UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2008
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR THE
TRANSITION PERIOD FROM ________ TO ________
COMMISSION
FILE NUMBER: 001-09727
PATIENT
SAFETY TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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13-3419202
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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43460
Ridge Park Drive, Suite 140, Temecula, CA 92591
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(Address
of principal executive offices) (Zip
Code)
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Registrant’s
telephone number, including area code: (951) 587-6201
Securities registered pursuant to
Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
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Title of each
class
Common
Stock, par value $0.33 per share
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Name of each exchange
on which registered
OTC
Bulletin Board
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
No x .
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x
No ¨ .
Indicate
by check mark, if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
Reporting Company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2) of the Act. Yes ¨
No x .
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant (without admitting that any person whose shares are not
included in such calculation is an affiliate) based on the last reported sale
price of the common stock as reported on the OTC.BB on June 30, 2008 was
approximately $18.5 million.
The
number of outstanding shares of the registrant’s common stock, par value $0.33
per share, as of March 31, 2009 was 17,197,872.
PATIENT
SAFETY TECHNOLOGIES, INC.
FORM
10-K FOR THE FISCAL YEAR
ENDED
DECEMBER 31, 2008
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Forward-looking
Statements
This
Annual Report on Form 10-K, including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, contains forward-looking
statements regarding future events and our future results that are subject to
the safe harbors created under the Securities Act of 1933 and the Securities
Exchange Act of 1934. These statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate and the beliefs and assumptions of our management. We use
words such as “anticipate”, “believe”, “continue”, “could”, “estimate”,
“expect”, “goal”, “intend”, “may”, “plan”, “project”, “see”, “should”, “target”,
“will”, “would” and variations of such words and similar expressions to identify
forward-looking statements. In addition, statements that refer to
projections of earnings, revenue, costs or other financial items; anticipated
growth and trends in our business or key markets; future growth and revenue from
our products; future economic conditions and performance; anticipated
performance of products or services; plans, objectives and strategies for future
operations; and other characterizations of future events or circumstances, are
forward-looking statements. Readers are cautioned that these
forward-looking statements are only predictions and are subject to risks,
uncertainties and assumptions that are difficult to predict, including those
identified under the heading “Risk Factors” in Item 1A, elsewhere in this report
and our other filings with the SEC. Therefore, actual results may
differ materially and adversely from those expressed in any forward-looking
statements. We undertake no obligation to revise or update any
forward-looking statements for any reason.
Company
Overview
Organizational
History
Patient
Safety Technologies, Inc. (referred to in this report as the “Company,”
“we,”
“us,” and “our”)
(formerly known as Franklin Capital Corporation) is a Delaware
corporation. Currently we conduct out operations through a single
wholly-owned operating subsidiary: SurgiCount Medical, Inc. (“SurgiCount”), a
California corporation.
The
Company was incorporated on March 31, 1987, under the laws of the state of
Delaware. Beginning in July 1987 until March 31, 2005 we operated as an
investment company registered pursuant to the Investment Company Act of 1940, as
amended (the “1940
Act”). From July 2005 through August 2007, the Company’s
wholly-owned subsidiary, Automotive Services Group, Inc., a Delaware
corporation, held the Company’s investment in Automotive Services Group, LLC
(“ASG”), its
wholly-owned express car wash subsidiary. During 2007, all assets of
Automotive Services Group, Inc. were sold.
SurgiCount
Medical, Inc., developer of the Safety-Sponge™ System, was acquired in 2005 to
focus our efforts in the medical patient safety markets.
SurgiCount
SurgiCount’s
Safety-Sponge System is designed to reduce the number of retained sponges and
towels unintentionally left in patients during surgical procedures by allowing
faster and more accurate counting of surgical sponges. The SurgiCount
Safety-SpongeSystem is a patented turn-keyline of modified surgical sponges,
SurgiCounter™ scanners, and software file and database elements integrated to
form a comprehensive counting and documentation system. Our business
model consists of selling our unique surgical sponge products and selling or
renting the scanners and software to hospitals. We use an exclusive
supplier to manufacture our sponge products and we sell through a direct sales
force for initial hospital conversions and through distributor organizations for
the ongoing supply of sponge products to customers.
The
Safety-Sponge System works much like a grocery store checkout process: Every
surgical sponge and towel is affixed with a unique inseparable two-dimensional
data matrix bar code and used with a SurgiCounter scanner to scan and record the
sponges at the initial and final counts during a surgical procedure. Because
each sponge is identified with a unique code, a SurgiCounter will not allow the
same sponge to be counted more than one time. When counts have been completed at
the end of a procedure, the system stores a documented electronic record of all
sponges used and removed and can output recordsto a
hospitalelectronic records system. The Safety-Sponge System is the first FDA
510k approved computer assisted sponge counting system.
Healthcare
Patient Safety Industry
We
believe that the healthcare delivery system is highly receptive to
cost-effective medical solutions which can quickly lower costs, reduce liability
and eliminate preventable errors. Increased litigation and a renewed focus on
patient safety by regulators is spurring demand for medical device
solutions.
The
medical community recognizes the importance of improving patient safety, not
only to enhance the quality of care, but also to help manage medical costs and
related litigation costs. We believe that healthcare professionals will embrace
solutions like the SurgiCount system that both reduce costs and eliminate
medical errors.
We are
dedicated to leading this effort through the development and introduction of the
patented Safety-Sponge™ System, which we believe will allow us to capture a
significant portion of United States surgical sponge sales. In addition, we
believe that our Safety-Sponge™ System could save over $750 million annually in
retained sponge litigation and other costs. The estimated size of the surgical
sponge market and actual savings derived from utilizing the Safety-Sponge™
System from retained sponge litigation is based on management’s estimates and
assumptions made by management.
Customers
and Distribution
We
currently target our sales to hospitals in the US that perform surgery in
multiple operating rooms, OB/GYN departments and other surgical
locations. Our sales process typically involves multiple stakeholders
in a hospital institution. Representatives from OR management, risk
management, surgeons, medical and nursing officers, and financial management
evaluate the economics and effectiveness of our system. We typically
will also conduct a product validation event in which a subset of hospital
clinicians are trained and use the system on a suitable number of cases to
understand the functionality and integration requirements to adopt use of the
SurgiCount system hospitalwide. Assuming a positive outcome of the
validation event, the entire hospital OR staff must then be trained to use the
system prior to the hospitalwide adoption. We currently estimate that
the validation process within prospect institutions range between two to six
months before a final decision is made to implement our
Safety-SpongeSystem.
On
November 14, 2006, SurgiCount entered into a Supply Agreement withCardinal
Health, Inc. ("Cardinal").
Pursuant to the agreement, Cardinal became the exclusive distributor of
SurgiCount's products in the United States, with the exception that SurgiCount
may sell its products to one other specified hospital supply company, solely for
its sale/distribution to its hospital customers. Under the agreement, SurgiCount
agrees to maintaina specified fill rate on all orders for products. The term of
the agreement is 36 months, unless earlier terminated as set forth therein.
Otherwise, theagreement automatically renews for successive 12 month
periods.
SurgiCount
may not assign its interest under the agreement without Cardinal's prior written
consent. Further as part of the agreement, SurgiCount executed a Continuing
Guaranty agreeing, among other things, to indemnify Cardinal for any loss or
claim a) for property damage on account of any SurgiCount product except as may
be caused by gross negligence or reckless disregard on the part of Cardinal or
any of its employees, or b) arising on account of any infringement by any
SurgiCount product of any patent, trademark or other proprietary right of any
other party
In
addition, the agreement provides that if we decide to divest, spin-off or
otherwise sell SurgiCount or any material assets of SurgiCount (such as
intellectual property) during the term of the agreement, Cardinal shall have a
right of first refusal to purchase SurgiCount.
Product
Development
SurgiCount
received confirmation from the U.S. Food and Drug Administration (“FDA”)
that the modification to surgical sponges required by the
Safety-Spongeline did not warrant a new product
listing. In March 2006, the Company received 510(k) clearance to
market and sell its patented Safety-Sponge™ System. The
Safety-SpongeSystem is the first computer-assisted sponge counting system
cleared by the FDA.
We use
third party developers to create, document and test our proprietary software
that operates in the SurgiCounter scanners and interfaces with our custom
Citadel™ desktop application. The scanner software controls the
individual procedure with easy-to-learn and easy-to-use touchscreen or bar code
driven menu items. The Citadel database software typically resides on
a PC environment and
consolidates
individual case data from the scanner software in a central database for
departmental statistics, documented outcomes records and output to patient
electronic records systems.
We also
seek qualified input from professionals in the healthcare profession as well as
University hospitals to guide us in the definition, development and testing our
products. We meet on an as needed basis to discuss medical,
technology and development issues. Through direct contracts and
sponsorship of studies, recommendations from these professionals have improved
various aspects of the Safety-SpongeSystem. Examples where
recommendations were utilized include: the ideal location for labels, label
coarseness and thickness, improved operating room procedures, label structure
and scanner functionality.
In 2005
we entered into a clinical trial agreement with Brigham and Women's Hospital,
the teaching affiliate of Harvard Medical School, relating to SurgiCount's
Safety-Sponge TM
System. Under terms of the agreement, Brigham and Women's
Hospital collected data on how the Safety-Sponge System saves time, reduces
costs and increases patient safety in the operating room. The clinical study
also was intended to provide clear guidance and instruction to hospitals on
techniques to easily integrate the Safety-SpongeSystem into operating room
protocols. Brigham and Women's Hospital received a non-exclusive
license to use the Safety-SpongeSystem, while we will own all technical
innovations and other intellectual properties derived from the
study. We provided a research grant to Brigham and Women’s Hospital
over the course of the clinical trial in the aggregate amount of $431
thousand. The final amount due under the terms of the clinical trial
agreement, of $68 thousand, was paid in February 2008.
Researchers
at Brigham and Women’s Hospital have found that using bar-code technology to
augment the counting of surgical sponges during an operative procedure increases
the detection rate of miscounted and/or misplaced sponges. Previous
studies have shown that counts are falsely reported as correct in the majority
of cases of retained sponges and instruments, resulting in the surgical team
believing that all the sponges are accounted for. In this study,
researchers compared the traditional counting protocol with or without
augmentation by the bar-code technology in 300 general surgery operations. The
researchers found that our technology can substantially reduce the incidence of
retained surgical sponges at a lower cost than the legal/medical costs of
retained events.
Manufacturing
SurgiCount
entered into an agreement on August 17, 2005 for A Plus International, Inc., a
major supplier of surgical sponge products to be the exclusive manufacturer and
provider of the Safety-Sponge™ products, which includes bar coded gauze sponges,
bar coded laparotomy sponges, bar coded O.R. towels and bar coded specialty
sponges. Services to be provided by A Plus include manufacturing,
packaging, sterilization, logistics and all related quality and regulatory
compliance.During the term of the agreement, A Plus agreed not to manufacture,
distribute or otherwise supply any bar coded sponges for any third
party. While we believe the manufacturing capacity of A Plus will be
sufficient to meet our expected demand, in the event A Plus cannot meet our
requirements the agreement allows us to retain additional providers of the
Safety-Sponge™ products.
On
January 29, 2007, we entered into an Exclusive License and Supply Agreement (the
“Supply
Agreement”) with A Plus. Pursuant to the Supply Agreement, A
Plus was granted the exclusive, world-wide license to manufacture and import
SurgiCount's products, including the right to sublicense to the extent necessary
to carry out the grant. The pricing schedule shall remain at its
current price for the first three (3) years of the Supply Agreement; thereafter,
the pricing schedule shall be based upon the Cotlook Index and the RMB exchange
rate. The term of Supply Agreement is eight years.
In
conjunction with entering into the Supply Agreement on January 29, 2007, the
Company entered into a subscription agreement with A Plus, pursuant to which the
Company sold to A Plus 800 thousand shares of its common stock and warrants to
purchase an additional 300 thousand shares of its common stock. The Company
received gross proceeds of $500 thousand in cash and a $500 thousand deposit
against future shipments. The deposit was fully utilized at December 31, 2007.
The warrants have a term of five (5) years and an exercise price equal to $2.00
per share.
Research and
Development
Research
and development activities are important to our business. We use contract firms
with suitable expertise for much of the research and development activities
related to improving our existing products or expanding our intellectual
property to similar products. We incurred costs of $271 thousand and $133
thousand, respectively during the fiscal years ended December 31, 2008 and 2007
relating to the development of new products, the improvement of existing
products, technical support of products and compliance with governmental
regulations.
Patents and
Trademarks
Our
patents and trademarks are protected by registration in the United States and
other countries where our products are marketed.
We
currently own patents issued in the United States and Europe related to the
Safety-SpongeSystem. This is covered by patent #5,931,824 registered with the
United States Patent and Trademark Office and patent #1 032 911 B1 registered
with the European Patent Office, which permits the holder to label or identify a
dressing with a unique identifier. Patent #5,931,824 and #1 032 911 B1 will
expire in August of 2019 and March of 2017, respectively. U.S Patent #5,931,824
recently underwent a reexamination proceeding in the U.S. Patent Office.
During 2007, the U. S. Patent Office granted a reexamination certificate
affirming the validity of the reexamined patent with certain amendments to the
claims.
Competition
There are
two known companies that compete with SurgiCount's Safety-Sponge System:
RF Surgical and ClearCount Medical, providing products using radio frequency
identification (“RF”) technology to identify surgical sponges with RF chips
embedded.
Regulation
of the Medical Products and Healthcare Industry
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. Class I and II
devices also have subsets of “exempt devices” which are exempt from the PMA
approval requirement subject to certain limitations. 21 CFR 878.4450
(”Gauze/Sponge, Internal, X-Ray Detectable”) is the defined device group of the
Safety-Sponge line of products. This defined device group is specifically
denoted as “exempt” from the premarket notification process. SurgiCount
submitted specific information on its Safety-Sponge product directly to the CDRH
and received confirmation of the 501(k) exempt status of this line of
products.
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 medical device
advertising for appropriate claims of effectiveness.
The
regulatory agencies under whose purview we operate have administrative powers
that may subject us to such actions as product recalls, seizure of products and
other civil and criminal sanctions. In some cases we may deem it advisable to
initiate product recalls voluntarily. We are also subject to the Safe Medical
Devices Act of 1990, which imposes certain reporting requirements on
distributors in the event of an incident involving serious illness, injury or
death caused by a medical device.
In
addition, sales and marketing practices in the health care industry have come
under increased scrutiny by government agencies and state attorney generals and
resulting investigations and prosecutions carry the risk of significant civil
and criminal penalties.
Changes
in regulations and healthcare policy occur frequently and may impact our
results, growth potential and the profitability of products we sell. There can
be no assurance that changes to governmental reimbursement programs will not
have a material adverse effect on the Company and our operations.
Investments
Our
investment portfolio, also known as our non-core assets, as of December 31, 2008
and 2007, is valued at $667 thousand and is composed of our investment in Alacra
Corporation.
Alacra
Corporation
At
December 31, 2008 and 2007, we had an investment in Alacra Corporation (“Alacra”), valued at $667
thousand, which represents 8.4% and 8.2% of our total assets at December 31,
2008 and 2007, respectively. On April 20, 2000, we purchased $1.0 million worth
of Alacra Series F Convertible Preferred Stock. We have the right, subject to
Alacra having the available cash, to have the preferred stock redeemed by Alacra
over a period of three years for face value plus accrued dividends beginning on
December 31, 2006. Pursuant to this right, in December 2006 we informed
management of Alacra that we were exercising our right to put back one-third of
our preferred stock. Alacra completed the initial redemption of one-third of our
preferred stock in December 2007. We received proceeds of $333
thousand from this redemption, which accounted for the entire amount of the
decrease in value of our Alacra investment in December 2007. We continue to
exercise our right to put back our remaining preferred stock to
Alacra. In December 2008Alacra informed the Company that their Board
of Directors had authorized the preferred stock redemption for the second
one-third of our preferred stock and that they expected the redemption to occur
in the second or third quarter of 2009. As there is no readily
determinable fair value of the Alacra Series F Convertible Preferred
Stock, we account for this investment under the cost method.
Real
Estate Investments
In 2008,
we disposed of all investments in real estate by completing the sale of the
undeveloped land in Springfield, Tennessee for net proceeds of $91 thousand,
which resulted in a realized loss of $91 thousand. In March 2008, we
completed the sale of the undeveloped land in Heber Springs for net proceeds of
$226 thousand.
Code
of Business Conduct and Ethics
Each
executive officer and director as well as every employee of the Company is
subject to the Company’s Code of Business Conduct and Ethics (the “Code of
Ethics” ) which was adopted by the Board of Directors on November 11,
2004 and is filed as Appendix D to the definitive proxy materials filed with the
SEC on March 2, 2005. The Code of Ethics applies to all directors, officers and
certain employees of the Company, including the chief executive officer, chief
financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the Code of Ethics may be obtained,
without charge, upon a written request mailed to: Patient Safety Technologies,
Inc., c/o Corporate Secretary, 43460 Ridge Park Drive, Suite 140, Temecula, CA
92590.
Available
Information
Copies of
our quarterly reports on Form 10-Q, annual reports on Form 10-K and current
reports on Form 8-K, and any amendments to the foregoing, will be provided
without charge to any shareholder submitting a written request to the Corporate
Secretary, Patient Safety Technologies, Inc., 46430 Ridge Park Drive, Suite 140,
Temecula, CA 92590 or by calling (951) 587-6201. You may also obtain the
documents filed by Patient Safety Technologies, Inc. with the SEC for free at
the Internet website maintained by the SEC at www.sec.gov. The Company does not
currently make these documents available on its website.
An
investment in our securities involves a high degree of risk. Before you invest
in our securities you should carefully consider the risks and uncertainties
described below and the other information in this prospectus. Each of the
following risks may materially and adversely affect our business, results of
operations and financial condition. These risks may cause the market price of
our common stock to decline, which may cause you to lose all or a part of the
money you paid to buy our securities. We provide the following cautionary
discussion of risks, uncertainties and possible inaccurate assumptions relevant
to our business and our products. These are factors that we think could cause
our actual results to differ materially from expected results.
Risks
relating to our business and structure
We
have just begun to generate sales from our safety-sponge system and the revenues
have just now begun to represent a significant source of revenue for our
Company.
During
the years ended December 31, 2008 and 2007 sales from our Safety-Sponge System
amounted to $2.8 million and $1.1 million, respectively. Our
future success is dependent on our ability to develop our patient-safety related
assets into a successful business, which depends upon wide-spread acceptance of
and commercializing our Safety-Sponge System. None of these factors is
demonstrated by our historic performance to date and there is no assurance we
will be able to accomplish them in order to sustain our
operations.
As a result, you should not rely on our historical results of operations as an
indication of the future performance of our business.
We
intend to undertake additional financings to meet our growth, operating and/or
capital needs, which may result in dilution to your ownership and voting
rights.
We
anticipate that revenue from our operations for the foreseeable future will not
be sufficient to meet our growth, operating and/or capital requirements. We
believe that in order to have the financial resources to meet our operating
requirements for the next twelve months we will need to undertake additional
equity or debt financings to allow us to meet our future growth, operating
and/or capital requirements. We currently have no commitments for any such
financings. Any equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictive covenants or other adverse
terms with respect to raising future capital and other financial and operational
matters. We may not be able to obtain additional financing in sufficient amounts
or on acceptable terms when needed, which could adversely affect our operating
results and prospects. If we fail to arrange for sufficient capital in the
future, we may be required to reduce the scope of our business activities until
we can obtain adequate financing.
Failure
to properly manage our potential growth would be detrimental to our
business.
Any
growth in our operations will place a significant strain on our resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employee base and
maintain close coordination among our technical, accounting, finance, marketing,
and sales staffs. We cannot guarantee that we will be able to do so, or that if
we are able to do so, we will be able to effectively integrate them into our
existing staff and systems. We may fail to adequately manage our anticipated
future growth. We will also need to continue to attract, retain and integrate
personnel in all aspects of our operations. Failure to manage our growth
effectively could hurt our business.
If
the protection of our intellectual property rights is inadequate, our ability to
compete successfully could be impaired.
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
have experienced turnover in our chief executive officer position and if we
continue with frequent executive turnover we may have difficulty implementing
our business strategy.
In
January 2007, Milton “Todd” Ault, III resigned as our Chief Executive Officer
and Chairman, and our Board of Directors appointed William B. Horne as Chief
Executive Officer. In April 2008, our Board of Directors appointed William
Adams, as our President and Chief Executive Officer. In January 2009,
Mr. Adams resigned, and our Board of Directors appointed David I. Bruce as
our President and Chief Executive Officer If we are not able to
attain stability of our Chief Executive Officer position we may have difficulty
implementing our business strategy.
Auditors’ opinion
includes going concern explanatory paragraph.
The
report of our independent registered public accounting firm dated April 15, 2009
for the years ended December 31, 2008 and 2007 includes a going concern
explanatory paragraph which states that our significant operating losses and
working capital deficit cause substantial doubt about the Company’s ability to
continue as a going concern.
Risks
related to our medical products and healthcare-related business
We
rely on a third party manufacturer and supplier to manufacture our safety-sponge
system, the loss of which may interrupt our operations.
On
January 29, 2007, SurgiCount entered into an agreement for A Plus International
Inc. to be the exclusive manufacturer and provider of SurgiCount's Safety-Sponge
products and granted A Plus the exclusive, world-wide license to manufacture and
import SurgiCount's products including the right to sublicense to the extent
necessary to carry out the grant. While our relationship with A Plus
International Inc. is currently on good terms, we cannot assure you that we will
be able to maintain our relationship with A Plus International Inc. or secure
additional suppliers and manufacturers on favorable terms as needed. Although we
believe the raw materials used in the manufacture of the Safety-Sponge System
are readily available and can be purchased and/or produced by multiple vendors,
the loss of our agreement with A Plus International Inc., deterioration of our
relationship with A Plus International Inc., changes in the specifications of
components used in our products, or our failure to establish good relationships
with major new suppliers or manufacturers as needed, could have a material
adverse effect on our business, financial condition and results of
operations.
The
unpredictable product cycles of the medical device and healthcare-related
industries and uncertain demand for products could cause our revenues to
fluctuate.
Our
target customer base includes hospitals, physicians, nurses and clinics. The
medical device and healthcare-related industries are subject to rapid
technological changes, short product life cycles, frequent new product
introductions and evolving industry standards, as well as economic cycles. If
the market for our products does not grow as rapidly as our management expects,
our revenues could be less than expected. We also face the risk that changes in
the medical device industry, for example, cost-cutting measures, changes to
manufacturing techniques or production standards, could cause our manufacturing,
design and engineering capabilities to lose widespread market acceptance. If our
products do not gain market acceptance or suffer because of competing products,
unfavorable regulatory actions, alternative treatment methods or cures, product
recalls or liability claims, they will no longer have the need for our products
and we may experience a decline in revenues. Adverse economic conditions
affecting the medical device and healthcare-related industries, in general, or
the market for our products in particular, could result in diminished sales,
reduced profit margins and a disruption in our business.
We
are subject to changes in the regulatory and economic environment in the
healthcare industry, which could adversely affect our business.
The
healthcare industry in the United States continues to experience change. In
recent years, the United States Congress and state legislatures have introduced
and debated various healthcare reform proposals. Federal, state and local
government representatives will, in all likelihood, continue to review and
assess alternative healthcare delivery systems and payment methodologies, and
ongoing public debate of these issues is expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices, the
relative costs associated with doing business and the amount of reimbursement by
both government and third-party payors to persons providing medical services. In
particular, the healthcare industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on healthcare companies to
reduce healthcare costs. Managed care and other healthcare provider
organizations have grown substantially in terms of the percentage of the
population in the United States that receives medical benefits through such
organizations and in terms of the influence and control that they are able to
exert over an increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow, increasing the
ability of these organizations to influence the practices and
pricing
involved in the purchase of medical devices, including our products, which is
expected to exert downward pressure on product margins. Both short-and long-term
cost containment pressures, as well as the possibility of continued regulatory
reform, may have an adverse impact on our business, financial condition and
operating results.
We
are subject to government regulation in the United States and abroad, which can
be time consuming and costly to our business.
