisting of a handheld scanner/imager/computer and of
SurgiCount supplied surgical dressings. Our sponges are unique in that they
are
individually labeled with a “bar code” at the point of manufacture. The sponges
are scanned in by a handheld scanner at the beginning of a surgical procedure,
and then scanned out at the end of a procedure after their use. Each sponge,
having a unique bar code, can accurately be accounted for at the end of the
procedure. Without using our Safety-Sponge System,
in a typical surgical procedure, a nurse and a scrub tech manually count all
sponges used and un-used. The core of the Safety-Sponge System
is
the ability to uniquely identify an individual dressing.
SurgiCount
began developing the Safety-Sponge line of sponges in February
1994 and received confirmation from the U.S. Food and Drug Administration
(“FDA”) that, due to the minor nature of the change in
surgical sponges attributed to the Safety-Sponge line of
sponges, a new product listing was not warranted and the
Safety-Sponge product line was granted 510k exempt status on
November 8, 1999. In 2005, SurgiCount requested, and received in March 2006,
510(k) clearance to market and sell its patented Safety-Sponge™ System, which
included the Safety-Sponge line of sponges. The
Safety-Sponge System is an integrated turn-key program of
thermally affixed, data matrix tagged surgical sponges, line-of-sight scanning
technology, and documentation that offers surgeons and hospitals a solution
to
gossypiboma – the term for surgical sponges accidentally left inside a
human body after surgery. The Safety-Sponge System is the
first computer-assisted program of counting sponges ever cleared by the
FDA. The Safety-Sponge line of sponges has passed required
FDA biocompatibility tests including ISO sensitization, cytotoxicity and skin
irritation tests. The Center for Devices and Radiological Health
(“CDRH”) handles the
premarket notification process for medical devices at the FDA. The CDRH requires
the biological evaluation of medical devices to determine the potential toxicity
resulting from contact of the component materials of the device with the human
body. Evaluation of any new device intended for human use requires data from
systemic testing to ensure that the benefits provided by the final product
will
exceed any potential risk produced by device materials. CDRH Blue Book Memo
G95-1 provides guidance for required biocompatibility testing procedures for
medical devices. SurgiCount requested specific guidance from the CDRH as to
the
required biocompatibility tests for the Safety-Sponge line of
products. The CDRH specifically guided SurgiCount to three required
biocompatibility tests for the Safety-Sponge line: Cytotoxicity,
Sensitization and Irritation/Intracutaneous Reactivity. SurgiCount has performed
and in 2003 passed all three of these required biocompatibility tests.
Cytotoxicity testing is conducted to determine whether or not the materials
used
in a medical device are harmfully reactive to certain biological elements on
a
cellular level. Sensitization or hypersensitivity reactions usually occur as
a
result of prolonged contact with a chemical substance that interacts with the
body’s immune system. The tests are used to eliminate the possibility that
patients will be exposed to strong sensitizing chemicals extracted from the
medical device.
The
tests
were completed prior to our acquisition of SurgiCount, which occurred in
February 2005. At the time the acquisition was completed we focused on
developing the product for commercialization. Although passing the three
biocompatibility tests was necessary to satisfy any questions as to whether
or
not the product was safe for use in the body it was only a part of the process
required to commercialize the product. In order to utilize the product as
designed, investment in specialized software, hardware as well as modification
of current operating room procedures was needed.
At
the
time that we acquired SurgiCount we believed that sales of the
Safety-Sponge System
would begin to materialize during the first half of 2005. However, this
expectation did not properly take into account the level of work required on
software development. Software development, which was initially expected to
take
a few months, required approximately nine months for completion. Initially,
we
expected that basic modification to existing software would be sufficient;
however, based upon feedback from third party users and consultants we abandoned
our plan to modify existing software currently in use and developed our own
proprietary software for the system. By developing our own proprietary software
we extended the time required to bring Safety-Sponge System
to
market by approximately seven months.
We
also
did not adequately account for the level of testing that would be performed
by
the adopters of our Safety-Sponge System.
Our expectation was that despite the pricing of our sponges, which is on average
four times the cost of traditional sponges, hospitals would be eager to order
the Safety-Sponge System
solely because of the anticipated improved level of safety which we believe
it
provides patients undergoing surgery. Due to the nature of the medical products
business, in spite of expectations for improved safety, any change in the
procedures requires rigorous rounds of testing and review in every
adopter. Demonstrations are given to relevant parties and small
“in-service” (an in-hospital teaching of how to use the system to the relevant
staff members) sessions are performed with the results evaluated. If the
results are viewed positively a second larger in-service session is usually
performed, which results are again reviewed. Assuming a positive outcome
of the in-service sessions, the entire staff must then be trained to use the
system prior to the placement of any order. We currently estimate that the
rounds of testing by an adopter could range between one to three months before
a
final decision is made to purchase our Safety-Sponge System.
We have seen several successful in-service sessions and began receiving orders
for the Safety-Sponge System,
in greater quantities, during the year ended December 31, 2007.
The
Safety-Sponge System
is
presently in the optimization and commercialization phase. Development of the
Safety-Sponge System
has been completed and the system is currently being rolled out into the market
as a commercial product. We intend to conduct further research and development
to advance our products. However, we expect that any costs associated with
R&D on our Safety-Sponge product will be insignificant and intend to
outsource much of the R&D functions so that we may focus our direct efforts
on optimizing the Safety-Sponge product and establishing distribution channels
with strategic alliances with hospitals to deploy the product. We also seek
qualified input from professionals in the healthcare profession as well as
University hospitals such as Harvard and the University of California, San
Francisco (“UCSF”).
These
physicians and researchers maintain medical practices primarily at University
hospitals and are involved in various research and clinical development
programs. We meet on an as needed basis to discuss medical, technology and
development issues. Through direct contracts and sponsorship of studies,
recommendations from these professionals have improved various aspects of the
Safety-Sponge System.
Examples where recommendations were utilized include: the ideal location for
labels, label coarseness and thickness, improved operating room procedures,
label structure and scanner functionality.
In
2005
we entered into a clinical trial agreement with Brigham and Women's Hospital,
the teaching affiliate of Harvard Medical School, relating to SurgiCount's
Safety-Sponge TM
System.
The clinical trial was 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 to refine 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. The final amount due under the terms of the clinical trial agreement,
of $68,000, was paid in February 2008. The clinical trials were completed around
September 2006 and the results from the clinical trial were published in the
April issue of the Annals
of Surgery.
Researchers
at Brigham and Women’s Hospital have found that using bar-code technology to
augment the counting of surgical sponges during an operative procedure increases
the detection rate of miscounted and/or misplaced sponges. Previous studies
have
shown that counts are falsely reported as correct in the majority of cases
of
retained sponges and instruments, resulting in the surgical team believing
that
all the sponges are accounted for. In this study, researchers compared the
traditional counting protocol with or without augmentation by the bar-code
technology in 300 general surgery operations. The researchers found that the
bar-code system detected more counting errors than traditional counting methods
both in cases where sponges were misplaced and counted incorrectly.
Manufacturing
We
believe that the raw materials used in our products are readily available and
can be purchased and/or produced by several different vendors and, therefore,
we
do not anticipate being dependent on any one vendor for our raw materials.
In
order
to meet the expected demand for bar-coded surgical dressings SurgiCount entered
into an agreement on August 17, 2005 for A Plus to be the exclusive manufacturer
and provider of the Safety-Sponge™ products, which includes bar coded gauze
sponges, bar coded laparotomy sponges, bar coded O.R. towels and bar coded
specialty sponges. Services to be provided by A Plus include manufacturing,
packaging, sterilization, logistics and all related quality and regulatory
compliance. During the term of the agreement, A Plus agreed not to manufacture,
distribute or otherwise supply any bar coded gauze sponges, bar coded laparotomy
sponges, bar coded O.R. towels or bar coded specialty sponges manufactured
in
China for any third party except for SurgiCount. A Plus was founded in 1988
and
is a global manufacturer of surgical dressings, patient drapes and surgical
gowns. A Plus provides OEM support to the largest healthcare manufacturers
and
distributors in the world. A Plus employs over 6,000 people in seven factories
throughout China and maintains over 200,000 sq. ft. of warehouse space in the
United States. While we believe the manufacturing capacity of A Plus will be
sufficient to meet our expected demand, in the event A Plus cannot meet our
requirements the agreement allows us to retain additional providers of the
Safety-Sponge™ products. The term of the agreement was for a period of five
years and automatically renewed for successive three-year periods. Either party
had the right to terminate the agreement without cause at any time after eight
years upon delivery of 90 days prior written notice.
On
January 29, 2007, on behalf of SurgiCount, we entered into an Exclusive License
and Supply Agreement (the “Supply
Agreement”)
with A
Plus. Pursuant to the agreement, A Plus agreed to act as the exclusive
manufacturer for SurgiCount's products. A Plus was previously engaged in the
manufacturing of SurgiCount's products under a Supply Agreement dated August
17,
2005, but was not previously granted the exclusive, world-wide license to
manufacture and import SurgiCount's products. Pursuant to the Supply Agreement,
A Plus was granted the exclusive, world-wide license to manufacture and import
SurgiCount's products, including the right to sublicense to the extent necessary
to carry out the grant. The Supply Agreement is a requirements contract, with
projections of the maximum/minimum level of required inventory to be provided
to
A Plus on a quarterly basis. The pricing schedule shall remain at its current
price for the first three (3) years of the Supply Agreement; thereafter, the
pricing schedule shall be based upon the Cotlook Index and the RMB exchange
rate. The term of Supply Agreement is eight years.
In
conjunction with entering into the Supply Agreement we also entered into a
subscription agreement with A Plus, in which we sold to A Plus 800,000 shares
of
our Common Stock and a warrant to purchase 300,000 shares of our common stock.
The Warrant has a term of five (5) years and has an exercise price equal to
$2.00 per share. We received gross proceeds of $500,000 in cash and will receive
$500,000 in product over the course of the next twelve (12) months. Pursuant
to
the subscription agreement with A Plus, we appointed Wayne Lin, the President
and Founder of A Plus, to our Board of Directors.
Research
and Development
Research
and development activities are important to our business. However, at this
time
we do not have a research facility but rather focus our efforts on acquisitions
of companies operating within our target industries that have demonstrated
product viability through their own research and development activities. We
intend to outsource much of the research and development activities related
to
improving our existing products or expanding our intellectual property to
similar products or products that have similar characteristics in our target
industries. We did not incur any costs during the fiscal years ended December
31, 2007 or 2006 relating to the development of new products, the improvement
of
existing products, technical support of products and compliance with
governmental regulations for the protection of consumers. In the future, these
costs will be charged directly to income in the year in which they are
incurred.
Patents
and Trademarks
We
make a
practice of obtaining patent protection on our products and processes where
possible. Our patents and trademarks are protected by registration in the United
States and other countries where our products are marketed.
We
currently own patents issued in the United States and Europe related to the
Safety-Sponge System. This is covered by patent #5,931,824 registered with
the
United States Patent and Trademark Office and patent #1 032 911 B1 registered
with the European Patent Office, which permits the holder to label or identify
a
dressing with a unique identifier. Patent #5,931,824 and #1 032 911 B1 will
expire in August of 2019 and March of 2017, respectively. U.S Patent Number
5,931,824 recently underwent a reexamination proceeding in the U.S. Patent
Office. During 2007, the U. S. Patent Office granted a reexamination
certificate affirming the validity of the reexamined patent with certain
amendments to the claims. Our counsel has reviewed the amended claims and
believes that they will cover the Safety-Sponge System as well as a broad range
of commercially equivalent systems. In addition to the reexamined patent
and the European patent, we have filed one additional U. S. Patent application
and one international patent application covering
improved methods and systems for the automated counting and tracking of surgical
articles, that would provide the Company’s Safety-Sponge System
with an additional level of protection to prevent competitors from attempting
to
replicate and market a similar version of the Company’s
Safety-Sponge System.
Sales
of
the Safety-Sponge System in the future are expected to contribute a
significant part of our total revenue. We consider these patents and trademarks
in the aggregate to be of material importance in the operation of our business.
The loss or expiration of any product patent or trademark could result in a
loss
of market exclusivity and can result in a significant reduction in
sales.
Competition
The
medical products and healthcare solutions industry is highly competitive. We
expect that if our business strategy proves to be successful, our current
competitors in the medical products and healthcare solutions market may
duplicate our strategy and new competitors may enter the market. We compete
against other medical products and healthcare solutions companies, some of
which
are much larger and have significantly greater financial resources than we
do.
We also compete against large companies that seek to license medical products
and healthcare solutions technologies for themselves. We cannot assure you
that
we will be able to successfully compete against these competitors in the
acquisition, development, or commercialization of any medical products and
healthcare solutions, funding of medical products and healthcare solutions
companies or marketing of our products and solutions.
Because
we have only recently begun selling and generating revenue from our patient
safety products, our competitive position in the medical products and healthcare
solutions industry cannot be determined.
Competitive
Advantages
We
believe that we are well positioned to provide financing and research and
development resources to medical products and health care-related companies
for
the following reasons:
|
·
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Focus
on innovative technologies, products and
services;
|
|
·
|
Network
of well respected industry affiliations and medical expertise;
and
|
|
·
|
Established
deal sourcing network.
|
Though
by
the nature of our patents, we can have no direct competition, there are two
existing individuals/companies that are trying to address the same issues as
SurgiCount's Safety-Sponge System. Among these are RF Surgical and
ClearCount Medical, two, privately held, radio frequency identification
(“RFID”)-based
companies.
The
RFID
companies both have similar approaches to solving retained sponges. Their
approach is to “impregnate” sponges with RFID tags. RFID-reading wands would be
held over the patients at the end of surgeries to ensure that no sponges are
left behind. It is our understanding from limited discussions with the
principals of RF Surgical and ClearCount Medical, and from discussions with
sponge manufacturers, that RF Surgical has actively begun to market and sell
its
product whereas ClearCount Medical is in the late development stage with its
competing products. SurgiCount has received FDA exemption for its Safety-Sponge
System and its scanner is currently registered in the FDA’s database as
non-interfering medical equipment. Since SurgiCount’s Safety-Sponge System is
fully developed and it has developed a contractual relationship with A Plus
and
Cardinal for the manufacturing and distribution of its product, we believe
this
provides an advantage over the above competing products.
The
healthcare industry is affected by extensive government regulation at the
federal and state levels. In addition, our business may also be subject to
varying degrees of governmental regulation in the countries in which operations
are conducted, and the general trend is toward regulation of increasing
stringency. In the United States, the drug, device, diagnostics and cosmetic
industries have long been subject to regulation by various federal, state and
local agencies, primarily as to product safety, efficacy, advertising and
labeling. The exercise of broad regulatory powers by the Food and Drug
Administration (“FDA”)
continues to result in increases in the amounts of testing and documentation
required for FDA clearance of new drugs and devices and a corresponding increase
in the expense of product introduction. Similar trends toward product and
process regulation are also evident in a number of major countries outside
of
the United States, especially in the European Community where efforts are
continuing to harmonize the internal regulatory systems.
The
FDA
administers the Food, Drug and Cosmetics Act (the “FDC
Act”).
Under
the FDC Act, most medical devices must receive FDA clearance through the
Section 510(k) notification process (“510(k)”)
or the
more lengthy premarket approval (“PMA”)
process
before they can be sold in the United States. All of our products, currently
consisting only of the Safety-Sponge™ System, must receive 510(k) clearance or
PMA approval. The Center for Devices and Radiological Health (“CDRH”)
handles
the PMA approval process for medical devices at the FDA. The CDRH places medical
devices into one of many predefined groups, then classifies each group into
one
of three classes (Class I, II or III) based on the level of controls necessary
to assure the safety and effectiveness of the specific device group. Class
I and
II devices also have subsets of “exempt devices” which are exempt from the PMA
approval requirement subject to certain limitations. 21 CFR 878.4450
(”Gauze/Sponge, Internal, X-Ray Detectable”) is the defined device group that
the Safety-Sponge line of products falls into. This defined device group is
specifically denoted as “exempt” from the premarket notification process.
SurgiCount submitted specific information on its Safety-Sponge product directly
to the CDRH and received confirmation of the 501(k) exempt status of this line
of products.
To
obtain
510(k) marketing clearance, a company must show that a new product is
“substantially equivalent” in terms of safety and effectiveness to a product
already legally marketed and which does not require a PMA. Therefore, it is
not
always necessary to prove the actual safety and effectiveness of the new product
in order to obtain 510(k) clearance for such product. To obtain a PMA, we must
submit extensive data, including clinical trial data, to prove the safety,
effectiveness and clinical utility of our products. FDA’s quality system
regulations also require companies to adhere to certain good manufacturing
practices requirements, which include testing, quality control, storage, and
documentation procedures. Compliance with applicable regulatory requirements
is
monitored through periodic site inspections by the FDA. In addition, we are
required to comply with FDA requirements for labeling and promotion. The Federal
Trade Commission also regulates most device advertising.
The
costs
of human health care have been and continue to be a subject of study,
investigation and regulation by governmental agencies and legislative bodies
in
the United States and other countries. In the United States, attention has
been
focused on drug prices and profits and programs that encourage doctors to write
prescriptions for particular drugs or recommend particular medical devices.
Managed care has become a more potent force in the market place and it is likely
that increased attention will be paid to drug and medical device pricing,
appropriate drug and medical device utilization and the quality of health
care.
The
regulatory agencies under whose purview we operate have administrative powers
that may subject us to such actions as product recalls, seizure of products
and
other civil and criminal sanctions. In some cases we may deem it advisable
to
initiate product recalls voluntarily. We are also subject to the Safe Medical
Devices Act of 1990, which imposes certain reporting requirements on
distributors in the event of an incident involving serious illness, injury
or
death caused by a medical device.
In
addition, sales and marketing practices in the health care industry have come
under increased scrutiny by government agencies and state attorney generals
and
resulting investigations and prosecutions carry the risk of significant civil
and criminal penalties.
Changes
in regulations and healthcare policy occur frequently and may impact our
results, growth potential and the profitability of products we sell. There
can
be no assurance that changes to governmental reimbursement programs will not
have a material adverse effect on the Company and our operations.
Investments
Our
investment portfolio, also known as our non-core assets, which is valued at
$666,667, is reflected below. At December 31, 2007, our investment portfolio
includes our investment in Alacra Corporation, our only significant investment
security. At December 31, 2006, our investment portfolio also consisted of
certain real property located in Arkansas and Tennessee. At December 31, 2007
the real property met the “held for sale” criteria and was classified as such.
The investment portfolio securities, which are described below, are classified
on our balance sheet as long-term investments.
|
|
December 31,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Alacra
Corporation
|
|
$
|
666,667
|
|
$
|
1,000,000
|
|
Investments
in Real Estate
|
|
|
—
|
|
|
430,563
|
|
Digicorp
|
|
|
—
|
|
|
10,970
|
|
|
|
$
|
666,667
|
|
$
|
1,441,533
|
|
Alacra
Corporation
At
December 31, 2007, we had an investment in Alacra Corporation (“Alacra”),
valued
at $667,000, which represents 8.2% of our total assets. On April 20, 2000,
we
purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
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. Alacra had a sufficient
amount of cash to redeem our preferred stock and in December 2007 completed
the
initial redemption of one-third of our preferred stock. We received proceeds
of
$333,000 which accounted for the entire amount of the decrease in value of
our
Alacra investment. We continue to exercise our right to put back our remaining
preferred stock to Alacra.
Real
Estate Investments
At
December 31, 2006, we had two real estate investments, valued in the aggregate
at $431,000. During the quarter ended December 31 2007 these real estate
investments were reclassified as assets held for sale. 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. In March 2008, we completed the sale
of
the undeveloped land in Heber Springs for net proceeds of $226,000, which
resulted in a realized loss of $25,000. During the year ended December 31,
2006,
we received payment on loans that were secured by real estate of $50,000. During
the year ended December 31, 2005, we liquidated properties with a cost basis
of
$113,000, which resulted in a gain of $28,000. We expect that any future gain
or
loss recognized on the liquidation of our final real estate holding would be
insignificant primarily due to the value paid for the real estate combined
with
the absence of any significant changes in property values in the real estate
market where the real estate is located.
Properties.
We
do not
own any real estate or other physical properties materially important to our
operation. Our headquarters are located at 43460 Ridge Park Drive, Suite 140,
Temecula, CA 92590. We are responsible for paying approximately $9,400 per
month
for the lease expense associated with our headquarters. Our office space is
currently approximately 3,500 square feet.
Legal
Proceedings.
On
July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed
a
lawsuit in the Superior Court of the State of California for the county of
Los
Angeles, Central District against us and five other defendants affiliated
with
Winstar Communications, Inc. The plaintiffs are attempting to collect a default
judgment of $5,014,000 entered against Winstar Global Media, Inc. (“WGM”)
by a
federal court in New York, by attempting to enforce the judgment against
us and
the other defendants, none of whom are judgment debtors. Further, the plaintiffs
are attempting to enforce their default judgment against us when their initial
lawsuit in federal court against us was dismissed on the merits. The Court
granted plaintiffs leave to amend the current Complaint after twice granting
our
motions to dismiss. Plaintiffs made some changes to their Complaint
and dropped two other defendants. On April 18, 2007, we filed our Answer
setting
forth our numerous defenses. The trial phase of our defense was
initiated April 29, 2008. We believe the lawsuit is without merit and
intend to vigorously defend against the lawsuit. However, an unfavorable
outcome may have a material adverse effect on our business, financial condition
and results of operations.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Prices
The
Company’s common stock has been quoted on the OTC Bulletin Board since February
16, 2007 under the symbol PSTX. Prior thereto, the Company’s common stock was
traded on the American Stock Exchange under the symbol “PST.” The following
table sets forth the range of the high and low selling price of the Company’s
common stock for the periods indicated below, as reported by the American Stock
Exchange and OTC Bulletin Board.
Period
|
|
Prices (Low)
|
|
Prices (High)
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
First
Quarter
|
|
$
|
2.27
|
|
$
|
4.70
|
|
Second
Quarter
|
|
$
|
2.60
|
|
$
|
4.30
|
|
Third
Quarter
|
|
$
|
1.45
|
|
$
|
3.25
|
|
Fourth
Quarter
|
|
$
|
0.57
|
|
$
|
3.97
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.01
|
|
$
|
2.50
|
|
Second
Quarter
|
|
$
|
1.35
|
|
$
|
1.85
|
|
Third
Quarter
|
|
$
|
0.85
|
|
$
|
1.52
|
|
Fourth
Quarter
|
|
$
|
0.90
|
|
$
|
1.75
|
|
Our
common stock is subject to Rules 15g-1 through 15g-9 under the Securities
Exchange Act of 1934, as amended, which impose certain sales practice
requirements on broker-dealers who sell our common stock to persons other than
established customers and “accredited investors” (generally, individuals with a
net worth in excess of $1,000,000 or an annual income exceeding $200,000
individually or $300,000 together with their spouses). For transactions covered
by this rule, a broker-dealer must make a special suitability determination
for
the purchaser and have received the purchaser’s written consent to the
transaction prior to the sale.
Stockholders
As
of
April 11, 2008, there were approximately 622 holders of record of the Company’s
common stock. The Company has 25,000,000 shares of common stock authorized,
of
which 12,079,602 were issued and outstanding at April 11, 2008. The Company
has
1,000,000 shares of convertible preferred stock authorized, of which 10,950
were
issued and outstanding at April 11, 2008.
SELECTED
CONSOLIDATED FINANCIAL DATA.
The
following selected financial data for the fiscal years ended December 31, 2007,
2006, 2005, 2004 and 2003 are derived from our financial statements which
have been audited by Ernst & Young, LLP (December 31, 2003), Rothstein Kass
(December 31, 2004 and 2005), and Squar, Milner, Peterson, Miranda &
Williamson, LLP (December 31, 2006 and 2007), our independent registered public
accounting firms. The data should be read in conjunction with our
financial statements and related notes thereto and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this report.
as
of December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
8,174,174
|
|
$
|
11,181,446
|
|
$
|
16,033,865
|
|
$
|
6,934,243
|
|
$
|
3,258,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
6,285,965
|
|
$
|
9,638,092
|
|
$
|
6,912,915
|
|
$
|
3,367,974
|
|
$
|
1,233,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
1,888,209
|
|
$
|
1,543,354
|
|
$
|
9,120,950
|
|
$
|
3,566,269
|
|
$
|
2,024,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
12,054,602
|
|
|
6,561,195
|
|
|
5,672,445
|
|
|
4,670,703
|
|
|
3,060,300
|
|
for
the year ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from Safety-Sponge product
|
|
$
|
1,089,001
|
|
$
|
140,654
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from related parties
|
|
$
|
-
|
|
$
|
103,875
|
|
$
|
562,374
|
|
$
|
-
|
|
$
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
dividend income and other, net
|
|
$
|
4,287
|
|
$
|
2,251
|
|
$
|
42,476
|
|
$
|
11,056
|
|
$
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
$
|
5,527,284
|
|
$
|
7,691,188
|
|
$
|
8,384,525
|
|
$
|
2,923,983
|
|
$
|
1,236,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
(loss) gains on investments, net
|
|
$
|
22,394
|
|
$
|
(1,541,506
|
)
|
$
|
2,014,369
|
|
$
|
1,591,156
|
|
$
|
430,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on marketable securities, net
|
|
$
|
(24,578
|
)
|
$
|
16,901
|
|
$
|
32,335
|
|
$
|
(1,054,702
|
)
|
$
|
(475,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders
|
|
$
|
(7,082,628
|
)
|
$
|
(13,699,802
|
)
|
$
|
(5,983,223
|
)
|
$
|
(2,485,407
|
)
|
$
|
(1,217,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.70
|
)
|
$
|
(2.15
|
)
|
$
|
(1.11
|
)
|
$
|
(0.75
|
)
|
$
|
(0.39
|
)
|
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 prospects. 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 under “Risk Factors” and elsewhere in this
prospectus.
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.
Patient
Safety Technologies, Inc. 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 December 31, 2007, 8.2% of our assets, consisting
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. Due to the
potential conflicts of interest that could have arisen from the divestiture
of
our non-patient safety related assets, the Board of Directors established a
special committee in January 2007 to evaluate any potential divestiture. The
special committee evaluated several alternative divestiture transactions for
ASG
and determined that in some instances the most favorable transactions involved
transactions with a related party. Specifically, ASG’s sale of its express car
wash and a parcel of real property to Charles H. Dellaccio and Darrell Grimsley.
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”).
Our
principal executive offices are located at 43460 Ridge Park Drive, Suite 140,
Temecula, CA 92590. 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. We recognized nil, $1,445,000 and $50,000,
in
impairments during the years ended December 31, 2007, 2006, and 2005,
respectively.
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
September 2006, the Financial Accounting Standards Board (“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.
On
January 1, 2007, we adopted Emerging Issues Task Force Issue No. 06-2,
Accounting
for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement
No. 43 (“EITF
06-2”).
EITF
06-2 requires companies to accrue the costs of compensated absences under a
sabbatical or similar benefit arrangement over the requisite service period.
Upon adoption, no liability for unrecognized compensated absences was
recognized.
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.
In
December 2007, the FASB issued Statement
of Financial Accounting Standards
No.
141(R), Business
Combinations (“SFAS
141(R)”).
This
statement requires
the acquiring entity in a business combination to record all assets acquired
and
liabilities assumed at their respective acquisition-date fair values, changes
the recognition of assets acquired and liabilities assumed arising from
contingencies, changes the recognition and measurement of contingent
consideration, and requires the expensing of acquisition-related costs as
incurred. SFAS 141(R) also requires additional disclosure of information
surrounding a business combination, such that users of the entity's financial
statements can fully understand the nature and financial impact of the business
combination. We will implement SFAS No. 141(R) on January 1, 2009 and
will
apply prospectively to business combinations completed on or after that
date.
In
December 2007, the FASB issued Statement
of Financial Accounting Standards
No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
an
amendment of ARB 51 (“SFAS
160”).
SFAS
160 establishes
accounting and reporting standards for ownership interests in subsidiaries
held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent's ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also established
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owner. We will implement SFAS No. 160 on January 1, 2009. We
do
not expect the adoption of this standard to have a material impact on our income
statement, financial position or cash flows.
Financial
Condition, Liquidity and Capital Resources
Our
cash
balance was $405,000 at December 31, 2007, versus $4,000 at December 31, 2006.
Total current liabilities were $2,402,000 at December 31, 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 $1,801,000 at December 31, 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
annual 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.
We
used 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 December 31, 2007 the
outstanding principal balance of the loan that we entered into with the Fund
was
$2,531,000. At December 31, 2007 we also had outstanding promissory notes to
four additional lenders, which were entered into during the year ended December
31, 2006, in the principal amount of $1,172,000.
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 December 31, 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
December 31, 2007, other than our office lease and employment agreements with
key executive officers, we had no commitments not reflected in our consolidated
financial statements.
Cash
increased by $401,000 to $405,000 for the year ended December 31, 2007, compared
to a decrease of $76,000 to $4,000 for the year ended December 31,
2006.
Operating
activities used $3,765,000 of cash for the year ended December 31, 2007,
compared to using $2,794,000 for the year ended December 31, 2006.
