UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE
QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
|
¨
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
FOR
THE
TRANSITION PERIOD
FROM TO
COMMISSION
FILE NUMBER
PATIENT
SAFETY TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
13-3419202
|
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification Number)
|
| |
|
|
|
1800
Century Park East, Ste. 200, Los Angeles, CA
90067
|
|
(Address
of principal executive offices) (Zip
Code)
|
Registrant’s
telephone number, including area code: (310) 895-7750
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
past 12 months (or for such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. Yes
x No ¨.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2) of the Act. Yes ¨ No x.
There
were 6,260,048 shares of the registrant's common stock outstanding as of May
15,
2006.
PATIENT
SAFETY TECHNOLOGIES, INC.
FORM
10-Q FOR THE FISCAL QUARTER
ENDED
MARCH 31, 2006
TABLE
OF CONTENTS
| |
|
Page
|
| |
PART
I - FINANCIAL INFORMATION
|
| |
|
|
| Item 1. |
Financial
Statements
|
1
|
| Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
| Item 3. |
Quantitative
and Qualitative Disclosures About Market Risk
|
34
|
| Item 4. |
Controls
and Procedures
|
34
|
| |
|
|
| |
PART
II - OTHER INFORMATION
|
| |
|
|
| Item 1. |
Legal
Proceedings
|
34
|
| Item 1A. |
Risk
Factors
|
35
|
| Item 2. |
Unregistered
Sales of Equity Securities and Use of Proceeds
|
47
|
| Item 3. |
Defaults
Upon Senior Securities
|
47
|
| Item 4. |
Submission
of Matters to a Vote of Security Holders
|
47
|
| Item 5. |
Other
Information
|
47
|
| Item 6. |
Exhibits
|
48
|
| |
|
|
| SIGNATURES |
51
|
"SAFE
HARBOR" STATEMENT UNDER
THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We
believe that it is important to communicate our plans and expectations about
the
future to our stockholders and to the public. Some of the statements in this
report are forward-looking statements about our plans and expectations of what
may happen in the future, including in particular the statements about our
plans
and expectations in Part I of this report under the heading “Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.” Statements that are not historical facts are forward-looking
statements. These forward-looking statements are made pursuant to the
“safe-harbor” provisions of the Private Securities Litigation Reform Act of
1995. You can sometimes identify forward-looking statements by our use of
forward-looking words like “may,” “should,” “expects,” “intends,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”
or the negative of these terms and other similar expressions.
Although
we believe that the plans and expectations reflected in or suggested by our
forward-looking statements are reasonable, those statements are based only
on
the current beliefs and assumptions of our management and on information
currently available to us and, therefore, they involve uncertainties and risks
as to what may happen in the future. Accordingly, we cannot guarantee you that
our plans and expectations will be achieved. Our actual results and stockholder
values could be very different from and worse than those expressed in or implied
by any forward-looking statement in this report as a result of many known and
unknown factors, many of which are beyond our ability to predict or control.
These factors include, but are not limited to, those contained in Part II of
this report under “Item 1A. Risk Factors.” All written and oral forward-looking
statements attributable to us are expressly qualified in their entirety by
these
cautionary statements.
Our
forward-looking statements speak only as of the date they are made and should
not be relied upon as representing our plans and expectations as of any
subsequent date. Although we may elect to update or revise forward-looking
statements at some time in the future, we specifically disclaim any obligation
to do so, even if our plans and expectations change.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements.
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
| |
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
|
|
$
|
57,863
|
|
$
|
79,373
|
|
|
Receivables
from investments
|
|
|
34,031
|
|
|
934,031
|
|
|
Marketable
securities
|
|
|
104,790
|
|
|
923,800
|
|
|
Inventories
|
|
|
77,481
|
|
|
77,481
|
|
|
Prepaid
expenses
|
|
|
130,607
|
|
|
112,734
|
|
|
Other
current assets
|
|
|
118,460
|
|
|
118,394
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
523,232
|
|
|
2,245,813
|
|
| |
|
|
|
|
|
|
|
|
Restricted
certificate of deposit
|
|
|
87,500
|
|
|
87,500
|
|
|
Property
and equipment, net
|
|
|
3,442,609
|
|
|
1,348,275
|
|
|
Goodwill
|
|
|
2,658,563
|
|
|
2,301,555
|
|
|
Patents,
net
|
|
|
4,332,556
|
|
|
4,413,791
|
|
|
Long-term
investments
|
|
|
4,880,826
|
|
|
5,636,931
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
15,925,286
|
|
$
|
16,033,865
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Notes
payable, current portion
|
|
$
|
3,484,066
|
|
$
|
1,796,554
|
|
|
Accounts
payable
|
|
|
543,805
|
|
|
785,507
|
|
|
Accrued
liabilities
|
|
|
756,214
|
|
|
569,116
|
|
|
Due
to broker
|
|
|
275,056
|
|
|
801,863
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
5,059,141
|
|
|
3,953,040
|
|
| |
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Notes
payable, less current portion
|
|
|
1,423,036
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
1,560,800
|
|
|
1,590,045
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
LONG-TERM LIABILITIES
|
|
|
2,983,836
|
|
|
2,706,883
|
|
| |
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
|
|
|
252,992
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Convertible
preferred stock, $1 par value, cumulative 7% dividend:
|
|
|
|
|
|
|
|
|
1,000,000
shares authorized; 10,950 issued and outstanding
|
|
|
|
|
|
|
|
|
at
March 31, 2006 and December 31, 2005
|
|
|
|
|
|
|
|
|
(Liquidation
preference $1,133,325)
|
|
|
10,950
|
|
|
10,950
|
|
|
Common
stock, $0.33 par value: 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
7,371,376
shares issued and 6,248,545 shares outstanding as of March 31,
2006;
6,995,276
|
|
|
|
|
|
|
|
|
shares
issued and 5,672,445 shares outstanding at December 31,
2005
|
|
|
2,432,554
|
|
|
2,308,441
|
|
|
Paid-in
capital
|
|
|
25,214,572
|
|
|
22,600,165
|
