UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
|
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE
QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
|
¨
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
OR
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 1500
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
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
July
27, 2005, there were 5,466,592 shares outstanding of the Registrant’s common
stock, $0.33 par value.
PATIENT
SAFETY TECHNOLOGIES, INC.
FORM
10-Q FOR THE SIX MONTHS
ENDED
JUNE 30, 2005
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Page
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PART
I - FINANCIAL INFORMATION
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|
| |
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Item
1. Condensed Consolidated Financial Statements
|
1
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
16
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
38
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|
Item
4. Controls and Procedures
|
38
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PART
II - OTHER INFORMATION
|
|
| |
|
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Item
1. Legal Proceedings
|
39
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|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
39
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|
Item
3. Defaults Upon Senior Securities
|
40
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|
Item
4. Submission of Matters to a Vote of Security Holders
|
40
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|
Item
5. Other Information
|
40
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Item
6. Exhibits
|
41
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| |
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SIGNATURES
|
42
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PART
I - FINANCIAL INFORMATION
Item
1. Financial
Statements.
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets (Unaudited)
| |
|
|
|
December
31,
2004
*
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
91,252
|
|
$
|
846,404
|
|
|
Accounts
receivable
|
|
|
1,331,250
|
|
|
|
|
|
Marketable
securities
|
|
|
1,402,222
|
|
|
3,487,719
|
|
|
Other
current assets
|
|
|
380,708
|
|
|
255,510
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,205,432
|
|
|
4,589,633
|
|
|
Property
and equipment, net
|
|
|
145,401
|
|
|
23,657
|
|
|
Patents,
net
|
|
|
4,576,262
|
|
|
|
|
|
Long-term
investments
|
|
|
3,861,012
|
|
|
2,320,953
|
|
|
TOTAL
ASSETS
|
|
$
|
11,788,107
|
|
$
|
6,934,243
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
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CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
1,838,880
|
|
$
|
892,530
|
|
|
Accounts
payable and accrued liabilities
|
|
|
1,831,446
|
|
|
939,568
|
|
|
Marketable
securities, sold short
|
|
|
|
|
|
1,075,100
|
|
|
Due
to broker
|
|
|
8,376
|
|
|
460,776
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,678,702
|
|
|
3,367,974
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
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|
Convertible
preferred stock, $1 par value, cumulative 7% dividend:
1,000,000
shares authorized; 10,950 issued and outstanding at June 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;
6,886,634
shares issued and 5,455,339 shares outstanding as of June 30,
2005;
6,128,067 shares issued and 4,670,703 shares outstanding at December
31,
2004
|
|
|
2,272,589
|
|
|
2,022,262
|
|
|
Paid-in
capital
|
|
|
20,629,446
|
|
|
13,950,775
|
|
|
Other
comprehensive income
|
|
|
1,158,750
|
|
|
|
|
|
Accumulated
deficit
|
|
|
(13,392,306
|
)
|
|
(9,800,885
|
)
|
| |
|
|
10,679,429
|
|
|
6,183,102
|
|
|
Deduct:
1,431,295 and 1,457,364 shares of common stock held in treasury,
at cost,
at June 30, 2005 and December 31, 2004, respectively
|
|
|
(2,570,024
|
)
|
|
(2,616,833
|
)
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
8,109,405
|
|
|
3,566,269
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
11,788,107
|
|
$
|
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.
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| |
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
| |
|
|
June 30,
2005
|
|
|
June 30,
2004
*
|
|
|
June 30,
2005
|
|
|
June 30,
2004
*
|
|
|
REVENUES
|
|
$
|
586,627
|
|
$
|
—
|
|
$
|
586,627
|
|
$
|
—
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
900,385
|
|
|
133,030
|
|
|
2,110,096
|
|
|
261,931
|
|
|
Professional
fees
|
|
|
897,974
|
|
|
184,122
|
|
|
1,454,945
|
|
|
241,122
|
|
|
Rent
|
|
|
24,478
|
|
|
18,879
|
|
|
24,478
|
|
|
36,954
|
|
|
Insurance
|
|
|
22,788
|
|
|
17,037
|
|
|
43,578
|
|
|
34,075
|
|
|
Taxes
other than income taxes
|
|
|
23,947
|
|
|
6,037
|
|
|
45,982
|
|
|
18,801
|
|
|
Amortization
of patents
|
|
|
81,235
|
|
|
|
|
|
108,314
|
|
|
|
|
|
General
and administrative
|
|
|
204,463
|
|
|
34,684
|
|
|
461,634
|
|
|
84,828
|
|
|
Operating
expenses
|
|
|
2,155,270
|
|
|
393,789
|
|
|
4,249,027
|
|
|
677,711
|
|
|
Operating
loss
|
|
|
(1,568,643
|
)
|
|
(393,789
|
)
|
|
(3,662,400
|
)
|
|
(677,711
|
)
|
|
Interest,
dividend income and other, net
|
|
|
11,485
|
|
|
50
|
|
|
40,088
|
|
|
215
|
|
|
Equity
in income (loss) of investee
|
|
|
(17,020
|
)
|
|
|
|
|
(17,020
|
)
|
|
|
|
|
Realized
gains on investments, net
|
|
|
138,372
|
|
|
451,400
|
|
|
103,644
|
|
|
500,878
|
|
|
Interest
expense
|
|
|
(34,243
|
)
|
|
(9,002
|
)
|
|
(61,561
|
)
|
|
(17,928
|
)
|
|
Unrealized
gains (losses) on marketable securities, net
|
|
|
(300,384
|
)
|
|
(19,015
|
)
|
|
43,203
|
|
|
83,744
|
|
|
Net
income (loss)
|
|
|
(1,770,433
|
)
|
|
29,644
|
|
|
(3,554,046
|
)
|
|
(110,802
|
)
|
|
Preferred
dividends
|
|
|
(24,637
|
)
|
|
(19,161
|
)
|
|
(37,375
|
)
|
|
(38,325
|
)
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(1,795,070
|
)
|
$
|
10,483
|
|
$
|
(3,591,421
|
)
|
$
|
(149,127
|
)
|
|
Basic
and diluted net income (loss) per common share
|
|
$
|
(0.33
|
)
|
$
|
0.00
|
|
$
|
(0.69
|
)
|
$
|
(0.05
|
)
|
|
Weighted
average common shares outstanding
|
|
|
5,430,528
|
|
|
3,083,664
|
|
|
5,172,181
|
|
|
3,072,048
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,770,433
|
)
|
$
|
29,644
|
|
$
|
(3,554,046
|
)
|
$
|
(110,802
|
)
|
|
Other
comprehensive income
|
|
|
1,158,750
|
|
|
|
|
|
1,158,750
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(611,683
|
)
|
$
|
29,644
|
|
$
|
(2,395,296
|
)
|
$
|
(110,802
|
)
|
*
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
Condensed
Consolidated Statements of Cash Flows (Unaudited)
| |
|
Six
Months Ended
|
|
| |
|
June 30,
2005
|
|
June 30,
2004
*
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,554,046
|
)
|
$
|
(110,802
|
)
|
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,131
|
|
|
|
|
|
Amortization
of patents
|
|
|
108,314
|
|
|
|
|
|
Realized
gains on investments, net
|
|
|
(103,644
|
)
|
|
(500,878
|
)
|
|
Unrealized
gain on marketable securities
|
|
|
(43,203
|
)
|
|
(83,744
|
)
|
|
Stock
based compensation
|
|
|
2,464,863
|
|
|
5,094
|
|
|
Stock
received for services
|
|
|
(10,000
|
)
|
|
|
|
|
Loss
on investee
|
|
|
17,019
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,331,250
|
)
|
|
|
|
|
Purchases
of marketable investment securities, net
|
|
|
717,245
|
|
|
774,332
|
|
|
Other
current assets
|
|
|
(145,198
|
)
|
|
25,926
|
|
|
Accounts
payable and accrued liabilities
|
|
|
873,666
|
|
|
(52,135
|
)
|
|
Due
to broker
|
|
|
(452,400
|
)
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(1,453,503
|
)
|
|
57,793
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(59,981
|
)
|
|
|
|
|
Purchase
of SurgiCount
|
|
|
(432,398
|
)
|
|
|
|
|
Proceeds
from sale of long-term investments
|
|
|
300,466
|
|
|
|
|
|
Purchases
of long-term investments
|
|
|
(163,173
|
)
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(355,086
|
)
|
|
|
|
|
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
|
|
|
|
|
|
2,470
|
|
|
Payments
of preferred dividends
|
|
|
(19,163
|
)
|
|
(38,325
|
)
|
|
Proceeds
from notes payable
|
|
|
1,000,000
|
|
|
|
|
|
Payments
and decrease in notes
|
|
|
(53,650
|
)
|
|
(11,040
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,053,437
|
|
|
(7,520
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(755,152
|
)
|
|
50,273
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
846,404
|
|
|
224,225
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
91,252
|
|
$
|
274,498
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
32,552
|
|
$
|
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
|
|
$
|
—
|
|
|
Dividends
accrued
|
|
$
|
37,375
|
|
$
|
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
June
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, health care solutions,
financial services and real estate 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) Franklin 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, as well as the financial services and real estate
industries. 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 Franklin Capital Properties, LLC, a real estate development
and
management company, and to focus on the financial services and real estate
industries.