Operating
activities for the year ended December 31, 2007, exclusive of changes in
operating assets and liabilities, used $4,026,000 of cash, as the Company's
net
cash used in operating activities of $3,765,000 included non-cash charges for
depreciation and amortization of $531,000, debt discount of $1,083,000, realized
gains of $33,000 and stock based compensation of $1,154,000. For the year ended
December 31, 2006, operating activities, exclusive of changes in operating
assets and liabilities, used $4,690,000 of cash, as the Company's net cash
used
in operating activities of $2,794,000 included non-cash charges for depreciation
and amortization of $461,000, debt discount of $2,983,000, goodwill impairment
of $971,000, gain on debt extinguishment of $191,000, realized losses of
$1,542,000, unrealized gains of $17,000 and stock based compensation of
$3,301,000.
Changes
in operating assets and liabilities provided cash of $260,000 during the year
ended December 31, 2007, principally due to an increase in accrued liabilities
and a decrease in prepaid expenses and inventories which were partially offset
by a decrease in the level of accounts payable. During the year ended December
31, 2006, changes in operating assets and liabilities provided cash of
$1,895,000 primarily 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 $2,993,000 of cash provided by investing activities
during the year ended December 31, 2007 was the sale
of
our express car wash and undeveloped land in Alabama for $3,178,000 and the
proceeds from selling one-third of our investment in Alacra Series F Preferred
stock for $333,000. This
was
partially offset by capitalized costs of $404,000 related to the ongoing
development of purchased software related to our Safety-Sponge System.
The principal factor in the $2,016,000 of cash used in investing activities
during the year ended December 31, 2006 was the purchase of land of $1,697,000,
capitalized construction costs of $381,000 related to ASG, and capitalized
costs
of $148,000 related to the ongoing development of software related to our
Safety-Sponge System
offset by proceeds from the sale of long-term investments of
$289,000.
Cash
provided by financing activities during the year ended December 31, 2007, of
$1,174,000 resulted primarily from net proceeds from the issuance of common
stock and warrants of $4,454,000 offset by the repayment of the Winstar Note
in
the amount of $450,000 and other notes in the amount of $2,922,000. Cash
provided by financing activities during the year ended December 31, 2006, of
$4,735,000 resulted from the net proceeds from notes payable of $4,207,000
and
the proceeds from the issuance of common stock and warrants for
$528,000.
Investments
Until
such time as we have completely liquidated our investment in Alacra Corporation,
our financial condition remains partially dependent on its success. 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.
Our investment in Alacra is subject to restrictions on resale under federal
securities laws and otherwise is illiquid, which will make it difficult to
dispose of this investment quickly. Since we may be forced to liquidate this
investment on an accelerated timeline, the proceeds of such liquidation may
be
significantly less than the value at which we acquired the investment. The
following is a discussion of our most significant investment at December 31,
2007.
Our
investment portfolio, also known as our non-core assets, which is valued at
$666,667, is reflected below. At December 31, 2007, our investment portfolio
includes our investment in Alacra Corporation, our only remaining investment
security. At December 31, 2006, our investment portfolio also consisted of
certain real property located in Arkansas and Tennessee. At December 31, 2007
the real property met the “held for sale” criteria and was classified as such.
The investment portfolio, which is reflected below, is classified as long-term
investments.
|
|
December 31,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Alacra
Corporation
|
|
$
|
666,667
|
|
$
|
1,000,000
|
|
Investments
in Real Estate
|
|
|
—
|
|
|
430,563
|
|
Digicorp
|
|
|
—
|
|
|
10,970
|
|
|
|
$
|
666,667
|
|
$
|
1,441,533
|
|
Alacra
Corporation
At
December 31, 2007, we had an investment in Alacra Corporation (“Alacra”),
valued
at $667,000, which represents 8.2% of our total assets. On April 20, 2000,
we
purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
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. Alacra had a sufficient
amount of cash to redeem our preferred stock and in December 2007 completed
the
initial redemption of one-third of our preferred stock. We received proceeds
of
$333,000 which accounted for the entire amount of the decrease in value of
our
Alacra investment. We continue to exercise our right to put back our remaining
preferred stock to Alacra.
Real
Estate Investments
At
December 31, 2006, we had two real estate investments, valued in the aggregate
at $431,000. During the quarter ended December 31 2007 these real estate
investments were reclassified as assets held for sale. 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. In March 2008, we completed the sale
of
the undeveloped land in Heber Springs for net proceeds of $226,000, which
resulted in a realized loss of $25,000. During the year ended December 31,
2006,
we received payment on loans that were secured by real estate of $50,000. During
the year ended December 31, 2005, we liquidated properties with a cost basis
of
$113,000, which resulted in a gain of $28,000. We expect that any future gain
or
loss recognized on the liquidation of our final real estate holding would be
insignificant primarily due to the value paid for the real estate combined
with
the absence of any significant changes in property values in the real estate
market where the real estate is 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:
|
o
|
"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
Year
2007, 2006 and 2005
We
recognized revenues of $1,089,000, $245,000 and $562,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. All of the revenues generated
during the year ended December 31, 2007 related to sales from the Safety-Sponge
of $878,000 and sales from hardware and supplies of $211,000. 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.
Of
the
revenues that were generated during the years ended December 31, 2006 and 2005,
only $141,000 related to sales of our Safety-Sponge System.
As expected, these initial revenues did not have a significant impact on our
results of operations, however, we continue to experience greater demand for
our
Safety-Sponge System and expect revenues to significantly increase and become
a
continual source of funds to cover our operating costs.
Of
the
revenue earned during the years ended December 31, 2006 and 2005, 104,000 and
$562,000, respectively, was 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.
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.
Expenses
Year
2007 compared to Year 2006
Operating
expenses were $5,527,000, $7,691,000, and 8,385,000 for the years ended December
31, 2007, December 31, 2006 and December 31, 2005, respectively.
The
decrease in operating expenses of $2,164,000, for year ended December 31, 2007
when compared to December 31, 2006, was primarily the result of salaries and
employee benefits, which decreased by $986,000. Our Compensation Committee,
currently comprised of three 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
year ended December 31, 2007, we recorded $674,000 related to grants of
nonqualified stock options and $297,000 related to restricted stock awards
to
our employees and $126,000 related to restricted stock awards to our
non-employee directors. During the year ended December 31, 2006, we recorded
$1,118,000 related to grants of nonqualified stock options, of which $114,000
was attributed to grants of nonqualified stock options to Darrell W. Grimsley,
the former Chief Executive Officer of our discontinued car wash segment. For
comparison purposes, stock based compensation expense attributed to the
discontinued car was segment is excluded in an analysis of stock based
compensation annual variances since expenses attributed to the discontinued
operations are included as a separate line in our Consolidated Statements of
Operations and Comprehensive Loss – Loss from discontinued car was segment.
During the year ended December 31, 2006, we also recorded $1,105,000 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
$1,138,000 for the year ended December 31, 2007. Therefore, excluding stock
based compensation, salaries and employee benefits increased by $152,000.
At
December 31, 2007, three of our executives were covered under employment
agreements. Our Chief Executive Officer, William B. Horne, was covered under
a
two year employment agreement with annual base compensation of $250,000; our
Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams, was 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, was 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 $156,000 as
opposed to $135,000 at December 31, 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 $1,318,000 during the year ended December 31, 2007 compared to
the
amount reported during the previous year. As in employee compensation, stock
based compensation expense is the most significant component of professional
fees. During the year ended December 31, 2007 and 2006, professional fees
included stock based compensation related to the issuances of restricted stock
and warrants of $57,000 and $898,000, respectively. The decrease in stock based
compensation of $841,000 paid to our outside consultants is the primary
component of our decrease in professional fees. This $841,000 decrease was
primarily caused from warrant issuances during the year ended December 31,
2006
of $593,000. A significant amount of the warrants issued during the year ended
December 31, 2006, relate 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. In addition to the stock based compensation from the Analog
Ventures warrant, we issued 75,380 warrants to purchase shares of our common
stock at prices ranging from $1.25 to $2.00 per share to our placement agent,
Ault Glazer & Co., LLC, (the “Placement
Agent”).
These
warrants, which were valued at $79,000, were issued to the Placement Agent
for
their successful efforts in assisting us with raising debt and equity financing.
The
remaining decrease in professional fees, of $477,000, is primarily attributed
to
a decrease in legal fees and the absence of any expenses associated with our
clinical trial agreement with Brigham and Women's Hospital, the teaching
affiliate of Harvard Medical School, offset by an overall increase in cash
payments to our nurse consultants which are utilized to generate awareness
and
train health care professionals in the use of our Safety-Sponge System.
The
decrease in legal fees of $300,000 is a result of (i) the successful resolution
of our patent reexamination that was initiated in order to strengthen the
enforceability of our U.S. patent, (ii) the absence of any significant
legal fees associated with debt financings and (iii) the overall simplified
corporate structure that was created upon the successful restructuring that
began in March 2006 when 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.
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, none of which was expensed during the year ended December 31, 2007
and
$280,000 was expensed during the year ended December 31, 2006. The final amount
due under the terms of the clinical trial agreement, of $68,000, was paid in
February 2008. The clinical trials were completed around September 2006 and
the
results from the clinical trial were released in March 2008.
All
of
our stock based compensation issued to employees, non-employee directors and
consultants were expensed in accordance with SFAS 123(R). During the years
ended
December 31, 2007, 2006, and 2005, 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.
Cost
of
sales experienced an increase of $557,000 during the year ended December 31,
2007 over the prior year. The increase in cost of sales reflects the significant
growth that we experienced from the sales of our Safety-Sponge System. With
the
assistance of our exclusive manufacturing partner, A Plus International, we
are
in the process of transitioning the majority of the production of our
Safety-Sponges from California to China. Consequently, we anticipate a reduction
in our cost of sales, as a percentage of our total revenues.
General
and administrative expenses experienced an increase of $226,000 during the
year
ended December 31, 2007 over the prior year. During the year ended December
31,
2007, we recorded restricted stock awards to our non-employee
directors
of
$126,000
in general and administrative expenses and accrued an additional $100,000 for
the services of our former Chairman, Arnold Spangler. After adjusting for these
restricted stock awards and accrued compensation, general and administrative
expenses reflected a decrease of $2,000. As
discussed above, in Financial Condition, Liquidity and Capital Resources, we
have a
significant working capital deficit 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.
Year
2006 compared to Year 2005
The
decrease in operating expenses of $535,000, for the year ended December 31,
2006
when compared to December 31, 2005, was primarily the result of salaries and
employee benefits, which decreased by $460,000. The most significant component
of employee compensation is stock based compensation expense.
For
the
year ended December 31, 2006, we recorded $1,118,000 related to grants of
nonqualified stock options. As discussed above, in our analysis of Year
2007 compared to Year 2006,
$114,000 of this amount was attributed to grants of nonqualified stock options
to Mr. Grimsley and included in our loss from discontinued operations. During
the year ended December 31, 2006, we also recorded $1,105,000 related to
restricted stock awards to our employees and non-employee directors. During
the
year ended December 31, 2005, we recorded $1,597,000 relating to grants of
nonqualified stock options and $1,520,000 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, excluding
the value of the grant to Mr. Grimsley, resulted in a decrease in stock based
compensation expense of $1,008,000 for the year ended December 31, 2006.
Therefore, excluding stock based compensation, salaries and employee benefits
increased by $548,000.
The
increase in employee compensation of $548,000 is attributed to a combination
of
factors. During the six months ended June 30, 2005 we did not incur any salary
expense on four highly compensated employees. During the quarter ended September
30, 2005 we entered into employment agreements with three of these highly
compensated employees, which reflected annualized salaries of $450,000 and
during the quarter ended June 30, 2006 we entered into the fourth employment
contract with an annualized salary of $300,000. Excluding benefits, the absence
of salary expense on these four highly compensated employees for either all
or
part of 2005 resulted in an increase of $436,000. In January 2006 we also
entered into a non-recurring severance package of $180,000 that was paid to
Milton “Todd” Ault III, our former Chairman and Chief Executive Officer. This
severance package represented a $30,000 increase over Mr. Ault’s 2005 salary. In
July 2006, subsequent to the payment of Mr. Ault’s severance package, Mr. Ault
was re-appointed as our Chief Executive Officer at a nominal
salary.
At
December 31, 2006, four of our executives were covered under employment
agreements. Our Chief Executive Officer, William B. Horne, was covered under
a
two year employment agreement with annual base compensation of $150,000; our
Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams was covered
under a three year employment agreement with annual base compensation of
$300,000; our President of Sales and Marketing of SurgiCount Medical, Inc.,
Richard Bertran, was covered under a three year employment agreement with annual
base compensation of $200,000 and; our Chief Operating Officer of SurgiCount
Medical, Inc., James Schafer, was covered under a two year employment agreement
with annual base compensation of $100,000. As discussed above, the addition
of
these employment contracts effectively increased employee compensation during
the year ended December 31, 2006 by $436,000. The remaining increase in employee
compensation is attributed to an overall increase in benefits associated with
the individuals that are covered under employment contracts.
The
second largest component of our operating expenses is professional fees, which
decreased by $362,000 during the year ended December 31, 2006 compared to the
amount reported during the previous year. This decrease is primarily comprised
of decreases in stock based compensation to outside consultants of $489,000
offset by an overall increase in cash payments to consultants who are utilized
to generate awareness and train health care professionals in the use of our
Safety-Sponge System.
Stock based compensation expense is the most significant component of
professional fees. During the year ended December 31, 2006 and 2005,
professional fees included stock based compensation related to the issuances
of
restricted stock and warrants of $898,000 and $1,388,000, respectively. The
decrease in stock based compensation of $490,000 paid to our outside consultants
is the primary component of our decrease in professional fees. This $490,000
decrease was primarily caused from warrant issuances during the year ended
December 31, 2006 and 2005, of $593,000 and $918,000, respectively, a decrease
of $325,000. A significant amount of the warrants issued during the year ended
December 31, 2006, relate to a consulting agreement that we entered into in
February 2006 with Analog Ventures, LLC (“Analog
Ventures”)
with an
associated expense of $405,000. In addition to the stock based compensation
from
the Analog Ventures warrant, we issued 75,380 warrants to purchase shares of
our
common stock to our placement agent, Ault Glazer & Co., LLC, (the
“Placement
Agent”).
These
warrants, which were valued at $79,000, were issued to the Placement Agent
for
their successful efforts in assisting us with raising debt and equity financing.
During
the year ended December 31, 2005 the primary amount of the warrants issued
related to a consulting agreement with Health West Marketing Incorporated
(“Health
West”)
that we
entered into in April 2005. As an incentive for entering into the agreement,
we
agreed to issue Health West a callable warrant to purchase 150,000 shares of
our
common stock at an exercise price of $5.95, exercisable for 5 years. We
recognized an expense of $528,000 related to these warrants. In addition to
the
stock based compensation that we recognized as a result of our agreement with
Health West, we issued additional warrants during the year ended December 30,
2005, valued at $361,000, to purchase shares of common stock to two consultants
performing investor relations services.
In
the
past we have also issued shares of our common stock to consultants for payment
of professional services. Pursuant to the April 2005 consulting agreement with
Health West, we have recognized expenses of $250,000 related to the issuance
26,261 shares and future issuance of 15,756 shares of our common stock to Health
West. We recognized $94,000 in 2006 as a result of Health West’s assistance in
developing a regional distribution network to integrate the
Safety-Sponge System
into the existing acute care supply chain. The remaining $156,000 was recognized
in 2005, a percentage upon the execution of our consulting agreement with Health
West and the remaining amount upon our entering into a comprehensive
manufacturing agreement with A Plus Manufacturing, Inc. The $62,000 decrease
in
expense from the issuance and future issuances of common stock to Health West
combined with the $325,000 decrease in expense from warrants is the primary
cause of the decrease in professional fees.
The
increase in cost of sales of $159,000 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.
The
increase in amortization expense, which reflected an increase of $54,000, of
our
patents was caused by the full quarter of amortization during the three months
ended March 31, 2006 as opposed to a partial quarter during the three months
ended March 31, 2005. The entire capitalized costs of SurgiCount’s patents,
valued at $4,685,000, are being amortized over their approximate useful life
of
14.4 years. Since the SurgiCount patents were not acquired until the end of
February 2005, amortization for the three months ended March 31, 2005 was only
$27,000 as opposed to $81,000 during the three months ended March 31,
2006.
General
and administrative expenses experienced an increase of $60,000 during the year
ended December 31, 2006 over the prior year. Travel related expenses are a
large
component of general and administrative expenses and represented an increase
of
$187,000. This increase was attributed to expenses incurred in marketing our
Safety-Sponge System
to
hospitals throughout the United States, attendance at trade shows and
conventions to promote the Company’s Safety-Sponge System,
and travel abroad to inspect the manufacturing facilities for our
Safety-Sponge System.
The offsetting decrease in general and administrative expenses is 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, $2,000, $42,000 for the years ended December 31,
2007, 2006, and 2005, respectively.
The
increase in interest income for the year ended December 31, 2007 when compared
to December 31, 2006 was primarily the result of an overall increase in cash
during the year ended December 31, 2007.
The
decrease in interest income for the year ended December 31, 2006 when compared
to December 31, 2005 was primarily the result of a decreased amount of fixed
income investments held throughout the period, primarily during the first
quarter of 2005. At March 31, 2005, we held in marketable securities
approximately $2.5 million in U.S. Treasuries as opposed to no investments
in
U.S. Treasuries during the year ended December 31, 2006.
Interest
expense
We
had
interest expense of $1,468,000, $3,156,000, and $135,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
The
decrease in interest expense for the year ended December 31, 2007 when compared
to December 31, 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 year ended December 31, 2007 and 2006, we recorded
$1,084,000 and $2,983,000, respectively, in non-cash interest charges. The
non-cash interest charges that were incurred during the year ended December
31,
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 $1,763,000 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 fluctuation in interest expense is attributable to
the
overall decreased level of borrowings during the year ended December 31, 2007
over the prior year.
The
increase in interest expense for the year ended December 31, 2006 when compared
to December 31, 2005 is primarily attributable to the non-cash interest charges
of $2,983,000, after a reduction for the non-cash interest charges of $136,000
related to loans at our discontinued car wash segment. Thus, non-cash interest
charges, excluding those of our discontinued car wash segment, resulted in
an
increase of $2,847,000 and represented the primary cause of the increase in
interest expense.
Realized
gains (losses) on investments, net
During
the year ended December 31, 2007 we realized a net gain of $22,000. Realized
gains (losses) during the year ended December 31, 2007 reflect the sale of
certain non-operating assets.
During
the year ended December 31, 2006, we realized net losses of $1,542,000 which
primarily related to our investment in IPEX. During 2006, we sold 95,000 shares
of IPEX common stock for $8,000 and, because IPEX is no longer conducting
business operations, we wrote down the carrying value of 950,000 shares of
IPEX
common stock. Our investment in IPEX had a cost basis of
$1,458,000.
During
the year ended December 31, 2005, we realized net gains of $2,014,000 primarily
from our stock appreciation rights in our holding in Excelsior for
$1,747,000.
Unrealized
gains (losses) on marketable securities, net
During
the year ended December 31, 2007, the Company recognized unrealized appreciation
of $25,000 due to the write-down to fair value of approximately 8.5 acres of
undeveloped land in Heber Springs, Arkansas. In March 2008, the Company
completed the sale of this real property for net proceeds of $226,000, which
resulted in a realized loss of $25,000.
Unrealized
appreciation of investments increased by $17,000 during the year ended December
31, 2006. Of this increase, $16,000 related to the sale of 108,200 shares of
Tuxis Corporation and 95,000 shares of IPEX common stock. At December 31, 2005,
both of these investments were classified as trading securities and while Tuxis
Corporation had unrealized depreciation of $134,000 IPEX had unrealized
appreciation of $118,000, which resulted in net unrealized depreciation of
$16,000. 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.
Unrealized
appreciation of investments increased by $32,000 during the year ended December
31, 2005, due to the price appreciation of our marketable
securities.
Loss
from discontinued car was segment
The
loss
from our discontinued car was segment decreased by $1,481,000 to $166,000 during
the year ended December 31, 2007 from a loss of $1,647,000 during the year
ended
December 30, 2007. ASG’s
first site, developed in Birmingham, Alabama, had its grand opening on March
8,
2006. Thus, the year ended December 31, 2006 reflected slightly less than ten
full months of operations whereas, due to the sale of our express car wash
on
June 29, 2007, the year ended December 31, 2007 reflected approximately six
full
months of operations. Further, during the year ended December 31,
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 acquisition of
ASG in March 2006. During
the year ended December 31, 2007, despite a significantly shorter operating
period and as a result of a more established business presence from a more
mature business, revenues reflected only a slight decrease of $34,000 and
operating costs decreased by $1,505,000. However, excluding goodwill impairment
of $971,000, operating costs decreased by $534,000. The remaining operating
cost
decrease of $534,000 is primarily attributed to a $257,000 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 year ended December 31, 2007 as opposed to an entire year of
operating expenses during the year ended December 31, 2006.
The
loss
from our discontinued car was segment increased by $1,585,000 during the year
ended December 31, 2006 from a loss of $62,000 during the year ended December
31, 2005, its first year of operations. In response to the financial constraints
stemming from our unsuccessful efforts to raise the necessary capital to
continue the planned build-out on the additional car wash facilities, coupled
with our emphasis on the patient
safety markets,
we
evaluated alternative methods to divest the car wash services segment.
Recognizing that revenues and cash flows would be lower than expected from
the
car wash services segment, we determined that a triggering event had occurred
and conducted an interim goodwill impairment analysis in the quarters ended
June
30, 2006 and September 30, 2006. As a result of our goodwill impairment
analyses, we recorded
goodwill impairment charges of $971,000 and nil during the year ended December
31, 2006 and 2005, respectively. This
goodwill impairment related to goodwill that resulted from the Company’s
acquisition of ASG. The fair value of our reporting units were estimated
using the expected present value of future cash flows and the valuation employed
a combination of present value techniques to measure fair value and considered
market factors.
The
remaining increase in loss of $614,000 is primarily attributed to interest
expense at the discontinued car wash segment of $458,000. The increase in
interest expense was a combination of both non-cash interest charges of $136,000
and interest expense of $322,000 attributable to the overall increase in
borrowings that occurred during the year ended December 31, 2006.
Accumulated
other comprehensive income
Unrealized
gains (losses) on our investments designated as available-for-sale are recorded
in accumulated other comprehensive income. At December 31, 2007 and 2006, our
remaining investments were carried at cost and therefore we did not record
any
unrealized gains (losses) on these investments. At December 31, 2005, we
classified our restricted holdings in Digicorp and IPEX as available-for-sale.
During the year ended December 31, 2006, we had disposed of or written-off
these
investments. 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
$2,375,000.
Taxes
We
are
subject to federal and state income tax on a portion of our taxable income.
At
December 31, 2007, we had a net operating loss carryforward of approximately
$25.0 million to offset future taxable income for federal income tax purposes.
The utilization of the loss carryforward to reduce any future income taxes
will
depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The carryforward expires
beginning in 2011.
A
change
in the ownership of a majority of the fair market value of our common stock
can
delay or limit the utilization of existing net operating loss carryforwards
pursuant to Internal Revenue Code Section 382. We believe that such a change
occurred during the year ended December 31, 2007 and are currently performing
an
analysis to determine the amount of our net operating loss carryforward that
is
limited.
Contractual
Obligations
The
following table sets forth information relating to our contractual obligations
as of December 31, 2007:
Contractual
obligations
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Less
than
1 year
|
|
1–3 years
|
|
3–5 years
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
$
|
351,258
|
|
$
|
113,082
|
|
$
|
238,176
|
|
$
|
—
|
|
Notes
Payable to Ault Glazer Capital Partners, LLC
|
|
|
2,530,558
|
|
|
—
|
|
|
—
|
|
|
2,530,558
|
|
Notes
Payable to Herb Langsam
|
|
|
600,000
|
|
|
600,000
|
|
|
—
|
|
|
—
|
|
Note
Payable to Charles Kalina III
|
|
|
400,000
|
|
|
400,000
|
|
|
—
|
|
|
—
|
|
Other
Notes Payable
|
|
|
172,380
|
|
|
172,380
|
|
|
—
|
|
|
—
|
|
Employment
Agreements
|
|
|
693,750
|
|
|
581,250
|
|
|
112,500
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,747,946
|
|
$
|
1,866,712
|
|
$
|
350,676
|
|
$
|
2,530,558
|
|
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. We expect that some of our 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 interests of some of the small
companies in which we have invested, the valuation of such the equity interests
is subject to the estimate of our Board of Directors. In making its
determination, the Board 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
investments may differ significantly from the values that would be placed on
them if a liquid market for the equity interests 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."
MANAGEMENT.
Pursuant
to the Company's Amended and Restated Certificate of Incorporation and its
Bylaws, the number of directors constituting the Board shall be fixed from
time
to time by resolution passed by a majority of the Board. The number of directors
on the Board is currently fixed at seven. The holders of the Series A Preferred
Stock, voting separately as one class, shall have the right to elect three
directors at all times during which the Series A Preferred Stock is outstanding
(the “Series
A Directors”).
Directors are elected by class for a staggered term of three years for each
class, with the term of office of one class of directors expiring each year.
Directors serve until their successors are elected and qualified. No current
disagreement exists between the Company and any of the current members of the
Board regarding the operations, policies or practices of the
Company.
The
current directors of the company are as follows: Steve Kane (Class I Director
(Served since 2008) - nominated for re-election to the Board for a three-year
term expiring in 2010); David M. Augustine (Class I Director (Served since
2007)
- nominated for re-election to the Board for a three-year term expiring in
2010); John P. Francis (Class I Director (Served since 2007) - nominated for
re-election to the Board for a three-year term expiring in 2010); Herbert
Langsam (Class II Director - (Served since 2004) - term expiring in 2008);
Wenchen Lin (Class II Director - (Served since 2007) - term expiring in 2008);
Arnold E. Spangler (Class III Director (Served since January 7, 2006) - term
expiring in 2009); and Louis Glazer, M.D., Ph.G (Class III Director (Served
since 2004) - term expiring in 2009). We believe under the standards for Nasdaq
listed companies that, other than Dr. Glazer, all of the Company’s directors are
independent.
Common
Stock Directors
Steven
H. Kane (1),
age 55,
is the Company’s Chairman and was elected by the Board of Directors to serve as
a Class I Director of the Company on February 7, 2008. Mr. Kane is currently
the
President, Chief Executive Officer and Director of Protalex, Inc. (OTCBB: PRTX)
and has over 30 years experience in the health care industry. From April 1997
to
August 2000, Mr. Kane served as Vice President of North American Sales &
Field Operations for Aspect Medical. While at Aspect, he helped guide the
company to a successful initial public offering in January 2000. Prior to
Aspect, Mr. Kane was Eastern Area Vice President for Pyxis Corporation, where
he
was instrumental in positioning the company for its successful initial public
offering in 1992. Pyxis later was acquired by Cardinal Health for $1 billion.
Prior to that Mr. Kane worked in sales management with Eli-Lilly and Becton
Dickinson
David
Augustine (2),
age
46,
was elected by the Board of Directors to serves as a Class I Director of the
Company on January 24, 2007 to fill the vacancy created by the resignation
of
Brig. Gen. Lytle Brown, III effective January 24, 2007. Mr. Augustine has almost
twenty years experience as a successful legal advisor, managing principal and
business consultant. Mr. Augustine began his career as an attorney in the
Mergers and Acquisitions department of Skadden, Arps, Slate, Meagher & Flom,
representing predominantly Fortune 500 companies. Mr. Augustine also started
up
the firm’s restructuring and reorganization department in its Wilmington,
Delaware office. Mr. Augustine has guided numerous companies through successful
restructurings both as a business principal and as a legal advisor. He also
has
substantial experience in the areas of intellectual property development,
protection, and licensing.
John
P. Francis,
age
42,
was elected by the Board of Directors to serves as a Class I Director of the
Company on November 26, 2007 to fill the vacancy created by the resignation
of
William B. Horne effective as of that date. Mr. Francis is President of Francis
Capital Management, LLC, an investment management firm specializing in small
capitalization equities. Mr. Francis has over eighteen years of
experience in investment management, finance and accounting.
Wenchen
Lin, age
52,
was elected by the Board of Directors to serves as a Class II Director of the
Company on March 28, 2007 to fill the vacancy created by the resignation of
Alice Campbell effective January 26, 2007. Mr. Lin has almost twenty years
experience as the President and founder of A Plus International, a successful
manufacturer producing a variety of surgical dressings, film and plastic
products and servicing the custom procedural tray industry on cotton textile
products. A Plus has established relationships with key market leaders in the
industries that A Plus services. Mr. Lin began his career serving as
Vice-President to large trade and shipping companies, such as Trade Diversified,
Inc. and Brother Trucking Co. and has vast knowledge and experience in oversees
factories, trade, transport and distribution. Mr. Lin received his MBA from
Ohio
University and his accounting degree from Taiwan Suzhou University.
Arnold
Spangler (2),
age 59,
was elected by the Board of Directors to serve as a Class III Director of the
Company on January 7, 2006 to fill the vacancy created by the first resignation
of Milton “Todd” Ault, III effective January 9, 2006. From 1993 through 2005 Mr.
