UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
|
¨
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE TRANSITION PERIOD
FROM TO
COMMISSION
FILE NUMBER:
PATIENT
SAFETY TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
13-3419202
|
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification Number)
|
| |
|
|
|
100
Wilshire Boulevard, Suite 1750
Santa
Monica, California 90401
|
|
(Address
of principal executive offices)
|
Registrant’s
telephone number, including area code: (310)
752-1442
With
Copies To:
Marc
J.
Ross, Esq.
Sichenzia
Ross Friedman Ference LLP
1065
Avenue of the Americas
New
York,
New York 10018
(212)
930-9700
Indicate
by check mark whether the registrant (1) 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 an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes
¨No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨ No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date: On
November 7, 2005, there were 5,626,708 shares outstanding of the Registrant’s
common stock, $0.33 par value.
PATIENT
SAFETY TECHNOLOGIES, INC.
FORM
10-Q FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2005
| |
Page
|
|
PART
I - FINANCIAL INFORMATION
|
|
| |
|
|
Item
1. Condensed
Consolidated Financial Statements
|
1
|
|
Item
2. Management’s Discussion
and
Analysis of Financial Condition and Results of Operations
|
18
|
|
Item
3. Quantitative
and
Qualitative Disclosures About Market Risk
|
38
|
|
Item
4. Controls
and Procedures
|
38
|
| |
|
|
PART
II - OTHER INFORMATION
|
|
| |
|
|
Item
1. Legal
Proceedings
|
39
|
|
Item
2. Unregistered
Sales of
Equity Securities and Use of Proceeds
|
39
|
|
Item
3. Defaults
Upon Senior Securities
|
39
|
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
39
|
|
Item
5. Other
Information
|
39
|
|
Item
6. Exhibits
|
40
|
| |
|
|
SIGNATURES
|
41
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September
30,
|
|
December
31,
|
|
| |
|
2005
|
|
2004
*
|
|
| |
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
| |
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
| |
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
162,980
|
|
$
|
846,404
|
|
|
Restricted
cash
|
|
|
237,731
|
|
|
|
|
|
Accounts
receivable
|
|
|
937,500
|
|
|
|
|
|
Marketable
securities
|
|
|
1,110,695
|
|
|
3,487,719
|
|
|
Other
current assets
|
|
|
307,684
|
|
|
255,510
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
2,756,590
|
|
|
4,589,633
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
202,171
|
|
|
23,657
|
|
|
Patents,
net
|
|
|
4,495,027
|
|
|
|
|
|
Long-term
investments
|
|
|
3,344,335
|
|
|
2,320,953
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
10,798,123
|
|
$
|
6,934,243
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
1,815,504
|
|
$
|
892,530
|
|
|
Accounts
payable and accrued liabilities
|
|
|
1,544,086
|
|
|
939,568
|
|
|
Marketable
securities, sold short
|
|
|
|
|
|
1,075,100
|
|
|
Due
to broker
|
|
|
874,500
|
|
|
460,776
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,234,090
|
|
|
3,367,974
|
|
| COMMITMENTS
AND CONTINGENCIES |
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1 par value, cumulative 7% dividend:
|
|
|
|
|
|
|
|
|
1,000,000
shares authorized; 10,950 issued and outstanding
|
|
|
|
|
|
|
|
|
at
September 30, 2005 and December 31, 2004
|
|
|
|
|
|
|
|
|
(Liquidation
preference $1,095,000)
|
|
|
10,950
|
|
|
10,950
|
|
|
Common
stock, $0.33 par value: 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
6,969,948
shares issued and 5,603,283 shares outstanding as of September
30, 2005;
6,128,067
|
|
|
|
|
|
|
|
|
shares
issued and 4,670,703 shares outstanding at December 31,
2004
|
|
|
2,300,083
|
|
|
2,022,262
|
|
|
Paid-in
capital
|
|
|
21,879,775
|
|
|
13,950,775
|
|
|
Other
comprehensive income
|
|
|
478,125
|
|
|
|
|
|
Accumulated
deficit
|
|
|
(15,566,179
|
)
|
|
(9,800,885
|
)
|
| |
|
|
|
|
|
|
|
| |
|
|
9,102,754
|
|
|
6,183,102
|
|
|
Deduct:
1,366,665 and 1,457,364 shares of treasury stock,
|
|
|
|
|
|
|
|
|
at
cost, at September 30, 2005 and December 31, 2004,
respectively
|
|
|
(2,538,721
|
)
|
|
(2,616,833
|
)
|
| |
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
6,564,033
|
|
|
3,566,269
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
10,798,123
|
|
$
|
6,934,243
|
|
| |
|
|
|
|
|
|
|
|
*
Restated to include the impact of share-based compensation
expense
|
|
The
accompanying notes are an integral part of these condensed
consolidated
financial
statements.
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(Unaudited)
|
|
|
| |
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
| |
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
| |
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
29,693
|
|
$
|
—
|
|
$
|
616,320
|
|
$
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
1,105,152
|
|
|
611,871
|
|
|
3,215,248
|
|
|
873,802
|
|
|
Professional
fees
|
|
|
497,984
|
|
|
579,200
|
|
|
1,952,929
|
|
|
820,322
|
|
|
Rent
|
|
|
35,367
|
|
|
18,653
|
|
|
59,845
|
|
|
55,607
|
|
|
Insurance
|
|
|
27,594
|
|
|
17,038
|
|
|
71,172
|
|
|
51,113
|
|
|
Taxes
other than income taxes
|
|
|
34,385
|
|
|
5,972
|
|
|
80,367
|
|
|
24,772
|
|
|
Amortization
of patents
|
|
|
81,235
|
|
|
|
|
|
189,549
|
|
|
|
|
|
General
and administrative
|
|
|
346,715
|
|
|
54,581
|
|
|
807,744
|
|
|
139,409
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,128,432
|
|
|
1,287,315
|
|
|
6,376,854
|
|
|
1,965,025
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,098,739
|
)
|
|
(1,287,315
|
)
|
|
(5,760,534
|
)
|
|
(1,965,025
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
dividend income and other, net
|
|
|
1,234
|
|
|
155
|
|
|
41,321
|
|
|
369
|
|
|
Equity
in income (loss) of investee
|
|
|
(59,796
|
)
|
|
|
|
|
(76,816
|
)
|
|
|
|
|
Realized
gains on investments, net
|
|
|
149,204
|
|
|
150,000
|
|
|
252,848
|
|
|
650,878
|
|
|
Interest
expense
|
|
|
(23,899
|
)
|
|
(8,850
|
)
|
|
(85,460
|
)
|
|
(26,778
|
)
|
|
Unrealized
losses on marketable securities, net
|
|
|
(123,318
|
)
|
|
(150,000
|
)
|
|
(80,115
|
)
|
|
(66,256
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,155,314
|
)
|
|
(1,296,010
|
)
|
|
(5,708,756
|
)
|
|
(1,406,812
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends
|
|
|
(19,162
|
)
|
|
(19,162
|
)
|
|
(56,538
|
)
|
|
(57,488
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(2,174,476
|
)
|
$
|
(1,315,172
|
)
|
$
|
(5,765,294
|
)
|
$
|
(1,464,300
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.39
|
)
|
$
|
(0.42
|
)
|
$
|
(1.09
|
)
|
$
|
(0.47
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
5,515,360
|
|
|
3,139,050
|
|
|
5,287,831
|
|
|
3,094,626
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,155,314
|
)
|
$
|
(1,296,010
|
)
|
$
|
(5,708,756
|
)
|
$
|
(1,406,812
|
)
|
|
Other
comprehensive income (loss)
|
|
|
(680,625
|
)
|
|
|
|
|
478,125
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(2,835,939
|
)
|
$
|
(1,296,010
|
)
|
$
|
(5,230,631
|
)
|
$
|
(1,406,812
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Restated to include the impact of share-based compensation
expense
|
| |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
| |
|
|
|
|
|
| |
|
Nine
Months Ended
|
|
| |
|
September 30,
|
|
September 30,
|
|
| |
|
2005
|
|
2004
*
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,708,756
|
)
|
$
|
(1,406,812
|
)
|
|
Adjustments
to reconcile net loss to net cash (used in) provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
13,207
|
|
|
|
|
|
Amortization
of patents
|
|
|
189,549
|
|
|
|
|
|
Realized
gains on investments, net
|
|
|
(252,848
|
)
|
|
(650,878
|
)
|
|
Unrealized
loss on marketable securities
|
|
|
80,115
|
|
|
66,256
|
|
|
Stock
based compensation to employees and directors
|
|
|
2,518,047
|
|
|
5,094
|
|
|
Stock
based compensation to consultants
|
|
|
1,191,232
|
|
|
|
|
|
Stock
received for services
|
|
|
(10,000
|
)
|
|
|
|
|
Loss
on investee
|
|
|
76,816
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(237,731
|
)
|
|
|
|
|
Accounts
receivable
|
|
|
(937,500
|
)
|
|
|
|
|
Purchases
of marketable investment securities, net
|
|
|
1,576,299
|
|
|
1,024,332
|
|
|
Other
current assets
|
|
|
(72,174
|
)
|
|
35,873
|
|
|
Accounts
payable and accrued liabilities
|
|
|
567,143
|
|
|
920,650
|
|
|
Due
to broker
|
|
|
413,724
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(592,877
|
)
|
|
(5,485
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(124,827
|
)
|
|
|
|
|
Purchase
of SurgiCount
|
|
|
(432,398
|
)
|
|
|
|
|
Proceeds
from sale of long-term investments
|
|
|
376,720
|
|
|
|
|
|
Purchases
of long-term investments
|
|
|
(903,173
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,083,678
|
)
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
100,000
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
26,250
|
|
|
39,375
|
|
|
Cash
proceeds related to 16B filing
|
|
|
|
|
|
2,471
|
|
|
Purchases
of treasury stock
|
|
|
(36,931
|
)
|
|
|
|
|
Payments
of preferred dividends
|
|
|
(19,162
|
)
|
|
(57,488
|
)
|
|
Proceeds
from notes payable
|
|
|
1,000,000
|
|
|
|
|
|
Payments
and decrease in notes
|
|
|
(77,026
|
)
|
|
(12,795
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
993,131
|
|
|
(28,437
|
)
|
| |
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(683,424
|
)
|
|
(33,922
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
846,404
|
|
|
224,225
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
162,980
|
|
$
|
190,303
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
33,904
|
|
$
|
228
|
|
|
Issuance
of common stock and warrants in connection with SurgiCount
acquisition
|
|
$
|
4,232,178
|
|
$
|
—
|
|
|
Issuance
of common stock in connection with asset purchase
agreement
|
|
$
|
66,895
|
|
$
|
—
|
|
|
Issuance
of common stock in connection with land acquisition
|
|
$
|
85,619
|
|
$
|
—
|
|
|
Issuance
of common stock in connection with purchase of marketable
securities
|
|
$
|
101,640
|
|
$
|
—
|
|
|
Dividends
accrued
|
|
$
|
56,538
|
|
$
|
19,163
|
|
| |
|
|
|
|
|
|
|
|
*
Restated to include the impact of share-based compensation
expense
|
| |
|
The
accompanying notes are an integral part of these condensed
consolidated
financial statements.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
September
30, 2005
1.
DESCRIPTION OF BUSINESS
Until
March 31, 2005, Patient Safety Technologies, Inc. ("PST",
or the
"Company")
(formerly known as Franklin Capital Corporation) was a Delaware corporation
that
elected to be a Business Development Company (“BDC”)
under
the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
approval was obtained to withdraw the Company’s election to be treated as a BDC
and on March 31, 2005, the Company filed an election to withdraw its election
with the Securities and Exchange Commission. Through its operating subsidiaries,
the Company is currently involved in providing capital and managerial assistance
to early stage companies in the medical products and health care solutions
industries.
Currently,
the Company has four wholly-owned operating subsidiaries: (1) SurgiCount
Medical, Inc., a California corporation; (2) Patient Safety Consulting Group,
LLC, a Delaware Limited Liability Company; (3) Ault
Glazer Bodnar Capital Properties, LLC,
a
Delaware Limited Liability Company; and (4) Ault Glazer Bodnar Merchant Capital,
Inc., a Delaware corporation.
The
Company, including its operating subsidiaries, is engaged in the acquisition
of
controlling interests in companies and research and development of products
and
services focused on the health care and medical products field, particularly
the
patient safety markets. SurgiCount Medical, Inc., a provider of patient safety
devices and Patient Safety Consulting Group, LLC, a healthcare consulting
services company, focus on the Company’s primary target industries, the health
care and medical products field. Ault Glazer Bodnar Merchant Capital, Inc.
(“AGB
Merchant Capital”)
was
formed on June 27, 2005, to hold the Company’s non-patient safety related
assets, such as Ault
Glazer Bodnar Capital Properties, LLC (“AGB
Properties”),
a real
estate development and management company. AGB Merchant Capital is in the
process of divesting the Company’s investments in the financial services and
real estate industries.
Liquidity
The
Company has a working capital deficiency of approximately $1.5 million at
September 30, 2005. For the nine months ended September 30, 2005, the Company
has incurred a loss of approximately $5.8 million and has utilized approximately
$0.6 million in cash in its operations. Further, as of September 30, 2005 and
through the date hereof, the Company has yet to generate revenues from its
medical products and healthcare solutions segments. During the nine months
ended
September 30, 2005, the Company has relied on liquidating investments and
certain financing to fund its operations. Management believes, however no
assurances can be made, that these avenues will continue to be available to
the
Company to fund its operations for the 12 months subsequent to September 30,
2005, or until the fruition of adequate cash flow from its medical products
and
healthcare solutions segments. However, long-term liquidity is dependent on
the
Company’s ability to attain future profitable operations.
2.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared
in
accordance with the instructions to Form 10-Q and do not include all the
information and disclosures required by accounting principles generally accepted
in the United States of America. The preparation of financial statements in
conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. The accounting estimates that
require management’s most difficult and subjective judgments are the valuation
of the non-marketable equity securities. The actual results may differ from
management’s estimates.
The
interim condensed consolidated 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
condensed consolidated interim financial statements should be read in connection
with the consolidated financial statements in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2004.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
Reclassifications
Certain
amounts reported in the condensed consolidated financial statements, as of
September 30, 2004, have been reclassified to conform with the presentation
adopted to report September 30, 2005 results.
Revenue
Recognition
Consulting
service contract revenue is recognized when the service is performed.
Consequently, the recognition of such revenue is deferred until each phase
of
the contract is complete. This method is predominately used by the Financial
Services and Real Estate segment. Service activities may include the following:
financial advice on mergers, acquisitions, restructurings and similar corporate
finance matters.
Investments
Marketable
Securities. The
Company’s investment in marketable securities that are bought and held
principally for the purpose of selling them in the near-term are classified
as
trading securities. Trading securities are recorded at fair value on the balance
sheet in current assets, with the change in fair value during the period
included in earnings.
Available-for-Sale
Investments. Investments
designated as available-for-sale include both marketable equity and debt
(including redeemable preferred stock) securities. Investments that are
designated as available-for-sale are reported at fair value, with unrealized
gains and losses, net of tax, recorded in stockholders’ equity. Realized gains
and losses on the sale or exchange of equity securities and declines in value
judged to be other than temporary are recorded in realized gains (losses) on
investments, net.
Equity
Method. Included
in long-term investments are investments in companies in which the Company
has a
20% to 50% interest. These investments are carried at cost, adjusted for the
Company’s proportionate share of their undistributed earnings or losses. The
Company’s proportionate share of income or losses are recorded in equity in
income (loss) of investee.
Stock-Based
Compensation
Prior
to
January 1, 2005, the Company accounted for stock-based compensation
in
accordance with Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by Statement of Financial Accounting
Standards (“SFAS”)
No. 123, Accounting
for Stock-Based Compensation.
In
December 2004, SFAS No. 123(R), “Share-Based
Payment,”
which
addresses the accounting for employee stock options, was issued. SFAS 123(R)
revises the disclosure provisions of SFAS 123 and supercedes APB Opinion No.
