Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
OR
o
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|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE
TRANSITION PERIOD
FROM TO
COMMISSION
FILE NUMBER 001-09727
PATIENT
SAFETY TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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13-3419202
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification
Number)
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43460
Ridge Park Drive, Suite 140, Temecula, CA
92590
|
(Address
of principal executive offices) (Zip
Code)
|
Registrant’s
telephone number, including area code:
(951) 587-6201
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
past 12 months (or for such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. Yes
x No ¨.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definitions of “accelerated filer,” “large accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
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|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2) of the Act. Yes ¨ No x.
There
were 17,172,872 shares of the registrant's common stock outstanding as of
November 14, 2008.
PATIENT
SAFETY TECHNOLOGIES, INC.
FORM
10-Q FOR THE QUARTER
ENDED
SEPTEMBER 30, 2008
TABLE
OF CONTENTS
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Page
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PART
I - FINANCIAL INFORMATION
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Item
1.
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Financial
Statements
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1
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk.
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25
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Item
4T.
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Controls
and Procedures
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25
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PART
II - OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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26
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Item
1A.
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Risk
Factors
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26
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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26
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Item
3.
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Defaults
Upon Senior Securities
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26
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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27
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Item
5.
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Other
Information
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27
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Item
6
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Exhibits
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27
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SIGNATURES
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28
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"SAFE
HARBOR" STATEMENT UNDER
THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We
believe that it is important to communicate our plans and expectations about
the
future to our stockholders and to the public. Some of the statements in this
report are forward-looking statements about our plans and expectations of what
may happen in the future, including in particular the statements about our
plans
and expectations in Part I of this report under the heading “Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.” Statements that are not historical facts are forward-looking
statements. These forward-looking statements are made pursuant to the
“safe-harbor” provisions of the Private Securities Litigation Reform Act of
1995. You can sometimes identify forward-looking statements by our use of
forward-looking words like “may,” “should,” “expects,” “intends,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”
or the negative of these terms and other similar expressions.
Although
we believe that the plans and expectations reflected in or suggested by our
forward-looking statements are reasonable, those statements are based only
on
the current beliefs and assumptions of our management and on information
currently available to us and, therefore, they involve uncertainties and risks
as to what may happen in the future. Accordingly, we cannot guarantee you that
our plans and expectations will be achieved. Our actual results and stockholder
values could be very different from and worse than those expressed in or implied
by any forward-looking statement in this report as a result of many known and
unknown factors, many of which are beyond our ability to predict or control.
These factors include, but are not limited to, those contained in Part II of
this report under “Item 1A. Risk Factors.” All written and oral forward-looking
statements attributable to us are expressly qualified in their entirety by
these
cautionary statements.
Our
forward-looking statements speak only as of the date they are made and should
not be relied upon as representing our plans and expectations as of any
subsequent date. Although we may elect to update or revise forward-looking
statements at some time in the future, we specifically disclaim any obligation
to do so, even if our plans and expectations change.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements.
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed
Consolidated Balance Sheets (Unaudited)
(In
thousands, except par value)
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|
September
30,
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December
31,
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|
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|
2008
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|
2007
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|
Assets
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|
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Current
assets:
|
|
|
|
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Cash
and cash equivalents
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$
|
1,038
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|
$
|
405
|
|
Accounts
receivable
|
|
|
325
|
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|
72
|
|
Inventories
|
|
|
35
|
|
|
—
|
|
Prepaid
expenses
|
|
|
309
|
|
|
105
|
|
Total
current assets
|
|
|
1,707
|
|
|
582
|
|
|
|
|
|
|
|
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Restricted
certificate of deposit
|
|
|
87
|
|
|
87
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|
Notes
receivable
|
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|
154
|
|
|
154
|
|
Property
and equipment, net
|
|
|
721
|
|
|
663
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|
Assets
held for sale, net
|
|
|
90
|
|
|
406
|
|
Goodwill
|
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|
1,832
|
|
|
1,832
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|
Patents,
net
|
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|
3,520
|
|
|
3,764
|
|
Long-term
investment
|
|
|
667
|
|
|
667
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Other
assets
|
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29
|
|
|
19
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|
Total
assets
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$
|
8,807
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|
$
|
8,174
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|
|
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|
|
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Liabilities
and Stockholders' (Deficit) Equity
|
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|
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|
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Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
603
|
|
$
|
709
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|
Current
portion of long term debt
|
|
|
2,946
|
|
|
1,172
|
|
Accrued
liabilities
|
|
|
3,303
|
|
|
521
|
|
Total
current liabilities
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|
6,852
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2,402
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Long-term
debt, less current portion
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—
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2,531
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|
Deferred
tax liabilities
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|
1,403
|
|
|
1,499
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|
Total
liabilities
|
|
|
8,255
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|
|
6,431
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Stockholders'
equity:
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Convertible
preferred stock, $1.00 par value, cumulative 7% dividend:
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1,000
shares authorized; 11 issued and outstanding
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at
September 30, 2008 and December 31, 2007
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(Liquidation
preference of $1.2 million at September 30, 2008 and December 31,
2007
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11
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11
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Common
stock, $0.33 par value: 25,000 shares authorized;
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16,673
shares issued and outstanding at September 30, 2008;
12,055
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shares
issued and outstanding at December 31, 2007
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5,502
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3,978
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Additional
paid-in capital
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35,408
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34,320
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Accumulated
deficit
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|
(40,369
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)
|
|
(36,567
|
)
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Total
stockholders' (deficit) equity
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|
552
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|
1,743
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|
Total
liabilities and stockholders' equity
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$
|
8,807
|
|
$
|
8,174
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|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Operations (Unaudited)
(In
thousands, except per share data)
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For
The Three Months Ended September 30,
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For
The Nine Months Ended September
30,
|
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2008
|
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2007
|
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2008
|
|
2007 |
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|
|
|
|
|
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Revenues
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$