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. Certain amounts reported
in the
previous period have been reclassified to conform to the current presentation
reflecting the Company’s withdrawal of its election to be treated as a
BDC.
Reclassifications
Certain
amounts reported in the condensed consolidated financial statements, as
of June
30, 2004, have been reclassified to conform with the presentation adopted
to
report June 30, 2005 results.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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.
Liquidity
The
Company has a working capital deficiency of approximately $473,000 at June
30,
2005. The Company continues to have recurring losses and has relied upon
liquidating its investments to fund operations. Management believes that
existing cash resources together with proceeds from its investments and
anticipated revenues from its operations, should be adequate to fund its
operations for the 12 months subsequent to June 30, 2005. However, long
term
liquidity is dependent on the Company’s ability to attain future profitable
operations.
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 49% 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 six
months
and three months ended June 30, 2005, the Company had stock-based compensation
expense included in reported net loss of $890,448 and $337,906, 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 (continued)
| |
|
Three
and six months ended June 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
|
|
$
|
2.92
|
|
|
|
|
Comprehensive
Income
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 six months ended June 30, 2005 and 2004 that have been excluded
from
net loss and reflected instead in equity. At June 30, 2005, the only investment
designated as available for sale was the Company’s restricted holdings in
IPEX.
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 June 30, 2005 to purchase 609,000 and 1,149,683
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 six
months
ended June 30, 2005, as their inclusion would have been antidilutive.
Options
outstanding as of June 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 six months ended June 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 (continued)
During
the six months ended June 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. At July 5, 2005, the primary
terms of a comprehensive manufacturing agreement with A Plus Manufacturing
had
been agreed upon and the July 5, 2005 deadline was extended. 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 11. 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
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 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. Cinapse Digital Media, LLC produces digital
video for corporate clients and will also produce digital training videos
for
the Company’s patient safety devices.
5.
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 June 30, 2005, are included in the condensed consolidated financial
statements.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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 June 30,
|
|
Six
months ended June 30,
|
|
| |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
Revenue
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net
loss
|
|
$
|
(1,789,000
|
)
|
$
|
(65,000
|
)
|
$
|
(3,633,000
|
)
|
$
|
(299,000
|
)
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.33
|
)
|
$
|
(0.02
|
)
|
$
|
(0.70
|
)
|
$
|
(0.10
|
)
|
6.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities at June 30, 2005 and December 31, 2004
are
comprised of the following:
| |
|
June
30,
|
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Professional
fees - legal
|
|
$
|
467,607
|
|
$
|
351,867
|
|
|
Accrued
purchase price on investment
|
|
|
165,240
|
|
|
165,240
|
|
|
Officer's
severance
|
|
|
31,405
|
|
|
160,142
|
|
|
Accrued
interest
|
|
|
141,441
|
|
|
112,432
|
|
|
Professional
fees - other
|
|
|
84,500
|
|
|
52,950
|
|
|
Deferred
revenue
|
|
|
754,623
|
|
|
|
|
|
Accrued
- other
|
|
|
186,630
|
|
|
96,937
|
|
| |
|
$
|
1,831,446
|
|
$
|
939,568
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
7.
MARKETABLE SECURITIES
Marketable
securities at June 30, 2005 and December 31, 2004 are comprised of the
following:
| |
|
June
30,
|
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
U.S.
Treasuries
|
|
$
|
—
|
|
$
|
2,016,406
|
|
|
IPEX,
Inc.
|
|
|
471,599
|
|
|
|
|
|
Other
Equities
|
|
|
930,623
|
|
|
1,471,313
|
|
| |
|
$
|
1,402,222
|
|
$
|
3,487,719
|
|
IPEX,
Inc.
At
June
30, 2005, the Company held 607,425 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”),
formerly Administration for International Credit & Investments, Inc. The
Company acquired approximately 450,000 shares of the common stock and all
of the
warrants directly from IPEX in March 2005 and, until such time as the sale
of
the securities is either registered with the SEC or the securities are
eligible
to be sold without restriction pursuant to Rule 144(k) promulgated pursuant
to
the Securities Exchange Act of 1934, the Company is restricted from publicly
selling the securities except in accordance with Rule 144. The remaining
157,425
shares of common stock are valued at $471,599 and included in marketable
securities. IPEX's common stock is traded on the OTC Bulletin Board, which
reported a closing price, at June 30, 2005, of $3.55. The Company has valued
its
holdings in IPEX at a 25% discount to the $3.55 closing price, or $2.66
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.
8.
LONG-TERM INVESTMENTS
Long-term
investments at June 30, 2005 and December 31, 2004 are comprised of the
following:
| |
|
June
30,
|
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
Alacra
Corporation
|
|
$
|
1,000,000
|
|
$
|
1,000,000
|
|
|
DigiCorp
|
|
|
549,942
|
|
|
532,435
|
|
|
IPEX,
Inc.
|
|
|
1,608,750
|
|
|
|
|
|
Real
Estate
|
|
|
652,320
|
|
|
738,518
|
|
|
China
Nurse
|
|
|
50,000
|
|
|
50,000
|
|
| |
|
$
|
3,861,012
|
|
$
|
2,320,953
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Alacra
Corporation
At
June
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.