|
|
Accumulated
other comprehensive income
|
|
|
1,629,143
|
|
|
2,374,858
|
|
|
Accumulated
deficit
|
|
|
(19,376,803
|
)
|
|
(15,784,108
|
)
|
| |
|
|
|
|
|
|
|
| |
|
|
9,910,416
|
|
|
11,510,306
|
|
|
Less:
1,122,831 and 1,322,831 shares of treasury stock,
|
|
|
|
|
|
|
|
|
at
cost, at March 31, 2006 and December 31, 2005,
respectively
|
|
|
(2,028,107
|
)
|
|
(2,389,356
|
)
|
| |
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
7,882,309
|
|
|
9,120,950
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
15,925,286
|
|
$
|
|
|
| |
|
|
|
|
| |
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
| |
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
| |
|
|
|
|
|
|
|
|
For
The Three Months
Ended
March 31,
|
| |
|
|
2006
|
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
75,760
|
|
$
|
—
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
2,450,884
|
|
|
1,210,950
|
|
|
Professional
fees
|
|
|
612,307
|
|
|
556,971
|
|
|
Rent
|
|
|
33,287
|
|
|
|
|
|
Insurance
|
|
|
30,007
|
|
|
19,551
|
|
|
Taxes
other than income taxes
|
|
|
34,261
|
|
|
22,035
|
|
|
Amortization
of patents
|
|
|
81,235
|
|
|
27,078
|
|
|
General
and administrative
|
|
|
245,900
|
|
|
257,770
|
|
| |
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,487,881
|
|
|
2,094,355
|
|
| |
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3,412,121
|
)
|
|
(2,094,355
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Interest,
dividend income and other
|
|
|
1,094
|
|
|
28,602
|
|
|
Realized
loss on investments, net
|
|
|
(136,262
|
)
|
|
(34,728
|
)
|
|
Interest
expense
|
|
|
(132,403
|
)
|
|
(27,318
|
)
|
|
Unrealized
gains on marketable securities, net
|
|
|
76,915
|
|
|
343,587
|
|
| |
|
|
|
|
|
|
|
|
Loss
before deferred income tax benefit
|
|
|
(3,602,777
|
)
|
|
(1,784,212
|
)
|
| |
|
|
|
|
|
|
|
|
Deferred
income tax benefit
|
|
|
29,245
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(3,573,532
|
)
|
|
(1,784,212
|
)
|
| |
|
|
|
|
|
|
|
|
Preferred
dividends
|
|
|
(19,163
|
)
|
|
(12,738
|
)
|
| |
|
|
|
|
|
|
|
|
Loss
available to common shareholders
|
|
$
|
(3,592,695
|
)
|
$
|
(1,796,950
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.60
|
)
|
$
|
(0.37
|
)
|
| |
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
6,003,103
|
|
|
4,910,963
|
|
| |
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,573,532
|
)
|
$
|
(1,784,212
|
)
|
|
Other
comprehensive loss, unrealized loss on available-for-sale
investments
|
|
|
(745,715
|
)
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$
|
(4,319,247
|
)
|
$
|
(1,784,212
|
)
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
| |
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
| |
|
|
|
|
|
| |
|
|
For
The Three Months
Ended
March 31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,573,532
|
)
|
$
|
(1,784,212
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
8,519
|
|
|
546
|
|
|
Amortization
of patents
|
|
|
81,235
|
|
|
27,078
|
|
|
Non-cash
interest
|
|
|
75,245
|
|
|
|
|
|
Realized
loss on investments, net
|
|
|
136,262
|
|
|
34,728
|
|
|
Unrealized
gain on marketable securities
|
|
|
(76,915
|
)
|
|
(343,587
|
)
|
|
Stock-based
compensation to employees and directors
|
|
|
1,935,967
|
|
|
1,127,517
|
|
|
Stock-based
compensation to consultants
|
|
|
418,012
|
|
|
96,584
|
|
|
Deferred
income tax benefit
|
|
|
(29,245
|
)
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
from investments
|
|
|
900,000
|
|
|
|
|
|
Marketable
securities, net
|
|
|
749,544
|
|
|
(1,727,528
|
)
|
|
Prepaid
expenses
|
|
|
(17,873
|
)
|
|
|
|
|
Other
current assets
|
|
|
(66
|
)
|
|
(13,942
|
)
|
|
Accounts
payable and accrued liabilities
|
|
|
(73,767
|
)
|
|
198,265
|
|
|
Due
to broker
|
|
|
(526,807
|
)
|
|
2,103,973
|
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
6,579
|
|
|
(280,578
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(2,102,853
|
)
|
|
(11,707
|
)
|
|
Purchase
of Surgicount
|
|
|
|
|
|
(432,398
|
)
|
|
Proceeds
from sale of long-term investments
|
|
|
20,508
|
|
|
|
|
|
Purchases
of long-term investments
|
|
|
|
|
|
(65,006
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,082,345
|
)
|
|
(509,111
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
26,250
|
|
|
Payments
of preferred dividends
|
|
|
|
|
|
(19,163
|
)
|
|
Proceeds
from notes payable
|
|
|
2,685,893
|
|
|
|
|
|
Payments
and decrease in notes payable
|
|
|
(631,637
|
)
|
|
(53,061
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
2,054,256
|
|
|
(45,974
|
)
|
| |
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(21,510
|
)
|
|
(835,663
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
79,373
|
|
|
846,404
|
|
| |
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
57,863
|
|
$
|
10,741
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
| |
|
|
|
|
|
|
PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|
| |
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(continued)
|
| |
|
|
|
|
|
| |
|
|
For
The Three Months
Ended
March 31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
12,946
|
|
$
|
19,574
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
schedule of non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Dividends
accrued
|
|
$
|
19,163
|
|
$
|
12,738
|
|
|
Capitalized
interest
|
|
$
|
30,453
|
|
$
|
—
|
|
| |
|
|
|
|
|
|
|
|
In
connection with the Company's acquisiton of the remaining 50% interest
in
ASG, equity instruments were issued during 2006 as
follows:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
|
|
|
Goodwill
|
|
$
|
357,078
|
|
|
|
|
|
Common
stock issued
|
|
|
(610,000
|
)
|
|
|
|
|
Minority
interest
|
|
|
252,922
|
|
|
|
|
|
Liabilities
assumed
|
|
$
|
—
|
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
March
31,
2006
1.
DESCRIPTION OF BUSINESS AND GOING CONCERN CONSIDERATION
Patient
Safety Technologies, Inc. ("PST", or the "Company") (formerly
known as Franklin Capital Corporation) is a Delaware corporation. Currently,
the
Company has four wholly-owned operating subsidiaries: (1) SurgiCount Medical,
Inc., a California corporation; (2) Patient Safety Consulting Group, LLC, a
Delaware Limited Liability Company; (3) Ault Glazer Bodnar Capital Properties,
LLC, a Delaware Limited Liability Company; and (4) Automotive Services Group,
Inc., (formerly known as Ault Glazer Bodnar Merchant Capital, Inc.) a Delaware
corporation.