Our
products and operations are subject to extensive regulation by numerous
governmental authorities, including, but not limited to, the FDA and state and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. The FDA administers the Food, Drug and
Cosmetics Act (the "FDC ACT"). Under the FDC Act, most medical devices must
receive FDA clearance through the Section 510(k) notification process ("510(K)")
or the more lengthy premarket approval ("PMA") process before they can be sold
in the United States. The Safety-Sponge System has received 501(k) clearance to
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. The process of obtaining such clearances
or approvals can be time-consuming and expensive, and there can be no assurance
that all clearances or approvals sought by us will be granted or that FDA review
will not involve delays adversely affecting the marketing and sale of our
products. FDA's quality system regulations also require companies to adhere to
certain good manufacturing practices requirements, which include testing,
quality control, storage, and documentation procedures. Compliance with
applicable regulatory requirements is monitored through periodic site
inspections by the FDA. In addition, we are required to comply with FDA
requirements for labeling and promotion. The Federal Trade Commission also
regulates most device advertising.
In
addition, international regulatory bodies often establish varying regulations
governing product testing and licensing standards, manufacturing compliance,
such as compliance with ISO 9001 standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. Our inability or failure to
comply with the varying regulations or the imposition of new regulations could
restrict our ability to sell our products internationally and thereby adversely
affect our business, financial condition and operating results.
Failure
to comply with applicable federal, state or foreign laws or regulations could
subject us to enforcement actions, including, but not limited to, product
seizures, injunctions, recalls, possible withdrawal of product clearances, civil
penalties and criminal prosecutions, any one or more of which could have a
material adverse effect on our business, financial condition and operating
results. Federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes, as are
administrative interpretations of regulatory requirements. Any such changes may
have a material adverse effect on our business, financial condition and
operating results.
We
are subject to intense competition in the medical products and health-care
related markets, which could harm our business.
The
medical products and healthcare solutions industry is highly competitive. We
compete against other medical products and healthcare solutions companies, some
of which are much larger and have significantly greater financial resources,
management resources, research and development staffs, sales and marketing
organizations and experience in the medical products and healthcare solutions
industries than us. In addition, these companies compete with us to acquire
technologies from universities and research laboratories. We also compete
against large companies that seek to license medical products and healthcare
solutions technologies for themselves. We cannot assure you that we will be able
to successfully compete against these competitors in the acquisition,
development, or commercialization of any medical products and healthcare
solutions, funding of medical products and healthcare solutions companies or
marketing of our products and solutions. If we cannot compete effectively
against our competitors, our business, financial condition and results of
operations may be materially adversely affected.
We
may be subject to product liability claims and if our insurance is not
sufficient to cover product liability claims our business and financial
condition will be materially adversely affected.
The
nature of our business exposes us to potential product liability risks, which
are inherent in the distribution of medical equipment and healthcare products.
We may not be able to avoid product liability exposure, since third parties
develop and manufacture our equipment and products. If a product liability claim
is successfully brought against us or any third party manufacturer then we would
experience adverse consequences to our reputation, we might be required to pay
damages, our insurance, legal and other expenses would increase, we might lose
customers and/or suppliers and there may be other adverse results.
Through
our subsidiary SurgiCount Medical, Inc. we have general liability insurance to
cover claims up to $3,000,000. In addition, A Plus International, Inc., the
manufacturer of our surgical sponges, maintains general liability insurance for
claims up to $4,000,000. These general liability insurance policies
cover product liability claims against SurgiCount Medical, Inc. There can be no
assurance that one or more liability claims will not exceed the coverage limits
of any of such policies. If we or our manufacturer are subjected to product
liability claims, the result of such claims could harm our reputation and lead
to less acceptance of our products in the healthcare products market. In
addition, if our insurance or our manufacturer's insurance is not sufficient to
cover product liability claims, our business and financial condition will be
materially adversely affected.
Risks
related to our investments
We
have investments in non-marketable investment securities which may subject us to
significant impairment charges.
We have
investments in illiquid equity securities acquired directly from issuers in
private transactions. At December 31, 2008, 8.4% of our consolidated assets were
comprised of investment securities, which are illiquid
investments. Investments in illiquid, or non-marketable, securities
are inherently risky and difficult to value. In the event the value
of the securities we hold are deemed impaired this could have a material impact
on our financial condition. We review our investment in
non-marketable securities on an annual basis for indicators of impairment,
however, for non-marketable equity securities, the impairment analysis required
significant judgment to identify events or circumstances that would likely have
a material adverse effect on the fair value of the
investment. 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. We account for our investments in non-marketable investment
securities on a cost basis. . Since a significant amount of our
assets are comprised of non-marketable investment securities, any future
impairment charges from the write down in value of these securities will most
likely have a material adverse affect on our financial condition.
Risks
related to our common stock
Our
common stock is subject to price volatility.
The
market price of our common stock has been, and is likely to continue to be,
highly volatile. Our stock price could be subject to wide
fluctuations in response to various factors beyond our control,
including:
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actual or anticipated
quarterly variations in operating
results;
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announcements of technological
innovations, new products or pricing by our
competitors;
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the rate of adoption by
hospitals of SurgiCount Medical technology in targeted
markets;
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the timing and extent of
technological advancements, patent and regulatory
approvals;
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the impact of acquisitions,
strategic alliances, and other significant corporate
events;
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anything other
than unqualified reports by our outside
auditors;
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the sales of our common stock
by affiliates or other shareholders with large holdings;
and
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general economic and market
conditions, including the recent instability in the financial markets and
global economy.
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Our
future operating results may fall below the expectations of securities industry
analysts or investors. Any such shortfall could result in a
significant decline in the market price of our common stock. In
addition, the stock market has at times experienced significant price and volume
fluctuations that have affected the market prices of the stock of many medical
device companies that often have been unrelated to the operating performance of
such companies. These broad market fluctuations may directly
influence the market price of our common stock.
Our
common stock is subject to the "penny stock" rules of the SEC, which would make
transactions in our common stock cumbersome and may reduce the value of an
investment in our stock.
The SEC
has adopted Rule 3a51-1 which establishes the definition of a "penny stock," for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, Rule 15g-9 require:
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that
a broker or dealer approve a person's account for transactions in penny
stocks; and
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the
broker or dealer receive from the investor, a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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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.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
We
depend upon our SurgiCount Medical product line, which is in its early stages of
market acceptance.
Our
future is dependent upon the success of the SurgiCount Medical product line and
similar products that are based on the same core technology. The
market for these products is in a relatively early stage of development, less
than 1% penetrated, and may never fully develop as we expect. The
long-term commercial success of the SurgiCount Medical product line requires
widespread acceptance of our products as safe, efficient and
cost-effective. Widespread acceptance would represent a significant
change in medical practice patterns.
The
capital markets are currently experiencing a period of dislocation and
instability, which has had and could continue to have a negative impact on the
availability and cost of capital.
The
general disruption in the U.S. capital markets has impacted the broader
financial and credit markets and reduced the availability of debt and equity
capital for the market as a whole. These conditions could persist for
a prolonged period of time or worsen in the future. Our ability to
access the capital markets may be restricted at a time when we would like, or
need, to access those markets, which could have an impact on our flexibility to
react to changing economic and business conditions. The resulting
lack of available credit, lack of confidence in the financial sector, increased
volatility in the financial markets and reduced business activity could
materially and adversely affect our business, financial condition, results of
operations and our ability to obtain and manage our liquidity. In
addition, the cost of debt financing and the proceeds of equity financing may be
materially adversely impacted by these market conditions.
To
service or retire our debt when and as due, we will require a significant amount
of cash. Our ability to generate cash depends on many factors beyond
our control.
Our
ability to service our debt and to fund our operations and planned capital
expenditures will depend on our operating performance. This, in part,
is subject to prevailing economic conditions and to financial, business and
other factors beyond our control. If our cash flow from operations is
insufficient to fund our debt service obligations, we may be forced to reduce or
delay capital expenditures, sell assets, obtain additional equity capital or
indebtedness or refinance or restructure our debt. These alternative
measures may not be successful and may not permit us to meet our scheduled debt
service obligations. In the absence of such operating results and
resources, we could face substantial cash flow problems and might be required to
sell material assets or operations to meet our debt service and other
obligations. We cannot assure you as to the timing of such sales or
the proceeds that we could realize from such sales or if additional debt or
equity financing would be available on acceptable terms, if at all.
Our
quarterly operating results frequently vary due to factors outside our
control.
We have
experienced and expect to continue to experience fluctuations in quarterly
operating results due to a number of factors. We cannot control many
of these factors, which include the following:
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the timing and number of new
competing product
introductions;
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the market acceptance of, and
changes in demand for our
products;
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the impact of any changes in
generally accepted accounting
principles;
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the loss of, or ordering
delays by any of our strategic
partners;
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product returns or bad debt
write-offs;
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changes in pricing policies by
our competitors;
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The timing of customer orders
and shipments;
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you should not rely on period-to-period comparisons of our financial results as
indications of future results.
Our
future financial results could be adversely impacted by asset impairments or
other charges.
Statement
of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets” requires that we test goodwill and other intangible assets
determined to have indefinite lives for impairment on an annual, or on an
interim basis if certain events occur or circumstances change that would reduce
the fair value of a reporting unit below its carrying value or if the fair value
of intangible assets with indefinite lives falls below their carrying
value. In addition, under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, long-lived assets with finite lives are
tested for impairment whenever events or changes in circumstances indicate that
its carrying value may not be recoverable. A significant decrease in
the fair value of a long-lived asset, an adverse change in the extent or manner
in which a long-lived asset is being used or in its physical condition or an
expectation that a long-lived asset will be sold or disposed of significantly
before the end of its previously estimated life are among several of the factors
that could result in an impairment charge.
We
evaluate intangible assets determined to have indefinite lives for
recoverability whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition, sales or disposition of
a significant portion of the business, or other factors such as a decline in our
market value below our book value for an extended period of time.
We
evaluate the estimated lives of all intangible assets on an annual basis, to
determine if events and circumstances continue to support an indefinite useful
life or the remaining useful life, as applicable, or if a revision in the
remaining period of amortization is required. The amount of any such
annual or interim impairment charge could be significant, and could have a
material adverse effect on reported financial results for the period in which
the charge is taken.
We
may need additional capital, which may be unavailable.
The
commercialization of our current product line, acquisition of complimentary
technologies and the development and commercialization of any additional
products may require greater expenditures than expected in our current business
plan. Our capital requirements will depend on numerous factors,
including:
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our rate of sales growth—fast
growth may actually increase our need for additional capital to hire
additional staff, purchase additional inventory, and finance the increase
in accounts receivable;
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the level of resources that we
devote to the development, manufacture and marketing of our products—any
decision we make to improve, expand, acquire complimentary technologies or
simply change our process, products or technology may require increased
funds;
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facilities requirements—as we
grow we need additional manufacturing, warehousing and administration
facilities and the costs of the facilities will be borne before
substantially increased revenue from growth would
occur;
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market acceptance and demand
for our products—although growth may increase our capital needs, the lack
of growth and continued losses would also increase our need for capital;
and
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customer financing
strategies—our attempt to accelerate the purchasing processes by offering
internal financing programs and by providing purchasers with extended
payment terms would consume additional
capital.
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We may be
unable to predict accurately the timing and amount of our capital
requirements. We may be required to raise additional funds through
public or private financing, bank loans, collaborative relationships or other
arrangements earlier than expected. As a result, additional funding
may not be available at attractive terms, or at all. If we cannot
obtain additional capital when needed, we may be forced to agree to unattractive
financing terms, to change our method of operation or to curtail our
operations.
Technological
change is difficult to predict and new product transitions are difficult to
manage.
Our
product line has required, and any future products will require, substantial
development efforts and compliance with governmental clearance or approval
requirements. We may encounter unforeseen technological or scientific
problems that force abandonment or substantial change in the development of a
specific product or process. In addition, as we introduce new
products and product enhancements, we may not be able to effectively segregate
or transition from existing products which could negatively impact revenue,
gross margin and overall profitability.
We
depend on management and other key personnel.
We are
dependent on a limited number of key management, sales and technical
personnel. The loss of one or more of our key employees may hurt our
business if we are unable to identify other individuals to provide us with
similar services. We do not maintain “key person” insurance on any of
our employees. We face intense competition in our recruiting
activities and may not be able to attract or retain qualified
personnel. We have historically used stock options or shares of
restricted stock as key components of our total employee compensation
program. In recent periods, many of our employee stock options have
had exercise prices in excess of our stock price, which reduces their value to
employees and could affect our ability to retain and attract present and
prospective employees. In addition, the implementation of SFAS No.
123 (revised 2004), Share-Based Payment (“SFAS 123R”), has required us to record
a charge to earnings for employee stock option grants and other equity
incentives which has changed our compensation strategy. Our ability
to retain our existing personnel and attract additional highly qualified
personnel may impact our future success.
We
must maintain and develop strategic relationships with third parties to increase
market penetration of our product lines.
We
distribute our products through distributors and through our direct sales
force. We may enter into similar agreements with other companies and
establish technology partnerships with other medical product, distribution and
technology companies. Successfully managing the interaction of our
direct sales force and strategic distribution partners is a complex
process. Widespread acceptance of our SurgiCountMedcialproducts may
be dependent on our establishing and maintaining these strategic relationships
with third parties and on the successful distribution efforts of third
parties. Many aspects of our relationships with third parties, and
the success with which third parties promote distribution of our products, are
beyond our control. We may be unsuccessful in maintaining our
existing strategic relationships and in identifying and entering into future
development and distribution agreements with third parties.
If
market conditions cause us to reduce the selling price of our products, our
margins and operating results will decrease.
The
selling price of our product are subject to market conditions. Market
conditions that could impact these aspects of our operations
include:
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changes in the reimbursement
policies of government and third-party
payers;
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hospital budgetary
constraints;
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the introduction of competing
products;
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price reductions by our
competitors;
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tightening of credit for
hospitals desiring to finance their purchase of our
equipment;
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development of more effective
products by our competitors;
and
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lengthening of buying or
selling cycles.
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If such
conditions force us to sell our products and systems at lower prices, or if we
are unable to effectively develop and market competitive products, our market
share, margins and operating results will likely decrease.
We
are subject to stock exchange and government regulation.
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) and SEC and stock exchange
regulations have increased financial reporting and disclosure requirements,
corporate governance and internal control requirements, and have significantly
increased the administrative costs of documenting and auditing internal
processes, gathering data, and reporting information. The need to
commit substantial resources and management attention in these areas impacts our
ability to deploy those same resources to other areas of our
business. If the regulations substantially increase or we are unable
to comply with the requirements, it could significantly impact our market
valuation.
We
may not have adequate intellectual property protection.
Our
patents and proprietary technology may not be sufficient to protect our
intellectual property rights. In addition, if our actions to enforce
our patents are found to be a violation of laws related to unlawful tying or
restraint of trade, we may be required to pay damages to third parties, which
could be costly and could harm our business. The validity and breadth
of claims in medical technology patents involve complex legal and factual
questions. There can be no assurance that pending patent applications
will result in issued patents, that future patent applications will be issued,
that patents issued to or licensed by us will not be challenged or circumvented
by competitors or that such patents will be found to be valid or sufficiently
broad to protect our technology or to provide us with a competitive
advantage. Our patents may be found to be invalid and other companies
may claim rights in or ownership of the patents and other proprietary rights
held or licensed by us. Also, our existing patents may not cover
products that we develop in the future. Moreover, when our patents
expire, the inventions will enter the public domain.
We also
rely on nondisclosure and noncompetition agreements with employees, consultants
and other parties to protect trade secrets and other proprietary
technology. There can be no assurance that these agreements will not
be breached, that we will have adequate remedies for any breach, that others
will not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary
knowledge.
We
face competition from other companies and technologies.
We
compete with other companies that are developing and marketing. Many
of these companies or their distributors may have more established and larger
marketing and sales organizations, significantly greater financial and technical
resources and a larger installed base of customers than we do.
The
introduction by others of products embodying new technologies and the emergence
of new industry standards may render our products obsolete and
unmarketable. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purposes of our products. Accordingly, the life cycles of
our products are difficult to estimate. To compete successfully, we
must develop and introduce new products that keep pace with technological
advancements, respond to evolving consumer requirements and achieve market
acceptance. We may be unable to develop new products that address our
competition.
We
may not be able to manage growth successfully.
If
successful, we will experience a period of growth that could place a significant
strain upon our managerial, financial and operational resources. Our
infrastructure, procedures, controls and information systems may not be adequate
to support our operations and to achieve the rapid execution necessary to
successfully market our products. Our future operating results will
also depend on our ability to continually upgrade our information systems,
expand our direct sales force and our internal sales, marketing and support
staff. If we are unable to manage future expansion effectively, our
business, results of operations and financial condition will suffer, our senior
management will be less effective, and our revenues and product development
results may decrease.
Our
limited order backlog makes it difficult to predict sales and plan manufacturing
requirements, which can lead to lower revenues, higher expenses and reduced
margins.
Our
customers typically order products on a purchase order basis, in limited
circumstances, customer orders may be cancelled, changed or delayed on short
notice. Lack of significant order backlog makes it difficult for us
to forecast future sales with certainty. Varying sales cycles with
our customers make it difficult to accurately forecast component and product
requirements. These factors expose us to a number of
risks:
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If we overestimate our
requirements we may be obligated to purchase more components or
third-party products than is
required;
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If we underestimate our
requirements, our third-party manufacturers and suppliers may have an
inadequate product inventory, which could interrupt manufacturing of our
products and result in delays in shipments and
revenues;
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We may also experience
shortages of product components from time to time, which also could delay
the manufacturing of our products;
and
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Over or under production can
lead to higher expense, lower than anticipated revenues, and reduced
margins.
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We
depend on third parties for development and manufacturing services.
Our
strategy for development and commercialization of our products depends upon
entering into various arrangements with third parties and upon the subsequent
success of these parties in performing their obligations. We may not
be able to negotiate acceptable arrangements in the future, and our existing
arrangements may not be successful. We rely on third parties to
manufacture our SurgiCount Medical scanners and we currently have our products
manufactured by a limited number of manufacturers. Therefore, we are
dependent on these manufacturers. If we experience a termination,
modification or disruption of any of our manufacturing arrangements, we may be
unable to deliver products to our customers on a timely basis, which may lead to
customer dissatisfaction and damage to our reputation.
We
have a history of losses and may experience continued losses.
We have
experienced losses every year because we have expended more money in the course
of developing our products and establishing and maintaining our sales, marketing
and administrative organizations than we have generated in
revenues. We expect that our operating expenses will continue at
current levels and eventually increase in the foreseeable future as we increase
our sales and marketing activities, expand our operations and continue to
develop our technology. It is possible that we will not be able to achieve the
revenue levels required to achieve and sustain profitability.
We
may not continue to receive necessary FDA or other regulatory clearances or
approvals.
Our
products and activities are subject to ongoing regulation by the Food and Drug
Administration and other governmental authorities. Delays in receipt
of, or failure to obtain or maintain, regulatory clearances and approvals, or
any failure to comply with regulatory requirements, could delay or prevent our
ability to market or distribute our product line.
We
do not intend to pay dividends in the foreseeable future.
We do not
intend to pay any cash dividends on our common stock in the foreseeable
future.
The
Company currently has one unresolved comment from their December 31, 2007 form
10-K regarding revenue recognition for sales of the SurgiCount Medical scanner
and related software.
We do not
own any real estate or other physical properties materially important to our
operation. Our headquarters are located at 43460 Ridge Park Drive, Suite 140,
Temecula, CA 92590. We are responsible for paying approximately $10
thousand per month for the lease expense associated with our headquarters. Our
office space is currently approximately 4 thousand square feet.
On July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
lawsuit in the Superior Court of the State of California for the county of Los
Angeles, Central District against us and five other defendants affiliated with
Winstar Communications, Inc. The plaintiffs are attempting to collect a default
judgment of $5.0 million entered against Winstar Global Media, Inc. (“WGM”) by
a federal court in New York, by attempting to enforce the judgment against us
and the other defendants, none of whom are judgment debtors. Further, the
plaintiffs are attempting to enforce their default judgment against us when
their initial lawsuit in federal court against us was dismissed on the merits.
The Court granted plaintiffs leave to amend the current Complaint after twice
granting our motions to dismiss. Plaintiffs made some changes to
their Complaint and dropped two other defendants. On April 18, 2007, we filed
our Answer setting forth our numerous defenses. On January 29, 2009
the Superior Court of California issued a preliminary ruling in the Company’s
favor.
None for
the year ended December 31, 2008
Executive
Officers of the Registrant
The
following is a list of the executive officers of the Company (information
provided as of March 31, 2009):
|
Name
|
|
Age
|
|
Position
|
|
Served
as an
Officer Since
|
|
David
I. Bruce
|
|
49
|
|
President
and Chief Executive Officer
|
|
2009
|
|
Mary
A. Lay
|
|
52
|
|
Interim
Chief Financial Officer, Principal Accounting Officer and
Secretary
|
|
2008
|
|
Brian
E. Stewart
|
|
37
|
|
Vice
President Business Development
|
|
2009
|
Executive
Officers
David
I. Bruce, age 49, joined
the company in January 2009 as President and Chief Executive
Officer. Prior to joining the Company Mr. Bruce was the Chief
Executive Officer of EP MedSystems, Inc. a developer of electrophysiology
devices, which was recently acquired by St. Jude Medical. Mr. Bruce’s
experience also includes nine years of increasing responsibility at Acuson
Corporation and the Ultrasound Division of Siemens, including as General Manager
of the intracardiac echo (ICE) catheter. He also served as Vice President,
Marketing for EVL, a laser vision correction company. Mr. Bruce
received an MBA from the Wharton School and BS in Mechanical Engineering from
the University of California, Berkeley.
Mary A.
Lay, age 52, Interim Chief Financial Officer and Principal Accounting
Officer, Secretary. Prior to joining the Company, from 2005 to 2008,
Ms. Lay served as the Chief Financial Officer of Meret Optical Communications,
Inc. a privately held manufacturer of RF Subsystems; from 2002 to 2004 as Vice
President of Finance and Acting Chief Financial Officer of
Sorrento
Networks
Corporation a mid-market manufacturer of intelligent optical networking
solutions listed on the NASDAQ Global Market; from 1999 to 2002 as Chief
Financial Officer for a dot.com development stage company and a golf publication
and manufacturing company. Ms. Lay earned a MBA from the University
of Phoenix and a BA of Business with emphasis in Financial Accounting from
National University. She received her CPA certification in
Maryland.
Brian E. Stewart,
age 37, Co-Founder, Vice President Business Development. Prior
to returning to SurgiCount, Mr. Stewart worked in the investment banking
division of Credit Suisse and CIBC World Markets. In addition to his
investment banking and entrepreneurial experience, Mr. Stewart’s previous
experience includes Strome Investment Management, a hedge fund in Santa Monica,
CA. Mr. Stewart received his MBA from The Anderson School at UCLA and his
BA in Economics from UCLA where he graduated Phi Beta Kappa and Summa Cum
Laude.
Stock
Transfer Agent
Transfer
Online, Inc., 317 SW Alder Street, 2nd Floor,
Portland, OR 97204 (Telephone (503) 227-2950) serves as transfer agent for the
Company’s common stock. Certificates to be transferred should be mailed directly
to the transfer agent, preferably by registered mail.
Market
Prices
The
Company’s common stock has been quoted on the OTC Bulletin Board since February
16, 2007 under the symbol PSTX. Prior thereto, the Company’s common
stock was traded on the American Stock Exchange under the symbol
“PST.” The following table sets forth the range of the high and low
selling price of the Company’s common stock for the periods indicated below, as
reported by the American Stock Exchange and OTC Bulletin Board.
| |
|
Market
Price
|
|
| Year
Ended December 31, 2008 |
|
High
|
|
|
Low
|
|
| Fourth
Quarter |
|
$ |
0.96 |
|
|
$ |
0.33 |
|
| Third
Quarter |
|
|
1.25 |
|
|
|
0.50 |
|
| Second
Quarter |
|
|
1.49 |
|
|
|
0.95 |
|
| First
Quarter |
|
|
1.50 |
|
|
|
0.85 |
|
| |
|
Market
Price
|
|
| Year
Ended December 31, 2008 |
|
High
|
|
|
Low
|
|
| Fourth
Quarter |
|
$ |
1.75 |
|
|
$ |
0.90 |
|
| Third
Quarter |
|
|
1.52 |
|
|
|
0.85 |
|
| Second
Quarter |
|
|
1.85 |
|
|
|
1.36 |
|
| First
Quarter |
|
|
2.50 |
|
|
|
1.01 |
|
| |
|
|
|
|
|
|
|
|
Our
common stock is subject to Rules 15g-1 through 15g-9 under the Securities
Exchange Act of 1934, as amended, which impose certain sales practice
requirements on broker-dealers who sell our common stock to persons other than
established customers and “accredited investors” (generally, individuals with a
net worth in excess of $1.0 million or an annual income exceeding $200 thousand
individually or $300 thousand together with their spouses). For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser’s written
consent to the transaction prior to the sale.