DigiCorp
At
June
30, 2005, the Company held 4,016,027 shares, or 41%, of the common stock
of
DigiCorp recorded at its cost, as adjusted for the Company’s proportionate share
of DigiCorp’s losses, of $549,942, or approximately $0.14 per share. Digicorp's
common stock is traded on the OTC Bulletin Board, which reported a closing
price, at June 30, 2005, of $0.22. 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 interest,
dividend
income and other, net.
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.
Investments
in Real Estate
At
June
30, 2005, the Company had several real estate investments, recorded at
its cost
of $652,320. These investments are included in long-term investments. The
Company holds its real estate investments in Franklin Capital Properties,
LLC
(“Franklin
Properties”).
Franklin Properties primary focus is on the acquisition and management
of income
producing real estate holdings. Franklin Properties’ real estate holdings
consist of eight vacant single family buildings and two multi-unit buildings
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. Franklin
Properties is evaluating alternative uses for its real estate holdings,
which
range from development and capital investments as a means of generating
recurring revenue to the liquidation of specific properties.
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 was extended until the lawsuit discussed in Note 13 was settled,
which
occurred on June 1, 2005. At June 30, 2005, the Company had incurred
approximately $161,120 in legal expenses which have been offset against
the
amount due. No payment has been made as the Company is evaluating the amount
of
additional offsets that it believes it is entitled to.
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.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
10.
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 June 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 June 30, 2005, the Company has granted 272,144 shares
of restricted stock of which 121,326 are vested. For the six months and
three
months ended June 30, 2005, the Company recorded compensation expense of
approximately $949,872 and $374,898, respectively, related to these shares
of
restricted stock.
The
following is a summary of the status of the Stock Option Plans:
| |
|
|
|
Outstanding
Options
|
|
| |
|
Shares
Available for Grant
|
|
|
|
Weighted
Average 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
|
|
|
(272,144
|
)
|
|
|
|
|
|
|
|
Grants
|
|
|
(609,000
|
)
|
|
609,000
|
|
$
|
5.27
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
June
30, 2005
|
|
|
437,938
|
|
|
609,000
|
|
$
|
5.27
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
|
Options
exercisable at:
|
|
|
|
|
|
|
December
31, 2003
|
|
|
61,875
|
|
$
|
3.80
|
|
|
December
31, 2004
|
|
|
5,625
|
|
$
|
4.67
|
|
|
June
30, 2005
|
|
|
185,250
|
|
$
|
5.27
|
|
The
outstanding options, all of which are issued under the 2005 SOP, have a
remaining contractual life of approximately 9.75 years.
11.
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 June 30, 2005, the Warrants, including those granted
on April
22, 2005, weighted average exercise price was $3.91 with a remaining contractual
life of 4.4 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.
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.
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 June 30,
2005,
all warrants issued to the consultants remain outstanding.
12.
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 Corporation (“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
June
30, 2005, the Company directly held 79,800 shares and indirectly, by virtue
of
its relationship with Ault Glazer, held 145,400 shares of Tuxis common
stock,
which represented approximately 8.11% and 14.78%, respectively, of the
total
outstanding shares. At March 31, 2005, Tuxis had reportable net assets
of
approximately $9.0 million.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
Land
Purchase
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 June 30, 2005, the Company
held
2.15% 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.
At
June
30, 2005, the Company 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) 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 June 30, 2005, the Company recognized $576,627 in
revenue
as a result of this agreement and has deferred approximately $755,000 of
revenue
relating to this consulting agreement which management expects will be
substantially recognized during the year ending December 31, 2005.
13.
COMMITMENTS AND CONTINGENCIES
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. 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.
14.
SEGMENT REPORTING
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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 Franklin 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”.
Segment
information for the three and six months ended June 30, 2005, and 2004
is as
follows:
| |
|
Three
Months Ended
|
|
Six
Months Ended
|
|
| |
|
June 30,
|
|
June
30,
|
|
June 30,
|
|
June 30,
|
|
| |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
Medical
Products
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(947,898
|
)
|
|
—
|
|
$
|
(1,168,629
|
)
|
|
—
|
|
|
Total
Assets
|
|
$
|
4,576,262
|
|
|
—
|
|
$
|
4,576,262
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(105,196
|
)
|
|
—
|
|
$
|
(232,921
|
)
|
|
—
|
|
|
Total
Assets
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services and Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
586,627
|
|
|
—
|
|
$
|
586,627
|
|
|
—
|
|
|
Net
income
|
|
$
|
237,901
|
|
$
|
432,435
|
|
$
|
313,064
|
|
$
|
584,837
|
|
|
Total
Assets
|
|
$
|
6,685,736
|
|
$
|
3,013,708
|
|
$
|
6,685,736
|
|
$
|
3,013,708
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(955,240
|
)
|
$
|
(402,791
|
)
|
$
|
(2,465,560
|
)
|
$
|
(695,639
|
)
|
|
Total
Assets
|
|
$
|
526,109
|
|
$
|
78,961
|
|
$
|
526,109
|
|
$
|
78,961
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
586,627
|
|
|
—
|
|
$
|
586,627
|
|
|
—
|
|
|
Net
loss
|
|
$
|
(1,770,433
|
)
|
$
|
29,644
|
|
$
|
(3,554,046
|
)
|
$
|
(110,802
|
)
|
|
Total
Assets
|
|
$
|
11,788,107
|
|
$
|
3,092,669
|
|
$
|
11,788,107
|
|
$
|
3,092,669
|
|
14.
SUBSEQUENT EVENTS
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (continued)
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. ASG was formed to develop
and operate automated car wash sites with the first location under development
in Birmingham, Alabama.
On
July
11, 2005, Franklin Capital Properties, LLC filed a certificate of amendment
with
the Secretary of State of the State of Delaware changing its name to Ault
Glazer
Bodnar Capital Properties, LLC.
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.
As
consideration for the PST shares, the Company received 12,000 shares of
Tuxis
common stock valued at $103,680.
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.
We
invest
in illiquid equity securities acquired directly from the issuer 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 may invest 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 make 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 invest in are expected to 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, and the investments would likely 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 ready
market for these securities existed.
Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which
case
we write the investment down to its impaired value. When a 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
six months ended June 30, 2005 and 2004.
Security
investments which are publicly traded on a national exchange or Nasdaq Stock
Market are stated at the last reported sales price on the day of valuation
or,
if no sale was reported on that date, then the securities are stated at the
last
quoted bid price. 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
("PST",
or the
"Company"),
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, as well
as the
financial services and real estate industries. 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 the Company’s non-patient safety related assets, and
Franklin
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.
SurgiCount
is our first acquisition in our plan to become a leader in the patient safety
field 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.
Ault
Glazer Bodnar Merchant Capital, Inc. was formed during June 2005 as a means
to
separate the Companies core patient safety related business from its
non-healthcare assets. The Company expects that Ault Glazer Bodnar Merchant
Capital, Inc. will hold the majority of the Company’s marketable securities and
long-term investments.
The
Company, including its subsidiaries, also provides capital and managerial
assistance to early stage companies in the medical products, health care
solutions, financial services and real estate industries.
Our
principal executive offices are located at 100 Wilshire Boulevard, Suite
1500,
Santa Monica, California 90401. Our telephone number is (310) 752-1416. Our
website is located at http://www.patientsafetytechnologies.com.