The
Company, including its operating subsidiaries, is engaged in the acquisition
of
controlling interests in companies and research and development of products
and
services focused primarily in the health care and medical products field,
particularly the patient safety markets. SurgiCount Medical, Inc., a provider
of
patient safety devices and Patient Safety Consulting Group, LLC, a healthcare
consulting services company, focus on the Company’s primary target industries,
the health care and medical products field. Ault
Glazer Bodnar Capital Properties, LLC (“AGB
Properties”)
holds
the Company’s real estate investments, which the Company intends to liquidate.
Automotive Services Group, Inc. (“Automotive
Services Group”)
holds
the Company’s investment in Automotive Services Group, LLC (“ASG”),
its
wholly-owned subsidiary. As discussed in Note 3, the Company purchased the
remaining equity interest in ASG in March 2006.
Going
Concern
The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. At March
31, 2006, the Company has an accumulated deficit of approximately $19.4 million
and a working capital deficit of approximately $4.5 million. For the three
months ended March 31, 2006, the Company incurred a loss of approximately $3.6
million. Further, as of March 31, 2006 and through the date hereof, the Company
has yet to generate revenues from its medical products and healthcare solutions
segments. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. During the three months ended March 31, 2006,
the Company has relied on liquidating investments and certain financing to
fund
its operations. Management is currently seeking additional financing and
believes, however no assurances can be made, that these avenues will continue
to
be available to the Company to fund its operations until the fruition of
adequate cash flow from its medical products segment. The
unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
2.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Use of Estimates
The
accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Article
10 of
Regulation S-X and do not include all the information and disclosures required
by accounting principles generally accepted in the United States of America.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The accounting estimates that require
management’s most difficult and subjective judgments are the valuation of the
non-marketable equity securities. The actual results may differ from
management’s estimates.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
The
interim condensed consolidated financial information is unaudited, but reflects
all normal adjustments that are, in the opinion of management, necessary to
provide a fair statement of results for the interim periods presented. The
condensed consolidated interim financial statements should be read in connection
with the consolidated financial statements in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2005. All intercompany transactions
have been eliminated in consolidation.
Investments
- Debt and Equity Securities
The
Company complies with accounting and reporting requirements of SFAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities.
SFAS
No. 115 requires that certain debt and equity securities be classified into
one
of three categories: held-to-maturity, available-for-sale or trading securities.
Trading
Securities. The
Company’s investment in marketable securities that are bought and held
principally for the purpose of selling them in the near-term are classified
as
trading securities. Trading securities are recorded at fair value on the balance
sheet in current assets, with the change in fair value during the period
included in earnings in the statement of operations.
Available-for-Sale
Investments. Investments
designated as available-for-sale include both marketable equity and debt
(including redeemable preferred stock) securities. Investments that are
designated as available-for-sale are reported at fair value, with unrealized
gains and losses recorded in stockholders’ equity. Realized gains and losses on
the sale or exchange of equity securities and declines in value judged to be
other than temporary are recorded in realized gains (losses) on investments,
net.
Investments
- Equity Method
The
Company complies with APB No. 18, The
Equity Method of Accounting for Investments in Common Stock.
Investments are accounted for using the equity method of accounting if the
investment provided the Company the ability to exercise significant influence,
but not control, over an investee. Significant influence is generally deemed
to
exist if the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation
on the investee's board of directors, are considered in determining whether
the
equity method of accounting is appropriate. The Company records its investments
in equity method investees meeting these characteristics under Long-Term
Investments in the accompanying consolidated financial statements. These
investments are carried at cost, adjusted for the Company’s proportionate share
of their undistributed earnings or losses. The Company’s proportionate share of
income or losses are recorded in equity in income (loss) of investee in the
statements of operations.
Other
investments that the Company has less than 20% ownership of common stock of
the
investee is accounted for under the cost method of accounting.
Valuation
of Investments. Security
investments which are publicly traded on a national exchange or Nasdaq Stock
Market are stated at the last reported sales price on the day of valuation
or,
if no sale was reported on that date, then the securities are stated at the
last
quoted bid price. The management of the Company may determine, if appropriate,
to discount the value where there is an impediment to the marketability of
the
securities held.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
Investments
for which there is no ready market are initially valued at cost and, thereafter,
at fair value. To determine fair value, an impairment analysis is performed
based upon the financial condition and operating results of the issuer and
other
pertinent factors as determined in good faith by management Other pertinent
factors taken into consideration to determine the fair value of an investment
includes, but are not limited to, assumptions related to future results of
operations and growth of the investee company, the nature and value of any
collateral, the investee company’s ability to make payments, the markets in
which the investee company does business, comparison to valuations of publicly
traded companies, comparisons to recent sales of comparable companies, the
discounted value of the cash flows of the portfolio company and other relevant
factors. The financial condition and operating results have been derived
utilizing both audited and unaudited data. In the absence of a ready market
for
an investment, numerous assumptions are inherent in the valuation process.
Some
or all of these assumptions may not materialize. Unanticipated events and
circumstances may occur subsequent to the date of the valuation and values
may
change due to future events. Therefore, the actual amounts eventually realized
from each investment may vary from the valuations shown and the differences
may
be material.
The
Company complies with the FASB's Emerging Issues Task Force (“EITF”)
Issue
No. 03-1, The
Meaning of Other-Than-Temporary Impairment and It's Application to Certain
Investments,
to
determine whether certain investments are considered impaired, whether that
impairment is other-than-temporary, and the measurement and recognition of
an
impairment loss. The EITF also provides guidance on accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have been recognized as
other-than-temporary impairments.
Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which
case
the investment is written down to its impaired value. When an investee company
is not considered viable from a financial or technological point of view, the
entire investment is written down since we consider the estimated fair market
value to be nominal. If an investee company obtains additional funding at a
valuation lower than the Company’s carrying amount or requires a new round of
equity funding to stay in operation and the new funding does not appear
imminent, a presumption is made that the investment is other than temporarily
impaired, unless specific facts and circumstances indicate otherwise. No
impairment charges were recognized during the three months ended March 31,
2006
and 2005.
Revenue
Recognition
The
Company complies with SEC Staff Accounting Bulletin (SAB) 101, Revenue
Recognition, amended by SAB 104. Consulting service contract revenue of
approximately $55,000 and $0 at March 31, 2006 and 2005, respectively, is
recognized when the service is performed. Consequently, the recognition of
such
consulting service contract revenue is deferred until each phase of the contract
is complete. This method is predominately used by the Financial Services and
Real Estate segment. Service activities may include the following: financial
advice on mergers, acquisitions, restructurings and similar corporate finance
matters. Revenues generated by Automotive Services Group of approximately
$21,000, the Company’s automated car wash subsidiary, are recognized at the time
of service.