|
880
|
|
$
|
213
|
|
$
|
1,937
|
|
$
|
834
|
|
Cost
of revenue
|
|
|
622
|
|
|
112
|
|
|
1,342
|
|
|
514
|
|
Gross
profit
|
|
|
258
|
|
|
101
|
|
|
595
|
|
|
320
|
|
|
|
|
|
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|
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Operating
expenses:
|
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|
|
|
|
|
|
|
|
|
|
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|
Research
and development
|
|
|
87
|
|
|
39
|
|
|
168
|
|
|
91
|
|
Sales
and marketing
|
|
|
662
|
|
|
418
|
|
|
1,796
|
|
|
1,090
|
|
General
and administrative
|
|
|
958
|
|
|
764
|
|
|
3,680
|
|
|
2,790
|
|
Total
operating expenses
|
|
|
1,707
|
|
|
1,221
|
|
|
5,644
|
|
|
3,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating
loss
|
|
|
(1,449
|
)
|
|
(1,120
|
)
|
|
(5,049
|
)
|
|
(3,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(79
|
)
|
|
(810
|
)
|
|
(254
|
)
|
|
(1,414
|
)
|
Change
in fair value of warrant liability
|
|
|
1,683
|
|
|
—
|
|
|
1,515
|
|
|
—
|
|
Realized
gain (loss) assets held for sale, net
|
|
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
22
|
|
Unrealized
loss on assets held for sale, net
|
|
|
—
|
|
|
—
|
|
|
(65
|
)
|
|
—
|
|
Other
income
|
|
|
36
|
|
|
—
|
|
|
35
|
|
|
—
|
|
Total
other income (expense)
|
|
|
1,640
|
|
|
(810
|
)
|
|
1,206
|
|
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income
taxes
|
|
|
191
|
|
|
(1,931
|
)
|
|
(3,843
|
)
|
|
(5,043
|
)
|
Income
tax provision
|
|
|
33
|
|
|
29
|
|
|
98
|
|
|
88
|
|
Income
(loss) from continuing operations
|
|
|
224
|
|
|
(1,901
|
)
|
|
(3,744
|
)
|
|
(4,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
(166
|
)
|
Net
income (loss)
|
|
|
224
|
|
|
(1,920
|
)
|
|
(3,745
|
)
|
|
(5,121
|
)
|
Preferred
dividends
|
|
|
(19
|
)
|
|
(19
|
)
|
|
(57
|
)
|
|
(57
|
)
|
Net
income (loss) applicable to common shareholders
|
|
$
|
205
|
|
$
|
(1,940
|
)
|
$
|
(3,802
|
)
|
$
|
(5,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.01
|
|
$
|
(0.18
|
)
|
$
|
(0.28
|
)
|
$
|
(0.53
|
)
|
Discontinued
operations
|
|
$
|
—
|
|
$
|
(0.00
|
)
|
$
|
—
|
|
$
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.01
|
|
$
|
(0.18
|
)
|
$
|
(0.28
|
)
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.01
|
|
$
|
(0.18
|
)
|
$
|
(0.28
|
)
|
$
|
(0.53
|
)
|
Discontinued
operations
|
|
$
|
0
|
|
$
|
0.00
|
|
$
|
—
|
|
$
|
(0.02
|
)
|
Net
income (loss)
|
|
$
|
0.01
|
|
$
|
(0.18
|
)
|
$
|
(0.28
|
)
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,615
|
|
|
10,626
|
|
|
13,588
|
|
|
9,501
|
|
Diluted
|
|
|
29,005
|
|
|
19,788
|
|
|
26,978
|
|
|
18,663
|
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(In
thousands)
|
|
For
The Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,745
|
)
|
$
|
(5,121
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
261
|
|
|
133
|
|
Amortization
of patents
|
|
|
244
|
|
|
244
|
|
Non-cash
interest
|
|
|
145
|
|
|
1,045
|
|
Non-cash
payments
|
|
|
568
|
|
|
—
|
|
Realized
loss on assets held for sale, net
|
|
|
25
|
|
|
—
|
|
Realized
loss (gain) on sale of property and equipment
|
|
|
—
|
|
|
(33
|
)
|
Unrealized
loss on assets held for sale, net
|
|
|
65
|
|
|
—
|
|
Stock-based
compensation to employees and directors
|
|
|
1,229
|
|
|
900
|
|
Change
in fair value of warrant derivative liability
|
|
|
(1,515
|
)
|
|
—
|
|
Income
tax benefit
|
|
|
(98
|
)
|
|
(86
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(253
|
)
|
|
2
|
|
Inventories
|
|
|
(35
|
)
|
|
15
|
|
Prepaid
expenses
|
|
|
30
|
|
|
402
|
|
Other
current assets
|
|
|
(10
|
)
|
|
—
|
|
Assets
held for sale, net
|
|
|
—
|
|
|
22
|
|
Accounts
payable
|
|
|
(105
|
)
|
|
(453
|
)
|
Accrued
liabilities
|
|
|
151
|
|
|
345
|
|
Net
cash used in operating activities
|
|
|
(3,043
|
)
|
|
(2,585
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(319
|
)
|
|
(387
|
)
|
Proceeds
from sale of property and equipment
|
|
|
—
|
|
|
43
|
|
Proceeds
from sale of assets held for sale, net
|
|
|
226
|
|
|
3,178
|
|
Net
cash provided by (used in) investing activities
|
|
|
(93
|
)
|
|
2,834
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
3,877
|
|
|
3,051
|
|
Proceeds
from notes payable
|
|
|
500
|
|
|
100
|
|
Payments
and decrease on notes payable
|
|
|
(551
|
)
|
|
(3,301
|
)
|
Payments
of preferred dividends
|
|
|
(57
|
)
|
|
(19
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
3,769
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
633
|
|
|
80
|
|
Cash
and cash equivalents at beginning of period
|
|
|
405
|
|
|
4
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,038
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
49
|
|
$
|
222
|
|
Non
cash investing and financing activities:
|
|
|
|
|
|
|
|
Issuance
of common stock in payment of accrued liabilities
|
|
$
|
185
|
|
$
|
—
|
|
Dividends
accrued
|
|
$
|
—
|
|
$
|
38
|
|
Issuance
of common stock in connection with contingent payment with Surgicount
acquisition
|
|
$
|
—
|
|
$
|
75
|
|
Issuance
of common stock in payment of notes payable, accrued and prepaid
interest
|
|
$
|
859
|
|
$
|
580
|
|
Issuance
of common stock for inventory
|
|
$
|
700
|
|
$
|
500
|
|
Payment
of accrued liability with long-term investments
|
|
$
|
—
|
|
$
|
11
|
|
Reclassification
of accrued interest to notes payable, less current portion -
net
|
|
$
|
—
|
|
$
|
349
|
|
Reclassification
of additional paid in capital to warrant derivative
liability
|
|
$
|
4,350
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
Patient
Safety Technologies, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
1.
DESCRIPTION OF BUSINESS
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 2007 the Company
completed the sale of the assets held in ASG. In addition, the Company holds
other unrelated investments including an investment in real estate and in
a
financial services company, which it is in the process of liquidating as
part of
a strategic plan adopted during 2006 to dispose of all of the Company’s non
patient safety related assets.
2.
LIQUIDITY AND GOING CONCERN
The
accompanying unaudited consolidated interim financial statements have been
prepared assuming that the Company will continue as a going concern. At
September 30, 2008, the Company has an accumulated deficit of approximately
$40.4 million and a working capital deficit of approximately $5.1 million.
For
the nine months ended September 30, 2008, the Company incurred a loss of
approximately $3.8 million and has used approximately $3.0 million in cash
in
its operations. Further, the Company has just begun to generate a material
amount of revenues from sales of the Company’s patient safety products. 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, additional 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.
No
assurances can be made that the Company will be successful obtaining a
sufficient amount of additional financing to continue to fund its operations
or
that the Company will achieve profitable operations and positive cash flow
from
its patient safety products. The consolidated interim financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty.
3.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated interim financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 8-03
of
Regulation S-X and do not include all the information and disclosures required
by accounting principles generally accepted in the United States of America.
The
consolidated interim financial information is unaudited but reflects all
normal
adjustments that are, in the opinion of management, necessary to provide
a fair
statement of results for the interim periods presented. The consolidated
interim
financial statements should be read in conjunction with the consolidated
financial statements in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007. Results of the nine months ended September 30, 2008
are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2008.
Revenue
Recognition
The
Company complies with SEC Staff Accounting Bulletin (“SAB”)
101,
Revenue
Recognition in Financial Statements,
amended
by SAB 104, Revenue
Recognition.
Revenues from sales of the Safety-SpongeTM
System
are recorded upon shipment.
Goodwill
and Intangible Assets
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment in accordance with SFAS
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which
requires impairment evaluation on long-lived assets used in operations when
indicators of impairment are present. Reviews are performed to determine
whether the carrying value of an asset is impaired, based on a comparison
to
undiscounted expected future cash flows. If this comparison indicates that
there is impairment, the impaired asset is written down to fair value, which
is
typically calculated using discounted expected future cash flows and a discount
rate based upon the Company’s weighted average cost of capital adjusted for
risks associated with the related operations. Impairment is based on the
excess of the carrying amount over the fair value of those assets.
Stock-Based
Compensation
The
Company accounts for stock-based compensation pursuant to SFAS No. 123(R),
Share-Based
Payment.
During
the three and nine months ended September 30, 2008, the Company recorded
total
stock-based compensation expense of $185 thousand and $1.2 million,
respectively, related to issuances to the Company’s employees and directors. The
total amount of stock-based compensation for the nine months ended September
30,
2008 of $1.2 million included expenses related to restricted stock grants
valued
at $35 thousand and stock $572 thousand, respectively. During the three and
nine
months ended September 30, 2007, the Company had stock-based compensation
expense, from issuances to the Company’s employees and directors, included in
reported net loss of $207 thousand and $843 thousand, respectively. The total
amount of stock-based compensation for the nine months ended September 30,
2007,
of $843 thousand, included expenses relate to restricted stock grants of
$421
thousand and stock options of $422 thousand.
During
the three and nine months ended September 30, 2008, the Company had stock-based
compensation expense from issuances of warrants to employees, directors and
consultants of the Company included in reported net loss of nil and $532
thousand, respectively. During the three and nine months ended September
30,
2007, the Company had stock-based compensation expense from issuances of
restricted stock and warrants to consultants of the Company of nil and
$57
thousand, respectively.
A
summary
of stock option activity for the nine months ended September 30, 2008 is
presented below (in
thousand, except per share data):
|
|
|
|
Outstanding
Options
|
|
|
|
Shares
Available for Grant
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
1
|
|
|
1,650
|
|
$
|
3.49
|
|
|
8.43
|
|
|
|
|
Grants
|
|
|
(550
|
)
|
|
550
|
|
$
|
1.25
|
|
|
9.70
|
|
|
|
|
Cancellations
|
|
|
793
|
|
|
(793
|
)
|
$
|
4.07
|
|
|
7.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
244
|
|
|
1,407
|
|
$
|
2.28
|
|
|
8.71
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
783
|
|
$
|
4.40
|
|
|
7.83
|
|
$
|
—
|
|
September
30, 2008
|
|
|
|
|
|
962
|
|
$
|
2.65
|
|
|
8.49
|
|
$
|
—
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (i.e., the difference between our closing stock price on
September 30, 2008 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 September 30, 2008. There have not been any options exercised
during the nine months ended September 30, 2008 or year ended December 31,
2007.