Spangler was Managing Director of Mancuso & Co., a private merchant banking
and equity firm which arranges and participates in leveraged buyout
acquisitions. Mr. Spangler is currently on advisory boards of NYPPE Holdings,
LLC and Total Equips, Inc., both private companies.
Series
A Preferred Stock Directors
Louis
Glazer, M.D., Ph.G. (1),
age 77,
has served as a Class III Director of the Company since October 22, 2004. Dr.
Glazer also currently serves on the executive council of patient safety at
Harvard Medical School and Brigham and Women’s Hospital and as a member of AGB
& Company IM’s advisory board and as an independent biotechnology and
medical consultant. Until 2002, Dr. Glazer served as the chief anesthesiologist
and medical director for the Vitreo-Retinal Clinic in Memphis, Tennessee. Prior
to that, Dr. Glazer taught obstetrics anesthesia at the University of Tennessee,
while practicing anesthesiology at Baptist East Hospital, Methodist Hospital,
St. Francis Hospital and Baptist Memorial Hospital in Memphis, Tennessee. Dr.
Glazer was also responsible for establishing anesthesia programs at Baptist
Memorial Hospital and Methodist Hospital South in Memphis, Tennessee. Dr. Glazer
received his B.S. in pharmacy from the University of Oklahoma and his M.D.
from
the University of Bologna School of Medicine in Italy.
Herbert
Langsam (1),
age 77,
has served as a Class II Director of the Company since October 22, 2004. Mr.
Langsam also currently serves as president of Medicare Recoveries, Inc., a
private company located in Oklahoma City, Oklahoma focused on providing Medicare
claims and recovery services. Mr. Langsam serves as a member of the board of
trustees for the Geriatric Research Drug Therapy Institute and as an adjunct
professor at the University of Oklahoma Pharmacy School. Previously, Mr. Langsam
was the founder, president and chief executive officer of Langsam Health
Services, a conglomerate of health care companies that serviced 17,000 long-term
care residents, that was acquired by Omnicare, Inc. in 1991. Mr. Langsam also
served as the vice president of pharmacy services for Omnicare, Inc. following
its acquisition of Langsam Health Services. Mr. Langsam received his B.S. in
pharmacy from the University of Oklahoma.
(1)
Member
of Compensation Committee; (2)
Member
of Audit Committee
The
executive officers of the Company as of March 31, 2008 are as
follows:
Name and Age
|
Title
|
Served as an
Officer Since
|
William
B. Horne (39)
|
Chief
Executive Officer and Chief Financial Officer and Principal Accounting
Officer
|
2005
|
William
Adams (52)
|
President
and Chief Executive Officer of SurgiCount Medical, Inc.
|
2005
|
Rick
Bertran (46)
|
President
of SurgiCount Medical, Inc.
|
2005
|
Executive
Officers
William
B. Horne,
age 39,
Chief Executive and Chief Financial Officer and Principal Accounting Officer.
Mr. Horne served as a Class I Director of the Company from January 9, 2007
to
November 26, 2007 to fill the vacancy created by the resignation of Milton
“Todd” Ault III effective January 9, 2007. Since July 20, 2005, Mr. Horne has
been a director of Digicorp (OTCBB: DGCO). From July 20, 2005 until April 20,
2007, Mr. Horne was also the Chief Financial Officer of Digicorp. From September
30, 2005 until December 29, 2005, Mr. Horne also served as Digicorp’s Chief
Executive Officer and Chairman of Digicorp’s Board of Directors. Since January
2002, Mr. Horne has provided strategic financial consulting services to private
and public companies. From May 2002 to April 2005, Mr. Horne held the position
of Chief Financial Officer of Alaska Wireless Communications, a privately held
advanced cellular communications company. From November 1996 to December 2001,
Mr. Horne held the position of Chief Financial Officer of The Phoenix Partners,
a venture capital limited partnership located in Seattle,
Washington.
Bill
Adams,
age 52,
President and Chief Executive Officer of SurgiCount Medical, Inc. Mr. Adams
has
25 years of experience in the health care industry and the disposable medical
supply business. As the President of Health West Marketing since its
inception in 1983, Mr. Adams pioneered the introduction of custom procedure
trays into the acute care supply chain. Additionally, Mr. Adams is one of
the industry's leaders in taking advantage of global economics through the
introduction of external manufacturing in China with A Plus
International. Mr. Adams has been actively involved in the design and
development of SurgiCount Medical's Safety-Sponge System for several
years and was instrumental in solidifying SurgiCount’s national distribution and
manufacturing agreements.
Richard
Bertran,
age 46,
President of SurgiCount Medical, Inc. From September 2002 until July 2005,
Mr.
Bertran was Director of North American Sales for eNGENUITY Technology, a company
in the visualization and simulation software industry. From 1988 to 1998, Mr.
Bertran served as Western Regional Sales Manager for Maxxim Medical, a company
that creates and packages custom surgical packs.
We
designed the compensation program for our named executive officers to attract,
motivate, and retain key executives who drive the Company’s success. We seek to
employ the best executive talent in our line of business. We want to reward
our
executives for business achievements and satisfaction of corporate objectives.
Additionally, the overall executive compensation program, taken as a whole,
should align the interests of the executives with the stockholders’ interests.
We achieve these objectives through a compensation package that:
|
·
|
provides
competitive total compensation consisting primarily of cash and
stock,
|
|
·
|
allows
our officer’s to participate in the benefit programs that we offer to all
full-time employees,
|
|
·
|
provides
certain officer’s to receive additional fringe
benefits,
|
|
·
|
differentiates
rewards based on the officer’s contributions to company performance,
and
|
|
·
|
encourages
our named executive officers to act as owners with an equity interest
in
Patient Safety.
|
We
view,
for compensation purposes, our competitors for executive talent as companies
in
the health care industry.
Determining
Executive Compensation
The
independent members of the Board approve the compensation of our named executive
officers. The Compensation Committee makes a recommendation to the independent
directors for annual compensation (including salary, bonus and stock-based
compensation) of our named executive officers. These recommendations are based
on:
Chief
executive officer
|
·
|
The
chief executive officer’s historical
earnings,
|
|
·
|
a
market competitive assessment of similar roles at other
companies,
|
|
·
|
the
earnings of other named executive officers, and
|
|
·
|
an
evaluation of the chief executive officer’s performance for the fiscal
year.
|
Named
executive officers (other than the chief executive officer).
|
·
|
The
executive’s historical earnings,
|
|
·
|
a
market competitive assessment of similar roles at other
companies,
|
|
·
|
internal
comparisons to the compensation of other
executives,
|
|
·
|
evaluations
of performance for the fiscal year,
and
|
|
·
|
the
chief executive officer’s recommendations for each named executive
officer’s base pay, and bonus
amounts.
|
The
evaluation is based on the success of the named executive officer in achieving
his performance commitments, which include financial, strategic and company
culture/leadership goals. The Board approves the named executive officers
salary, bonus and stock-based compensation in the first quarter of the fiscal
year after the relevant performance information is available.
The
components of our executive compensation program
Our
executive compensation program consists of three elements: base pay; cash bonus
and grants of fair market value of either restricted stock or options to
purchase shares of our common stock. We use this mix of programs for a variety
of reasons:
|
·
|
As
a package, these types of programs are typically offered by the types
of
companies from which we would seek executive
talent.
|
|
·
|
As
a package, these particular programs provide both a current and a
long
term incentive for the executive officers, thereby aligning the
executives’ interests with
shareholders.
|
|
·
|
These
programs, as a package, provide the executives with short and long
term
rewards; this serves as a retention, as well as a motivational, device
for
the executives.
|
We
also
provide our named executive officers with a package of fringe benefits on the
same basis that is provided to all full-time benefits eligible employees. These
benefits include such items as health insurance and group term life insurance.
We provide certain executives with an additional benefit of an automobile
allowance, which is provided for in their employment contracts.
We
believe that the package of executive compensation programs that we offer is
competitive; we are able to attract and retain the executive talent that we
need
to successfully run our business. We currently believe that the long term
incentive component of our executive compensation program, which uses fair
market value stock options and grants of restricted common stock, provides
executives with an incentive as well as putting a portion of their compensation
at risk if our share price declines.
We
believe that our named executive officers should have formalized employment
contracts. The existence of a contract gives the Company, and the named
executive officer structure as to the other’s expectations from the employment
relationship. We also believe that the level of security that an employment
contract provides to the executive is an important retention tool; we feel
that
many of the companies with whom we compete for executive talent offer such
agreements and that we would be at a competitive disadvantage if we did not
have
them. The salient terms of the employment agreements for the named executive
officers are discussed in the “Employment Agreements” section.
Our
process for setting executive pay
The
Compensation Committee’s focus is to determine the compensation of the chief
executive officer and to review the proposals of the chief executive officer
regarding the compensation for other named executive officers. In 2007, the
Compensation Committee made the final decision on all aspects of named executive
officer pay. In 2008, the Compensation Committee will present recommendations
to
the entire Board of Directors for their approval.
Our
executive compensation process begins with the chief executive officer’s
submission of each executive’s total pay package to the Compensation Committee
for its determination. We maintain a pay structure with ranges for each type
of
compensation (base pay, bonus, equity grant) for the named executive officers.
We have developed this structure based on our knowledge of our industry.
Our
process for determining the value of each component of executive pay functioned
in the following manner for 2007:
Base
pay:
Base
compensation for all of our named executive officers is provided for in their
respective employment agreements, and the Company has the ability to make annual
increases to the base pay level. Looking at information from other reporting
companies, the chief executive officer makes a recommendation for executive
base
pay increases to the Compensation Committee. The Compensation Committee reviews
the information provided by the chief executive officer and its supporting
data,
and makes a determination of annual base pay increases.
The
Compensation Committee awarded the following base pay increases to the named
executive officers; the increases were effective on January 1, 2007 for our
chief executive and chief financial officer and May 1, 2007 for the President
of
SurgiCount Medical.
Named
Executive Officer
|
|
Annualized
2006
Base
|
|
Annual
Increase
|
|
Annualized
2007
Base
|
|
Percentage
Increase
|
|
William
Horne, Chief Executive and Chief Financial Officer
|
|
$
|
150,000
|
|
$
|
100,000
|
|
$
|
250,000
|
|
|
66.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Adams, President and Chief Executive Officer of SurgiCount Medical,
Inc.
|
|
$
|
300,000
|
|
$
|
0
|
|
$
|
300,000
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bertran, President of SurgiCount Medical, Inc.
|
|
$
|
200,000
|
|
$
|
50,000
|
|
$
|
250,000
|
|
|
25
|
%
|
The
Chief
Executive and Chief Financial Officer and the President of SurgiCount each
received significant raises because further analysis by the Compensation
Committee indicated that the positions were underpaid. The Compensation
Committee specifically noted that the additional responsibilities Mr. Horne
assumed, effective January 2007, in his dual role as both the Company’s Chief
Executive Officer and Chief Financial Officer warranted additional cash
compensation. The Compensation Committee elected to increase Mr. Bertran’s base
compensation as a reward for his individual efforts in promoting the Company
Safety-Sponge product. Further, the Compensation Committee wanted to establish
an equitable level of base pay amounts for our three senior
executives.
Annual
bonus:
Our
annual bonus program for executives is administered in the following manner.
Our
Compensation Committee determines the amount of bonuses, if any, for each of
our
named executive officers. To the extent bonuses are made they are on a
completely discretionary basis at the reasonable and good faith discretion
of
the Compensation Committee, based upon the financial performance of the Company.
During 2007 the Compensation Committee did not award any bonuses.
Equity
grants:
In
certain circumstances, the Compensation Committee may award equity grants to
named executive officers. The reasons for these grants include:
|
·
|
an
incentive to join the Company, based on compensation that is being
forfeited through the termination of previous
employment,
|
|
·
|
to
encourage retention of critical
talent,
|
|
·
|
as
a strategic investment in someone deemed critical to the Company’s
leadership, and
|
|
·
|
to
reward outstanding performance
|
The
chief
executive officer recommends the equity grant, if any, to a named executive
officer. The Compensation Committee considers the chief executive officer’s
recommendation and makes a final decision based on the factors listed above.
Equity grants that were made to named executive officers during 2007 were in
connection with a grant specifically authorized by our Board of Directors,
in
the case of our Chief Executive and Financial Officer, or an employment contract
executed by the President of SurgiCount Medical. The equity grant during 2007
to
our Chief Executive and Chief Financial Officer was in the form of restricted
stock issued as a means to retain his services, at the direction of our Board
of
Directors. The equity grant during 2007 to our President of SurgiCount Medical
was in the form of non-qualified stock options pursuant to an employment
contract executed upon joining the Company. All of the options granted in 2007
were valued at fair market value as of the date of grant (as further explained
below). The grant to our President of SurgiCount Medical was fully vested at
the
date of grant.
In
connection with the award of equity grants, the Principal Executive Officer
provides the Compensation Committee with a proposal for equity grants as part
of
the employment contract process. The amount of the grant is based on the equity
grant ranges for the position which the Company maintains. The Compensation
Committee reviewed the Principal Executive Officer’s proposal and the underlying
information, and makes its determination as to the grant.
We
establish the exercise price for our options in the following
manner:
For
a new
hire, the Compensation Committee approves the grant and establishes the price
based on the Company’s closing price on the day of Compensation committee
approval; however, if the executive has not yet started employment as of the
date of Compensation Committee approval, the price is set as the Company’s
closing price on the executive’s first day of work.
For
a new
contract for a current executive, the Compensation Committee approves the grant
and establishes the price based on the Company’s closing price on the day of
Compensation Committee approval.
We
believe that the grant of fair market value stock options, even though there
is
now a financial statement impact before the options are exercised, continues
to
provide substantial benefits to the Company and the executive. We benefit
because the options align the executive’s financial interest with the
shareholders’ interest:
The
executives benefit because:
|
·
|
They
can realize additional income if our shares increase in value,
and
|
|
·
|
They
have no personal income tax impact until they exercise the
options
|
We
do not
maintain any equity ownership guidelines for our named executive officers.
We
have adopted a corporate policy which expressly prohibits any named executive
officer from trading in derivative securities of our Company, short selling
our
securities, or purchasing our securities on margin at any time. We do not time
the granting of our options with any favorable or unfavorable news relating
to
our Company. Proximity of any awards to an earnings announcement, market event
or other event related to us is purely coincidental.
Because
we feel that each of our named executive officers provides unique services
to
us, we do not use a fixed relationship between base pay, short term bonus and
equity awards. When the Compensation Committee makes the final decisions about
a
named executive officers total compensation package for a year, the three
elements (base pay, bonus and equity award) are considered both individually
and
as a complete package. We do not take into account amounts that a named
executive officer may have realized in a year as a result of short term bonus
awards or stock option exercises when we establish pay levels and goals for
the
current year. Overall, we believe that our total compensation program for
executives is reasonable while being competitive with market peers.
The
following table sets forth information concerning the annual and long-term
compensation earned by or paid to our Chief Executive Officer and to other
persons who served as executive officers as at and/or during the fiscal year
ended December 31, 2007 who earned compensation exceeding $100,000 during 2007
(the “named
executive officers”),
for
services as executive officers for the last three fiscal years.
SUMMARY
COMPENSATION TABLE
|
|
|
|
Name
and principal position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
(3)
|
|
Option
Awards
($)
(3)
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
Nonqualified Deferred
Compensation Earnings ($)
|
|
All
Other Compensation
($)
(4)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
B. Horne, Chief Executive & Chief Financial Officer
(1)
|
|
|
2007
2006
2005
|
|
|
218,750
150,000
75,000
|
|
|
0
0
750
|
|
|
26,100
38,703
277,536
|
|
|
0
0
227,732
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
255
368
|
|
|
244,850
188,958
581,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Adams, President & Chief Executive Officer of SurgiCount
(2)
|
|
|
2007
2006
2005
|
|
|
312,500
206,250
0
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
996,302
0
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
822
0
|
|
|
312,500
1,203,374
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lynne
Silverstein, Executive Vice President
|
|
|
2007
2006
2005
|
|
|
105,000
120,000
120,000
|
|
|
0
0
0
|
|
|
25,000
123,000
158,000
|
|
|
0
108,085
131,384
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
200
591
|
|
|
130,000
351,285
409,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bertran, President of SurgiCount
|
|
|
2007
2006
2005
|
|
|
231,243
200,000
92,500
|
|
|
0
0
750
|
|
|
0
0
36,000
|
|
|
53,308
0
343,195
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
360
433
|
|
|
284,551
200,360
47,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Schafer, Director of Manufacturing of SurgiCount
|
|
|
2007
2006
2005
|
|
|
67,051
100,000
39,807
|
|
|
0
0
750
|
|
|
50,000
0
50,000
|
|
|
0
0
186,324
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
342
361
|
|
|
117,051
100,342
277,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis
Glazer, M.D., Ph.G., Former Chief Executive Officer
|
|
|
2007
2006
2005
|
|
|
0
118,750
120,000
|
|
|
0
0
750
|
|
|
26,100
246,000
316,000
|
|
|
0
216,169
262,768
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
1,060
2,582
|
|
|
26,100
581,979
702,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milton
“Todd” Ault III, Former Chief Executive Officer
|
|
|
2007
2006
2005
|
|
|
0
180,000
150,000
|
|
|
0
0
750
|
|
|
26,100
270,000
316,000
|
|
|
0
237,259
262,768
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
184
184
1,248
|
|
|
26,100
687,443
730,766
|
|
|
|
Mr.
Horne was appointed Chief Executive Officer on January 9,
2007.
|
|
(2)
|
Mr.
Adams was appointed President on February 28, 2007 and Chief Executive
Officer of SurgiCount on April 21,
2006.
|
|
(3)
|
Represents
the dollar amount recognized for financial reporting purposes of
restricted stock grants and stock options awarded in 2007, 2006 and
2005,
respectively, computed in accordance with SFAS
123(R).
|
|
(4)
|
Primarily
represents long term disability premiums and life insurance premiums
paid
by the Company
|
The
following table sets forth information with respect to the named executive
officers concerning the grant of stock options during the fiscal year ended
December 31, 2007. The Company did not have any outstanding stock appreciation
rights (“SARs”)
as of
December 31, 2007.
GRANTS
OF PLAN-BASED AWARDS
|
|
|
|
Estimated Future Payouts Under Non-
Equity Incentive Plan Awards
|
|
Estimated Future Payouts Under
Equity Incentive Plan Awards
|
|
All Other
Stock
Awards:
Number of
Shares of
|
|
All Other
Option Awards:
Number of
Securities
|
|
Exercise or
Base Price of
|
|
Grant Date
Fair Value of
Stock and
|
|
Name
|
|
Grant Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Stocks or
Units(#)
|
|
Underlying
Options(#)
|
|
Option Awards
($/Sh)
|
|
Option
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
B. Horne
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
|
26,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Adams
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lynne
Silverstein
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
20,000
|
|
|
0
|
|
|
0
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bertran
|
|
|
10/02/2007
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
50,000
|
|
|
1.39
|
|
|
53,308
|
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
|
|
STOCK AWARDS
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or Units
of Stock That
Have Not
Vested (#)
|
|
Market Value
of Shares or
Units of Stock
That Have Not
Vested
($)
|
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
(#)
|
|
Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units or
Other Rights That
Have Not Vested
(#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
B. Horne
|
|
|
78,000
|
|
|
0
|
|
|
0
|
|
|
5.267
|
|
|
3/30/2015
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Adams
|
|
|
100,000
|
|
|
300,000
|
|
|
0
|
|
|
3.50
|
|
|
4/18/2016
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lynne
Silverstein
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bertran
|
|
|
133,333
50,000
|
|
|
66,667
0
|
|
|
0
0
|
|
|
5.00
1.39
|
|
|
7/18/2015
10/02/2017
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Schafer
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis
Glazer, M.D., Ph.G.,
|
|
|
75,000
60,000
|
|
|
0
0
|
|
|
0
0
|
|
|
5.267
4.10
|
|
|
3/30/2015
1/31/2016
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milton
“Todd” Ault III
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
OPTION
EXERCISES AND STOCK VESTED
|
|
OPTION AWARDS
|
|
STOCK AWARDS
|
|
Name
|
|
Number of
Shares Aquired
on Exercise
(#)
|
|
Value
Realized
on Exercise
($)
|
|
Number of
Shares
Aquired
on Vesting
(#)
|
|
Value
Realized
on Vesting
($)
|
|
|
|
|
|
|
|
|
|
|
|
William
B. Horne
|
|
|
0
|
|
|
0
|
|
|
18,019
|
|
|
31,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Adams
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lynne
Silverstein
|
|
|
0
|
|
|
0
|
|
|
20,000
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bertran
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Schafer
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis
Glazer, M.D., Ph.G.,
|
|
|
0
|
|
|
0
|
|
|
15,000
|
|
|
26,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milton
“Todd” Ault III
|
|
|
0
|
|
|
0
|
|
|
15,000
|
|
|
26,100
|
|
Pension
Benefits
The
Company does not offer a pension benefit plan.
Non-Qualified
Deferred Compensation
The
Company does not offer a non-qualified deferred compensation plan.
Compensation
of Directors
As
of
December 31, 2007, the cash compensation earned by each director of the Company
varies. Arnold Spanger and David Augustine earned $100,000 and $20,000,
respectively, whereas the other compensated directors, which include Mr.
Langsam, Dr. Glazer and Mr. Brown, were eligible to receive a fee of $500 plus
reimbursement of expenses incurred in attending each board meeting. During
2007,
the Company did not compensate Mr. Langsam, Dr. Glazer and Mr. Brown in cash
and
all of Mr. Spangler’s and a portion of Mr. Augustine’s cash compensation was
accrued at December 31, 2007. In addition, directors are eligible to receive
grants of restricted stock and/or stock options pursuant to the Company’s
compensation plans which are described below. The
following table provides certain summary information concerning the compensation
paid to directors, other than William Horne (our Chief Executive Officer) and
Louis Glazer, M.D., Ph.G. (our former Chief Executive Officers), during 2006.
All compensation paid to Messrs.
Horne
and Glazer is set forth in the table under “Executive
Compensation.”
Director
Compensation
Name
|
|
Fees Earned or
Paid in Cash ($)
|
|
Stock
Awards ($) (7)
|
|
Option
Awards ($) (7)
|
|
Non-Equity
Incentive Plan
Compensation ($)
|
|
Change in Pension
Value and Nonqualified
Deferred Compensation
Earnings ($)
|
|
All Other
Compensation ($)
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Spangler
|
|
|
100,000
|
|
|
151,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
151,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbert
Langsam
|
|
|
0
|
|
|
26,100
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Augustine (1)
|
|
|
20,000
|
|
|
10,000
|
|
|
61,802
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
91,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenchen
Lin (2)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alice
Campbell (3)
|
|
|
0
|
|
|
26,100
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
26,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brigadier
General (Ret.) Lytle Brown III (4)
|
|
|
0
|
|
|
26,100
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
26,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Francis(5)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
H. Kane (6)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1) Mr.
Augustine was appointed as a director effective January 24, 2007.
(2) Mr.
Lin
was appointed as a director effective March 28, 2007.
(3) Ms.
Campbell resigned as a director effective January 26, 2007.
(4) Mr.
Brown
resigned as a director effective January 24, 2007.
(5) Mr.
Francis was appointed as a director effective November 26, 2007.
(6) Mr.
Kane
was appointed as a director effective February 7, 2008.
(7) Represents
the dollar amount recognized for financial reporting purposes of restricted
stock grants and stock options awarded, computed in accordance with SFAS
123(R).
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee members currently are Messrs. Steven H. Kane, Louis
Glazer and Herbert Langsam, each of whom is independent. Each member of the
Compensation Committee is a “non-employee director” for purposes of Rule 16b-3
under Section 16 of the Exchange Act and an “outside director” for purposes of
Section 162(m) of the Internal Revenue Code. Mr. Kane serves as the Chairman
of
the Compensation Committee. Other than Dr. Glazer, none of these individuals
is
a present or former officer or employee of the Company.
During
the last fiscal year, no executive officer of the Company served either as:
(1)
a member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of another entity, one of whose executive officers served on
the
compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of
the
Company; (2) a director of another entity, one of whose executive officers
served on the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of the Company; or (3) a member of the compensation committee
(or
other board committee performing equivalent functions or, in the absence of
any
such committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of the Company.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security
Ownership of Certain Beneficial Owners and Management
The
following tables set forth certain information with respect to beneficial
ownership (as that term is defined in the rules and regulations of the SEC)
of
the Company’s common stock and preferred stock as of April 11, 2008, by (1) each
person who is known by the Company to be the beneficial owner of more than
five
percent of the outstanding common stock and preferred stock, (2) each director
of the Company, (3) each current executive officer listed in the Summary
Compensation Table and (4) all directors and named executive officers of the
Company as a group. Except as otherwise indicated, to the Company’s knowledge,
all shares are beneficially owned and investment and voting power is held as
stated by the persons named as owners. The address for all beneficial owners,
unless stated otherwise below, is c/o Patient Safety Technologies, Inc., 43460
Ridge Park Drive, Suite 140, Temecula, CA 92590.
|
|
Beneficial Ownership
|
|
Name and Address of Beneficial Owner
|
|
Number of Shares
of Common Stock (1)
|
|
Percent
of Class
|
|
Number of Shares
of Preferred Stock (2)
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
|
|
Greater
than 5% Beneficial Owners :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Francis
Capital Management, LLC
429
Santa Monica Blvd., Suite 320
Santa
Monica, CA 90401
|
|
|
2,080,200
|
(3)
|
|
16.1
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melanie
Glazer
1800
Century Park East, Ste. 200
Los
Angeles, California 90067
|
|
|
1,360,203
|
(4)
|
|
11.0
|
%
|
|
8,150
|
(4)
|
|
74.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSAM
Fund LP
222
Broadway, 6th
Floor
New
York, NY 10038
|
|
|
1,294,000
|
(5)
|
|
10.3
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ault
Glazer Capital Partners, LLC
1800
Century Park East, Ste. 200
Los
Angeles, California 90067
|
|
|
1,320,893
|
(6)
|
|
9.9
|
%
|
|
2,600
|
(6)
|
|
23.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
Plus International, Inc.
5138
Eucalyptus Avenue
Chino,
California 91710
|
|
|
1,100,000
|
(7)
|
|
8.9
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
E. Morelli
225
Mantua Road
Pacific
Palisades, California 90272
|
|
|
1,151,351
|
(8)
|
|
8.7
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Bodnar & Bodnar Capital Management LLC
680
Old Academy Road
Fairfield,
CT 06824
|
|
|
843,750
|
(9)
|
|
6.9
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
P. Francis
|
|
|
2,080,200
|
(3)
|
|
16.1
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenchen
Lin
|
|
|
1,100,000
|
(7)
|
|
8.9
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Adams
|
|
|
302,017
|
(10)
|
|
2.4
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Spangler
|
|
|
268,250
|
(11)
|
|
2.2
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
B. Horne
|
|
|
239,035
|
(12)
|
|
2.0
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Bertran
|
|
|
193,889
|
(13)
|
|
1.6
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis
Glazer, M.D., Ph.G
|
|
|
141,600
|
(14)
|
|
1.2
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbert
Langsam
|
|
|
175,903
|
(15)
|
|
1.2
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Augustine
|
|
|
37,500
|
(16)
|
|
*
|
|
|
—
|
|
|
—
|
|
All
directors and named executive
officers
as a group (9 persons)
|
|
|
4,538,394
|
|
|
32.4
|
%
|
|
—
|
|
|
—
|
|
*
Represents less than 1%
(1)
|
Applicable
percentage ownership is based on 12,079,602 shares of common stock
outstanding as of April 11, 2008, together with securities exercisable
or
convertible into shares of common stock within 60 days of April 11,
2008
for each security holder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Shares
of
common stock that a person has the right to acquire beneficial ownership
of upon the exercise or conversion of options, convertible stock,
warrants
or other securities that are currently exercisable or convertible
or that
will become exercisable or convertible within 60 days of April 11,
2008
are deemed to be beneficially owned by the person holding such securities
for the purpose of computing the percentage of ownership of such
person,
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other
person.
|
(2)
|
Applicable
percentage ownership is based on 10,950 shares of Series A Convertible
Preferred Stock outstanding. Each share of Series A Convertible Preferred
Stock is convertible into 22.5 shares of common stock. Except as
otherwise
required by law, each holder of Series A Convertible Preferred Stock
is
entitled to vote on all matters submitted to our stockholders, voting
together with the holders of common stock as a single class, with
each
shares of Series A Convertible Preferred Stock entitled to one vote
per
share.
|
(3)
|
Consists
of: (a) 1,272,000 shares of common stock; and (b) warrants for purchase
of
808,200 shares of common stock. John Francis has voting and investment
control over the securities held by Francis Capital Management,
LLC.
|
(4)
|
Consists
of: (a) 1,086,162 shares of common stock; (b) warrants for purchase
of
90,666 shares of common stock; and (c) 183,375 shares of common stock
issuable upon conversion of 8,150 shares of Series A Convertible
Preferred Stock.
|
(5)
|
Consists
of: (a) 820,000 shares of common stock; and (b) warrants for purchase
of
474,000 shares of common stock.
|
(6)
|
Ault
Glazer Capital Partners, LLC (“the
Fund”)
is an investment fund. The securities beneficially owned by the Fund
include: (a) 76,870 shares of common stock; (b) a Convertible Secured
Promissory Note in
the principal amount of $2,530,558 that is convertible
into 1,012,223 shares of the Company’s common stock at a conversion price
of $2.50; (c) warrants for purchase of 173,300 shares of common stock;
and
(d) 58,500 shares of common stock issuable upon conversion of
2,600 shares of Series A Convertible Preferred Stock. The managing
member of the Fund, Milton “Todd” Ault, III, may be deemed to beneficially
own the securities held by the Fund due to his relationship with
the
Fund.
|
(7)
|
A
Plus International, Inc. owns 800,000 shares of common stock and
warrants to purchase 300,000 shares of common stock.