Stock-Based
Compensation
The
Company adopted SFAS 123(R), “Share-Based
Payment,”
as
of
January 1, 2005 using the modified retrospective application method as provided
by SFAS 123(R). During the three months ended March 31, 2006, the Company had
stock-based compensation expense, from issuances to the Company’s employee
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
and
directors, included in reported net loss, of approximately $1,936,000. This
included restricted stock grants valued at approximately $1,014,000 and stock
options valued at approximately $922,000. During the three months ended March
31, 2005, the Company had stock-based compensation expense, from issuances
to
the Company’s employee and directors, included in reported net loss, of
approximately $1,128,000. This included restricted stock grants valued at
approximately $575,000 and stock options valued at approximately $553,000.
All
options that the Company granted in 2006 and 2005 were granted at the per share
fair market value on the grant date. Vesting of options differs based on the
terms of each option. The Company utilized the Black-Scholes option pricing
model and the assumptions used for each period are as follows:
| |
|
|
Three
months ended March 31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
Weighted
average risk free interest rate
|
|
|
3.75
|
%
|
|
3.75
|
%
|
|
Weighted
average life (in years)
|
|
|
3.0
|
|
|
3.0
|
|
|
Volatility
|
|
|
89
|
%
|
|
83
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
Weighted
average grant-date fair value per share of options granted
|
|
$
|
4.25
|
|
$
|
2.92
|
|
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 condensed consolidated statements of operations. Basic loss per share
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur if
convertible preferred stock or debentures, options and warrants were to be
exercised or converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity.
Since
the
effects of outstanding options, warrants and the conversion of convertible
preferred stock are anti-dilutive in all periods presented it has been excluded
from the computation of loss per common share.
Recent
Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (“FASB”)
released SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments.
SFAS No.155 is an amendment of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and
SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
SFAS No. 155 establishes, among other items, the accounting for certain
derivative instruments embedded within other types of financial instruments;
and, eliminates a restriction on the passive derivative instruments that a
qualifying special-purpose entity may hold. Effective for the Company beginning
January 1, 2007, SFAS No. 155 is not expected to have any impact on
the Company's financial position, results of operations or cash flows.
In
March 2006, the FASB released SFAS No. 156, Accounting
for Servicing of Financial Assets, an amendment of SFAS
No. 140.
SFAS No. 156 amends SFAS No. 140 to require that all separately
recognized servicing assets and liabilities in accordance with SFAS No. 140
be
initially measured at fair value, if practicable. Furthermore, this standard
permits, but does not require, fair value measurement for separately recognized
servicing assets and liabilities in subsequent reporting periods. SFAS No.
156 is also effective for the Company beginning January 1, 2007; however,
the standard is not expected to have any impact on the Company's financial
position, results of operation or cash flows.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
3.
ACQUISITION
Automotive
Services Group, LLC
In
July
2005, the Company purchased 50% of the outstanding equity interests of
Automotive Services Group LLC (“ASG”),
an
Alabama Limited Liability Company, from an unrelated party for $300,000.
ASG
was
formed to develop and operate automated car wash sites under the trade name
“Bubba’s Express Wash”.
ASG’s
first site, developed in Birmingham, Alabama, had its grand opening on March
8,
2006.
From
the Company’s initial purchase through November 2005, the Company accounted for
its 50% investment in ASG under the equity method of accounting. However, as
a
result of negotiations which commenced during the 4th
quarter
of 2005, and ultimately resulted in the Company’s acquisition of the remaining
50% equity interest of ASG on March 15, 2006, the Company determined that it
became the primary beneficiary of ASG, a Variable Interest Entity as determined
by Financial Accounting Standards Board (“FASB”) Interpretation
No. 46R, “Consolidation
of Variable Interest Entities”
(“FIN
46R”).
Accordingly, the Company has consolidated the accounts of ASG since the
4th
quarter
of 2005.
On
March
15, 2006, the Company entered into a Unit Purchase Agreement (the “Agreement”)
for
Automotive Services Group to purchase the remaining 50% equity interest (the
“Membership
Interest”)
in ASG.
After completing the transaction, Automotive Services Group now owns 100% of
the
outstanding equity interests in ASG. As consideration for the Membership
Interest, the Company issued 200,000 shares of the Company’s common stock valued
at $610,000, which is based on the closing stock price at March 15,
2006.
The
Company has not provided pro forma data summarizing the results of operations
for the periods indicated as if the ASG acquisition had been completed as of
the
beginning of each period presented since the effects were considered immaterial
to actual operating results.
Upon
initial measurement, components of the purchase price are as
follows:
|
Land
|
|
$
|
480,211
|
|
|
Furniture
and equipment
|
|
|
972
|
|
|
Notes
payable
|
|
|
(495,211
|
)
|
|
Net
liabilities assumed
|
|
|
(14,028
|
)
|
|
Goodwill
|
|
|
614,028
|
|
|
Minority
interest
|
|
|
(300,000
|
)
|
|
Purchase
price
|
|
$
|
300,000
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
In
March
2006, upon the purchase of the remaining 50% interest, components of the
purchase price are as follows:
|
Goodwill
|
|
$
|
357,008
|
|
|
Minority
interest
|
|
|
252,992
|
|
|
Purchase
price
|
|
$
|
610,000
|
|
4.
GOODWILL
The
Company’s goodwill relates primarily to the Financial Services and
Real Estate and Medical Products reporting segment. The changes in the
amount of goodwill for the three months ended March 31, 2006, is as
follows:
| |
|
Goodwill
|
|
|
Balance
as of December 31, 2005
|
|
$
|
2,301,555
|
|
|
Goodwill
for purchase of ASG
|
|
|
357,008
|
|
|
Balance
as of March 31, 2006 (unaudited)
|
|
$
|
2,658,563
|
|
5.