Financial
Condition
The
Company's cash and marketable securities were $1,493,474, at June 30, 2005,
versus $4,334,123 at December 31, 2004. Total current liabilities, were
$3,678,702 at June 30, 2005 versus $3,367,974 at December 31, 2004. Included
in
current liabilities at June 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 $966,512 and $1,004,962, respectively. As discussed in Note 9
in the Company’s notes to its condensed consolidated financial statements filed
with this Form 10-Q, the due date on the note payable to Winstar was June
1,
2005, the settlement date of the Leve Lawsuit. 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 June 30, 2005, we incurred $161,120 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
$838,880 reflected as a note payable on the accompanying balance sheet.
At
June
30, 2005 and December 31, 2004, we had $91,252 and $846,404 in cash and cash
equivalents. Our Board has given our Chairman and Chief Executive Officer,
Milton "Todd" Ault III, the authority to invest our cash balances in the
public
equity and debt markets as appropriate to maximize the short-term return
on such
assets. The making of such investments entails risks related to the loss
of
investment and price volatility.
The
Company had a working capital deficit of approximately $473,000 at June 30,
2005. The Company continues to have recurring losses and has relied upon
liquidating its portfolio companies to fund operations. 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. The Company
has received shareholder approval to sell equity and/or debt securities of
the
Company up to $10 million in any calendar year to the Company’s Chairman and
Chief Executive Officer, Milton “Todd” Ault, III, to the Company’s President and
Secretary, Lynne Silverstein, to the Chief Health and Science Officer of
the
Company’s subsidiary Patient Safety Consulting Group, LLC, Louis Glazer, and to
the Manager of the Company’s subsidiary Franklin Capital Properties, LLC and Mr.
Glazer’s spouse, Melanie Glazer. If the Company proposed to sell more than $10
million of securities in a calendar year to such persons additional shareholder
approval would be required. The Company does not currently anticipate selling
equity or debt securities to these persons and, in the event the Company
elected
to pursue such an investment, the Company cannot guarantee that such persons
would be willing to further invest in the Company. At this time, the Company
plans to fund future operations primarily by liquidating its portfolio
companies. On April 7, 2005, the Company 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 to the Company. 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 maturity date of the Note. The obligations under the Note are secured
by all
real property owned by the Company. Management believes that existing cash
resources, together with proceeds from investments and anticipated revenues
from
its operations, should be adequate to fund its operations for the twelve
months
subsequent to June 30, 2005. However, long-term liquidity is dependent on
the
Company's ability to attain future profitable operations. Management may
undertake additional debt or equity financings to better enable the Company
to
grow and meet its future operating and capital requirements.
On
November 3, 2004, the Company entered into a Subscription Agreement and sold
an
aggregate of 405,625 shares (1,216,875 shares post 3:1 forward stock split)
of
its Common Stock and warrants to purchase an aggregate of up to 202,810 shares
(608,430 shares post split) of its Common Stock in a private placement
transaction to certain accredited investors. Pursuant to the terms of the
Subscription Agreement, the Company held additional closings of the private
placement on November 15, 2004, December 2, 2004, and on December 27, 2004,
and
sold an aggregate of 100,275 additional shares (300,825 shares post split)
of
its Common Stock and warrants to purchase an aggregate of up to 50,137 shares
(150,411 shares post split) of its Common Stock. The Company received aggregate
net proceeds from all the closings of $3,924,786. The Company filed a
registration statement with the SEC on May 3, 2005 registering the resale
of the
shares of our 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 file such registration statement
with
the SEC. We intend to use 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.
As
of
June 30, 2005, the Company had no commitments not reflected on its balance
sheet. As in prior acquisitions, we intend to use a combination of common
stock
and warrants to purchase common stock as the primary means to acquire companies.
Accordingly, the Company’s need to raise significant amounts of cash can be
minimized, provided the companies we acquire are willing to accept non-cash
forms of consideration.
Investments
The
Company’s financial condition is dependent on the success of its investments.
The Company intends to invest a substantial portion of its 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. Short
selling
is a component of the Company’s investment strategy and these trades typically
range, in any particular month, from 0% to 20% of total trading activity.
The
making of such investments entails significant risk that the price of a security
may increase resulting in the loss of or negative return on the investment.
The
following is a discussion of our most significant investments at June 30,
2005.
Alacra
Corporation
At
June
30, 2005, the Company had an investment in Alacra Corporation (“Alacra”), valued
at $1,000,000, which represents 8.5% of the Company’s total assets. Alacra, a
privately held company based in New York, is a leading 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 leading financial institutions, management consulting, law
and
accounting firms and other corporations throughout the world. Currently,
the
company’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 robust, sophisticated
tools
designed to locate and extract business information from the Internet and
from
the Alacra library of premium content. The company’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 the requisite information in the appropriate
format, gleaned from such prestigious content partners as Thomson Financial(TM),
Barra, The Economist Intelligence Unit, Factiva, Mergerstat(R) and many others.
The
information services industry is intensely competitive and we expect it to
remain so. Although Alacra has been in operation since 1996 they are
significantly smaller in terms of revenue than a large number of companies
offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
revenues that range anywhere from $100 million to several billion dollars,
as
reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
range of products and services, greater financial and marketing resources,
larger customer bases, greater name recognition, greater global reach and
more
established relationships with potential customers than Alacra has. These
larger
and better capitalized competitors may be better able to respond to changes
in
the financial services industry, to compete for skilled professionals, to
finance investment and acquisition opportunities, to fund internal growth
and to
compete for market share generally.
On
April
20, 2000, the Company 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 of approximately $11.4
million, were in excess of the prior years revenues by approximately 38%.
At
December 31, 2004, Alacra had total assets of approximately $4.4 million
with
total liabilities of approximately $7.2 million. Deferred revenue, which
represents subscription revenues are amortized over the term of the contract,
which is generally one year, and represented approximately $3.3 million of
the
total liabilities. 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.
China
Nurse
On
November 23, 2004, the Company entered into a strategic relationship with
China
Nurse LLC ("China Nurse"), 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. The primary purpose for this strategic investment was in anticipation
of leveraging the relationships that China Nurse developed during the ordinary
course of its business for the Company’s other patient safety products. In
connection with this strategic relationship, the Company has agreed to provide
referrals and other assistance and has also made a small capital investment
in
that company. This investment was a seed investment in a concept that may
ultimately be completely impaired within a one year time frame if China Nurse
is
unable to secure additional interest both in the form of additional investment
and from hospitals and health care facilities in the United States.
Digicorp
At
June
30, 2005, the Company had an investment in DigiCorp valued at $549,942, which
represents 4.7% of the Company’s total assets. On December 29, 2004, the Company
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. Of such shares, 1,224,000 shares of DigiCorp common
stock
will be purchased from the selling shareholders at such time as the shares
are
registered for resale with the SEC. The purchase price for such shares is
$.135
or $.145 per share, depending on when the closing occurs. Digicorp’s common
stock is traded on the OTC Bulletin Board, which reported a closing price,
at
June 30, 2005, of $0.22. In connection with the Agreement, the Company is
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
Franklin 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 1, 2005, Philip
Gatch,
our Chief Technology Officer, was appointed Chief Technology Officer of
Digicorp. 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. The Company is currently
evaluating several strategic alternatives for the use of the DigiCorp entity.