Dividends
The
Company paid $77 thousand and $38 thousand in dividends to preferred
stockholders during 2008 and 2007, respectively, and has not paid any dividends
to common stockholders. Dividends to preferred stockholders are cumulative and
paid at the rate of 7% a year. We currently have no intention of paying
dividends on our common stock.
Stockholders
As of
March 31, 2009, there were approximately 613 holders of record of the Company’s
common stock. The Company has 25.0 million shares of common stock authorized, of
which 17.2 million were issued and outstanding at March 31, 2009. The Company
has 1.0 million shares of convertible preferred stock authorized, of which 11
thousand were issued and outstanding at March 31, 2009.
Equity
Compensation Plans
The
information pertaining to our equity compensation plans under which
the Company's common stock is authorized for issuance as of the fiscal year
ended December 31, 2008 is incorporated herein by reference to the Company’s
Definitive proxy Statement (which will be filed with the SEC pursuant to
Regulation 14A under the Exchange Act) relating to the 2009 Annual Meeting under
the captions, “Equity Compensation Plan Information.
Recent
Sales of Unregistered Securities
Between
January 1, 2007 and April 6, 2007, the Company issued 79 thousand shares of
Common Stock to various employees, directors, consultants and
creditors. The Common Stock was issued for services and payment of
accrued interest. The Common Stock was valued at approximately $127
thousand. These shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On
January 29, 2007, the Company entered into a subscription agreement and sold an
aggregate of 800 thousand shares of its Common Stock and warrants to purchase an
aggregate of up to 300 thousand shares of its Common Stock in a private
placement transaction to A Plus, an accredited investor. The warrants
are exercisable for a period of five years, have an exercise price equal to
$2.00, and 50% of the warrants are callable upon the occurrence of any one of a
number of specified events when, after any such specified occurrence, the
average closing price of the Company’s common stock during any period of five
consecutive trading days exceeds $4.00 per share. The Company
received gross proceeds of $500 thousand in cash and a $500 thousand deposit
against future shipments. The deposit was fully utilized at December 31, 2007.
These securities were sold in reliance upon the exemption provided by Section
4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D
promulgated under the Securities Act. No advertising or general
solicitation was employed in offering the securities, the sales were made to a
limited number of persons, all of whom represented to the Company that they are
accredited investors, and transfer of the securities is restricted in accordance
with the requirements of the Securities Act.
On
January 29, 2007, the Company entered into a subscription agreement with several
unaffiliated accredited investors in a private placement exempt from the
registration requirements of the Securities Act. The Company issued
and sold to these accredited investors an aggregate of 104 thousand shares of
its common stock and warrants to purchase an additional 52 thousand shares of
its common stock. The warrants are exercisable for a period of five
years, have an exercise price equal to $2.00, and 50% of the warrants are
callable upon the occurrence of any one of a number of specified events when,
after any such specified occurrence, the average closing price of the Company’s
common stock during any period of five consecutive trading days exceeds $4.00
per share. These issuances resulted in aggregate gross proceeds to
the Company of $130 thousand. These securities were sold in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
the safe harbor of Rule 506 under Regulation D promulgated under the Securities
Act. No advertising or general solicitation was employed in offering
the securities, the sales were made to a limited number of persons, all of whom
represented to the Company that they are accredited investors, and transfer of
the securities is restricted in accordance with the requirements of the
Securities Act.
On
January 30, 2007, the Company issued 8 thousand warrants to purchase shares of
common stock at $2.00 per share to the Company’s Placement Agent. The warrants
vested immediately and have a five-year life. The warrants were valued at
approximately $8 thousand and were expensed at the time of
issuance. These securities will be issued pursuant to Section 4(2) of
the Securities Act of 1933. These warrants were issued in reliance
upon the exemption provided by Section 4(2) of the Securities
Act.
Between
March 7, 2007 and April 5, 2007, the Company entered into a subscription
agreement with several accredited investors in a private placement exempt from
the registration requirements of the Securities Act. The Company
issued and sold to these accredited investors an aggregate of 2.0 million shares
of its common stock and warrants to purchase an additional 1.0 million shares of
its common stock. The warrants are exercisable for a period of five
years, have an exercise price equal to $2.00, and 50% of the warrants are
callable upon the occurrence of any one of a number of specified events when,
after any such specified occurrence, the average closing price of the Company’s
common stock during any period of five consecutive trading days exceeds $4.00
per share. These issuances resulted in aggregate gross proceeds to
the Company of $2.5 million. We were required to file a registration
statement within 120 days after April 5, 2007 (the “Closing
Date”). The registration statement was not filed until
November 16, 2007 and we therefore issued, as liquidated damages, to the
purchasers of the 2.0 million shares of our Common Stock and the warrants to
purchase 1.0 million shares of our Common Stock, warrants with a term of five
years and an exercise price of $2.00 per share to purchase 200 thousand shares
of our Common Stock. We recognized $193 thousand in expense as a
result of these liquidated damaged. We used the net proceeds from
this private placement transaction primarily for general corporate purposes and
repayment of existing liabilities. These securities were sold in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
the safe harbor of Rule 506 under Regulation D promulgated under the Securities
Act. No advertising or general solicitation was employed in offering
the securities, the sales were made to a limited number of persons, all of whom
represented to the Company that they are accredited investors, and transfer of
the securities is restricted in accordance with the requirements of the
Securities Act.
On April
5, 2007, the Company issued 90 thousand warrants to purchase shares of common
stock at $2.00 per share to the Company’s Placement Agent. The warrants vested
immediately and have a five-year life. The warrants were valued at approximately
$81 thousand and were expensed at the time of issuance. These
securities will be issued pursuant to Section 4(2) of the Securities Act of
1933. These warrants were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On April
26, 2007, upon the occurrence of default of Maroon Creek Capital, LP’s (“Maroon”), a California
limited partnership, $81 thousand promissory note, the Company issued 10
thousand warrants to purchase shares of common stock at $2.00 per share to
Maroon. The warrants vested immediately and have a five-year life. The warrants
were valued at $9 thousand and were expensed at the time of
issuance. These warrants were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
Between
May 9, 2007 and June 28, 2007, the Company issued 220 thousand shares of Common
Stock to various employees, directors, consultants and creditors. The
Common Stock was issued for services and payment of accrued
interest. The Common Stock was valued at approximately $392
thousand. These shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On June
7, 2007, the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act. The Company issued and sold to
these accredited investors an aggregate of 48 thousand shares of its common
stock and warrants to purchase an additional 24 thousand shares of its common
stock. The warrants are exercisable for a period of five years, have
an exercise price equal to $2.00, and 50% of the warrants are callable upon the
occurrence of any one of a number of specified events when, after any such
specified occurrence, the average closing price of the Company’s common stock
during any period of five consecutive trading days exceeds $4.00 per
share. These issuances resulted in aggregate gross proceeds to the
Company of $60 thousand. We used the net proceeds from this private
placement transaction primarily for general corporate purposes. These
securities were sold in reliance upon the exemption provided by Section 4(2) of
the Securities Act and the safe harbor of Rule 506 under Regulation D
promulgated under the Securities Act. No advertising or general
solicitation was employed in offering the securities, the sales were made to a
limited number of persons, all of whom represented to the Company that they are
accredited investors, and transfer of the securities is restricted in accordance
with the requirements of the Securities Act.
Pursuant
to the February 2005 Agreement and Plan of Merger and Reorganization (the
“Merger”) between the Company and SurgiCount, in the event that prior to the
fifth anniversary of the closing of the Merger the cumulative gross revenues of
SurgiCount exceed $500 thousand, the Company is obligated to issue an additional
50 thousand shares of the Company’s common stock to certain SurgiCount founders.
Should the cumulative gross revenues exceed $1.0 million during the five-year
period, the additional shares would be increased by 50 thousand, for a total of
100 thousand additional shares. During the year ended December 31,
2007, cumulative gross revenues of SurgiCount exceeded $1.0 million and as such
the Company issued 100 thousand shares to the SurgiCount
founders. The Company recorded $145 thousand of goodwill as a result
of these issuances.
On June
28, 2007, the Company issued 337 thousand shares of its common stock to Ault
Glazer Capital Partners, LLC. The shares were issued in satisfaction
of the unpaid principal and accrued interest of $422 thousand owed to Ault
Glazer Capital Partners pursuant to a Revolving Line of Credit Agreement entered
into on March 7, 2006. The amount due under the Revolving Line of
Credit, which was in default, was converted into shares of the Company’s common
stock at a conversion price of $1.25 per share.
On July
23, 2007, the Company issued 25 thousand warrants to purchase shares of common
stock at $1.75 per share to a consultant. The warrants vested immediately and
have a five-year life. The warrants were valued at $27 thousand and were
expensed at the time of issuance. These warrants were issued in
reliance upon the exemption provided by Section 4(2) of the Securities
Act.
Between
August 1, 2007 and October 12, 2007, the Company issued 102 thousand shares of
Common Stock to an employee, director, and creditors of the
Company. The Common Stock was issued for services and payment of
accrued interest. The Common Stock was valued at approximately $133
thousand. These shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On
October 17, 2007, the Company entered into a securities purchase agreement with
Francis Capital Management, LLC (“Francis
Capital”), an accredited investor, in a private placement exempt from the
registration requirements of the Securities Act. The Company issued and sold to
Francis Capital an aggregate of 1.3 million shares of its common stock and
warrants to purchase an additional 763 thousand shares of its common stock.
Additionally, pursuant to the terms of the securities purchase agreement with
Francis Capital, the Company issued warrants to purchase 400 thousand shares of
its common stock to two consultants that provided services in connection with
the financing. The services provided included investor relations and an
evaluation of and oversight responsibilities over completion of the transaction
The warrants are exercisable for a period of five years at an exercise price
equal to $1.40 per share. These issuances resulted in aggregate gross proceeds
to the Company of $1.5 million in cash and the extinguishment of $90 thousand in
existing debt owed to Francis Capital by the Company. We were required to file a
registration statement and to use our best efforts to cause the registration
statement to become effective within 120 calendar day from November 16, 2007
(the “Filing
Date”) or, in the event of a full review by the Securities and Exchange
Commission, within 150 calendar days from the Filing Date (collectively the
“Effectiveness
Date”). The registration statement was declared effective on December 21,
2008. We intend to use the net proceeds from this private placement transaction
primarily for general corporate purposes and repayment of existing liabilities.
These securities were sold in reliance upon the exemption provided by Section
4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D
promulgated under the Securities Act. No advertising or general solicitation was
employed in offering the securities, the sales were made to a limited number of
persons, all of whom represented to the Company that they are accredited
investors, and transfer of the securities is restricted in accordance with the
requirements of the Securities Act.
On
December 31, 2007, the Company issued 32 thousand shares of Common Stock to a
creditor of the Company. The Common Stock was issued for payment of
accrued interest. The Common Stock was valued at approximately $45
thousand. These shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On May
27, 2008 the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act. The Company issued and sold to
these accredited investors an aggregate of 2.1 million shares of its common
stock and warrants to purchase an additional 1.3 million shares of its common
stock. The warrants are exercisable for a period of five years, have
an exercise price equal to $1.40. These issuances resulted in
aggregate gross proceeds to the Company of $2.2 million and the extinguishment
of $426 thousand in existing debt. We used the net proceeds from this
private placement transaction primarily for general corporate purposes and
repayment of existing liabilities. These securities were sold in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
the safe harbor of Rule 506 under Regulation D promulgated under the Securities
Act. No advertising or general solicitation was employed in offering
the securities, the sales were made to a limited number of persons, all of whom
represented to the Company that they are accredited investors, and transfer of
the securities is restricted in accordance with the requirements of the
Securities Act.
Between
April 2008 and June 2008, the Company issued 1.7 million warrants to officers,
directors and consultants of the Company. The warrants were issued in
place of prior issuances of stock options with exercise prices well above market
price that were cancelled. The exercise prices of the warrants were
$1.25 and $1.75 and vested over four years. During this same time
period, 263 thousand warrants were issued to directors and consultants with an
exercise price of $1.25 and $1.75 that vested upon grant. These
shares were issued in reliance upon the exemption provided by Section 4(2) of
the Securities Act.
On July
31, 2008, the Company issued 153 thousand shares of its common stock to Ault
Glazer Capital Partners, LLC. The shares were issued in satisfaction
of unpaid accrued interest of $103 thousand due on the senior secured promissory
note held by Ault Glazer Capital Partners and prepaid interest of $127
thousand. The accrued interest paid, which was in default, was
converted into shares of the Company’s common stock at a conversion price of
$1.50 per share. These shares were issued in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
On August
1, 2008 the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act. The Company issued and sold to
these accredited investors an aggregate of 2.0 million shares of its common
stock and warrants to purchase an additional 1.2 million shares of its common
stock. The warrants are exercisable for a period of five years, have
an exercise price equal to $1.40. These issuances resulted in
aggregate gross proceeds to the Company of $2.5 million. We used the
net proceeds from this private placement transaction primarily for general
corporate purposes and repayment of existing liabilities. These
securities were sold in reliance upon the exemption provided by Section 4(2) of
the Securities Act and the safe harbor of Rule 506 under Regulation D
promulgated under the Securities Act. No advertising or general
solicitation was employed in offering the securities, the sales were made to a
limited number of persons, all of whom represented to the Company that they are
accredited investors, and transfer of the securities is restricted in accordance
with the requirements of the Securities Act.
Between
September 12, 2008 and November 6, 2008 the Company issued 800 thousand shares
of common stock to Ault Glazer Capital Partners, LLC. The shares were
issued in partial satisfaction of the senior secured promissory note held by
Ault Glazer Capital Partners. The principal amount paid, for book
purposes only, was converted into shares of the Company’s common stock at a
conversion price equal to the closing price of our common stock on date of
issuance. The contract conversion price is approximately $1.60 per
share. These shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On
December 29, 2008, we issued 25 thousand shares of common stock to Herbert
Langsam, currently a director of the Company. The shares were issued,
in return for a maturity date extension, on two loans held by Mr.
Langsam. Prior to December 29, 2008 the loans had been in
default. These shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes thereto contained elsewhere in this Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing plans
are forward-looking statements. In many cases, you can identify forward-looking
statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
statements are only predictions. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those
projected in any forward-looking statements. In evaluating these statements, you
should specifically consider various factors, including, but not limited to,
those set forth under “Item 1A. Risk Factors” and elsewhere in this report on
Form 10-K.
The
following “Overview” section is a brief summary of the significant issues
addressed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”). Investors should
read the relevant sections of the MD&A for a complete discussion of the
issues summarized below. The entire MD&A should be read in conjunction with
Item 6. Selected Financial Data and Item 8. Financial Statements and
Supplementary Data appearing elsewhere in this Form 10-K.
Overview
Patient
Safety Technologies, Inc. is a Delaware corporation. The Company’s
operations are conducted through its wholly-owned operating subsidiary,
SurgiCount Medical, Inc., a California corporation.
The
Company’s primary focus is development, manufacturing and distribution of
products and services focused primarily in the health care and medical products
field, particularly the patient safety markets. SurgiCount’s
Safety-Sponge System is designed to reduce the number of retained sponges and
towels unintentionally left in patients during surgical procedures by allowing
faster and more accurate counting of surgical sponges. The SurgiCount
Safety-Sponge System is a patented turn-key line of modified surgical sponges,
SurgiCounter™ scanners, and software file and database elements
integrated
to form a comprehensive counting and documentation system. Our
business model consists of selling our unique surgical sponge products and
selling or renting the scanners and software to hospitals. We use an exclusive
supplier to manufacture our sponge products and we sell through a direct sales
force for initial hospital conversions and through distributor organizations for
the ongoing supply of sponge products to customers.
The
Safety-Sponge System works much like a grocery store checkout process: Every
surgical sponge and towel is affixed with a unique inseparable two-dimensional
data matrix bar code and used with a SurgiCounter™ to scan and record the
sponges during the initial and final counts during a surgical procedures.
Because each sponge is identified with a unique code, a SurgiCounter™ will not
allow the same sponge to be counted more than one time. When counts have been
completed at the end of a procedure, the system stores a documented electronic
record of all sponges used and removed and can output records to a hospital
electronic records system. The Safety-Sponge System is the first FDA 510k
approved computer assisted sponge counting system.
Our
management considers several variables associated withtheongoing operations of
our business, including market demand, product life cycle, manufacturing,
inventory levels, head count and expenses related to research and
development. We are currently focused on increasing our market
penetration, the size and effectiveness of our sales force, marketing
activities, research and development efforts, inventory management and our
corporate infrastructure.
Results
of Operations
Operating
Segments
Patient
Safety Technologies, Inc. currently conducts business solely through its wholly
owned subsidiary, SurgiCount Medical, Inc. During the 2007 period
ending August 13, 2007, the company operated a subsidiary called Automotive
Services Group, Inc., which was previously reported as a separate operating
segment pursuant to Statement of Financial Accounting Standards No.
131. Based on the sale of all assets of this subsidiary in 2007, we
now report as one operating segment. The results of the former
Automotive Services Group segment are reported as “discontinued operations”
within the Consolidated Statements of Operations.
Revenue
and Expense Components
The
following is a description of the primary components of our revenues and
expenses:
Revenues. We
derive our revenue primarily from the sale of our SurgiCount sponges and the
related hardware. Our revenues are generated by our direct sales
force and independent distributors. Our products are typically
ordered directly by the hospitals through our distributors who ship and bill
directly. We expect that once an institution adopts our system, they will be
committed to its use and therefore provide a recurring source of revenues for
sales of the safety sponge.
|
|
·
|
Surgical Sponge
Revenues: Revenues related to the sale of sponges are
recognized in accordance with SAB 104. Generally revenues from
the sale of sponges are recognized upon shipment, as most sponge sales are
sold FOB shipping point. In the event that terms of the sale
are FOB customer, revenue is recognized at the time delivery to the
customer has been completed.
|
|
|
·
|
Hardware, Software and
Maintenance Agreement Revenues: For the hardware and software
elements, revenues are recognized on delivery, considered to be at the
time of shipment where terms are FOB shipping point, and upon receipt by
the customer when terms of the sale are FOB destination. As the
software included in the scanner is not incidental to the product being
sold, the sale of the software falls within the scope of SOP
97-2. The scanner is considered to be a software-related
element, as defined in SOP 97-2, since the software is essential to the
functionality of the scanner, and the maintenance agreement, which
provides for product support including unspecified product upgrades and
enhancements developed by the Company during the period covered by the
agreement is considered to be post-contract customer support (“PCS”) as
defined in SOP 97-2. These items are considered to be separate
deliverables within a multiple-element arrangement, and accordingly, the
total price of this arrangement is allocated to each respective
deliverable, and recognized as revenue as each element is delivered.
Delivery with respect to the initial one-year maintenance agreement is
considered to occur on a monthly basis over the term of the one year
period, and revenues related to this element are recognized on a pro-rata
basis during this period.
|
Cost of revenues.Cost of
revenues consist of direct product costs billed from our contract
manufacturers.
Research and
development. Research and development expense consists of
costs associated with the design, development, testing and enhancement of our
products. Research and development costs also include salaries and
related employee benefits, research-related overhead expenses and fees paid to
external service providers.
Sales and
marketing. Our sales and marketing expense consists primarily
of salaries and related employee benefits, sales commissions and support cost,
professional service fees, travel, education, trade show and marketing
costs.
General and
administrative. Our general and administrative expense
consists primarily of salaries and related employee benefits, professional
service fees, legal costs and expenses related to being a public
entity.
Other income
(expense). Total other income (expense) includes interest
income, interest expense, change in fair value of warrant liability, realized
gain (loss) on assets held for sale and unrealized loss on assets held for
sale.
Income tax (benefit)
provision. The income tax (benefit) expense for 2008 and 2007
consisted primarily of incomes taxes and the tax effect of changes in deferred
tax liabilities associated with goodwill.
Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007
Revenues. Revenues
increased $1.7 million, or 155%, to $2.8 million for fiscal year ended December
31, 2008 from $1.1 million for the fiscal year ended December 31,
2007. Revenues for the twelve months ended December 31, 2008
consisted of sales from the Safety-Sponge of $2.4 million and sales from
hardware and related supplies of $357 thousand,
respectively. Revenues for the twelve months ended December 31, 2007
consisted of sales from the Safety-Sponge of $873 thousand and sales from
hardware and related supplies of $216 thousand,
respectively. Although hardware sales are not considered a recurring
item, we expect that once an institution adopts our system, they will be
committed to its use and therefore provide a recurring source of revenues from
the sales of the safety sponge.
We
attribute a significant amount of the increase in sales generated by our
Safety-Sponge™ System to increased product awareness and demand. We
have had several major institutions adopt the Safety-Sponge™ System and expect
this trend to continue. The Safety-Sponge™ System is currently being evaluated
by a large number of medical institutions, the adoption by any one of which
would have a material impact on our revenues. We expect that each
smaller sized medical institutions which adopt the Safety-Sponge™ System
will produce approximately $100 thousand in annual revenue whereas each of the
larger institutions could produce annual recurring revenues of $400 thousand or
more.
Cost of revenue.Cost of
revenues increased $1.1 million, or 152% to $1.8 million for the fiscal year
ended December 31, 2008 compared to $716 thousand for fiscal year ended December
31, 2007. This reflects an increase in sales of our Safety-Sponge™
System and an inventory write down for obsolete inventory returned from a
distributor of $87 thousand.
Research and
development.Research and development costs were $271 thousand and $133
thousand, for the fiscal years ended December 31, 2008 and 2007,
respectively. The increase is primarily due to an increase in
software development costs associated with our system hardware.
Sales and marketing.We had
sales and marketing expenses of $2.5 million and $1.8 million for the fiscal
years ended December 31, 2008 and 2007, respectively. The increase is
primarily due to the addition of sales and clinical representatives in the field
and the associated salary, commission, benefits and travel
expenses.
General and
administration.General and administrative costs were $5.2 million and
$3.7 million for the fiscal years ended December 31, 2008 and 2007,
respectively. The decrease is due to a decrease in stock based
compensation relating to stock option forfeitures that were recorded during the
twelve months ended December 31, 2008. This decrease was partially
off-set by an increase in legal fees, salaries and officers
severance.
Total other income (expense),
net.Other income and expenses increased to income of $2.2 million from an
expense of $1.7 million for the fiscal years ended December 31, 2008 and 2007,
respectively. This increase was mainly due to a decrease in the fair
market value of our warrant derivative liability resulting in a gain of $2.6
million and a decrease in interest expense of $1.2 million, partially
off-set by a realized loss of $91 thousand on assets held for sale.
Interest
expense. We had interest expense of 333 thousand and $1.5
million for the fiscal years ended December 31, 2008 and 2007,
respectively. The decrease in interest expense for the fiscal year
ended December 31, 2008 when compared to December 31, 2007 is primarily
attributable to the non-cash interest charges incurred in fiscal year 2007 as a
result of the debt discount amortization associated with our short-term debt
financings. These charges resulted from the issuance of debt that
either had conversion prices on the date of issuance that were below the fair
market value of the underlying common stock or required the issuance of warrants
to purchase shares of our common stock, which required us to record an expense
based on the estimated fair value of the warrants. We recorded $167
thousand and $1.1 million in non-cash interest charges for the fiscal years
ended December 31, 2008 and 2007, respectively.
Realized gains (losses) on
investments, net. We recorded a realized loss on investments
of $91 thousand and a realized gain of $22 thousand for the fiscal years ended
December 31, 2008 and 2007, respectively. The realized loss for
fiscal year 2008 was the result of a sale of approximately 0.61 acres of
undeveloped land in Springfield, Tennessee. The realized losses in
fiscal year 2007 were a result of the sale of certain non-operating assets for a
gain of $22 thousand.
Unrealized loss on assets held for
sale, net. We recorded unrealized losses on assets held for sale of zero
and $25 thousand for fiscal years ended December 31, 2008 and 2007,
respectively. During the year ended December 31, 2007, we recognized
unrealized loss due to a write-down to fair value of approximately 8.5 acres of
undeveloped land in Heber Springs, Arkansas. In March 2008, the
Company completed the sale of this real property for net proceeds of $226
thousand.