Mr. Lin has the power to vote and direct the disposition of all
securities owned by A Plus International, Inc.
|
(8)
|
Consists
of warrants to purchase shares of common stock.
|
(9)
|
Bodnar
Capital Management LLC owns 562,500 shares of common stock and
warrants to purchase 281,250 shares of common stock.
Mr. Bodnar has the power to vote and direct the disposition of all
securities owned by Bodnar Capital Management LLC.
|
(10)
|
Consists
of: (a) 82,017 shares of common stock; (b) 200,000 shares of common
stock
issuable upon exercise of stock options with an exercise price of
$3.50
per share that expire on April 21, 2016; and (c) warrants for purchase
of
20,000 shares of common stock.
|
(11)
|
Consists
of: (a) 210,500 shares of common stock; (b) 15,000 shares of common
stock
issuable upon exercise of stock options with an exercise price of
$4.30
per share that expire on January 25, 2016; and (c) warrants for purchase
of 42,750 shares of common stock.
|
(12)
|
Consists
of: (a) 141,035 shares of common stock; (b) 78,000 shares of common
stock
issuable upon exercise of stock options with an exercise price
of $5.27
per shares that expire March 30, 2015; and (c) warrants for purchase
of
20,000 shares of common stock.
|
(13)
|
Consists
of: (a) 10,555 shares of common stock; (b) 133,334 shares of common
stock
issuable upon exercise of stock options with an exercise price
of $5.00
per share that expire on July 18, 2015; and (c) 50,000 shares of
common
stock issuable upon exercise of stock options with an exercise
price of
$1.39 per share that expire on October 2, 2017.
|
(14)
|
Consists
of: (a) 6,600 shares of common stock; (b) 60,000 shares of common
stock
issuable upon exercise of stock options with an exercise price
of $4.10
per share that expire on January 31, 2016; and (d) 75,000 shares
of common
stock issuable upon exercise of stock options with an exercise
price of
$5.27 per share that expire on March 30, 2015.
|
(15)
|
Consists
of: (a) 93,403 shares of common stock; (b) 15,000 shares of common
stock
issuable upon exercise of stock options with an exercise price
of $4.30
per share that expire on January 25, 2016; (c) 4,500 shares of
common
stock issuable upon exercise of stock options with an exercise
price of
$5.27 per share that expire on March 30, 2015; and (d) warrants
for
purchase of 63,000 shares of common stock.
|
(16)
|
Consists
of: (a) 6,250 shares of common stock; and (b) 31,250 shares of
common
stock issuable upon exercise of stock options with an exercise
price of
$1.75 per share that expire on January 24,
2017.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Management
believes that all of the below transactions were on terms at least as favorable
as could be obtained from unrelated third parties.
Related
Transactions with AGB & Company Inc and its Related
Entities
Certain
of the Company's officers, directors and/or their family members had existing
responsibilities to act and/or provide services as executive officers,
directors, owners and/or managers of AG Management and its parent company The
AG
Group. While, certain conflicts of interest between the Company and AG
Management and The AG Group may have occurred from time to time, the Company
believes that any such conflicts of interest, to the extent they occurred,
were
resolved in the Company’s favor. The officers and directors of the Company are
accountable to the Company and to its stockholders as fiduciaries, which
requires that the officers and directors exercise good faith and integrity
in
handling the Company's affairs. Specifically, 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, the Company’s current Chief
Executive Officer and Chief Financial Officer, William B. Horne, was the Chief
Financial Officer of The AG Group, and Melanie Glazer, former Manager of the
Company’s closed subsidiary Ault Glazer Bodnar Capital Properties, LLC, is a
director of The AG Group.
The
Board
does not believe that the Company has any conflicts of interest with the
business of AG Management or The AG Group other than the past responsibilities
of Mr. Ault, Mr. Horne and Mrs. Glazer to devote time providing certain
management and administrative services to The AG Group, AG Management and AG
Management’s clients from time-to-time. However, subject to applicable law, the
Company may engage in transactions with The AG Group and AG Management and
related parties in the future, including but not limited to financing
transactions, acquisitions and/or joint investments in target industries. These
related party transactions may raise conflicts of interest and, although the
Company does not have a formal policy to address such conflicts of interest,
the
Audit Committee intends to evaluate relationships and transactions involving
conflicts of interest on a case by case basis.
The
Audit
Committee will conduct a review of all related party transactions for potential
conflict of interest situations on an ongoing basis, and the approval of the
Audit Committee will be required for all such transactions. The Audit Committee
intends that any related party transactions will be on terms and conditions
no
less favorable to the Company than those terms and conditions reasonably
obtainable from third parties and in accordance with applicable
law.
The
Company shared office space, telephone, computer, Internet service, office
supplies and administrative and secretarial support with AG Management at 1800
Century Park East, Ste. 200, Los Angeles, California 90067. Until recently,
the
Company was responsible for paying approximately 25% of the lease expense
associated with such office space, goods and services, which amounted to
approximately $8,100 per month. Effective March 31, 2007, the Company had
consolidated its operations in the Company’s Temecula office and was no longer
required to pay lease expense associated with the 1800 Century Park East
location.
During
the year ended December 31, 2007 and 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, our former Chairman and Chief Executive Officer, is Chairman,
Chief Executive Officer and President of Ault Glazer. Until June 8, 2006, the
Company’s current Chief Executive Officer and Chief Financial Officer was also
Chief Financial Officer of Ault Glazer.
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. 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 year ended December 31, 2007 and 2006, the Company
incurred interest expense, excluding amortization of debt discount, of $28,000
and $61,000, 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 year ended
December 31, 2007 and 2006, the Company incurred interest expense of $70,000
and
$160,000, 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 year ended December 31, 2007, the Company
incurred interest expense of $103,000 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 year ended December 31, 2007 and 2006, the Company incurred interest expense
of $15,000 and $16,000, respectively, on the Revolving Line of Credit.
The
Company retained Ault Glazer & Co., LLC (“AG
& Co.”)
as a
consultant to the Company. AG & Co. is a registered broker-dealer that is
wholly owned by The AG Group. Mr. Ault, as a principal of AG & Co., has been
advising the Company with respect to potential capital raising transactions
and
other strategic financial matters. Mr. Ault has not been, and does not expect
to
be, compensated for such services. However, AG & Co. was successful in
assisting the Company with completing a series of capital raising transactions
whereby the Company received $2,286,000 in debt financing during 2006, $298,000
in equity financing during 2006 and $1,530,000 in equity financing during 2007,
and as a result the Company agreed to pay AG & Co. aggregate cash fees of
$215,000, of which $92,000 related to 2006. Additionally, the Company issued
AG
& Co. 56,340 warrants to purchase shares of common stock at $1.25 per share
and 116,960 warrants to purchase shares of common stock at $2.00 per share.
Management believes the fees paid to AG & Co. as a result of its successful
efforts in assisting the Company to raise both debt and equity capital are
on
terms at least as favorable as could be obtained from an unrelated third
party.
During
March 2007, the Company sold 240,000 shares of common stock and warrants to
purchase 120,000 shares of common stock to certain current directors and
officers of the Company, at a price of $1.25 per share, resulting in gross
proceeds of $300,000. The warrants are exercisable for a period of 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.
We
used the net proceeds from the private placement transaction primarily for
general corporate purposes.
SELLING
STOCKHOLDERS
The
following table sets forth the common stock ownership of the selling
stockholders as of November 16, 2007, including the number of shares of common
stock issuable upon the exercise of warrants and conversion of a convertible
promissory note held by the selling stockholders. The selling stockholders
acquired their securities through (1) our private placement of common stock
in
August 2006; (2) our private placement of a convertible note and warrants in
November 2006; (3) our private placement of common stock and warrants in
December 2006; (4) our private placement of common stock and warrants in March
2007; and (5) as compensation for services, the material terms of which are
described elsewhere in this prospectus. All of such transactions were made
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended. Other than as set forth in the following
table, the selling stockholders have not held any position or office or had
any
other material relationship with us or any of our predecessors or affiliates
within the past three years.
|
|
Number of Shares
Beneficially Owned
|
|
Number of Shares
Offered Pursuant to
|
|
Shares Beneficially
Owned
After the Offering (2)
|
|
Name
|
|
Prior to Offering (1)
|
|
this Prospectus
|
|
Number
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
A
Plus International, Inc. (3)
|
|
|
1,100,000
|
|
|
1,100,000
|
|
|
0
|
|
|
*
|
|
David
and Susan Wilstein as Trustees of the Century Trust (4)
|
|
|
36,000
|
|
|
36,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nite
Capital, LP (5)
|
|
|
120,000
|
|
|
120,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSAM
Fund, LP (6)
|
|
|
1,230,000
|
|
|
640,000
|
|
|
590,000
|
|
|
4.8
|
%
|
Ajayan
B Nair & Lena Ajay Ttee, Maya Ajay Nair Irrev Trust Dtd 09/14/2005
(7)
|
|
|
32,400
|
|
|
21,600
|
|
|
10,800
|
|
|
*
|
|
Anna
L Gillilan & Roderic W Gillilan JTWROS (8)
|
|
|
44,400
|
|
|
29,600
|
|
|
14,800
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carmel
D Wimber (9)
|
|
|
26,400
|
|
|
17,600
|
|
|
8,800
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
A Stalker (10)
|
|
|
48,000
|
|
|
32,000
|
|
|
16,000
|
|
|
*
|
|
Claude
Wayne Hudson IRA Rollover Charles Schwab & Co Custodian
(11)
|
|
|
39,600
|
|
|
26,400
|
|
|
13,200
|
|
|
*
|
|
David
Allen & Dallas Allen Ttee, Allen Family Trust U/A DTD 02/04/2003
(12)
|
|
|
42,000
|
|
|
28,000
|
|
|
14,000
|
|
|
*
|
|
David
Armstrong & Joan Armstrong Ttee Armstrong Family Trust Investment Acct
DTD 09/22/83 (13)
|
|
|
88,800
|
|
|
59,200
|
|
|
29,600
|
|
|
*
|
|
Dan
Landa & Deno Landa Ttee Landa Family Trust U/A DTD 08/23/2003
(14)
|
|
|
76,800
|
|
|
51,200
|
|
|
25,600
|
|
|
*
|
|
Deborah
Stalker & Michael Stalker Ttee Stalker Family Tr U/A DTD 10/02/1990
(15)
|
|
|
44,400
|
|
|
29,600
|
|
|
14,800
|
|
|
*
|
|
Dan
A Hanson & Durene C Hanson Ttee Hanson Family Trust DTD 04/07/1993
(16)
|
|
|
54,000
|
|
|
36,000
|
|
|
18,000
|
|
|
*
|
|
Edward
J Fotsch Ttee Edward J Fotsch Trust DTD 10/23/2006 (17)
|
|
|
63,600
|
|
|
42,400
|
|
|
21,200
|
|
|
*
|
|
George
E Hanson, Roth IRA Charles Schwab & Co. Custodian (18)
|
|
|
66,000
|
|
|
44,000
|
|
|
22,000
|
|
|
*
|
|
Greg
& Stephanie Loos Living Trust DTD 09/22/2006 (19)
|
|
|
24,000
|
|
|
16,000
|
|
|
8,000
|
|
|
*
|
|
James
F Loos & Sherry Loos Ttee Loos Family Trust DTD 10/10/1991
(20)
|
|
|
84,000
|
|
|
56,000
|
|
|
28,000
|
|
|
*
|
|
Kent
Fergusson & Kristine Fergusson Ttee Fergusson Joint Trust U/A DTD
05/18/2006 (21)
|
|
|
72,000
|
|
|
48,000
|
|
|
24,000
|
|
|
*
|
|
Kathy
Rost, IRA Rollover Charles Schwab & Co. Cust (22)
|
|
|
60,000
|
|
|
40,000
|
|
|
20,000
|
|
|
*
|
|
Kent
D Fergusson Roth IRA Charles Schwab & Co. Custodian
(23)
|
|
|
36,000
|
|
|
24,000
|
|
|
12,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattox
L. Purvis, Jr. (24)
|
|
|
64,800
|
|
|
43,200
|
|
|
21,600
|
|
|
*
|
|
Nan
M. Phifer Roth IRA Charles Schwab & Co. Custodian (25)
|
|
|
33,600
|
|
|
22,400
|
|
|
11,200
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrice
O'Brien (26)
|
|
|
93,600
|
|
|
62,400
|
|
|
31,200
|
|
|
*
|
|
Roger
E Schlesinger & Sharon Schlesinger Ttee Schlesinger Family Tr DTD
09/02/1982 (27)
|
|
|
75,600
|
|
|
50,400
|
|
|
25,200
|
|
|
*
|
|
Richard
McCall & Alan McCall Ttee Richard E & Naomi McCall Credit Shelter
Tr Dtd 05/15/75 (28)
|
|
|
42,000
|
|
|
28,000
|
|
|
14,000
|
|
|
*
|
|
Raymond
Thagard & Raymond Thagard Ttee, Raymond G Thagard Living Tr Dtd
07/25/1985 (29)
|
|
|
43,200
|
|
|
28,800
|
|
|
14,400
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
D Meltebeke (30)
|
|
|
49,200
|
|
|
32,800
|
|
|
16,400
|
|
|
*
|
|
Robert
L Raffety & Priscilla L Raffety JTWROS (31)
|
|
|
54,000
|
|
|
36,000
|
|
|
18,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger
Best & Robin Best JTWROS (32)
|
|
|
36,000
|
|
|
24,000
|
|
|
12,000
|
|
|
*
|
|
Stephen
G. Skipworth Roth IRA Charles Schwab & Co. Custodian
(33)
|
|
|
32,400
|
|
|
21,600
|
|
|
10,800
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan
A Platt (34)
|
|
|
49,200
|
|
|
32,800
|
|
|
16,400
|
|
|
*
|
|
Susan
M Kunoth IRA Rollover Charles Schwab & Co. Custodian
(35)
|
|
|
66,000
|
|
|
44,000
|
|
|
22,000
|
|
|
*
|
|
Suzanne
Mackie Trust U/A DTD 05/10/1990 (36)
|
|
|
24,000
|
|
|
16,000
|
|
|
8,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tomme
J Stalker (37)
|
|
|
42,000
|
|
|
28,000
|
|
|
14,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Wiese & Laurel Rakestraw Ttee Wiese-Rakestraw Trust U/A DTD 05/16/2000
(38)
|
|
|
36,000
|
|
|
24,000
|
|
|
12,000
|
|
|
*
|
|
William
O Knight IRA Rollover Charles Schwab & Co Custodian
(39)
|
|
|
36,000
|
|
|
24,000
|
|
|
12,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
B. Horne (40)
|
|
|
239,035
|
|
|
40,000
|
|
|
199,035
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arnold
Spangler (41)
|
|
|
268,250
|
|
|
40,000
|
|
|
228,250
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbert
Langsam (42)
|
|
|
175,903
|
|
|
20,000
|
|
|
155,903
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
M. Adams (43)
|
|
|
302,017
|
|
|
40,000
|
|
|
262,017
|
|
|
2.1
|
%
|
First
Tennessee Bank National Association and Melanie Morris Glazer, Co-Trustees
of Lynnette P. Morris Trust FBO Melanie Morris Glazer created 12/15/99
(44)
|
|
|
24,000
|
|
|
16,000
|
|
|
8,000
|
|
|
*
|
|
First
Tennessee Bank National Association and Melanie Morris Glazer, Co-Trustees
of Morris Trust UA DTD 12/20/86 FBO Melanie Morris Glazer
(45)
|
|
|
42,000
|
|
|
28,000
|
|
|
14,000
|
|
|
*
|
|
Melanie
Morris Glazer, Trustees of Morris Trust DTD 1/30/7 FBO Melanie Morris
Glazer (46)
|
|
|
60,000
|
|
|
40,000
|
|
|
20,000
|
|
|
*
|
|
First
Tennessee Bank National Association Successor Trustee UA Melville
C.
Morris DTD 5/15/78 FBO Melanie Morris Glazer (47)
|
|
|
24,000
|
|
|
16,000
|
|
|
8,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
F. Rada (48)
|
|
|
6,000
|
|
|
6,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
J. Kalina III (49)
|
|
|
180,000
|
|
|
180,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hillcrest
Investors Ltd. (50)
|
|
|
12,000
|
|
|
12,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
R. Neal (51)
|
|
|
15,000
|
|
|
15,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carol
K. Barker (52)
|
|
|
60,000
|
|
|
60,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frederick
& Deborah Schrodt (53)
|
|
|
6,000
|
|
|
6,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Hefner Intervivos Trust (54)
|
|
|
30,000
|
|
|
30,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
N. Bauman II (55)
|
|
|
36,000
|
|
|
36,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay
D. Rice (56)
|
|
|
12,000
|
|
|
12,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Sveinson (57)
|
|
|
101,971
|
|
|
101,971
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nobu
Ventures, Inc. (58)
|
|
|
120,000
|
|
|
120,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Project Finance AG (59)
|
|
|
80,000
|
|
|
80,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Francis
Capital Management, LLC (60)
|
|
|
115,200
|
|
|
115,200
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalysis
Partners, LLC (61)
|
|
|
1,081,800
|
|
|
1,036,800
|
|
|
45,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalysis
Offshore, Ltd (62)
|
|
|
883,200
|
|
|
883,200
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHARES OFFERED
|
|
|
|
|
|
5,950,171
|
|
|
|
|
|
|
|
*
Less
than 1%.
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and generally includes voting or investment power
with
respect to securities. Shares of common stock that are currently
exercisable or exercisable within 60 days of November 16, 2007 are
deemed
to be beneficially owned by the person holding such securities for
the
purpose of computing the percentage of ownership of such person,
but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
|
|
(2)
|
Assumes
that all securities registered will be sold and that all shares of
common
stock underlying common stock purchase warrants will be
issued.
|
|
(3)
|
Includes
800,000 shares of common stock and 300,000 shares of common stock
issuable
upon exercise of warrants purchased by A Plus International, Inc.
Wayne
Lin, a Class II Director of the Company and the President and founder
of A
Plus International has
voting and investment control over the securities held by A Plus
International.
|
|
(4)
|
Includes
24,000 shares of common stock and 12,000 shares of common stock issuable
upon exercise of warrants purchased by David and Susan Wilstein as
Trustees of The Century Trust on January 29,
2007.
|
|
(5)
|
Includes
80,000 shares of common stock and 40,000 shares of common stock issuable
upon exercise of warrants purchased by Nite Capital, LP on January
29,
2007.
|
|
(6)
|
Includes
820,000 shares of common stock, and 410,000 shares of common stock
issuable upon exercise of warrants. The DSAM Fund LP’s beneficial
ownership includes 640,000 shares of common stock and 320,000 shares
of
common stock issuable upon exercise of warrants purchased in our
March
2007 private placement and 180,000 shares of common stock and 90,000
shares of common stock issuable upon exercise of warrants purchased
in the
first closing of our private placement conducted during the fourth
quarter
of 2004. The 640,000 shares of common stock purchased in March 2007
are
offered pursuant to this prospectus. Gary di Silvestri
has voting and investment control over the securities held by the
DSAM
Fund, LP.
|
|
(7)
|
Includes
21,600 shares of common stock and 10,800 shares of common stock issuable
upon exercise of warrants purchased by the Maya Ajay Nair Irrevocable
Trust in our March 2007 private placement. The 21,600 shares of common
stock purchased in March 2007 are offered pursuant to this
prospectus.
|
|
(8)
|
Includes
29,600 shares of common stock and 14,800 shares of common stock issuable
upon exercise of warrants purchased by Anna and Roderic Gillilan
in our
March 2007 private placement. The 29,600 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(9)
|
Includes
17,600 shares of common stock and 8,800 shares of common stock issuable
upon exercise of warrants purchased Carmel Wimber in our March 2007
private placement. The 17,600 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(10)
|
Includes
32,000 shares of common stock and 16,000 shares of common stock issuable
upon exercise of warrants purchased by Charles Stalker in our March
2007
private placement. The 32,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(11)
|
Includes
26,400 shares of common stock and 13,200 shares of common stock issuable
upon exercise of warrants purchased by Claude Hudson in our March
2007
private placement. The 26,400 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(12)
|
Includes
28,000 shares of common stock and 14,000 shares of common stock issuable
upon exercise of warrants purchased by the Allen Family Trust in
our March
2007 private placement. The 28,000 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(13)
|
Includes
59,200 shares of common stock and 29,600 shares of common stock issuable
upon exercise of warrants purchased by the Armstong Family Trust
Investment Account in our March 2007 private placement. The 59,200
shares
of common stock purchased in March 2007 are offered pursuant to this
prospectus.
|
|
(14)
|
Includes
51,200 shares of common stock and 25,600 shares of common stock issuable
upon exercise of warrants purchased by the Landa Family Trust in
our March
2007 private placement. The 51,200 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(15)
|
Includes
29,600 shares of common stock and 14,800 shares of common stock issuable
upon exercise of warrants purchased by the Stalker Family Trust in
our
March 2007 private placement. The 29,600 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(16)
|
Includes
36,000 shares of common stock and 18,000 shares of common stock issuable
upon exercise of warrants purchased by the Hanson Family Trust in
our
March 2007 private placement. The 36,000 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(17)
|
Includes
42,400 shares of common stock and 21,200 shares of common stock issuable
upon exercise of warrants purchased by the Edward J Fotsch Trust
in our
March 2007 private placement. The 42,400 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(18)
|
Includes
44,000 shares of common stock and 22,000 shares of common stock issuable
upon exercise of warrants purchased by George E Hanson in our March
2007
private placement. The 44,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(19)
|
Includes
16,000 shares of common stock and 8,000 shares of common stock issuable
upon exercise of warrants purchased by the Greg and Stephanie Loos
Living
Trust in our March 2007 private placement. The 16,000 shares of common
stock purchased in March 2007 are offered pursuant to this
prospectus.
|
|
(20)
|
Includes
56,000 shares of common stock and 28,000 shares of common stock issuable
upon exercise of warrants purchased by the Loos Family Trust in our
March
2007 private placement. The 56,000 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(21)
|
Includes
48,000 shares of common stock and 24,000 shares of common stock issuable
upon exercise of warrants purchased by the Fergusson Joint Trust
in our
March 2007 private placement. The 48,000 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(22)
|
Includes
40,000 shares of common stock and 20,000 shares of common stock issuable
upon exercise of warrants purchased by Kathy Rost in our March 2007
private placement. The 40,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(23)
|
Includes
24,000 shares of common stock and 12,000 shares of common stock issuable
upon exercise of warrants purchased by Kent Fergusson in our March
2007
private placement. The 24,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(24)
|
Includes
43,200 shares of common stock and 21,600 shares of common stock issuable
upon exercise of warrants purchased by Mattox L Purvis, Jr. in our
March
2007 private placement. The 43,200 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(25)
|
Includes
22,400 shares of common stock and 11,200 shares of common stock issuable
upon exercise of warrants purchased by Nan M. Phifer in our March
2007
private placement. The 22,400 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(26)
|
Includes
62,400 shares of common stock and 31,200 shares of common stock issuable
upon exercise of warrants purchased by Patrice O’Brien in our March 2007
private placement. The 62,400 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(27)
|
Includes
50,400 shares of common stock and 25,200 shares of common stock issuable
upon exercise of warrants purchased by the Schlesinger Family Trust
in our
March 2007 private placement. The 50,400 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(28)
|
Includes
28,000 shares of common stock and 14,000 shares of common stock issuable
upon exercise of warrants purchased by the Richard E and Naomi McCall
Credit Shelter Trust in our March 2007 private placement. The 28,000
shares of common stock purchased in March 2007 are offered pursuant
to
this prospectus.
|
|
(29)
|
Includes
28,800 shares of common stock and 14,400 shares of common stock issuable
upon exercise of warrants purchased by the Raymond G Thagard Living
Trust
in our March 2007 private placement. The 28,800 shares of common
stock
purchased in March 2007 are offered pursuant to this
prospectus.
|
|
(30)
|
Includes
32,800 shares of common stock and 16,400 shares of common stock issuable
upon exercise of warrants purchased by Richard Meltebeke in our March
2007
private placement. The 32,800 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(31)
|
Includes
36,000 shares of common stock and 18,000 shares of common stock issuable
upon exercise of warrants purchased by Robert and Priscilla Raffety
in our
March 2007 private placement. The 36,000 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(32)
|
Includes
24,000 shares of common stock and 12,000 shares of common stock issuable
upon exercise of warrants purchased by Roger and Robin Best in our
March
2007 private placement. The 24,000 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(33)
|
Includes
21,600 shares of common stock and 10,800 shares of common stock issuable
upon exercise of warrants purchased by Stephen G. Skipworth in our
March
2007 private placement. The 21,600 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(34)
|
Includes
32,800 shares of common stock and 16,400 shares of common stock issuable
upon exercise of warrants purchased by Susan A. Platt in our March
2007
private placement. The 32,800 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(35)
|
Includes
44,000 shares of common stock and 22,000 shares of common stock issuable
upon exercise of warrants purchased by Susan M. Kunoth in our March
2007
private placement. The 44,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(36)
|
Includes
16,000 shares of common stock and 8,000 shares of common stock issuable
upon exercise of warrants purchased by the Susan Mackie Trust in
our March
2007 private placement. The 16,000 shares of common stock purchased
in
March 2007 are offered pursuant to this
prospectus.
|
|
(37)
|
Includes
28,000 shares of common stock and 14,000 shares of common stock issuable
upon exercise of warrants purchased by Tomme J. Stalker in our March
2007
private placement. The 28,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(38)
|
Includes
24,000 shares of common stock and 12,000 shares of common stock issuable
upon exercise of warrants purchased by the Wiese-Rakestraw Trust
in our
March 2007 private placement. The 24,000 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(39)
|
Includes
24,000 shares of common stock and 12,000 shares of common stock issuable
upon exercise of warrants purchased by William O. Knight in our March
2007
private placement. The 24,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(40)
|
Includes
141,035 shares of common stock, 78,000 shares of common stock issuable
upon exercise of stock options with an exercise price of $5.27 per
shares
that expire March 30, 2015 and 20,000 shares of common stock issuable
upon
exercise of warrants. Mr. Horne’s beneficial ownership includes 40,000
shares of common stock and 20,000 shares of common stock issuable
upon
exercise of warrants purchased in our March 2007 private placement.
The
40,000 shares of common stock purchased in March 2007 are offered
pursuant
to this prospectus. Mr. Horne is our Chief Executive Officer and
Chief
Financial Officer and was appointed to our Board of Directors on
January
9, 2007.
|
|
(41)
|
Includes
210,500 shares of common stock, 15,000 shares of common stock issuable
upon exercise of stock options with an exercise price of $4.30 per
share
that expire on January 25, 2016 and 42,750 shares of common stock
issuable
upon exercise of warrants. Mr. Spangler’s beneficial ownership includes
40,000 shares of common stock and 20,000 shares of common stock issuable
upon exercise of warrants purchased in our March 2007 private placement
and 37,500 shares of common stock and 18,750 shares of common stock
issuable upon exercise of warrants purchased in the third closing
of our
private placement conducted during the fourth quarter of 2004. The
40,000
shares of common stock purchased in March 2007 are offered pursuant
to
this prospectus. Mr. Spangler was appointed to our Board of Directors
on
January 7, 2006.
|
|
(42)
|
Includes
93,403 shares of common stock, 15,000 shares of common stock issuable
upon
exercise of stock options with an exercise price of $4.30 per share
that
expire on January 25, 2016, 4,500 shares of common stock issuable
upon
exercise of stock options with an exercise price of $5.27 per share
that
expire on March 30, 2015 and 63,000 shares of common stock issuable
upon
exercise of warrants. Mr. Langsam’s beneficial ownership includes 20,000
shares of common stock and 10,000 shares of common stock issuable
upon
exercise of warrants purchased by Mr Langsam in our March 2007 private
placement and 6,000 shares of common stock and 3,000 shares of common
stock issuable upon exercise of warrants purchased in the first closing
of
our private placement conducted during the fourth quarter of 2004.
The
20,000 shares of common stock purchased in March 2007 are offered
pursuant
to this prospectus. Mr. Langsam is a member of our Board of Directors
and
is a Class II Director.
|
|
(43)
|
Includes
82,017 shares of common stock, 200,000 shares of common stock issuable
upon exercise of stock options with an exercise price of $3.50 per
share
that expire on April 21, 2016 and 24,000 shares of common stock issuable
upon exercise of warrants. Mr. Adams’ beneficial ownership includes 40,000
shares of common stock and 20,000 shares of common stock issuable
upon
exercise of warrants purchased in our March 2007 private placement.