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 entered into a subscription agreement with Bodnar
Capital
Management, LLC ("Bodnar Capital"), pursuant to which DigiCorp sold Bodnar
Capital 2,941,176 shares (the "Shares") of its common stock and warrants
(the
"Warrants") to purchase an additional 3,000,000 shares of its common stock.
DigiCorp received gross proceeds of approximately $500,000 from the sale
of
stock and warrants to Bodnar Capital. 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
July
15, 2005, DigiCorp entered into a binding letter of intent to acquire certain
assets which include the iCodemedia suite of websites and internet properties
and all related intellectual property (the “iCodemedia Assets”) from Philip
Gatch, who was recently appointed DigiCorp’s Chief Technology Officer. Digicorp
agreed to issue Mr. Gatch 1,000,000 shares of its common stock as consideration
for the iCodemedia Assets. Consummation of the transaction is subject to
the
execution of a definitive purchase and sale contract.
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. The Company has stock appreciation rights on these
shares that begin to expire on August 8, 2005.
IPEX,
Inc.
At
June
30, 2005, the Company held 607,425 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”),
formerly Administration for International Credit & Investments, Inc, valued
at $2,080,349. IPEX's common stock is traded on the OTC Bulletin Board, which
reported a closing price, at June 30, 2005, of $3.55. The warrants are
exercisable for a period of five years and are callable by IPEX in certain
instances. IPEX operates a fully automated, software-based, centralized 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 and currently has contracts with approximately 120 international
carriers. 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.
The
Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
of $450,000. This investment was part of the private placement that IPEX
completed on March 18, 2005. The total amount of IPEX’s private placement was
for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
of
$259,980, resulting in net realized proceeds of $3,240,020. The common stock,
Series A and Series B Warrants were sold as Units, with each Unit consisting
of
two shares of common stock, one series A Warrant and one Series B Warrant.
Each
Series A Warrant entitles the holder to purchase one share of common stock
at
$1.50 per share, exercisable for a period of five years. Each Series B Warrant
entitles the holder to purchase one share of common stock at $2.00 per share,
exercisable for a period of five years. Subsequent to the effectiveness of
a
registration statement covering shares underlying the warrants, the Series
A and
Series B Warrants are callable by IPEX, under certain circumstances, if IPEX's
common stock trades at or above $2.00 and $2.50, respectively, for ten
consecutive trading days.
As
reflected in IPEX’s March 31, 2005 Form 10-Q, sales for the quarter ended March
31, 2005 rose to $1,801,886 as compared to sales of $629,127 from the prior
year's quarter ended March 31, 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 the 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. IPEX’s management believes
IPEX is now in a position to increase sales in the future by moving up to
Tier 1
customers, which require net 30 terms for payment.
Tuxis
Corporation
On
July
22, 2005, Ault Glazer filed a Schedule 13D/A with the SEC relating to its
holdings in Tuxis Corporation ("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
June 30, 2005, the Company directly held 79,800 shares and indirectly, by
virtue
of its relationship with Ault Glazer, held 145,400 shares of Tuxis common
stock,
which represented approximately 8.11% and 14.78%, respectively, of the total
outstanding shares. At March 31, 2005, Tuxis had reportable net assets of
approximately $9.0 million.
Franklin
Capital Properties, LLC
At
June
30, 2005, the Company had several real estate investments, valued at $652,320,
which represents 5.5% of the Company’s total assets. The Company holds its real
estate investments in Franklin Capital Properties, LLC (“Franklin
Properties”),
a
Delaware limited liability company and a wholly owned subsidiary. Franklin
Properties primary focus is on the acquisition and management of income
producing real estate holdings. Franklin Properties real estate holdings
consist
of eight vacant single family buildings and two multi-unit buildings 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. Franklin
Properties is evaluating alternative uses for its real estate holdings, which
range from development and capital investments as a means of generating
recurring revenue to the liquidation of specific properties. As of June 30,
2005, the Company had not generated revenue from rental activities, nor does
it
expect to generate any recurring revenue during 2005, on any of its real
estate
investments. Further, the Company has not defined a rental strategy for its
existing properties. In the event that Franklin Properties elects to liquidate
some or all of its real estate holdings the Company expects that any gain
or
loss recognized on the liquidation would be insignificant to the Company
primarily due to the short period of time that the properties were owned
combined with the absence of any significant changes in property values in
the
real estate markets where the Company’s real estate holdings are located.
Results
of Operations
The
Company accounts for its operations under accounting principles generally
accepted in the United States. The principal measure of the Company’s financial
performance is captioned “Net loss attributable to common shareholders,” which
is comprised of the following:
| |
§
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"Revenues,"
which is the amount the Company receives from sales of its
products;
|
| |
§
|
“Operating
expenses,” are the related costs and expenses of operating the
business;
|
| |
§
|
“Interest,
dividend income and other, net,” which is the amount the Company receives
from interest and dividends from its short term investments and
money
market accounts, and its 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
|
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§
|
“Unrealized
gains (losses) on marketable securities, net,” which is the net change in
the fair value of the Company’s 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.
The
Company generally earns 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 the Company's fixed income portfolio and
the
average yield on this portfolio.
Revenues
The
Company recognized revenue of $586,627 for the six and three months ended
June
30, 2005 as opposed to no revenues during the six and three months ended
June
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 June 30, 2006 based in part upon the
results of initial usage of the Safety-SpongeTM
System
in
hospital operating rooms. We expect these revenues will initially have an
insignificant impact on our results of operations, however, during the three
month period ending December 31, 2006 we expect that revenues from our
Safety-SpongeTM
System
will provide a material source of funds to cover a portion of our operating
costs.
The
increase in revenue was the result 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. 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. Although the determination of whether
the Company will receive IPEX common stock or cash is in the discretion of
Mr.
Grabher, the Company has operated under the assumption that the Company will
most likely receive 500,000 shares of IPEX common stock as payment for the
services. 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 June 30, 2005, the Company held 2.15%
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, founder and majority
shareholder of IPEX, from time to time; and (c) assisting IPEX in installing
a
new management team.
At
June
30, 2005, the Company 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 of a Chief Executive Officer, Chief Operating Officer and a Vice
President of Research & Development, none of which would be deemed related
parties; and (iv) the appointment of two members to the Board of Directors
of
IPEX. The Company has deferred approximately $755,000 of revenue relating
to
this consulting agreement which management expects will be substantially
recognized during the year ended December 31, 2005.
Expenses
Operating
expenses were $4,249,027 and $677,711 for the six months and $2,155,270 and
$393,789 for the three months ended June 30, 2005 and June 30, 2004,
respectively.
The
increase in operating expenses for the six months ended June 30, 2005 when
compared to June 30, 2004, was primarily the result of legal fees and stock
based compensation expenses, and to a lesser extent printing Amex 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, as well as 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.
Legal
fees for the six months ended June 30, 2005 were $517,064, an increase of
$329,942 over the six months ended June 30, 2004. The increase in legal fees
is
attributable to work performed on the Company’s proxy statements, registration
statements and annual report, which required a significant amount of additional
time to prepare due to the Company’s change from a business development company
to an operating company, filed with the SEC, as well as other corporate matters.
Other corporate matters typically include services performed in relation
to
areas such as attendance at meetings, federal securities law, stock option
plans, press releases, and corporate agreements. Additionally, the Company
experienced an increase in ancillary fees as a direct result of the proxy
statement and the related annual meeting of shareholders. These ancillary
fees
included increases in printing fees and AMEX stock exchange fees.