Loss from discontinued operations. During the
fiscal year ended December 31, 2007, we recorded a loss from our discontinued
car wash segment of $166 thousand. Consistent with our decision to
focus our business exclusively on the patient safety medical products field, we
completed the divestiture of ASG in August 2007. We did not incur a
loss from discontinued operations for the fiscal year ended December 31,
2008.
Income tax (benefit)
provision.We recorded a tax benefit of $439 thousand for fiscal year
ended December 31, 2008 compared to a tax expense of $31 thousand for fiscal
year ended December 31, 2007. As of December 31, 2008 we had net
operating loss carryforward of approximately $29 million to offset future
taxable income for federal income tax purposes. The utilization of
the loss carryforwards to reduce any future income taxes will depend on our
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward begin expiring in
2016.
Financial
Condition, Liquidity and Capital Resources
Our
principal sources of cash have included the issuance of equity and debt
securities. Principal uses of cash have included cash used in
operations, capital expenditures and working capital. We expect that
our principal uses of cash in the future will be for operations, working
capital, capital expenditures and research and development. We expect
that, as our revenues grow, our sales and marketing and research and development
expenses will continue to grow and, as a result, we will need to generate
significant net revenues to achieve profitability. We do not believe
that our current cash and cash equivalents, will be enough to fund our projected
operating requirements. In order to ensure the continued viability of
the Company, additional financing must be obtained and profitable operations
must be achieved in order to repay the existing short-term and long-term debt
and to provide a sufficient source of operating capital. The sale of
additional equity or convertible debt securities could result in dilution to our
stockholders. If additional funds are raised through the issuance of
equity or debt securities, these securities could have rights senior to those
associated with our common stock and could contain covenants that would restrict
our operations. Any additional financing may not be available in
amounts or on terms acceptable to us, or at all. If we are unable to
obtain this additional financing, we may berequired to reduce the scope of our
planned product development and marketing efforts.
Our cash
and cash equivalents balance was $296 thousand as of December 31, 2008 compared
to $405 thousand at December 31, 2007. Total current liabilities were
$6.8 million and $3.1 million for the fiscal years ended December 31, 2008 and
2007, respectively. As of December 31, 2008 we had a working capital
deficit of approximately $5.7 million. Since we continue to have
recurring losses, we have relied upon private placements of equity and debt
securities. Our existing cash and cash equivalents balance are not
expected to meet our anticipated funding requirements during the next twelve
months.
2008
Private Placements
During
the period May 20, 2008 to August 29, 2008, we sold to accredited investors in
our private placements, as reflected below, $5.1 million in equity
securities.
Between
May 20, 2008 and June 19, 2008, the Company entered into a securities purchase
agreement with several accredited investors, in a private placement exempt from
the registration requirements of the Securities Act. The Company issued and sold
to these investors an aggregate of 2.1 million shares of its common stock and
warrants to purchase an additional 1.3 million shares of its common
stock.
Between
August 1, 2008 and August 29, 2008, the Company entered into a securities
purchase agreement with several accredited investors, in a private placement
exempt from the registration requirements of the Securities Act. The Company
issued and sold to these investors an aggregate of 2.0 million shares of its
common stock and warrants to purchase an additional 1.2 million shares of its
common stock.
2007
Private Placements
During
2007 we sold to accredited investors in our private placements, as reflected
below, $5.3 million in equity securities.
Between
January 29, 2007 and June 8, 2007, we entered into various subscription
agreements with accredited investors in private placements exempt from the
registration requirements of the Securities Act. We issued and sold to these
accredited investors an aggregate of 3.0 million shares of our common stock and
warrants to purchase an additional 1.4 million shares of our common
stock.
On
October 17, 2007, we entered into a securities purchase agreement with Francis
Capital Management, LLC, an accredited investor, in a private placement exempt
from the registration requirements of the Securities Act. We issued and sold to
Francis Capital an aggregate of 1.3 million shares of our common stock and
warrants to purchase an additional 763 thousand shares of our common
stock. The warrants are exercisable for a period of five years at an
exercise price equal to $1.40 per share. These issuances resulted in aggregate
gross proceeds to us of $1.5 million in cash and the extinguishment of $90
thousand in existing debt.
Promissory
Notes
In
addition to our private placements, we have also received funding from Ault
Glazer Capital Partners, LLC (the “Fund”). AG Management is the
managing member of the Fund. The managing member of AG Management is The Ault
Glazer Group, Inc. (“The AG
Group”). The Company’s former Chairman and former Chief Executive
Officer, Milton “Todd” Ault, III, is Chairman, Chief Executive Officer and
President of The AG Group. At December 31, 2008 the outstanding
principal balance of the loan that we entered into with the Fund was $1.4
million.
At
September 30, 2008 we had additional outstanding promissory notes in the
aggregate principal amount of $1.2 million. Between February 28, 2008 and March
20, 2008, Catalysis Offshore, Ltd. and Catalysis Partners, LLC (collectively
“Catalysis”),
which are parties related to one another, loaned us an aggregate of $500
thousand. As consideration for the loans, we issued Catalysis
promissory notes in the aggregate principal amount of $500 thousand (the “Catalysis
Notes”). The Catalysis Notes accrue interest at the rate of 8% per annum
and has maturity dates of October 31, 2008. The other outstanding promissory
notes were entered into during 2006.
During
the period from June 29, 2007 to August 13, 2007, Automotive Services Group sold
all the assets held by ASG thereby completing the liquidation of Automotive
Services Group. We received net proceeds, after expenses of the sales, of $3.2
million which resulted in a gain of $10 thousand. The majority of the proceeds
from the sales were used to repay existing debt.
Operating
activities
We used
net cash of $4.6 million in operating activities for the year ended December 31,
2008. During this period net cash used in operating activities
primarily consisted of a net loss of $4.4 million including a $2.6 million
non-cash, unrealized gain on our warrant
derivative
liability caused by the decrease in the value of our common stock, an increase
of $200 thousand in inventory to support implementations scheduled for the first
quarter, an increase of $314 thousand in accounts receivable, a decrease of $7
thousand in prepaids and other assets, offset by a $766 thousand increase in
accounts payable and accrued liabilities, $1.7 million in stock based
compensation and $461 thousand in non-cash costs including amortization,
depreciation and deferred income taxes.
We used
net cash of $3.8 million in operating activities for the year ended December 31,
2007. During this period net cash used in operating activities
primarily consisted of a net loss of $7.0 million, a decrease in accounts
payable of $587 thousand offset by a decrease in prepaid expenses of $474
thousand, and increase of accrued liabilities of $320 thousand and non-cash
costs including $1.1 million in stock based compensation, $1.1 million in
amortization of debt discount and $557 thousand in non-cash costs including
amortization and depreciation and deferred income taxes.
Investing
activities
We used
net cash of $33 thousand in investing activities for the year ended December 31,
2008 primarily on $282 thousand for the purchase of property and equipment used
to expand our operations offset by $315 thousand received on the sale of our
real estate holdings.
We
generated net cash of $3.0 million provided by investing activities during the
year ended December 31, 2007 primarily from the sale of our assets from our
Automotive group and undeveloped land in Alabama for $3.2 million and the
proceeds from selling one-third of our investment in Alacra Series F Preferred
stock for $333 thousand. This was partially offset by capitalized
costs of $561 thousand related to the purchase of property and equipment
including the ongoing development of purchased software related to our
Safety-SpongeSystem.
Financing
activities
Cash
provided by financing activities during the year ended December 31, 2008 of $4.4
million, resulted primarily from net proceeds from the issuance of common stock
and warrants of $4.6 million and $650 thousand in notes payable, offset by
repayments of notes payable of $722 thousand and preferred dividends of $77
thousand.
Cash
provided by financing activities during the year ended December 31, 2007, of
$1.2 million resulted primarily from net proceeds from the issuance of common
stock and warrants of $4.5 million offset by the repayment of the notes payable
in the amount of $3.4 million.
Investments
Our
investment portfolio, which is valued at $667 thousand, is reflected below. At
December 31, 2008, our investment portfolio includes our investment in Alacra
Corporation, our only remaining investment security. At December 31, 2007, our
investment portfolio also consisted of certain real property located in Arkansas
and Tennessee.
|
(in
thousands)
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Alacra
Corporation
|
|
$ |
667 |
|
|
$ |
667 |
|
|
Investments
in Real Estate
|
|
|
— |
|
|
|
406 |
|
|
|
|
$ |
667 |
|
|
$ |
1,073 |
|
Alacra
Corporation
At
December 31, 2008, we had an investment in Alacra Corporation (“Alacra”), valued at $667
thousand, which represents 8.4% and 8.2% of our total assets, at December 31,
2008 and 2007, respectively. On April 20, 2000, we purchased $1.0 million worth
of Alacra Series F Convertible Preferred Stock. We have the right, subject to
Alacra having the available cash, to have the preferred stock redeemed by Alacra
over a period of three years for face value plus accrued dividends beginning on
December 31, 2006. Pursuant to this right, in December 2006 we informed
management of Alacra that we were exercising our right to put back one-third of
our preferred stock. Alacra completed the initial redemption of one-third of our
preferred stock in December 2007. We received
proceeds
of $333
thousand, which accounted for the entire amount of the decrease in value of our
Alacra investment. In December 2007, we continue to exercise our right to put
back our remaining preferred stock to Alacra. In December 2008 Alacra
informed the Company that their Board of Directors had authorized the preferred
stock redemption for the second one-third of our preferred stock and that they
expected the redemption to occur in the second or third quarter of 2009.As there
is no readily determinable fair value for the shares of Alacra’s Series F
Convertible Preferred Stock we account for the investment under the cost
method.
Real
Estate Investments
At
December 31, 2007, we had two real estate investments, valued in the aggregate
at $406 thousand. The real estate investments, consisting of
approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and 0.61
acres of undeveloped land in Springfield, Tennessee. During 2008, we completed
the sale of the undeveloped land net proceeds of approximately$315 thousand,
which resulted in a realized loss of $91 thousand.
Off-Balance
Sheet arrangements
As of
December 31, 2008, other than our office lease and employment agreements with
key executive officers, we had no commitments other than the liabilities
reflected in our consolidated financial statements. We are not a
party to off-balance sheet arrangements and are not a party to any transaction
with persons or activities that derive benefits, except as disclosed herein,
from their non-independent relationships with the Company.
Critical
accounting policies and estimates
The below
discussion and analysis of our financial condition and results of operations is
based upon the accompanying financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Critical
accounting policies are those that are both important to the presentation of our
financial condition and results of operations and require management's most
difficult, complex, or subjective judgments, often as a result of the need to
make estimates of matters that are inherently uncertain. Our most critical
accounting policy relates to the valuation of our investments in non-marketable
equity securities, valuation of our intangible assets and stock based
compensation.
Valuation
of Intangible Assets
We assess
the impairment of intangible assets when events or changes in circumstances
indicate that the carrying value of the assets or the asset grouping may not be
recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of a product line in relation to
expectations, significant negative industry or economic trends, and significant
changes or planned changes in our use of the assets. Recoverability of
intangible assets that will continue to be used in our operations is measured by
comparing the carrying amount of the asset grouping to our estimate of the
related total future net cash flows. If an asset grouping’s carrying value is
not recoverable through the related cash flows, the asset grouping is considered
to be impaired. The impairment is measured by the difference between the asset
grouping’s carrying amount and its fair value, based on the best information
available, including market prices or discounted cash flow
analysis. Impairments of intangible assets are determined for groups
of assets related to the lowest level of identifiable independent cash flows.
Due to our limited operating history and the early stage of development of some
of our intangible assets, we must make subjective judgments in determining the
independent cash flows that can be related to specific asset
groupings. To date we have not recognized impairments on any of our
intangible assets related to the Safety-Sponge™ System.
Stock-Based
Compensation
We have
adopted the provisions of SFAS No. 123(R), Share-Based Payment,
effective January 1, 2005 using the modified retrospective application
method as provided by SFAS 123(R) and accordingly, financial statement amounts
for the prior periods in which the Company granted employee stock options have
been restated to reflect the fair value method of expensing prescribed by SFAS
123(R). The fair value of each option grant, nonvested stock award
and shares issued under the employee stock purchase plan were estimated on the
date of grant using the Black-Scholes option pricing model and various inputs to
the model. Expected volatilities were based on historical volatility of our
stock. The expected term represents the period of time that grants and awards
are expected to be outstanding. The risk-free interest rate approximates the
U.S. treasury rate corresponding to the expected term of the option,
and dividends were assumed to be zero. These inputs are based on our
assumptions, which include complex and subjective variables. Other reasonable
assumptions could result in different fair values for our stock-based
awards.
Stock-based
compensation expense, as determined using the Black-Scholesoption pricing model,
is recognized on a straight line basis over the service period, net of estimated
forfeitures. Forfeiture estimates are based on historical data. To the extent
actual results or revised estimates differ from the estimates used, such amounts
will be recorded as a cumulative adjustment in the period that estimates are
revised.
New
Accounting Pronouncements
In
September 2006, theFASB,issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements. SFAS
157 does not require new fair value measurements but rather defines fair value,
establishes a framework for measuring fair value and expands disclosure of fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We adopted SFAS
157 on January 1, 2008 and in connection with its adoption, there was no
impact on our consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment to FASB
Statement No. 115. This statement permits companies to choose to measure
many financial instruments and other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement of accounting for financial instruments. The fair value option
established by this statement permits all entities to measure eligible items at
fair value at specified election dates with the resulting unrealized gains and
losses, if any, reported in earnings.We adopted SFAS 159 on January 1, 2008
and in connection with its adoption, there was no impact on our consolidated
financial statements.
Staff
Accounting Bulletin 110 issued by the SEC was effective for us beginning in the
first quarter of 2008. SAB 110 amends the SEC’s views discussed in Staff
Accounting Bulletin 107 regarding the use of the simplified method in developing
estimates of the expected lives of share options in accordance with SFAS No.
123(R), Share-Based
Payment. We will continue to use the simplified method until we have the
historical data necessary to provide reasonable estimates of expected lives in
accordance with SAB 107, as amended by SAB 110.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), Business
Combinations. This statement requires the acquiring entity in
a business combination to record all assets acquired and liabilities assumed at
their respective acquisition-date fair values, changes the recognition of assets
acquired and liabilities assumed arising from contingencies, changes the
recognition and measurement of contingent consideration, and requires the
expensing of acquisition-related costs as incurred. SFAS 141(R) also requires
additional disclosure of information surrounding a business combination, such
that users of the entity's financial statements can fully understand the nature
and financial impact of the business combination. We will implement SFAS No.
141(R) on January 1, 2009 and will apply prospectively to business combinations
completed on or after that date. The Company does not expect an
impact on our financial position or results of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160,Noncontrolling Interests
in Consolidated Financial Statements an amendment of ARB
51. SFAS 160 establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also established reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owner. We will
implement SFAS No. 160 on January 1, 2009. As of May 20, 2009, we did not have
any minority interests. Therefore, we do not expect the adoption of this
standard will have a material impact on our income statement, financial position
or cash flows.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133. The standard requires additional quantitative
disclosures (provided in tabular form) and qualitative disclosures for
derivative instruments. The required disclosures include how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows; relative volume of derivative activity;
the objectives and strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated as the hedging
instrument in a hedge relationship; and the existence and nature of
credit-related contingent features for derivatives. SFAS No. 161 does not
change the accounting treatment for derivative instruments. SFAS No. 161 is
effective for us in the first
quarter of fiscal year 2009. The Company does not expect that the adoption of
this standard will have a material impact on our financial position or results
of operations.
In April
2008, the FASB issued FSP FAS 142-3, Determination of Useful Life of
Intangible Assets. FSP FAS 14203 amends the factors that
should be considered in developing the renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS 142,
“Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires
expanded disclosure related to the determination of intangible asset useful
lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is not permitted. We
do not expect FSP FAS 142-3 will have a material impact on our financial
statements.
In May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 requires recognition of both the
liability and equity components of convertible debt instruments with cash
settlement features. The debt component is required to be recognized
at the fair value of a similar instrument that does not have an associated
equity component. The equity component is recognized as the
difference between the proceeds from the issuance of the note and the fair value
of the liability. FSP APB 14-1 also requires an accretion o the
resulting debt discount over the expected life of the
debt. Retrospective application to all periods presented is required
and a cumulative-effect adjustment is recognized as of the beginning of the
first period presented. This standard is effective for us in the
first quarter of fiscal year 2009. We are currently evaluating the
impact of FSP APB 14-1.
In May
2008, the FASB issued Statement of Financial Accounting Standards No.
162. The Hierarchy
of Generally Accepted Accounting Policies, which reorganizes the GAAP
hierarchy. The purpose of the new standard is to improve financial
reporting by providing a consistent framework for determining what accounting
principles should be used when preparing the U.S. GAAP financial
statements. The standard is effective 60 days after the SEC’s
approval of the PCAOB’s amendments to AU Section 411. The adoption of
SFAS 162 will not have an impact on our financial position or results of
operations.
In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
which requires entities to apply the two-class method of computing basic and
diluted earnings per share for participating securities that include awards that
accrue cash dividends (whether paid or unpaid) any time common shareholders
received dividends and those dividends do not need to be returned to the entity
if the employee forfeits the award. FSP EITF 03-6-1 will be effective
for the Company on January 1, 2009 and will require retroactive
disclosure. We are currently evaluating the impact of adopting FSP
EITF 03-6-1 on our consolidated financial position, cash flows and results of
operations.
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
07-5”). EITF07-5 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS No. 133 – specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument. ETF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or n embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
SFAS No. 133 paragraph 11(a) scope exception. The Company has
outstanding warrants to purchase common stock that have been preliminarily
evaluated as ineligible for equity classification under EITF 07-5 because of
certain provisions that may result in an adjustment to the exercise price of the
warrants. Accordingly, the adjustment feature may cause the warrant
to fail to be indexed solely to the Company’s stock. The warrants
would therefore be classified as liabilities and re-measured at fair value with
changes in the fair value recognized in operating results. The
Company has not completed our analysis of these instruments nor determined the
effects of pending adoption, if any, on our consolidated financial
statements.
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.
PATIENT
SAFETY TECHNOLOGIES, INC.
INDEX
TO FINANCIAL STATEMENTS
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F-1
|
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F-2
|
|
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F-3
|
|
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|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
– F-28
|
The
schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instruction or are inapplicable and, therefore, have been omitted
To the
Board of Directors and Stockholders
Patient
Safety Technologies, Inc.
We have
audited the accompanying consolidated balance sheets of Patient Safety
Technologies, Inc. as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company was not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that were appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for
our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Patient Safety Technologies, Inc.