25.
SFAS 123(R) requires that the cost of all employee stock options, as well as
other equity-based compensation arrangements, be reflected in the financial
statements over the vesting period based on the estimated fair value of the
awards. This statement is effective for the Company as of the beginning of
the
first interim or annual reporting period that begins after January 1, 2006.
The
Company elected to adopt SFAS 123(R) as of January 1, 2005 using the modified
retrospective application method as provided by SFAS 123(R) and accordingly,
financial statement amounts for the prior periods in which the Company granted
employee stock options have been restated to reflect the fair value method
of
expensing prescribed by SFAS 123(R). During the year ended December 31, 2004,
the entire amount of equity compensation expense required to be recognized
under
the modified retrospective application method was $5,094 relating to stock
option grants that occurred in the second quarter of 2004. During the three
and
nine months ended September 30, 2005, the Company had stock-based compensation
expense included in reported net loss of $340,103 and $1,230,551, respectively.
All
options that we granted in 2005 and 2004 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:
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
| |
|
Nine
months ended September 30,
|
|
| |
|
2005
|
|
2004
|
|
|
Weighted
average risk free interest rates
|
|
|
3.75
|
% |
|
|
3.00
|
% |
|
|
Weighted
average life (in years)
|
|
|
3.0
|
|
|
|
0.1
|
|
|
|
Volatility
|
|
|
83
|
% |
|
|
102
|
% |
|
|
Expected
dividend yield
|
|
|
0
|
% |
|
|
0
|
% |
|
|
Weighted
average grant-date fair value per share of options granted
|
|
$
|
5.03
|
|
|
$
|
0.50
|
|
|
Comprehensive
Income (Loss)
The
Company applies SFAS No. 130, “Reporting
Comprehensive Income.”Comprehensive
income (loss) consists of the after tax net change in unrealized gains and
losses on securities classified as available for sale by the Company during
the
three and nine months ended September 30, 2005 and 2004 that have been excluded
from net loss and reflected instead in stockholders’ equity. At September 30,
2005, the only investments designated as available for sale were the Company’s
restricted holdings in IPEX, Inc. (“IPEX”)
and its
investment in Alacra Corporation (“Alacra”).
3.
LOSS PER COMMON SHARE
Loss
per
common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, “Earnings
Per Share,”
which
requires dual presentation of basic and diluted earnings per share on the face
of the statements of operations. Basic loss per share excludes dilution and
is
computed by dividing income (loss) available to common stockholders by the
weighted-average common shares outstanding for the period. Diluted loss per
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.
Options
and warrants outstanding as of September 30, 2005 to purchase 719,000 and
1,249,683 shares of common stock, respectively, and 246,375 shares issuable
upon
conversion of outstanding convertible preferred stock were not included in
the
computation of diluted net loss per common share for the three and nine months
ended September 30, 2005, as their inclusion would have been antidilutive.
Options
outstanding as of September 30, 2004 to purchase 61,875 shares of common stock,
and 246,375 shares issuable upon conversion of outstanding convertible preferred
stock were not included in the computation of diluted net loss per common share
for the three and nine months ended September 30, 2004, as their inclusion
would
have been antidilutive.
4.
EQUITY TRANSACTIONS
On
March
30, 2005, stockholders’ approval was obtained to (i) decrease the authorized
number of shares of common stock from 50,000,000 shares to 25,000,000 shares,
(ii) decrease the authorized number of shares of preferred stock from 10,000,000
shares to 1,000,000 shares and (iii) to reduce the par value of the common
stock
from $1.00 per share to $0.33 per share and effect a three-for-one split of
the
common stock.
Stockholders’
equity has been restated to give retroactive recognition to the stock split
for
all periods presented. In addition, all per share and weighted average share
amounts have been restated to reflect this stock split.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
During
the nine months ended September 30, 2005, the Company issued 5,625 shares of
common stock held in treasury upon exercise of options under the Company’s 1997
Stock Incentive Plan and 20,444 shares of common stock held in treasury to
purchase 0.61 acres of vacant land in Springfield, Tennessee.
On
April
5, 2005, the Company entered into a consulting agreement with Health West
Marketing Incorporated, a California corporation ("Health West"). Under the
agreement, Health West agreed to help the Company establish a comprehensive
manufacturing and distribution strategy for the Company's
Safety-SpongeTM
System worldwide.
The initial term of the agreement is for a period of two years. After the
initial two-year term, the agreement will terminate unless extended by the
parties for one or more additional one-year periods.
In
consideration for Health West's services, the Company agreed to issue Health
West 42,017 shares of the Company's common stock, to be issued as follows:
(a)
10,505 shares valued at $62,505 were issued upon signing the agreement; (b)
if
Health West helps the Company structure a comprehensive manufacturing agreement
with A Plus Manufacturing by July 5, 2005, then the Company will issue Health
West an additional 15,756 shares; and (c) if Health West helps the Company
develop a regional distribution network to integrate the
Safety-SpongeTM
System into
the
existing acute care supply chain by February 5, 2006, then the Company will
issue Health West the remaining 15,756 shares. On August 17, 2005, the Company
entered into a comprehensive manufacturing agreement with A Plus Manufacturing
and at that time agreed to issue 15,756 shares, valued at $93,748, to Health
West. As an additional incentive the Company granted Health West warrants to
purchase a total of 175,000 shares of the Company’s common stock as discussed in
Note 13. In the event of the death of Bill Adams, who is Health West's Chief
Executive Officer, the agreement will automatically terminate. The Company
may
terminate the agreement at any time upon delivery to Health West of notice
of a
good faith determination by the Company's Board of Directors that the agreement
should be terminated for cause or as a result of disability of Mr. Adams. Health
West may voluntarily terminate the agreement only after expiration of the
initial two-year term upon providing 30 days prior written notice to the
Company.
On
April
22, 2005, the Company entered into a subscription agreement pursuant to which
the Company sold to an investor 20,000 shares of the Company's common stock
held
in treasury and warrants to purchase an additional 20,000 shares of the
Company's common stock. The warrants are exercisable for a period of five years,
have an exercise price equal to $6.05, and 50% of the warrants are callable.
In
the event the closing sale price of the Company's common stock equals or exceeds
$7.50 for at least five consecutive trading days, the Company, upon 30 days
prior written notice, may call the callable warrants at a redemption price
equal
to $0.01 per share of common stock then purchasable pursuant to such warrants.
Notwithstanding, such notice, the warrant holder may exercise the callable
warrant prior to the end of the 30-day notice period. The Company received
gross
proceeds of $100,000 from the sale of stock and warrants. The sale was made
in a
private placement exempt from registration requirements pursuant to Section
4(2)
of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder.
On
May
12, 2005, the Company entered into an asset purchase agreement whereby the
Company purchased all of the assets of Cinapse Digital Media, a sole
proprietorship, for the issuance of 17,241 shares of common stock held in
treasury and 8,621 warrants to purchase common stock at an exercise price of
$5.80 and a contractual life of 5 years. The assets were valued at $66,895
and
consisted primarily of computers and equipment utilized in the production of
digital video. Simultaneously with the asset purchase, the Company formed
Cinapse Digital Media, LLC, a 50% owned Delaware limited liability company,
and
contributed the acquired assets. The Company consolidates its investment in
Cinapse Digital Media, LLC. Cinapse Digital Media, LLC produces digital video
for corporate clients and will also produce digital training videos for the
Company’s patient safety devices.
On
July
19, 2005, the Company entered into a stock purchase agreement pursuant to which
the Company sold to an investor 38,000 shares of the Company's common stock
held
in treasury. As consideration the Company received 12,000 shares of Tuxis
Corporation (“Tuxis”)
common
stock valued at approximately $102,000.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
5.
STOCK REPURCHASE PROGRAM
In
May 2005, the Board of Directors authorized a stock repurchase program under
which up to 150,000 shares of the Company’s common stock could be repurchased
from time to time with available funds. The primary purpose of the stock
repurchase program is to allow the Company the flexibility to repurchase its
common stock to potentially reduce stock dilution and seek to improve its
long-term earnings per share. Repurchases may be made in the open market or
in
privately negotiated transactions, subject to regulatory considerations, and
may
be discontinued at any time. During the three and nine months ended September
30, 2005, the Company repurchased 10,611 shares of common stock for
$36,931. During the year ended December 31, 2004, the Company did not
repurchase any shares of common stock. Although the Company’s stock repurchase
program remains in place, the Company does not currently intend to make a
material amount of repurchases. Future repurchases, if any, will depend on
subsequent developments, corporate needs and market conditions. If subsequent
developments occur or corporate needs and market conditions change that might
cause the Company to make one or more repurchases, the Company would not
necessarily make a public announcement about it at that time.
6.
ACQUISITION
In
February 2005, the Company invested $4,035,600, excluding acquisition costs,
to
acquire 100% of the common stock of SurgiCount Medical, Inc. (”SurgiCount”).
The
Company acquired SurgiCount for its patents related to the
Safety-SpongeTM
System,
an innovation which the Company believes will allow it to capture a significant
portion of the United States and European surgical sponge sales. SurgiCount’s
operating results from the closing date of the acquisition, February 25, 2005,
through September 30, 2005, are included in the condensed consolidated financial
statements.
At
closing, the purchase price, including acquisition costs was determined to
be
$4,684,576, comprised of $340,000 in cash payments and 600,000 shares of the
Company’s common stock valued at $3,695,600 issued to SurgiCount’s equity
holders. Additionally, the Company incurred approximately $112,398 in direct
costs and issued 150,000 warrants, valued at $536,578, to purchase the common
stock of the Company to consultants providing advisory services for the Merger.
The value assigned to the stock portion of the purchase price is $6.16 per
share
based on the average closing price of the Company’s common stock for the five
days beginning two days prior to and ending two days after February 4, 2005,
the
date of the Agreement and Plan of Merger and Reorganization (the “Merger”). In
addition, in the event that prior to the fifth anniversary of the closing of
the
Merger the cumulative gross revenues of SurgiCount exceed $500,000 the Company
is obligated to issue an additional 50,001 shares of the Company’s common stock
to certain SurgiCount shareholders. Should the cumulative gross revenues exceed
$1,000,000 during the five-year period the additional shares would be increased
by 50,001, for a total of 100,002 additional shares. Such amount is not included
in the aggregate purchase price and will be recorded when and if issued.
The
entire purchase price, including acquisition costs, has been allocated to
SurgiCount’s patents, with an approximate useful life of 14.4 years, on a
preliminary basis and may change as additional information becomes available.
The
following pro forma data summarizes the results of operations for the periods
indicated as if the SurgiCount acquisition had been completed as of the
beginning of each period presented. The pro forma data gives effect to actual
operating results prior to the acquisition, adjusted to include the pro forma
effect of amortization of intangibles. These pro forma amounts do not purport
to
be indicative of the results that would have actually been obtained if the
acquisition occurred as of the beginning of each period presented or that may
be
obtained in future periods:
| |
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
| |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
Revenue
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net
loss
|
|
$
|
(2,168,000
|
)
|
$
|
(1,390,000
|
)
|
$
|
(5,801,000
|
)
|
$
|
(1,690,000
|
)
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(1.10
|
)
|
$
|
(0.55
|
)
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
7.
MARKETABLE SECURITIES
Marketable
securities at September 30, 2005 and December 31, 2004 are comprised of the
following:
| |
|
|
September
30,
|
|
|
December
31,
|
|
| |
|
|
2005
|
|
|
2004
|
|
|
U.S.
Treasuries
|
|
$
|
—
|
|
$
|
2,016,406
|
|
|
IPEX,
Inc.
|
|
|
178,125
|
|
|
|
|
|
Tuxis
Corporation
|
|
|
932,450
|
|
|
1,471,313
|
|
|
Other
Equities
|
|
|
120
|
|
|
|
|
| |
|
$
|
1,110,695
|
|
$
|
3,487,719
|
|
IPEX,
Inc.
At
September 30, 2005, the Company held 545,000 shares of common stock and warrants
to purchase 225,000 shares of common stock at $1.50 per share and warrants
to
purchase 225,000 shares of common stock at $2.00 per share of IPEX, formerly
Administration for International Credit & Investments, Inc. The Company
acquired 450,000 shares of the common stock and all of the warrants directly
from IPEX and, until such time as the securities are either registered with
the
SEC or subject to the provisions of Rule 144, is restricted from selling these
securities. The remaining 95,000 shares of common stock are valued at $178,125
and included in marketable securities. The Company has borrowed against these
95,000 shares and has therefore pledged these shares to a financial institution
as discussed in Note 11. IPEX's common stock is traded on the OTC Bulletin
Board, which reported a closing price, at September 30, 2005, of $2.50. The
Company has valued its holdings in IPEX at a 25% discount to the $2.50 closing
price, or $1.875 per share, due to the limited average number of shares traded
on the OTC Bulletin Board as well as other trading restrictions on the Company’s
unregistered holdings in IPEX. The warrants are exercisable for a period of
five
years and are callable by IPEX in certain instances. IPEX operates an electronic
market for collecting, detecting, converting, enhancing and routing
telecommunication traffic and digital content. Members of the exchange
anonymously exchange information based on route quality and price through a
centralized, web accessible database and then route traffic. IPEX’s
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through IPEX’s system. IPEX invoices and processes payments for its members’
transactions and offsets credit risk through its credit management programs
with
third parties.
Tuxis
Corporation
At
September 30, 2005, the Company held 109,700 shares of common stock of Tuxis
as
discussed in Note 14. The Company has borrowed against 20,000 of these shares
and has therefore pledged 20,000 shares to a financial institution as discussed
in Note 11.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
8.
LONG-TERM INVESTMENTS
Long-term
investments at September 30, 2005 and December 31, 2004 are comprised of the
following:
| |
|
|
September
30,
|
|
|
December
31,
|
|
| |
|
|
2005
|
|
|
2004
|
|
|
Alacra
Corporation
|
|
$
|
1,000,000
|
|
$
|
1,000,000
|
|
|
Automotive
Services Group
|
|
|
297,844
|
|
|
|
|
|
Digicorp
|
|
|
492,301
|
|
|
532,435
|
|
|
IPEX,
Inc.
|
|
|
928,125
|
|
|
|
|
|
Real
Estate
|
|
|
576,065
|
|
|
738,518
|
|
|
China
Nurse
|
|
|
50,000
|
|
|
50,000
|
|
| |
|
$
|
3,344,335
|
|
$
|
2,320,953
|
|
Alacra
Corporation
At
September 30, 2005, the Company had an investment in shares of Series F
convertible preferred stock of Alacra Corporation, valued at $1,000,000, and
classified as an available-for-sale investment. The Company has the right to
have the Series F convertible preferred stock redeemed by Alacra for face value
plus accrued dividends on December 31, 2006. Alacra, based in New York, is
a
global provider of business and financial information. Alacra provides a diverse
portfolio of fast, sophisticated online services that allow users to quickly
find, analyze, package and present mission-critical business information.
Alacra's customers include more than 750 financial institutions, management
consulting, law and accounting firms and other corporations throughout the
world.
Automotive
Services Group, LLC
During
July 2005, Ault Glazer Bodnar Merchant Capital, Inc. purchased a 50% interest
in
Automotive Services Group (“ASG”),
LLC, an Alabama Limited Liability Company for $300,000. The Company has recorded
its investment in ASG at its cost, as adjusted for the Company’s proportionate
share of ASG’s losses, or $297,844. ASG was formed to develop and operate
automated car wash sites with the first location under development in
Birmingham, Alabama. The
Company accounts for its investment in ASG under the equity method of accounting
since the controlling interest resides with the president of ASG who, in
addition to owning a 50% interest in ASG, manages all of the operating
activities of ASG. The Company’s proportionate share of income or losses from
this investment is recorded in equity in income (loss) of investee.
Digicorp
At
September 30, 2005, the Company held 4,016,027 shares, or 28%, of the common
stock of Digicorp recorded at its cost, as adjusted for the Company’s
proportionate share of Digicorp’s losses, of $492,301, or approximately $0.12
per share. The Company has borrowed against 600,000 of these shares and has
therefore pledged 600,000 shares to a financial institution as discussed in
Note
11. The Company accounts for its investment in Digicorp under the equity method
of accounting. The Company’s proportionate share of income or losses from this
investment is recorded in equity in income (loss) of investee.