The
40,000 shares of common stock purchased in March 2007 are offered
pursuant
to this prospectus. Mr. Adams is our President and the Chief Executive
Officer of SurgiCount Medical, Inc.
|
|
(44)
|
Includes
16,000 shares of common stock and 8,000 shares of common stock issuable
upon exercise of warrants purchased by the Lynnette P. Morris Trust
in our
March 2007 private placement. The 16,000 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(45)
|
Includes
28,000 shares of common stock and 14,000 shares of common stock issuable
upon exercise of warrants purchased by the Morris Trust in our March
2007
private placement. The 28,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(46)
|
Includes
40,000 shares of common stock and 20,000 shares of common stock issuable
upon exercise of warrants purchased by the Morris Trust in our March
2007
private placement. The 40,000 shares of common stock purchased in
March
2007 are offered pursuant to this
prospectus.
|
|
(47)
|
Includes
16,000 shares of common stock and 8,000 shares of common stock issuable
upon exercise of warrants purchased by the Melville C. Morris Trust
in our
March 2007 private placement. The 16,000 shares of common stock purchased
in March 2007 are offered pursuant to this
prospectus.
|
|
(48)
|
Includes
4,000 shares of common stock and 2,000 shares of common stock issuable
upon exercise of warrants purchased by Mr. Rada in our December 2006
private placement.
|
|
(49)
|
Includes
120,000 shares of common stock and 60,000 shares of common stock
issuable
upon exercise of warrants purchased by Mr. Kalina in our December
2006
private placement.
|
|
(50)
|
Includes
8,000 shares of common stock and 4,000 shares of common stock issuable
upon exercise of warrants purchased by Hillcrest Investors Ltd. in
our
December 2006 private placement.
|
|
(51)
|
Includes
10,000 shares of common stock and 5,000 shares of common stock issuable
upon exercise of warrants purchased by Mr. Neal in our December 2006
private placement.
|
|
(52)
|
Includes
40,000 shares of common stock and 20,000 shares of common stock issuable
upon exercise of warrants purchased by Ms. Barker in our December
2006
private placement.
|
|
(53)
|
Includes
4,000 shares of common stock and 2,000 shares of common stock issuable
upon exercise of warrants purchased by Mr. and Mrs. Schrodt in our
December 2006 private placement.
|
|
(54)
|
Includes
20,000 shares of common stock and 10,000 shares of common stock issuable
upon exercise of warrants purchased by the Hefner Intervivos Trust
in our
December 2006 private placement.
|
|
(55)
|
Includes
24,000 shares of common stock and 12,000 shares of common stock issuable
upon exercise of warrants purchased by Mr. Bauman in our December
2006
private placement.
|
|
(56)
|
Includes
8,000 shares of common stock and 4,000 shares of common stock issuable
upon exercise of warrants purchased by Mr. Rice in our December 2006
private placement.
|
|
(57)
|
Includes
81,971 shares of common stock issuable upon conversion of a Convertible
Promissory Note in the principal amount of $102,463.84, dated November
1,
2006, that the Company received from Mr. Sveinson and 20,000 shares
of
common stock issuable upon exercise of warrants issued in conjunction
with
the Convertible Promissory Note.
|
|
(58)
|
Includes
120,000 shares of common stock purchased by Nobu Ventures, Inc. in
our
August 2006 private placement.
|
|
(59)
|
Includes
80,000 shares of common stock purchased by Global Project Finance
AG in
our August 2006 private placement.
|
|
(60)
|
Includes
72,000 shares of common stock and 43,200 shares of common stock issuable
upon exercise of warrants purchased by Francis Capital Management,
LLC in
our October 2007 private placement. John Francis has
voting and investment control over the securities held by Francis
Capital
Management, LLC.
|
|
(61)
|
Includes
648,000 shares of common stock and 433,800 shares of common stock
issuable
upon exercise of warrants. Catalysis Partners’ beneficial ownership
includes 648,000 shares of common stock and 388,800 shares of common
stock
issuable upon exercise of warrants purchased in our October 2007
private
placement and 45,000 shares of common stock issuable upon exercise
of
warrants purchased in the first closing of our private placement
conducted
during the fourth quarter of 2004. The 648,000 shares of common stock
and
388,800 shares of common stock issuable upon exercise of warrants
purchased in our October 2007 private placement are offered pursuant
to
this prospectus. John Francis has
voting and investment control over the securities held by Catalysis
Partners.
|
|
(62)
|
Includes
552,000 shares of common stock and 331,200 shares of common stock
issuable
upon exercise of warrants purchased by Catalysis Offshore, Ltd. in
our
October 2007 private placement. John Francis has
voting and investment control over the securities held by Catalysis
Offshore, Ltd.
|
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their respective pledgees, donees, assignees
and
other successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at
fixed or negotiated prices. The selling stockholders may use any one or more
of
the following methods when selling shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately-negotiated
transactions;
|
|
·
|
short
sales that are not violations of the laws and regulations of any
state or
the United States;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per share;
|
|
·
|
through
the writing of options on the shares;
|
|
·
|
a
combination of any such methods of sale; and
|
|
·
|
any
other method permitted pursuant to applicable law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities
Act”),
if
available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
FINRA NASD Rule 2440; and in the case of a principal transaction a markup or
markdown in compliance with NASD IM-2440.
In
connection with the sale of the common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In
no
event shall any broker-dealer receive fees, commissions and markups which,
in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including
by
compliance with Rule 172 under the Securities Act).
DESCRIPTION
OF SECURITIES
Capital
Structure
Our
authorized capital consists of 25,000,000 shares of common stock, $0.33 par
value per share, and 1,000,000 shares of preferred stock, $1.00 par value per
share, of which 500,000 shares have been designated as Series A Convertible
Preferred Stock. At the close of business on March 31, 2008, we had 12,079,602
shares of common stock issued and outstanding and 10,950 shares of Series A
Preferred Stock issued and outstanding. As of March 31, 2008, we had the
following outstanding commitments to issue shares of our capital stock: (1)
options and unvested shares of common stock issued to employees, directors
and
consultants which are exercisable into 1,650,000 shares of common stock; (2)
outstanding warrants which are exercisable into 6,114,521 shares of common
stock
at a weighted average exercise price of $2.32 per share; and (3) 10,950 shares
of Series A Convertible Preferred Stock currently convertible into 246,375
shares of common stock.
Dividend
Policy
We
paid
$38,325, nil, $19,163, and $76,650 in dividends to preferred stockholders during
2007, 2006, 2005 and 2004, respectively, and have not paid any dividends to
common stockholders during the past three years. Dividends to our preferred
stockholders are cumulative and paid at the rate of 7% a year. Our Board of
Directors has no present intention of declaring any cash dividends, as we expect
to re-invest all profits in the business for additional working capital for
continuity and growth. The future declaration and payment of dividends will
be
determined by our Board of Directors after considering the conditions then
existing, including our earnings, financial condition, capital requirements,
and
other factors.
Common
Stock
The
holders of common stock are entitled to one vote for each share held of record
on all matters to be voted on by the stockholders. The holders of common stock
are entitled to receive dividends ratably, when, as and if declared by the
Board
of Directors, out of funds legally available therefore. In the event of a
liquidation, dissolution or winding-up of our business, the holders of common
stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision
is
made for each class of stock having preference over the common stock.
Investors
in our common stock that participated in October 2007 private placements have
preemptive rights. Upon
any
issuance by the Company of common stock or common stock equivalents for cash
consideration these
investors will be entitled, but not required, to purchase additional shares
of
our common stock. In the case of the investors that participated in the October
2007 private placement, this right will terminate on the
12 month
anniversary of the date this registration statement was declared effective.
Otherwise,
the holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are, and
the
shares of common stock offered hereby, when issued will be, validly issued,
fully paid and non-assessable.
Series
A Convertible Preferred Stock
On
February 22, 2000, we sold 16,450 shares of Series A Convertible Preferred
Stock
at a price of $100 per share. The Series A Convertible Preferred Stock is
convertible into our common stock at any time prior to February 22, 2010 at
a
conversion price of $4.4444 per common share. The Series A Convertible Preferred
Stock is convertible into the number of shares of common stock obtained by
dividing the purchase price for the convertible preferred stock of $1,095,000
(10,950 shares multiplied by $100 per share) by the conversion price in effect,
currently $4.444444444444, or 246,375 shares of common stock.
We
may
redeem the Series A Convertible Preferred Stock in whole or in part, on a pro
rata basis, if at any time on or after February 22, 2000 the average trading
price of our common stock for at least 20 days during any 30 consecutive trading
days is equal to or in excess of 150% of the conversion price; provided,
however, that the holders of the Series A Convertible Preferred Stock have
the
right until 5:00 p.m., New York time, on the third business day preceding the
redemption date to convert the Series A Convertible Preferred Stock at the
conversion price. If any holder fails to convert the Series A Convertible
Preferred Stock during a redemption period, then we may redeem the Series A
Convertible Preferred Stock in cash at a price per share equal to the
liquidation preference ($100) plus any accrued and unpaid dividends through
the
date of redemption, and plus any dividends that were scheduled to accrue thereon
through the end of the calendar year of such redemption.
Upon
liquidation, dissolution or winding up of our business, or a reduction or
decrease in our capital stock resulting in a distribution of assets to our
security holders, each holder of Series A Convertible Preferred Stock is
entitled to payment out of our assets available for distribution a liquidation
preference in an amount equal to $100 per share, plus accrued and unpaid
dividends. After payment in full of the $100 liquidation preference, and all
accrued and unpaid dividends to which holders of Series A Convertible Preferred
Stock are entitled, such holders will not be entitled to any further
participation in any distribution of our assets. Upon liquidation, dissolution
or winding up of our business, the Series A Convertible Preferred Stock ranks:
(a) senior to all classes of common stock and to each other class of capital
stock or series of preferred stock the terms of which do not expressly provide
that it ranks senior to or on parity with the Series A Convertible Preferred
Stock; (b) on parity with any other class of capital stock or any additional
series of preferred stock the terms of which expressly provide that such class
or series ranks on parity with the Series A Convertible Preferred Stock; and
(c)
junior to each class of capital stock or series of preferred stock the terms
of
which expressly provide that such class or series ranks senior to the Series
A
Convertible Preferred Stock.
While
the
Series A Convertible Preferred Stock is outstanding, holders of Series A
Convertible Preferred Stock are entitled to receive out of funds legally
available therefore, preferential dividends in cash at a rate of 7% per annum
of
the liquidation preference, payable quarterly.
Except
as
otherwise required by law, each holder of Series A Convertible Preferred Stock
is entitled to vote on all matters submitted to our stockholders, voting
together with the holders of our common stock as a single class, with each
shares of Series A Convertible Preferred Stock entitled to one vote per share.
The holders of the Series A Convertible Preferred Stock, voting separately
as
one class, have the right to elect: (a) two directors at all times during which
the Series A Convertible Preferred Stock is outstanding; and (b) a majority
of
the directors, if at any time dividends on the Series A Convertible Preferred
Stock have not been paid in an amount equal to two full years’ of dividends, and
to continue to be so represented until all dividends in arrears have been paid
or otherwise provided for, subject to the prior rights, if any, of the holders
of any class of senior securities outstanding.
Warrants
to Purchase Common Stock
A
total
of 6,114,521 warrants, at exercise prices ranging from $1.25 to $6.05 remain
outstanding. We have issued warrants primarily in connection with the various
debt and equity financings entered into by the Company as well as payment for
services. The warrants granted during the year ended December 31, 2007 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% – 101%, 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.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section
145 (“Section 145”) of the Delaware General Corporation Law, as amended (the
“DGCL”), permits indemnification of directors, officers, agents and controlling
persons of a corporation under certain conditions and subject to certain
limitations. Section 145 empowers a corporation to indemnify any person who
was
or is a party or is threatened to be made a party to any threatened, pending
or
completed action, suit or proceeding whether civil, criminal, administrative
or
investigative, by reason of the fact that he or she is or was a director,
officer or agent of the corporation or another enterprise if serving at the
request of the corporation. Depending on the character of the proceeding, a
corporation may indemnify against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in
or
not opposed to, the best interests of the corporation, and, with respect to
any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue
or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine that despite
the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a present or former director or officer
of a
corporation has been successful in the defense of any action, suit or proceeding
referred to above or in the defense of any claim, issue or matter therein,
such
person shall be indemnified against expenses (including attorneys’ fees)
actually and reasonably incurred by such person in connection therewith.
The
Registrant’s Amended and Restated Certificate of Incorporation, as amended (the
“Charter”), provides that no current or former director of the Registrant shall
be personally liable to the Registrant or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability: (a) for any
breach of the director’s duty of loyalty to the Registrant or its stockholders;
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (c) under Section 174 of the DGCL;
or
(d) for any transaction from which the director derived any improper personal
benefit. The Registrant’s Charter also authorizes the Registrant, to the fullest
extent permitted by applicable law, to provide indemnification of, and advanced
expenses to, the Registrant’s agents and any other persons to which the DGCL
permits.
In
accordance with Section 145, the Registrant’s Bylaws provide that the Registrant
shall indemnify its officers and directors, and any employee who serves as
an
officer or director of any corporation at the Registrant’s request. According to
Article IV of the Bylaws, directors and officers as well as employees and
individuals may be indemnified against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as
a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation,
and
with respect to any criminal action or proceeding, had no reasonable cause
to
believe their conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
LEGAL
MATTERS
The
validity of the shares of common stock being offered hereby will be passed
upon
for us by Morrison & Foerster LLP, Los Angeles,
California.
EXPERTS
The
financial statements of Patient Safety Technologies, Inc. and Subsidiaries
appearing in the Company’s Annual Report on Form 10-K as of and for the years
ended December
31, 3007 and 2006 and the related consolidated statements of operations,
cash
flows and changes in stockholders’ equity for the years ended December 31, 2007
and 2006 have
been
audited by Squar,
Milner, Peterson, Miranda & Williamson, LLP, independent registered public
accounting firm,
as set
forth in their report included therein and incorporated herein. Such financial
statements are incorporated herein in reliance upon such report given on
the
authority of such firm as experts in accounting and auditing.
The
financial statements of Patient Safety Technologies, Inc. and Subsidiaries
appearing in the Company’s Annual Report on Form 10-K for the year ended
December
31, 2005 and the related consolidated statement of operations, cash flow
and
change in stockholders’ equity for the year ended December 31,
2005 have
been
audited by Rothstein,
Kass & Company, P.C.,
independent
registered public accounting firm,
as set
forth in their report included therein and incorporated herein. Such financial
statements are incorporated herein in reliance upon such report given on
the
authority of such firm as experts in accounting and auditing.
Such
financial statements and financial highlights are included in reliance upon
such
reports given on the authority of such firm as experts in accounting and
auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
This
prospectus constitutes the prospectus of our company, filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance
with
the rules and regulations of the Securities and Exchange Commission, or the
SEC.
We
are
subject to the informational requirements of the Securities Exchange Act of
1934, which requires us to file reports, proxy statements and other information
with the SEC. Such reports, proxy statements and other information may be
inspected at the public reference room of the SEC at 100 F Street N.E.,
Washington D.C. 20549. Copies of such material can be obtained from the facility
at prescribed rates. Please call the SEC toll free at 1-800-SEC-0330 for
information about its public reference room. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC’s Internet website at http://www.sec.gov or our website at http://www.patientsafetytechnologies.com.
Information contained in our website is not part of this
prospectus.
Our
statements in this prospectus about the contents of any contract or other
document are not necessarily complete. You should refer to the copy of our
contract or other document we have filed as an exhibit to the registration
statement for complete information.
You
should rely only on the information incorporated by reference or provided in
this prospectus. We have not authorized anyone else to provide you with
different information. The selling stockholders are not making an offer of
these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.
We
furnish our stockholders with annual reports containing audited financial
statements.
INDEX
TO FINANCIAL STATEMENTS
Report
of Squar, Milner, Peterson, Miranda & Williamson, LLP
|
F-2
|
|
|
Report
of Rothstein, Kass & Company, P.C.
|
F-3
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-4
|
|
|
Consolidated
Statements of Operations and Comprehensive loss for the years ended
December 31, 2007, 2006 and 2005
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and
2005
|
F-6
|
|
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2007,
2006 and 2005
|
F-8
|
|
|
Notes
to Financial Statements
|
F-9
|
To
the
Board of Directors and Stockholders of
Patient
Safety Technologies, Inc.
We
have
audited the accompanying consolidated balance sheets of Patient Safety
Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2007 and
2006, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement.
The
Company is not required to have, nor were we engaged to perform, an audit
of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audits
provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Patient Safety Technologies, Inc.
as of December 31, 2007 and 2006, and the results of its operations and its
cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has reported recurring losses from operations through
December 31, 2007 and has a significant accumulated deficit and a significant
working capital deficit at December 31, 2007. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans as to these matters are described in Note 1. The accompanying financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Squar,
Milner, Peterson, Miranda & Williamson, LLP
San
Diego, California
April
15,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Patient
Safety Technologies, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Patient Safety
Technologies, Inc. (formerly known as Franklin Capital Corporation) and
Subsidiaries (collectively the, “Company”) as of December 31, 2005 and 2004, and
the related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for each of the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Patient Safety Technologies,
Inc. as of December 31, 2005 and 2004, and the results of their operations
and
their cash flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1, the
Company has a significant accumulated deficit and working capital deficit,
and
has incurred a significant net loss from operations. Further, the Company has
yet to generate revenues from its medical products and healthcare solutions
segments. These matters raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The accompanying consolidated financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/
Rothstein, Kass & Company, P.C.
Roseland,
New Jersey
April
10,
2006
Consolidated
Balance Sheets
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
405,413
|
|
$
|
3,775
|
|
Accounts
receivable
|
|
|
71,840
|
|
|
65,933
|
|
Inventories
|
|
|
—
|
|
|
42,825
|
|
Prepaid
expenses
|
|
|
104,723
|
|
|
78,834
|
|
Other
current assets
|
|
|
19,174
|
|
|
13,125
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
601,150
|
|
|
204,492
|
|
|
|
|
|
|
|
|
|
Restricted
certificate of deposit
|
|
|
87,500
|
|
|
87,500
|
|
Notes
receivable
|
|
|
153,545
|
|
|
153,668
|
|
Property
and equipment, net
|
|
|
663,391
|
|
|
328,202
|
|
Assets
held for sale, net
|
|
|
405,986
|
|
|
3,189,674
|
|
Goodwill
|
|
|
1,832,027
|
|
|
1,687,527
|
|
Patents,
net
|
|
|
3,763,908
|
|
|
4,088,850
|
|
Long-term
investments
|
|
|
666,667
|
|
|
1,441,533
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
8,174,174
|
|
$
|
11,181,446
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, current portion - net
|
|
$
|
1,172,380
|
|
$
|
3,517,149
|
|
Accounts
payable
|
|
|
708,593
|
|
|
1,295,849
|
|
Accrued
liabilities
|
|
|
520,749
|
|
|
824,466
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,401,722
|
|
|
5,637,464
|
|
|
|
|
|
|
|
|
|
Notes
payable, less current portion - net
|
|
|
2,530,558
|
|
|
2,527,562
|
|
Deferred
tax liabilities
|
|
|
1,499,329
|
|
|
1,473,066
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1.00 par value, cumulative 7% dividend: 1,000,000
shares
authorized; 10,950 issued and outstanding at December 31, 2007 and
December 31, 2006 (Liquidation preference of $1,229,138 at December
31,
2007 and $1,190,813 at December 31, 2006)
|
|
|
10,950
|
|
|
10,950
|
|
Common
stock, $0.33 par value: 25,000,000 shares authorized; 12,054,602
shares
issued and outstanding as of December 31, 2007; 7,489,026 shares
issued
and 6,874,889 shares outstanding at December 31, 2006
|
|
|
3,978,019
|
|
|
2,471,379
|
|
Additional
paid-in capital
|
|
|
34,320,134
|
|
|
29,654,341
|
|
Accumulated
deficit
|
|
|
(36,566,538
|
)
|
|
(29,483,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
1,742,565
|
|
|
2,652,760
|
|
|
|
|
|
|
|
|
|
Less:
614,137 shares of treasury stock, at cost, at December 31,
2006
|
|
|
—
|
|
|
(1,109,406
|
)
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
1,742,565
|
|
|
1,543,354
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
8,174,174
|
|
$
|
11,181,446
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Operations and Comprehensive Loss
|
|
For
The Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,089,001
|
|
$
|
244,529
|
|
$
|
562,374
|
|
COST
OF SALES
|
|
|
716,292
|
|
|
158,902
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
372,709
|
|
|
85,627
|
|
|
562,374
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
2,737,235
|
|
|
3,722,822
|
|
|
4,182,466
|
|
Professional
fees
|
|
|
843,207
|
|
|
2,161,044
|
|
|
2,523,035
|
|
Rent
|
|
|
78,937
|
|
|
131,129
|
|
|
88,368
|
|
Insurance
|
|
|
88,327
|
|
|
87,674
|
|
|
113,921
|
|
Taxes
other than income taxes
|
|
|
66,309
|
|
|
101,536
|
|
|
104,238
|
|
Amortization
of patents
|
|
|
324,942
|
|
|
324,942
|
|
|
270,785
|
|
General
and administrative
|
|
|
1,388,327
|
|
|
1,162,041
|
|
|
1,101,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,527,284
|
|
|
7,691,188
|
|
|
8,384,525
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5,154,575
|
)
|
|
(7,605,561
|
)
|
|
(7,822,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
Interest,
dividend income and other
|
|
|
4,287
|
|
|
2,251
|
|
|
42,476
|
|
Liquidated
damages
|
|
|
(193,346
|
)
|
|
—
|
|
|
—
|
|
Equity
in loss of investee
|
|
|
—
|
|
|
—
|
|
|
(74,660
|
)
|
Realized
gain (loss) on investments, net
|
|
|
22,394
|
|
|
(1,541,506
|
)
|
|
2,014,369
|
|
Gain
on debt extinguishment
|
|
|
—
|
|
|
190,922
|
|
|
—
|
|
Interest
expense
|
|
|
(1,468,045
|
)
|
|
(3,155,853
|
)
|
|
(135,414
|
)
|
Unrealized
(loss) gain on marketable securities, net
|
|
|
(24,578
|
)
|
|
16,901
|
|
|
32,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(6,813,863
|
)
|
|
(12,092,846
|
)
|
|
(5,943,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(26,264
|
)
|
|
116,979
|
|
|
97,482
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(6,840,127
|
)
|
|
(11,975,867
|
)
|
|
(5,845,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(165,851
|
)
|
|
(1,647,285
|
)
|
|
(61,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(7,005,978
|
)
|
|
(13,623,152
|
)
|
|
(5,907,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends
|
|
|
(76,650
|
)
|
|
(76,650
|
)
|
|
(75,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders
|
|
$
|
(7,082,628
|
)
|
$
|
(13,699,802
|
)
|
$
|
(5,983,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.68
|
)
|
$
|
(1.89
|
)
|
$
|
(1.10
|
)
|
Discontinued
operations
|
|
$
|
(0.02
|
)
|
$
|
(0.26
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.70
|
)
|
$
|
(2.15
|
)
|
$
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and
diluted
|
|
|
10,066,940
|
|
|
6,362,195
|
|
|
5,373,318
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,005,978
|
)
|
$
|
(13,623,152
|
)
|
$
|
(5,907,523
|
)
|
Other
comprehensive (loss) gain, unrealized gain (loss) on available-for-sale
investments
|
|
|
—
|
|
|
(2,374,858
|
)
|
|
2,374,858.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$
|
(7,005,978
|
)
|
$
|
(15,998,010
|
)
|
$
|
(3,532,665
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Cash Flows
|
|
For
The Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,005,978
|
)
|
$
|
(13,623,152
|
)
|
$
|
(5,907,523
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
205,673
|
|
|
136,056
|
|
|
14,943
|
|
Amortization
of patents
|
|
|
324,942
|
|
|
324,942
|
|
|
270,785
|
|
Non-cash
interest
|
|
|
1,083,813
|
|
|
2,983,417
|
|
|
—
|
|
Goodwill
impairment
|
|
|
—
|
|
|
971,036
|
|
|
—
|
|
Realized
(gain) loss on investments, net
|
|
|
(32,561
|
)
|
|
1,541,506
|
|
|
(2,014,369
|
)
|
Gain
on debt extinguishment
|
|
|
—
|
|
|
(190,922
|
)
|
|
—
|
|
Unrealized
gain on marketable securities
|
|
|
24,578
|
|
|
(16,901
|
)
|
|
(32,335
|
)
|
Stock-based
compensation to employees and directors
|
|
|
1,097,123
|
|
|
2,403,173
|
|
|
3,116,674
|
|
Stock-based
compensation to consultants
|
|
|
57,249
|
|
|
898,294
|
|
|
1,387,612
|
|
Stock-based
compensation for liquidated damages
|
|
|
193,346
|
|
|
—
|
|
|
—
|
|
Stock
received for services
|
|
|
—
|
|
|
—
|
|
|
(666,249
|
)
|
Loss
on investee
|
|
|
—
|
|
|
—
|
|
|
74,660
|
|
Income
tax expense (benefit)
|
|
|
26,264
|
|
|
(116,979
|
)
|
|
(97,482
|
)
|
Minority
interest
|
|
|
—
|
|
|
—
|
|
|
(47,008
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
—
|
|
|
—
|
|
|
(87,500
|
)
|
Accounts
receivable
|
|
|
(5,907
|
)
|
|
(65,933
|
)
|
|
—
|
|
Receivables
from investments
|
|
|
—
|
|
|
934,031
|
|
|
(934,031
|
)
|
Marketable
securities, net
|
|
|
—
|
|
|
809,260
|
|
|
2,439,665
|
|
Inventories
|
|
|
42,825
|
|
|
34,656
|
|
|
(77,481
|
)
|
Prepaid
expenses
|
|
|
474,111
|
|
|
33,900
|
|
|
43,278
|
|
Other
current assets
|
|
|
(6,049
|
)
|
|
105,269
|
|
|
(38,896
|
)
|
Notes
receivable
|
|
|
123
|
|
|
(32,603
|
)
|
|
—
|
|
Assets
held for sale, net
|
|
|
21,818
|
|
|
—
|
|
|
—
|
|
Accounts
payable
|
|
|
(587,256
|
)
|
|
878,372
|
|
|
494,918
|
|
Accrued
liabilities
|
|
|
320,770
|
|
|
|
|
|
|
|
Due
to broker
|
|
|
—
|
|
|
(801,863
|
)
|
|
341,087
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(3,765,116
|
)
|
|
(2,794,441
|
)
|
|
(1,719,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(561,068
|
)
|
|
(2,305,657
|
)
|
|
(829,537
|
)
|
Purchase
of SurgiCount
|
|
|
—
|
|
|
—
|
|
|
(432,398
|
)
|
Proceeds
from sale of property and equipment
|
|
|
42,600
|
|
|
—
|
|
|
—
|
|
Proceeds
from sale of assets held for sale, net
|
|
|
3,178,023
|
|
|
—
|
|
|
—
|
|
Proceeds
from sale of long-term investments
|
|
|
333,333
|
|
|
289,409
|
|
|
1,371,522
|
|
Purchases
of long-term investments
|
|
|
—
|
|
|
—
|
|
|
(903,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,992,888
|
|
|
(2,016,248
|
)
|
|
(793,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
4,484,406
|
|
|
527,850
|
|
|
250,000
|
|
Proceeds
from exercise of stock options
|
|
|
—
|
|
|
—
|
|
|
26,250
|
|
Purchases
of treasury stock
|
|
|
—
|
|
|
—
|
|
|
(36,931
|
)
|
Proceeds
from notes payable
|
|
|
100,000
|
|
|
7,549,683
|
|
|
1,621,627
|
|
Payments
and decrease on notes payable
|
|
|
(3,372,215
|
)
|
|
(3,342,442
|
)
|
|
(95,976
|
)
|
Payments
of preferred dividends
|
|
|
(38,325
|
)
|
|
—
|
|
|
(19,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,173,866
|
|
|
4,735,091
|
|
|
1,745,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
401,638
|
|
|
(75,598
|
)
|
|
(767,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
3,775
|
|
|
79,373
|
|
|
846,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
405,413
|
|
$
|
3,775
|
|
$
|
79,373
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Cash Flows (continued)
|
|
For
The Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
255,245
|
|
$
|
216,779
|
|
$
|
61,593
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Dividends
accrued
|
|
$
|
38,325
|
|
$
|
76,650
|
|
$
|
75,700
|
|
Issuance
of common stock and warrants in connection with Surgicount
acquisition
|
|
$
|
144,500
|
|
$
|
—
|
|
$
|
4,232,178
|
|
Issuance
of common stock in payment of notes payable and accrued
interest
|
|
$
|
695,732
|
|
$
|
—
|
|
$
|
—
|
|
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
|
|
$
|
—
|
|
$
|
—
|
|
Reclassification
of long term investments to assets held for sale
|
|
$
|
430,564
|
|
$
|
—
|
|
$
|
—
|
|
Issuance
of common stock in connection with asset purchase
agreement
|
|
$
|
—
|
|
$
|
—
|
|
$
|
66,895
|
|
Issuance
of common stock in connection with land acquisition
|
|
$
|
—
|
|
$
|
—
|
|
$
|
85,619
|
|
Issuance
of common stock in connection with purchase of marketable
securities
|
|
$
|
—
|
|
$
|
—
|
|
$
|
101,640
|
|
Issuance
of common stock in connection with prepaid legal services
|
|
$
|
—
|
|
$
|
50,000
|
|
$
|
—
|
|
Accrued
purchase price of investment
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(165,240
|
)
|
Assumption
of accrued liabilities
|
|
$
|
—
|
|
$
|
—
|
|
$
|
15,000
|
|
Capitalized
interest
|
|
$
|
—
|
|
$
|
—
|
|
$
|
28,840
|
|
Reclassification
of other current asset to purchase of Surgicount
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
357,008
|
|
|
|
|
|
|
|
Common
stock issued
|
|
$
|
(610,000
|
)
|
|
|
|
|
|
|
Minority
interest
|
|
$
|
252,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the Company's acquisitons of Surgicount and ASG,
equity
instruments were issued and liabilities assumed during 2005 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgicount
|
|
|
ASG
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
6,372,103
|
|
$
|
1,095,211
|
|
|
|
|
Cash
paid
|
|
|
(452,398
|
)
|
|
(300,000
|
)
|
|
|
|
Equity
instruments issued
|
|
|
(4,232,178
|
)
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
(300,000
|
)
|
|
|
|
Liabilities
assumed
|
|
$
|
1,687,527
|
|
$
|
495,211
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Stockholders' Equity
For
the Three Years Ended December 31, 2007
|
|
Preferred
Stock
|
|
Common
Stock Issued
|
|
Paid-In
|
|
Other
Comprehensive
|
|
Accumulated
|
|
Treasury
Stock
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2004
|
|
|
10,950
|
|
$
|
10,950
|
|
|
6,128,067
|
|
$
|
2,022,262
|
|
$
|
13,950,774
|
|
$
|
—
|
|
$
|
(9,800,885
|
)
|
|
(1,457,364
|
)
|
$
|
(2,616,832
|
)
|
$
|
3,566,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,907,523
|
)
|
|
—
|
|
|
—
|
|
|
(5,907,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,374,858
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,374,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(75,700
|
)
|
|
—
|
|
|
—
|
|
|
(75,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
129,904
|
|
|
—
|
|
|
—
|
|
|
65,319
|
|
|
120,096
|
|
|
250,000
|
|
Purchase
of investments/Surgicount acquisition
|
|
|
—
|
|
|
—
|
|
|
600,000
|
|
|
198,000
|
|
|
3,579,916
|
|
|
—
|
|
|
—
|
|
|
58,444
|
|
|
104,943
|
|
|
3,882,859
|
|
Exercise
of stock options
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,150
|
|
|
—
|
|
|
—
|
|
|
5,625
|
|
|
10,100
|
|
|
26,250
|
|
Services
|
|
|
—
|
|
|
—
|
|
|
96,961
|
|
|
31,998
|
|
|
408,220
|
|
|
—
|
|
|
—
|
|
|
15,756
|
|
|
29,268
|
|
|
469,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense due to warrant issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
918,132
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
918,132
|
|
Compensation
expense due to restricted stock issuances
|
|
|
—
|
|
|
—
|
|
|
170,248
|
|
|
56,181
|
|
|
1,463,666
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,519,847
|
|
Compensation
expense due to stock option issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,596,825
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,596,825
|
|
Warrants
issued in purchase of Surgicount
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
536,578
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
536,578
|
|
Repurchases
of common stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,611
|
)
|
|
(36,931
|
)
|
|
(36,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2005
|
|
|
10,950
|
|
$
|
10,950
|
|
|
6,995,276
|
|
$
|
2,308,441
|
|
$
|
22,600,165
|
|
$
|
2,374,858
|
|
$
|
(15,784,108
|
)
|
|
(1,322,831
|
)
|
$
|
(2,389,356
|
)
|
$
|
9,120,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,623,152
|
)
|
|
—
|
|
|
—
|
|
|
(13,623,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,374,858
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,374,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(76,650
|
)
|
|
—
|
|
|
—
|
|
|
(76,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(263,178
|
)
|
|
—
|
|
|
—
|
|
|
438,000
|
|
|
791,028
|
|
|
527,850
|
|
Purchase
of ASG
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
248,751
|
|
|
—
|
|
|
—
|
|
|
200,000
|
|
|
361,249
|
|
|
610,000
|
|
Services
|
|
|
—
|
|
|
—
|
|
|
79,144
|
|
|
26,118
|
|
|
331,288
|
|
|
—
|
|
|
—
|
|
|
70,694
|
|
|
127,673
|
|
|
485,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense due to warrant issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
593,215
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
593,215
|
|
Compensation
expense due to restricted stock issuances
|
|
|
—
|
|
|
—
|
|
|
414,606
|
|
|
136,820
|
|
|
968,565
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,105,385
|
|
Compensation
expense due to stock option issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,117,788
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,117,788
|
|
Warrants
issued in connection with debt financings
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,057,747
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,057,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2006
|
|
|
10,950
|
|
$
|
10,950
|
|
|
7,489,026
|
|
$
|
2,471,379
|
|
$
|
29,654,341
|
|
$
|
—
|
|
$
|
(29,483,910
|
)
|
|
(614,137
|
)
|
$
|
(1,109,406
|
)
|
$
|
1,543,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,005,978
|
)
|
|
—
|
|
|
—
|
|
|
(7,005,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(76,650
|
)
|
|
—
|
|
|
—
|
|
|
(76,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
—
|
|
|
—
|
|
|
3,639,863
|
|
|
1,201,155
|
|
|
2,828,026
|
|
|
—
|
|
|
—
|
|
|
584,137
|
|
|
1,055,226
|
|
|
5,084,407
|
|
Contingent
payment due to SurgiCount acquisition
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
|
33,000
|
|
|
111,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
144,500
|
|
Services
|
|
|
—
|
|
|
—
|
|
|
33,000
|
|
|
10,890
|
|
|
38,610
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,500
|
|
Payment
of debt
|
|
|
|
|
|
|
|
|
551,197
|
|
|
181,895
|
|
|
513,836
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
695,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense due to warrant issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
210,578
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
210,578
|
|
Compensation
expense due to restricted stock issuances
|
|
|
—
|
|
|
—
|
|
|
241,516
|
|
|
79,700
|
|
|
289,054
|
|
|
—
|
|
|
—
|
|
|
30,000
|
|
|
54,180
|
|
|
422,934
|
|
Compensation
expense due to stock option issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
674,189
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
674,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,950
|
|
$
|
10,950
|
|
|
12,054,602
|
|
$
|
3,978,019
|
|
$
|
34,320,134
|
|
$
|
—
|
|
$
|
(36,566,538
|
)
|
|
—
|
|
$
|
—
|
|
|
1,742,565
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Patient
Safety Technologies, Inc. ("PST"
or the
"Company")
is a
Delaware corporation. The Company’s 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-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.