as of December 31, 2008 and 2007, and the results of their operations and their
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has incurred significant recurring net losses
and negative cash flows from operating activities through December 31,
2008. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans as to these matters
are described in Note 3. The accompanying financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/s/
SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
San
Diego, California
April 15,
2009
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
|
|
|
|
(In
thousands, except par value)
|
|
|
|
For
the Year Ending December 31,
|
|
|
|
|
2008
|
|
|
2007
(Restated)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
296 |
|
|
$ |
405 |
|
|
Accounts
receivable
|
|
|
418 |
|
|
|
104 |
|
|
Inventories
|
|
|
200 |
|
|
|
0 |
|
|
Prepaid
expenses
|
|
|
188 |
|
|
|
105 |
|
|
Total
current assets
|
|
|
1,102 |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
certificate of deposit
|
|
|
94 |
|
|
|
88 |
|
|
Notes
receivable
|
|
|
121 |
|
|
|
121 |
|
|
Property
and equipment, net
|
|
|
622 |
|
|
|
663 |
|
|
Assets
held for sale, net
|
|
|
0 |
|
|
|
406 |
|
|
Goodwill
|
|
|
1,832 |
|
|
|
1,832 |
|
|
Patents,
net
|
|
|
3,439 |
|
|
|
3,764 |
|
|
Long-term
investment
|
|
|
667 |
|
|
|
667 |
|
|
Other
assets
|
|
|
37 |
|
|
|
19 |
|
|
Total
assets
|
|
$ |
7,914 |
|
|
$ |
8,174 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
909 |
|
|
$ |
709 |
|
|
Current
portion of convertible debentures
|
|
|
1,425 |
|
|
|
572 |
|
|
Current
portion of notes payable
|
|
|
1,100 |
|
|
|
600 |
|
|
Accrued
liabilities
|
|
|
3,358 |
|
|
|
1,193 |
|
|
Total
current liabilities
|
|
|
6,792 |
|
|
|
3,074 |
|
|
Long-term
convertible debentures, less current portion
|
|
|
51 |
|
|
|
2,531 |
|
|
Deferred
tax liabilities
|
|
|
1,042 |
|
|
|
1,500 |
|
|
Total
liabilities
|
|
|
7,885 |
|
|
|
7,105 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1.00 par value, cumulative 7% dividend:
|
|
|
1,000
shares authorized; 11 issued and outstanding
|
|
|
at
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
(Liquidation
preference of $1.2 million at December 31, 2008 and 2007
|
|
|
11 |
|
|
|
11 |
|
|
Common
stock, $0.33 par value: 25,000 shares authorized;
|
|
|
|
|
|
|
17,180
shares issued and outstanding at December 31, 2008;
|
|
|
|
|
|
|
12,055
shares issued and outstanding at December 31, 2007
|
|
|
5,675 |
|
|
|
3,978 |
|
|
Additional
paid-in capital
|
|
|
36,034 |
|
|
|
34,320 |
|
|
Accumulated
deficit
|
|
|
(41,691 |
) |
|
|
(37,240 |
) |
|
Total
stockholders' equity
|
|
|
29 |
|
|
|
1,069 |
|
|
Total
liabilities and stockholders' equity
|
|
$ |
7,914 |
|
|
$ |
8,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
|
|
|
|
(In
thousands, except per share data)
|
|
|
For
the Year Ending December 31,
|
|
|
|
|
2008
|
|
|
2007
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,780 |
|
|
$ |
1,089 |
|
|
Cost
of revenue
|
|
|
1,802 |
|
|
|
716 |
|
|
Gross
profit
|
|
|
978 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
271 |
|
|
|
133 |
|
|
Sales
and marketing
|
|
|
2,516 |
|
|
|
1,811 |
|
|
General
and administrative
|
|
|
5,206 |
|
|
|
3,730 |
|
|
Total
operating expenses
|
|
|
7,993 |
|
|
|
5,674 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(7,015 |
) |
|
|
(5,301 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
Liquidated
damages
|
|
|
— |
|
|
|
(194 |
) |
|
Interest
expense
|
|
|
(333 |
) |
|
|
(1,496 |
) |
|
Change
in fair value of warrant liability
|
|
|
2,582 |
|
|
|
— |
|
|
Realized
gain (loss) assets held for sale, net
|
|
|
(91 |
) |
|
|
22 |
|
|
Unrealized
loss on assets held for sale, net
|
|
|
— |
|
|
|
(25 |
) |
|
Other
income
|
|
|
44 |
|
|
|
(3 |
) |
|
Total
other income (expense)
|
|
|
2,202 |
|
|
|
(1,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(4,813 |
) |
|
|
(6,997 |
) |
|
Income
tax benefit (provision)
|
|
|
439 |
|
|
|
(31 |
) |
|
Loss
from continuing operations
|
|
|
(4,374 |
) |
|
|
(7,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
— |
|
|
|
(166 |
) |
|
Net
loss
|
|
|
(4,374 |
) |
|
|
(7,194 |
) |
|
Preferred
dividends
|
|
|
(77 |
) |
|
|
(77 |
) |
|
Net
loss applicable to common shareholders
|
|
$ |
(4,451 |
) |
|
$ |
(7,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted per common share:
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.33 |
) |
|
$ |
(0.70 |
) |
|
Discontinued
operations
|
|
$ |
— |
|
|
$ |
(0.02 |
) |
|
Net
loss
|
|
$ |
(0.33 |
) |
|
$ |
(0.72 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
Basic
and Diluted
|
|
|
14,452 |
|
|
|
10,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
|
|
|
|
(In
thousands)
|
|
|
|
For
the Year Ending December 31,
|
|
|
|
|
2008
|
|
|
2007
(Restated)
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,374 |
) |
|
$ |
(7,194 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
352 |
|
|
|
206 |
|
|
Amortization
of patents
|
|
|
325 |
|
|
|
325 |
|
|
Non-cash
interest
|
|
|
167 |
|
|
|
1,112 |
|
|
Issuance
of common stock for loan fees
|
|
|
15 |
|
|
|
— |
|
|
Forgiveness
of debt
|
|
|
(37 |
) |
|
|
— |
|
|
Unrealized
gain on marketable securities
|
|
|
— |
|
|
|
25 |
|
|
Stock-based
compensation to consultants
|
|
|
— |
|
|
|
57 |
|
|
Stock-based
compensation to liquidated damages
|
|
|
— |
|
|
|
193 |
|
|
Stock-based
compensation to employees and directors
|
|
|
1,666 |
|
|
|
1,113 |
|
|
Unrealized
gain on warrant derivative liability
|
|
|
(2,582 |
) |
|
|
— |
|
|
Loss
on investments, net
|
|
|
— |
|
|
|
(33 |
) |
|
Loss
on sale of property
|
|
|
91 |
|
|
|
— |
|
|
Change
in deferred tax liability
|
|
|
(452 |
) |
|
|
31 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(314 |
) |
|
|
(6 |
) |
|
Inventories
|
|
|
(200 |
) |
|
|
43 |
|
|
Prepaid
expenses
|
|
|
20 |
|
|
|
474 |
|
|
Other
assets
|
|
|
(13 |
) |
|
|
8 |
|
|
Accounts
payable
|
|
|
251 |
|
|
|
(587 |
) |
|
Accrued
liabilities
|
|
|
515 |
|
|
|
467 |
|
|
Net
cash used in operating activities
|
|
|
(4,570 |
) |
|
|
(3,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(282 |
) |
|
|
(561 |
) |
|
Proceeds
from sale of property and equipment
|
|
|
— |
|
|
|
43 |
|
|
Proceeds
from sale of assets held for sale, net
|
|
|
315 |
|
|
|
3,178 |
|
|
Proceeds
from sale of long term investments
|
|
|
— |
|
|
|
333 |
|
|
Net
cash provided by investing activities
|
|
|
33 |
|
|
|
2,993 |
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
4,577 |
|
|
|
4,484 |
|
|
Proceeds
from notes payable
|
|
|
650 |
|
|
|
100 |
|
|
Payments
and decrease on notes payable
|
|
|
(722 |
) |
|
|
(3,372 |
) |
|
Payments
of preferred dividends
|
|
|
(77 |
) |
|
|
(38 |
) |
|
Net
cash provided by financing activities
|
|
|
4,428 |
|
|
|
1,174 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase and decrease in cash and cash equivalents
|
|
|
(109 |
) |
|
|
401 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
405 |
|
|
|
4 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
296 |
|
|
$ |
405 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$ |
75 |
|
|
$ |
255 |
|
|
Cash
paid during the period for taxes
|
|
$ |
1 |
|
|
$ |
1 |
|
|
Non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Dividends
accrued
|
|
$ |
77 |
|
|
$ |
77 |
|
|
Forgiveness
of debt
|
|
$ |
37 |
|
|
|
— |
|
|
Issuance
of common stock in connection with contingent payment with Surgicount
acquisition
|
|
$ |
— |
|
|
$ |
145 |
|
|
Issuance
of common stock for a prepaid expense
|
|
$ |
103 |
|
|
|
|
|
|
Issuance
of common stock for an accrued liability
|
|
$ |
141 |
|
|
|
|
|
|
Issuance
of common stock for accounts payable
|
|
$ |
50 |
|
|
|
|
|
|
Issuance
of common stock in payment of notes payable and accrued
interest
|
|
$ |
1,162 |
|
|
$ |
696 |
|
|
Issuance
of common stock for inventory
|
|
$ |
— |
|
|
$ |
500 |
|
|
Payment
of accrued liability with long-term investments
|
|
$ |
— |
|
|
$ |
11 |
|
|
Reclassification
of accrued interest to notes payable, less current portion -
net
|
|
$ |
— |
|
|
$ |
349 |
|
|
Reclassification
of of long term investments to assets held for sale
|
|
$ |
— |
|
|
$ |
431 |
|
|
Reclassification
of warrant derivative liability from equity
|
|
$ |
4,344 |
|
|
$ |
— |
|
| |
|
| |
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock Issued
|
|
|
Paid
- In
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Stockholder's
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2006 (Restated)
|
|
|
11 |
|
|
|
11 |
|
|
|
7,489 |
|
|
|
2,471 |
|
|
|
29,654 |
|
|
|
(29,970 |
) |
|
|
(614 |
) |
|
|
(1,109 |
) |
|
|
1,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,194 |
) |
|
|
— |
|
|
|
— |
|
|
|
(7,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(77 |
) |
|
|
— |
|
|
|
— |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
— |
|
|
|
— |
|
|
|
3,640 |
|
|
|
1,201 |
|
|
|
2,828 |
|
|
|
— |
|
|
|
584 |
|
|
|
1,055 |
|
|
|
5,084 |
|
|
Contingent
payment due to SurgiCount acquisition
|
|
|
— |
|
|
|
— |
|
|
|
100 |
|
|
|
33 |
|
|
|
112 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
145 |
|
|
Service
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
|
11 |
|
|
|
39 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
50 |
|
|
Payment
of Debt
|
|
|
— |
|
|
|
— |
|
|
|
551 |
|
|
|
182 |
|
|
|
514 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense due to warrant issuances
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
211 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
211 |
|
|
Compensation
expense due to restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
242 |
|
|
|
80 |
|
|
|
289 |
|
|
|
— |
|
|
|
30 |
|
|
|
54 |
|
|
|
423 |
|
|
Compensation
expense due to stock option issuances
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
674 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
674 |
|
|
BALANCES,
December 31, 2007 (Restated)
|
|
|
11 |
|
|
|
11 |
|
|
|
12,055 |
|
|
|
3,978 |
|
|
|
34,320 |
|
|
|
(37,240 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,374 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(77 |
) |
|
|
— |
|
|
|
— |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
— |
|
|
|
— |
|
|
|
3,662 |
|
|
|
1,208 |
|
|
|
3,369 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,577 |
|
|
Payment
of AP
|
|
|
— |
|
|
|
— |
|
|
|
136 |
|
|
|
45
|
|
|
|
140 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
185 |
|
|
Payment
of Debt
|
|
|
— |
|
|
|
— |
|
|
|
1,294 |
|
|
|
427 |
|
|
|
885 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,312 |
|
|
Note
extension
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
8 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
| Services |
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
9 |
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
derivative liability reclassification
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,344 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,344 |
) |
|
Compensation
expense due to warrant issuances
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
713 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
713 |
|
|
Compensation
expense due to stock option issuances
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
920 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
920 |
|
|
BALANCES,
December 31, 2008
|
|
|
11 |
|
|
|
11 |
|
|
|
17,198 |
|
|
|
5,675 |
|
|
|
36,034 |
|
|
|
(41,691 |
) |
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Patient
Safety Technologies, Inc. and Subsidiaries
1.
DESCRIPTION OF BUSINESS
Patient
Safety Technologies, Inc. ("PST" or
the "Company")
is a Delaware corporation. The Company’s operations are conducted through its
wholly-owned operating subsidiary, SurgiCount Medical, Inc. (“SurgiCount”),
a California corporation. Operations of the Company’s
subsidiary, Automotive Services Group, Inc., were discontinued during
2007.
The
Company’s operating focus is the development, marketing and sales of products
and services focused in the medical patient safety markets. The
SurgiCount Safety-SpongeTM System
is a patented turn-key system of bar-coded surgical sponges,
SurgiCounter™scanners and software applications which integrate together to form
a comprehensive accounting and documentation system to avoid unintentionally
leaving sponges in patients during surgical procedures.
2. PRIOR PERIOD
CORRECTION OF ERROR
As more
fully described at Note 19, during 2008 the Company determined that it had
understated expenses and accrued liabilities in 2006 and 2007 in connection with
its failure to properly report and account for withholding amounts and related
taxes on stock grants to certain employees and consultants.
In
accordance with SFAS No. 154, “Accounting for Changes and Error
Corrections”, the Company has accounted for this as a correction of
errors in prior periods. As shown below, the cumulative effect of
these errors on prior periods is being recorded through an adjustment
to the opening balance of retained earnings and the carrying amount of accrued
liabilities as of the beginning of the first period
presented. Further, the financial statements for each individual
prior period presented have been adjusted to reflect the correction of the
error.
The
correction of these errors required the following adjustments:
|
|
·
|
Restatement
of the opening balances as of January 1, 2007 reflecting a decrease in the
opening balance retained earnings and an increase in the opening balance
of accrued liabilities in the amount of $486
thousand.
|
|
|
·
|
Restatement
of financial statements for the year ended December 31, 2007 to reflect
additional expenses and related net loss in the amount of $187 thousand,
and an additional increase to accrued liabilities in the amount of $187
thousand as of December 31, 2007.
|
3.
LIQUIDITY AND GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. At December 31, 2008, the Company
has an accumulated deficit of approximately $41.7 million and a working capital
deficit of approximately $5.7 million. For the year ended December 31, 2008, the
Company incurred a loss of approximately $4.5 million and incurred negative cash
flow from operating activities of approximately $4.6 million. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern.
We
believe that existing cash resources, combined with projected cash flow from
operations, will not be sufficient to fund our working capital requirement for
the next twelve months, and that in order to continue to operate as a going
concern it will be necessary to raise additional capital. Management
plans to raise the additional required capital through debt and/or equity
financing transactions. In this regard, the Company received proceeds
of $2.0 million in January 2009 through a debt financing transaction (see Note
21).
The
Company believes that it will be successful in raising additional new capital,
as required. However no assurances can be made that it will be
successful obtaining a sufficient amount of financing to continue to fund its
operations or that the Company will achieve profitable operations and positive
cash flow. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
4.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements for 2008 include the accounts of
the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of these financial statementsrequires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.These estimates and assumptions include, but are not limited to,
assessing the following: the valuation of accounts receivable and inventory,
impairment of goodwill and other intangible assets, the fair value of
stock-based compensation and derivative liabilities, valuation allowance related
to deferred tax assets, warranty obligations, provisions for returns
and allowances and the determination of assurance of the collection of revenue
arrangements.
Revenue
Recognition
The
Company recognizes revenue from the sale of products to end-users, distributors
and strategic partners when persuasive evidence of a sale exists, the product is
complete, tested and has been shipped which coincides with transfer of title and
risk of loss, the sales price is fixed and determinable, collection of the
resulting receivable is reasonably assured, there are no material contingencies
and the Company does not have significant obligations for future
performance. When collectability is not reasonably assured, we defer
the revenue over the cash collection period.Provisions for estimated future
product returns and allowances are recorded in the period of the sale based on
the historical and anticipated future rate of returns. Revenue is
recorded net of any discounts or trade-in allowances given to the
buyer.
We derive
our revenue primarily from the sale of our SurgiCount sponges and the related
hardware. Our revenues are generated by our direct sales force and
independent distributors. Our products are ordered directly by the
hospitals through our distributors and shipped and billed directly. Although
hardware sales are not considered a recurring item, we expect that once an
institution adopts our system, they will be committed to its use and therefore
provide a recurring source of revenues for sales of the safety
sponge.
|
|
·
|
Hardware,
Software and Maintenance Agreement Revenues: As the software included in
the scanner is not incidental to the product being sold, the sale of the
software falls within the scope of SOP 97-2. The scanner is
considered to be a software-related element, as defined in SOP 97-2, since
the software is essential to the functionality of the scanner, and the
maintenance agreement, which provides for product support including
unspecified product upgrades and enhancements developed by the Company
during the period covered by the agreement is considered to be
post-contract customer support (“PCS”) as defined in SOP
97-2. These items are considered to be separate deliverables
within a multiple-element arrangement, and accordingly, the total price of
this arrangement is allocated to each respective deliverable, and
recognized as revenue as each element is delivered. For the hardware and
software elements, delivery is generally considered to be at the time of
shipment where terms are FOB shipping point. In the event that
terms of the sale are FOB customer, the delivery is considered to occur at
the time that delivery to the customer has been
completed. Delivery with respect to the initial one-year
maintenance agreement is considered to occur on a monthly basis over the
term of the one-year period, and revenues related to this element are
recognized on a pro-rata basis during this
period.
|
|
|
·
|
Surgical
Sponge Revenues: As the disposable surgical sponges are sold
separately from the hardware and software described above, the sponges are
not considered to be part of a multiple-element
arrangement. Accordingly, revenues related to the sale of
sponges are recognized in accordance with SAB 104. Generally
revenues from the sale of sponges are recognized upon shipment as most
sponge sales are sold FOB shipping point. In the event that
terms of the sale are FOB customer, revenue is recognized at the time
delivery to the customer has been
completed.
|
Provisions
for estimated future product returns and allowances are recorded in the period
of the sale based on the historical and anticipated future rate of
returns. The Company records shipping and handling costs charged to
customers as revenue and shipping and handling costs to cost of sales as
incurred. Revenue is reduced for any discounts or trade in allowances
given to the buyer.
Financial
Instruments
The
carrying amounts of financial instruments such as cash and cash equivalents,
restricted cash, accounts receivable and accounts payable approximate their fair
values because of the short-term nature of these financial
instruments. Note receivable arrangements
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
include a
market rate of interest and their carrying values approximates fair
value. Convertible debentures and note payable arrangements are based
on borrowing rates currently available to the Company for loans with similar
terms and maturities,are reported at their carrying values, which the Company
believes approximates fair value. Warrants classified as derivative
liabilities are reported at their estimated fair value, with changes in fair
value being report in current period earnings (loss).
Cash
and Cash Equivalents
Cash
equivalents are short-term, highly liquid investments with maturities of three
months or less at the time of purchase. These investments generally
consist of money market funds and commercial paper and are stated at cost, which
approximates fair market value.
Concentration
of Credit Risk
From time
to time, the Company maintains its cash balances at a financial institution that
exceeds the Federal Deposit Insurance Corporation coverage of $250
thousand. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk related to its
cash and cash equivalents.
At
December 31, 2008 and 2007, due to our distribution agreement with Cardinal
Health, we had one individual customer whose receivable balance outstanding that
represented 61% and 62% of the gross account receivable balance, respectively.
During 2008 Cardinal Health represented in excess of 80% our net revenue for the
2008 reporting period.
We rely
primarily on A Plus International to supply our sponge products, but also rely
on a number of third parties to manufacture certain of our products. If any of
our third-party manufacturers cannot, or will not, manufacture our products in
the required volumes, on a cost-effective basis, in a timely manner, or at all,
we will have to secure additional manufacturing capacity. Any interruption or
delay in manufacturing could have a material adverse effect on our business and
operating results.
Accounts
Receivable
Accounts
receivable are recorded at the invoice amount and do not bear
interest. Historically, the Company has not incurred any credit
losses on extended credits. An allowance for bad debts has not been
recorded and is not considered necessary due to the nature of the Company's
customer base and the lack of historical write offs. If customer
payment timeframes were to deteriorate, additional allowances for doubtful
accounts would be required.
Inventories
Inventories,
consisting primarily of hand held scanners at December 31, 2008, are stated at
the lower of cost or market on the first-in, first-out basis. The
Company evaluates inventory on hand against historical and planned usage to
determine appropriate provisions for obsolete, slow-moving and sales
demonstration inventory. Inventory includes material, labor and
overhead costs. While the Company believes the manufacturing
capacity of A Plus will be sufficient to meet expected demand, in the event A
Plus cannot meet requirements, the agreement allows the Company to retain
additional providers of the Safety-Sponge™ products.
SurgiCount
entered into an agreement on August 17, 2005 for A Plus to be the exclusive
manufacturer and provider of the Safety-Sponge™ products, which includes bar
coded gauze sponges, bar coded laparotomy sponges, bar coded O.R. towels and bar
coded specialty sponges. Services to be provided by A Plus include
manufacturing, packaging, sterilization, logistics and all related quality and
regulatory compliance. During the term of the agreement, A Plus
agreed not to manufacture, distribute or otherwise supply any bar coded sponges
for any third party. While the Companybelieves the manufacturing
capacity of A Plus will be sufficient to meet expected demand, in the event A
Plus cannot meet requirements, the agreement allows the Company to retain
additional providers of the Safety-Sponge™ products.
On
January 29, 2007, the Company entered into an Exclusive License and Supply
Agreement (the “Supply Agreement”) with A Plus. Pursuant to the
Supply Agreement, A Plus was granted the exclusive, world-wide license to
manufacture and import SurgiCount's products, including the right to sublicense
to the extent necessary to carry out the grant. The pricing schedule
shall remain at its current price for the first three (3) years of the Supply
Agreement; thereafter, the pricing schedule shall be based upon the Cotlook
Index and the RMB exchange rate. The term of Supply Agreement is
eight years.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In
conjunction with entering into the Supply Agreement the Company also entered
into a subscription agreement with A Plus, in which the Company sold to A Plus
800 thousand shares of Common Stock and a warrant to purchase 300 thousand
shares of common stock. The Warrant has a term of five (5) years and
has an exercise price equal to $2.00 per share. The Company received
gross proceeds of $500 thousand in cash and will receive $500 thousand in
product over the course of the next twelve (12) months. Pursuant to
the subscription agreement with A Plus, the Company appointed Wayne Lin, the
President and Founder of A Plus, to our Board of Directors.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Property, plant and
equipment acquired under capital leases are recorded at the present value of
future minimum lease payments. Leasehold improvements are amortized
using the straight-line method over the shorter of the remaining lease term or
the estimated useful life of the improvement. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. When assets are sold, or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is recorded.
Goodwill
and Intangible Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill and Other Intangible
Assets, goodwill is tested for impairment annually or more frequently if
an event or circumstances indicates that impairment has occurred. The
Company performs impairment reviews at the reporting unit level and uses both a
discounted cash flow model, based on management’s judgment and assumptions, and
a market capitalization model, comparing to other similar public company’s
revenues and enterprise values, to determine the initial estimated fair value of
our single reporting unit. An impairment loss generally would be
recognized when the carrying amount of the reporting unit exceeds the estimated
fair value of the reporting unit. Impairment testing indicated that
the estimated fair value of our single reporting unit exceeded its corresponding
carrying amount, as such; no impairment exists as of December 31, 2008 or
2007.
Gains
(Losses) on Sale of Investments
Amounts
reported as realized gains (losses) are measured by the difference between the
proceeds of sale or exchange and the cost basis of the
investment. Gains (losses) are considered realized when sales or
dissolution of investments are consummated.
Long-Lived
Assets
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, long-lived assets with finite lives are
tested for impairment whenever events or changes in circumstances indicate that
their carrying value may not be recoverable. A significant decrease
in the fair value of a long-lived asset, an adverse change in the extent or
manner in which a long-lived asset is being used or in its physical condition or
an expectation that a long-lived asset will be sold or disposed of significantly
before the end of its previously estimated life are among several of the factors
that could result in an impairment charge.
Recoverability
of assets to be held and used in operations is measured by a comparison of the
carrying amount of an asset to the future net cash flows expected to be
generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs. As of December 31,
2008 and 2007, there was no impairment recorded.
Research
and Development
Research
and development costs
Advertising
Advertising
costs are expensed in the period incurred and reported under sales and marketing
expenses. Advertising costs applicable to continuing operations,
including trade show expenses, amounted to $834thousand and $991 thousand in
2008 and 2007, respectively.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Income
Taxes
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. To the extent that available evidence about future
taxable earnings indicates that it is more likely than not that the tax benefit
associated with the deferred tax assets will not be realized, a valuation
allowance is established.
Derivative
Financial Instruments
The
Company reviews the terms of convertible debt and equity instruments it issues
to determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In circumstances
where the convertible instrument contains more than one embedded derivative
instrument, including the conversion option, that is required to be bifurcated,
the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument. Also, in connection with the sale of
convertible debt and equity instruments, the Company may issue freestanding
warrants that may, depending on their terms, be accounted for as derivative
instrument liabilities, rather than as equity.
Derivative
instruments are initially recorded at fair value and are then revalued at each
reporting date with changes in the fair value reported as charges or credits to
income. When the convertible debt or equity instruments contain
embedded derivative instruments that are to be bifurcated and accounted for as
liabilities, the total proceeds allocated to the convertible host instruments
are first allocated to the fair value of all the bifurcated derivative
instruments. The remaining proceeds, if any, are then allocated to
the convertible instruments themselves, usually resulting in those instruments
being recorded at a discount from their face amount.
The
discount from the face value of the convertible debt, together with the stated
interest on the instrument, is amortized over the life of the instrument through
periodic charges to income, using the effective interest method.
Stock-Based
Compensation
The
Company adopted SFAS No. 123(R), Share-Based Payment, as of
January 1, 2005 using the modified retrospective application method as provided
by SFAS 123(R) and accordingly, financial statement amounts for the prior
periods in which the Company granted employee stock options have been restated
to reflect the fair value method of expensing prescribed by SFAS 123(R). During
the years ended December 31, 2008, and 2007, the Company had stock-based
compensation expense of $1.7 million and $1.1 million,
respectively. The total amount of stock-based compensation for the
year ended December 31, 2008, included common stock valued at $33 thousand,
warrants valued at $713 thousand and stock options valued at $920 thousand.
The total amount of stock-based compensation for the year ended December 31,
2007 of $1.1 million included restricted stock grants valued at $423 thousand
and stock options valued at $674 thousand.
During
the years ended December 31, 2008, and 2007, the Company had stock-based
compensation expense, from issuances of restricted stock and warrants to
consultants of the Company of $0 and $57 thousand, respectively.
Beneficial
Conversion Feature of Convertible Notes Payable
The
convertible feature of certain notes payable provides for a rate of conversion
that is below market value. Such feature is normally characterized as
a Beneficial Conversion Feature (“BCF”). Pursuant
to EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio, EITF No. 00-27, Application of EITF Issue No. 98-5
To Certain Convertible Instruments and APB 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, the estimated fair value of the
BCF is recorded in the consolidated financial statements as a discount from the
face amount of the
notes. Such discounts are amortized to accretion of convertible debt
discount over the term of the notes (or conversion of the notes, if
sooner).
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Warrant
Derivative Liability
The
Company accounts for warrants issued in connection with financing arrangements
in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF
00-19”). Pursuant to EIFT 00-19, an evaluation of specifically
identified conditions is made to determine whether warrants issued are required
to be classified as either equity or a liability. If the
classification required under EITF 00-19 changes as a result of events during a
reporting period, the instrument is reclassified as of the date of the event
that caused the reclassification. In the event that this evaluation
results in a partial reclassification, our policy is to first reclassify
warrants with the latest date of issuance. The estimated fair value
of warrants classified as derivative liabilities is determined using the
Black-Scholes option pricing model. The fair value of warrants
classified as derivative liabilities is adjusted for changes in fair value at
each reporting period, and the corresponding non-cash gain or loss is recorded
in current period loss. There is no limit on the number of times a
contract may be reclassified.
Net
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 consolidated statements of operations. Basic loss per common share
excludes dilution and is computed by dividing lossattributable to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted loss per common share reflects the potential dilution that could occur
if convertible preferred stock or debentures, options and warrants were to be
exercised or converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity.
Since the
effects of outstanding options, warrants and the conversion of convertible
preferred stock and convertible debt are anti-dilutive in all periods presented,
shares of common stock underlying these instruments have been excluded from the
computation of loss per common share, as shown below (in
thousands):
|
|
|
FY
2008
|
|
|
|
|
|
|
|
Convertible
Debentures
|
|
$ |
543 |
|
|
Convertible
Preferred Stock
|
|
|
246 |
|
|
Warrants
|
|
|
10.275 |
|
|
Stock
Options
|
|
|
1.627 |
|
|
Total
|
|
|
13.141 |
|
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS
157”). This statement defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements. This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
board of directors has previous concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Accordingly,
this statement does not require any new fair value
measurements. However for some entities, the application of this
Statement will change the current practice. In February 2008, the
FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157 for all
non-financial assets and liabilities, except those items recognized or disclosed
at fair value on an annual or more frequent recurring basis until years
beginning after November 15, 2008. The Company’s adoption of
SFAS 157 for its financial assets and liabilities on January 1, 2008 did not
have a material impact on the Company’s financial position, cash flows, or
results of operations. The Company is currently reviewing the
adoption requirements related to our nonfinancial assets and liabilities and has
not yet determined the impact, if any, this will have on our financial position,
cash flows, or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment to FASB
Statement No. 115. This statement permits companies to choose to measure
many financial instruments and other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement of accounting for financial instruments. The fair value option
established by this statement permits all entities to measure eligible items at
fair value at specified election dates with the resulting unrealized gains and
losses, if any, reported in earnings.We adopted SFAS 159 on January 1, 2008
and in connection with its adoption, there was no impact on our consolidated
financial statements.