Excelsior
Radio Networks, Inc.
During
the period from August 12, 2003 through October 22, 2004, the Company liquidated
its investment in Excelsior Radio Networks, Inc. (“Excelsior”).
The
Company sold a total of 1,476,804 shares and warrants to purchase 87,111 shares
of Excelsior common stock. Certain of these sales are subject to potential
adjustment whereby the Company would receive additional proceeds in the event
of
certain circumstances. However, no value has been ascribed to this
right.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
Investments
in Real Estate
At
September 30, 2005, the Company had several real estate investments, recorded
at
its cost of $576,065. These investments are included in long-term investments.
The Company holds its real estate investments in AGB Properties. AGB Properties
real estate holdings consist of two vacant single family buildings and one
multi-unit building in Baltimore, Maryland, approximately 8.5 acres of
undeveloped land in Heber Springs, Arkansas, 0.61 acres of undeveloped land
in
Springfield, Tennessee, and various loans secured by real estate in Heber
Springs, Arkansas. AGB Properties is in the process of liquidating its real
estate holdings.
9.
NOTES PAYABLE
The
Company initially purchased Excelsior on August 28, 2001. As part of the
purchase price paid by the Company for its investment in Excelsior, the Company
issued a $1,000,000 note to Winstar. This note was due February 28, 2002 with
interest at 3.54% but in accordance with the agreement has a right of offset
against certain representations and warranties made by Winstar. The due date
of
the note is extended until the lawsuit discussed in Note 15 is settled. At
September 30, 2005, the Company had incurred a total of approximately $184,496
in legal expenses, of which $77,026 was incurred during the nine months ended
September 30, 2005. These amounts have been offset against the amount due.
On
April
7, 2005, the Company issued a $1,000,000 principal amount promissory note (the
"Note")
to
Bodnar Capital Management, LLC, in consideration for a loan from Bodnar Capital
Management, LLC to the Company in the amount of $1,000,000. Steven J. Bodnar
is
a managing member of Bodnar Capital Management, LLC. Mr. Bodnar, through Bodnar
Capital Management, LLC, is a principal stockholder of the Company. The
principal amount of the Note and interest at the rate of 6% per annum is payable
on May 31, 2006. The obligations under the Note are collateralized by all real
property owned by the Company.
10.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities at September 30, 2005 and December 31, 2004
are
comprised of the following:
| |
|
|
December
31,
|
|
|
December
31,
|
|
| |
|
|
2005
|
|
|
2004
|
|
|
Professional
fees - legal
|
|
$
|
393,109
|
|
$
|
351,867
|
|
|
Accrued
purchase price on investment
|
|
|
165,240
|
|
|
165,240
|
|
|
Officer's
severance
|
|
|
26,728
|
|
|
160,142
|
|
|
Accrued
interest
|
|
|
163,988
|
|
|
112,432
|
|
|
Professional
fees - other
|
|
|
53,800
|
|
|
52,950
|
|
|
Deferred
revenue
|
|
|
331,180
|
|
|
|
|
|
Other
|
|
|
410,041
|
|
|
96,937
|
|
| |
|
$
|
1,544,086
|
|
$
|
939,568
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
11.
DUE TO BROKER
In
August
2005, the Company entered into an agreement with a financial institution to
borrow against securities. The agreement, which extends for 53 weeks, is subject
to a premium of up to 6% of the amount of the borrowings which is amortized
on a
straight line basis over the term of the agreement. To the extent the agreement
is terminated early, the Company does not incur a premium for the amount of
time
that the agreement is terminated. The agreement also provides that in addition
to the securities held by the financial institution, the Company pledge a total
of 25% of the value of the securities in cash. The pledged cash is reduced
daily
by the amount of the earned premium and protects the financial institution
from
decreases in the market value of the securities. Any decrease in the market
value of the pledged securities in excess of 5% over the securities notional
value would require the Company to fund additional monies, such that 25% of
the
initial borrowing, as adjusted by the earned premium, was covered. If the
Company failed to fund additional monies the financial institution has the
right
to liquidate the pledged securities. In the event the proceeds from liquidation
are insufficient to cover the amount of the borrowings, the financial
institution’s sole recourse is against the pledged cash. During the nine months
ended September 30, 2005, the Company received proceeds from such borrowings
of
$874,500 and consequently recorded a liability at September 30, 2005 of $874,500
which is included in current liabilities under the heading “Due to broker.”
Additionally, the Company has recorded $237,731 as restricted cash related
to
borrowings under this agreement.
12.
STOCK OPTION PLANS
On
September 9, 1997, the Company’s stockholders approved two Stock Option Plans: a
Stock Incentive Plan (“SIP”)
to be
offered to the Company’s consultants, officers and employees (including any
officer or employee who is also a director of the Company) and a Non-Statutory
Stock Option Plan (“SOP”)
to be
offered to the Company’s “outside” directors, (i.e., those directors who are not
also officers or employees of The Company’). As of September 30, 2005, there
were no outstanding options to purchase the Company’s common stock and no
options available for future issuance under either the SIP or the SOP.
In
December 2004, the Board of Directors of the Company approved the 2005 Stock
Option and Restricted Stock Plan (the “2005
SOP”)
and the
Company’s stockholders approved the Plan in March 2005. The Plan reserves
1,319,082 shares of common stock for grants of incentive stock options,
nonqualified stock options, and restricted stock awards to employees,
non-employee directors and consultants performing services for the Company.
Options granted under the Plan have an exercise price equal to or greater than
the fair market value of the underlying common stock at the date of grant and
become exercisable based on a vesting schedule determined at the date
of
grant. The options expire 10 years from the date of grant. Restricted
stock
awards granted under the Plan are subject to a vesting period determined at
the
date of grant. As of September 30, 2005, the Company has granted 462,239 shares
of restricted stock of which 241,881 are vested. For the three and nine months
ended September 30, 2005, the Company recorded compensation expense of
approximately $769,602 and $1,719,475, respectively, related to these shares
of
restricted stock.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
The
following is a summary of the status of the Stock Option Plans:
| |
|
|
|
|
|
Outstanding
Options
|
|
| |
|
|
Shares
|
|
|
|
|
|
|
|
| |
|
|
Available for
|
|
|
Number of
|
|
|
Weighted
Average
|
|
| |
|
|
Grant
|
|
|
Shares
|
|
|
Exercise
Price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
December
31, 2003
|
|
|
22,500
|
|
|
61,875
|
|
$
|
3.80
|
|
|
Grants
|
|
|
(78,750
|
)
|
|
78,750
|
|
$
|
0.50
|
|
|
Exercises
|
|
|
|
|
|
(78,750
|
)
|
$
|
0.50
|
|
|
Cancellations
|
|
|
56,250
|
|
|
(56,250
|
)
|
$
|
3.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
—
|
|
|
5,625
|
|
$
|
4.67
|
|
|
Adoption
of 2005 SOP
|
|
|
1,319,082
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
(5,625
|
)
|
$
|
4.67
|
|
|
Restricted
Stock Awards
|
|
|
(462,239
|
)
|
|
|
|
|
|
|
|
Grants
|
|
|
(719,000
|
)
|
|
719,000
|
|
$
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
|
137,843
|
|
|
719,000
|
|
$
|
5.03
|
|
|
Options
exercisable at:
|
|
|
|
|
|
|
December
31, 2003
|
|
|
61,875
|
|
$
|
3.80
|
|
|
December
31, 2004
|
|
|
5,625
|
|
$
|
4.67
|
|
|
September
30, 2005
|
|
|
202,375
|
|
$
|
5.27
|
|
The
outstanding options, all of which are issued under the 2005 SOP, have a
remaining contractual life of approximately 9.55 years.
13.
WARRANTS
On
November 3, 2004, the Company entered into a Subscription Agreement with several
accredited investors (the "Investors"),
relating to the issuance and sale by the Company of shares of its common stock
(the "Shares")
and
five-year warrants (the "Warrants")
to
purchase additional shares of its common stock (the "Warrant
Shares")
in one
or more closings of a private placement (the "Private
Placement").
During
the period November 3, 2004 through December 21, 2004, the Company held a series
of four closings of the Private Placement. In conjunction with the closings
the
Company issued and sold to the Investors an aggregate of 1,517,700 Shares and
Warrants to purchase an aggregate of up to 758,841 Warrant Shares pursuant
to
the terms of the Subscription Agreement. On April 22, 2005, the Company entered
into a Subscription Agreement with an accredited investor whereby the Company
sold an additional 20,000 Shares and Warrants to purchase an additional 20,000
Warrant Shares. At September 30, 2005, the Warrants, including those granted
on
April 22, 2005, weighted average exercise price was $3.91 with a remaining
contractual life of 4.1 years.
In
March
2005, the Company issued 177,000 warrants (including 150,000 capitalized as
part
of the acquisition of the SurgiCount patents) to purchase shares of common
stock
at $5.27 per share to various consultants. The warrants are immediately
exercisable and have a five-year life. The warrants were valued at $633,163
and,
depending on the nature of the consulting services received by the Company,
were
either capitalized or expensed.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
In
April
2005, the Company entered into a consulting agreement with Health West Marketing
Incorporated and as incentive for entering into the agreement, the Company
agreed to issue Health West a callable warrant to purchase 150,000 (post 3:1
forward stock split) shares of the Company's common stock at an exercise price
of $5.95, exercisable for 5 years. In addition, the Company agreed to issue
a
callable warrant to purchase 25,000 (post 3:1 forward stock split) shares of
the
Company's common stock at an exercise price of $5.95, exercisable upon meeting
specified milestones. The warrants were valued at $615,951 of which $527,958
was
expensed during the period and the remaining amount will be expensed when and
if
the milestones are met.
In
April
2005, the Company issued 100,000 warrants to purchase shares of common stock
at
$5.85 per share to a consultant. The warrants vest over a 12 month period and
have a five-year life. The warrants were valued at $397,340 of which $134,711
has been expensed.
Warrants
granted during the year were valued using the Black-Scholes valuation model
assuming expected dividend yield, risk-free interest rate, expected life and
volatility of 0%, 3.75%, five years and 83%, respectively. As of September
30,
2005, all warrants issued to the consultants remain outstanding.
14.
RELATED PARTY TRANSACTIONS
Tuxis
Corporation
On
July
22, 2005, Ault Glazer filed a Schedule 13D/A with the SEC relating to its
holdings in Tuxis. Tuxis, a Maryland corporation, currently is registered under
the 1940 Act as a closed-end management investment company. Tuxis previously
received Board of Directors and shareholder approval to change the nature of
its
business so as to cease to be an investment company and on May 3, 2004, filed
an
application with the SEC to de-register. At September 30, 2005, the Company
directly held 109,700 shares and indirectly, by virtue of its relationship
with
Ault Glazer, held 207,000 shares of Tuxis common stock, which represented
approximately 11.15% and 21.23%, respectively, of the total outstanding shares.
At September 30, 2005, Tuxis had reportable net assets of approximately $8.9
million.
AGB
Properties
On
April
28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
Tennessee from a related party. The purchase price consisted of approximately
$90,000 in cash, 20,444 shares of common stock and 10,221 warrants to purchase
common stock at an exercise price of $4.53 and a 5 year contractual
life.
Ipex,
Inc.
On
June
30, 2005, the Company formalized the terms of a consulting agreement, consented
to by IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
shareholder of IPEX, former President, former Chief Executive Officer and former
director of IPEX, to serve as a business consultant to IPEX. Mr. Grabher owns
18,855,900 shares of IPEX's 28,195,566 outstanding shares of common stock and
has granted Mr. Ault, the Company’s Chairman and Chief Executive Officer, an
irrevocable voting proxy for his shares. At September 30, 2005, the Company
held
1.93% of IPEX’s outstanding shares of common stock. On June 30, 2005, the
Company agreed with IPEX as to the scope of such consulting services and the
consideration for such services. The Company has provided and/or will provide
if
reasonably necessary within the next 12 months, the following services to IPEX:
(a) substantial review of IPEX's business and operations in order to facilitate
an analysis of IPEX's strategic options regarding a turnaround of IPEX's
business; (b) providing advice in the following areas: (i) identification of
financing sources; (ii) providing capital introductions of financial
institutions and/or strategic investors; (iii) evaluation and recommendation
of
candidates for appointment as officers, directors or employees; (iv) making
personnel of the Company available to IPEX to provide services to IPEX on a
temporary or permanent basis; (v) evaluation and/or negotiation of merger or
sale opportunities, or such other form of transaction or endeavor which IPEX
may
elect to pursue; and (vi) providing any other services as are mutually agreed
upon in writing by the Company and Wolfgang Grabher from time to time; and
(c)
assisting IPEX in installing a new management team.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
The
Company has performed a significant amount of the services stipulated under
the
terms of the consulting agreement, including but not limited to: (i) a review
of
the business and operations; (ii) the execution of two purchase agreements
for
the purchase of certain intellectual property assets; (iii) the hiring of a
Chief Executive Officer, Chief Operating Officer and a Vice President of
Research & Development; and (iv) the appointment of two members to the Board
of Directors of IPEX. The Company initially valued the amount of the consulting
services at $1,331,250, which was due on August 15, 2005, and was based upon
the
assumption that the Company would most likely receive 500,000 shares of IPEX
common stock as payment for the services. During the three months ended
September 30, 2005, the fair market value of IPEX common stock has decreased
by
approximately 29.6%. Accordingly, since the amount due will be paid to the
Company, most likely, in the form of 500,000 shares of IPEX common stock we
have
reduced the receivable and deferred revenue by the amount of the decrease in
the
fair market value of IPEX common stock, $393,750. As a result of the decrease
in
the fair market value of IPEX common stock, the Company now expects to
ultimately recognize $937,500 in revenue as a result of this agreement, of
which
approximately $606,320 has been recognized and approximately $331,180 has been
deferred. Management expects that substantially all of the revenue will be
recognized during the year ending December 31, 2005.
Digicorp
In
connection with the Company’s investment in Digicorp, the Company was entitled
to designate two members to the Board of Directors of Digicorp. The Company’s
first designee, Melanie Glazer, who is also manager of our subsidiary Ault
Glazer Bodnar Capital Properties, LLC, was appointed on December 29, 2004.
Milton “Todd” Ault, III, our Chairman and Chief Executive Officer, was appointed
Chief Executive Officer of Digicorp on April 26, 2005. On July 16, 2005, Alice
M. Campbell, one of our directors, and Mr. Ault were appointed to the Board
of
Directors of Digicorp. On July 20, 2005, Lynne Silverstein, our President and
Secretary, was appointed as a director of Digicorp, and William B. Horne, our
Chief Financial Officer, was appointed as a director and as Chief Financial
Officer of Digicorp. On September 30, 2005, Mr. Ault resigned from all positions
with Digicorp and Mr. Horne was appointed as the interim Chief Executive
Officer.
On
September 19, 2005, Digicorp entered into an asset purchase agreement with
Philip Gatch, who at that time was our Company's Chief Technology Officer.
The
assets purchased consisted of the iCodemedia suite of websites and internet
properties and all related intellectual property (the “iCodemedia
Assets”).
Mr.
Gatch received 1,000,000 shares of Digicorp’s common stock as consideration for
the iCodemedia Assets.
15.
COMMITMENT AND CONTINGENCIES
Operating
Lease
During
August 2005 the Company entered into an operating agreement for office
space. The lease requires monthly payments of $4,174 from October 1,
2005
through September 30, 2006 and $4,341 from October 1, 2006 through September
30,
2007. Future minimum annual rent payments under these leases for the
twelve months subsequent to September 30, 2005 are as follows:
| |
September
30,
|
|
|
|
|
| |
2006
|
|
|
2007
|
|
|
Total
|
|
|
$
|
50,088
|
|
$
|
52,092
|
|
$
|
102,180
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
Legal
Proceedings
On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit (the “Leve
Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
On
February 25, 2003, the case against the Company and Sunshine was dismissed,
however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
that the Winstar defendants conspired to commit fraud and breached their
fiduciary duty to the plaintiffs in connection with the acquisition of the
plaintiff's radio production and distribution business. The complaint further
alleged that the Company and Sunshine joined the alleged conspiracy. On June
1,
2005, the United States Court of Appeals for the Second Circuit affirmed the
February 25, 2003 judgment of the district court dismissing the claims against
the Company.