All
options that the Company granted during the nine months ended September 30,
2008
and 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:
|
|
|
Nine
Months ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
Weighted
average risk free interest rate
|
|
|
3.50
|
%
|
|
4.50
|
%
|
Weighted
average life (in years)
|
|
|
5.00
|
|
|
5.00
|
|
Volatility
|
|
|
106
|
%
|
|
98
- 100
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Weighted
average grant-date fair value per share of options granted
|
|
$
|
0.93
|
|
$
|
1.22
|
|
A
summary
of the changes in the Company’s nonvested options during the nine months ended
September 30, 2008 is as follows:
Nonvested
Shares
|
|
Shares
|
|
Weighted
Average Grant Date Fair Value
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2007
|
|
|
867
|
|
$
|
1.75
|
|
Granted
|
|
|
550
|
|
$
|
1.40
|
|
Vested
|
|
|
(566
|
)
|
$
|
1.56
|
|
Cancelled
and forfeited
|
|
|
(407
|
)
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2008
|
|
|
445
|
|
$
|
1.12
|
|
As
of
September 30, 2008, total unrecognized compensation costs related to unvested
stock options was $283 thousand. Which is expected to be recognized over
a
weighted average period of 1.37 years.
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).
Warrant
Derivative Liability
The
Company accounts for warrants issued in connection with financing arrangements
in accordance with EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock (“EITF 00-19”).
Pursuant
to EIFT 00-19, an evaluation of specifically identified conditions is made
to
determine whether warrants issued are required to be classified as either
equity
or a liability. If the classification required under EITF 00-19 changes as
a
result of events during a reporting period, the instrument is reclassified
as of
the date of the event that caused the reclassification. In the event that
this
evaluation results in a partial reclassification, our policy is to first
reclassify warrants with the latest date of issuance. The estimated fair
value
of warrants classified as derivative liabilities is determined using the
Black-Scholes option pricing model. The fair value of warrants classified
as
derivative liabilities is adjusted for changes in fair value at each reporting
period, and the corresponding non-cash gain or loss is recorded in current
period earnings. There is no limit on the number of times a contract may
be
reclassified.
Earnings
(Loss) per Common Share
Earnings
(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 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.
The
following sets forth the number of shares of common stock underlying outstanding
options, warrants, convertible preferred stock and convertible debt as of
September 30, 2008 and 2007 (in
thousands):
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
Warrants
|
|
|
10,680
|
|
|
4,758
|
|
Stock
options
|
|
|
1,407
|
|
|
1,491
|
|
Convertible
promissory notes
|
|
|
1,057
|
|
|
2,667
|
|
Convertible
preferred stock
|
|
|
246
|
|
|
246
|
|
|
|
|
13,390
|
|
|
9,162
|
|
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The actual results may differ from
management’s estimates.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the 2008
presentation. These
reclassifications had no effect on previously reported results of operations
or
accumulated deficit.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board known
as
FASB issued
Statement of Financial Accounting Standards No. 157, Fair
Value Measurements.
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. The
Company adopted SFAS 157 on January 1, 2008 and in
connection with its adoption, there was no impact on the Company’s consolidated
financial statements.
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.
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
with the resulting unrealized gains and losses, if any, reported in earnings.
The
Company adopted SFAS 159 on January 1, 2008 and in
connection with its adoption, there was no impact on the Company’s consolidated
financial statements.
Staff
Accounting Bulletin 110 issued by the SEC was effective for the Company
beginning in the first quarter of 2008. SAB 110 amends the SEC’s views discussed
in Staff Accounting Bulletin 107 regarding the use of the simplified method
in
developing estimates of the expected lives of share options in accordance
with
SFAS No. 123(R), Share-Based
Payment.
The
Company will continue to use the simplified method until we have the historical
data necessary to provide reasonable estimates of expected lives in accordance
with SAB 107, as amended by SAB 110.
In
December 2007, the FASB issued Statement
of Financial Accounting Standards
No.
141(R), Business
Combinations.
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. The Company will implement SFAS No. 141(R) on January 1, 2009
and
will
apply prospectively to business combinations completed on or after that
date.
The
Company does not expect that the adoption of this standard will have a material
impact on our financial position or results of operations.
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 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. The Company will implement SFAS No. 160 on January
1,
2009. As of September 30, 2008, the Company did not have any minority interests.
Therefore, the Company does not expect the adoption of this standard to have
a
material impact on our income statement, financial position or cash flows.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133.
The
standard requires additional quantitative disclosures (provided in tabular
form)
and qualitative disclosures for derivative instruments. The required disclosures
include how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows; relative volume
of
derivative activity; the objectives and strategies for using derivative
instruments; the accounting treatment for those derivative instruments formally
designated as the hedging instrument in a hedge relationship; and the existence
and nature of credit-related contingent features for derivatives. SFAS
No. 161 does not change the accounting treatment for derivative
instruments. SFAS No. 161 is effective for the Company in the first quarter
of fiscal year 2009. The Company does not expect that the adoption of this
standard will have a material impact on our financial position or results
of
operations.
In
May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement).
FSP APB
14-1 requires recognition of both the liability and equity components of
convertible debt instruments with cash settlement features. The debt component
is required to be recognized at the fair value of a similar instrument that
does
not have an associated equity component. The equity component is recognized
as
the difference between the proceeds from the issuance of the note and the
fair
value of the liability. FSP APB 14-1 also requires an accretion of the resulting
debt discount over the expected life of the debt. Retrospective application
to
all periods presented is required and a cumulative-effect adjustment is
recognized as of the beginning of the first period presented. This standard
is
effective for us in the first quarter of fiscal year 2009. We are currently
evaluating the impact of FSP APB 14-1.
In
May
2008, the FASB issued Statement of Financial Accounting Standards No. 162.
The
Hierarchy of Generally Accepted Accounting Policies,
which
reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
financial reporting by providing a consistent framework for determining what
accounting principles should be used when preparing the U.S. GAAP financial
statements. The standard is effective 60 days after the SEC’s approval of the
PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
impact on our financial position or results of operations.
In
June
2008, the FASB issued FSP No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,
which
requires entities to apply the two-class method of computing basic and diluted
earnings per share for participating securities that include awards that
accrue
cash dividends (whether paid or unpaid) any time common shareholders received
dividends and those dividends do not need to be returned to the entity if
the
employee forfeits the award. FSP EITF 03-6-1 will be effective for the Company
on January 1, 2009 and will require retroactive disclosure. We are currently
evaluating the impact of adopting FSP EITF 03-6-1 on our consolidated financial
position, cash flows and results of operations.
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 the remaining two parcels of undeveloped land during the nine 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 nine months ended
September 30, 2008 and 2007 related to the held for sale assets of
Automotive Services Group (in
thousands):
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
Operating
revenues
|
|
$
|
—
|
|
$
|
309
|
|
Operating
expenses
|
|
|
—
|
|
|
(262
|
)
|
Depreciation
and amortization
|
|
|
—
|
|
|
(22
|
)
|
Interest
expense
|
|
|
—
|
|
|
(201
|
)
|
Gain
on sale of assets
|
|
|
—
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
—
|
|
$
|
(166
|
)
|
Assets
held for sale
Assets
held for sale as of September 30, 2008 consist of a parcel of land located
in
Tennessee and has a book value of $90 thousand. The land is currently in
escrow and the Company expects the sale to be completed prior to
year-end.
5.
PATENTS
Patents,
net, as of September 30, 2008 and December 31, 2007 are composed of patents
(in
thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
Patents
|
|
$
|
4,685
|
|
$
|
4,685
|
|
Accumulated
amortization
|
|
|
(1,165
|
)
|
|
(921
|
)
|
|
|
$
|
3,520
|
|
$
|
3,764
|
|
6.
LONG-TERM INVESTMENTS
Long-term
investments at September 30, 2008 and December 31, 2007 are comprised of
the
Company’s investment in Alacra Corporation (“Alacra”).
The
investment represents 221 thousand shares of Series F convertible preferred
stock of Alacra Corporation, recorded at its cost of $667 thousand, 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.
7.
OTHER ASSETS
At
September 30, 2008 and December 31, 2007, the Company had other assets of
approximately $29 thousand and $19 thousand respectively, consisting primarily
of security deposits.