Staff
Accounting Bulletin 110 issued by the SEC was effective for us beginning in the
first quarter of 2008. SAB 110 amends the SEC’s views discussed in Staff
Accounting Bulletin 107 regarding the use of the simplified method in developing
estimates of the expected lives of share options in accordance with SFAS No.
123(R), Share-Based
Payment. We will continue to use the simplified method
until we have the historical data necessary to provide reasonable estimates of
expected lives in accordance with SAB 107, as amended by SAB 110.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), Business
Combinations(“SFAS 141(R)”). This statement requires the
acquiring entity in a business combination to record all assets acquired and
liabilities assumed at their respective acquisition-date fair values, changes
the recognition of assets acquired and liabilities assumed arising from
contingencies, changes the recognition and measurement of contingent
consideration, and requires the expensing of acquisition-related costs as
incurred. SFAS 141(R) also requires additional disclosure of information
surrounding a business combination, such that users of the entity's financial
statements can fully understand the nature and financial impact of the business
combination. We will implement SFAS No. 141(R) on January 1, 2009 and will apply
prospectively to business combinations completed on or after that
date. The Company does not expect an impact on our financial position
or results of operations.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160,Noncontrolling Interests
in Consolidated Financial Statements an amendment of ARB 5 (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also established reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owner. We will
implement SFAS No. 160 on January 1, 2009. As of May 20, 2009, we did not have
any minority interests. Therefore, we do not expect the adoption of this
standard will have a material impact on our income statement, financial position
or cash flows.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133 (“SFAS 161”).The standard requires additional
quantitative disclosures (provided in tabular form) and qualitative disclosures
for derivative instruments. The required disclosures include how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows; relative volume of derivative activity;
the objectives and strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated as the hedging
instrument in a hedge relationship; and the existence and nature of
credit-related contingent features for derivatives. SFAS No. 161 does not
change the accounting treatment for derivative instruments. SFAS No. 161 is
effective for us in the first quarter of fiscal year 2009. The Company does not
expect that the adoption of this standard will have a material impact on our
financial position or results of operations.
In April
2008, the FASB issued FSP FAS 142-3, Determination of Useful Life of
Intangible Assets. FSP FAS 14203 amends the factors that
should be considered in developing the renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS 142,
“Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires
expanded disclosure related to the determination of intangible asset useful
lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is not permitted. We
do not expect FSP FAS 142-3 will have a material impact on our financial
statements.
In May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 requires recognition of both the
liability and equity components of convertible debt instruments with cash
settlement features. The debt component is required to be recognized
at the fair value of a similar instrument that does not have an associated
equity component. The equity component is recognized as the
difference between the proceeds from the issuance of the note and the fair value
of the liability. FSP APB 14-1 also requires an accretion o the
resulting debt discount over the expected life of the
debt. Retrospective application to all periods presented is required
and a cumulative-effect adjustment is recognized as of the beginning of the
first period presented. This standard is effective for us in the
first quarter of fiscal year 2009. We are currently evaluating the
impact of FSP APB 14-1.
In May
2008, the FASB issued Statement of Financial Accounting Standards No.
162. The Hierarchy
of Generally Accepted Accounting Principles (“SFAS 162”), which
reorganizes the GAAP hierarchy. The purpose of the new standard is to
improve financial reporting by providing a consistent framework for determining
what accounting principles should be used when preparing the U.S. GAAP financial
statements. The standard is effective 60 days after the SEC’s
approval of the PCAOB’s amendments to AU Section 411. The adoption of
SFAS 162 will not have an impact on our financial position or results of
operations.
In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
which requires entities to apply the two-class method of computing basic and
diluted earnings per share for participating securities that include awards that
accrue cash dividends (whether paid or unpaid) any time common shareholders
received dividends and those dividends do not need to be returned to the entity
if the employee forfeits the award. FSP EITF 03-6-1 will be effective
for the Company on January 1, 2009 and will require retroactive
disclosure. We are currently
evaluating the impact of adopting FSP EITF 03-6-1 on our consolidated financial
position, cash flows and results of operations.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity’s own Stock” (“EITF
07-5). EITF 07-5 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS No. 133 – specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be consider a derivative
financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception. The Company has outstanding warrants
to purchase common stock that have been preliminarily evaluated as ineligible
for equity classification under EITF 07-5 because of certain provision that may
result in an adjustment to the exercise price of the
warrants. Accordingly, the adjustment feature may cause the warrant
to fail to be indexed solely to the Company’s stock. The warrants
would therefore be classified as liabilities and re-measured at fair value with
changes in the fair value recognized in operating results. The
Company has not completed our analysis of these instruments nor determined the
effects of pending adoption, if any, on our consolidated financial
statements.
5.
DISCONTINUED OPERATIONS
During
2007 the Company discontinued the operations of its Automotive
Services Group subsidiary.
The
following sets forth the discontinued operations for the years ended December
31, 2008 and 2007 related to the Automotive Services Group (in thousands):
|
|
|
Years
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
— |
|
|
$ |
309 |
|
|
Operating
expenses
|
|
|
— |
|
|
|
262 |
|
|
Depreciation
and amortization
|
|
|
— |
|
|
|
22 |
|
|
Goodwill
impairment
|
|
|
— |
|
|
|
— |
|
|
Interest
expense
|
|
|
— |
|
|
|
201 |
|
|
Gain
(loss) on sale of assets
|
|
|
— |
|
|
|
10 |
|
|
Loss
from discontinued operations
|
|
$ |
— |
|
|
$ |
(166 |
) |
6.
RESTRICTED CERTIFICATE OF DEPOSIT
At
December 31, 2008, the Company had a restricted certificate of deposit of
$94thousand, including accrued interest income of $6 thousand, held by a
financial institution securing a letter of credit. This restricted
certificate of deposit is held to cover a portion of the security deposit
related to a lease on the Company’s prior corporate offices that runs through
January 2012.
7.
PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2008and 2007are comprised of the following(in thousands):
|
|
December
31,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
Computer
software and equipment
|
|
$ |
1,086 |
|
|
$ |
767 |
|
|
Furniture
and equipment
|
|
|
215 |
|
|
|
215 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
Property
and equipment, gross
|
|
|
1,301 |
|
|
|
982 |
|
|
Less:
accumulated depreciation
|
|
|
(679 |
) |
|
|
(319 |
) |
|
Property
and equipment, net
|
|
$ |
622 |
|
|
$ |
663 |
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Depreciation
expense for the years ended December 31, 2008 and 2007 was $352 thousand and
$206 thousand, respectively.
The
Company recorded goodwill in the amount of $1.7 million in connection with its
acquisition of SurgiCount Medical,Inc. in February 2005. During the
year ended December 31, 2007, cumulative gross revenues of SurgiCount exceeded
$1.0 million and as such the Company issued 100 thousand shares of common stock,
valued at $145 thousand to the SurgiCount founders, as contingent consideration,
which was recorded as additional goodwill. In addition, in connection
with the SurgiCount acquisition, the Company recorded patents acquired that were
valued at $4.7 million.
We
perform our annual impairment analysis of goodwill in the fourth quarter of each
year according to the provisions of SFAS 142, Goodwill and Other Intangible
Assets (“SFAS 142”). This statement requires that we perform a two-step
impairment test on goodwill. In the first step, we compare the fair value of
each reporting unit to its carrying value. If the fair value of the reporting
unit exceeds the carrying value of the net assets assigned to the reporting
unit, goodwill is not impaired and we are not required to perform further
testing. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, then we must perform the second
step of the impairment testing to determine the implied fair value of the
reporting unit’s goodwill. The implied fair value of goodwill is calculated by
deducting the fair value of all tangible and intangible assets of the reporting
unit, excluding goodwill, from the fair value of the reporting unit as
determined in the first step. If the carrying value of a reporting unit’s
goodwill exceeds its implied fair value, then we record an impairment loss equal
to the difference
During
2008 the Company conducted its annual test for impairment, at
year-end and determined that no impairment of good will was
required.
Goodwill
as of December 31, 2008 and 2007 is as follows (in thousands):
|
|
|
Goodwill
|
|
|
Balance
as of December 31, 2007
|
|
$ |
1,832 |
|
|
Balance
as of December 31, 2008
|
|
$ |
1,832 |
|
Patents,
net, as of December 31, 2008 are composed of the following(in thousands):
|
|
|
Patents
|
|
|
Patents
|
|
$ |
4,685 |
|
|
Accumulated amortization
|
|
|
(1,246 |
) |
|
|
|
$ |
3,439 |
|
The patents
are subject to amortization over their estimated useful life of 14.4
years. Amortization expense was $325 thousand for the years ended December 31,
2008 and 2007. The following table presents estimated amortization expense for
each of the succeeding five calendar years and thereafter (in thousands).
| 2009 |
|
$ |
325 |
|
|
2010
|
|
|
325 |
|
|
2011
|
|
|
325 |
|
|
2012
|
|
|
325 |
|
|
2013
|
|
|
325 |
|
|
Thereafter
|
|
|
1,814 |
|
|
Total
|
|
$ |
3,439 |
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
9.
LONG-TERM INVESTMENTS AND ASSETS HELD FOR SALE
Long-term
investments at December 31, 2008 and December 31, 2007 are comprised of the
following(in
thousands):
|
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
|
Alacra
Corporation
|
|
$ |
667 |
|
|
$ |
667 |
|
|
Investments
in Real Estate
|
|
|
— |
|
|
|
406 |
|
|
|
|
$ |
667 |
|
|
$ |
1,073 |
|
Alacra
Corporation
At
December 31, 2008, the Company had an investment in shares of Series F
convertible preferred stock of Alacra Corporation (“Alacra”),
recorded at its cost of $667 thousand. The Company has the right, to the extent
that Alacra has sufficient available capital, to have the Series F convertible
preferred stock redeemed by Alacra for face value plus accrued dividends
beginning on December 31, 2006. During the year ended December 31, 2008, Alacra
redeemed one-third of the Series F convertible preferred
stock. Alacra, based in New York, is a global provider of business
and financial information.
Investments
in Real Estate
During
the year ended December 31, 2008, all real estate investments were sold for net
proceeds of $315, which resulted in a loss on sale in the amount of
$91. At December 31, 2007, the Company’s real estate
investments,which were classified as “Assets Held for Sale” in accordance with
SFAS No. 144, consisted of approximately 8.5 acres of undeveloped land in
Heber Springs, Arkansas and 0.61 acres of undeveloped land in Springfield,
Tennessee, which were recorded at their cost of $406 thousand.
10.
CONVERTIBLE DEBENTURES & NOTES PAYABLE
Convertible
Debentures
Convertible
debenturesat December 31, 2008 and 2007 are comprised of the following (in thousands):
|
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
Ault
Glazer Capital Partners, LLC (a) *
|
|
$ |
1,425 |
|
|
$ |
2,531 |
|
|
Charles
Kalina III (b)
|
|
|
— |
|
|
|
400 |
|
|
James
Sveinson (c)
|
|
|
— |
|
|
|
101 |
|
|
Michael
Sedlak (d)
|
|
|
— |
|
|
|
71 |
|
|
David
Spiegel (e)
|
|
|
65 |
|
|
|
— |
|
|
Total
convertible debentures
|
|
|
1,490 |
|
|
|
3,103 |
|
|
Less: unamortized
discount
|
|
|
(14 |
) |
|
|
— |
|
|
|
|
|
1,476 |
|
|
|
3,103 |
|
|
Less: current
portion
|
|
|
(1,425 |
) |
|
|
(572 |
) |
|
Convertible
debentures - long term portion
|
|
$ |
51 |
|
|
$ |
2,531 |
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Maturities
of the convertible debentures at December 31, 2008 are as follows (in thousands):
|
Years
Ending December 31,
|
|
|
|
|
2009
|
|
$ |
1,425 |
|
|
2010
|
|
|
65 |
|
|
Thereafter
|
|
|
— |
|
|
Total
|
|
$ |
1,490 |
|
| |
|
|
|
|
·
|
Related
Party (See Note 10)
|
|
(a)
|
As
of December 31, 2006, Ault Glazer Capital Partners, LLC loaned $1.5
million to ASG in addition to the ASG Note. The loans were
advanced to ASG, pursuant to the terms of a Real Estate Note dated July
27, 2005, as amended (the "Real
Estate Note"). The Real Estate Note had an interest rate of 3%
above the Prime Rate as published in the Wall Street Journal. All unpaid
principal, interest and charges under the Real Estate Note were due in
full on July 31, 2010. The Real Estate Note was collateralized
by a mortgage on certain real estate owned by ASG pursuant to the terms of
a Future Advance Mortgage Assignment of Rents and Leases and Security
Agreement dated July 27, 2005 between ASG and the Fund. During
the year ended December 31, 2007 the Company incurred interest expense of
$70,000 on the Real Estate Note.
|
On March
7, 2006, the Company entered into a line of credit agreement with Ault Glazer
Capital Partners pursuant to a Revolving Line of Credit Agreement (the “Revolving Line
of Credit”). The Revolving Line of Credit allowed the Company to request
advances of up to $500 thousand. Each advance under the Revolving Line of Credit
was evidenced by a secured promissory note and a security agreement. The secured
promissory notes issued pursuant to the Revolving Line of Credit required
repayment with interest at the Prime Rate plus 1% within 60 days from issuance.
The outstanding principal balance of $394 thousand and accrued interest of $28
thousand, which was in default, was converted into 337 thousand shares of the
Company’s common stock at a conversion price of $1.25 per share on May 31,
2007. During the year ended December 31, 2007 the Company incurred
interest expense of $15 thousand on the Revolving Line of Credit.
Effective
June 1, 2007, the entire unpaid principal and interest under the ASG Note and
Real Estate Note were restructured into a new Convertible Secured Promissory
Note (the "AG Capital
Partners Convertible Note") in the principal amount of $2.5 million with
an effective date of June 1, 2007. The AG Partners Convertible Note
bears interest at the rate of 7% per annum and is due on the earlier of December
31, 2010, or the occurrence of an event of default. During the
year ended December 31, 2007, the Company incurred interest expense of $103
thousand on the AG Capital Partners Convertible Note.
On
September 5, 2008, the Company entered into an Amendment and Early Conversion of
the Secured Convertible Promissory Note (the “Amendment”). The
Amendment allowed for the conversion, prior to the maturity date, of the
outstanding principal balance of the Note into 1,300,000 shares of Patient
Safety common stock and $450,000 in cash prepayments. According to
the Amendment, after the prepayments were made, the Note could be converted into
1,300,000 shares of common stock upon Ault Glazer’s satisfaction of certain
conditions. During the fiscal year ended December 31, 2008, the
Company incurred interest expense of $127 thousand on the AG Capital Convertible
Partners Note.
On
September 12, 2008, the parties executed an Agreement for the Advancement of
Common Stock Prior to close of the Amendment and Early Conversion of Secured
Convertible Promissory Note, dated September 5, 2008
(“Advancement”).
Ault
Glazer failed to satisfy the conditions by the deadline stated in the
Advancement. Although the conditions remained unsatisfied, the
Company made two additional issuances of shares to Ault Glazer pursuant to the
Amendment. The Company issued
another 250,000 shares on October 10, 2008 and another 250,000 shares on
November 6, 2008. As of this date, there remain 500,000 shares
issuable to Ault Glazer upon Ault Glazer meeting the conditions of the
Amendment.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
|
(b)
|
On
July 12, 2006 the Company, executed a Convertible Promissory Note in the
principal amount of $250 thousand in favor of Charles J. Kalina, III, an
existing shareholder of the Company. On November 3, 2006 the balance due
under the $250 thousand Convertible Promissory Note was added to a new
Convertible Promissory Note in the principal amount of $400 thousand (the
“Kalina
Note”), pursuant to which the Company received proceeds of
approximately $150 thousand. The Kalina Note accrued interest
at the rate of 12% per annum and was due on January 31,
2008. On May 20, 2008, the principal and accrued interest on
the Kalina Note, in the aggregate amount of $426 thousand, was exchanged
for equity in the Company. Mr. Kalina received 341 thousand
shares of the Company’s common stock and a warrant to purchase 205
thousand shares of the Company’s common stock at $1.40 per
share. During the fiscal years ended December 31, 2008 and
2007, the Company incurred interest expense, excluding amortization of
debt discount of $19 thousand and $46 thousand, respectively, on the
Kalina Note. At December 31, 2007 accrued interest on the Kalina Note
totaled $8 thousand.
|
|
(c)
|
On
November 1, 2006 we entered into a Convertible Promissory Note with James
Sveinson in the principal amount of $101 thousand (the “Sveinson
Note”). The Sveinson Note was repaid in full as of December 31,
2008. During the fiscal years ended December 31, 2008 and 2007,
the Company incurred interest expense, excluding amortization of debt
discount of $2 thousand and $12 thousand, respectively, on the Sveinson
Note.
|
|
(d)
|
On
November 1, 2006 we entered into a Convertible Promissory Note with
Michael G. Sedlak in the principal amount of $71 thousand (the “Sedlak
Note”). The Sedlak Note was repaid in full as of December 31,
2008.During the fiscal years ended December 31, 2008 and 2007, the Company
incurred interest expense, excluding amortization of debt discount of $9
thousand and $8 thousand, respectively, on the Sedlak
Note.
|
|
(e)
|
On
October 27, 2008 we entered into a Discount Convertible Debenture with
David Spiegel in the principal amount of $65 thousand (the “Spiegel
Note”) with a 9% original issue discount of $15
thousand. The Note is convertible at any time, in whole or in
part, into common stock of the Company at a conversion price of $1.50 per
common shareat the option of the holder.. During the fiscal year ended
December 31, 2008, the Company incurred interest expense and amortization
of the debt discount of $1 thousand on the Spiegel
Note.
|
Notes
Payable
Notes
payable at December 31, 2008 and 2007 are comprised of the following (in thousands):
|
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
Herb
Langsam (a)*
|
|
$ |
600 |
|
|
$ |
600 |
|
|
Catalysis
Offshore (b)*
|
|
|
250 |
|
|
|
— |
|
|
Catalysis
Partners (b)*
|
|
|
250 |
|
|
|
— |
|
|
Total
notes payable
|
|
|
1,100 |
|
|
|
600 |
|
|
Less: current
portion
|
|
|
(1,100 |
) |
|
|
(600 |
) |
|
Notes
payable - long term portion
|
|
$ |
— |
|
|
$ |
— |
|
Maturities
of the notes payable at December 31, 2008 are as follows (in thousands):
|
Years
Ending December 31,
|
|
|
|
|
2009
|
|
|
1,100 |
|
|
Thereafter
|
|
|
— |
|
|
Total
|
|
$ |
1,100 |
|
* Related
party (see Note 10)
|
(a)
|
On
May 1, 2006, Herbert Langsam, a Class II Director of the Company, loaned
the Company $500 thousand. The loan is documented by a $500 thousand
Secured Promissory Note (the “Langsam
Note”) payable to the Herbert Langsam Irrevocable Trust. The
Langsam Note accrues interest at the rate of 12% per annum and had a
maturity date of November 1, 2006. This note was not repaid by the
scheduled maturity and to date has not been extended, therefore the
Langsam Note is recorded in current liabilities. Accordingly, the note is
currently in default and therefore accruing interest at the rate of 16%
per annum. Pursuant to the terms of a Security Agreement dated May 1,
2006, the Company granted the Herbert Langsam Revocable Trust a security
interest in all of the Company’s assets as collateral for the satisfaction
and performance of the Company’s obligations pursuant to the Langsam
Note.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
On
November 13, 2006, Mr. Langsam, loaned the Company an additional $100 thousand.
The loan is documented by a $100 thousand Secured Promissory Note (the “Second Langsam
Note”) payable to the Herbert Langsam Irrevocable Trust. The Second
Langsam Note accrues interest at the rate of 12% per annum and had a maturity
date of May 13, 2007. The Company is in the process of restructuring the debt
that is owed to Mr. Herbert Langsam. Mr. Langsam received warrants to purchase
50 thousand shares of the Company’s common stock at an exercise price of $1.25
per share as additional consideration for entering into the loan agreement. The
Company recorded debt discount in the amount of $17 thousand as the estimated
value of the warrants. The debt discount was amortized as non-cash interest
expense over the term of the debt using the effective interest method. During
fiscal years ended December 31, 2008 and 2007, interest expense of $0 and $12
thousand, respectively, was recorded from the debt discount
amortization. Pursuant to the terms of a Security Agreement dated
November 13, 2006, the Company granted the Herbert Langsam Revocable Trust a
security interest in all of the Company’s assets as collateral for the
satisfaction and performance of the Company’s obligations pursuant to the Second
Langsam Note.
On
December 29, 2008 Mr. Langsam received 25 thousand shares of the Company’s
common stock to extend the maturity dates of both loans to June 30,
2009.
During
the year ended December 31, 2008 and 2007, the Company incurred interest
expense, excluding amortization of debt discount, of $96 thousand and $88
thousand, respectively, on the Langsam Notes. At December 31, 2008
and 2007, accrued interest on the Langsam Notes totaled $186 thousand and $138
thousand, respectively.
|
(b)
|
Between
February 28, 2008 and March 20, 2008, Catalysis Offshore, Ltd. and
Catalysis Partners, LLC (collectively “Catalysis”),
related parties, each loaned $250 thousand to the Company. As
consideration for the loans, the Company issued Catalysis promissory notes
in the aggregate principal amount of $500 thousand (the “Catalysis
Notes”). The Catalysis Notes accrue interest at the rate of 8% per
annum and had maturity dates of May 31, 2008. The managing partner of
Catalysis is Francis Capital Management, LLC (“Francis
Capital”), an investment management firm. John Francis, a director
of the Company and President of Francis Capital, has voting and investment
control over the securities held by Catalysis. Francis Capital, including
shares directly held by Catalysis, beneficially owns 1.3 million shares of
the Company’s common stock and warrants for purchase of 808 thousand
shares of the Company’s common stock. During the fiscal year
ended December 31, 2008, the Company incurred interest expense of $50
thousand on the Catalysis Notes. At December 31, 2008 accrued
interest on the Catalysis Notes totaled $50
thousand.
|
11.
ACCRUED LIABILITIES
Accrued
liabilities at December 31, 2008 and 2007 are comprised of the following(in thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Accrued
interest
|
|
$ |
237 |
|
|
$ |
168 |
|
|
Accrued
lease liability
|
|
|
56 |
|
|
|
— |
|
|
Accrued
derivative liability
|
|
|
1,766 |
|
|
|
— |
|
|
Accrued
dividends on preferred stock
|
|
|
134 |
|
|
|
134 |
|
|
Accrued
salaries
|
|
|
17 |
|
|
|
212 |
|
|
Accrued
officer severance
|
|
|
268 |
|
|
|
— |
|
| Accrued
director's fees |
|
|
145 |
|
|
|
— |
|
| Contingent
tax liability |
|
|
701 |
|
|
|
673 |
|
| Other |
|
|
34 |
|
|
|
6 |
|
| Total
accrued liabilities |
|
$ |
3,358 |
|
|
$ |
1,193 |
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
12.
EQUITY TRANSACTIONS
Convertible
Preferred Stock
The
convertible preferred stock has a cumulative 7% quarterly dividend and is
convertible into the number of shares of common stock by dividing the purchase
price for the convertible preferred stock by conversion price in effect,
currently $4.44. The convertible preferred stock has anti-dilution provisions,
which can change the conversion price in certain circumstances. In the event the
Company subdivides its outstanding shares of common stock into a greater number
of shares of common stock the conversion price in effect would be reduced,
thereby increasing the total number of shares of common stock that the
convertible preferred stock is convertible into. The holder has the
right to convert the shares of convertible preferred stock at any time until
February 22, 2010 into common stock. Upon liquidation, dissolution or
winding up of the Company, the stockholders of the convertible preferred stock
are entitled to receive $100 per share plus any accrued and unpaid dividends
before distributions to any holder of the Company’s common stock.
Common
Stock
On
January 29, 2007, the Company entered into a subscription agreement with A Plus,
pursuant to which the Company sold to A Plus 800 thousand shares of its common
stock and warrants to purchase an additional 300thousand shares of its common
stock. The Company received gross proceeds of $500thousand in cash
and a $500 thousand deposit against future shipments.The deposit was fully
utilized at December 31, 2007. The warrants have a term of five (5) years and an
exercise price equal to $2.00 per share.