On
July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
new
lawsuit (the “new
Leve Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
The
new Leve Lawsuit attempts to collect a federal default judgment of $5,014,000
entered against only two entities, i.e., Winstar Radio Networks, LLC and Winstar
Global Media, Inc., by attempting to enforce the judgment against a number
of
additional entities who are not judgment debtors. Further, the new Leve Lawsuit
attempts to enforce the plaintiffs default judgment against entities who were
dismissed on the merits from the underlying action in which plaintiffs obtained
their default judgment. An unfavorable outcome in the lawsuit, may have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes the lawsuit is without merit and
intends to vigorously defend itself. These condensed consolidated financial
statements do not include any adjustments for the possible outcome of this
uncertainty.
16.
SEGMENT REPORTING
The
Company reports selected segment information in its financial reports to
shareholders in accordance with SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information.”
The segment information provided reflects the three distinct lines of business
within the Company’s organizational structure: medical
products, which consists of SurgiCount, a provider of patient safety devices,
health care solutions, which consists of Patient Safety Consulting Group, LLC,
and financial services and real estate, which consists of Ault
Glazer Bodnar Capital Properties,
LLC.
Unallocated
corporate expenses are centrally managed at the corporate level and not reviewed
by the Company’s chief operating decision maker in evaluating results by
segment.
Transactions
between segments are not common and are not material to the segment information.
Some business activities that cannot be classified in the aforementioned
segments are shown under “corporate”.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
Segment
information for the three and nine months ended September 30, 2005, and 2004
is
as follows:
| |
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
| |
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
| |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
Medical
Products
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(663,714
|
)
|
|
—
|
|
$
|
(1,832,343
|
)
|
|
—
|
|
|
Total
Assets
|
|
$
|
4,603,439
|
|
|
—
|
|
$
|
4,603,439
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(81,430
|
)
|
|
—
|
|
$
|
(314,350
|
)
|
|
—
|
|
|
Total
Assets
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services and Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
29,693
|
|
|
—
|
|
$
|
616,320
|
|
|
—
|
|
|
Net
income
|
|
$
|
(158,219
|
)
|
$
|
155
|
|
$
|
154,845
|
|
$
|
584,991
|
|
|
Total
Assets
|
|
$
|
5,807,207
|
|
$
|
2,679,513
|
|
$
|
5,807,207
|
|
$
|
2,679,513
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(1,251,951
|
)
|
$
|
(1,296,165
|
)
|
$
|
(3,716,908
|
)
|
$
|
(1,991,803
|
)
|
|
Total
Assets
|
|
$
|
387,477
|
|
$
|
69,014
|
|
$
|
387,477
|
|
$
|
69,014
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
29,693
|
|
|
—
|
|
$
|
616,320
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(2,155,314
|
)
|
$
|
(1,296,010
|
)
|
$
|
(5,708,756
|
)
|
$
|
(1,406,812
|
)
|
|
Total
Assets
|
|
$
|
10,798,123
|
|
$
|
2,748,527
|
|
$
|
10,798,123
|
|
$
|
2,748,527
|
|
17.
SUBSEQUENT EVENTS
On
October 19, 2005, the Company entered into a subscription agreement with an
accredited investor, pursuant to which the Company sold 16,666 shares of common
stock at a price of $3.00 per share. The Company received gross proceeds of
$50,000 from the sale of the stock.
On
November 3, 2005, the Company entered into a subscription agreement with Herbert
Langsam, a current director of the Company, pursuant to which the Company sold
28,653 shares of common stock at a price of $3.49 per share. The Company
received gross proceeds of $100,000 from the sale of the stock.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere
in
this Form 10-Q. This Form 10-Q contains forward-looking statements regarding
the
plans and objectives of management for future operations. This information
may
involve known and unknown risks, uncertainties and other factors which may
cause
our actual results, performance or achievements to be materially different
from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative
of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect,
and
we cannot assure you that the projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from
those expressed or implied by the forward-looking statements as a result of
various factors. We undertake no obligation to revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof
or
to reflect the occurrence of unanticipated events.
Critical
accounting policies and estimates
The
below
discussion and analysis of Patient Safety Technologies’ financial condition and
results of operations are based upon the Company's 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. Our
most
critical accounting policy relates to the valuation of our non-marketable equity
securities.
In
the
past we invested in illiquid equity securities acquired directly from issuers
in
private transactions. Our investments are generally subject to restrictions
on
resale or otherwise are illiquid and generally have no established trading
market. Additionally, many of the securities that we have invested in will
not
be eligible for sale to the public without registration under the Securities
Act
of 1933. Because of the type of investments that we made and the nature of
our
business, our valuation process requires an analysis of various factors.
Investments
in non-marketable securities are inherently risky and a number of the companies
we have invested in may fail. Their success (or lack thereof) is dependent
upon
product development, market acceptance, operational efficiency and other key
business success factors. In addition, depending on their future prospects,
they
may not be able to raise additional funds when needed or they may receive lower
valuations, with less favorable investment terms than in previous financings,
likely causing our investments to become impaired.
We
review
all of our investments quarterly for indicators of impairment; however, for
non-marketable equity securities, the impairment analysis requires significant
judgment to identify events or circumstances that would likely have a material
adverse effect on the fair value of the investment. The indicators that we
use
to identify those events or circumstances includes as relevant, the nature
and
value of any collateral, the portfolio company’s ability to make payments and
its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted value of the cash flows of the
portfolio company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of fair
value may differ materially from the values that would be assessed if a liquid
market for these securities existed.
Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which
case
we write the investment down to its impaired value. When a portfolio company
is
not considered viable from a financial or technological point of view, we write
down the entire investment since we consider the estimated fair market value
to
be nominal. If a portfolio company obtains additional funding at a valuation
lower than our carrying amount or requires a new round of equity funding to
stay
in operation and the new funding does not appear imminent, we presume that
the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise. We did not recognize any impairments for
the
nine months ended September 30, 2005 and 2004.
Security
investments which are publicly traded on a national securities exchange or
over-the-counter market are stated at the last reported sale price on the day
of
valuation or, if no sale was reported on that date, then the securities are
stated at the last quoted bid price. Our Board may determine, if appropriate,
to
discount the value where there is an impediment to the marketability of the
securities held.
Accounting
Developments
In
December 2004, Statement of Financial Accounting Standards ("SFAS")
No.
123(R), "Share-Based
Payment,"
which
addresses the accounting for employee stock options, was issued. SFAS 123(R)
revises the disclosure provisions of SFAS 123, "Accounting
for Stock Based Compensation"
and
supercedes Accounting Principles Board ("APB")
Opinion
No. 25, "Accounting
for Stock Issued to Employees."
SFAS
123(R) requires that the cost of all employee stock options, as well as other
equity-based compensation arrangements, be reflected in the financial statements
based on the estimated fair value of the awards. The Company elected early
adoption of SFAS No. 123(R) as of January 1, 2005.
Overview
Until
March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation
(“we,”“us,”
or “our”),
elected to be a Business Development Company (“BDC”)
under
the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
approval was obtained to withdraw our election to be treated as a BDC and on
March 31, 2005 we filed an election to withdraw our election with the Securities
and Exchange Commission.
We
are
currently engaged in the acquisition of controlling interests in companies
and
research and development of products and services focused on the health care
and
medical products field, particularly the patient safety markets. In the past
we
also focused on the financial services and real estate industries; however,
in
October 2005 our board of directors authorized us to evaluate alternative
strategies for the divesture of our non-healthcare assets in order to focus
all
of our efforts on the health care and medical products field. SurgiCount
Medical, Inc., a provider of patient safety devices, Patient Safety Consulting
Group, LLC, a healthcare consulting services company, Ault Glazer Bodnar
Merchant Capital, Inc., a holding company for our non-patient safety related
assets, and Ault
Glazer Bodnar Capital Properties, LLC,
a real
estate development and management company, are wholly-owned operating
subsidiaries, which were either acquired or created to enhance our ability
to
focus our efforts in each targeted industry. Currently, we are evaluating ways
in which to monetize the assets in Ault Glazer Bodnar Merchant Capital, Inc,
and
Ault Glazer Bodnar Capital Properties, LLC. However, the divestiture of any
assets will be dependent on a number of factors including: (1) lack of a liquid
market to dispose of such assets; (2) potential adverse tax effects from a
disposition; or (3) our board of directors and management may change their
decision to dispose of certain assets.
SurgiCount
is our first acquisition in our plan to become a leader in the estimated billion
dollar patient safety market. SurgiCount owns patents issued in the United
States and Europe related to the Safety-SpongeTM
System,
an innovation which management believes will allow us to capture a significant
portion of the United States and European surgical sponge sales. Based upon
assumptions that take into consideration factors such as the approximate number
of hospitals and operating rooms in the United States and Europe, the
approximate number of surgeries performed annually, and estimates for the
average cost of surgical sponges, incorporating the Safety-SpongeTM
System,
per surgery, we believe that the existing market for surgical sponge sales
in
the United States and Europe represents a market opportunity equal to or in
excess of $650 million in annual sales.
The
Safety-SpongeTM
System
allows for faster and more accurate counting of surgical sponges. SurgiCount
has
obtained FDA 510k exempt status for the Safety-SpongeTM
line.
Together
with our subsidiaries, we also plan to provide
capital and managerial assistance to early stage companies in the medical
products and health care solutions industries.
Our
principal executive offices are located at 100 Wilshire Boulevard, Suite 1750,
Santa Monica, California 90401. Our telephone number is (310) 752-1442. Our
website is located at http://www.patientsafetytechnologies.com.
Financial
Condition
Our
cash
and marketable securities were $1,511,406 at September 30, 2005, versus
$4,334,123 at December 31, 2004. Total current liabilities were $4,234,090
at
September 30, 2005, versus $3,367,974 at December 31, 2004. Included in current
liabilities at September 30, 2005 and December 31, 2004 is a note payable,
and
accrued interest on such note, payable to Winstar Communications, Inc. in the
amount of $950,561 and $1,004,962, respectively. As discussed in Note 9
in
the notes to the accompanying condensed consolidated financial statements filed
with this Form 10-Q, the due date on the note payable to Winstar was February
28, 2002. The note payable has a right of offset against certain representations
and warranties made by Winstar and we believe the amount of the offsets exceed
the amount of the note payable. However, since Winstar may not agree with this
belief, the only offsets against the principal balance of the note reflected
in
the accompanying financial statements relate to legal fees attributed to our
defense of the lawsuits filed against us. As of September 30, 2005, we incurred
$184,496 in legal fees attributed to our defense of lawsuits
filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
and the
representations and warranties made by Winstar Radio Networks, Inc. These fees
have been offset against the note with the remaining principal balance of
$815,504 reflected as a note payable on the accompanying balance
sheet.
At
September 30, 2005 and December 31, 2004, we had $400,711 and $846,404,
respectively, in cash and cash equivalents. At September 30, 2005, $237,731
of
our total cash balance was restricted. Our Board has authorized our Chairman
and
Chief Executive Officer, Milton "Todd" Ault III, to invest our cash balances
in
the public equity and debt markets as appropriate to maximize the short-term
return on such assets. Such investments entail risks including the loss of
investment and price volatility.
We
had a
working capital deficit of approximately $1,477,500 at September 30, 2005 and
we
continue to have recurring losses. In the past we have relied upon private
placements of equity and debt securities and we may rely on private placements
to fund our capital requirements in the future. However, we also plan to fund
operations in the future primarily by liquidating our portfolio companies.
On
April 7, 2005, we issued a $1,000,000 promissory note (the "Note")
to
Bodnar Capital Management, LLC, in consideration of a $1,000,000 loan from
Bodnar Capital Management, LLC. Steven J. Bodnar is a managing member of Bodnar
Capital Management, LLC. Mr. Bodnar, through Bodnar Capital Management, LLC,
is
one of our principal stockholders. The principal amount of the Note and interest
at the rate of 6% per annum is due on May 31, 2006. The obligations under the
Note are secured by all real property owned by us. Management believes that
existing cash resources, together with proceeds from investments and anticipated
revenues from operations, should be adequate to fund our operations for the
twelve months subsequent to September 30, 2005. However, long-term liquidity
is
dependent on our ability to attain future profitable operations. Management
may
undertake additional debt or equity financings to better enable us to grow
and
meet future operating and capital requirements.
On
November 3, 2004, we sold an aggregate of 1,216,875 shares of common stock
and
warrants to purchase an aggregate of 608,430 shares of common stock in a private
placement transaction to certain accredited investors. Pursuant to the terms
of
the private placement, we held additional closings on November 15, 2004,
December 2, 2004, and on December 27, 2004, and sold an aggregate of 300,825
additional shares of common stock and warrants to purchase an aggregate of
150,411 shares of common stock. We received aggregate net proceeds of $3,924,786
from all the closings. We used the net proceeds from the private placement
transaction primarily for general corporate purposes and in buying controlling
equity stakes in companies and/or assets in the medical products, health care
solutions, financial services and real estate industries. We filed a
registration statement with the SEC on May 3, 2005 registering the resale of
the
shares of common stock (including the shares of common stock issuable upon
exercise of the warrants) sold in the private placement transactions on a
continuous or delayed basis under the Securities Act of 1933. We are required
to
use our reasonable best efforts to cause the registration statement to become
effective within 90 days after the date we filed such registration statement
with the SEC.
As
of
September 30, 2005, other than our office lease, we had no commitments not
reflected in our condensed consolidated financial statements. As in prior
acquisitions, we intend to use a combination of common stock and warrants as
the
primary means to acquire companies. Accordingly, our need to raise significant
amounts of cash for acquisitions can be minimized, provided the companies we
acquire are willing to accept non-cash forms of consideration.
Investments
Our
financial condition is dependent on the success of our investments. In the
future, we intend to invest a substantial portion of our assets in private
companies in the medical products, health care solutions and financial services
industries. These private businesses may be thinly capitalized, unproven, small
companies that lack management depth, are dependent on new, commercially
unproven technologies and have little or no history of operations. The following
is a discussion of our most significant investments at September 30, 2005.
Alacra
Corporation
At
September 30, 2005, we had an investment in Alacra Corporation (“Alacra”),
valued at $1,000,000, which represents 9.3% of our total assets. On April 20,
2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
Stock. Alacra has recorded revenue growth in every year since the Company’s
original investment, further, 2004 revenues were in excess of the prior years
revenues by greater than 20%. The Company has the right to have the preferred
stock redeemed by Alacra for face value plus accrued dividends on December
31,
2006. In connection with this investment, the Company was granted observer
rights on Alacra board of directors meetings.
Alacra,
a
privately held company based in New York, is a global provider of business
and
financial information. Alacra provides a diverse portfolio of fast,
sophisticated online services that allow users to quickly find, analyze, package
and present business information. Alacra’s customers include more than 750
leading financial institutions, management consulting, law and accounting firms
and other corporations throughout the world. Currently, Alacra’s largest
customer segment is investment and commercial banking, followed closely by
management consulting, law and multi-national corporations.
Alacra’s
online service allows users to search via a set of tools designed to locate
and
extract business information from the Internet and from Alacra’s library of
content. Alacra’s team of information professionals selects, categorizes and
indexes more than 45,000 sites on the Web containing the most reliable and
comprehensive business information. Simultaneously, users can search more than
100 premium commercial databases that contain financial information, economic
data, business news, and investment and market research. Alacra provides
information in the required format, gleaned from such prestigious content
partners as Thomson Financial™, Barra, The Economist Intelligence Unit, Factiva,
Mergerstat® and many others.