8.
NOTES PAYABLE
Notes
payable at September 30, 2008 and December 31, 2007 are comprised of the
following (in
thousands):
Related
Party Notes:
|
|
|
September
30,
2008
|
|
|
December
31, 2007
|
|
Notes
payable to Ault Glazer Capital Partners, LLC (a)
|
|
$
|
1,775
|
|
$
|
2,531
|
|
Notes
payable to Herb Langsam (b)
|
|
|
600
|
|
|
600
|
|
Note
payable to Catalysis Offshore, Ltd (c)
|
|
|
250
|
|
|
—
|
|
Note
payable to Catalysis Partners, LLC (c)
|
|
|
250
|
|
|
—
|
|
Sub-total,
Related Party Notes
|
|
|
2,875
|
|
|
3,131
|
|
Note
payable to Charles Kalina III (d)
|
|
|
—
|
|
|
400
|
|
Other
notes payable (e)
|
|
|
71
|
|
|
172
|
|
Total
notes payable
|
|
|
2,946
|
|
|
3,703
|
|
Less:
current portion
|
|
|
(2,946
|
)
|
|
(1,172
|
)
|
Notes
payable - long-term portion
|
|
$
|
—
|
|
$
|
2,531
|
|
Aggregate
future required principal payments on these notes during the twelve month
period
subsequent to September 30, 2008 are $2.9 million.
(a) |
Effective
June 1, 2007, the entire unpaid principal and interest due under
note
payable agreements previously entered into with Ault Glazer Capital
Partners, LLC (formerly AGB Acquisition Fund) (the “Fund”)
a
related party, were restructured into a new Convertible Secured
Promissory
Note (the "AG
Partners Convertible Note")
in
the principal amount of $2.5 million. The Fund is controlled by
Milton
“Todd” Ault III, a former director of the Company and its former Chairman
and Chief Executive Officer and Louis Glazer, a director of the
Company,
both of whom currently have a significant beneficial ownership
interest in
the Company’s common and preferred stock. 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 million 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 three and nine months ended September
30,
2008, the Company incurred interest expense of $38 thousand and
$127
thousand, respectively, on the AG Partners Convertible Note. During
the
three and nine months ended September 30, 2007, the Company incurred
interest expense of $44 thousand and $59 thousand, respectively,
on the AG
Partners Convertible Note.
|
|
In
connection with the Ault Glazer Partners, LLC Note agreement, the
Company
issued 153,150 shares of its common stock in July 2008, with an
agreed
upon value of $1.50 per share, to pay past due interest owed by
the
Company from the first and second quarter of 2008 and current interest
owed for the third quarter of 2008 totaling approximately $127
thousand,
and to prepay future interest related to the outstanding note balance.
The
prepaid interest balance, which is included in prepaid expenses
at
September 30, 2008 is approximately $103
thousand.
|
|
On September
5, 2008 an amendment was entered into between Ault Glazer Partners
LLC and
the Company. The Amendment and Early Conversion of Secured Convertible
Promissory Note (the “AG Amendment”) replaces the Secured Convertible
Promissory Note, effective June 1, 2007 in the principal amount
of $2.5
million, described above. The terms of the AG Amendment stipulate
the
Company will pay the lender $450 thousand in cash and convert the
remaining balance of the note to 1.3 million shares of common stock
upon
satisfactory completion of certain conditions, as specified in
the
amendment. The lender is currently in possession of several pieces
of
office equipment that is leased under the Company’s name. One of the
stipulations of the amendment is to transfer the leases into the
lenders’
name. The equipment is not carried on the Company’s book and does not pay
the monthly lease payment. The lender may transfer or sell the
Early
Conversion Shares according to the following schedule: 400 thousand
shares
may be sold or transferred within the first 90 days after closing
and up
to 125 thousand shares may be sold or transferred during each calendar
month beginning 90 days after closing. As of September 30, 2008
the
Company has paid $450 thousand in cash and issued 300 thousand
shares of
common stock as partial settlement under the AG Amendment. In November
2008, the Company issued 250 thousand additional shares of its
common
stock pursuant to the Amendment. The Company expects the remaining
750
thousand shares of common stock to be issued in
2009.
|
(b) |
On
May 1, 2006, Herbert Langsam, a Class II Director of the Company,
loaned
the Company $500 thousand. The loan is documented by a $500 thousand
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
thousand. The loan is documented by a $100 thousand 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 had a maturity
date of
May 13, 2007. The Company is in the process of restructuring the
debt that
is owed to Mr. Herbert Langsam. Mr. Langsam received warrants to
purchase
50 thousand 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
thousand as the estimated value of the warrants. The debt discount
was
amortized as non-cash interest expense over the term of the debt
using the
effective interest method. During the nine months ended September
30, 2008
and 2007, interest expense of nil and $12 thousand, respectively,
was
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 three and nine months ended September 30, 2008, the Company
incurred
interest expense, excluding amortization of debt discount, of $24
thousand
and $72 thousand, respectively, on the Langsam Notes. During the
three and
nine months ended September 30, 2007, the Company incurred interest
expense, excluding amortization of debt discount, of $18 thousand
and $64
thousand, respectively. At September 30, 2008 and December 31,
2007
accrued interest on the Langsam Notes totaled $186 thousand and
$138
thousand, respectively.
|
(c) |
Between
February 28, 2008 and March 20, 2008, Catalysis Offshore, Ltd.
and
Catalysis Partners, LLC (collectively “Catalysis”),
related parties, each loaned $250 thousand to the Company. As
consideration for the loans, the Company issued Catalysis promissory
notes
in the aggregate principal amount of $500 thousand (the “Catalysis
Notes”).
The Catalysis Notes accrue interest at the rate of 8% per annum
and had
maturity dates of May 31, 2008. The managing partner of Catalysis
is
Francis Capital Management, LLC (“Francis
Capital”),
an investment management firm. John Francis, a director of the
Company and
President of Francis Capital, has voting and investment control
over the
securities held by Catalysis. Francis Capital, including shares
directly
held by Catalysis, beneficially owns 1.3 million shares of the
Company’s
common stock and warrants for purchase of 763 thousand shares of
the
Company’s common stock.
During the three and nine months ended September 30, 2008, the
Company
incurred interest expense of $14 thousand and $27 thousand, respectively,
on the Catalysis Notes. At September 30, 2008 accrued interest
on the
Catalysis Notes totaled $27
thousand.
|
(d) |
On
July 12, 2006 the Company, executed a Convertible Promissory Note
in the
principal amount of $250 thousand in favor of Charles J. Kalina,
III, an
existing shareholder of the Company. On November 3, 2006 the balance
due
under the $250 thousand Convertible Promissory Note was added to
a new
Convertible Promissory Note in the principal amount of $400 thousand
(the
“Kalina
Note”),
pursuant to which the Company received proceeds of approximately
$150
thousand. The Kalina Note accrued interest at the rate of 12% per
annum
and was due on January 31, 2008. On May 20, 2008, the principal
and
accrued interest on the Kalina Note, in the aggregate amount of
$426
thousand, was exchanged for equity in the Company. Mr. Kalina received
341
thousand shares of the Company’s common stock and a warrant to purchase
205 thousand shares of the Company’s common stock at $1.40 per share.
During the three and nine months ended September 30, 2008, the
Company
incurred interest expense, excluding amortization of debt discount
of $12
thousand and $34 thousand, respectively, on the Kalina Note. At
December
31, 2007 accrued interest on the Kalina Note totaled $8
thousand.
|
(e) |
On
November 1, 2006 we entered into a Convertible Promissory Note
with
Michael G. Sedlak in the principal amount of $71 thousand (the
“Sedlak
Note”).
The Sedlak Note, which was not paid by its scheduled maturity date,
January 31, 2008, accrues interest at the rate of 12% per
annum.
|
9.
ACCRUED LIABILITIES
Accrued
liabilities at September 30, 2008 and December 31, 2007 are comprised of
the
following (in
thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
Accrued
interest
|
|
$
|
213
|
|
$
|
169
|
|
Accrued
dividends on preferred stock
|
|
|
134
|
|
|
134
|
|
Accrued
salaries and director fees
|
|
|
123
|
|
|
212
|
|
Warrant
derivative liability
|
|
|
2,825
|
|
|
—
|
|
Other
|
|
|
8
|
|
|
6
|
|
|
|
$
|
3,303
|
|
$
|
521
|
|
10.