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 consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. At December 31, 2007, the Company
has an accumulated deficit of approximately $36.6 million and a working capital
deficit of approximately $1.8 million. For the year ended December 31, 2007,
the
Company incurred a loss of approximately $7.1 million and has used approximately
$3.8 million in cash in its operations. Further, as of December 31, 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 year ended December 31, 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Use
of Estimates
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. These estimates
are
based on knowledge of current events and anticipated future events and
accordingly, actual results may differ from those estimates.
The
Company considers only highly-liquid investments such as money market funds
and
commercial paper with maturities of three months or less at the date of their
acquisition as cash and cash equivalents.
Concentration
of Credit Risk
From
time
to time, the Company maintains its cash balances at a financial institution
that
exceeds the Federal Deposit Insurance Corporation coverage of $100,000. The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any significant credit risk on cash.
Shipping
and Handling Costs
Shipping
and handling costs are classified as cost of sales.
Accounts
Receivable
Accounts
receivable are recorded at the invoice amount and do not bear interest. Account
balances are reviewed individually for collectibility. Historically, the Company
has not incurred any credit losses on extended credits. An allowance for bad
debts has not been recorded and is not considered necessary due to the nature
of
the Company's customer base and the lack of historical write offs.
Inventories
Inventories,
consisting primarily of hand held scanners at December 31, 2006, are stated
at
the lower of cost or market on the first-in, first-out basis. There was no
inventory recorded as of December 31, 2007.
Investments –
Debt and Equity Securities
The
Company complies with accounting and reporting requirements of Statement of
Financial Accounting Standards (“SFAS”)
No.
115, Accounting
for Certain Investments in Debt and Equity Securities
(“SFAS
No. 115”).
SFAS
No. 115 requires that certain debt and equity securities be classified into
one
of three categories: held-to-maturity, available-for-sale or trading securities.
Trading
Securities. The
Company’s investment in marketable securities that are bought and held
principally for the purpose of selling them in the near-term are classified
as
trading securities. Trading securities are recorded at fair value on the balance
sheet in current assets, with the change in fair value during the period
included in earnings in the statement of operations.
Available-for-Sale
Investments. Investments
designated as available-for-sale include both marketable equity and debt
(including redeemable preferred stock) securities. Investments that are
designated as available-for-sale are reported at fair value, with unrealized
gains and losses recorded in stockholders’ equity. Realized gains and losses on
the sale or exchange of equity securities and declines in value judged to be
other than temporary are recorded in realized gains (losses) on investments,
net. During the year ended December 31, 2006, $2,375,000 of other comprehensive
income was reclassified into earnings.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Investments
The
Company complies with Accounting Principles Board (“APB”)
Opinion
No. 18, The
Equity Method of Accounting for Investments in Common Stock.
Investments are accounted for using the equity method of accounting if the
investment provided the Company the ability to exercise significant influence,
but not control, over an investee. Significant influence is generally deemed
to
exist if the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation
on the investee's board of directors, are considered in determining whether
the
equity method of accounting is appropriate. The Company records its investments
in equity method investees meeting these characteristics under Long-Term
Investments in the accompanying consolidated financial statements. These
investments are carried at cost, adjusted for the Company’s proportionate share
of their undistributed earnings or losses. The Company’s proportionate share of
income or losses are recorded in equity in income (loss) of investee in the
statements of operations.
Other
investments that the Company has less than 20% ownership of common stock of
the
investee is accounted for under the cost method of accounting.
Valuation
of Investments. Security
investments which are publicly traded on a national exchange or Nasdaq Stock
Market are stated at the last reported sales 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. The Company may determine, if appropriate, to discount the
value where there is an impediment to the marketability of the securities
held.
Investments
for which there is no ready market are initially valued at cost and, thereafter,
at fair value. To determine fair value, an impairment analysis is performed
based upon the financial condition and operating results of the issuer and
other
pertinent factors. Other pertinent factors taken into consideration to determine
the fair value of an investment includes, but are not limited to, assumptions
related to future results of operations and growth of the investee company,
the
nature and value of any collateral, the investee company’s ability to make
payments, the markets in which the investee 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. The financial condition and operating
results have been derived utilizing both audited and unaudited data. In the
absence of a ready market for an investment, numerous assumptions are inherent
in the valuation process. Some or all of these assumptions may not materialize.
Unanticipated events and circumstances may occur subsequent to the date of
the
valuation and values may change due to future events. Therefore, the actual
amounts eventually realized from each investment may vary from the valuations
shown and the differences may be material.
The
Company complies with the FASB's Emerging Issues Task Force (“EITF”)
Issue
No. 03-1, The
Meaning of Other-Than-Temporary Impairment and It's Application to Certain
Investments,
to
determine whether certain investments are considered impaired, whether that
impairment is other-than-temporary, and the measurement and recognition of
an
impairment loss. The EITF Issue No. 03-1 also provides guidance on accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have
been recognized as other-than-temporary impairments.
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
the investment is written down to its impaired value. When an investee company
is not considered viable from a financial or technological point of view, the
entire investment is written down since we consider the estimated fair market
value to be nominal. If an investee company obtains additional funding at a
valuation lower than the Company’s carrying amount or requires a new round of
equity funding to stay in operation and the new funding does not appear
imminent, a presumption is made that the investment is other than temporarily
impaired, unless specific facts and circumstances indicate otherwise. No
impairment charges were recognized during the year ended December 31, 2007.
During the years ended December 31, 2006 and 2005, included in realized gain
(loss) on investments, net, is a $1,458,000 impairment charge from the Company’s
investment in Ipex, Inc. and a $50,000 impairment charge from the Company’s
investment China Nurse, LLC, respectively.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Gains
(Losses) on Sale of Investments
Amounts
reported as realized gains (losses) are measured by the difference between
the
proceeds of sale or exchange and the cost basis of the investment. Gains
(losses) are considered realized when sales or dissolution of investments are
consummated.
Fair
Value of Financial Instruments
The
fair
value of the Company’s assets and liabilities, which qualify as financial
instruments under SFAS No. 107, Disclosures
About Fair Value of Financial Instruments,
approximate the carrying amounts presented in the accompanying Consolidated
Balance Sheets.
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-Sponge 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 expensing prescribed by SFAS 123(R). During
the years ended December 31, 2007, 2006 and 2005, the Company had stock-based
compensation expense, related to issuances to the Company’s employee and
directors, included in reported net loss, of $1,097,000, $2,223,000 and
$3,117,000, respectively. The total amount of stock-based compensation for
the
year ended December 31, 2007 of $1,097,000, included restricted stock grants
valued at $423,000
and stock options valued at $674,000. The total amount of stock-based
compensation for the year ended December 31, 2006 of $2,223,000, included
restricted stock grants valued at $1,105,000 and stock options valued at
$1,118,000. The total amount of stock based compensation for the year ended
December 31, 2005 of $3,117,000, included restricted stock grants valued at
$1,520,000 and stock options valued at $1,597,000.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
During
the years ended December 31, 2007, 2006 and 2005, the Company had stock-based
compensation expense, from issuances of restricted stock and warrants to
consultants of the Company of $57,000, $898,000 and $1,388,000, respectively.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated on the straight-line method
over the estimated useful lives of the assets as follows:
|
|
Estimated
Useful
Lives
|
|
|
|
|
|
Furniture
and fixtures
|
|
|
5-7
Years
|
|
Computer
software and equipment
|
|
|
3-5
Years
|
|
Maintenance
and repairs are charged to operations, while betterments and improvements are
capitalized.
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).
Income
Taxes
The
Company accounts for income taxes in accordance with the provisions of SFAS
No.
109, Accounting
for Income Taxes.
The
significant components of deferred tax assets and liabilities are principally
related to the Company's net operating loss carryforward and its unrealized
appreciation of investments.
Deferred
income taxes are provided in amounts sufficient to give effect to temporary
differences between financial and tax reporting, principally related to net
operating loss carryforwards. Valuation allowances are provided to the extent
realization of recorded tax assets is not considered likely.
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.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
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.
Treasury
Stock
Shares
of
common stock repurchased by the Company are recorded at cost as treasury stock
and result in a reduction of stockholders' equity in the accompany consolidated
balance sheets. When shares are reissued, the Company uses the weighted average
cost method for determining cost. The difference between the cost of the shares
and the issuance price is added or deducted from additional paid-in
capital.
Comprehensive
Income (Loss)
The
Company applies SFAS No. 130, Reporting
Comprehensive Income. Comprehensive
income (loss) consists of the after tax net change in unrealized gains and
losses on securities classified as available-for-sale that have been excluded
from net loss and reflected instead in stockholders’ equity. At December 31,
2005, the only investments designated as available-for-sale were the Company’s
restricted holdings in IPEX, Inc. (“IPEX”)
and its
investment in Digicorp and Alacra Corporation (“Alacra”).
During
the year ended December 31, 2006, the Company sold its investment in Digicorp
and recorded an impairment charge for the entire amount of its investment in
IPEX leaving Alacra as the only remaining investment designated as
available-for-sale as of December 31, 2007.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“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.
On
January 1, 2007, we adopted Emerging Issues Task Force Issue No. 06-2,
Accounting
for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement
No. 43 (“EITF
06-2”).
EITF
06-2 requires companies to accrue the costs of compensated absences under a
sabbatical or similar benefit arrangement over the requisite service period.
Upon adoption, no liability for unrecognized compensated absences was
recognized.
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.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141(R), Business
Combinations
(“SFAS
141(R)”).
This
statement requires the acquiring entity in a business combination to record
all
assets acquired and liabilities assumed at their respective acquisition-date
fair values, changes the recognition of assets acquired and liabilities assumed
arising from contingencies, changes the recognition and measurement of
contingent consideration, and requires the expensing of acquisition-related
costs as incurred. SFAS 141(R) also requires additional disclosure of
information surrounding a business combination, such that users of the entity's
financial statements can fully understand the nature and financial impact of
the
business combination. We will implement SFAS No. 141(R) on January 1, 2009
and
will apply prospectively to business combinations completed on or after that
date.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
160, Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB
51
(“SFAS
160”).
SFAS
160 establishes accounting and reporting standards for ownership interests
in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent's ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS
160
also established reporting requirements that provide sufficient disclosures
that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owner. We will implement SFAS No. 160 on January
1, 2009. We do not expect the adoption of this standard to have a material
impact on our income statement, financial position or cash flows.
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 years ended December
31, 2007, 2006 and 2005 related to the held for sale assets of Automotive
Services Group:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
309,455
|
|
$
|
343,431
|
|
$
|
—
|
|
Operating
expenses
|
|
|
262,323
|
|
|
530,285
|
|
|
61,960
|
|
Depreciation
and amortization
|
|
|
21,819
|
|
|
31,529
|
|
|
—
|
|
Goodwill
impairment
|
|
|
—
|
|
|
971,036
|
|
|
—
|
|
Interest
expense
|
|
|
201,331
|
|
|
457,866
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
10,167
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(165,851
|
)
|
$
|
(1,647,285
|
)
|
$
|
(61,960
|
)
|
The
following sets forth the assets that are held for sale that are related to
the
discontinued operations:
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Property
and equipment, net
|
|
$
|
—
|
|
$
|
3,189,674
|
|
Goodwill
|
|
|
—
|
|
|
—
|
|
Other
assets
|
|
|
—
|
|
|
—
|
|
Total
assets of discontinued operations
|
|
$
|
—
|
|
$
|
3,189,674
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
5.
RESTRICTED CERTIFICATE OF DEPOSIT
At
December 31, 2007, the Company had a restricted certificate of deposit of
$87,500 held by a financial institution securing a letter of credit. This
restricted certificate of deposit is held to cover a portion of the security
deposit for the Company’s prior corporate offices that it occupied with Ault
Glazer & Company Investment Management LLC ("Ault
Glazer"),
a
related party. Ault Glazer provided an additional certificate of deposit, in
the
amount of $262,500, required to be held at the financial institution under
the
terms of the non-cancelable operating lease. (see Operating Lease, Note
19).
6.
PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2007 and 2006 are comprised of the
following:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Computer
software and equipment
|
|
$
|
767,004
|
|
$
|
356,642
|
|
Furniture
and equipment
|
|
|
215,423
|
|
|
71,687
|
|
Other
|
|
|
—
|
|
|
20,206
|
|
Property
and equipment, gross
|
|
|
982,427
|
|
|
448,535
|
|
Less:
accumulated depreciation
|
|
|
(319,036
|
)
|
|
(120,333
|
)
|
Property
and equipment, net
|
|
$
|
663,391
|
|
$
|
328,202
|
|
Depreciation
expense for the years ended December 31, 2007, 2006 and 2005 was $205,673,
$136,056 and $14,943, respectively.
7.
ACQUISITIONS
Surgicount
Medical, Inc.
In
February 2005, the Company invested $4,035,600, excluding acquisition costs,
to
acquire 100% of the common stock of SurgiCount. The Company acquired SurgiCount
for its patents related to the Safety-Sponge System,
an innovation which the Company believes will allow it to capture a significant
portion of the United States and European surgical sponge sales. SurgiCount’s
operating results from the closing date of the acquisition, February 25, 2005,
through December 31, 2007, are included in the consolidated financial
statements.
At
closing, the purchase price, including acquisition costs was determined to
be
$4,684,576, comprised of $340,000 in cash payments and 600,000 shares of the
Company’s common stock valued at $3,695,600 issued to SurgiCount’s equity
holders. Additionally, the Company incurred approximately $112,398 in direct
costs and issued 150,000 warrants, valued at $536,578, to purchase the common
stock of the Company to consultants providing advisory services for the
acquisition. The value assigned to the stock portion of the purchase price
is
$6.16 per share based on the average closing price of the Company’s common stock
for the five days beginning two days prior to and ending two days after February
4, 2005, the date of the Agreement and Plan of Merger and Reorganization (the
“Merger”). In addition, since the cumulative gross revenues of SurgiCount
exceeded $1,000,000 prior to the fifth anniversary of the closing of the Merger,
the Company issued a total of an additional 100,000 shares of the Company’s
common stock, of which 50,000 shares were issued on June 29, 2007 and 50,000
shares were issued on December 31, 2007, valued at $144,500, to certain
SurgiCount shareholders. Such amount is not included in the aggregate closing
purchase price but rather was recorded upon issuance as an increase to goodwill.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
acquisition of Surgicount was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, Business
Combinations.
Under
the purchase method, assets acquired and liabilities assumed are recorded at
their estimated fair values. Fair value of the patents was determined by an
independent appraisal. Goodwill is recorded to the extent the purchase price,
including acquisition costs, exceeds fair value of the net identifiable tangible
and intangible assets acquired less liabilities assumed at the date of
acquisition.
The
components of the initial purchase price are allocated as follows:
Patents
|
|
$
|
4,684,576
|
|
Deferred
tax liability
|
|
|
(1,687,527
|
)
|
Net
assets acquired
|
|
|
2,997,049
|
|
Goodwill
|
|
|
1,687,527
|
|
|
|
$
|
4,684,576
|
|
The
patents are being amortized for book purposes over their estimated useful life
of 14.4 years. Approximate annual amortization expense for patents is expected
to be $325,000.
The
following pro forma data summarizes the results of operations for the periods
indicated as if the Surgicount acquisition had been completed as of the
beginning of each period presented. The pro forma data gives effect to actual
operating results prior to the acquisition, adjusted to include the pro forma
effect of amortization of intangibles. These pro forma amounts do not purport
to
be indicative of the results that would have actually been obtained if the
acquisition occurred as of the beginning of each period presented or that may
be
obtained in future periods:
|
|
Year ended
|
|
|
|
December 31, 2005
|
|
Revenue
|
|
$
|
562,374
|
|
Net
loss
|
|
$
|
(6,013,000
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(1.12
|
)
|
Automotive
Services Group, LLC
In
July
2005, the Company purchased 50% of the outstanding equity interests of
Automotive Services Group, LLC (“ASG”), an Alabama
limited liability company, from an unrelated party for $300,000. ASG was formed
to develop and operate automated car wash sites under the trade name “Bubba’s
Express Wash”. ASG’s first site, developed in Birmingham, Alabama, had its grand
opening on March 8, 2006. From the Company’s initial purchase through November
2005, the Company accounted for its 50% investment in ASG under the equity
method of accounting. However, as a result of negotiations which commenced
during the 4th quarter of 2005, and ultimately resulted in the
Company’s acquisition of the remaining 50% equity interest of ASG on March 15,
2006, the Company determined that it became the primary beneficiary of ASG,
a
Variable Interest Entity as determined by Financial Accounting Standards Board
(“FASB”) Interpretation No. 46R,
“Consolidation of Variable Interest Entities” (“FIN
46R”). Accordingly, the Company has consolidated the accounts of
ASG since the 4th quarter of 2005.
On
March
15, 2006, the Company entered into a Unit Purchase Agreement (the “Agreement”)
for
Automotive Services Group to purchase the remaining 50% equity interest (the
“Membership
Interest”)
in ASG.
After completing the transaction, Automotive Services Group owned 100% of the
outstanding equity interests in ASG. As consideration for the Membership
Interest, the Company issued 200,000 shares of the Company’s common stock valued
at $610,000, based on the closing stock price at March 15, 2006.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
The
Company has not provided pro forma data summarizing the results of operations
for the periods indicated as if the ASG acquisition had been completed as of
the
beginning of each period presented since the effects were considered immaterial
to actual operating results.
Upon
initial measurement, components of the purchase price were as
follows:
Land
|
|
$
|
480,211
|
|
Furniture
and equipment
|
|
|
972
|
|
Notes
payable
|
|
|
(495,211
|
)
|
Net
liabilities assumed
|
|
|
(14,028
|
)
|
Goodwill
|
|
|
614,028
|
|
Minority
interest
|
|
|
(300,000
|
)
|
Purchase
price
|
|
$
|
300,000
|
|
In
March
2006, upon the purchase of the remaining 50% interest, components of the
purchase price were as follows:
Goodwill
|
|
$
|
357,008
|
|
Minority
interest
|
|
|
252,992
|
|
Purchase
price
|
|
$
|
610,000
|
|
As
discussed in Note 10, all goodwill previously recorded in connection with the
acquisition of ASG was written off during the quarters ended June 30, 2006
and
September 30, 2006.
8.
GOODWILL AND PATENTS
The
Company’s goodwill relates to the Medical Products reporting segment.
During the year ended December 31, 2007, cumulative gross revenues of SurgiCount
exceeded $1,000,000 and as such the Company issued 100,000 shares of common
stock to the SurgiCount founders. The Company recorded $144,500 of goodwill
as a
result of these issuances, based on the estimated fair value of the
shares.
During
the year ended December 31, 2006, the Company recognized a goodwill impairment
charge of $971,000. As
discussed in Note 1, the Company has both a significant accumulated deficit
and
a
working capital deficit. These financial constraints prevented the Company
from
continuing
the planned build-out of the additional car wash facilities. In response to
these financial constraints, coupled with the Company’s emphasis on the
patient
safety markets,
the
Company elected to divest the car wash services segment. Recognizing that
revenues and cash flows would be lower than expected from the car wash services
segment, the Company determined that a triggering event had occurred and
conducted an interim goodwill impairment analysis in the quarters ended June
30,
2006 and September 30, 2006 which resulted in the recording of total
goodwill impairment
charges
during 2006 of $971,000 in the car wash services operating segment. This
impairment
related
to goodwill that resulted from the Company’s acquisition of ASG
The
change in goodwill for year ended December 31, 2007, is as follows:
|
|
Goodwill
|
|
Balance
as of December 31, 2006
|
|
$
|
1,687,527
|
|
Issuance
of contingent payment for SurgiCount
|
|
|
144,500
|
|
Balance
as of December 31, 2007
|
|
$
|
1,832,027
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
Patents,
net, as of December 31, 2007 are composed of the following:
Patents
|
|
$
|
4,684,576
|
|
Accumulated amortization
|
|
|
(920,668
|
)
|
|
|
$
|
3,763,908
|
|
The patents
are subject to amortization over their estimated useful life of 14.4
years. The following table presents estimated amortization expense for each
of
the succeeding five calendar years and thereafter.
2008
|
|
$
|
325,000
|
|
2009
|
|
|
325,000
|
|
2010
|
|
|
325,000
|
|
2011
|
|
|
325,000
|
|
2012
|
|
|
325,000
|
|
Thereafter
|
|
|
2,138,908
|
|
|
|
$
|
3,763,908
|
|
9.
LONG-TERM INVESTMENTS AND ASSETS HELD FOR SALE
Long-term
investments at December 31, 2007 and December 31, 2006 are comprised of the
following:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Alacra
Corporation
|
|
$
|
666,667
|
|
$
|
1,000,000
|
|
Investments
in Real Estate
|
|
|
—
|
|
|
430,563
|
|
Digicorp
|
|
|
—
|
|
|
10,970
|
|
|
|
$
|
666,667
|
|
$
|
1,441,533
|
|
Alacra
Corporation
At
December 31, 2007, the Company had an investment in shares of Series F
convertible preferred stock of Alacra Corporation (“Alacra”),
recorded at its cost of $666,667, 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.
During the year ended December 31, 2007, Alacra redeemed one-third of the Series
F convertible preferred stock. Alacra, based in New York, is a global provider
of business and financial information.
Investments
in Real Estate
At
December 31, 2006, the Company’s real estate investments consisted of
approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
0.61
acres of undeveloped land in Springfield, Tennessee, which were recorded at
their cost of $430,563. At December 31, 2007, these real estates investments
met
the “held for sale” criteria in accordance with SFAS 144 and were classified as
such.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
10.