China
Nurse, LLC
At
September 30, 2005, we had an investment in China Nurse LLC ("China
Nurse"),
valued
at $50,000, which represents 0.5% of our total assets. During the three months
ended December 31, 2004, we entered into a strategic relationship with China
Nurse. In connection with this strategic relationship, we agreed to provide
referrals and other assistance and we made a capital investment in cash of
$50,000 in China Nurse. China Nurse is a developmental stage international
nurse-recruiting firm based in New York that focuses on recruiting and training
qualified nurses from China and Taiwan for job placement with hospitals and
other health care facilities in the United States. China Nurse creates an
opportunity for hospitals and other health care providers to efficiently recruit
skilled professionals from China and Taiwan. It maintains a customized
approach to matching the qualifications of the nurses with the specific needs
of
U.S. clients.
Digicorp
At
September 30, 2005, we had an investment in Digicorp valued at $492,301, which
represents 4.6% of our total assets. On December 29, 2004, we entered into
a
Common Stock Purchase Agreement with certain shareholders of Digicorp (the
"Agreement"), to purchase an aggregate of 3,453,527 shares of Digicorp common
stock. We purchased 2,229,527 of such shares on December 29, 2004 (2,128,740
shares at a price of $0.135 per share and 100,787 shares at a price of $0.145
per share) and we are required to purchase the remaining 1,224,000 shares from
the selling shareholders at a price of $0.145 per share at such time that
Digicorp registers the resale of the shares with the SEC. Digicorp’s common
stock is traded on the OTC Bulletin Board, which reported a closing price,
at
September 30, 2005, of $0.85. In connection with the Agreement, we are entitled
to designate two members to the Board of Directors of Digicorp. Our first
designee, Melanie Glazer, who is also manager of our subsidiary Ault Glazer
Bodnar Capital Properties, LLC, was appointed on December 29, 2004. Milton
“Todd” Ault, III, our Chairman and Chief Executive Officer, was appointed Chief
Executive Officer of Digicorp on April 26, 2005. On July 16, 2005, Alice M.
Campbell, one of our directors, and Mr. Ault was appointed to the Board of
Directors of Digicorp. On July 20, 2005, Lynne Silverstein, our President and
Secretary, was appointed as a director of Digicorp, and William B. Horne, our
Chief Financial Officer, was appointed as a director and as Chief Financial
Officer of Digicorp. On September 30, 2005, Mr. Ault resigned from all positions
with Digicorp and Mr. Horne was appointed as the interim Chief Executive
Officer.
Since
June 30, 1995, Digicorp has been in the developmental stage and has had no
operations other than issuing shares of common stock for financing the
preparation of financial statements and for preparing filings for the SEC.
On
May 18, 2005, Digicorp sold Bodnar Capital Management, LLC 2,941,176 shares
of
its common stock and warrants to purchase an additional 3,000,000 shares of
its
common stock with exercise prices ranging from $0.25 to $1.50 per share.
Digicorp received gross proceeds of approximately $500,000 from the sale of
stock and warrants to Bodnar Capital Management, LLC. As described above under
“Financial Condition,” Bodnar Capital Management, LLC also is one of our
principal stockholders. On October 27, 2005, Bodnar Capital Management, LLC
canceled the warrants to purchase 3,000,000 shares of common stock in exchange
for the issuance of a warrant to purchase 500,000 shares of Digicorp’s common
stock with an exercise price of $0.01 per share.
On
September 19, 2005, upon entering into an asset purchase agreement, Digicorp
completed the initial transaction to transform itself from that of a development
stage enterprise to a digital media and content delivery company. The assets
purchased consisted of the iCodemedia suite of websites and internet properties
and all related intellectual property (the “iCodemedia
Assets”).
The
iCodemedia suite of websites consists of the websites www.icodemedia.com,
www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com
and
www.tunespromo.com. Digicorp plans to use these websites and the related
intellectual property to provide a suite of applications and services to enable
content creators the ability to publish and deliver content to existing and
next
generation digital media devices, such as the Apple iPod and the Sony PSP,
based
upon the consumers’ expectation for broader and on-demand access to content and
services.
On
September 30, 2005, Digicorp entered into a non-binding Letter of Intent
(the
"LOI")
to
purchase (the "Acquisition")
all of
the issued and outstanding shares of capital stock of Rebel Crew Films, Inc.,
a
California corporation ("Rebel
Crew").
As
proposed in the LOI, upon closing the Acquisition, Digicorp would issue 20
million shares of its common stock to the shareholders of Rebel Crew as
compensation for the issued and outstanding capital stock of Rebel Crew. Rebel
Crew was founded in 2001 as a film licensing and distribution company of Latino
home entertainment products. Rebel Crew currently maintains more than 200
Spanish language films and serves the some of the nation’s largest wholesale,
retail, catalog, and e-commerce accounts. Rebel Crew’s titles can be found at
Wal-Mart, Best Buy, Blockbuster, K-Mart, and hundreds of independent video
outlets across the United States and Canada. Since the Acquisition is subject
to
further negotiation of definitive agreements, we cannot assure that the proposed
transactions will be completed. However, we believe that the proposed
Acquisition, if consummated, will allow Digicorp to leverage Rebel Crew’s Latino
content and industry relationships with the iCodemedia Assets to create a
compelling digital media and content delivery company.
Excelsior
Radio Networks, Inc.
During
the period from August 12, 2003 through October 22, 2004, we liquidated our
investment in Excelsior Radio Networks, Inc. (“Excelsior”).
We
sold a total of 1,476,804 shares and warrants to purchase 87,111 shares of
Excelsior common stock. We have stock appreciation rights on these shares that
began to expire on August 8, 2005, however, no value has been ascribed to these
rights.
IPEX,
Inc.
At
September 30, 2005, we held 545,000 shares of common stock and warrants to
purchase 225,000 shares of common stock at $1.50 per share and warrants to
purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc.
(“IPEX”),
valued
at $1,106,250, which represents 10.2% of our total assets. IPEX's common stock
is traded on the OTC Bulletin Board, which reported a closing price, at
September 30, 2005, of $2.50. The warrants are exercisable for a period of
five
years and are callable by IPEX in certain instances. IPEX operates a Voice
over
Internet Protocol ("VoIP")
routing
platform that exchanges international telecommunication traffic. IPEX's exchange
operates on a software-based switching platform which monitors and dynamically
checks up to 256 different routes for one country code, optimizing margin and
quality through real time traffic adjustments. The exchange delivers seamless
access through an Internet Protocol (“IP”)
connection which significantly reduces the time to connect to the exchange.
IPEX
offers its service to international telecom carriers and Internet Service
Providers. IPEX invoices and processes payments for its members’ transactions
and offsets credit risk through its credit management programs with third
parties. On June 23, 2005, Alice M. Campbell, who is one of our directors,
was
appointed to the Board of Directors of IPEX. In addition, from May 26, 2005
until July 20, 2005, Milton “Todd” Ault, III, our Chairman and Chief Executive
Officer, served as interim Chief Executive Officer and a director of
IPEX.
As
reflected in IPEX’s June 30, 2005 Form 10-Q, sales for the six months ended June
30, 2005 rose to $4,816,177 as compared to sales of $1,778,705 from the prior
year's six months ended June 30, 2004. Due to prior working capital constraints
IPEX could only maintain selling to Tier 3 customers on a weekly net 5 basis.
The additional working capital provided by a private placement completed in
March 2005 allowed IPEX to extend credit to Tier 2 carriers under net 15 terms
therefore increasing the number of overall customers.
Tuxis
Corporation
At
September 30, 2005, we held 109,700 shares of common stock of Tuxis Corporation
(“Tuxis”)
valued
at $932,450, which represents 8.6% of our total assets. Tuxis is a Maryland
corporation currently registered under the Investment Company Act of 1940 as
a
closed-end management investment company. Tuxis previously received Board of
Directors and shareholder approval to change the nature of its business so
as to
cease to be an investment company and on May 3, 2004, filed an application
with
the SEC to de-register. At June 30, 2005, Tuxis had reportable net assets of
approximately $8.9 million.
Ault
Glazer Bodnar Capital Properties, LLC
At
September 30, 2005, we had several real estate investments, valued at $576,065,
which represents 5.3% of our total assets. We hold our real estate investments
in Ault Glazer Bodnar Capital Properties, LLC (“AGB
Properties”),
a
Delaware limited liability company and a wholly owned subsidiary. AGB Properties
is in the process of liquidating its real estate holdings. AGB Properties’
primary focus was on the acquisition and management of income producing real
estate holdings. AGB Properties real estate holdings consist of two vacant
single family buildings and one multi-unit building in Baltimore, Maryland,
approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas, 0.61
acres of undeveloped land in Springfield, Tennessee, and various loans secured
by real estate in Heber Springs, Arkansas.
Results
of Operations
We
account for our operations under accounting principles generally accepted in
the
United States. The principal measure of our financial performance is captioned
“Net loss attributable to common shareholders,” which is comprised of the
following:
| |
§
|
"Revenues,"
which is the amount we receive from sales of our
products;
|
| |
§
|
“Operating
expenses,” which are the related costs and expenses of operating our
business;
|
| |
§
|
“Interest,
dividend income and other, net,” which is the amount we receive from
interest and dividends from our short term investments and money
market
accounts, and our proportionate share of income or losses from investments
accounted for under the equity method of
accounting;
|
| |
§
|
“Realized
gains (losses) on investments, net,” which is the difference between the
proceeds received from dispositions of investments and their stated
cost;
and
|
| |
§
|
“Unrealized
gains (losses) on marketable securities, net,” which is the net change in
the fair value of our marketable securities, net of any (decrease)
increase in deferred income taxes that would become payable if the
unrealized appreciation were realized through the sale or other
disposition of the investment
portfolio.
|
“Realized
gains (losses) on investments, net” and “Unrealized gains (losses) on marketable
securities, net” are directly related. When a security is sold to realize a
gain, the net unrealized gain decreases and the net realized gain increases.
When a security is sold to realize a loss, the net unrealized gain increases
and
the net realized gain decreases.
We
generally earn interest income from loans, preferred stock, corporate bonds
and
other fixed income securities. The amount of interest income varies based upon
the average balance of our fixed income portfolio and the average yield on
this
portfolio.
Revenues
We
recognized revenues of $29,693 and $616,320 for the three and nine months ended
September 30, 2005 as opposed to no revenues during the three and nine months
ended September 30, 2004. Although none of the revenues that we recognized
related to sales of our Safety-SpongeTM
System
we
expect to begin recognizing revenues from the Safety-SpongeTM
System
during the three month period ending March 31, 2006 based in part upon the
results of initial usage of the Safety-SpongeTM
System
in
hospital operating rooms.
The
increase in revenue was the result of a consulting agreement, consented to
by
IPEX, whereby Wolfgang Grabher, the majority shareholder of IPEX, former
President, former Chief Executive Officer and former director of IPEX, retained
us to serve as a business consultant to IPEX. In consideration for the services,
Mr. Grabher personally agreed to pay us either 500,000 shares of common stock
of
IPEX, or $1,500,000 in cash, as a non-refundable consulting fee. Whether the
consulting fee is paid in the form of IPEX common stock or cash is in the sole
discretion of Mr. Grabher and this has not been determined yet. Mr. Grabher
owns
18,855,900 shares of IPEX's 28,195,566 outstanding shares of common stock and
in
May 2005 granted Mr. Ault, our Chairman and Chief Executive Officer, an
irrevocable voting proxy for his shares for a period of three years or earlier
if independent counsel hired by IPEX clears Mr. Grabher of any wrongdoings
in
connection with IPEX’s operations, if Mr. Ault releases the proxy or if Mr.
Grabher sells the subject shares. The irrevocable voting proxy was granted
to
Mr. Ault while he served as interim Chief Executive Officer and a director
of
IPEX in order to distance Mr. Grabher from control over IPEX amid allegations
of
wrongdoing. At September 30, 2005, we held 1.93% of IPEX’s outstanding shares of
common stock. On June 30, 2005, we agreed with IPEX as to the scope of such
consulting services and the consideration for such services. We have provided
and/or will provide if reasonably necessary within the 12 month period ending
June 30, 2006, the following services to IPEX: (a) substantial review of IPEX's
business and operations in order to facilitate an analysis of IPEX's strategic
options regarding a turnaround of IPEX's business; (b) providing advice in
the
following areas: (i) identification of financing sources, (ii) providing capital
introductions of financial institutions and/or strategic investors, (iii)
evaluation and recommendation of candidates for appointment as officers,
directors or employees, (iv) making our personnel available to IPEX to provide
services to IPEX on a temporary or permanent basis, (v) evaluation and/or
negotiation of merger or sale opportunities, or such other form of transaction
or endeavor which IPEX may elect to pursue, and (vi) providing any other
services as are mutually agreed upon in writing with Mr. Grabher from time
to
time; and (c) assisting IPEX in installing a new management team.
At
September 30, 2005, we had performed a significant amount of the services
stipulated under the terms of the consulting agreement, including but not
limited to: (i) a review of the business and operations (ii) advice in
connection with IPEX’s purchase of certain intellectual property assets; (iii)
the hiring by IPEX of a new Chief Executive Officer, Chief Operating Officer
and
a Vice President of Research & Development, none of which would be deemed
related parties; and (iv) IPEX’s appointment of two new members to its Board of
Directors. We have deferred approximately $331,180 of revenue relating to this
consulting agreement which management expects will be substantially recognized
during the year ending December 31, 2005.
Expenses
Operating
expenses were $6,376,854 and $1,965,025 for the nine months and $2,128,432
and
$1,287,315 for the three months ended September 30, 2005 and September 30,
2004,
respectively.
The
increase in operating expenses for the nine months ended September 30, 2005
when
compared to September 30, 2004, was primarily the result of stock based
compensation expenses, and to a lesser extent printing, stock exchange and
transfer agent fees. Until October 22, 2004, the date the Company’s shareholders
approved certain proposals relating to the Company’s restructuring plan to
change from a business development company to an operating company, the
Company’s principal activities involved the management of existing investments.
As such, compensation expense was primarily the salaries of the Company’s Chief
Executive Officer and to a lesser extent the Chief Financial Officer. Since
the
restructuring plan, management has aggressively focused on expanding into the
health care and medical products field, particularly the patient safety markets,
and up until October 2005, the financial services and real estate industries.
A
significant component of this strategy has resulted in the acquisition of
assets. The Company has hired personnel in order to meet the increased needs
of
its current business focus which has resulted in increases in almost every
expense category.
Printing,
Amex stock exchange, and transfer agent fees for the nine months ended September
30, 2005 increased by $61,174, $65,783 and $46,138, respectively, over the
nine
months ended September 30, 2004. The increase is primarily attributable to
work
performed on the Company’s proxy statements, registration statements, annual
report and related annual meeting of shareholders. All of these reports required
a significant amount of additional time to prepare due to the Company’s change
from a business development company to an operating company. Printing fees
increased as a direct result of the greater number of printed documents,
including business cards and stationary, as well as revisions to those
documents. Amex stock exchange fees primarily increased as a result of a
non-recurring fee associated with the Company’s 3 for 1 stock split.
Printing,
Amex stock exchange, and transfer agent fees are a component of the $668,335
increase reflected in general and administrative expenses for the nine months
ended September 30, 2005. An increase in travel related expenses of $176,553,
another component of general and administrative expenses, was attributed to
expenses incurred in identifying and reviewing investment opportunities and
attendance at trade shows and conventions to promote the Company’s patient
safety products. The remaining increase in general and administrative expenses
is a direct result of an overall increase in business activity associated with
being an operating company with increased personnel. These expenses, which
are
not significant individually, include but are not limited to office supplies,
postage, and marketing.