EQUITY TRANSACTIONS
Between
May 20, 2008 and June 19, 2008, the Company sold, in a private placement
exempt
from the registration requirements of the Securities Act, 2.1 million shares
of
the Company’s common stock at $1.25 price per share and issued five-year
warrants to purchase 1.3 million shares of common stock at an exercise price
of
$1.40 per share, pursuant to a Securities Purchase Agreement entered into
with
several accredited investors. The investors paid a total of $1.5 million
in
cash, $700 thousand in prepaid inventory, and agreed to the extinguishment
of
debt and accrued interest totaling $426 thousand owed by the
Company.
Between
August 1, 2008 and August 30, 2008, the Company sold, in a private placement
exempt from the registration requirements of the Securities Act, 2.0 million
shares of the Company’s common stock at $1.25 price per share and issued
five-year warrants to purchase 1.3 million shares of common stock at an exercise
price of $1.40 per share, pursuant to a Securities Purchase Agreement entered
into with several accredited investors. The investors paid a total of $2.4
million in cash, and agreed to extinguishment of existing accrued liabilities
totaling $83 thousand owed by the Company.
11.
WARRANTS AND WARRANT DERIVATIVE LIABILITY
During
the three and nine months ended September 30, 2008, a total of 1.3 million
and
4.6 million warrants, at an average exercise price of $1.39 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%,
3.50%, five years and 103% - 106%, respectively. Warrants granted during
the
year ended December 31, 2007 were valued using an expected dividend yield,
risk-free interest rate, expected life and volatility of 0%, 4.50%, five
years
and 63% - 101%, respectively. As of September 30, 2008, a total of 10.7 million
warrants, at exercise prices ranging from $1.25 to $6.05 remain outstanding.
Of
the 10.7 million warrants outstanding, 1.2 million warrants are
unvested.
As
discussed in Note 2, EITF 00-19 requires analysis of criteria which must
be met
in order to classify warrants issued in a Company’s own stock as either equity
or liabilities. Evaluation of these criteria as of September 30, 2008 resulted
in the determination that certain outstanding warrants should be classified
as
derivative liabilities.
Based
on
this analysis, 5.3 million warrants have been classified as warrant derivative
liabilities. As of September 30, 2008, the total fair value of the warrant
derivative liabilities is $2.8 million, which is included as a component
of
accrued liabilities. Based on the change in fair value of the warrant derivative
liability, the Company recorded a non-cash gain of $1.7 million and $1.5
million during the three and nine months ended September 30, 2008,
respectively.
12.
FAIR VALUE MEASUREMENTS
We
adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities
measured on a recurring basis. SFAS 157 defines fair value, establishes a
framework for measuring fair value and generally accepted accounting principles
and expands disclosures about fair value measurements. This standard applies
in
situations where other accounting pronouncements either permit or require
fair
value measurements. SFAS 157 does not require any new fair value
measurements.
Fair
value is defined in SFAS 157 as the price that would be received to sell
an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurements are to be
considered from the perspective of a market participant that holds the assets
or
owes the liability. SFAS 157 also establishes a fair value hierarchy which
required an entity to maximize the use of observable inputs and minimize
the use
of unobservable inputs when measuring fair value.
The
standard describes three levels of inputs that may be used to measure fair
value:
Level
1:
Quoted prices in active markets for identical or similar assets and
liabilities.
Level
2:
Quoted prices for identical or similar assets and liabilities in markets
that
are not active or observable inputs other than quoted prices in active markets
for identical or similar assets and liabilities.
Level
3:
Unobservable inputs that are supported by little or no market activity and
that
are significant to the fair value of the assets or liabilities.
At
September 30, 2008 we had outstanding warrants to purchase common shares
of our
stock that are classified as warrant derivative liabilities with a fair value
of
$2.8 million. The warrants are valued using Level 3 inputs because there
are
significant unobservable inputs associated with them.
13.
RELATED PARTY TRANSACTIONS
Rent
During
the nine months ended September 30, 2007 the Company paid approximately $26
thousand of the base rent on the corporate offices and The Ault Glazer Group,
Inc. ("Ault
Glazer")
paid
the remaining base rent based upon their respective usage of the facilities.
Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
Officer of the Company, and Louis Glazer, a Class I Director of the Company,
and
Melanie Glazer, the former Manager of our real estate segment, (together,
the
“Glazers”)
own a
controlling interest in the outstanding capital stock of Ault Glazer. As
of
September 30, 2008 and December 31, 2007, Ault Glazer, Mr. Ault and the Glazers
had a significant beneficial ownership interest in the outstanding common
and
preferred stock of the Company.
Notes
Payable
As
of
September 30, 2008 and December 31, 2007, the Company has notes payable
agreements issued to related parties with aggregate outstanding principal
balances of $2.9 million and $3.1 million, respectively (See Note
8).
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 was the Chairman of the Board
and Chief Executive Officer of Automotive Services Group.
A
Plus International, Inc.
The
Company recorded cost of goods sold of $514 thousand and $100 thousand for
the
three months ended September 30, 2008 and 2007, respectively, in connection
with
surgical sponges provided by A Plus. During the nine months ended September
30,
2008 and 2007, the Company recorded cost of goods sold of $1.1 million and
$352
thousand, respectively, in connection with surgical sponges provided by A
Plus.
As part of the May 2008 financing, the Company recorded $700 thousand in
prepaid
expenses to be used against inventory ordered from A Plus. As of September
30,
2008 there was $133 thousand remaining in prepaid expenses. Wenchen Lin,
a
director and significant beneficial owner of the Company is a founder and
significant owner of A Plus.
Health
West Marketing Inc.
During
the three and nine months ended September 30, 2008, Health West Marketing
Incorporated received payments for consulting services, of $60 thousand and
$180
thousand, respectively, from A Plus International, Inc. William Adams the
Company’s Chief Executive Officer is the Chief Executive Officer and President
of Health West Marketing Inc. For the three and nine months ended September
30,
2007, Health West Marketing Incorporated received payments for consulting
services of $60 thousand and $180 thousand, respectively. The consulting
arrangement between A Plus and Health West has been an ongoing agreement
between
the respective parties. The Company does not recognize this income or expense
on
their financial statements.
14.
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit (the “Leve
Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
On
February 25, 2003, the case against the Company and Sunshine was dismissed,
however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
that the Winstar defendants conspired to commit fraud and breached their
fiduciary duty to the plaintiffs in connection with the acquisition of the
plaintiff's radio production and distribution business. The complaint further
alleged that the Company and Sunshine joined the alleged conspiracy. On June
1,
2005, the United States Court of Appeals for the Second Circuit affirmed
the
February 25, 2003 judgment of the district court dismissing the claims against
the Company.
On
July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed
a new
lawsuit (the “new
Leve Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
The
new Leve Lawsuit attempts to collect a federal default judgment of $5.0 million
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.
As
of
September 30, 2008 final arguments were being prepared by the respective
parties. No decision has been rendered by the Court.
15.
SUBSEQUENT EVENTS
On
October 10, 2008, the Company’s former principal accounting officer, tendered
his resignation as Chief Financial Officer and Secretary of the Company and
as
an officer and director of the Company’s subsidiary, SurgiCount Medical, Inc.,
effective October 13, 2008. The resignation arose from his desire to spend
more
time with his family and to pursue other career opportunities.
To
fill
the vacancy created by the resignation, Mary Lay was appointed Interim Chief
Financial Officer and principal accounting officer, effective October 13,
2008.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes thereto contained elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve risks and
uncertainties. All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing
plans
are forward-looking statements. In many cases, you can identify forward-looking
statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
statements are only predictions. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those
projected in any forward-looking statements. In evaluating these statements,
you
should specifically consider various factors, including, but not limited to,
those set forth in Part II of this report under “Item 1A. Risk Factors” and
elsewhere in this report on Form 10-Q.
The
following “Overview” section is a brief summary of the significant issues
addressed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”).
Investors should read the relevant sections of the MD&A for a complete
discussion of the issues summarized below. The entire MD&A should be read in
conjunction with Item 1 of Part I of this report, “Financial
Statements.”
Overview
Patient
Safety Technologies, Inc. (referred to in this report as the “Company,”
“we,”
“us,”
and
“our”)
was
incorporated on March 31, 1987, under the laws of the state of Delaware.
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., 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 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 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 a
result of our prior focus on the financial services and real estate industries,
we continue to hold various other unrelated investments. We are in the process
of liquidating these few remaining non-patient safety related assets (the
“non-core
assets”).
The
non-core assets are recorded on the Company’s balance sheet in “long-term
investments” and “assets held for sale, net”.