LONG-TERM INVESTMENTS
Long-term
investments at March 31, 2006 and December 31, 2005 are comprised of the
following:
| |
|
|
March
31,
2006
(unaudited)
|
|
|
December
31,
2005
|
|
|
Alacra
Corporation
|
|
$
|
1,000,000
|
|
$
|
1,000,000
|
|
|
Digicorp
|
|
|
2,772,793
|
|
|
3,025,398
|
|
|
IPEX,
Inc.
|
|
|
627,000
|
|
|
1,130,500
|
|
|
Investments
in Real Estate
|
|
|
481,033
|
|
|
481,033
|
|
| |
|
$
|
4,880,826
|
|
$
|
5,636,931
|
|
Alacra
Corporation
At
March
31, 2006, the Company had an investment in shares of Series F convertible
preferred stock of Alacra Corporation (“Alacra”),
valued
at $1,000,000, and classified as an available-for-sale investment. The Company
has the right to have the Series F convertible preferred stock redeemed by
Alacra for face value plus accrued dividends on December 31, 2006. Alacra,
based
in New York, is a global provider of business and financial information. Alacra
provides a diverse portfolio of fast, sophisticated online services that allow
users to quickly find, analyze, package and present mission-critical business
information. Alacra's customers include more than 750 financial institutions,
management consulting, law and accounting firms and other corporations
throughout the world.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
Digicorp
At
March
31, 2006, the Company held 2,738,561 shares, or approximately 7.5%, of the
common stock of Digicorp. The Company has borrowed against 255,000 of these
shares and has therefore pledged 255,000 shares to a financial institution
as
discussed in Note 8. Prior to December 31, 2005, the Company accounted for
its
investment in Digicorp under the equity method of accounting and the Company’s
proportionate share of income or losses from this investment was recorded in
equity in income (loss) of investee. However, on December 29, 2005, Digicorp
completed the purchase of all of the issued and outstanding shares of capital
stock of Rebel Crew Films, Inc. ("Rebel
Crew"),
a
California corporation. Digicorp issued approximately 21 million shares of
its
common stock to the shareholders of Rebel Crew which decreased the Company’s
ownership interest from approximately 20% at September 30, 2005, to
approximately 7.5%. The 2,738,561 shares of common stock are valued at
$2,772,793. Digicorp's common stock is traded on the OTC Bulletin Board, which
reported a closing price, at March 31, 2006, of $1.35 per share. The Company
has
valued its holdings in Digicorp at an approximate 25% discount to the $1.35
closing price, or $1.01 per share, due to the limited average number of shares
traded on the OTC Bulletin Board.
IPEX,
Inc.
At
March
31, 2006, the Company held 1,045,000 shares of common stock and warrants to
purchase 787,500 shares of common stock at $1.00 per share of IPEX, formerly
Administration for International Credit & Investments, Inc. The Company
acquired 450,000 shares of the common stock and all of the warrants directly
from IPEX in March 2005 and received 500,000 shares of the common stock directly
from the majority shareholder of IPEX, former President, former Chief Executive
Officer and former director of IPEX and, until such time as the sale of the
securities is either registered with the SEC or the securities are eligible
to
be sold without restriction pursuant to Rule 144(k) promulgated pursuant to
the
Securities Exchange Act of 1934, the Company is restricted from publicly selling
these securities except in accordance with Rule 144. The remaining 95,000 shares
of common stock are valued at $62,700 and included in marketable securities.
The
Company has borrowed against these 95,000 shares and has therefore pledged
these
shares to a financial institution as discussed in Note 8. IPEX's common stock
is
traded on the OTC Bulletin Board, which reported a closing price, at March
31,
2006, of $0.88. The Company has valued its holdings in IPEX at a 25% discount
to
the $0.88 closing price, or $0.66 per share, due to the limited average number
of shares traded on the OTC Bulletin Board as well as other trading restrictions
on the Company’s unregistered holdings in IPEX. The warrants are exercisable for
a period of five years and are callable by IPEX in certain instances. IPEX
operates an electronic market for collecting, detecting, converting, enhancing
and routing telecommunication traffic and digital content. Members of the
exchange anonymously exchange information based on route quality and price
through a centralized, web accessible database and then route traffic. IPEX’s
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through IPEX’s system. IPEX invoices and processes payments for its members’
transactions and offsets credit risk through its credit management programs
with
third parties.
Investments
in Real Estate
At
March
31, 2006, the Company had several real estate investments, recorded at its
cost
of $481,033. These investments are included in long-term investments. The
Company holds its real estate investments in AGB Properties. AGB Properties
real
estate holdings consist of approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas, 0.61 acres of undeveloped land in Springfield, Tennessee,
and
various loans secured by real estate in Heber Springs, Arkansas. AGB Properties
is in the process of liquidating its real estate holdings.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31, 2006
6.
NOTES PAYABLE
Notes
payable at March 31, 2006 and December 31, 2005 are comprised of the
following:
| |
|
|
March
31,
2006
(unaudited)
|
|
|
December
31,
2005
|
|
|
Note
payable to Winstar (a)
|
|
$
|
785,667
|
|
$
|
796,554
|
|
|
Note
payable to Bodnar Capital Management, LLC (b)
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
Notes
payable to Ault Glazer Bodnar Acq. Fund, LLC (c)
|
|
|
2,181,981
|
|
|
1,116,838
|
|
|
Note
payable to Steven J. Caspi (d)
|
|
|
1,000,000
|
|
|
—
|
|
| |
|
|
4,967,648
|
|
|
2,913,392
|
|
|
Less:
unamortized debt discount
|
|
|
(60,546
|
|
|
—
|
|
|
Total
notes payable
|
|
$
|
4,907,102
|
|
$
|
2,913,392
|
|
Aggregate
future required principal payments on these notes during the twelve month period
subsequent to March 31, 2006 are as follows:
|
2006
|
$ |
3,484,066
|
|
2007
|
|
—
|
|
2008
|
|
—
|
|
2009
|
|
—
|
|
2010
|
|
1,423,036
|
| |
$
|
4,907,102
|
|
(a)
|
On
August 28, 2001, the Company made an investment in Excelsior Radio
Networks, Inc. (“Excelsior”)
which was completely liquidated during 2005. As part of the purchase
price
paid by the Company for its investment in Excelsior, the Company
issued a
$1,000,000 note to Winstar. This note was due February 28, 2002 with
interest at 3.54% but in accordance with the agreement has a right
of
offset against certain representations and warranties made by Winstar
and
we believe the amount of the offsets exceed the amount of the note
payable. However, since Winstar does not agree with this belief,
the only
offsets against the principal balance of the note reflected in the
accompanying condensed consolidated financial statements relate to
legal
fees attributed to our defense of the lawsuits filed against us.
The due
date of the note is extended until the lawsuit discussed in Note
11 is
settled. At March 31, 2006, the Company had incurred a total of
approximately $214,000 in legal expenses, of which approximately
$11,000
and $53,000 was incurred during the three months ended March 31,
2006 and
2005, respectively. These amounts have been offset against the amount
due.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31, 2006
|
(b)
|
On
April 7, 2005, the Company issued a $1,000,000 principal amount
promissory
note (the "Bodnar
Note")
to Bodnar Capital Management, LLC, in consideration for a loan
from Bodnar
Capital Management, LLC to the Company in the amount of $1,000,000.
Steven
J. Bodnar is a managing member of Bodnar Capital Management, LLC.
Mr.