A
majority of our operating expenses consist of employee compensation, which
increased by $2,341,446. The most significant component of employee compensation
is stock based compensation expense. For the nine months ended September 30,
2005, we recorded approximately $1,230,551 relating to grants of nonqualified
stock options and $1,287,496 related to restricted stock awards to our employees
and non-employee directors, all of which were expensed in accordance with SFAS
123(R). During the nine months ended September 30, 2004, our total stock based
compensation expense, which was caused from the issuance of 26,250 options
to
members of our Board of Directors, was $5,094. Thus, the increase in expenses
related to the issuance of stock options and restricted stock awards to our
employees and non-employee directors amounted to $2,512,953. The difference
between the amount by which stock based compensation increased above the overall
increase in employee compensation was $171,507 and was caused by the lack of
severance payments in the current period offset by an increase in base salaries
caused by an increased number of employees. Included in compensation expense
for
the three months ended September 30, 2004, was the severance package paid to
Stephen L. Brown, our former Chairman and Chief Executive Officer, of $483,000.
The absence of compensation related to the severance package was offset by
an
increase in base salaries of $294,643 attributed to the increased number of
employees. At September 30, 2005, we had 14 full time employees as opposed
to 4
full time employees at September 30, 2004.
The
second largest component of our operating expenses is professional fees, which
increased by $1,132,607. As in the case of employee compensation, stock based
compensation expense is the most significant component of professional fees
for
the nine months ended September 30, 2005. We incurred approximately $759,253
relating to the issuance of warrants and $431,979 related to restricted stock
awards to our consultants performing services for us.
A
significant amount of the warrants relate to a consulting agreement that we
entered into in April 2005 with Health West Marketing Incorporated (“Health
West”)
where
we agreed, as an incentive for entering into the agreement, to issue Health
West
a callable warrant to purchase 150,000 shares of our common stock at an exercise
price of $5.95, exercisable for 5 years. We recognized an expense of $527,958
related to these warrants. In addition to the warrants, we have recognized
expenses of $156,253 related to the issuance and future issuance of 26,261
shares of our common stock, as follows: (a) 10,505 shares valued at $62,505
were
issued upon signing the agreement; and (b) on August 17, 2005, we entered into
a
comprehensive manufacturing agreement with A Plus Manufacturing and became
obligated to issue 15,756 shares, valued at $93,748, to Health West. In the
event that Health West helps us develop a regional distribution network to
integrate the Safety-SpongeTM
System
into the existing acute care supply chain by February 5, 2006, we will then
issue Health West an additional 15,756 shares and at that time recognize an
additional expense of $93,748.
In
addition to the stock based compensation that we recognized as a result of
our
agreement with Health West, we have issued additional warrants to purchase
shares of common stock and granted restricted shares of common stock to various
consultants performing services for us. These services have primarily related
to
investor relations and legal services.
All
of
our stock based compensation issued to employees, non-employee directors and
consultants were expensed in accordance with SFAS 123(R). We valued the
nonqualified stock options and warrants using the Black-Scholes valuation model
assuming expected dividend yield, risk-free interest rate, expected life and
volatility of 0%, 3.75%, three to five years and 83%, respectively. The
restricted stock awards were valued at the closing price on the date the
restricted shares were granted. The overall increase in expenses related to
the
issuance of stock options, warrants and restricted stock awards amounted to
$3,704,185.
We
also
issued 150,000 warrants, valued at $536,578, to an independent consultant
providing advisory services for the acquisition of SurgiCount Medical, Inc.
The
services provided by the consultant included an evaluation of and oversight
over
completion of the transaction. The value of the warrants, along with the
purchase price and direct costs incurred as a result of the transaction, were
capitalized. The entire capitalized costs, valued at $4,684,576, have been
allocated to SurgiCount’s patents, with an approximate useful life of 14.4
years, on a preliminary basis and may change as additional information becomes
available. Amortization expense related to the patents, for the nine months
ended September 30, 2005, was approximately $190,000 as opposed to no expense
during the nine months ended September 30, 2004.
Interest,
dividend income and other, net
We
had
investment income of $41,321 and $369 for the nine months ended and $1,234
and
$155 for the three months ended September 30, 2005 and September 30, 2004,
respectively.
The
increase in investment income for the nine and three months ended September
30,
2005 when compared to September 30, 2004, was primarily the result of an
increased amount of fixed income investments held throughout the period. At
March 31, 2005, we held in marketable securities approximately $2.5 million
in
U.S. Treasuries which were liquidated during the three month period ended June
30, 2005. At September 30, 2004, our primary contributing asset to investment
income was its cash balance of $190,303.
Realized
gains (losses) on investments, net
During
the nine months ended September 30, 2005, we realized net gains of $252,848
from
trades of marketable securities.
During
the nine months ended September 30, 2004, we realized net gains of $650,878
primarily from the disposition of a portion of our equity interest in Excelsior
and the sale of common shares in Principal Financial Group.
We
have
relied and we continue to rely to a large extent upon proceeds from sales of
investments rather than investment income to defray a significant portion of
our
operating expenses. Because such sales cannot be predicted with certainty,
we
attempt to maintain adequate working capital to provide for fiscal periods
when
there are no such sales.
Unrealized
gains (losses) on marketable securities, net
Unrealized
losses, as compared to that which was reported at December 31, 2004, increased
by $80,115 during the nine months ended September 30, 2005, primarily due to
our
investment in IPEX which had an unrealized loss of $168,993 for the period
then
ended. Additionally, all marketable securities which had an unrealized loss
at
December 31, 2004, in the amount of $58,254, had been disposed of.
Unrealized
losses, as compared to that which was reported at December 31, 2003, increased
by $66,256 during the nine months ended September 30, 2004 primarily due to
the
sale of a portion of our Excelsior common stock holdings, which resulted in
a
corresponding increase in realized gains of $508,804, offset by an increase
in
the value of the remaining Excelsior holdings of $435,548.
Accumulated
other comprehensive income
Unrealized
gains (losses) on our investments designated as available-for-sale are recorded
in accumulated other comprehensive income. At September 30, 2005, we classified
all of our restricted holdings in IPEX as available-for-sale. At September
30,
2005, the unrealized gains on our restricted holdings in IPEX amounted to
$478,125. We did not hold any investments classified as available-for-sale
at
September 30, 2004.
Taxes
We
are
taxed under Title 26, Chapter 1, Subchapter C of the Internal Revenue Code
of
1986, as amended, and therefore subject to federal income tax on the portion
of
our taxable income.
At
December 31, 2004, we had a net operating loss carryforward of approximately
$8.6 million to offset future taxable income for federal income tax purposes.
The utilization of the loss carryforward to reduce any future income taxes
will
depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The carryforward expires
beginning in 2011.
A
change
in the ownership of a majority of the fair market value of our common stock
can
delay or limit the utilization of existing net operating loss carryforwards
pursuant to Internal Revenue Code Section 382. We believe that such a change
occurred during the year ended December 31, 2004. Based upon an analysis of
purchase transactions of our equity securities during 2004, we believe that
our
net operating loss carryforward utilization is limited to approximately $755,000
per year.
Risk
Factors
An
investment in our securities involves a high degree of risk relating to our
business, strategy, structure and investment objectives. Each of the following
risks may materially adversely affect our business, financial condition and
results of operations. In addition to the risk factors described below, other
factors that could cause actual results to differ materially include:
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changes
in the economy;
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risk
associated with possible disruption in our operations due to
terrorism;
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future
regulatory actions and conditions in our operating areas or target
industries for investments;
and
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other
risks and uncertainties as may be detailed from time to time in our
public
announcements and SEC filings.
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RISKS
RELATING TO OUR BUSINESS AND STRUCTURE
We
recently restructured our business strategy and objective and have limited
operating history under our new structure. If we cannot successfully implement
our new business structure the value of your investment in our business could
decline.
Since
the
change of control that occurred in October 2004, we restructured our business
strategy and objective to focus on the medical products and healthcare solutions
industries instead of the radio and telecommunications industries. We have
a
limited operating history under this new structure. Historically, we have not
typically invested in these industries and therefore our historical results
of
operations should not be relied upon as an indication of our future financial
performance. If we do not successfully implement our new business structure
the
value of your investment in our business could decline substantially.
Withdrawal
of our election to be treated as a BDC may increase the risks to our
shareholders since we are no longer subject the regulatory restrictions or
financial reporting benefits of the Investment Company Act of 1940 (the “1940
Act”).
We
may never dispose of our non-core, non-patient safety related assets, which
could require us to re-register under the 1940 Act.
In
the
past, as a BDC registered under the 1940 Act, we invested in illiquid equity
securities acquired directly from issuers in private transactions. In March
2005, we changed our business strategy to become an operating company focused
on
the health care and medical products field, particularly the patient safety
markets. In order to further our new business strategy, our management is
currently trying to dispose of our non-core, non-patient safety related assets,
which includes various investments in businesses and real estate that are
not
part of our current business plan. We may never dispose of these non-core,
non-patient safety related assets due to a number of reasons including: (1)
lack
of a liquid market to dispose of such assets; (2) potential adverse tax effects
from a disposition; or (3) our board of directors and management may change
their decision to dispose of such assets. If we do not dispose of these assets,
our management’s focus will be diverted from our present business strategy,
which could delay implementation of our business plan and which could require
us
to re-register under the 1940 Act.
We
may have to take actions that are disruptive to our business strategy to
avoid
registration under the 1940 Act.
The
1940
Act generally requires public companies that are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities
to
register as investment companies. A company may be deemed to be an investment
company if it owns “investment securities” with a value exceeding 40% of the
value of its total assets (excluding government securities and cash items)
on an
unconsolidated basis, unless an exemption or safe harbor applies. Securities
issued by companies other than majority-owned subsidiaries are generally
counted
as investment securities for purposes of the 1940 Act.
Presently
we are near the 40% investment threshold for meeting the definition of an
investment company under the 1940 Act and thus could be required to register
as
investment company under the 1940 Act in the near future.
Registration
as an investment company would subject us to restrictions that are inconsistent
with our fundamental business strategy of equity growth through creating,
building and operating companies
in the medical products, healthcare services, financial and real estate
industries. Moreover, registration under the 1940 Act would subject us to
increased regulatory and compliance costs, and other restrictions on the
way we
operate. We
may
also have to take actions, including buying, refraining from buying, selling
or
refraining from selling securities, when we would otherwise not choose to
do so
in order to continue to avoid registration under the 1940
Act.
Since
we
withdrew our election to be treated as a BDC, we are no longer subject to
regulation under the 1940 Act, which is designed to protect the interests of
investors in investment companies. As a non-BDC, we are no longer subject to
many of the regulatory, financial reporting and other requirements and
restrictions imposed by the 1940 Act including, but not limited to, limitations
on the amounts, types and prices at which we may issue securities, participation
in related party transactions, the payment of compensation to executives, and
the scope of eligible investments.
The
nature of our business has changed from investing in radio and
telecommunications companies with the goal of achieving gains on appreciation
and dividend income, to actively operating businesses in the medical products
and health care solutions industries, with the goal of generating income from
the operations of those businesses. No assurance can be given that our business
strategy or objectives will be achieved by withdrawing our election to be
treated as a BDC.
Further,
our election to withdraw as a BDC under the 1940 Act resulted in a significant
change in our method of accounting. BDC financial statement presentation and
accounting utilizes the value method of accounting used by investment companies,
which allows BDCs to recognize income and value their investments at market
value as opposed to historical cost. As an operating company, the required
financial statement presentation and accounting for securities held will be
either fair value or historical cost methods of accounting, depending on the
classification of the investment and our intent with respect to the period
of
time we intend to hold the investment.
The
change in our method of accounting could reduce the market value of our
investments in privately held companies by eliminating our ability to report
an
increase in the value of our holdings as they occur. Also, as an operating
company, we now have to consolidate our financial statements with subsidiaries,
thus eliminating the portfolio company reporting benefits available to BDCs.
We
may need to undertake additional financings to meet our growth, operating and/or
capital needs, which may result in dilution to your ownership and voting
rights.
Revenue
from our operations for the foreseeable future may not be sufficient to meet
our
growth, operating and/or capital requirements. We believe that we currently
have
the financial resources to meet our operating requirements for the next twelve
months. We may however undertake additional equity or debt financings to better
enable us to meet our future growth, operating and/or capital requirements.
We
currently have no commitments for any such financings. Any equity financing
may
be dilutive to our stockholders, and debt financing, if available, may involve
restrictive covenants or other adverse terms with respect to raising future
capital and other financial and operational matters. We
may not be able to obtain additional financing in sufficient amounts or on
acceptable terms when needed, which could adversely affect our operating results
and prospects. If we fail to arrange for sufficient capital in the future,
we
may be required to reduce the scope of our business activities until we can
obtain adequate financing.
Should
the value of our patents be less than their purchase price, we could incur
significant impairment charges.
At
September 30, 2005, patents received in the acquisition of SurgiCount Medical,
Inc., net of accumulated amortization, represented $4,495,027, or 41.6%, of
our
total assets. We
perform an annual review in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist to determine if the recorded amount
of our patents is impaired. This determination requires significant judgment
and
changes in our estimates
and assumptions could materially affect the determination of fair value and/or
impairment of patents. We may incur charges for the impairment of our patents
in
the future if sales of our patient safety products, in particular our
Safety-Sponge™ System, fail to achieve our assumed revenue growth rates or
assumed operating margin results.
We
have in the past invested in non-marketable investment securities which may
subject us to significant impairment charges.
We
have
in the past invested in illiquid equity securities acquired directly from
issuers in private transactions. At September 30, 2005, 41.25% of our assets
were comprised of investment securities, the majority of which are illiquid
investments. Investments in illiquid, or non-marketable, securities are
inherently risky and a number of the companies we have invested may fail. We
review all of our investments quarterly for indicators of impairment; however,
for non-marketable equity securities, the impairment analysis requires
significant judgment to identify events or circumstances that would likely
have
a material adverse effect on the fair value of the investment. The indicators
we
use to identify those events or circumstances includes as relevant, the nature
and value of any collateral, the company’s ability to make payments and its
earnings, the markets in which the company does business, comparison to
valuations of publicly traded companies, comparisons to recent sales of
comparable companies, the discounted cash flows of the company and other
relevant factors. Because such valuations are inherently uncertain and may
be
based on estimates, our determinations of fair value may differ materially
from
the values that would be assessed if a liquid market for these securities
existed. Investments identified as having an indicator of impairment are subject
to further analysis to determine if the investment is other than temporarily
impaired, in which case we write the investment down to its impaired value.
When
a company is not considered viable from a financial or technological point
of
view, we write down the entire investment since we consider the estimated fair
market value to be nominal. Although we did not recognize any impairment for
the
nine months ended September 30, 2005, since a significant amount of our assets
are comprised of non-marketable investment securities, any future impairment
charges from the write down in value of these securities will adversely affect
our financial condition.
We
may not be able to effectively integrate our acquisition targets, which would
be
detrimental to our business.
On
February 25, 2005, we purchased SurgiCount Medical, Inc., a holding company
for
intellectual property rights relating to our Safety-Sponge™ System. We
anticipate seeking other acquisitions in furtherance of our plan to acquire
assets and businesses in the medical products and health care solutions
industries. Acquisitions involve numerous risks, including potential difficulty
in integrating operations, technologies, systems, and products and services
of
acquired companies, diversion of management’s attention and disruption of
operations, increased expenses and working capital requirements and the
potential loss of key employees and customers of acquired companies. In
addition, acquisitions involve financial risks, such as the potential
liabilities of the acquired businesses, the dilutive effect of the issuance
of
additional equity securities, the incurrence of additional debt, the financial
impact of transaction expenses and the amortization of goodwill and other
intangible assets involved in any transactions that are accounted for by using
the purchase method of accounting, and possible adverse tax and accounting
effects. Any of the foregoing could materially and adversely affect our
business.
Failure
to properly manage our potential growth would be detrimental to our
business.
Any
growth in our operations will place a significant strain on our resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employee base and
maintain close coordination among our technical, accounting, finance, marketing,
sales and editorial staffs. We cannot guarantee that we will be able to do
so,
or that if we are able to do so, we will be able to effectively integrate them
into our existing staff and systems. We may fail to adequately manage our
anticipated future growth. We will also need to continue to attract, retain
and
integrate personnel in all aspects of our operations. Failure to manage our
growth effectively could hurt our business.