SurgiCount
SurgiCount,
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. SurgiCount’s Safety-Sponge System helps reduce the
number of retained sponges and towels in patients during surgical procedures
and
allows for faster and more accurate counting of surgical sponges. The SurgiCount
Safety-Sponge System
is
a patented turn-key array of modified surgical sponges, line-of-sight scanning
SurgiCounters, and printPAD printers integrated together to form a comprehensive
counting and documentation system. The Safety-Sponge System works much like
a
grocery store checkout process: Every surgical sponge and towel is affixed
with
a unique inseparable two-dimensional data matrix bar code and used with a
SurgiCounter to scan and record the sponges during the initial and final counts.
Because each sponge is identified with a unique code, a SurgiCounter will not
allow the same sponge to be counted more than one time. When counts have been
completed at the end of a procedure, the system will produce a printed report,
or can be modified to work with a hospital's paperless system. By scanning
the
surgical dressings in at the beginning of a surgical procedure and then scanning
them out at the end of the procedure, the sponges can be counted faster and
more
accurately than traditional methods which require two medical personnel manually
counting the used and un-used sponges. The Safety-Sponge System is the only
FDA
510k approved computer assisted sponge counting system. SurgiCount is the
first acquisition in our plan to become a leader in the patient safety
market.
Our
principal executive offices are located at 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 policies relate to revenue recognition, valuation of warrant
derivative liability, valuation of our intangible assets and stock based
compensation and accounting for income taxes.
Warrant
Derivative Liability
The
Company accounts for warrants issued in connection with financing arrangements
in accordance with EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock (“EITF 00-19”).
Pursuant
to EIFT 00-19, an evaluation of specifically identified conditions is made
to
determine whether warrants issued are required to be classified as either equity
or a liability. If the classification required under EITF 00-19 changes as
a
result of events during a reporting period, the instrument is reclassified
as of
the date of the event that caused the reclassification. In the event that this
evaluation results in a partial reclassification, our policy is to first
reclassify warrants with the latest date of issuance. The estimated fair value
of warrants classified as derivative liabilities is determined using the
Black-Scholes option pricing model. The fair value of warrants classified as
derivative liabilities is adjusted for changes in fair value at each reporting
period, and the corresponding non-cash gain or loss is recorded in current
period earnings. There is no limit on the number of times a contract may be
reclassified.
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.
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
FASB, issued
Statement of Financial Accounting Standards No. 157, Fair
Value Measurements.
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
adopted
SFAS 157 on January 1, 2008 and in
connection with its adoption, there was no impact on our consolidated financial
statements.
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.
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
with the resulting unrealized gains and losses, if any, reported in earnings.
We
adopted
SFAS 159 on January 1, 2008 and in
connection with its adoption, there was no impact on our consolidated financial
statements.
Staff
Accounting Bulletin 110 issued by the SEC was effective for us beginning in
the
first quarter of 2008. SAB 110 amends the SEC’s views discussed in Staff
Accounting Bulletin 107 regarding the use of the simplified method in developing
estimates of the expected lives of share options in accordance with SFAS No.
123(R), Share-Based
Payment.
We will
continue to use the simplified method until we have the historical data
necessary to provide reasonable estimates of expected lives in accordance with
SAB 107, as amended by SAB 110.
In
December 2007, the FASB issued Statement
of Financial Accounting Standards
No.
141(R), Business
Combinations.
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.
The
Company does not expect an impact on our financial position or results of
operations.
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 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. As
of
May 20, 2009, we did not have any minority interests. Therefore, we do not
expect the adoption of this standard will have a material impact on our income
statement, financial position or cash flows.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133.
The
standard requires additional quantitative disclosures (provided in tabular
form)
and qualitative disclosures for derivative instruments. The required disclosures
include how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows; relative volume
of
derivative activity; the objectives and strategies for using derivative
instruments; the accounting treatment for those derivative instruments formally
designated as the hedging instrument in a hedge relationship; and the existence
and nature of credit-related contingent features for derivatives. SFAS
No. 161 does not change the accounting treatment for derivative
instruments. SFAS No. 161 is effective for us in the first quarter of
fiscal year 2009. The
Company does not expect that the adoption of this standard will have a material
impact on our financial position or results of operations.
In
April
2008, the FASB issued FSP FAS 142-3,
Determination of Useful Life of Intangible Assets.
FSP FAS
14203 amends the factors that should be considered in developing the renewal
or
extension assumptions used to determine the useful life of a recognized
intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS
142-3 also requires expanded disclosure related to the determination of
intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008. Earlier adoption is not permitted. We do
not
expect FSP FAS 142-3 will have a material impact on our financial
statements.
In
May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).
FSP APB
14-1 requires recognition of both the liability and equity components of
convertible debt instruments with cash settlement features. The debt component
is required to be recognized at the fair value of a similar instrument that
does
not have an associated equity component. The equity component is recognized
as
the difference between the proceeds from the issuance of the note and the fair
value of the liability. FSP APB 14-1 also requires an accretion o the resulting
debt discount over the expected life of the debt. Retrospective application
to
all periods presented is required and a cumulative-effect adjustment is
recognized as of the beginning of the first period presented. This standard
is
effective for us in the first quarter of fiscal year 2009. We are currently
evaluating the impact of FSP APB 14-1.
In
May
2008, the FASB issued Statement of Financial Accounting Standards No. 162.
The
Hierarchy of Generally Accepted Accounting Policies,
which
reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
financial reporting by providing a consistent framework for determining what
accounting principles should be used when preparing the U.S. GAAP financial
statements. The standard is effective 60 days after the SEC’s approval of the
PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
impact on our financial position or results of operations.
In
June
2008, the FASB issued FSP No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,
which
requires entities to apply the two-class method of computing basic and diluted
earnings per share for participating securities that include awards that accrue
cash dividends (whether paid or unpaid) any time common shareholders received
dividends and those dividends do not need to be returned to the entity if the
employee forfeits the award. FSP EITF 03-6-1 will be effective for the Company
on January 1, 2009 and will require retroactive disclosure. We are currently
evaluating the impact of adopting FSP EITF 03-6-1 on our consolidated financial
position, cash flows and results of operations.
Results
of Operations
Revenue
and Expense Components
The
following is a description of the primary components of our revenues and
expenses:
Revenues.
We
derive our revenue primarily from the sale of our SurgiCount sponges and the
related hardware. Our revenues are generated by our direct sales force and
independent distributors. Our products are ordered directly by the hospitals
through our distributors and shipped and billed directly. 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
Cost
of revenues.
Cost of
revenues consist of direct product costs billed from our contract manufacturer.
Research
and development.
Research and development expense consists of costs associated with the design,
development, testing and enhancement of our products. Research and development
costs also include salaries and related employee benefits, research-related
overhead expenses and fees paid to external service providers.
Sales
and marketing.
Our
sales and marketing expense consists primarily of salaries and related employee
benefits, sales commissions and support cost, professional service fees, travel,
education, trade show and marketing costs.
General
and administrative.
Our
general and administrative expense consists primarily of salaries and related
employee benefits, professional service fees, legal costs and expenses related
to being a public entity.
Total
other income (expense).
Total
other income (expense) includes interest income, interest expense, change in
fair value of warrant liability, realized gain (loss) on assets held for sale
and unrealized loss on assets held for sale.
Revenues
We
recognized revenues of $880 thousand and $213 thousand during the three months
ended September 30, 2008 and 2007, respectively. Revenues during the three
months ended September 30, 2008 consisted of sales from the Safety-Sponge of
$737 thousand and sales from hardware and supplies of $142 thousand. Revenues
during the three months ended September 30, 2007 consisted of sales from the
Safety-Sponge of $1.6 million and sales from hardware and supplies of $314
thousand. 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
recognized revenues of $1.9 million and $834 thousand during the nine months
ended September 30, 2008 and 2007, respectively. Revenues during the nine months
ended September 30, 2008 consisted of sales from the Safety-Sponge of $212
thousand and sales from hardware and supplies of $1 thousand, respectively.
Revenues during the nine months ended September 30, 2007 consisted of sales
from
the Safety-Sponge of $710 thousand and sales from hardware and supplies of
$123
thousand.
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 a large number of 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 thousand in annual revenue whereas the larger
institutions could represent annual recurring revenues of $600 thousand or
more.
On
November 14, 2006, SurgiCount entered into a Supply Agreement with Cardinal
Health 200, Inc., a Delaware corporation. 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 has and will continue to 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.