Bodnar, through Bodnar Capital Management, LLC, is a principal
stockholder
of the Company. The principal amount of the Bodnar Note and interest
at
the rate of 6% per annum is payable on May 31, 2006. The obligations
under
the Note are collateralized by all real property owned by the Company.
During the three months ended March 31, 2006 and 2005, the Company
incurred interest expense of approximately $15,000 and $0, respectively,
on the Bodnar Note, all of which is accrued at March 31,
2006.
|
| (c) |
From
January 11, 2006 through March 31, 2006 AGB Acquisition Fund, a
related
party, loaned the Company a total of approximately $443,000, of
which
approximately $401,000 was repaid. As consideration for the outstanding
balance of $42,000, the Company issued AGB Acquisition Fund secured
promissory notes in the principal amount of $42,000 (the “AGB
Acquisition Fund Notes”),
and entered into a security agreement granting AGB Acquisition
Fund a
security interest in the Company’s personal property and fixtures,
inventory, products and proceeds as security for the Company’s obligations
under the AGB Acquisition Fund Notes. The AGB Acquisition Fund
Notes
accrue interest at the rate of 7% per annum, which together with
principal
are due to be repaid sixty days from the dates the notes were issued
and
will began to expire on April 24, 2006. At the option of the Company,
payments of principal and interest may be paid by exchange of any
securities owned by the Company valued on the day before the maturity
date
of the Note.
|
| |
On
February 8, 2006, AGB Acquisition Fund loaned approximately $687,000
to
ASG. As consideration for the loan, ASG issued AGB Acquisition
Fund a
secured promissory note in the principal amount of approximately
$687,000
(the “ASG
Note”)
and granted a real estate mortgage in favor of AGB Acquisition
Fund
relating to certain real property located in Jefferson County,
Alabama
(the “ASG
Property”).
The ASG Note bears interest at the rate of 10% per annum and is
due on
April 10, 2006, or within 30 days thereafter. AGB Acquisition Fund
received warrants to purchase 20,608 shares of the Company’s common stock
at an exercise price of $3.86 per share as additional consideration
for
entering into the loan agreement. The Company recorded debt discount
in
the amount of approximately $44,000 as the estimated value of the
warrants. The debt discount will be amortized as non-cash interest
expense
over the term of the debt using the effective interest method.
Through
March 31, 2006, interest expense of approximately $29,000 has been
recorded from the debt discount amortization, and as of March 31,
2006,
the remaining debt discount balance of approximately $15,000 is
reflected
as a reduction of notes payable. As security for the performance
of ASG’s
obligations pursuant to the ASG Note, ASG granted AGB Acquisition
Fund a
security interest in all personal property and fixtures located
at the ASG
Property. During the three months ended March 31, 2006, the Company
had
incurred interest expense, excluding amortization of debt discount,
of
approximately $10,000 on the ASG Note, all of which is accrued
at March
31, 2006.
|
| |
As
of March 31, 2006 and December 31, 2005, AGB Acquisition Fund had
loaned
an aggregate of approximately $1,423,000 and $1,117,000, respectively,
to
ASG. 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 bears interest at the rate of 3% above the
Prime Rate
as published in the Wall Street Journal (7.75% at March 31, 2006).
All
unpaid principal, interest and charges under the Real Estate Note
are due
in full on July 31, 2010. The Real Estate Note is 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 AGB Acquisition Fund.
During
the three months ended March 31, 2006, the Company had incurred
interest
of approximately $30,000 on the Real Estate Note, all of which
is accrued
at March 31, 2006.
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
| |
As
of March 31, 2006, AGB Acquisition Fund had loaned an aggregate of
approximately $30,000 to the Company. The loans were advanced to the
Company pursuant to a Revolving Line of Credit Agreement (the “Revolving
Line of Credit”) entered into with AGB Acquisition Fund on March 7, 2006.
The Revolving Line of Credit allows the Company to request advances
of up
to $500,000 from AGB Acquisition Fund. The initial term of the Revolving
Line of Credit is for a period of six months and may be extended for
one
or more additional six month periods upon mutual agreement of the parties.
Each advance under the Revolving Line of Credit will be evidenced by
a
secured promissory note and a security agreement. The secured promissory
notes issued pursuant to the Revolving Line of Credit must be repaid
with
interest at the Prime Rate plus 1% within 60 days from issuance and
will
be convertible into shares of the Company’s common stock at the option of
AGB Acquisition Fund at a price of $3.10 per share. The obligations
of the
Company pursuant to such secured promissory notes will be secured by
the
Company’s assets, personal property and fixtures, inventory, products and
proceeds therefrom. |
| (d) |
On
January 12, 2006, Steven J. Caspi (“Caspi”)
loaned $1,000,000 to ASG. As consideration for the loan, ASG issued
Caspi
a promissory note in the principal amount of $1,000,000 (the “Caspi
Note”)
and granted Caspi a mortgage on certain real estate owned by ASG and
a
security interest on all personal property and fixtures located on
such
real estate as security for the obligations under the Caspi Note. In
addition, the Company entered into an agreement guaranteeing ASG’s
obligations pursuant to the Caspi Note and Caspi received warrants
to
purchase 30,000 shares of the Company’s common stock at an exercise price
of $4.50 per share. The Company recorded debt discount in the amount
of
approximately $92,000 as the estimated value of the warrants. The debt
discount will be amortized as non-cash interest expense over the term
of
the debt using the effective interest method. Through March 31, 2006,
interest expense of approximately $46,000 has been recorded from the
debt
discount amortization, and as of March 31, 2006, the remaining debt
discount balance of approximately $46,000 is reflected as a reduction
of
notes payable. The Caspi Note accrues interest at the rate of 10% per
annum, which together with principal, is due to be repaid on July 13,
2006. |
7.
ACCRUED LIABILITIES
Accrued
liabilities at March 31, 2006 and December 31, 2005 are comprised of the
following:
| |
|
|
March
31,
|
|
|
|
|
| |
|
|
2006
(unaudited)
|
|
|
December
31,
2005
|
|
|
Accrued
officer's severance
|
|
$
|
164,229
|
|
$
|
22,716
|
|
|
Accrued
interest
|
|
|
274,250
|
|
|
215,093
|
|
|
Accrued
professional fees
|
|
|
176,000
|
|
|
160,000
|
|
|
Deferred
revenue
|
|
|
48,882
|
|
|
103,875
|
|
|
Accrued
salaries
|
|
|
52,083
|
|
|
45,833
|
|
|
Other
|
|
|
40,770
|
|
|
21,599
|
|
| |
|
$
|
756,214
|
|
$
|
569,116
|
|
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
8.