If
the protection of our intellectual property rights is inadequate, our ability
to
compete successfully could be impaired.
In
connection with our purchase of SurgiCount Medical, Inc., we acquired one
registered U.S. patent and one registered international patent of the
Safety-Sponge™
System. We regard our patents, copyrights, trademarks, trade secrets and similar
intellectual property as critical to our business. We rely on a combination
of
patent, trademark and copyright law and trade secret protection to protect
our
proprietary rights. Nevertheless, the steps we take to protect our proprietary
rights may be inadequate. Detection and elimination of unauthorized use of
our
products is difficult. We may not have the means, financial or otherwise, to
prosecute infringing uses of our intellectual property by third parties.
Further, effective patent, trademark, service mark, copyright and trade secret
protection may not be available in every country in which we will sell our
products and offer our services. If we are unable to protect or preserve the
value of our patents, trademarks, copyrights, trade secrets or other proprietary
rights for any reason, our business, operating results and financial condition
could be harmed.
Litigation
may be necessary in the future to enforce our intellectual property rights,
to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims that our products
infringe upon the proprietary rights of others or that proprietary rights that
we claim are invalid. Litigation could result in substantial costs and diversion
of resources and could harm our business, operating results and financial
condition regardless of the outcome of the litigation.
Other
parties may assert infringement or unfair competition claims against us. We
cannot predict whether third parties will assert claims of infringement against
us, or whether any future claims will prevent us from operating our business
as
planned. If we are forced to defend against third-party infringement claims,
whether they are with or without merit or are determined in our favor, we could
face expensive and time-consuming litigation, which could distract technical
and
management personnel. If an infringement claim is determined against us, we
may
be required to pay monetary damages or ongoing royalties. Further, as a result
of infringement claims, we may be required, or deem it advisable, to develop
non-infringing intellectual property or enter into costly royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms that are acceptable to us, or at all. If a third party
successfully asserts an infringement claim against us and we are required to
pay
monetary damages or royalties or we are unable to develop suitable
non-infringing alternatives or license the infringed or similar intellectual
property on reasonable terms on a timely basis, it could significantly harm
our
business.
There
are significant potential conflicts of interest with our officers, directors
and
our affiliated entities which could adversely affect our results from
operations.
Certain
of our officers, directors and/or their family members have existing
responsibilities and, in the future, may have additional responsibilities,
to
act and/or provide services as executive officers, directors, owners and/or
managers of Ault Glazer Bodnar & Company Investment Management LLC. In
particular, Milton “Todd” Ault, III, our Chairman and Chief Executive Officer,
Melanie Glazer, Manager of our subsidiary Ault Glazer Bodnar Capital Properties,
LLC, and Lynne Silverstein, our President and Secretary, are all principals
of
Ault Glazer Bodnar & Company Investment Management LLC. Mr. Ault and Ms.
Silverstein devote approximately 85% of their time to our business, based on
a
60-hour, 6-day workweek. Ms. Glazer works full time for Ault Glazer Bodnar
Capital Properties, LLC. Ms. Silverstein is the stepdaughter of Louis Glazer,
one of our Directors and Chief Health and Science Officer of Patient Safety
Consulting Group, LLC. Accordingly, certain conflicts of interest may arise
from
time to time with our officers, directors and Ault Glazer Bodnar & Company
Investment Management LLC. Because of these possible conflicts of interest,
such
individuals may direct potential business and investment opportunities to other
entities rather than to us, which may not be in the best interest of our
stockholders. We will attempt to resolve any such conflicts of interest in
our
favor.
Our
Board
of Directors does not believe that we currently have any conflicts of interest
with the business of Ault Glazer Bodnar & Company Investment Management LLC,
other than certain of our officers’ responsibility to provide management and
administrative services to Ault Glazer Bodnar & Company Investment
Management LLC. and its clients from time-to-time. However, subject to
applicable law, we may engage in transactions with Ault Glazer Bodnar &
Company Investment Management LLC. and other related parties in the future.
These related party transactions may raise conflicts of interest and, although
we do not have a formal policy to address such conflicts of interest, our Audit
Committee intends to evaluate relationships and transactions involving conflicts
of interest on a case-by-case basis and the approval of our Audit Committee
is
required for all such transactions. The Audit Committee intends that any related
party transactions will be on terms and conditions no less favorable to us
than
terms and conditions reasonably obtainable from third parties and in accordance
with applicable law.
Our
management has limited experience in managing and operating a public company.
Any failure to comply or adequately comply with federal securities laws, rules
or regulations could subject us to fines or regulatory actions, which may
materially adversely affect our business, results of operations and financial
condition.
Prior
to
the change in control that occurred in October 2004, our current senior
management was primarily engaged in operating a private investment management
firm. In this capacity they developed a general understanding of the
administrative and regulatory environment in which public companies operate.
However, our senior management lacks practical experience operating a public
company and relies in many instances on the professional experience and advice
of third parties including its consultants, attorneys and accountants. Failure
to comply or adequately comply with any laws, rules, or regulations applicable
to our business may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation, or financial condition.
We
are dependent on our Chief Executive Officer for our future success. The
departure of our Chief Executive Officer could materially adversely affect
our
ability to run our business.
Our
future success is dependent on the personal efforts, performance and abilities
of Milton “Todd” Ault, III, our Chairman and Chief Executive Officer. Mr. Ault
is an integral part of our daily operations. Although Mr. Ault does not
currently have any plans to retire or leave our company in the near future,
he
is not currently subject to an employment contract with us. The departure of
Mr.
Ault as our Chief Executive Officer could have a material adverse effect on
our
ability to implement our business strategy or achieve our investment objective.
Our
Chief Executive Officer controls a significant portion of our outstanding common
stock and his ownership interest may conflict with our outside stockholders
who
may be unable to influence management and exercise control over our business.
As
of
October 1, 2005, Milton “Todd” Ault, III, our Chief Executive Officer and
Chairman, beneficially owned approximately 25.6% of our common stock. As a
result, Mr. Ault may be able to exert significant influence over our management
and policies to:
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elect
or defeat the election of our directors;
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amend
or prevent amendment of our certificate of incorporation or bylaws;
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effect
or prevent a merger, sale of assets or other corporate transaction;
and
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control
the outcome of any other matter submitted to the shareholders for
vote.
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Accordingly,
our outside stockholders may be unable to influence management and exercise
control over our business.
RISKS
RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
BUSINESS
We
rely on a third party manufacturer and supplier to manufacture our
Safety-Sponge™ System. The loss of this manufacturer and supplier may interrupt
our operations.
On
August
17, 2005, our wholly owned subsidiary SurgiCount entered into an agreement
for A
Plus International Inc. to be the exclusive manufacturer and provider of the
Safety-Sponge™ System. During the term of the agreement, A Plus International
Inc. agreed not to manufacture, distribute or otherwise supply any bar coded
gauze sponges, bar coded laparotomy sponges, bar coded O.R. towels or bar coded
specialty sponges manufactured in China for any third party except for
SurgiCount. However, in the event A Plus International Inc. does not meet the
requirements of the agreement, SurgiCount may seek additional providers of
the
Safety-Sponge™ products. We cannot assure you that SurgiCont will be able to
maintain its relationship with A Plus International Inc. or secure additional
suppliers and manufacturers on favorable terms as needed. Although we believe
the materials used in the manufacture of the Safety-Sponge™ System are readily
available and can be purchased and/or produced by multiple vendors, the loss
of
a major supplier or manufacturer, the deterioration of our relationship with
a
major supplier or manufacturer, changes in the specifications of components
used
in our products, or our failure to establish good relationships with major
new
suppliers or manufacturers could have a material adverse effect on our business,
financial condition and results of operations.
The
unpredictable product cycles of the medical device and healthcare-related
industries and uncertain demand for products could cause our revenues to
fluctuate.
Our
target customer base includes hospitals, physicians, nurses and clinics. The
medical device and healthcare-related industries are subject to rapid
technological changes, short product life cycles, frequent new product
introductions and evolving industry standards, as well as economic cycles.
If
the market for our products does not grow as rapidly as our management expects,
our revenues could be less than expected. We also face the risk that changes
in
the medical device industry, for example, cost-cutting measures, changes to
manufacturing techniques or production standards, could cause our manufacturing,
design and engineering capabilities to lose widespread market acceptance. If
our
products do not gain market acceptance or suffer because of competing products,
unfavorable regulatory actions, alternative treatment methods or cures, product
recalls or liability claims, they will no longer have the need for our products
and we may experience a decline in revenues. Adverse economic conditions
affecting the medical device and healthcare-related industries, in general,
or
the market for our products in particular, could result in diminished sales,
reduced profit margins and a disruption in our business.
We
are subject to changes in the regulatory and economic environment in the
healthcare industry, which could adversely affect our
business.
The
healthcare industry in the United States continues to experience change. In
recent years, the United States Congress and state legislatures have introduced
and debated various healthcare reform proposals. Federal, state and local
government representatives will, in all likelihood, continue to review and
assess alternative healthcare delivery systems and payment methodologies, and
ongoing public debate of these issues is expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices,
the
relative costs associated with doing business and the amount of reimbursement
by
both government and third-party payers to persons providing medical services.
In
particular, the healthcare industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on healthcare companies
to
reduce healthcare costs. Managed care and other healthcare provider
organizations have grown substantially in terms of the percentage of the
population in the United States that receives medical benefits through such
organizations and in terms of the influence and control that they are able
to
exert over an increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow, increasing the
ability of these organizations to influence the practices and pricing involved
in the purchase of medical devices, including our products, which is expected
to
exert downward pressure on product margins. Both short-and long-term cost
containment pressures, as well as the possibility of continued regulatory
reform, may have an adverse impact on our business, financial condition and
operating results.
We
are subject to government regulation in the United States and abroad, which
can
be time consuming and costly to our business.
Our
products and operations are subject to extensive regulation by numerous
governmental authorities, including, but not limited to, the FDA and state
and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. The FDA administers the Food, Drug
and
Cosmetics Act (the “FDC Act”). Under the FDC Act, most medical devices must
receive FDA clearance through the Section 510(k) notification process
(“510(k)”) or the more lengthy premarket approval (“PMA”) process before they
can be sold in the United States. All of our products, currently comprising
only
the Safety-Sponge™ System, must receive 510(k) clearance or PMA approval. The
Safety-Sponge™ System has already received 501(k) exempt status from the FDA. To
obtain 510(k) marketing clearance, a company must show that a new product is
“substantially equivalent” in terms of safety and effectiveness to a product
already legally marketed and which does not require a PMA. Therefore, it is
not
always necessary to prove the actual safety and effectiveness of the new product
in order to obtain 510(k) clearance for such product. To obtain a PMA, we must
submit extensive data, including clinical trial data, to prove the safety,
effectiveness and clinical utility of our products. The process of obtaining
such clearances or approvals can be time-consuming and expensive, and there
can
be no assurance that all clearances or approvals sought by us will be granted
or
that FDA review will not involve delays adversely affecting the marketing and
sale of our products. FDA’s quality system regulations also require companies to
adhere to certain good manufacturing practices requirements, which include
testing, quality control, storage, and documentation procedures. Compliance
with
applicable regulatory requirements is monitored through periodic site
inspections by the FDA. In addition, we are required to comply with FDA
requirements for labeling and promotion. The Federal Trade Commission also
regulates most device advertising.
In
addition, international regulatory bodies often establish varying regulations
governing product testing and licensing standards, manufacturing compliance,
such as compliance with ISO 9001 standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. Our inability or failure
to
comply with the varying regulations or the imposition of new regulations could
restrict our ability to sell our products internationally and thereby adversely
affect our business, financial condition and operating results.
Failure
to comply with applicable federal, state or foreign laws or regulations could
subject us to enforcement actions, including, but not limited to, product
seizures, injunctions, recalls, possible withdrawal of product clearances,
civil
penalties and criminal prosecutions, any one or more of which could have a
material adverse effect on our business, financial condition and operating
results. Federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes, as are
administrative interpretations of regulatory requirements. Any such changes
may
have a material adverse effect on our business, financial condition and
operating results.
We
are subject to intense competition in the medical products and health-care
related markets, which could harm our business.
The
medical products and healthcare solutions industry is highly competitive. We
compete against other medical products and healthcare solutions companies,
some
of which are much larger and have significantly greater financial resources,
management resources, research and development staffs, sales and marketing
organizations and experience in the medical products and healthcare solutions
industries than us. In addition, these companies compete with us to acquire
technologies from universities and research laboratories. We also compete
against large companies that seek to license medical products and healthcare
solutions technologies for themselves. We cannot assure you that we will be
able
to successfully compete against these competitors in the acquisition,
development, or commercialization of any medical products and healthcare
solutions, funding of medical products and healthcare solutions companies or
marketing of our products and solutions. If we cannot compete effectively
against our competitors, our business, financial condition and results of
operations may be materially adversely affected.
We
may be subject to product liability claims and if our insurance is not
sufficient to cover product liability claims our business and financial
condition will be materially adversely affected.
The
nature of our business exposes us to potential product liability risks, which
are inherent in the distribution of medical equipment and healthcare products.
We may not be able to avoid product liability exposure, since third parties
develop and manufacture our equipment and products. If a product liability
claim
is successfully brought against us or any third party manufacturer then we
would
experience adverse consequences to our reputation, we might be required to
pay
damages, our insurance, legal and other expenses would increase, we might lose
customers and/or suppliers and there may be other adverse results.
Through
our subsidiary SurgiCount Medical, Inc. we have general liability insurance
to
cover claims up to $1,000,000. This insurance will cover the clinical trial/time
study relating to the bar coding of surgical sponges only. In addition, A Plus
International, Inc., the manufacturer of our surgical sponges, maintains general
liability insurance for claims up to $4,000,000 that covers product liability
claims against SurgiCount Medical, Inc. There can be no assurance that one
or
more liability claims will not exceed the coverage limits of any of such
policies. If we or our manufacturer are subjected to product liability claims,
the result of such claims could harm our reputation and lead to less acceptance
of our products in the healthcare products market. In addition, if our insurance
or our manufacturer’s insurance is not sufficient to cover product liability
claims, our business and financial condition will be materially adversely
affected.
RISKS
RELATED TO OUR INVESTMENTS
We
may experience fluctuations in our quarterly results.
We
may
experience fluctuations in our quarterly operating results due to a number
of
factors, including the success rate of our current investments, the level of
our
expenses, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in
our
markets and general economic conditions. As a result of these factors, results
for any period should not be relied upon as being indicative of performance
in
future periods.
Economic
recessions or downturns could impair investments and harm our operating results.
Many
of
the companies in which we have made investments may be susceptible to economic
slowdowns or recessions. An economic slowdown may affect the ability of a
company to engage in a liquidity event such as a sale, recapitalization, or
initial public offering. Our nonperforming assets are likely to increase and
the
value of our investments is likely to decrease during these periods. These
conditions could lead to financial losses in our investments and a decrease
in
our revenues, net income, and assets. Our investments also may be affected
by
current and future market conditions. Significant changes in the capital markets
could have an effect on the valuations of private companies and on the potential
for liquidity events involving such companies. This could affect the amount
and
timing of gains realized on our investments.
The
inability of our portfolio companies to successfully market their products
would
have a negative impact on our investment returns
Even
if
our portfolio companies are able to develop commercially viable products and
services, the market for new products and services is highly competitive and
rapidly changing. Commercial success is difficult to predict and the marketing
efforts of our portfolio companies may not be successful.
Investing
in private companies involves a high degree of risk.
Our
assets include investments in private companies. Investments in private
businesses involve a high degree of business and financial risk, which can
result in substantial losses and accordingly should be considered speculative.
Because of the speculative nature and the lack of a public market for these
investments, there is significantly greater risk of loss than is the case with
traditional investment securities. We have invested a substantial portion of
our
assets in small private companies or start-up companies. These private
businesses tend to be thinly capitalized and unproven, with risky technologies
that lack management depth and have not attained profitability or have no
history of operations. In addition, some smaller businesses have narrower
product lines and market shares than their competition and may be more
vulnerable to customer preferences, market conditions, loss of key personnel,
or
economic downturns, which may adversely affect the return on, or the recovery
of, our investment in such businesses.