Printing,
Amex stock exchange, and transfer agent fees for the six months ended June
30,
2005 increased by $67,951, $58,533 and $43,334, respectively, over the six
months ended June 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
fees, Amex stock exchange fees and transfer agent fees are a component of
the
$376,806 increase reflected in general and administrative expenses for the
six
months ended June 30, 2005. An increase in travel related expenses of $109,381,
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 the Company's operating expenses consist of employee compensation
and professional fees, which increased by $1,848,165 and $1,213,823,
respectively. As discussed above, legal fees which are a component of
professional fees increased by $329,942. Excluding legal fees, professional
fees
increased by $883,881, of which $624,543 is attributed to stock based
compensation of consultants and approximately $176,000 is attributed to auditor
and consultant fees. Stock based compensation expense, which is a component
of
both employee compensation and professional fees, for the six months ended
June
30, 2005, was approximately $624,543 relating to the issuance of warrants
to
consultants of the Company, as well as $890,448 relating to grants of
nonqualified stock options and $949,872 related to restricted stock awards
to
the Company’s employees, non-employee directors and consultants performing
services for the Company, all of which were expensed in accordance with SFAS
123(R). The Company 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. During the six months
ended June 30, 2004, the Company’s total stock based compensation expense, which
was caused from the issuance of 26,250 options to members of the Company’s Board
of Directors, was $5,094. Thus, the increase in expenses related to the issuance
of stock options, warrants and restricted stock awards amounted to $2,459,769.
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
an
expense of $62,505 related to the issuance of 10,505 shares of our common
stock
upon signing the agreement with Health West. At such time as Health West
assists
the Company in executing a comprehensive manufacturing agreement with A Plus
Manufacturing the Company will become obligated to issue Health West 15,756
shares of its common stock and at that time recognize an expense of $93,748.
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.
The
remaining difference between the amount by which stock based compensation
increased above the overall increase in employee compensation and professional
fees, excluding legal fees, was $272,277 and primarily attributed to an increase
in salaries of $83,450, attributed to the increased number of employees,
and an
increase in cash payments to the Company’s various consultants and auditors of
approximately $176,000 relating to services in the area of accounting, investor
relations, and medical consulting. At June 30, 2005, we had 13 full time
employees as opposed to 2 full time employees at June 30, 2004. Although
we
experienced a significant overall increase in the number of full time employees
the actual increase in salary expense was not reflective of this increase
because the majority of the full time employees did not begin receiving
compensation until April 2005. At June 30, 2005, none of our executives were
covered under employment agreements, thus, other than monthly salaries paid
we
were under no financial obligation for our executive management. We believe,
as
with all our operating expenses, that existing cash resources, together with
proceeds from investments and anticipated revenues from our operations, should
be adequate to fund our salary obligations. During the six month period ended
December 31, 2005, the Company expects that salaries will increase significantly
from the prior year’s comparable reporting period and be paid from existing cash
resources, together with proceeds from investments and anticipated revenues
from
the Company’s operations
The
Company also issued 150,000 warrants, valued at $536,578, to Aegis Securities
Corp., a nonaffiliated consultant, for providing advisory services in connection
with the acquisition of SurgiCount Medical, Inc. The services provided by
Aegis
Securities Corp. included an evaluation of and oversight over completion
of the
transaction. The value of the warrants, along with the purchase price and
direct
costs incurred as a result of the transaction, were capitalized. The 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 six months ended June 30, 2005, was $108,000
as
opposed to no expense during the six months ended June 30, 2004.
Interest,
dividend income and other, net
The
Company had investment income of $40,088 and $215 for the six months ended
and
$11,485 and $50 for the three months ended June 30, 2005 and June 30, 2004,
respectively.
The
increase in investment income for the six and three months ended June 30,
2005
when compared to June 30, 2004, was primarily the result of an increased
amount
of fixed income investments held throughout the period. At March 31, 2005,
the
Company 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 June 30, 2004, the Company’s primary contributing asset to investment
income was its cash balance of $274,498.
Realized
gains (losses) on investments, net
During
the six months ended June 30, 2005, the Company realized net gains of $103,644
from trades of marketable securities.
During
the six months ended June 30, 2004, the Company realized net gains of $500,878
primarily from the disposition of a portion of the Company's equity interest
in
Excelsior and the sale of common shares in Principal Financial Group.
The
Company has relied and continues to rely to a large extent upon proceeds
from
sales of investments rather than investment income to defray a significant
portion of its operating expenses. Because such sales cannot be predicted
with
certainty, the Company attempts to maintain adequate working capital to provide
for fiscal periods when there are no such sales.
Unrealized
gains (losses) on marketable securities, net
Unrealized
gains increased by $43,203 during the six months ended June 30, 2005, primarily
due to the Company’s investment in Tuxis which had an unrealized gain of $69,500
for the period then ended. Additionally, any marketable securities which
had an
unrealized loss at December 31, 2004 had been disposed of by June 30,
2005.
Unrealized
gains increased by $83,744 during the six months ended June 30, 2004 primarily
due to the increase in value of the Company’s Excelsior holdings.
Accumulated
other comprehensive income
Unrealized
gains (losses) on the Company’s investments designated as available-for-sale are
recorded in accumulated other comprehensive income. At June 30, 2005, the
Company classified all of its restricted holdings in IPEX as available-for-sale.
At June 30, 2005, the unrealized gains on the Company’s restricted holdings in
IPEX amounted to $1,158,750. The Company did not hold any investments classified
as available-for-sale at June 30, 2004.
Taxes
The
Company is taxed under Title 26, Chapter 1, Subchapter C of the Internal
Revenue
Code of 2004, as amended, and therefore subject to federal income tax on
the
portion of its taxable income.
At
December 31, 2004, the Company has 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 such
future
income taxes will depend on the Company’s 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 the Company’s common
stock can delay or limit the utilization of existing net operating loss
carryforwards pursuant to the Internal Revenue Code Section 382. The Company
believes that such a change occurred during the year ended December 31, 2004.
Based upon a detail analysis of purchase transactions of our equity securities,
the Company believes that its 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 the Company’s operations due to
terrorism;
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future
regulatory actions and conditions in the Company’s 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
the
Company’s 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.
Upon
the
change of control that occurred in October 2004, we restructured our business
strategy and objective to focus on the medical products, healthcare solutions,
financial services and real estate industries instead of the radio and
telecommunications industries. 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”).
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 is changing 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,
health care solutions, financial services and real estate industries, with
the
goal of generating income from the operations of those businesses. No assurance
can be given that our business strategy or investment 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 will result 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.
A
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 will
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.
We
anticipate that 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
June
30, 2005, patents received in the acquisition of SurgiCount Medical, Inc.,
net
of accumulated amortization, represented $4,576,262, or 38.8%, 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(TM) System, fail to achieve our assumed revenue growth rates
or
assumed operating margin results.
We
invest in non-marketable investment securities which may subject us to
significant impairment charges.