NOTES PAYABLE
Notes
payable at December 31, 2007 and 2006 are comprised of the
following:
|
|
December
31,
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
|
|
|
172,380
|
|
|
598,232
|
|
Total
notes payable
|
|
|
3,702,938
|
|
|
7,119,041
|
|
Less:
debt discount on beneficial conversion feature
|
|
|
—
|
|
|
(1,074,330
|
)
|
|
|
|
3,702,938
|
|
|
6,044,711
|
|
Less:
current portion
|
|
|
(1,172,380
|
)
|
|
(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 December 31, 2007 are as follows:
2007
|
|
$
|
1,172,380
|
|
2008
|
|
|
—
|
|
2009
|
|
|
—
|
|
2010
|
|
|
2,530,558
|
|
|
|
$
|
3,702,938
|
|
(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 Financial Statements
(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 year ended December 31, 2007 and 2006, the Company
incurred interest expense, excluding amortization of debt discount,
of
$28,000 and $61,000, 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 year ended
December 31, 2007 and 2006, the Company incurred interest expense of $70,000
and
$160,000, 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 year ended December 31, 2007, the Company
incurred interest expense of $103,000 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 year ended December 31, 2007 and 2006, the Company incurred
interest expense of $15,000 and $16,000, respectively, on the Revolving Line
of
Credit.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(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
year ended December 31, 2007 and 2006, the Company incurred interest
expense of $89,000 and $130,000, respectively, on the Caspi Note.
|
(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
year ended December 31, 2007 and 2006, the Company incurred interest
expense, excluding amortization of debt discount, of $109,000 and
$56,000,
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 year ended
December 31, 2007 and 2006, interest expense of $877,000 and $123,000 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 year ended December 31, 2007 and 2006,
interest expense of $12,000 and 5,000, respectively, 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.
During
the year ended December 31, 2007 and 2006, the Company incurred interest
expense, excluding amortization of debt discount, of $88,000 and $50,000,
respectively, on the Langsam Notes. At December 31, 2007 and 2006, accrued
interest on the Langsam Notes totaled $138,000 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 year
ended
December 31, 2007 and 2006, the Company incurred interest expense,
excluding amortization of debt discount of $46,000 and $20,000,
respectively, on the Second Kalina Note. At December 31, 2007 and
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 was amortized as non-cash interest expense over
the
term of the debt using the effective interest method. During the year ended
December 31, 2007 and 2006, interest expense of $91,000 and $15,000,
respectively, has been recorded from the debt discount
amortization.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
11.
ACCRUED LIABILITIES
Accrued
liabilities at December 31, 2007 and 2006 are comprised of the
following:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Accrued
interest
|
|
$
|
168,449
|
|
$
|
520,114
|
|
Accrued
professional fees
|
|
|
—
|
|
|
10,000
|
|
Accrued
dividends on preferred stock
|
|
|
134,138
|
|
|
95,812
|
|
Accrued
salaries
|
|
|
212,000
|
|
|
197,495
|
|
Other
|
|
|
6,162
|
|
|
1,045
|
|
|
|
$
|
520,749
|
|
$
|
824,466
|
|
12.
EQUITY TRANSACTIONS
On
March
30, 2005, stockholders’ approval was obtained to (i) decrease the authorized
number of shares of common stock from 50,000,000 shares to 25,000,000 shares,
(ii) decrease the authorized number of shares of preferred stock from 10,000,000
shares to 1,000,000 shares and (iii) to reduce the par value of the common
stock
from $1.00 per share to $0.33 per share and effect a three-for-one split of
the
common stock. Stockholders’ equity has been restated to give retroactive
recognition to the stock split for all periods presented. In addition, all
per
share and weighted average share amounts have been restated to reflect this
stock split.
The
convertible preferred stock has a cumulative 7% quarterly dividend and is
convertible into the number of shares of common stock by dividing the purchase
price for the convertible preferred stock by conversion price in effect,
currently $4.44. The convertible preferred stock has anti-dilution provisions,
which can change the conversion price in certain circumstances. In the event
the
Company subdivides its outstanding shares of common stock into a greater number
of shares of common stock the conversion price in effect would be reduced,
thereby increasing the total number of shares of common stock that the
convertible preferred stock is convertible into. The holder has the right to
convert the shares of convertible preferred stock at any time until February
22,
2010 into common stock. Upon liquidation, dissolution or winding up of the
Company, the stockholders of the convertible preferred stock are entitled to
receive $100 per share plus any accrued and unpaid dividends before
distributions to any holder of the Company’s common stock.
During
the year ended December 31, 2005, the Company issued 5,625 shares of common
stock held in treasury upon exercise of options under the Company’s 1997 Stock
Incentive Plan and 20,444 shares of common stock held in treasury to purchase
0.61 acres of vacant land in Springfield, Tennessee.
On
April
5, 2005, the Company entered into a consulting agreement with Health West
Marketing Incorporated, a California corporation ("Health West"). Under the
agreement, Health West agreed to help the Company establish a comprehensive
manufacturing and distribution strategy for the Company's Safety-Sponge System
worldwide. The initial term of the agreement is for a period of two years.
After
the initial two-year term, the agreement will terminate unless extended by
the
parties for one or more additional one-year periods.
In
consideration for Health West's services, the Company agreed to issue Health
West 42,017 shares of the Company's common stock, to be issued as follows:
(a)
10,505 shares, valued at $62,505, were issued upon signing the agreement; (b)
an
additional 15,756 shares, valued at $93,748, of the Company’s common stock held
in treasury were issued as a result of Health West’s assistance in structuring a
comprehensive manufacturing agreement with A Plus International Inc.
(“A
Plus”),
which
was entered into on August 17, 2005; and (c) during 2007 the Company issued
the
remaining 15,756 shares for Health West’s services in developing a regional
distribution network to integrate the Safety-Sponge™ System into the existing
acute care supply chain. As an additional incentive, in 2005 the Company granted
Health West warrants to purchase a total of 175,000 shares of the Company’s
common stock as discussed in Note 13.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
On
April
22, 2005, the Company entered into a subscription agreement pursuant to which
the Company sold to an investor shares of the Company's common stock held in
treasury and warrants to purchase an additional 20,000 shares of the Company's
common stock. The warrants are exercisable for a period of five years, have
an
exercise price equal to $6.05, and 50% of the warrants are callable. In the
event the closing sale price of the Company's common stock equals or exceeds
$7.50 for at least five consecutive trading days, the Company, upon 30 days
prior written notice, may call the callable warrants at a redemption price
equal
to $0.01 per share of common stock then purchasable pursuant to such warrants.
Notwithstanding such notice, the warrant holder may exercise the callable
warrant prior to the end of the 30-day notice period. The Company received
gross
proceeds of $100,000 from the sale of stock and warrants.
On
July
19, 2005, the Company entered into a stock purchase agreement pursuant to which
the Company sold to an investor 38,000 shares of the Company's common stock
held
in treasury. As consideration, the Company received 12,000 shares of Tuxis
Corporation (“Tuxis”)
common
stock valued at approximately $102,000.
On
October 19, 2005, the Company entered into a subscription agreement with an
accredited investor, pursuant to which the Company sold shares of the Company's
common stock held in treasury at a price of $3.00 per share. The Company
received gross proceeds of $50,000 from the sale of the stock.
On
November 3, 2005, the Company entered into a subscription agreement with Herbert
Langsam, a current director of the Company, pursuant to which the Company sold
shares of the Company's common stock held in treasury at a price of $3.49 per
share. The Company received gross proceeds of $100,000 from the sale of the
stock.
In
August
2006, the Company entered into subscription agreements pursuant to which the
Company sold to investors shares of the Company's common stock held in treasury
at a price of $1.25 per share. The Company received gross proceeds of $250,000
from the sale of stock.
Between
November 30, 2006 and December 15, 2006, 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 these accredited investors an aggregate of 238,000
shares of its common stock and warrants to purchase an additional 119,000 shares
of its common stock. The warrants are exercisable for a period of three 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
$297,500.
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 during the year ended
December 31, 2007, received $500,000 in product. 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. The Company was required to file a registration statement within
120
days after April 5, 2007 covering the resale of 2,000,000 shares of our Common
Stock purchased in these private placements. The registration statement was
not
filed until November 16, 2007 and we therefore issued, as liquidated damages,
warrants with a term of five years and an exercise price of $2.00 per share
to
purchase 200,000 shares of our Common Stock. We recognized $193,000 in expense
as a result of these liquidated damages.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
Pursuant
to 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 $1,000,000, the Company is obligated to issue an additional
100,000 shares of the Company’s common stock to certain SurgiCount founders. As
discussed in Note 7, cumulative gross revenues of SurgiCount exceeded $1,000,000
and therefore the Company issued an additional 100,000 shares of the Company’s
common stock, valued at $144,500. The Company recorded $144,500 of goodwill
as a
result of these issuances, based on the estimated fair value of the shares.
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 the
Company’s common stock at $1.25 price per share and issued five-year warrants to
purchase 763,000 shares of common stock at an exercise price of $1.40 per share,
pursuant to a Securities Purchase Agreement entered into with Francis Capital
Management, LLC, (“Francis
Capital”) 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.
13.
WARRANTS
During
the year ended December 31, 2007, a total of 2,872,120 warrants, at an average
exercise price of $1.75 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% – 101%, 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 December 31, 2007, a total of 6,114,521
warrants, at exercise prices ranging from $1.25 to $6.05 remain outstanding.
14.
STOCK REPURCHASE PROGRAM
In
May
2005, the Board of Directors authorized a stock repurchase program under which
up to 150,000 shares of the Company’s common stock could be repurchased from
time to time with available funds. The primary purpose of the stock repurchase
program is to allow the Company the flexibility to repurchase its common stock
to potentially reduce stock dilution and seek to improve its long-term earnings
per share. Repurchases may be made in the open market or in privately negotiated
transactions, subject to regulatory considerations, and may be discontinued
at
any time. The only repurchases made by the Company during the last three years
occurred during the year ended December 31, 2005 when the Company repurchased
10,611 shares of common stock for $36,931. Although the Company’s stock
repurchase program remains in place, the Company does not currently intend
to
make a material amount of repurchases. Future repurchases, if any, will depend
on subsequent developments, corporate needs and market conditions. If subsequent
developments occur or corporate needs and market conditions change that might
cause the Company to make one or more repurchases, the Company would not
necessarily make a public announcement about it at that time.
15.
STOCK OPTION PLANS
In
September 2005, the Board of Directors of the Company approved the Amended
and
Restated 2005 Stock Option and Restricted Stock Plan (the “2005
SOP”)
and the
Company’s stockholders approved the Plan in November 2005. The Plan reserves
2,500,000 shares of common stock for grants of incentive stock options,
nonqualified stock options, warrants and restricted stock awards to employees,
non–employee directors and consultants performing services for the Company.
Options granted under the Plan have an exercise price equal to or greater than
the fair market value of the underlying common stock at the date of grant and
become exercisable based on a vesting schedule determined at the date of
grant. The options expire 10 years from the date of grant. Restricted stock
awards granted under the Plan are subject to a vesting period determined at
the
date of grant.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
A
summary
of stock option activity for the year ended December 31, 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, 2004
|
|
|
56,250
|
|
|
5,625
|
|
$
|
4.67
|
|
|
5.08
|
|
|
|
|
Adoption
of Amended 2005 SOP
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
(5,625
|
)
|
$
|
4.67
|
|
|
5.00
|
|
|
|
|
Restricted
Stock Awards
|
|
|
(438,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
(1,044,000
|
)
|
|
1,044,000
|
|
$
|
5.02
|
|
|
9.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
1,074,204
|
|
|
1,044,000
|
|
$
|
5.02
|
|
|
9.39
|
|
|
|
|
Cancellation
of 1997 Plans
|
|
|
(56,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Awards
|
|
|
(331,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
(785,000
|
)
|
|
785,000
|
|
$
|
3.80
|
|
|
9.21
|
|
|
|
|
Cancellations
|
|
|
125,000
|
|
|
(125,000
|
)
|
$
|
4.51
|
|
|
8.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
26,026
|
|
|
1,704,000
|
|
$
|
4.50
|
|
|
8.73
|
|
$
|
—
|
|
Restricted
Stock Awards
|
|
|
(79,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
(545,000
|
)
|
|
545,000
|
|
$
|
1.53
|
|
|
9.76
|
|
|
|
|
Cancellations
|
|
|
599,000
|
|
|
(599,000
|
)
|
$
|
4.59
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
990
|
|
|
1,650,000
|
|
$
|
3.49
|
|
|
8.43
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
220,125
|
|
$
|
5.27
|
|
|
9.25
|
|
$
|
—
|
|
December
31, 2006
|
|
|
|
|
|
832,625
|
|
$
|
4.90
|
|
|
8.54
|
|
$
|
—
|
|
December
31, 2007
|
|
|
|
|
|
782,500
|
|
$
|
4.40
|
|
|
7.83
|
|
$
|
—
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (i.e., the difference between our closing stock price on
December 31, 2007 and the exercise price, times the number of shares) that
would have been received by the option holders had all option holders exercised
their options on December 31, 2007. There have been 5,625 options exercised
during the year ended December 31, 2005.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
A
summary
of the changes in the Company’s nonvested options during the year ended December
31, 2007 is as follows:
Nonvested
Shares
|
|
Shares
|
|
Weighted
Average Grant
Date Fair
Value
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
871,375
|
|
$
|
2.31
|
|
Granted
|
|
|
545,000
|
|
$
|
1.16
|
|
Vested
|
|
|
(330,125
|
)
|
$
|
2.07
|
|
Cancelled
and forfeited
|
|
|
(218,750
|
)
|
$
|
2.02
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2007
|
|
|
867,500
|
|
$
|
1.75
|
|
All
options that the Company granted during 2005 through 2007 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:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted
average risk free interest rate
|
|
|
4.50
|
%
|
|
3.75
|
%
|
|
3.75
|
%
|
Weighted
average life (in years)
|
|
|
5.00
|
|
|
4.16
|
|
|
3.0
|
|
Volatility
|
|
|
98
- 101
|
%
|
|
89
|
%
|
|
83
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Weighted
average grant-date fair value per share of options granted
|
|
$
|
1.16
|
|
$
|
2.50
|
|
$
|
2.48
|
|
During
the year ended December 31, 2007, the Company recorded compensation costs
related to stock options of $674,189. As of December 31, 2007, total
unrecognized compensation cost related to unvested stock options was $899,000.
The cost is expected to be recognized over a weighted average period of 1.43
years.
16.
RELATED PARTY TRANSACTIONS
Due
from Related Parties
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
December 31, 2007 and 2006, Ault Glazer, Mr. Ault and the Glazers indirectly
beneficially own or control approximately 10% of the outstanding common stock
of
the Company and beneficially own approximately 98% of the outstanding preferred
stock of the Company.
IPEX,
Inc.
During
the years ended December 31, 2007, 2006 and 2005, the Company recognized revenue
of nil, $104,000 and $552,000, 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 former Chief Executive Officer of ASG
served as an IPEX director and member of IPEX’s Audit Committee from August 2005
through January 2006.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
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 year ended December 31, 2007 and 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 and
Chief Financial Officer 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.
A
Plus International, Inc.
During
the years ended December 31, 2007, 2006 and 2005, the Company recognized cost
of
goods sold of 467,000, $44,000 and nil, respectively, in connection with
surgical sponges provided by A Plus. Wayne Lin, a director and significant
beneficial owner of the Company is a founder and significant owner of A
Plus.
17.
INCOME TAXES
In
June 2006, the FASB issued FASB Interpretation Number 48 (“FIN
48”),
Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109,
which
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes,
and
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. Under FIN 48, the impact of an uncertain income
tax position on the income tax return must be recognized at the largest amount
that is, more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 was effective for the
Company beginning January 1, 2007.
The
Company adopted the provisions of FIN 48 on January 1, 2007, and has commenced
analyzing filing positions in all of the federal and state jurisdictions where
it is required to file income tax returns, as well as all open tax years in
these jurisdictions. As a result of adoption, the Company has recorded no
additional tax liability. As of December 31, 2007, the Company has not yet
completed its analysis of the deferred tax assets for net operating losses
of
$25.5 million. As such, these amounts and the offsetting valuation allowance
have been removed from the Company’s deferred tax assets. The Company will
complete a Section 382 analysis regarding the limitation of the net operating
losses.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
A
rollforward of the changes in the Company’s unrecognized tax benefits related to
FIN 48 positions is shown below:
Balance
at January 1, 2007
|
|
$
|
—
|
|
Additions
based on tax positions related to the current year
|
|
|
—
|
|
Additions
for tax positions of prior years
|
|
|
—
|
|
Reductions
for tax positions of prior years
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Balance
at December 31, 2007
|
|
$
|
—
|
|
Due
to
the existence of the valuation allowance, future changes in our unrecognized
tax
benefits will not impact the Company’s effective tax rate.
The
Company is subject to taxation in the U.S. and state jurisdictions. The
Company’s tax years for 2002 and forward are subject to examination by the U.S.
and California tax authorities due to the carryforward of unutilized net
operating losses. The Company is currently not under examination by any taxing
authorities.
The
Company’s practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. During the twelve months ended December
31,
2007, the Company did not recognize any interest or penalties. Upon adoption
of
FIN 48 on January 1, 2007, the Company did not record any interest
penalties.
The
adoption of FIN 48 did not impact the Company’s financial condition, results of
operations or cash flows. At December 31, 2007, the Company had net deferred
tax
assets of $2.0 million. Due to uncertainties surrounding the Company’s ability
to generate future taxable income to realize these assets, a full valuation
has
been established to offset the net deferred tax asset. Additionally, the future
utilization of the Company’s net operating loss to offset future taxable income
may be subject to an annual limitation as a result of ownership changes that
may
have occurred previously or that could occur in the future. The Company has
not
yet determined whether such an ownership change has occurred; however the
Company will be completing a Section 382 analysis regarding the limitation
of
the net operating loss. Until this analysis has been completed the Company
has
removed the deferred tax assets associated with these carryforwards from its
deferred tax asset schedule and has recorded a corresponding decrease in its
valuation allowance. When the Section 382 analysis is completed, the Company
plans to update its unrecognized tax benefits under FIN 48.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
Deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for tax purposes. Significant components of
the Company’s deferred tax assets as of December 31, 2007 and 2006
are as follows:
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
Federal
net operating loss carryforward
|
|
$
|
—
|
|
$
|
6,931,000
|
|
State
net operating loss carryforward
|
|
|
—
|
|
|
1,041,000
|
|
Stock
based compensation
|
|
|
1,959,000
|
|
|
1,840,000
|
|
Other
|
|
|
120,000
|
|
|
19,000
|
|
Total
deferred tax asset
|
|
|
2,079,000
|
|
|
9,831,000
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
Book
and tax bases difference arising from purchased patents
|
|
|
(1,499,000
|
)
|
|
(1,473,066
|
)
|
Total
net deferred tax asset
|
|
|
580,000
|
|
|
8,357,934
|
|
Less
valuation allowance
|
|
|
(2,079,000
|
)
|
|
(9,831,000
|
)
|
Net
deferred tax liability
|
|
$
|
(1,499,000
|
)
|
$
|
(1,473,066
|
)
|
For
the
years ended December 31, 2007, 2006 and 2005, a reconciliation of the
federal statutory tax rate to the Company's effective tax rate is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Federal
statutory tax rate
|
|
|
(34.00)
|
%
|
|
(34.00)
|
%
|
|
(34.00)
|
%
|
State
and local income taxes, net of federal tax Benefit
|
|
|
0.08
|
|
|
0.01
|
|
|
0.01
|
|
Non
deductible items
|
|
|
6.44
|
|
|
8.30
|
|
|
1.76
|
|
Valuation
allowance
|
|
|
27.89
|
|
|
24.83
|
|
|
30.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
effective tax rate
|
|
|
0.41
|
%
|
|
(0.86
|
)
|
|
(1.62)
|
%
|
18.
COMMITMENTS AND CONTINGENCIES
Operating
Lease
During
November 2007, the Company entered into an operating agreement for office space
for Surgicount. The lease requires monthly payments of $9,424, subject to
an annual increase of 3.5% per year, from January 1, 2008 through December
31,
2010. Future minimum annual rent payments of $113,082, $117,040 and
$121,136 due during the years ended December 31, 2008, 2009 and 2010,
respectively, represent the remaining obligation under the Company’s existing
operating lease.
Rent
expense during the years ended December 31, 2007, 2006 and 2005 was $78,937,
$131,129 and $88,368, respectively.
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.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
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.
Employment
Agreements
The
Company has entered into employment agreements with certain of its executives,
which provide for annual base compensation plus, in most cases, bonuses and
other benefits. As of December 31, 2007, approximate future annual base
compensation under these agreements are as follows:
Years
ended December 31,
|
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
|
|
|
|
|
$ |
581,250
|
|
$
|
112,500
|
|
$
|
693,750
|
|
19.
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.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
(continued)
20.
SELECTED QUARTERLY RESULTS (UNAUDITED)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
2007
Quarter Ended
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
13,038,354
|
|
$
|
10,447,051
|
|
$
|
8,205,147
|
|
$
|
8,174,174
|
|
Revenues
|
|
$
|
307,158
|
|
$
|
313,461
|
|
$
|
212,999
|
|
$
|
255,383
|
|
Operating
loss
|
|
$
|
(1,102,234
|
)
|
$
|
(1,409,279
|
)
|
$
|
(1,139,450
|
)
|
$
|
(1,503,612
|
)
|
Net
loss
|
|
$
|
(1,425,053
|
)
|
$
|
(1,756,157
|
)
|
$
|
(1,939,542
|
)
|
$
|
(1,885,226
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(0.18
|
)
|
$
|
(0.18
|
)
|
$
|
(0.18
|
)
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,925,286
|
|
$
|
14,036,035
|
|
$
|
11,654,435
|
|
$
|
11,181,446
|
|
Revenues
|
|
$
|
54,993
|
|
$
|
48,882
|
|
$
|
18,514
|
|
$
|
122,140
|
|
Operating
loss
|
|
$
|
(3,339,629
|
)
|
$
|
(1,486,107
|
)
|
$
|
(1,525,689
|
)
|
$
|
(1,608,125
|
)
|
Net
loss
|
|
$
|
(3,573,532
|
)
|
$
|
(2,917,733
|
)
|
$
|
(5,618,832
|
)
|
$
|
(1,513,055
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(0.60
|
)
|
$
|
(0.47
|
)
|
$
|
(0.87
|
)
|
$
|
(0.23
|
)
|
21.
SUBSEQUENT EVENTS
Between
February 28, 2008 and March 20, 2008, Francis Capital, a related party, loaned
$500,000 to the Company. As consideration for the loan, the Company issued
Francis Capital promissory notes in the principal amount of $500,000 (the
“Francis
Capital Note”).
Francis Capital beneficially owns 1,272,000 shares of the Company’s common stock
and warrants for purchase of 763,200 shares of the Company’s common stock. John
Francis, a director of the Company, has voting and investment control over
the
securities held by Francis Capital. The Francis Capital Note has an interest
rate of 8% per annum and is due on May 31, 2008.
In
March
2008, the Company completed the sale of approximately 8.5 acres of undeveloped
land in Heber Springs, Arkansas for net proceeds of $226,000, which resulted
in
a realized loss of $25,000.
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution.
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
Nature
of Expense
|
|
Amount
|
|
SEC
registration fee
|
|
$
|
3,500
*
|
|
Accounting
fees and expenses
|
|
$
|
15,000
*
|
|
Legal
fees and expenses
|
|
$
|
40,000
*
|
|
Printing
and related expenses
|
|
$
|
2,500
*
|
|
TOTAL
|
|
$
|
61,000
*
|
|
* Estimated
Item 14.
Indemnification of Directors and Officers.
Section 145
of the Delaware General Corporation Law authorizes a court to award, or a
corporation’s board of directors to grant, indemnity to officers, directors and
other corporate agents under certain circumstances and subject to certain
limitations. The Registrant’s certificate of incorporation and bylaws provide
that the Registrant shall indemnify its directors, officers, employees and
agents to the full extent permitted by Delaware General Corporation Law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. The Registrant also maintains director and officer liability
insurance.
These
indemnification provisions may be sufficiently broad to permit indemnification
of the Registrant’s officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities
Act.
Item 15.
Recent Sales of Unregistered Securities.
On
November 3, 2004, our [predecessor], Franklin Capital Corporation (“Franklin”),
entered into a Subscription Agreement with several accredited investors (the
"Investors") relating to the issuance and sale by Franklin of shares of its
common stock (the "Shares") and five-year warrants (the "Warrants") to purchase
additional shares of its common stock (the "Warrant Shares") in one or more
closings of a private placement (the "Private Placement"). Pursuant to the
Subscription Agreement, Franklin may issue and sell to accredited investors
an
aggregate of up to 1,875,000 Shares at a price per Share of $2.67. Each investor
that purchases Shares pursuant to the Subscription Agreement will also receive
a
Warrant to purchase that number of Warrant Shares equal to 50% of the number
of
Shares purchased by that investor at an exercise price per Warrant Share equal
to 110% of the closing price of Franklin's common stock on the date of the
issuance and sale of the Shares to such investor. Each Warrant further specifies
that Franklin may require the holder thereof to exercise the Warrant in
accordance with its terms in the event that the average closing price of
Franklin's common stock during any period of five consecutive trading days
exceeds 200% of the Warrant's exercise price per share. Securities issued under
the terms of the Subscription Agreement were made in reliance upon the exemption
provided in Section 4(2) of the Securities Act and the safe harbor of Rule
506
under Regulation D promulgated under the Securities Act of 1933, as amended
(the
"Securities Act"). During the period November 3, 2004, through December 21,
2004, Franklin held a series of four closings of the Private Placement. In
conjunction with the closings Franklin issued and sold to the Investors an
aggregate of 1,517,700 Shares and Warrants to purchase an aggregate of up to
758,841 Warrant Shares pursuant to the terms of the Subscription Agreement.
On
February 25, 2005, the Company purchased all of the issued and outstanding
capital stock of SurgiCount Medical, Inc. in exchange for $340,000 in cash
and
600,000 shares (post 3:1 forward split effective April 5, 2005) of common stock.
issued equally to Brian Stewart and Dr. William Stewart, the former owners
of
SurgiCount Medical, Inc. In addition, in the event that prior to the fifth
anniversary of the closing of the acquisition the cumulative gross revenues
of
SurgiCount exceed $500,000, Brian Stewart and Dr. William Stewart are entitled
to receive an additional 50,000 shares of common stock (for a total of 650,000
shares of common stock). In the event that prior to the fifth anniversary of
the
closing of the acquisition the cumulative gross revenues of SurgiCount exceed
$1,000,000, Brian Stewart and Dr. William Stewart will be entitled to receive
an
additional 50,000 shares of common stock (for a total of 700,000 shares of
common stock). The assets acquired in connection with the SurgiCount acquisition
consist primarily of intellectual property rights, including one U.S. patent
and
one European patent, relating to SurgiCount's Safety-Sponge System. The
foregoing issuances were made 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 are accredited investors, and transfer of the securities
is
restricted in accordance with the requirements of the Securities
Act.
On
October 18, 2004, the Company entered into a consulting agreement with Aegis
Securities Corp. (the “Aegis
Agreement”).
Under
the Aegis Agreement, the Company retained Aegis Securities Corp. to advise
the
Company in connection with the Company’s acquisition of SurgiCount Medical, Inc.
The Company issued 150,000 warrants, valued at $537,000, to Aegis Securities
Corp. The services provided by Aegis Securities Corp. included an evaluation
of
and oversight over completion of the transaction. The value of the warrants,
along with the purchase price and direct costs incurred as a result of the
transaction, were capitalized. The Aegis Warrants have an exercise price of
$5.267 per share and expire on March 30, 2010. These securities will be issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended. These
securities were issued in reliance upon the exemption provided by Section 4(2)
of the Securities Act. No advertising or general solicitation was employed
in
offering the securities, the sales were made to a limited number of persons,
and
transfer of the securities is restricted in accordance with the requirements
of
the Securities Act.
On
March
30, 2005, the Company issued 27,000 warrants to purchase shares of common stock
at $5.27 per share to a consultant. The warrants are immediately exercisable
and
have a five-year life. The warrants were valued at $97,000 and expensed at
the
time of issuance. These securities will be issued pursuant to Section 4(2)
of
the Securities Act of 1933, as amended. These securities were issued in reliance
upon the exemption provided by Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities,
the
sales were made to a limited number of persons, and transfer of the securities
is restricted in accordance with the requirements of the Securities
Act.
On
April
4, 2005, the Company entered into a consulting agreement with Crescent
Communications (the “Crescent
Agreement”).
The
Company retained Crescent Communications to provide investor communications
services. The Company agreed to pay Crescent Communications $8,000 per month
for
Crescent Communications’ services under the Crescent Agreement for a minimum
term of six months. In addition to the $8,000 per month, the Company agreed
to
issue Crescent Communications or its nominee warrants to purchase 100,000 shares
of the Company’s common stock (the “Crescent
Warrants”)
valued
at $397,000, of which $265,000 was expensed during 2005. The Crescent Warrants
have an exercise price of $5.85 per share and expire on April 1, 2010. These
securities will be issued pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities, the sales were made to
a
limited number of persons, and transfer of the securities is restricted in
accordance with the requirements of the Securities Act.