Cost
of revenues
Cost
of
revenues increased $510 thousand, or 455% to $622 thousand for the three months
ended September 30, 2008 from $112 thousand for the same period in 2007. This
reflects an increase in sales of our Safety-SpongeTM
System.
Cost
of
revenues increased $828 thousand, or 161% to $1.3 million for the nine months
ended September 30, 2008 compared to $514 thousand for the nine months ended
September 30, 2007. This reflects an increase in sales of our
Safety-SpongeTM
System
and an inventory write down for obsolete inventory returned from a distributor
of $87 thousand.
Gross
profit
During
the three months ended September 30, 2008, our gross profit increased $157
thousand or 155%, to $258 thousand from $101 thousand for the same period in
2007. Our gross margin percentage was 29% for the three months ended September
30, 2008 compared to 47% for the same period in 2007. The decrease in gross
margin percentage was primarily as a result of a write off for obsolete
inventory and discounts provided in connection with hardware sales.
Our
gross
profit increased $275 thousand or 86%, to $595 thousand during the nine months
ended September 30, 2008 from $320 thousand for the same period in 2007. Our
gross margin percentage was 31% compared to 38% for the same period in 2007.
The
decrease in gross margin was primarily as a result of a write off for obsolete
inventory and discounts provided in connection with hardware sales.
Research
and development
Research
and development costs were $87 thousand and $39 thousand, for the three months
ended September 30, 2008 and 2007, respectively. During the nine months ended
September 30, 2008 we had research and development costs of $168 thousand,
compared to $91 thousand for the same period last year. The increase is
primarily due to an increase in software development costs associated with
our
system hardware.
Sales
and marketing
We
had
sales and marketing expenses of $662 thousand and $418 thousand for the three
months ended September 30, 2008 and 2007, respectively. For the nine months
ended September 30, 2008 and 2007, respectively, we had sales and marketing
expenses of $1.8 million and $1.1 million. The increase is primarily due to
the
addition of sales representatives in the field and the associated benefit costs
and travel expenses.
General
and administrative
General
and administrative costs were $959 thousand and $765 thousand for the three
months ended September 30, 2008 and 2007, respectively. Our general and
administrative costs for the nine months ended September 30, 2008 were $3.7
million compared to $2.8 million for the same period in the prior year. The
increase is primarily due to an increase in stock based compensation to
employees, increased legal and audit fees as well as an increase in employee
benefit costs.
Total
other income (expense), net
Total
other income increased to income of $1.6 million from an expense of $810
thousand for the three months ended September 30, 2008 and 2007 respectively.
This increase was mainly due to a decrease in the fair market value of our
warranty derivative liability resulting in a gain of $1.7 million in the three
months ended September 30, 2008 and a decrease of interest expense of $731
thousand, as described below.
For
the
nine months ended September 30, 2008 other income (expense), net increased
to
income of $1.2 million from an expense of $1.4 million for the nine months
ended
September 30, 2007. This increase is mainly due to the decrease in the fair
market value of our warranty derivative liability resulting in a gain of $1.5
million, a decrease in interest expense and a decrease in debt discount
amortization associated with our short term financing as well as a realized
loss
on assets held for sale of $25 thousand and an unrealized loss on assets held
for sale of $65 thousand, net.
Interest
expense
We
had
interest expense of $79 thousand and $810 thousand for the three months ended
September 30, 2008 and 2007, respectively. The decrease in interest expense
for
the three months ended September 30, 2008 when compared to September 30,
2007 is
primarily attributable to the non-cash interest charges incurred in the 2007
period as a result of the debt discount amortization associated with our
short-term debt financings. During the three months ended September 30, 2008
and
2007, we recorded nil and $392 thousand, respectively, in non-cash interest
charges. These 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.
We
had
interest expense of $254 thousand and $1.4 million for the nine months ended
September 30, 2008 and 2007, respectively. The decrease in interest expense
for
the nine months ended September 30, 2008 when compared to September 30, 2007
is
primarily attributable to the non-cash interest charges incurred in the 2007
period as a result of the debt discount amortization associated with our
short-term debt financings. During the nine months ended September 30, 2008
and
2007, we recorded $127 thousand and $1.0 million, respectively, in non-cash
interest charges. These 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.
Realized
gains (losses) on investments, net
During
the nine months ended September 30, 2008 we realized a net loss of $25 thousand
compared to a net gain of $22 thousand during the nine months ended September
30, 2007. Realized loss during the nine months ended September 30, 2008 reflects
the sale of approximately 8.5 acres of undeveloped land in Heber Springs,
Arkansas. Realized gain of $51 thousand during the nine months ended September
30, 2007 reflects the sale of our operating car wash for a gain of $29 thousand,
which is reported in our consolidated statements of operations in loss from
discontinued operations, combined with the sale of certain non-operating assets
for a gain of $22 thousand.
Loss
from discontinued operations
During
the nine months ended September 30, 2007, we recorded a loss from our
discontinued car wash segment of $166 thousand. Consistent
with our decision to focus our business exclusively on the patient safety
medical products field, we completed the divestiture of ASG in August 2007.
Thus, we did not incur a loss from the discontinued car wash segment during
the
three or nine months ended September 30, 2008.
Financial
Condition, Liquidity and Capital Resources
Our
cash
and cash equivalents balance was $1.0 million at September 30, 2008, versus
$405
thousand at December 31, 2007. Total current liabilities were $6.9 million
at
September 30, 2008, versus $2.4 million at December 31, 2007. As of September
30, 2008 we had a working capital deficit of approximately $5.1 million. Since
we continue to have recurring losses, we have relied upon private placements
of
equity and debt securities. Our existing cash and cash equivalents balance,
combined with the proceeds received from out August 2008 equity financing,
are
not expected to be sufficient to meet our anticipated funding requirements
during the next twelve months.
In
order
to ensure the continued viability of the Company, additional 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.
As
of
September 30, 2008, other than our office lease and employment agreements with
key executive officers, we had no commitments other than the liabilities
reflected in our consolidated financial statements.
Cash
increased by $632 thousand to $1.0 million during the nine months ended
September 30, 2008, compared to an increase of $80 thousand during the nine
months ended September 30, 2007, primarily as a result of financing activities
during 2008 as described below.
Operating
activities
Operating
activities used $3.0 million of cash during the nine months ended September
30,
2008, compared to $2.6 million during the nine months ended September 30,
2007.
Operating
activities for the nine months ended September 30, 2008, exclusive of changes
in
operating assets and liabilities, used $2.8 million of cash, as the Company's
net cash used in operating activities of $3.0 million included non-cash charges
for change in fair value of warrant derivative liability of $1.5 million,
depreciation and amortization of $508 thousand and stock based compensation
of
$1.2 million.
For
the
nine months ended September 30, 2007, operating activities, exclusive of changes
in operating assets and liabilities, used $2.9 million of cash, as the Company's
net cash used in operating activities of $2.6 million included non-cash charges
for depreciation and amortization of $377 thousand, debt discount of $1.0
million and stock based compensation of $900 thousand.
Changes
in operating assets and liabilities provided cash of $224 thousand during
the nine months ended September 30, 2008, principally due to increases in
accrued liabilities associated with the warrant derivative liability partially
offset by increases in prepaid expenses and a decrease in accounts payable.
Changes
in operating assets and liabilities used cash of $333 thousand during the nine
months ended September 30, 2007, principally due to decreases in the level
of
accounts payable which were partially offset by an increase in accrued
liabilities and a decrease in prepaid expenses.
Investing
activities
The
principal factor in the $93 thousand of cash used in investing activities during
the nine months ended September 30, 2008 was capitalized costs of $264 thousand,
of which $251 thousand related to the ongoing development of purchased software
related to our Safety-Sponge System.
This
was
offset by the
sale
of our undeveloped land in Alabama for $226 thousand.
The
principal factor in the $1.3 million of cash provided by investing activities
during the nine months ended September 30, 2007 was due to the
sale
of the express car wash and underlying real estate in Birmingham, Alabama for
$1.5 million. This
was
partially offset by capitalized costs of $160 thousand related to the ongoing
development of purchased software related to our Safety-Sponge System.
Financing
activities
Cash
provided by financing activities during the nine months ended September 30,
2008
of $3.8 million resulted from the net proceeds from the issuance of common
stock
and warrants of $3.9 million and short-term debt financings of $500 thousand.
The net proceeds from the issuance of securities was offset by the repayment
of
a promissory note of $551 thousand and the payment of preferred dividends of
$57
thousand.