We
expect
that some of our investments will be a complete loss or will be unprofitable
and
that some will appear to be likely to become successful but never realize their
potential. We have in the past relied, and we continue to rely to a large
extent, upon proceeds from sales of investments rather than investment income
or
revenue generated from operating activities to defray a significant portion
of
our operating expenses.
The
lack of liquidity in our investments may adversely affect our business.
A
portion
of our investments consist of securities acquired directly from the issuer
in
private transactions. Some of these investments are subject to restrictions
on
resale and/or otherwise are illiquid. There is no established trading market
for
most of such securities. Additionally, many of such securities are not eligible
for sale to the public without registration under the Securities Act of 1933,
which could prevent or delay any sale by us of such investments or reduce the
amount of proceeds that might otherwise be realized therefrom. Restricted
securities generally sell at a price lower than similar securities not subject
to restrictions on resale. Further, even if a portfolio company registers its
securities and becomes a reporting corporation under the Securities Exchange
Act
of 1934, we may be considered an insider by virtue of our board representation
and would be restricted in sales of such corporation's securities. The
illiquidity of our investments may adversely affect our ability to dispose
of
debt and equity securities at times when it may be otherwise advantageous for
us
to liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of our investments, the proceeds of such liquidation
may
be significantly less than the value at which we acquired those investments.
We
may not realize gains from our equity investments.
Our
investments are primarily in equity securities of other companies. These equity
interests may not appreciate in value and, in fact, may decline in value.
Accordingly, we may not be able to realize gains from our equity interests,
and
any gains that we do realize on the disposition of any equity interests may
not
be sufficient to offset any other losses we experience.
There
is uncertainty regarding the value of our investments that are not publicly
trades securities, which could adversely affect the determination of our asset
value.
The
fair
value of investments that are not publicly traded securities is not readily
determinable. Therefore, we value these securities at fair value as determined
in good faith by our Board of Directors. The types of factors that our Board
of
Directors takes into account include, as relevant, the nature and value of
any
collateral, the portfolio company’s ability to make payments and its earnings,
the markets in which the portfolio company does business, comparison to
valuations of publicly traded companies, comparisons to recent sales of
comparable companies, the discounted value of the cash flows of the portfolio
company and other relevant factors. Because such valuations are inherently
uncertain and may be based on estimates, our determinations of fair value may
differ materially from the values that would be assessed if a ready market
for
these securities existed.
Our
financial results could be negatively affected if a significant investment
fails
to perform as expected.
We
have
acquired controlling equity stakes in certain companies and our total debt
and
equity investment in controlled companies may be significant individually or
in
the aggregate. Investments in controlled portfolio companies are generally
larger and in fewer companies than our investments in companies that we do
not
control. As a result, if a significant investment in one or more controlled
companies fails to perform as expected, our financial results could be more
negatively affected and the magnitude of the loss could be more significant
than
if we had made smaller investments in more companies.
We
borrow money, which magnifies the potential for gain or loss on amounts invested
and may increase the risk of investing in us.
Borrowings,
also known as leverage, magnify the potential for gain or loss on amounts
invested and, therefore, increase the risks associated with investing in our
securities. We may borrow from and issue senior debt securities to banks,
insurance companies, and other lenders. Lenders of these senior securities
have
fixed dollar claims on our consolidated assets that are superior to the claims
of our common shareholders. If the value of our consolidated assets increases,
then leveraging would cause the value of our consolidated assets to increase
more sharply than it would have had we not leveraged. Conversely, if the value
of our consolidated assets decreases, leveraging would cause the value of our
consolidated net assets to decline more sharply than it otherwise would have
had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Leverage is generally considered a
speculative investment technique.
Changes
in interest rates may affect our cost of capital and net investment income.
Because
we may borrow money to make investments, our net income is partially dependent
upon the difference between the rate at which we borrow funds and the rate
at
which we invest these funds. As a result, there can be no assurance that a
significant change in market interest rates will not have a material adverse
effect on our net income. In periods of rising interest rates, our cost of
funds
would increase, which would reduce our net income. We may use a combination
of
long-term and short-term borrowings and equity capital to finance our investing
activities. We may use interest rate risk management techniques in an effort
to
limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities. Accordingly, no assurances can be
given that such changes will not have a material adverse effect on the return
on, or the recovery of, the Company’s investments.
RISKS
RELATED TO OUR REAL ESTATE HOLDINGS
The
value of real estate fluctuates depending on conditions in the general economy
and the real estate business. These conditions may limit the amount of cash
we
eventually receive on the liquidation of our real estate holdings.
The
value
of our real estate holdings is affected by many factors including, but not
limited to: national, regional and local economic conditions; consequences
of
any armed conflict involving or terrorist attacks against the United States;
our
ability to secure adequate insurance; local conditions such as an oversupply
of
space or a reduction in demand for real estate in a particular area; competition
from other available space; whether tenants consider a property attractive;
the
financial condition of tenants, including the extent of tenant bankruptcies
or
defaults; whether we are able to pass some or all of any increased operating
costs through to tenants; how well we manage our properties; fluctuations in
interest rates; changes in real estate taxes and other expenses; changes in
market rental rates; the timing and costs associated with property improvements
and rentals; changes in taxation or zoning laws; government regulation;
potential liability under environmental or other laws or regulations; and
general competitive factors. If adverse changes in any of these factors were
to
occur, we generally would expect to receive less cash upon liquidation of our
real estate holdings.
Our
current real estate holdings are concentrated in Baltimore, Maryland and Heber
Springs, Arkansas. Adverse circumstances affecting these areas generally could
adversely affect the value of such real estate holdings.
A
significant proportion of our real estate investments are in Baltimore, Maryland
and Heber Springs, Arkansas and are affected by the economic cycles and risks
inherent to those regions. Like other real estate markets, the real estate
markets in these areas have experienced economic downturns in the past, and
we
cannot predict how the current economic conditions will impact these markets
in
both the short and long term. Further declines in the economy or a decline
in
the real estate markets in these areas could hurt our financial performance
and
the value of our properties. The factors affecting economic conditions in these
regions include: business layoffs or downsizing; industry slowdowns; relocations
of businesses; changing demographics; and any oversupply of or reduced demand
for real estate.
RISKS
RELATED TO OUR FINANCING
There
are a large number of shares of common stock and shares underlying outstanding
warrants from our recent private placement that may be available for future
sale
and the sale of these shares may depress the market price of our common stock.
As
of
November 7, 2005, we had 5,626,708 shares of common stock outstanding. There
are
1,517,700 outstanding shares of common stock and 758,841 shares of common stock
issuable upon exercise of outstanding warrants from our recent private placement
being offered pursuant to a Form S-3 registration statement filed with the
SEC
on May 3, 2005. After the Form S-3 is declared effective by the SEC, all of
these shares may be sold without restriction. The sale of these shares may
adversely affect the market price of our common stock.
The
issuance of shares upon exercise of outstanding warrants will cause immediate
and substantial dilution to our existing stockholders.
The
issuance of shares upon exercise of our outstanding warrants will result in
substantial dilution to the interests of other stockholders. This may include
dilution in the market price of our common stock since the exercising warrant
holders may exercise and sell the full amount issuable on exercise.
RISKS
RELATED TO OUR COMMON STOCK
Our
historic stock price has been volatile and the future market price for our
common stock may continue to be volatile. Further, the limited market for our
shares will make our price more volatile. This may make it difficult for you
to
sell our common stock for a positive return on your investment.
The
public market for our common stock has historically been very volatile. Over
the
past two fiscal years and the interim quarterly periods, the market price for
our common stock has ranged from $0.167 to $7.333. Any future market price
for
our shares may continue to be very volatile. This price volatility may make
it
more difficult for you to sell shares when you want at prices you find
attractive. We do not know of any one particular factor that has caused
volatility in our stock price. However, the stock market in general has
experienced extreme price and volume fluctuations that often are unrelated
or
disproportionate to the operating performance of companies. Broad market factors
and the investing public’s negative perception of our business may reduce our
stock price, regardless of our operating performance. Further, the market for
our common stock is limited and we cannot assure you that a larger market will
ever be developed or maintained. Our common stock is currently listed on the
American Stock Exchange (“AMEX”).
The
average daily trading volume of our common stock over the past three months
was
approximately 3,973 shares. The last reported sale price for our common stock
on
October 3, 2005, was $3.55 per share. Market fluctuations and volatility, as
well as general economic, market and political conditions, could reduce our
market price. As a result, this may make it difficult or impossible for you
to
sell our common stock.
If
we fail to meet continued listing standards of AMEX, our common stock may be
delisted which would have a material adverse effect on the price of our common
stock.
Our
common stock is currently traded on AMEX under the symbol “PST”. In order for
our securities to be eligible for continued listing on AMEX, we must remain
in
compliance with certain listing standards. On June 24, 2004, we received a
letter from AMEX inquiring as to our ability to remain listed on AMEX.
Specifically, AMEX indicated that our common stock was subject to delisting
under sections 1003(a)(i) and 1003(a)(ii) of AMEX’s Company Guide because our
stockholders’ equity was below the level required by AMEX’s continued listing
standards. Accordingly, AMEX requested information relating to our plan to
retain listing. On September 13, 2004, we presented the final components of
our
proposed plan to AMEX to comply with AMEX’s continued listing standards and on
September 15, 2004, AMEX notified us that it accepted our plan and granted
us an
extension until December 26, 2005 to regain compliance, during which time AMEX
will continue our listing subject to certain conditions. We have cooperated,
and
will continue to cooperate, with AMEX regarding these issues and we intend
to
make every effort to remain listed on AMEX. AMEX has notified us, however,
that
failure to make progress consistent with the plan of compliance or to regain
compliance with the continued listing standards by December 26, 2005 could
result in our common stock being delisted. We believe we have re-gained
compliance with AMEX’s continued listing requirements. If we were to again
become noncompliant with AMEX’s continued listing requirements, our common stock
may be delisted which would have a material adverse affect on the price and
liquidity of our common stock.
If
we are delisted from AMEX, our common stock may be subject to the “penny stock”
rules of the SEC, which would make transactions in our common stock cumbersome
and may reduce the value of an investment in our stock.
The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes
the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, Rule 15g-9
require:
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that
a broker or dealer approve a person's account for transactions in
penny
stocks; and
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the
broker or dealer receive from the investor a written agreement to
the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
|
In
order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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obtain
financial information and investment experience objectives of the
person;
and
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make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the risks
of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to
the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
Our
business activities contain elements of market risk. We consider a principal
type of market risk to be valuation risk. Investments and other assets are
valued at fair value as determined in good faith by our Board of Directors.
We
have
invested a substantial portion of our assets in private development stage or
start-up companies. These private businesses tend to be thinly capitalized,
unproven, small companies that lack management depth and have not attained
profitability or have no history of operations. Because of the speculative
nature and the lack of public market for these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. We expect that some of our venture capital investments will be
a
complete loss or will be unprofitable and that some will appear to be likely
to
become successful but never realize their potential.
Because
there is no public market for the equity interests of some of the small
companies in which we have invested, the valuation of such the equity interests
is subject to the estimate of our Board of Directors. In making its
determination, the Board may consider valuation information provided by an
independent third party or the portfolio company itself. In the absence of
a
readily ascertainable market value, the estimated value of our equity
investments may differ significantly from the values that would be placed on
them if a liquid market for the equity interests existed. Any changes in
valuation are recorded in our consolidated statements of operations as either
"Unrealized losses on marketable securities, net” or “Other comprehensive
income."
As
of the
end of the period covered by this report, we conducted an evaluation, under
the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in
Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that all information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is: (1)
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure;
and (2)
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. There was no change in our internal
controls or in other factors that could affect these controls during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings.
On
July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
lawsuit against us, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. The
plaintiffs are attempting to collect a federal default judgment of $5,014,000
entered against two entities, i.e., Winstar Radio Networks, LLC and Winstar
Global Media, Inc., by attempting to enforce the judgment against us and the
other defendants, none of whom are judgment debtors. Further, the plaintiffs
are
attempting to enforce their default judgment against us when their initial
lawsuit against us was dismissed on the merits. An unfavorable outcome in the
lawsuit may have a material adverse effect on our business, financial condition
and results of operations. We believe the lawsuit is without merit and we intend
to vigorously defend against the lawsuit.
On
October 25, 2005, we sold 16,666 shares of common
stock to an unaffiliated accredited investor at a price of $3.00 per share,
resulting in gross proceeds of $50,000. These securities were sold pursuant
to
Rule 506 promulgated under the Securities Act of 1933, as amended.
On
November 3, 2005, we sold Herbert Langsam, one of our current directors, 28,653
shares of common stock at a price of $3.49 per share, resulting in gross
proceeds of $100,000. These securities were sold pursuant to Rule 506
promulgated under the Securities Act of 1933, as amended.
For
each
of the above sales, no advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors, business associates of ours
or our executive officers, and transfer was restricted by us in accordance
with
the requirements of the Securities Act. Each of the above security holders
represented that they are accredited and sophisticated investors, that they
are
capable of analyzing the merits and risks of their investment, and that they
understand the speculative nature of their investment. Furthermore, all of
the
above-referenced persons had access to our Securities and Exchange Commission
filings.
Item
3. Defaults
Upon Senior Securities.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
None.
Item
5. Other
Information.
None.
|
Exhibit
Number
|
|
Description
|
|
10.1
|
|
Consulting
Agreement among Wolfgang Grabher and Patient Safety Technologies,
Inc.
(Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on July 7, 2005)
|
|
10.2
|
|
Agreement
between Patient Safety Technologies, Inc. and IPEX, Inc. dated July
7,
2005 (Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on July 7, 2005)
|
|
10.3
|
|
Supply
Agreement entered into August 17, 2005 with A Plus International,
Inc.
(Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on August 23, 2005)
|
|
10.4
|
|
Real
Estate Note dated July 27, 2005 in the principal amount of $480,000
issued
by Automotive Services Group, LLC to Ault Glazer Bodnar Acquisition
Fund,
LLC (Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on September 29,
2005)
|
|
10.5
|
|
Future
Advance Mortgage Assignment of Rents and Leases and Security Agreement
dated July 27, 2005 between Automotive Services Group, LLC to Ault
Glazer
Bodnar Acquisition Fund, LLC (Incorporated by reference to the Company’s
Form 8-K filed with the Securities and Exchange Commission on September
29, 2005)
|
|
10.6
|
|
Addendum
I dated August 10, 2005 to Real Estate Note issued by Automotive
Services
Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated
by
reference to the Company’s Form 8-K filed with the Securities and Exchange
Commission on September 29, 2005)
|
|
10.7
|
|
Addendum
II to Real Estate Note issued by Automotive Services Group, LLC to
Ault
Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
the
Company’s Form 8-K filed with the Securities and Exchange Commission on
September 29, 2005)
|
|
10.8
|
|
Employment
Agreement dated October 31, 2005 between SurgiCount Medical, Inc.,
Patient
Safety Technologies, Inc. and Richard Bertran (Incorporated by reference
to the Company’s Form 8-K filed with the Securities and Exchange
Commission on November 2, 2005)
|
|
10.9
|
|
Employment
Agreement dated November 2, 2005 by and between SurgiCount Medical,
Inc.,
Patient Safety Technologies, Inc. and James Schafer (Incorporated
by
reference to the Company’s Form 8-K filed with the Securities and Exchange
Commission on November 7, 2005)
|
|
31.1
|
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
31.2
|
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
32.1
|
|
Certification
by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
the
United States Code
|
|
32.2
|
|
Certification
by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
the
United States Code
|
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, 2005 |
By: |
/s/ Milton
“Todd” Ault III |
| |
Milton
“Todd”
Ault III |
| |
Chairman
& Chief Executive Officer |
|
|
|
|
| Date: November
14, 2005 |
By: |
/s/ William
B. Horne |
| |
William
B. Horne |
| |
Chief
Financial Officer
and
Principal Accounting
Officer
|