We
invest
in illiquid equity securities acquired directly from issuers in private
transactions. At June 30, 2005, 39% 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 invest in are expected to fail. We review all of our investments
quarterly for indicators of impairment; however, for non-marketable equity
securities, the impairment analysis requires significant judgment to identify
events or circumstances that would likely have a material adverse effect
on the
fair value of the investment. The indicators we use to identify those events
or
circumstances 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 ready
market for these securities existed. Investments identified as having an
indicator of impairment are subject to further analysis to determine if the
investment is other than temporarily impaired, in which case we write the
investment down to its impaired value. When a company 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 three months ended June
30,
2004, 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(TM) System. We
anticipate seeking other acquisitions in furtherance of our plan to acquire
assets and businesses in the medical products, health care solutions, financial
services and real estate 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(TM)
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.
We
may not seek a public listing for our subsidiary Ault Glazer Bodnar Merchant
Capital, Inc. as we disclosed we would in our June 30, 2005 press
release.
Ault
Glazer Bodnar Merchant Capital, Inc. was formed on June 27, 2005 to hold
our
non-patient safety related assets, such as Franklin Capital Properties, LLC,
a
real estate development and management company, and to focus on the financial
services and real estate industries. On June 30, 2005, we issued a press
release
indicating that we would immediately initiate appropriate regulatory filings
to
secure a public listing for Ault Glazer Bodnar Merchant Capital, Inc. early
next
year. A public listing for Ault Glazer Bodnar Merchant Capital, Inc. would
significantly increase the liquidity and potential value of our non-patient
safety related assets. We are currently considering alternative structures
for
our business and we may decide not to pursue a public listing for Ault Glazer
Bodnar Merchant Capital, Inc.
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 Franklin 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 Franklin 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
April 26, 2005, Milton “Todd” Ault, III, our Chief Executive Officer and
Chairman, beneficially owned approximately 27.2% 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
intend to rely on third party manufacturers and suppliers to manufacture
our
Safety-SpongeTM System, the loss of which may interrupt our
operations.
We
have
not begun commercial manufacturing of our Safety-SpongeTM System.
Before we begin to commercially manufacture the system, we intend to enter
into
agreements or relationships with several vendors to commercially produce
the
product. We cannot assure you that we will be able to enter into such agreements
or relationships, maintain such relationships if attained or secure additional
suppliers and manufacturers on favorable terms as needed. Although we believe
the materials used in the manufacture of the Safety-SpongeTM 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(TM) System, must receive 510(k) clearance or PMA approval.
The
Safety-Sponge(TM) 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 are in the process of obtaining
general liability insurance to cover claims up to $1,000,000. This insurance,
if
obtained, 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
operate in a highly competitive market for investment opportunities.
A
large
number of entities compete with us to make the types of investments that
we
make. We compete with a large number of private equity and venture capital
funds, other equity and non-equity based investment funds, investment banks
and
other sources of financing, including traditional financial services companies
such as commercial banks and specialty finance companies. Many of our
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than we do. For example, some competitors
may
have a lower cost of funds and access to funding sources that are not available
to us. In addition, some of our competitors may have higher risk tolerances
or
different risk assessments, which could allow them to consider a wider variety
of investments and establish more relationships than us. There can be no
assurance that the competitive pressures we face will not have a material
adverse effect on our business, financial condition and results of operations.
Also, as a result of this competition, we may not be able to take advantage
of
attractive investment opportunities from time to time, and we can offer no
assurance that we will be able to identify and make investments that are
consistent with our investment objective.
Our
business model depends upon the development of strong referral relationships
with private equity and venture capital funds and investment banking firms.
If
we
fail to maintain our relationships with key firms, or if we fail to establish
strong referral relationships with other firms or other sources of investment
opportunities, we may not be able to achieve our investment objective. In
addition, persons with whom we have informal relationships are not obligated
to
provide us with investment opportunities, and therefore there is no assurance
that such relationships will lead to the origination of equity or other
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 new 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 or will make 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
business of making private equity investments and positioning them for liquidity
events also may be affected by current and future market conditions. The
absence
of an active senior lending environment may slow the amount of private equity
investment activity generally. As a result, the pace of our investment activity
may slow. In addition, 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.
The
Company’s portfolio may 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. The Company has invested a
substantial portion of its 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.
The
Company expects that some of its 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. The Company has been risk seeking rather than
risk averse in its approach to its investments. The Company has in the past
relied, and continues to rely to a large extent, upon proceeds from sales
of
investments rather than investment income or revenue generated from its
operating activities to defray a significant portion of its operating expenses.
Our
investments may be concentrated in one or more industries and if these
industries should decline or fail to develop as expected our investments
will be
lost.
Our
investments may be concentrated in one or more industries. This concentration
will mean that our investments will be particularly dependent on the development
and performance of those industries. Accordingly, our investments may not
benefit from any advantages, which might be obtained with greater
diversification of the industries in which our portfolio companies operate.
If
those industries should decline or fail to develop as expected, our investments
in those industries will be subject to loss.
The
lack of liquidity in our investments may adversely affect our business.
A
portion
of the Company's investments consist of securities acquired directly from
the
issuer in private transactions. They may be subject to restrictions on resale
or
otherwise be illiquid. There may not be an established trading market for
such
securities. Additionally, many of the securities that the Company may invest
in
will not be eligible for sale to the public without registration under the
Securities Act of 1933, which could prevent or delay any sale by the Company
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, the Company may be considered
an
insider by virtue of its board representation and would be restricted in
sales
of such corporation's securities.
We
typically exit our investments when the portfolio company has a liquidity
event
such as a sale, recapitalization, or initial public offering of the company.
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 the investments in the portfolio, the proceeds of
such
liquidation would be significantly less than the value at which we acquired
those investments.
Our
failure to make follow-on investments in our portfolio companies could impair
the value of our portfolio.
Following
its initial investments in portfolio companies, the Company may make additional
investments in such portfolio companies as "follow-on" investments, in order
to
increase its investment in a portfolio company, and exercise warrants, options
or convertible securities that may be acquired in the original financing.
Such
follow-on investments may be made for a variety of reasons including: 1)
to
increase the Company's exposure to a portfolio company, 2) to acquire securities
issued as a result of exercising convertible securities that were purchased
in a
prior financing, 3) to preserve or reduce dilution of the Company's
proportionate ownership in a subsequent financing, or 4) in an attempt to
preserve or enhance the value of the Company's investment.
There
can
be no assurance that the Company will make follow-on investments or have
sufficient funds to make such investments; the Company will have the discretion
to make any follow-on investments as it determines, subject to the availability
of capital resources. The failure to make such follow-on investments may,
in
certain circumstances, jeopardize the continued viability of a portfolio
company
and the Company's initial investment, or may result in a missed opportunity
for
the Company to increase its participation in a successful operation. Even
if the
Company has sufficient capital to make a follow-on investment, we may elect
not
to make the follow-on investment because we may not want to increase our
concentration of risk or because we prefer other opportunities.
We
may not realize gains from our equity investments.
We
primarily invest in the equity securities of other companies. However, 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
acquire controlling equity stakes in 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 revenues from our
real
estate properties and available cash.
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. The rents we expect to receive and the occupancy
levels at our properties may not materialize as a result of adverse changes
in
any of these factors. If our rental revenue fails to materialize, we generally
would expect to have less cash available to pay our operating costs. In
addition, some expenses, including mortgage payments, real estate taxes and
maintenance costs, generally do not decline when the related rents decline.
Our
current real estate holdings are concentrated in Baltimore, Maryland and
Heber
Springs, Arkansas. Adverse circumstances affecting these areas generally
could
adversely affect our business.