Cash
used
by financing activities during the nine months ended September 30, 2007 of
$169
thousand resulted primarily from repayment of promissory notes in the amount
of
$3.3 million offset by net proceeds from the issuance of common stock and
warrants of $3.1 million.
2008
Private Placements
During
the period May 20, 2008 to August 29, 2008, we sold to accredited investors
in
our private placements, as reflected below, $5.1 million in equity
securities.
Between
May 20, 2008 and June 19, 2008, the Company entered into a securities purchase
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 investors an aggregate of 2.1 million shares of its common stock and
warrants to purchase an additional 1.3 million shares of its common
stock.
Between
August 1, 2008 and August 29, 2008, the Company entered into a securities
purchase 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 investors an aggregate of 2.0 million shares of its
common stock and warrants to purchase an additional 1.3 million shares of its
common stock.
2007
Private Placements
During
2007 we sold to accredited investors in our private placements, as reflected
below, $5.3 million in equity securities.
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 3.0 million shares of our common stock
and
warrants to purchase an additional 1.4 million shares of our common stock.
On
October 17, 2007, we entered into a securities purchase agreement with Francis
Capital Management, LLC, 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 1.3 million shares of our common stock and
warrants to purchase an additional 763 thousand shares of our common stock.
Promissory
Notes
In
addition to our private placements, we have also received a significant amount
of funding from Ault Glazer Capital Partners, LLC (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”).
The
Company’s former Chairman and former Chief Executive Officer, Milton “Todd”
Ault, III, is Chairman, Chief Executive Officer and President of The AG Group.
At September 30, 2008 the outstanding principal balance of the loan that we
entered into with the Fund was $1.8 million.
At
September 30, 2008 we had additional outstanding promissory notes in the
aggregate principal amount of $1.2 million. Between February 28, 2008 and March
20, 2008, Catalysis Offshore, Ltd. and Catalysis Partners, LLC (collectively
“Catalysis”),
which
are parties related to one another, loaned us an aggregate of $500 thousand.
As
consideration for the loans, we issued Catalysis promissory notes in the
aggregate principal amount of $500 thousand (the “Catalysis
Notes”).
The
Catalysis Notes accrue interest at the rate of 8% per annum and has maturity
dates of October 31, 2008. The other outstanding promissory notes were entered
into during 2006.
Investments
Our
investments are illiquid, which will make it difficult to dispose of the
securities quickly. Since we may be forced to liquidate some or all of the
investments on an accelerated timeline, the proceeds of such liquidation may
be
significantly less than the value at which we acquired the investments. The
following is a discussion of our most significant investments at September
30,
2008.
Alacra
Corporation
At
September 30, 2008, we had an investment in Alacra Corporation, valued at $667
thousand, which represents 7.7% of our total assets. On April 20, 2000, we
purchased $1.0 million 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 thousand which accounted for the entire amount of the decrease in value
of
our Alacra investment. We continue to maintain our right to put back our
remaining preferred stock to Alacra and expect an additional redemption of
one-third of our preferred stock in December 2008.
Real
Estate Investments
At
September 30, 2008, we had one real estate investment, valued at $90 thousand.
The real estate investment, consisting of 0.61 acres of undeveloped land in
Springfield, Tennessee, is currently being marketed for sale. In March 2008,
we
completed the sale of approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas for net proceeds of $226 thousand, which resulted in a
realized loss of $25 thousand. In March 2008 we wrote down the value of our
one
remaining parcel in Springfield, Tennessee to $90 thousand. We recognized an
unrealized loss of $90 thousand as a result of this write-down. We anticipate
consummating the sale of the undeveloped land in Tennessee during the quarter
ended December 31, 2008.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
As
a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and
in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this item.
Item
4T. Controls and Procedures.
Limitations
on the Effectiveness of Controls
We
seek
to improve and strengthen our control processes to ensure that all of our
controls and procedures are adequate and effective. We believe that a control
system, no matter how well designed and operated, can only provide reasonable,
not absolute, assurance that the objectives of the control system are met.
In
reaching a reasonable level of assurance, management necessarily was required
to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. In addition, the design of any system of controls
also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may
become inadequate because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. No evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within a company will be detected. As set forth below, our Chief
Executive Officer and our Interim Chief Financial Officer have concluded, based
on their evaluation as of the end of the period covered by this report, that
our
disclosure controls and procedures were sufficiently effective to provide
reasonable assurance that the objectives of our disclosure control system were
met.
Evaluation
of Effectiveness of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and interim chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(b)
of the Exchange Act. Based upon that evaluation, our chief executive
officer and chief financial officer concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were
effective at the reasonable assurance level discussed above.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting identified
in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that occurred during the last quarter that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
As
of the
date this report was filed, there have been no material developments in the
legal proceedings previously reported in our annual report on Form 10-K for
the
fiscal year ended December 31, 2007, which was filed with the Securities and
Exchange Commission on April 15, 2008.
Item
1A. Risk Factors.
There
have been no material changes from risk factors previously disclosed in
Item 1A included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007, which was filed with the SEC on April 15, 2008.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Between
August 1, 2008 and August 29, 2008, the Company entered into a securities
purchase agreement with several accredited investors (the “Investors”),
in a
private placement exempt from the registration requirements of the Securities
Act. The Company issued and sold to the Investors an aggregate of 2.0 million
shares of its common stock and warrants to purchase an additional 1.3 million
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 $2.3 million in cash and the
extinguishment of $83 thousand in accrued liabilities. We are required to file
a
registration statement within 180 calendar days from August 4, 2008 (the
“Filing
Date”)
and to
use our best efforts to cause the registration statement to become effective
within 120 calendar days from 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”).
We
intend to use the net proceeds from this private placement transaction primarily
for general corporate purposes and repayment of existing liabilities. These
securities were sold in reliance upon the exemption provided by Section 4(2)
of
the Securities Act and the safe harbor of Rule 506 under Regulation D
promulgated under the Securities Act. No advertising or general solicitation
was
employed in offering the securities, the sales were made to a limited number
of
persons, all of whom represented to the Company that they are accredited
investors, and transfer of the securities is restricted in accordance with
the
requirements of the Securities Act.
On
May 1,
2006, the Company entered into a secured promissory note with Herbert Langsam,
a
Class II Director of the Company, in the principal amount of $500 thousand.
This
note was due to be repaid on November 1, 2006. The Company is in the process
of
attempting to restructuring the debt that is owed to Mr. Herbert
Langsam.
On
November 13, 2006, the Company entered into a secured promissory note with
Mr.
Langsam in the principal amount of $100 thousand. This note was due to be repaid
on May 13, 2007. The Company is in the process of attempting to restructuring
the debt that is owed to Mr. Herbert Langsam.
On
November 1, 2006 the Company entered into a convertible promissory note with
Michael G. Sedlak in the principal amount of $71 thousand. This note was due
to
be repaid on January 31, 2008. The Company intends to pay this note in full
prior to year-end.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibit
Number
|
|
Description
|
10.01
|
|
Form
of Securities Purchase Agreement entered into May 20, 2008 between
Patient
Safety Technologies, Inc. and several accredited investors (Incorporated
by reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on June 2, 2008)
|
10.02
|
|
Form
of Registration Rights Agreement entered into May 20, 2008 between
Patient
Safety Technologies, Inc. and several accredited investors (Incorporated
by reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on June 2, 2008)
|
10.03
|
|
Form
of Warrant Agreement entered into May 20, 2008 between Patient Safety
Technologies, Inc. and several accredited investors (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on June 2, 2008)
|
10.04
|
|
Form
of Securities Purchase Agreement entered into August 1, 2008 between
Patient Safety Technologies, Inc. and several accredited investors
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 14,
2008)
|
10.05
|
|
Form
of Registration Rights Agreement entered into August 1, 2008 between
Patient Safety Technologies, Inc. and several accredited investors
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 14,
2008)
|
10.06
|
|
Form
of Warrant Agreement entered into August 1, 2008 between Patient
Safety
Technologies, Inc. and several accredited investors (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on August 14, 2008)
|
31.1*
|
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a)
|
31.2*
|
|
Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a)
|
32.1*
|
|
Certification
of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code
|
32.2*
|
|
Certification
of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code
|
*
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
PATIENT
SAFETY TECHNOLOGIES, INC.
|
|
|
|
Date:
November 14, 2008
|
By: |
/s/ William
Adams |
|
William
Adams |
|
Chief
Executive Officer
|
|
|
|
Date:
November 14, 2008
|
By: |
/s/ Mary
A.
Lay |
|
Mary
A. Lay |
|
Interim
Chief Financial Officer and
Principal
Accounting Officer
|