Between
January 29, 2007 and June 7, 2007, the Company entered into a subscription
agreement with several accredited investors in a private placement exempt from
the registration requirements of the Securities Act of 1933, as amended (the
“Securities
Act”). The Company issued and sold to the investors an
aggregate of 2.2 million shares of its common stock and warrants to purchase an
additional 1.1 million shares of its common stock. The warrants are
exercisable for a period of three to five years, have an exercise price equal to
$2.00, and 50% of the warrants are callable upon the occurrence of any one of a
number of specified events when, after any such specified occurrence, the
average closing price of the Company’s common stock during any period of five
consecutive trading days exceeds $4.00 per share. These issuances
resulted in aggregate gross proceeds to the Company of $2.7 million.The Company
was required to file a registration statement within 120 days after April 5,
2007 covering the resale of 2.0 million shares of our Common Stock purchased in
these private placements. The registration statement was not filed
until November 16, 2007 and we therefore issued, as liquidated damages, warrants
with a term of five years and an exercise price of $2.00 per share to purchase
200 thousandshares of our Common Stock. We recognized $193 thousand
in expense as a result ofthese liquidated damaged
Pursuant
to the Merger between the Company and SurgiCount, in the event that prior to the
fifth anniversary of the closing of the Merger the cumulative gross revenues of
SurgiCount exceed $1.0 million, the Company is obligated to issue an additional
100thousand shares of the Company’s common stock to certain SurgiCount founders.
As discussed in Note 7, cumulative gross revenues of SurgiCount exceeded $1.0
million and therefore the Company issued an additional 100thousand shares of the
Company’s common stock, valued at $145thousand. Between June 2007 and
December 2007 the Company recorded $145 thousand of goodwill as a result of
these issuances, based on the estimated fair value of the shares.
On
October 17, 2007, the Company sold, in a private placement exempt from the
registration requirements of the Securities Act, 1.3 million shares of the
Company’s common stock at $1.25 price per share and issued five-year warrants to
purchase 763thousand shares of common stock at an exercise price of $1.40 per
share, pursuant to a Securities Purchase Agreement entered into with Francis
Capital Management, LLC, (“Francis
Capital”) an accredited investor. The investor paid $1.5
million in cash and agreed to extinguish $90thousand in existing debt owed to it
by the Company.
On May
27, 2008 the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act. The Company issued and sold to
these accredited investors an aggregate of 2.1 million shares of its common
stock and warrants to purchase an additional 1.3 million shares of its common
stock. The warrants are
exercisable for a period of five years, have an exercise price equal to
$1.40. These issuances resulted in aggregate gross proceeds to the
Company of $2.2 million and the extinguishment of $426 thousand in existing
debt. We used the net proceeds from this private placement
transaction primarily for general corporate purposes and repayment of existing
liabilities. Between
April 2008 and June 2008, the Company issued 1.7 million warrants to officers,
directors and consultants of the Company. The warrants were issued in
place of prior issuances of stock options with exercise prices well above market
price that were cancelled. The exercise prices of the warrants were
$1.25 and $1.75 and vested over four years. During this same time
period, 263 thousand warrants were issued to directors and consultants with an
exercise price of $1.25 and $1.75 that vested upon grant.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
On July
31, 2008, the Company issued 153 thousand shares of its common stock to Ault
Glazer Capital Partners, LLC. The shares were issued in satisfaction
of unpaid accrued interest of $103 thousand due on the senior secured promissory
note held by Ault Glazer Capital Partners and prepaid interest of $127
thousand. The accrued interest paid, which was in default, was
converted into shares of the Company’s common stock at a conversion price of
$1.50 per share.
On August
1, 2008 the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act. The Company issued and sold to
these accredited investors an aggregate of 2.0 million shares of its common
stock and warrants to purchase an additional 1.2 million shares of its common
stock. The warrants are exercisable for a period of five years, have
an exercise price equal to $1.40. These issuances resulted in
aggregate gross proceeds to the Company of $2.4 million and $83 thousand in debt
extinguishment which included $50 thousand paid in common stock and $37 thousand
was forgiven. We used the net proceeds from this private placement
transaction primarily for general corporate purposes and repayment of existing
liabilities. Between
September 12, 2008 and November 6, 2008 the Company issued 800 thousand shares
of common stock to Ault Glazer Capital Partners, LLC. The shares were
issued in partial satisfaction of the senior secured promissory note held by
Ault Glazer Capital Partners. The issuance of the
Company’s common stock reduced the principal balance.
On
December 29, 2008, we issued 25 thousand shares of common stock to Herbert
Langsam, currently a director of the Company. The shares were issued,
in return for a maturity date extension to June 30, 2009, on two loans held by
Mr. Langsam. Prior to December 29, 2008 the loans had been in
default.
13.
WARRANTS AND WARRANT DERIVATIVE LIABILITY
The
following table summarizes warrants to purchase common stock activity for the
two years ended December 31, 2008:
| |
|
|
|
|
Range
of Exercise
|
|
| |
|
Amount
|
|
|
Price
|
|
|
Warrants
outstanding December 31, 2006
|
|
|
3,274,521 |
|
|
|
$1.25
- $6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
2,872,120 |
|
|
|
$1.40
- 2.00
|
|
|
Cancelled/Expired
|
|
|
(32,120 |
) |
|
|
$3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding December 31, 2007
|
|
|
6,114,521 |
|
|
|
$1.25
- $6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
4,617,875 |
|
|
|
$1.40
- 2.00
|
|
|
Cancelled/Expired
|
|
|
(12,500 |
) |
|
|
$3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding December 31, 2008
|
|
|
10,719,896 |
|
|
|
$1.25
- $6.05
|
|
The
warrants issued during the year ended December 31, 2008 and 2007 were issued
primary in connection with the various subscription agreements entered into by
the Company as well as payments for services and accrued interest. The warrants
outstanding as of December 31, 2008 have exercise terms of 3-5 years from the
date of issuance and exercise dates ranging from June 2009 through September
2013.
As
discussed in Note 4, EITF 00-19 requires analysis of criteria which must be met
in order to classify warrants issued in a Company’s own stock as either equity
or liabilities. Evaluation of these criteria during, 2008 resulted in
the determination that certain outstanding warrants should be classified as
derivative liabilities.
Based on
this analysis, 5.3 million warrants have been classified as warrant derivative
liabilities. As of December 31, 2008, the total fair value of the
warrant derivative liabilities is $1.8 million, which is included as a component
of accrued liabilities. Based on the change in fair value of the
warrant derivative liability, the Company recorded a non-cash gain of $2.6
million for the year ending December 31, 2008.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
14.
FAIR VALUE MEASUREMENTS
We
adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities
measured on a recurring basis. SFAS 157 defines fair value,
establishes a framework for measuring fair value and generally accepted
accounting principles and expands disclosures about fair value
measurements. This standard applies in situations where other
accounting pronouncements either permit or require fair value
measurements. SFAS 157 does not require any new fair value
measurements.
Fair
value is defined in SFAS 157 as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurements are to
be considered from the perspective of a market participant that holds the assets
or owes the liability. SFAS 157 also establishes a fair value
hierarchy which required an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
The
standard describes three levels of inputs that may be used to measure fair
value:
Level 1:
Quoted prices in active markets for identical or similar assets and
liabilities.
Level
2: Quoted prices for identical or similar assets and liabilities in
markets that are not active or observable inputs other than quoted prices in
active markets for identical or similar assets and liabilities.
Level
3: Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
At
December 31, 2008 the Company had outstanding warrants to purchase common shares
of our stock that are classified as warrant derivative liabilities with a fair
value of $1.8 million. The warrants are valued using Level 3 inputs
because there are significant unobservable inputs associated with
them.
The table
below sets forth a summary of changes in the fair value of the Company’s
Level 3 assets and liabilities for the year ended December 31,
2008.
|
|
|
January
1,
2008
|
|
|
Transfers
into
Level
3
|
|
|
Net
realized gains
included
in earnings
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
derivative liability
|
|
|
— |
|
|
$ |
(
4,344 |
) |
|
$ |
2,582 |
|
|
$ |
(1,766 |
) |
Gains
included in earnings for the period ended December 31, 2008, are reported in
other income/expensein the amount of $2.6 million.
15.
STOCK OPTION PLANS
In
September 2005, the Board of Directors of the Company approved the Amended and
Restated 2005 Stock Option and Restricted Stock Plan (the “2005
SOP”) and the Company’s stockholders approved the Plan in November 2005.
The Plan reserves 2.5 million shares of common stock for grants of incentive
stock options, nonqualified stock options, warrants and restricted stock awards
to employees, non–employee directors and consultants performing services for the
Company. Options granted under the Plan have an exercise price equal to or
greater than the fair market value of the underlying common stock at the date of
grant and become exercisable based on a vesting schedule determined at the
date of grant. The options expire 10 years from the date of grant.
Restricted stock awards granted under the Plan are subject to a vesting period
determined at the date of grant.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
A summary
of stock option activity for the year ended December 31, 2008 is presented
below(in thousands except
exercise price and weighted average):
|
|
|
|
|
|
Outstanding
Options
|
|
|
|
|
Shares
Available
for
Grant
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
1 |
|
|
|
1,650 |
|
|
$ |
3.49 |
|
|
|
8.43 |
|
|
$ |
— |
|
|
Restricted
Stock Awards
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
(745
|
) |
|
|
745 |
|
|
$ |
1.53 |
|
|
|
9.76 |
|
|
|
|
|
|
Cancellations
|
|
|
768 |
|
|
|
(768 |
) |
|
$ |
4.59 |
|
|
|
8.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
24
|
|
|
|
1,627 |
|
|
$ |
4.40 |
|
|
|
8.50 |
|
|
$ |
— |
|
|
Options
exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
833 |
|
|
$ |
4.90 |
|
|
|
8.54 |
|
|
$ |
— |
|
|
December
31, 2007
|
|
|
|
|
|
|
783 |
|
|
$ |
4.40 |
|
|
|
7.83 |
|
|
$ |
— |
|
|
December
31, 2008
|
|
|
|
|
|
|
1,171 |
|
|
$ |
2.62 |
|
|
|
8.50 |
|
|
$ |
— |
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (i.e., the difference between our closing stock price on
December 31, 2008and the exercise price, times the number of shares) that
would have been received by the option holders had all option holders exercised
their options on December 31, 2008. There have been no options exercised
during the year ended December 31, 2008.
A summary
of the changes in the Company’s non-vested options during the year ended
December 31, 2008 is as follows(in thousands, except value):
|
Nonvested
Shares
|
|
Shares
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31,2007
|
|
|
1,166 |
|
|
$ |
1.75 |
|
|
Granted
|
|
|
745 |
|
|
|
2.62 |
|
|
Vested
|
|
|
710 |
|
|
|
2.28 |
|
|
Cancelled
and forfeited
|
|
|
(15
|
) |
|
|
5.48 |
|
|
Nonvested
at December 31,2008
|
|
|
1,187 |
|
|
|
2.62 |
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
All
options that the Company granted during 2008 and 2007were granted at the per
share fair market value on the grant date. Vesting of options differs based on
the terms of each option. The Company utilized the Black-Scholes option pricing
model and the assumptions used for each period are as follows:
| |
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Weighted
average risk free interest rate
|
|
|
3.60
|
% |
|
|
4.50
|
% |
|
Weighted
average life (in years)
|
|
|
8.24 |
|
|
|
5.00 |
|
|
Volatility
|
|
|
113
- 135 |
% |
|
|
98
- 101 |
% |
|
Expected
dividend yield
|
|
|
0
|
% |
|
|
0
|
% |
|
Weighted
average grant-date fair value per share of options granted
|
|
$ |
0.95 |
|
|
$ |
1.16 |
|
During
the year ended December 31, 2008, the Company recorded compensation costs
related to stock options of $920 thousand. As of December 31, 2008,
total unrecognized compensation cost related to unvested stock options was
$1,064 thousand. The cost is expected to be recognized over a
weighted average period of 6.3 years.
16.
RELATED PARTY TRANSACTIONS
Due
from Related Parties
During
the three months ended March 31, 2007 and year ended December 31, 2006, the
Company paid approximately 25% of the base rent on the corporate offices and The
Ault Glazer Group, Inc. ("Ault
Glazer") paid the remaining base rent based upon their respective usage
of the facilities. The office equipment leases and 25% of the security deposit
securing the office lease are in the Company’s name. As part of the
Ault Glazer Capital Partners LLC (“AG Capital Partners”)
Secured Promissory Note Amendment, these leases and the security deposit were to
be taken out of the Company’s name and put into AG Capital Partners
name. This has not happened and the equipment leases are currently in
default and our shown on our balance sheet as a current
liability. The total outstanding balance on the equipment leases as
of December 31, 2008 is $55 thousand.
Together,
Milton “Todd” Ault III, former Chairman and Chief Executive Officer of the
Company, and Louis Glazer, a former Director of the Company, and Melanie Glazer,
the former Manager of our real estate segment, (together, the “Glazers”)
own a controlling interest in the outstanding capital stock of Ault
Glazer. As of December 31, 2008 and 2007, the Glazers beneficially
own approximately 98% of the outstanding preferred stock of the
Company. As of December 31, 2008 and December 31, 2007, Ault Glazer,
Mr. Ault and the Glazers indirectly beneficially owned or controlled greater
than 10% and less than 1% of the outstanding common stock of the
Company.
Loans
During
the year ended December 31, 2007, the Company received loans from Ault Glazer
Capital Partners, LLC (“AG Capital Partners”). Ault Glazer &
Company Investment Management, LLC is the managing member of AG
Capital. The managing member of Ault
Glazer & Company Investment Management, LLC is Ault Glazer. Mr.
Ault is Chairman, Chief Executive Officer and President of Ault
Glazer.
Convertible
Debentures and Notes Payable
As of
December 31, 2008 and 2007, the Company has convertible debentures
and notes payable agreements issued to related parties with aggregate
outstanding principal balances of $2.5 million and $3.1 million, respectively
(See Note 10).
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
A
Plus International, Inc.
During
the years ended December 31, 2008 and 2007, the Company recognized cost of goods
sold of $1.4 million and $467 thousand, respectively, in connection with
surgical sponges provided by A Plus. As part of the May 2008
financing, the Company recorded $700 thousand in prepaid expenses to be used
against inventory ordered from A Plus. As of December 31, 2008 the
entire $700 thousand had been applied to surgical sponge purchases, leaving a
balance of zero in prepaid expenses relating to this
transaction. Wenchen Lin, a director and significant beneficial owner
of the Company is a founder and significant owner of A Plus.
Health
West Marketing Inc.
During
the years ended December 31, 2008 and 2007 Health West Marketing Incorporated
received payments for consulting services, of $240 thousand annually, from A
Plus International, Inc. William Adams the Company’s former Chief
Executive Officer is the Chief Executive Officer and President of Health West
Marketing Inc. The consulting arrangement between A Plus and Health
West has been an ongoing agreement between the respective
parties. The Company does not recognize this income or expense on
their financial statements.
ASG
During
the period from June 29, 2007 to August 13, 2007, Automotive Services Group sold
its express car wash and underlying real estate and a parcel of undeveloped land
located in Birmingham, Alabama to Charels H. Dellaccio and Darrell
Grimsley. Mr. Grimsley was the Chairman of the Board and Chief
Executive Officer of Automotive Services Group.
17. INCOME
TAXES
For
financial reporting purposes, income (loss) before income taxes includes the
following components for the years ended December 31, 2008 and
2007:
|
|
|
2008
|
|
|
2007
|
|
|
United
States
|
|
$ |
(4,814 |
) |
|
$ |
(6,997 |
) |
|
Foreign
|
|
|
- |
|
|
|
- |
|
|
|
|
$ |
(4,814 |
) |
|
$ |
(6,997 |
) |
The
(benefits) provisions for income taxes for the years ended December 31, 2008 and
2007 are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$ |
- |
|
|
$ |
26 |
|
|
State
|
|
|
18 |
|
|
|
5 |
|
|
Subtotal
current
|
|
|
18 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(428 |
) |
|
|
- |
|
|
State
|
|
|
(28 |
) |
|
|
- |
|
|
Subtotal
deferred
|
|
|
(456 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
(benefit) provision for income taxes
|
|
|
(439 |
) |
|
|
31 |
|
For
the years ended December 31, 2008 and 2007, a reconciliation of the federal
statutory tax rate to the Company's effective tax rate is as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
Federal
statutory tax rate
|
|
|
(34.00 |
)
% |
|
|
(34.00 |
)
% |
| Warrant
derivative liability |
|
|
(17.95 |
) |
|
|
- |
|
|
State
and local income taxes, net of federal tax Benefit
|
|
|
(7.02 |
) |
|
|
0.08 |
|
|
FIN
48 Adjustments
|
|
|
80.74 |
|
|
|
-
|
|
| Non
deductible items |
|
|
0.94 |
|
|
|
-
|
|
| Incentive
stock options |
|
|
11.58 |
|
|
|
- |
|
| Other |
|
|
5.70 |
|
|
|
- |
|
|
Valuation
allowance
|
|
|
(48.97 |
) |
|
|
27.89 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
effective tax rate
|
|
|
(8.99 |
)
% |
|
|
(0.41 |
)
% |
Deferred income
taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for tax purposes. Significant components of the
Company’s deferred tax assets as of December 31, 2008 and 2007 are as follows
(in
thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Payroll
related accruals
|
|
$ |
329 |
|
|
$ |
268 |
|
|
Intangible
assets
|
|
|
- |
|
|
|
100 |
|
|
Stock
based compensation
|
|
|
- |
|
|
|
1,959 |
|
|
Other
|
|
|
25 |
|
|
|
68 |
|
|
Total
deferred tax asset
|
|
|
354 |
|
|
|
2,395 |
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(26 |
) |
|
|
0 |
|
|
Book
and tax basis difference arising from purchased patents
|
|
|
(1,370 |
) |
|
|
(1,500 |
) |
|
Total
net deferred tax (liability) asset
|
|
|
(1,042 |
) |
|
|
895 |
|
|
Less
valuation allowance
|
|
|
- |
|
|
|
(2,395 |
) |
|
Net
deferred tax liability
|
|
$ |
(1,042 |
) |
|
$ |
(1,500 |
) |
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
The
ultimate realization of deferred tax assets depends upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. As of December 31, 2008, the Company has provided
a valuation allowance in the amount of $0, a decrease of $2,395. The
federal and state net operating losses expire in varying amounts through
2028.
On
January 1, 2007 the Company adopted the provisions of the Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB No. 109” (“FIN
No. 48”). FIN No. 48 addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN No. 48, the Company must recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
resolution. The Company did not recognize any additional liabilities for
uncertain tax positions as a result of the implementation of FIN
No. 48.
As of
December 31, 2008, the Company has not yet completed its analysis of the
deferred tax assets for federal and state net operating losses of $30 million
and $29 million, respectively. The Company has not yet completed its
analysis of the deferred tax asset for stock compensation of $3 million issued
prior to 2008. As such, these amounts and the offsetting valuation
allowance have been removed from the Company's deferred tax
assets. The Company will complete an analysis of the net operating
losses under Internal Revenue Code §382 regarding the limitation of the net
operating losses. Future changes in ownership could further limit the ability to
recognize the benefits of its deferred tax assets.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Gross
unrecognized tax benefits at January 1
|
|
$
|
—
|
|
$
|
—
|
|
Increases
for tax positions in current year
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Gross
unrecognized tax benefits at December 31
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
The
Company’s uncertain tax positions are related to tax years that remain subject
to examination by the relevant taxing authorities. The Company is currently open
to audit under the statute of limitations by the Internal Revenue Service for
the calendar years ended December 31, 2005 through December 31, 2008.
The Company and its subsidiaries’ state tax returns are also open to audit under
similar statute of limitations for the calendar years ended December 31,
2004 through December 31, 2008. The Company is currently not under
examination by any taxing authorities.
The
Company accrues interest on unrecognized tax benefits as a component of income
tax expense. Penalties, if incurred, would be recognized as a component of
income tax expense. The Company had no such accrued interest or penalties
included in the accrued liabilities associated with unrecognized tax benefits as
of the date of adoption.
Additionally,
the Company is subject to tax examinations for payroll, value added, sales-based
and other taxes. The Company is currently not under examination by the taxing
authorities relating to these other types of taxes. Where
appropriate, the Company has made accruals for these matters which are reflected
in the Company’s consolidated financial statements.
18. COMMITMENTS
AND CONTINGENCIES
Operating
Lease
During
November 2007, the Company entered into an operating agreement for office space
for Surgicount. The lease requires monthly payments of $10 thousand,
subject to an annual increase of 3.5% per year, from January 1, 2008 through
December 31, 2010. Future minimum annual rent payments of $117 thousand
and $121 thousandare due during the years ended December 31, 2009, and 2010
respectively, represent the remaining obligation under the Company’s existing
operating lease.
Rent
expense during the years ended December 31, 2008 and 2007was $ 114 thousandand
$79 thousand, respectively.
The
Company entered into leases for office equipment at their former location which
included telephone equipment and basic office equipment. It was
agreed upon that the sub-tenant would continue to pay the lease payment for the
use of the equipment. In September 2008, the sub-tenant defaulted on
the leases and the Company became obligated to pay for the remaining terms of
the lease. The total future payments are approximately $68 thousand
and are included in the number represented below for the year ended December 31,
2009.
The
following table sets forth information relating to our commitments and
contingencies as of December 31, 2008:
| Years
ending December 31, |
|
Operating
|
|
|
Capital
|
|
| |
|
|
|
|
|
|
|
2009
|
|
$ |
195 |
|
|
$ |
— |
|
|
2010
|
|
|
129 |
|
|
|
— |
|
|
2011
|
|
|
5 |
|
|
|
— |
|
|
2012
|
|
|
3 |
|
|
|
— |
|
|
2013
|
|
|
3 |
|
|
|
— |
|
|
Total
|
|
$ |
335 |
|
|
$ |
— |
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Contingent
Tax Liability
In the
process of preparing our federal tax returns for prior years, the Company’s
management found there had been errors in reporting income related to stock
grants made to certain employees and consultants to the recipients and the
respective taxing authorities. In addition, the Company
determined that required tax withholding relating to these stock grants had not
been made or remitted, as required.
Due to
the Company’s failure to to properly report this income and withhold/remit
required amounts, the Company is liable for the the amounts that should have
been withheld plus related penalties and interest. The Company
has estimated its contingent liability based on the estimated required federal
and state withholding amounts, the employee and employer portion of social
security taxes as well as the possible penalties and interest associated with
the error.
Although
the Company’s liability may ultimately be reduced if it can prove that the taxes
due on this income were paid on a timely basis by the recipient, the estimated
liability accrued by the Company is based on the assumption that it will be
liable for the entire amounts due to the uncertainty with respect to whether or
not the recipient made such payments.
As the
Company determined that it is probable that it will be held liable for the
amounts owed, and as the amount could be reasonably estimated, an accrual for
the estimated liability has been included in accrued liabilities as of December
31, 2008. In addition, as indicated in Note 2, the amounts
attributable to 2006 have been recorded as adjustments to the respective opening
balances as of January 1, 2007, and the amounts attributable to 2007 have been
reflected in the restated balances in the financial statements as of, and for
the year ended December 31, 2007, herein.
The table
below breaks out the estimated liability by year (in thousands):
| Year
Ended December 31, |
|
Contingent
Tax Liability *
|
|
| 2006 |
|
|
486 |
|
| 2007 |
|
|
187 |
|
| 2008 |
|
|
28 |
|
| Total |
|
$ |
701 |
|
* Includes interest and penalties
Legal
Proceedings
On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit (the “Leve
Lawsuit”) against the Company, Sunshine Wireless, LLC ("Sunshine"),
and four other defendants affiliated with Winstar Communications, Inc.
(“Winstar”).
On February 25, 2003, the case against the Company and Sunshine was dismissed,
however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. exercised their right to appeal. The initial
lawsuit alleged that the Winstar defendants conspired to commit fraud and
breached their fiduciary duty to the plaintiffs in connection with the
acquisition of the plaintiff's radio production and distribution
business. The complaint further alleged that the Company and Sunshine
joined the alleged conspiracy. On June 1, 2005, the United States Court of
Appeals for the Second Circuit affirmed the February 25, 2003 judgment of the
district court dismissing the claims against the Company.