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
April 26, 2005, we had 5,276,328 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 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 may cause immediate
and
substantial dilution to our existing stockholders.
The
issuance of shares upon exercise of our outstanding warrants may result in
substantial dilution to the interests of other stockholders since the selling
stockholders may ultimately 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 $0.50 to $14.75. 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 16,909 shares. The last
reported sales price for our common stock on April 26, 2005, was $4.51 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 the American Stock Exchange (“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. As of June 30, 2005, 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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·
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that
a broker or dealer approve a person's account for transactions
in penny
stocks; and
|
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·
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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.
|
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.
The
Company's business activities contain elements of risk. The Company considers
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 the Board of Directors.
The
Company has invested a substantial portion of its 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. The Company expects that some of its 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 typically no public market for the equity interests of the small
companies in which the Company invests, the valuation of the equity interests
in
the Company's portfolio is subject to the estimate of the Company's 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 the Company's portfolio of equity interests may differ significantly
from the values that would be placed on the portfolio if a ready market for
the
equity interests existed. Any changes in valuation are recorded in the Company's
consolidated statements of operations as "Net increase (decrease) in unrealized
appreciation on investments."
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
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin Capital Corp. (n/k/a Patient Safety
Technologies, Inc.), Sunshine Wireless, LLC, and four other defendants
affiliated with Winstar Communications, Inc. On February 25, 2003, the case
against Franklin Capital and Sunshine Wireless was dismissed. However, on
October 19, 2004, the plaintiffs exercised their right to appeal. 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. The initial lawsuit alleged that the Winstar Communications
defendants conspired to commit fraud and breached their fiduciary duty to
the
plaintiffs in connection with the acquisition of the plaintiffs' radio
production and distribution business. The complaint further alleged that
Franklin Capital and Sunshine Wireless, which were co-investors in the
acquisition of the plaintiffs’ radio production and distribution business,
joined the alleged conspiracy in structuring a transaction in which the
plaintiffs’ business was transferred to a venture primarily composed of and
operated by Franklin Capital and Sunshine Wireless and where the proceeds
were
retained by non-bankrupt affiliates of Winstar Communications. The plaintiffs
sought recovery of damages in excess of $10,000,000, costs and attorneys'
fees.
On
April
5, 2005, we entered into a consulting agreement with Health West Marketing
Incorporated, a California corporation ("Health West"). Under the agreement,
Health West agreed to help the Company establish a comprehensive manufacturing
and distribution strategy for the Company's Safety-Sponge(TM) System worldwide.
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 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-Sponge(TM) System into
the
existing acute care supply chain by February 5, 2006, then the Company will
issue Health West the remaining 15,756 shares. 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. These securities will be issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On
May
12, 2005, the Company purchased certain assets from Philip Gatch, our current
Chief Technology Officer, for use in a production and post-production media
content facility. As consideration for the assets the Company issued Mr.
Gatch:
(1) 17,241 shares of common stock; and (2) warrants to purchase 8,621 shares
of
common stock with a three-year term and an exercise price of $5.80 per share.
These securities were issued pursuant to Rule 506 under the Securities Act
of
1933, as amended.
On
April
22, 2005, we entered into a subscription agreement with an accredited investor,
pursuant to which we sold 20,000 shares of common stock and warrants to purchase
an additional 20,000 shares of common stock. We received gross proceeds of
$100,000 from the sale of stock and warrants. These securities were issued
pursuant to Rule 506 under the Securities Act of 1933, as amended.
On
April
28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
Tennessee from two trusts related to Melanie Glazer, Manager of our subsidiary
Franklin Capital Properties, LLC. The purchase price consisted of approximately
$90,000 in cash, 20,444 shares of common stock and 10,221 warrants to purchase
common stock at an exercise price of $4.53 and a 5 year contractual
life.
We
sold
shares of common stock at a price of $5.00 per share. For each two shares
of
common stock purchased we issued one callable warrant and one non-callable
warrant to purchase additional shares of our common stock. In aggregate,
the
accredited investor purchased 20,000 shares of common stock, callable warrants
to purchase 10,000 shares of common stock and non-callable warrants to purchase
10,000 shares of common stock. Pursuant to the subscription agreement, we
granted piggy back registration rights to register the resale of the shares
of
common stock and shares issuable upon exercise of the warrants.
Both
the
callable and non-callable warrants are exercisable for a period of five years
from April 22, 2005 and have an exercise price per share equal to $6.05.
In the
event the closing sale price of our common stock equals or exceeds $7.50
for at
least five consecutive trading days, upon 30 days prior written notice we
may
call the callable warrant at a redemption price equal to $0.01 per share
of
common stock then purchasable pursuant to such warrant. Notwithstanding such
notice, the warrant holder may exercise the callable warrant prior to the
end of
the 30-day notice period.
On
June
13, 2005, we entered into an employment agreement with William B. Horne as
our
Chief Financial Officer. Pursuant to the employment agreement we agreed to
issue
Mr. Horne 26,315 shares of common stock which shares will vest quarterly
over
each year of the agreement. The number of shares to be issued to Mr. Horne
for
the first year of the agreement will be reduced by the value of any unvested
restricted stock that he would be entitled to under his prior consulting
agreement with the Company.
Except
as
expressly set forth above, for transactions exempt from registration under
Rule
506, the individuals and entities to whom we issued securities are unaffiliated
with us. For each of such 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 who were not our executive officers 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.
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Exhibit
Number
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|
Description
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4.1
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$1,000,000
principal amount Promissory Note dated April 7, 2005 issued to
Bodnar
Capital Management, LLC (Incorporated by reference to the Company’s Form
8-K filed with the Securities and Exchange Commission on April
13,
2005)
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4.2
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|
Security
Agreement dated April 7, 2005 in favor of Bodnar Capital Management,
LLC
(Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on April 13, 2005)
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|
4.3
|
|
Form
of non-callable Warrant issued to James Colen (Incorporated by
reference
to the Company’s Form 8-K filed with the Securities and Exchange
Commission on April 26,
2005)
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|
4.4
|
|
Form
of callable Warrant issued to James Colen (Incorporated by reference
to
the Company’s Form 8-K filed with the Securities and Exchange Commission
on April 26,
2005)
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10.1
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|
Consulting
Agreement entered into as of April 5, 2005 by and between Health
West
Marketing Incorporated and Patient Safety Technologies, Inc. (Incorporated
by reference to the Company’s Form 8-K filed with the Securities and
Exchange Commission on April 11, 2005)
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|
10.2
|
|
Subscription
Agreement dated April 22, 2005 between Patient Safety Technologies,
Inc.
and James Colen (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on April 26,
2005)
|
|
10.3
|
|
Employment
Agreement entered into as of June 13, 2005 by and between Patient
Safety
Technologies, Inc. and William B. Horne (Incorporated by reference
to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
June 16, 2005)
|
|
10.4
|
|
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)
|
|
10.5
|
|
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)
|
|
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 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
|
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:
February 13, 2006 |
By: |
/s/
Louis Glazer, M.D., Ph.G
|
| |
Louis
Glazer, M.D., Ph.G
|
| |
Chief
Executive Officer and
Chairman
of the Board
|
| |
|
|
| |
|
|
|
|
| Date:
February 13, 2006 |
By: |
/s/
William B. Horne
|
| |
William
B. Horne
|
| |
Chief
Financial Officer
and
Principal Accounting Officer
|