DUE TO BROKER
In
August
2005, the Company entered into an agreement with a financial institution to
borrow against securities. The agreement, which extends for 53 weeks, is subject
to a premium of up to 6% of the amount of the borrowings which is amortized
on a
straight line basis over the term of the agreement. To the extent the agreement
is terminated early, the Company does not incur a premium for the amount of
time
that the agreement is terminated. The agreement also provides that in addition
to the securities held by the financial institution, the Company pledge a total
of 25% of the value of the securities in cash. The pledged cash is reduced
daily
by the amount of the earned premium and protects the financial institution
from
decreases in the market value of the securities. Any decrease in the market
value of the pledged securities in excess of 5% over the securities notional
value would require the Company to fund additional monies, such that 25% of
the
initial borrowing, as adjusted by the earned premium, was covered. If the
Company failed to fund additional monies the financial institution has the
right
to liquidate the pledged securities. In the event the proceeds from liquidation
are insufficient to cover the amount of the borrowings, the financial
institution’s sole recourse is against the pledged cash. During the three months
ended March 31, 2006, the Company received proceeds from such borrowings of
approximately $645,000, of which $370,000 was repaid. Consequently, the Company
recorded a liability at March 31, 2006 of approximately $275,000 which is
included in current liabilities under the heading “Due to broker.”
9.
WARRANTS
In
February 2006, the Company issued 175,000 warrants to purchase shares of common
stock at $3.95 per share to a consultant. The warrants vested immediately and
have a three-year life. The warrants were valued at approximately $405,000
and
were expensed during the three months ended March 31, 2006.
Warrants
granted during the three months ended March 31, 2006, were valued using the
Black-Scholes valuation model assuming expected dividend yield, risk-free
interest rate, expected life and volatility of 0%, 3.75%, three to five years
and 89%, respectively. Warrants granted during the year ended December 31,
2005
were valued using the same assumptions with the exception that the Company
used
volatility of 83%. As of March 31, 2006, all warrants issued to the consultants
remain outstanding.
10.
RELATED PARTY TRANSACTIONS
During
the year ended December 31, 2005, the Company paid approximately 75% of the
base
rent on the corporate offices and Ault Glazer & Company Investment
Management LLC ("Ault
Glazer"),
based
upon their usage of the facilities, paid the remaining base rent. Ault Glazer
is
a private investment management firm that manages an estimated $20 million
in
individual client accounts and private investment funds. Ault Glazer has been
given discretionary authority to buy, sell, and vote securities on behalf of
each of those client accounts and funds. Together, Milton “Todd” Ault III
(“Ault”),
our
former Chairman and Chief Executive Officer of the Company, and Louis Glazer,
Chief Health and Science Officer and Class I Director of the Company, and
Melanie Glazer, Manager of AGB Propeties, (together, the “Glazers”)
own
approximately 69% of the outstanding membership interests in Ault Glazer. As
of
December 31, 2005, Ault Glazer, Ault and the Glazers indirectly beneficially
own
or control approximately 25% of the outstanding common stock of the Company
and
beneficially own approximately 98.2% of the outstanding preferred stock of
the
Company.
At
March
31, 2006 and December 31, 2005, the Company had an amount due from Strome
Securities of $0 and $8,636, respectively, recorded in other current assets.
Until October 31, 2005, the Company maintained a brokerage account with Strome
Securities and until December 31, 2004, Ault was a registered representative
of
Strome Securities. Beginning November 1, 2005, the Company moved its brokerage
account from Strome Securities to AGB Securities, Inc., a related party. A
nominal amount of commissions were incurred by the Company during the three
months ended March 31, 2006 as a result of trades in the Company’s brokerage
account.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31, 2006
AGB
Properties
On
April
28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
Tennessee from a related party. The purchase price consisted of approximately
$90,000 in cash, 20,444 shares of common stock and 10,221 warrants to purchase
common stock at an exercise price of $4.53 and a 5 year contractual life valued
at approximately $86,000.
IPEX,
Inc.
On
June
30, 2005, the Company formalized the terms of a consulting agreement, consented
to by IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
shareholder of IPEX, former President, former Chief Executive Officer and former
director of IPEX, to serve as a business consultant to IPEX. At June 30, 2005,
Mr. Grabher owned 18,855,900 shares of IPEX's 28,195,566 outstanding shares
of
common stock and granted Mr. Ault, the Company’s Chairman and Chief Executive
Officer at that time, an irrevocable voting proxy for his shares. At December
31, 2005, the Company held 7.8% of IPEX’s outstanding shares of common stock. On
June 30, 2005, the Company agreed with IPEX as to the scope of such consulting
services and the consideration for such services. The Company has provided
and/or will provide if reasonably necessary within the next 12 months, the
following services to IPEX: (a) substantial review of IPEX's business and
operations in order to facilitate an analysis of IPEX's strategic options
regarding a turnaround of IPEX's business; (b) providing advice in the following
areas: (i) identification of financing sources; (ii) providing capital
introductions of financial institutions and/or strategic investors; (iii)
evaluation and recommendation of candidates for appointment as officers,
directors or employees; (iv) making personnel of the Company available to IPEX
to provide services to IPEX on a temporary or permanent basis; (v) evaluation
and/or negotiation of merger or sale opportunities, or such other form of
transaction or endeavor which IPEX may elect to pursue; and (vi) providing
any
other services as are mutually agreed upon in writing by the Company and
Wolfgang Grabher from time to time; and (c) assisting IPEX in installing a
new
management team.
The
Company has performed a significant amount of the services stipulated under
the
terms of the consulting agreement, including but not limited to: (i) a review of
the business and operations; (ii) the execution of two purchase agreements
for
the purchase of certain intellectual property assets; (iii) the hiring of a
Chief Executive Officer, Chief Operating Officer and a Vice President of
Research & Development; and (iv) the appointment of two members to the Board
of Directors of IPEX. The Company initially valued the amount of the consulting
services at approximately $1,331,000, which was due on August 15, 2005. The
Company received 500,000 shares of IPEX common stock in December 2005 as payment
for the services. At the time of payment, the fair market value of IPEX common
stock had decreased by approximately 33%. Accordingly, the Company reduced
the
initial value of the consulting services by the amount of the decrease in the
fair market value of IPEX common stock, approximately $675,000. As a result
of
the decrease in the fair market value of IPEX common stock, the Company now
expects to ultimately recognize approximately $656,000 in revenue as a result
of
this agreement, of which approximately $607,000 has been recognized and
approximately $49,000 has been deferred. Management expects that it will
recognize the deferred revenue during the three months ended June 30,
2006.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
The
Company’s former Chairman and Chief Executive Officer and significant beneficial
owner of the Company, Milton “Todd” Ault III, is currently a director of IPEX.