On
April
5, 2005, we entered into a consulting agreement with Health West Marketing
Incorporated, a California corporation (“Health
West”),
pursuant to which Health West agreed to help the Company establish a
comprehensive manufacturing and distribution strategy for its Safety-Sponge
System worldwide. As consideration for Health West's services, the Company
issued Health West 42,017 shares of the Company's common stock, as follows:
(a)
10,505 shares were issued upon signing the agreement; (b) the Company issued
Health West 15,756 shares in December 2005 when Health West helped the Company
structure a comprehensive manufacturing agreement with A Plus Manufacturing;
and
(c) the Company issued Health West an additional 15,756 shares in May
2007
for
Health West’s assistance in helping the Company develop a regional distribution
network to integrate the Safety-Sponge System into the existing acute care
supply chain. As incentive for entering into the agreement, the Company issued
Health West a callable warrant to purchase 150,000 (post 3:1 forward stock
split) shares of the Company's common stock at an exercise price of $5.95,
exercisable for 5 years. In addition, the Company agreed to issue a callable
warrant to purchase 25,000 (post 3:1 forward stock split) shares of the
Company's common stock at an exercise price of $5.95, exercisable upon meeting
specified milestones. These securities will be issued pursuant to Section 4(2)
of the Securities Act of 1933, as amended. These securities were issued in
reliance upon the exemption provided by Section 4(2) of the Securities Act.
No
advertising or general solicitation was employed in offering the securities,
the
sales were made to a limited number of persons, and transfer of the securities
is restricted in accordance with the requirements of the Securities
Act.
On
April
22, 2005, the Company sold 20,000 shares of common stock and warrants to
purchase an additional 20,000 shares of common stock to James Colen. The
warrants are exercisable for a period of five years, have an exercise price
equal to $6.05, and 50% of the warrants are callable. In the event the closing
sale price of the Company's common stock equals or exceeds $7.50 for at least
five consecutive trading days, the Company, upon 30 days prior written notice,
may call the callable warrants at a redemption price equal to $0.01 per share
of
common stock then purchasable pursuant to such warrants. Notwithstanding, such
notice, the warrant holder may exercise the callable warrant prior to the end
of
the 30-day notice period. The Company received gross proceeds of $100,000 from
the sale of stock and warrants. 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
April
28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
Tennessee from two trusts related to Melanie Glazer, the former manager of
the
Company’s closed subsidiary Ault Glazer Bodnar Capital Properties, LLC. The
purchase price consisted of approximately $90,000 in cash, 20,444 shares of
common stock and 10,221 warrants to purchase common stock at an exercise price
of $4.53 and a 5 year contractual life. The common stock and warrants in this
transaction were issued 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
12, 2005, the Company purchased certain assets from Philip Gatch, the Company’s
former Chief Technology Officer, for use in a production and post-production
media content facility. As consideration for the assets the Company issued
Mr.
Gatch: (1) 17,241 shares of common stock; and (2) warrants to purchase 8,621
shares of common stock with a five-year term and an exercise price of $5.80
per
share. The Company subsequently contributed the assets purchased from Mr. Gatch
to Cinapse Digital Media, LLC of which the Company held a 50% ownership
interest. On October 14, 2005, the Company sold its 50% interest in Cinapse
Digital Media, LLC in exchange for the cancellation of the 17,241 shares of
common stock and the warrants to purchase 8,621 shares of common stock issued
in
the asset purchase. The common stock and warrants in the asset purchase were
issued 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
July
19, 2005, the Company sold 38,000 shares of common stock to an unaffiliated
accredited investor in exchange for 12,000 shares of common stock of Tuxis
Corporation valued at approximately $102,000. 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
September 15, 2005, the Company issued 12,500 warrants to purchase shares of
common stock at $3.55 per share to a consultant. The warrants are immediately
exercisable and have a three-year life. The warrants were valued at $25,000,
all
of which was expensed during 2005 and 2006. These securities will be issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended. These
securities were issued in reliance upon the exemption provided by Section 4(2)
of the Securities Act. No advertising or general solicitation was employed
in
offering the securities, the sales were made to a limited number of persons,
and
transfer of the securities is restricted in accordance with the requirements
of
the Securities Act.
On
October 12, 2005, the Company issued 25,000 warrants to purchase shares of
common stock at $3.26 per share to a consultant. The warrants are immediately
exercisable and have a three-year life. The warrants were valued at $45,000,
all
of which was expensed during 2005 and 2006. These securities will be issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended. These
securities were issued in reliance upon the exemption provided by Section 4(2)
of the Securities Act. No advertising or general solicitation was employed
in
offering the securities, the sales were made to a limited number of persons,
and
transfer of the securities is restricted in accordance with the requirements
of
the Securities Act.
On
October 25, 2005, the Company sold 16,666 shares of common stock to Jay Rifkin,
present Chief Executive Officer of the Company’s former portfolio company
Digicorp, at a price of $3.00 per share, resulting in gross proceeds of $50,000.
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
November 3, 2005, the Company sold 28,653 shares of common stock to Herbert
Langsam, one of the Company’s current directors, at a price of $3.49 per share,
resulting in gross proceeds of $100,000. These securities were sold pursuant
to
Rule 506 promulgated under the Securities Act of 1933, as amended. 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
January 12, 2006, ASG entered into a Secured Promissory Note with Steven J.
Caspi in the principal amount of $1,000,000. As additional consideration for
entering into the secured promissory note, Mr. Caspi received warrants to
purchase 30,000 shares of the Company’s common stock. The warrants are
exercisable for a period of five years and have an exercise price of $4.50
per
share. The issuance of the above warrants to Mr. Caspi was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933, as amended (the “Securities
Act”),
and
Rule 506 promulgated thereunder. No advertising or general solicitation was
employed in offering the securities and Mr. Caspi represented that he is an
accredited investor and that he is able to bear the economic risk of his
investment.
On
February 8, 2006, we entered into a Secured Promissory Note with Ault Glazer
Capital Partners, LLC (formerly AGB Acquisition Fund) (the “Fund”),
a
related party, in the principal amount of $687,000. As an inducement for
entering into the secured promissory note the Fund received warrants to purchase
20,608 shares of the Company’s common stock. The warrants are exercisable for a
period of five years and have an exercise price equal to $3.86. The issuance
of
the above warrants to AGB Acquisition Fund was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. No advertising or general solicitation was employed
in
offering the securities and Mr. Caspi represented that he is an accredited
investor and that he is able to bear the economic risk of his investment.
On
February 13, 2006, the Company issued 175,000 warrants to purchase shares of
common stock at $3.95 per share to a consultant. The warrants vested immediately
and have a three-year life. The warrants were valued at $405,000 and were
expensed during the three months ended March 31, 2006. These warrants were
issued in reliance upon the exemption provided by Section 4(2) of the Securities
Act.
On
March
15, 2006 the Company, Automotive Services Group, ASG and Darell W. Grimsley,
Jr.
entered into a Unit Purchase Agreement for Automotive Services Group to purchase
a 50% equity interest (the “Membership
Interest”)
in ASG
from Mr. Grimsley. As consideration for the Membership Interest the Company
issued Mr. Grimsley 200,000 shares of the Company’s common stock. Until June 29,
2007, Mr. Grimsley continued to act as Chairman and Chief Executive Officer
of
Automotive Services Group. The issuance of the above shares to Mr. Grimsley
was
exempt from registration requirements pursuant to Section 4(2) of the Securities
Act of 1933, as amended,
and Rule 506 promulgated thereunder. No advertising or general solicitation
was
employed in offering the securities and Mr. Grimsley represented that he is
an
accredited investor and that he is able to bear the economic risk of his
investment.
On
May
19, 2006, the Company issued 32,120 warrants to purchase shares of common stock
at $3.50 per share to a consultant. The warrants vested immediately and had
a
one-year life. The warrants were valued at approximately $31,000 and were
expensed over the warrant term. These securities will be issued pursuant to
Section 4(2) of the Securities Act. These warrants were issued in reliance
upon
the exemption provided by Section 4(2) of the Securities Act.
On
June
6, 2006 we entered into a Secured Convertible Promissory Note with Alan Morelli
in the principal amount of $1,100,000. As an inducement for entering into the
secured convertible promissory note, Mr. Morelli received warrants to purchase
401,460 shares of our common stock. On August 17, 2006, we sold shares of our
common stock at $1.25 per share thereby requiring modifications to Mr. Morelli’s
secured convertible promissory note and warrant. These modifications resulted
in
an adjustment to the conversion price of the Morelli Note from $2.74 to $1.25
per share, an adjustment to the exercise price of the Morelli Warrant, and
an
increase in the number of shares of common stock available to purchase upon
exercise of the Morelli Warrant from 401,460 to 976,351. The warrants are
exercisable for a period of five years and have an adjusted exercise price
equal
to $1.25. The issuance of these securities to Mr. Morelli was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder. No advertising or general solicitation was
employed in offering the securities and Mr. Morelli represented that he is
an
accredited investor and that he is able to bear the economic risk of his
investment.
On
July
12, 2006 we entered into a Convertible Promissory Note with Charles J. Kalina,
III in the principal amount of $250,000. As an inducement for entering into
the
secured promissory note, Mr. Kalina received warrants to purchase 85,000 shares
of the Company’s common stock. The warrants are exercisable for a period of five
years and have an exercise price equal to $2.69. The issuance of these
securities to Mr. Kalina was exempt from registration requirements pursuant
to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
advertising or general solicitation was employed in offering the securities
and
Mr. Kalina represented that he is an accredited investor and that he is able
to
bear the economic risk of his investment.
In
August
2006, we entered into subscription agreements with two unaffiliated accredited
investors, pursuant to which we sold 200,000 shares of the Company’s common
stock, $0.33 par value per share, at a price of $1.25 per share. We received
gross proceeds of approximately $250,000 from the sale of our common stock
to
the accredited investors. Pursuant to the subscription agreement, we granted
the
accredited investors piggy back registration rights to register the resale
of
the shares of common stock. The sale was made in a private placement exempt
from
registration requirements pursuant to Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.
On
September 8, 2006 we entered into a Convertible Promissory Note with Steven
J.
Caspi in the principal amount of $1,495,000. As an inducement for entering
into
the secured promissory note, Mr. Caspi received warrants to purchase 250,000
shares of the Company’s common stock. The warrants are exercisable for a period
of five years and have an exercise price equal to $1.25. The issuance of these
securities to Mr. Caspi was exempt from registration requirements pursuant
to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
advertising or general solicitation was employed in offering the securities
and
Mr. Caspi represented that he is an accredited investor and that he is able
to
bear the economic risk of his investment.
Between
September 15, 2006 and November 1, 2006, the Company issued 70,694 shares of
Common Stock to two employees and a consultant. The Common Stock was issued
for
accrued salaries and services. The Common Stock was valued at approximately
$190,000. These shares were issued in reliance upon the exemption provided
by
Section 4(2) of the Securities Act.
On
November 1, 2006 we entered into a Convertible Promissory Note with Michael
G.
Sedlak in the principal amount of $71,000. As an inducement for entering into
the secured promissory note, Mr. Sedlak received warrants to purchase 20,000
shares of the Company’s common stock. The warrants are exercisable for a period
of five years and have an exercise price equal to $1.25. The issuance of these
securities to Mr. Sedlak was exempt from registration requirements pursuant
to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
advertising or general solicitation was employed in offering the securities
and
Mr. Sedlak represented that he is an accredited investor and that he is able
to
bear the economic risk of his investment.
On
November 1, 2006 we entered into a Convertible Promissory Note with James
Sveinson in the principal amount of $102,000. As an inducement for entering
into
the secured promissory note, Mr. Sveinson received warrants to purchase 20,000
shares of the Company’s common stock. The warrants are exercisable for a period
of five years and have an exercise price equal to $1.25. The issuance of these
securities to Mr. Sveinson was exempt from registration requirements pursuant
to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
advertising or general solicitation was employed in offering the securities
and
Mr. Sveinson represented that he is an accredited investor and that he is able
to bear the economic risk of his investment.
On
November 3, 2006 we entered into a Convertible Promissory Note with Charles
J.
Kalina, III in the principal amount of $400,000. As an inducement for entering
into the secured promissory note, Mr. Kalina received warrants to purchase
100,000 shares of the Company’s common stock. The warrants are exercisable for a
period of five years and have an exercise price equal to $1.25. The issuance
of
these securities to Mr. Kalina was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder. No advertising or general solicitation was employed in offering
the
securities and Mr. Kalina represented that he is an accredited investor and
that
he is able to bear the economic risk of his investment.
On
November 13, 2006 we entered into a Promissory Note with Herbert Langsam, a
Director of the Company, in the principal amount of $100,000. As an inducement
for entering into the secured promissory note, Mr. Langsam received warrants
to
purchase 50,000 shares of the Company’s common stock. The warrants are
exercisable for a period of five years and have an exercise price equal to
$1.25. The issuance of these securities to Mr. Langsam was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder. No advertising or general solicitation was
employed in offering the securities and Mr. Langsam represented that he is
an
accredited investor and that he is able to bear the economic risk of his
investment.
On
November 18, 2006, the Company issued 12,500 warrants to purchase shares of
common stock at $2.00 per share to a consultant. The warrants vested immediately
and have a three-year life. The warrants were valued at approximately $2,000
and
were expensed at the time of issuance. These securities will be issued pursuant
to Section 4(2) of the Securities Act. These warrants were issued in reliance
upon the exemption provided by Section 4(2) of the Securities Act.
Between
November 30, 2006 and December 15, 2006, the Company entered into a subscription
agreement and sold an aggregate of 238,000 shares of its Common Stock and
warrants to purchase an aggregate of up to 119,000 shares of its Common Stock
in
a private placement transaction to certain accredited investors. The warrants
are exercisable for a period of three 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. The Company received aggregate
gross proceeds of $298,000. 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
December 26, 2006 we entered into a Promissory Note with Maroon Creek Capital,
LP (“Maroon”),
a
California limited partnership, in the principal amount of $81,000. As an
inducement for entering into the secured promissory note, Maroon received
warrants to purchase 30,000 shares of the Company’s common stock. The warrants
are exercisable for a period of five years and have an exercise price equal
to
$2.00. The issuance of these securities to Maroon was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. No advertising or general solicitation was employed
in
offering the securities and Maroon represented that it is an accredited investor
and that it is able to bear the economic risk of his investment.
On
December 31, 2006, the Company issued 56,340 warrants to purchase shares of
common stock at $1.25 per share to the Company’s placement agent, Ault Glazer
& Co., LLC, (the “Placement
Agent”).
The
warrants vested immediately and have a five-year life. The warrants were valued
at approximately $62,000 and were expensed at the time of issuance. These
securities will be issued pursuant to Section 4(2) of the Securities Act. These
warrants were issued in reliance upon the exemption provided by Section 4(2)
of
the Securities Act.
On
December 31, 2006, the Company issued 19,040 warrants to purchase shares of
common stock at $2.00 per share to the Company’s Placement Agent. The warrants
vested immediately and have a five-year life. The warrants were valued at
approximately $17,000 and were expensed at the time of issuance. These
securities will be issued pursuant to Section 4(2) of the Securities Act. These
warrants were issued in reliance upon the exemption provided by Section 4(2)
of
the Securities Act.
Between
January 1, 2007 and April 6, 2007, the Company issued 79,138 shares of Common
Stock to various employees, directors, consultants and creditors. The Common
Stock was issued for services and payment of accrued interest. The Common Stock
was valued at approximately $131,000. These shares were issued in reliance
upon
the exemption provided by Section 4(2) of the Securities Act.
On
January 29, 2007, the Company entered into a subscription agreement and sold
an
aggregate of 800,000 shares of its Common Stock and warrants to purchase an
aggregate of up to 300,000 shares of its Common Stock in a private placement
transaction to A Plus, an accredited investor. The warrants are exercisable
for
a period of 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. 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. 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
January 29, 2007, the Company entered into a subscription agreement with several
unaffiliated accredited investors in a private placement exempt from the
registration requirements of the Securities Act. The Company issued and sold
to
these accredited investors an aggregate of 104,000 shares of its common stock
and warrants to purchase an additional 52,000 shares of its common stock. The
warrants are exercisable for a period of 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 $130,000. 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
January 30, 2007, the Company issued 8,320 warrants to purchase shares of common
stock at $2.00 per share to the Company’s Placement Agent. The warrants vested
immediately and have a five-year life. The warrants were valued at approximately
$8,000 and were expensed at the time of issuance. These securities will be
issued pursuant to Section 4(2) of the Securities Act of 1933. These warrants
were issued in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
Between
March 7, 2007 and April 5, 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. The Company issued and
sold
to these accredited investors an aggregate of 2,000,000 shares of its common
stock and warrants to purchase an additional 1,000,000 shares of its common
stock. The warrants are exercisable for a period of 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 $2,500,000. We are
required to use our reasonable best efforts to cause the registration statement
to become effective within 120 days after the Closing Date, April 5, 2007.
If
the registration statement has not been filed on or prior to the 120th day
after
the Closing Date, we will issue, as liquidated damages, to the purchasers of
the
2,000,000 shares of our Common Stock and the warrants to purchase
1,000,000 shares of our Common Stock warrants with a term of five years and
an
exercise price of $2.00 per share to purchase shares of our Common Stock equal
to 2.5% of the number of shares of Common Stock purchased by the purchasers
for
each thirty
(30) day period following
the 120th
day
after the Closing Date until the date on which the registration statement is
first filed or is no longer required to be filed. 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
April
5, 2007, the Company issued 89,600 warrants to purchase shares of common stock
at $2.00 per share to the Company’s Placement Agent. The warrants vested
immediately and have a five-year life. The warrants were valued at approximately
$81,000 and were expensed at the time of issuance. These securities will be
issued pursuant to Section 4(2) of the Securities Act of 1933. These warrants
were issued in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
Between
May 9, 2007 and June 28, 2007, the Company issued 220,169 shares of Common
Stock
to various employees, directors, consultants and creditors. The Common Stock
was
issued for services and payment of accrued interest. The Common Stock was valued
at approximately $392,000. These shares were issued in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
On
January 30, 2007, the Company issued 8,320 warrants to purchase shares of common
stock at $2.00 per share to the Company’s Placement Agent. The warrants vested
immediately and have a five-year life. The warrants were valued at approximately
$8,000 and were expensed at the time of issuance. These securities will be
issued pursuant to Section 4(2) of the Securities Act of 1933. These warrants
were issued in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
On
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. The Company issued and sold to these
accredited investors an aggregate of 48,000 shares of its common stock and
warrants to purchase an additional 24,000 shares of its common stock. The
warrants are exercisable for a period of 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 $60,000. We intend to use the
net
proceeds from this private placement transaction primarily for general corporate
purposes. 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.
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, 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.
On
June
28, 2007, the Company issued 337,439 shares of its common stock to Ault Glazer
Capital Partners, LLC (formerly AGB Acquisition Fund) (the “Fund”).
The
shares were issued in satisfaction of the unpaid principal and accrued interest
of $422,000 owed to the Fund pursuant to a Revolving Line of Credit Agreement
(the “Revolving
Line of Credit”)
entered
into with the Fund on March 7, 2006. The amount due under the
Revolving Line
of
Credit, which
was
in default, was converted into shares of the Company’s common stock at a
conversion price of $1.25 per share.
On
April
26, 2007, upon the occurrence of default of Maroon Creek Capital, LP’s
(“Maroon”),
a
California limited partnership, $81,000 promissory note, the Company issued
10,000 warrants to purchase shares of common stock at $2.00 per share to Maroon.
The warrants vested immediately and have a five-year life. The warrants were
valued at $9,000 and were expensed at the time of issuance. These warrants
were
issued in reliance upon the exemption provided by Section 4(2) of the Securities
Act.
On
July
23, 2007, the Company issued 25,000 warrants to purchase shares of common stock
at $1.75 per share to a consultant. The warrants vested immediately and have
a
five-year life. The warrants were valued at $27,000 and were expensed at the
time of issuance. These warrants were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
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.
Item 16.
Exhibits and Financial Statement Schedules.
Exhibits.
The exhibits are set forth in the Exhibit Index attached hereto.
Item 17.
Undertakings.
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
to
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
(ii)
to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low
or
high end of the estimated maximum offering range may be reflected in the form
of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20% change
in
the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement; or
(iii)
to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
That,
for the purpose of determining liability under the Securities Act of 1933 to
any
purchaser:
(i)
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed
to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7)
as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose
of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement
as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter,
such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall
be
deemed to be the initial bona fide offering thereof. Provided, however, that
no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made
in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
(5)
That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities:
The
undersigned registrant undertakes that in a primary offering of securities
of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if
the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv)
Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(6)
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions described in Item 15 above,
or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Post-Effective Amendment No. 1 to Registration Statement on Form
S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Temecula, California, on April 28, 2008.
PATIENT
SAFETY TECHNOLOGIES, INC.
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By:
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/s/
William M. Adams
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William
M. Adams
Chief
Executive Officer
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Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
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Title
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Date
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/s/
Steven H. Kane
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Chairman
of the Board
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April
28, 2008
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STEVEN
H. KANE
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*
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Director
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April
28, 2008
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JOHN
P. FRANCIS
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*
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Director
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April
28, 2008
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DAVID
AUGUSTINE
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*
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Director
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April
28, 2008
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LOUIS
GLAZER, M.D., PH.G.
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*
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Director
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April
28, 2008
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HERBERT
LANGSAM
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*
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Director
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April
28, 2008
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WAYNE
LIN
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*
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Director
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April
28, 2008
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ARNOLD
SPANGLER
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*
By:
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/s/
William B. Horne
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William
B. Horne
(Attorney-in-fact)
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Exhibit
Number
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Description
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2.1
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Agreement
and Plan of Merger and Reorganization, dated as of February 3, 2005,
by
and among Franklin Capital Corporation (n/k/a Patient Safety Technologies,
Inc.), SurgiCount Acquisition Corp., SurgiCount Medical, Inc., Brian
Stewart and Dr. William Stewart (Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 9, 2005)
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3.1
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Amended
and Restated Certificate of Incorporation (Incorporated by reference
to
the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2004, filed with the Securities and Exchange Commission
on
March 30, 2005)
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3.2
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Certificate
of Amendment to Certificate of Incorporation (Incorporated by reference
to
Appendix E to the Company’s Definitive Proxy Statement on Schedule 14A,
filed with the Securities and Exchange Commission on March 2,
2005)
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3.3
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By-laws
(Incorporated by reference to the Company’s Form N-2 filed with the
Securities and Exchange Commission on July 31, 1992)
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4.1
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Certificate
of Designation of Series A Convertible Preferred Stock (Included
in
Amended and Restated Certificate of Incorporation (Exhibit 3.1
hereto))
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4.2
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$1,000,000
principal amount Promissory Note dated August 28, 2001 issued to
Winstar
Radio Networks, LLC, Winstar Global Media, Inc. or Winstar Radio
Productions, LLC (Incorporated by reference to the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2005, filed with
the
Securities and Exchange Commission on April 17, 2006)
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4.3
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Form
of non-callable Warrant issued to James Colen (Incorporated by reference
to the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on April 26, 2005)
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4.4
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Form
of callable Warrant issued to James Colen (Incorporated by reference
to
the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on April 26, 2005)
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4.5
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Promissory
Note in the principal amount of $1,000,000 issued January 12, 2006
by
Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on January 18, 2006)
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4.6
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Promissory
Note dated February 8, 2006 issued by Automotive Services Group,
LLC to
Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference
to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 14, 2006)
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4.7
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Revolving
Line of Credit Agreement dated and effective as of March 7, 2006
by and
between Ault Glazer Bodnar Acquisition Fund LLC and Patient Safety
Technologies, Inc. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission
on
March 8, 2006)
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4.8
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Promissory
Note in the principal amount of $500,000 issued May 1, 2006 by the
Patient
Safety Technologies, Inc. to the Herbert Langsam Irrevocable Trust
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on February 14,
2006)
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4.9
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$400,000
principal amount Convertible Promissory Note issued by Patient Safety
Technologies, Inc. to Charles J. Kalina III on November 3,
2006
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5.1
#
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Opinion
of Morrison & Foerster LLP
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10.1
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Amended
and Restated Stock Option and Restricted Stock Plan (Incorporated
by
reference to Annex A to the Company’s Revised Definitive Proxy Statement
on Schedule 14A, filed with the Securities and Exchange Commission
on
October 18, 2005)
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10.2
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Employment
Agreement entered into as of June 13, 2005 by and between Patient
Safety
Technologies, Inc. and William B. Horne (Incorporated by reference
to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on June 16, 2005)
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10.3
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Employment
Agreement dated October 31, 2005 between SurgiCount Medical, Inc.,
Patient
Safety Technologies, Inc. and Richard Bertran (Incorporated by reference
to the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on November 2, 2005)
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10.4
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Employment
Agreement entered into as of April 21, 2006 between SurgiCount Medical,
Inc., Patient Safety Technologies, Inc. and William M. Adams (Incorporated
by reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on April 27,
2006)
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10.5
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Engagement
Letter dated February 10, 2006 between Analog Ventures, LLC and Patient
Safety Technologies, Inc. (Incorporated by reference to the Company’s
quarterly report on Form 10-Q for the quarter ended March 31, 2006,
filed
with the Securities and Exchange Commission on May 19,
2006)
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10.6
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Security
Agreement dated May 1, 2006, between the Company and the Herbert
Langsam
Revocable Trust (Incorporated by reference to the Company’s current report
on Form 8-K filed with the Securities and Exchange Commission on
May 5,
2006)
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10.7
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Secured
Convertible Note and Warrant Purchase Agreement dated June 6, 2006
between
the Company and Alan Morelli (Incorporated by reference to the Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on June 9, 2006)
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10.8
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Registration
Rights Agreement dated June 6, 2006 by and between Patient Safety
Technologies, Inc. and Alan E. Morelli (Incorporated by reference
to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on June 9, 2006)
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10.9
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Subscription
Agreement dated August 30, 2006 between Patient Safety Technologies,
Inc.
and Nobu Ventures Inc. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission
on
September 6, 2006)
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10.10
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Secured
Convertible Note and Warrant Purchase Agreement dated September 8,
2006
between the Company and Steven J. Caspi (Incorporated by reference
to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 1, 2007)
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10.11
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Pledge
Agreement and Addendum to Pledge Agreement dated as of September
8, 2006
between the Company and Steven J. Caspi (Incorporated by reference
to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 1, 2007)
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10.12
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Supply
Agreement dated November 14, 2006 between SurgiCount Medical, Inc.
and
Cardinal Health 200, Inc. (Incorporated by reference to the Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on November 20, 2006)
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10.13
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Exclusive
License and Supply Agreement dated January 26, 2007, by and among
SurgiCount Medical, Inc. and A Plus International, Inc. (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2007)
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10.14
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Subscription
Agreement dated January 26, 2007 between Patient Safety Technologies,
Inc.
and A Plus International, Inc. (Incorporated by reference to the
Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on February 2, 2007)
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10.15
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Subscription
Agreement dated January 29, 2007 between Patient Safety Technologies,
Inc.
and Nite Capital, LP. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission
on
February 2, 2007)
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10.16
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Subscription
Agreement dated January 29, 2007 between Patient Safety Technologies,
Inc.
and David Wilstein and Susan Wilstein, as Trustees of the Century
Trust
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on February 2,
2007)
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10.17
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Form
of Subscription Agreement entered into between March 7, 2007 to April
5,
2007 between Patient Safety Technologies, Inc. and several accredited
investors (Incorporated by reference to the Company’s annual report on
Form 10-K for the year ended December 31, 2006, filed with the Securities
and Exchange Commission on May 16, 2007)
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10.18
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Secured
Convertible Note issued August 10, 2007 with an effective date of
June 1,
2007 between the Company and Ault Glazer Capital Partners, LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
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10.19
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Guaranty
of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
Inc., in favor of Ault Glazer Capital Partners, LLC in connection
with the
$2,530,558.40 Promissory Note issued August 10, 2007 with an effective
date of June 1, 2007 by the Company to Ault Glazer Capital Partners,
LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
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10.20
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Form
of Subscription Agreement entered into between March 7, 2007 to April
5,
2007 between Patient Safety Technologies, Inc. and several accredited
investors (Incorporated by reference to the Company’s annual report on
Form 10-K for the year ended December 31, 2006, filed with the Securities
and Exchange Commission on May 16, 2007)
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10.21
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Secured
Convertible Note issued August 10, 2007 with an effective date of
June 1,
2007 between the Company and Ault Glazer Capital Partners, LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
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10.22
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Guaranty
of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
Inc., in favor of Ault Glazer Capital Partners, LLC in connection
with the
$2,530,558.40 Promissory Note issued August 10, 2007 with an effective
date of June 1, 2007 by the Company to Ault Glazer Capital Partners,
LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
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14.1
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Code
of Business Conduct and Ethics (Incorporated by reference to Appendix
E to
the Company’s Definitive Proxy Statement on Schedule 14A, filed with the
Securities and Exchange Commission on March 2, 2005)
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16.1
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Letter
from Peterson & Company, LLP to the SEC dated December 14, 2006
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on December 15,
2006)
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21.1
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Subsidiaries
of the Company (Incorporated by reference to the Company’s annual report
on Form 10-K for the year ended December 31, 2007, filed with the
Securities and Exchange Commission on April 15, 2007)
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23.1
#
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Consent
of Morrison & Foerster LLP is contained in Exhibit 5.1 to this
Registration Statement.
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23.2
*
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Consent
of Squar, Milner, Peterson, Miranda & Williamson,
LLP
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23.3
*
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Consent
of Rothstein, Kass & Company, P.C.
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24.1
#
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Powers
of Attorney.
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*
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Filed
herewith.
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Previously
filed.
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