On July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a new
lawsuit (the “new Leve
Lawsuit”) against the Company, Sunshine Wireless, LLC ("Sunshine"),
and four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
The new Leve Lawsuit attempts to collect a federal default judgment of
$5,014,000 entered against only two entities, i.e., Winstar Radio Networks, LLC
and Winstar Global Media, Inc., by attempting to enforce the judgment against a
number of additional entities who are not judgment debtors. Further, the new
Leve Lawsuit attempts to enforce the plaintiffs default judgment against
entities who were dismissed on the merits from the underlying action in which
plaintiffs obtained their default judgment. An unfavorable outcome in the
lawsuit may have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes the lawsuit
is without merit and intends to vigorously defend itself. These
consolidated interim financial statements do not include any adjustments for the
possible outcome of this uncertainty. On January 29, 2009 the
Superior Court of California issued a preliminary ruling in the Company’s
favor.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Employment
Agreements
The
Company has entered into employment agreements with certain of its executives,
which provide for annual base compensation plus, in most cases, bonuses and
other benefits. As of December 31, 2008, approximate future annual base
compensation under these agreements is as follows(in thousands):
|
Years
ended December 31,
|
|
|
|
|
| |
2009
|
|
2010
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
$
|
230 |
|
$ |
— |
|
|
$ |
— |
|
19.
SEGMENT REPORTING
The
Company reports segment information in accordance with SFAS No. 131,
Disclosures about Segments of
an Enterprise and Related Information.Based on the restructuring of the
Company’s operations in 2007 to focus solely on its medical products business,
the Company only operates within a single industry and as such, segment
information is no longer reported.
20.
SUBSEQUENT EVENTS
Departure
and Election of Officers and Directors
On
January 5, 2009, William Adams, resigned as the President and Chief Executive
Officer of the Company. Mr. Adams also resigned as an officer and
director of the Company’s subsidiary to which he served in such capacities, also
effective January 5, 2009. Mr. Adams has agreed to stay on with the
Company as a consultant.
On
January 5, 2009, the Company’s Board of Directors appointed David Bruce as its
President and Chief Executive Officer, effective immediately. Mr.
Bruce was also appointed to the Board of Directors. In connection
with this appointment, on January 5, 2009 the Company entered into an employment
agreement with Mr. Bruce (the “Agreement”).
The
Agreement has the following terms: Mr. Bruce will receive an initial
annual base salary of $325,000 and he is eligible to receive an incentive bonus
each fiscal year in the amount of not less than 25% of his annual base salary
for such year, with the payment of such bonus based on Mr. Bruce’s achievement
of performance objectives established by the Company’s Board of Directors each
fiscal year. The Agreement also provides for certain severance
arrangements for Mr. Bruce, beginning six months after the effective date of the
Agreement. In the event that Mr. Bruce’s employment is terminated
without cause the Company is required to pay Mr. Bruce (1) all accrued but
unpaid compensation; (2) severance payments based on his annual base salary for
a period of twelve months; (3) a pro-rated
bonus for the year in which termination occurred; and (4) payment of, or
reimbursement for, the continuation of his health and welfare benefits coverage
pursuant to COBRA for a twelve-month period following such termination or
resignation date.
Pursuant
to the Agreement, the Company granted Mr. Bruce incentive stock options to
purchase 2,000,000 shares of the Company’ common stock. The exercise
price of the option was set at the average closing price of the Company’s common
stock for the ten trading days prior to the effective date of the
Agreement. Upon the six-month anniversary of the effective date of
the Agreement, 250,000 Shares subject to the Option shall vest and become
exercisable and thereafter, the remaining shares will vest over a forty-two
month period at the rate of 1/48th of the
total shares per month. In addition, upon a change of control of the
Company that occurs during his employment, any unvested options shall become
fully vested and Mr. Bruce will receive a cash payment of two times his current
base salary.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
Prior to
joining the Company, Mr. Bruce, 49, was the Chief Executive Officer of EP
MedSystems, Inc. a developer of electrophysiology devices, which was recently
acquired by St. Jude Medical. Mr. Bruce’s experience also includes
nine years of increasing responsibility at Acuson Corporation and the Ultrasound
Division of Siemens, including as General Manager of the intracardiac echo (ICE)
catheter. He also served as Vice President, Marketing for EVL, a
laser vision correction company. Mr. Bruce received an MBA from the
Wharton School and BS in Mechanical Engineering from the University of
California, Berkeley.
On
January 6, 2009 Richard Bertran, resigned as President of SurgiCount Medical,
Inc., the Company’s subsidiary, effective immediately.
On March
11, 2009 Mssrs. William Adams and David Augustine resigned from the Company’s
Board of Directors. Mr. Augustine also resigned his position as
Corporate Secretary. Mary Lay, the Company’s Interim Financial
Officer was appointed to fill the vacancy.
Financing
On
January 29, 2009, the Company entered into a Senior Secured Note and Warrant
Purchase Agreement, pursuant to which, the Company sold Senior Secured
Promissory Notes (the “Notes”) in the principal amount of $2.6 million and
warrants to purchase 1.5 million shares of the Company’s common stock (the
“Warrant”), to several accredited investors (the “Investors”). The
Investors paid $2.0 million in cash and converted $550 thousand of existing debt
and accrued interest into the new Notes. The Notes accrue
interest at 10% per annum, throughout the term of the notes, and unless earlier
converted into a Financing Round, have a maturity date of January 29,
2011. The Warrants have an exercise price of $1.00 and expire on
January 29, 2014.
The Note
Holders have the option to participate in the next issuance of Securities issued
by the Company for cash or the exchange of debt, taking place after the Closing
and prior to the Note’s maturity date. The Company has the right to
prepay the unpaid principal and interest due on the Notes without any prepayment
penalty. The Notes are secured by essentially all of the Company’s
assets including but not limited to the Company’s interest in their primary
operating subsidiary, SurgiCount Medical Technologies, Inc.
The
financing was completed through a debt placement to one or more accredited
investors and was exempt from registration under the Securities act of 1933, as
amended (the “Securities Act”), pursuant to Section 4(2) thereof and Rule 506
thereunder. The Warrants and the shares issuable upon exercise of the
Warrants have not yet been registered under the Securities Act or any state
securities laws. Unless so registered, such securities may not be
offered or sold absent an exemption from, or in a transaction not subject to,
the registration requirement of the Securities Act and any applicable state
securities laws
Legal
On July
28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a new
lawsuit (the “new Leve
Lawsuit”) against the Company, Sunshine Wireless, LLC ("Sunshine"),
and four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
The new Leve Lawsuit attempts to collect a federal default judgment of
$5,014,000 entered against only two entities, i.e., Winstar Radio Networks, LLC
and Winstar Global Media, Inc., by attempting to enforce the judgment against a
number of additional entities who are not judgment debtors. Further, the new
Leve Lawsuit attempts to enforce the plaintiffs default judgment against
entities who were dismissed on the merits from the underlying action in which
plaintiffs obtained their default judgment. An unfavorable outcome in the
lawsuit may have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes the lawsuit
is without merit and intends to vigorously defend itself. These
consolidated interim financial statements do not include any adjustments for the
possible outcome of this uncertainty. On January 29, 2009 the
Superior Court of California issued a preliminary ruling in the Company’s
favor.
None.
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and
interim chief financial officer of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of o possible
controls and procedures.
Based on
this evaluation, our chief executive officer and interim chief financial officer
have concluded that our disclosure controls and procedures were not effective as
of December 31, 2008 at the reasonable assurance level for the reasons discussed
below related to identified material weaknesses in our internal controls over
financial reporting.
To
address the material weakness, we performed additional analysis and other
post-closing procedures in an effort to ensure our consolidated financial
statement included in this annual report have been prepared in accordance with
accounting principles generally accepted in the United States of
America. Accordingly, management believes that the financial
statements included in this report fairly present all material respects of our
financial condition, results of operations and cash flows for the periods
presented.
We
recognize the importance of internal controls and management is making an effort
to mitigate this material weakness to the fullest extent possible. At
any time, if it appears that any control can be implemented to continue to
mitigate such weakness, it will be immediately implemented.
Management’s
Report on Internal Control Over Financial Reporting
Under
Section 404 of the Sarbanes-Oxley Act of 2002, management is required to
assess the effectiveness of the Company’s internal control over financial
reporting as of the end of each fiscal year and report, based on that
assessment, whether the Company’s internal control over financial reporting is
effective.
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance of the
reliability of its financial reporting and of the preparation of its financial
statements for external reporting purposes, in accordance with U.S. generally
accepted accounting principles.
The
Company’s internal control over financial reporting includes policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and
disposition of assets; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures are being made only in accordance with the authorization of its
management and directors; and (3) provide reasonable assurance regarding
the prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on its
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures included in such controls may
deteriorate.
The
Company’s management has assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, the Company used the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control—Integrated Framework.” These criteria are in the areas
of
control
environment, risk assessment, control activities, information and communication,
and monitoring. The Company’s assessment included extensive documenting,
evaluating and testing the design and operating effectiveness of its internal
controls over financial reporting.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be presented or detected on a timely basis.
Based on
management’s assessment, we have concluded that, as of December 31, 2008,
the Company’s internal control over financial reporting was not effective due
to the material weaknesses identified below:
|
|
1.
|
We
have concluded that the Company’s General Control Environment was
ineffective due to the following identified
weaknesses:
|
|
|
a.
|
We
had not established an adequate tone at the top by management and the
board of directors concerning the importance of, and commitment to,
internal control and generally accepted business
practices.
|
|
|
b.
|
We
had not designed and implemented policies and procedures to ensure
effective oversight by the Company’s board of directors and consistent
operation by the board of directors in accordance with committee
charters.
|
|
|
c.
|
We
had not designed and implemented policies and procedures to ensure
effective monitoring by management of financial and operational activities
and to measure actual results against expected results and planned
objectives.
|
To
address these identified weaknesses, the board of directors initends to
appoint two additional, independent members to the audit committee, one
being a financial expert, and has taken steps to insure compliance with the
committee charters. In addition, to correct the weakness related to
management, the board hired anew Interim Chief Financial Officer in
October 2008 and a new Chief Executive Officer in January 2009, both of whom
have relevant public company financial controls experience.
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2.
|
We
had not designed and implemented policies and procedures to ensure
effective risk assessment processes by management and the board of
directors designed to identify and mitigate internal and external risks
that could impact the Company’s ability to achieve its
objectives. To correct this weakness, the Company has engaged
an internal control specialist to design and help to implement effective
risk assessment processes.
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3.
|
We
hadnot designed and implemented effective internal control policies and
procedures relating to equity transactions and share-based
payments. To correct these deficiencies the Company has
implemented policies and procedures to formalize procedures relating to
transactions of this nature and ensure that such transactions are entered
into and issued in accordance with board of director
approvals. Further, the Company has implemented a software
program specifically designed to track and account for share-based
payments.
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4.
|
We
hadnot designed and implemented effective internal control policies and
procedures to ensure the proper reporting of income and accounting for
payroll taxes related to certain stock grants to employees and
consultants. This weakness resulted in the need for a restatement of
previously issued financial statements due to the correction of an error
for the cumulative effect of the understatement of payroll taxes and the
related accrued liability for stock awards issued in 2005 and 2006, as of
the beginning of the year ended December 31, 2007, and for the effect of
the understatement in these accounts for the year ended December 31,
2007. To correct these deficiencies the Company plans to design
and implement policies and procedures to ensure that all reporting
obligations and required withholdings related to stock grants to employees
and consultants are processed and reported on a timely
basis.
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5.
|
We
hadnot designed and implemented effective internal control policies and
procedures to provide reasonable assurance regarding the accuracy and
integrity of spreadsheets and other “off system” work papers used in the
financial reporting process.
|
This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation requirements by the Company’s independent registered public account
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this Annual
Report.
Changes
in Internal Control Over Financial Reporting
Except
for the remediation efforts described above in connection with the identified
material weaknesses, we made no changes during our most recently completed
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange
Act.
None.
The
information called for in this Item 10, is incorporated herein by
reference to the Company’s Definitive Proxy Statement (which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act) relating to the
Company’s 2009 Annual Meeting of Shareholders (the “2009 Annual Meeting”) under
the captions “Proposal 1-Election of Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Board of Directors and Committees of the
Board” and “Corporate Governance-Policies on Business Ethics: Chief Compliance
Officer.”
The
information called for by this Item 11 is incorporated herein by reference to
the Company’s Definitive Proxy Statement (which will be filed with the SEC
pursuant to Regulation 14A under the Exchange Act) relating to the 2009 Annual
Meeting under the captions “Compensation Discussion and Analysis” and “Executive
Compensation”.
The
information called for by this Item 12 is incorporated herein by reference to
the Company’s Definitive Proxy Statement (which will be filed with the SEC
pursuant to Regulation 14A under the Exchange Act) relating to the 2009 Annual
Meeting under the captions, “Equity Compensation Plan Information” and “Security
Ownership of Certain Beneficial Owners and Management”.
The
information called for by this Item 13 is incorporated herein by reference to
the Company’s Definitive Proxy Statement (which will be filed with the SEC
pursuant to Regulation 14A under the Exchange Act) relating to the 2009 Annual
Meeting under the captions “Certain Relationships and Related Transactions” and
“Corporate Governance-Director Independence”.
The
information called for by this Item 14 is incorporated herein by reference to
the Company’s Definitive Proxy Statement (which will ve filed with the SEC
pursuant to Regulation 14A under the Exchange Act) relating to the 2009 Annual
Meeting under the captions “Independent Accounts” and “Board of Directors and
Committees of the Board-Committees of the Board.”
Item
15(a). The following documents are set forth under Part II, Item 8 of
this Annual Report on Form 10-K.
(1) Financial
Statements:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheet
Consolidated
Statement of Operations
Consolidated
Statements of Stockholders’ Equity (Deficit)
Consolidated
Statement of Cash Flows
Notes to
Consolidated Financial Statements
Item
15(a)(2) Exhibits List.
The
following exhibits are filed herewith or incorporated by reference as set forth
below:
|
Exhibit
Number
|
Description
|
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of February 3, 2005, by
and among Franklin Capital Corporation (n/k/a Patient Safety Technologies,
Inc.), SurgiCount Acquisition Corp., SurgiCount Medical, Inc., Brian
Stewart and Dr. William Stewart (Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 9, 2005)
|
|
3.1
|
Amended
and Restated Certificate of Incorporation (Incorporated by reference to
the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2004, filed with the Securities and Exchange Commission on
March 30, 2005)
|
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation (Incorporated by reference to
Appendix E to the Company’s Definitive Proxy Statement on Schedule 14A,
filed with the Securities and Exchange Commission on March 2,
2005)
|
|
3.3
|
By-laws
(Incorporated by reference to the Company’s Form N-2 filed with the
Securities and Exchange Commission on July 31, 1992)
|
|
4.1
|
Certificate
of Designation of Series A Convertible Preferred Stock (Included in
Amended and Restated Certificate of Incorporation (Exhibit 3.1
hereto))
|
|
4.2
|
$1,000,000
principal amount Promissory Note dated August 28, 2001 issued to Winstar
Radio Networks, LLC, Winstar Global Media, Inc. or Winstar Radio
Productions, LLC (Incorporated by reference to the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2005, filed with the
Securities and Exchange Commission on April 17, 2006)
|
|
4.3
|
Form
of non-callable Warrant issued to James Colen (Incorporated by reference
to the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on April 26, 2005)
|
|
4.4
|
Form
of callable Warrant issued to James Colen (Incorporated by reference to
the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on April 26, 2005)
|
|
4.5
|
Promissory
Note in the principal amount of $1,000,000 issued January 12, 2006 by
Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on January 18, 2006)
|
|
4.6
|
Promissory
Note dated February 8, 2006 issued by Automotive Services Group, LLC to
Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 14, 2006)
|
|
4.7
|
Revolving
Line of Credit Agreement dated and effective as of March 7, 2006 by and
between Ault Glazer Bodnar Acquisition Fund LLC and Patient Safety
Technologies, Inc. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission on
March 8, 2006)
|
|
4.8
|
Promissory
Note in the principal amount of $500,000 issued May 1, 2006 by the Patient
Safety Technologies, Inc. to the Herbert Langsam Irrevocable Trust
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on February 14,
2006)
|
|
4.9
|
$400,000
principal amount Convertible Promissory Note issued by Patient Safety
Technologies, Inc. to Charles J. Kalina III on November 3,
2006
|
|
4.10
|
Warrant
to purchase 85,000 shares of common stock issued by Patient Safety
Technologies, Inc. to Charles J. Kalina III on July 12, 2006 (Incorporated
by reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on July14, 2006)
|
|
4.11
|
Warrant
to purchase 100,000 shares of common stock issued by Patient Safety
Technologies, Inc. to Charles J. Kalina III on November 3,
2006
|
|
4.12*
|
Amended
Promissory Note dated September 5, 2008 between the Company and Ault
Glazer Capital Partners, LLC.
|
|
10.1
|
Amended
and Restated Stock Option and Restricted Stock Plan (Incorporated by
reference to Annex A to the Company’s Revised Definitive Proxy Statement
on Schedule 14A, filed with the Securities and Exchange Commission on
October 18, 2005)
|
|
|
|
|
Exhibit
Number
|
Description
|
|
10.2
|
Employment
Agreement entered into as of June 13, 2005 by and between Patient Safety
Technologies, Inc. and William B. Horne (Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on June 16,
2005)
|
|
10.3
|
Employment
Agreement dated October 31, 2005 between SurgiCount Medical, Inc., Patient
Safety Technologies, Inc. and Richard Bertran (Incorporated by reference
to the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on November 2, 2005)
|
|
10.4
|
Employment
Agreement entered into as of April 21, 2006 between SurgiCount Medical,
Inc., Patient Safety Technologies, Inc. and William M. Adams (Incorporated
by reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on April 27, 2006)
|
|
10.5
|
Engagement
Letter dated February 10, 2006 between Analog Ventures, LLC and Patient
Safety Technologies, Inc. (Incorporated by reference to the Company’s
quarterly report on Form 10-Q for the quarter ended March 31, 2006, filed
with the Securities and Exchange Commission on May 19,
2006)
|
|
10.6
|
Security
Agreement dated May 1, 2006, between the Company and the Herbert Langsam
Revocable Trust (Incorporated by reference to the Company’s current report
on Form 8-K filed with the Securities and Exchange Commission on May 5,
2006)
|
|
10.7
|
Secured
Convertible Note and Warrant Purchase Agreement dated June 6, 2006 between
the Company and Alan Morelli (Incorporated by reference to the Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on June 9, 2006)
|
|
10.8
|
Registration
Rights Agreement dated June 6, 2006 by and between Patient Safety
Technologies, Inc. and Alan E. Morelli(Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on June9, 2006)
|
|
10.9
|
Subscription
Agreement dated August 30, 2006 between Patient Safety Technologies, Inc.
and Nobu Ventures Inc. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission on
September 6, 2006)
|
|
10.10
|
Secured
Convertible Note and Warrant Purchase Agreement dated September 8, 2006
between the Company and Steven J. Caspi (Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 1, 2007)
|
|
10.11
|
Pledge
Agreement and Addendum to Pledge Agreement dated as of September 8, 2006
between the Company and Steven J. Caspi (Incorporated by reference to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 1, 2007)
|
|
10.12
|
Supply
Agreement dated November 14, 2006 between SurgiCount Medical, Inc. and
Cardinal Health 200, Inc. (Incorporated by reference to the Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on November 20, 2006)
|
|
10.13
|
Exclusive
License and Supply Agreement dated January 26, 2007, by and among
SurgiCount Medical, Inc. and A Plus International, Inc. (Incorporated by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2007)
|
|
10.14
|
Subscription
Agreement dated January 26, 2007 between Patient Safety Technologies, Inc.
and A Plus International, Inc. (Incorporated by reference to the Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on February 2, 2007)
|
|
10.15
|
Subscription
Agreement dated January 29, 2007 between Patient Safety Technologies, Inc.
and Nite Capital, LP. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission on
February 2, 2007)
|
|
10.16
|
Subscription
Agreement dated January 29, 2007 between Patient Safety Technologies, Inc.
and David Wilstein and Susan Wilstein, as Trustees of the Century Trust
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on February 2,
2007)
|
|
Exhibit
Number
|
Description
|
|
10.17
|
Form
of Subscription Agreement entered into between March 7, 2007 to April 5,
2007 between Patient Safety Technologies, Inc. and several accredited
investors (Incorporated by reference to the Company’s annual report on
Form 10-K for the year ended December 31, 2006, filed with the Securities
and Exchange Commission on May 16, 2007)
|
|
10.18
|
Secured
Convertible Note issued August 10, 2007 with an effective date of June 1,
2007 between the Company and Ault Glazer Capital Partners, LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
|
|
10.19
|
Guaranty
of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
Inc., in favor of Ault Glazer Capital Partners, LLC in connection with the
$2,530,558.40 Promissory Note issued August 10, 2007 with an effective
date of June 1, 2007 by the Company to Ault Glazer Capital Partners, LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
|
|
10.20
|
Form
of Subscription Agreement entered into between March 7, 2007 to April 5,
2007 between Patient Safety Technologies, Inc. and several accredited
investors (Incorporated by reference to the Company’s annual report on
Form 10-K for the year ended December 31, 2006, filed with the Securities
and Exchange Commission on May 16, 2007)
|
|
10.21
|
Secured
Convertible Note issued August 10, 2007 with an effective date of June 1,
2007 between the Company and Ault Glazer Capital Partners, LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
|
|
10.22
|
Guaranty
of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
Inc., in favor of Ault Glazer Capital Partners, LLC in connection with the
$2,530,558.40 Promissory Note issued August 10, 2007 with an effective
date of June 1, 2007 by the Company to Ault Glazer Capital Partners, LLC
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 16,
2007)
|
|
10.23
|
Form
of Subscription Agreement entered into on May 27, 2008 between Patient
Safety Technologies, Inc. and several accredited investors (Incorporated
by reference to the Company’s annual report on Form 10-K for the year
ended December 31, 2008, filed with the Securities and Exchange Commission
on June 2, 2008.
|
|
10.24
|
Form
of Subscription Agreement entered into on August 1, 2008 between Patient
Safety Technologies, Inc. and several accredited investors (Incorporated
by reference to the Company’s annual report on Form 10-K for the year
ended December 31, 2008, filed with the Securities and Exchange Commission
on August 14, 2008.
|
|
10.25*
|
Executive
Services Agreement dated July 11, 2008 between Patient Safety
Technologies, Inc. and Tatum LLC for the employment of Mary A. Lay as the
Interim Chief Financial Officer.
|
|
10.26*
|
Employment
Agreement dated January 5, 2009 between Patient Safety Technologies Inc.
and David I. Bruce.
|
|
14.1
|
Code
of Business Conduct and Ethics (Incorporated by reference to Appendix E to
the Company’s Definitive Proxy Statement on Schedule 14A, filed with the
Securities and Exchange Commission on March 2, 2005)
|
|
16.1
|
Letter
from Peterson & Company, LLP to the SEC dated December 14, 2006
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on December 15,
2006)
|
|
21.1*
|
Subsidiaries
of the Company
|
|
31.1*
|
Certification
of Chief Executive required by Rule 13a-14(a) or Rule
15d-14(a)
|
|
31.2*
|
Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a)
|
|
32.1*
|
Certification
of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code
|
|
32.2*
|
Certification
of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code
|
| |
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
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Date:
April
15, 2009
|
By:
|
/s/ Mary
A. Lay. |
|
| |
|
Name: Mary A.
Lay
|
|
| |
|
Title: Interim
Chief Financial Officer and Principal
Accounting Officer
|
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| |
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
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Title
|
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Date
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/s/
Steven H. Kane
|
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Chairman
of the Board
|
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April15,
2009
|
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Steven
H. Kane
|
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/s/
David I. Bruce
|
|
President
and Chief Executive Officer (principal executive officer),
Director
|
|
April15,
2009
|
|
David
I. Bruce
|
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/s/
John Francis
|
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Director
|
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April15,
2009
|
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John
Francis
|
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/s/
Wenchen Lin
|
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Director
|
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April15,
2009
|
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Wenchen
Lin
|
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/s/
Louis Glazer
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Director
|
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April15,
2009
|
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Louis
Glazer, M.D., Ph.G.
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/s/
Herbert Langsam
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|
Director
|
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April15,
2009
|
|
Herbert
Langsam
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