Further, the Chief Executive Officer of ASG served as an IPEX director and
member of IPEX’s Audit Committee from August 2005 through January
2006.
Digicorp
At
March
31, 2006, the Company had an investment in Digicorp recorded in long-term
investments. The Company’s Chief Financial Officer, William B. Horne, is also
Chief Financial Officer of Digicorp and a director of the Company. Alice M.
Campbell is also a director of Digicorp. Further, certain Company officers
and
directors, both past and present, served in various management and director
roles at Digicorp.
Loans
During
the three months ended March 31, 2006 and year ended December 31, 2005, the
Company received loans from AGB Acquisition Fund (see Note 6). Ault Glazer
Bodnar & Company Investment Management, LLC (“AGB
& Company IM”)
is the
managing member of AGB Acquisition Fund. The managing member of AGB &
Company IM is Ault Glazer Bodnar & Company, Inc. (“AGB
& Company”).
The
Company’s former Chairman and Chief Executive Officer, Milton “Todd” Ault, III,
is Chairman, Chief Executive Officer and President of AGB & Company. The
Company’s Chief Financial Officer, William B. Horne, is also Chief Financial
Officer of AGB & Company. Melanie Glazer, Manager of the Company’s
subsidiary AGB Properties is also a director of AGB & Company.
During
the three months ended March 31, 2006 the Company received short-term loans
from
an entity whose primary beneficiary is Melanie Glazer. The Notes, which were
repaid during the three months ended March 31, 2006, accrued interest at the
rate of 7% per annum, or approximately $1,700.
Due
from Related Parties
At
March
31, 2006 and December 31, 2005, the Company had an amount due from related
parties of approximately $101,000 and $85,000, respectively, recorded in other
current assets. This amount relates to an allocation of expenses from the
Company to the related parties
11.
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit (the “Leve
Lawsuit”)
against
the Company, Sunshine Wireless, LLC ("Sunshine"),
and
four other defendants affiliated with Winstar Communications, Inc. (“Winstar”).
On
February 25, 2003, the case against the Company and Sunshine was dismissed,
however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
that the Winstar defendants conspired to commit fraud and breached their
fiduciary duty to the plaintiffs in connection with the acquisition of the
plaintiff's radio production and distribution business. The complaint further
alleged that the Company and Sunshine joined the alleged conspiracy. On June
1,
2005, the United States Court of Appeals for the Second Circuit affirmed the
February 25, 2003 judgment of the district court dismissing the claims against
the Company.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
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 financial statements
do
not include any adjustments for the possible outcome of this
uncertainty.
On
February 3, 2006, Winstar Global Media, Inc. (“WGM”)
filed a
lawsuit against the Company. The WGM lawsuit attempts to collect upon the
$1,000,000 note between the Company and Winstar discussed in Note 6. The Company
believes the lawsuit is without merit and intends to vigorously defend
itself.
Severance
Compensation
On
January 9, 2006, Milton “Todd” Ault, III resigned as our Chairman and Chief
Executive Officer. As severance compensation the Company granted Mr. Ault one
year of salary totaling $180,000, options to purchase 90,000 shares of the
Company’s common stock and 60,000 shares of the Company’s common stock. At March
31, 2006, the Company had accrued the remaining salary amount due Mr. Ault
of
approximately $142,000 (See Note 7).
12.
SEGMENT REPORTING
The
Company reports selected segment information in its financial reports to
shareholders in accordance with SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information.”
The
segment information provided reflects the three distinct lines of business
within the Company’s organizational structure: medical
products, which consists of SurgiCount and Patient Safety Consulting Group,
LLC,
a provider of patient safety devices and health care solutions, financial
services and real estate, which consists of AGB
Properties and car wash services, which consists of Automotive Services
Group.
Unallocated
corporate expenses are centrally managed at the corporate level and not reviewed
by the Company’s chief operating decision maker in evaluating results by
segment.
Transactions
between segments are not common and are not material to the segment information.
Some business activities that cannot be classified in the aforementioned
segments are shown under “corporate”.
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
Segment
information for the three months ended March 31, 2006 and 2005 is as follows:
| |
|
|
Three
Months Ended
|
|
| |
|
|
March 31,
|
|
|
March 31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
Medical
Products
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
|
Net
loss
|
|
$
|
(506,116
|
)
|
$
|
(348,455
|
)
|
|
Total
Assets
|
|
$
|
6,380,973
|
|
$
|
4,657,497
|
|
| |
|
|
|
|
|
|
|
|
Financial
Services and Real Estate
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
54,993
|
|
$
|
—
|
|
|
Net
income (loss)
|
|
$
|
(39,790
|
)
|
$
|
75,164
|
|
|
Total
Assets
|
|
$
|
5,019,647
|
|
$
|
6,805,884
|
|
| |
|
|
|
|
|
|
|
|
Car
Wash Services
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,767
|
|
$
|
—
|
|
|
Net
loss
|
|
$
|
(170,212
|
)
|
$
|
—
|
|
|
Total
Assets
|
|
$
|
4,161,472
|
|
$
|
—
|
|
| |
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
|
Net
loss
|
|
$
|
(2,857,414
|
)
|
$
|
(1,510,921
|
)
|
|
Total
Assets
|
|
$
|
363,194
|
|
$
|
330,519
|
|
| |
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
75,760
|
|
$
|
—
|
|
|
Net
loss
|
|
$
|
(3,573,532
|
)
|
$
|
(1,784,212
|
)
|
|
Total
Assets
|
|
$
|
15,925,286
|
|
$
|
11,793,900
|
|
13.
SUBSEQUENT EVENTS
On
May 1,
2006, Herbert Langsam, a Class II Director of the Company, loaned the Company
$500,000. The loan is documented by a $500,000 Secured Promissory Note (the
“Langsam
Note”)
payable
to the Herbert Langsam Irrevocable Trust. The Langsam Note accrues interest
at
the rate of 12% per annum and has a maturity date of November 1, 2006. Interest
is payable monthly on the 30th day of each calendar month. In the event of
breach or default on any provision of the Langsam Note, the interest rate will
increase to 16% per annum. Pursuant to the terms of a Security Agreement dated
May 1, 2006, the Company granted the Herbert Langsam Revocable Trust a security
interest in all of the Company’s assets as collateral for the satisfaction and
performance of the Company’s obligations pursuant to the Langsam
Note.
On
April
18, 2006, the Company entered into a consulting agreement with Ault Glazer
Bodnar Securities, LLC, a registered broker-dealer (“AGB
Securities”)
and a
related party. Pursuant to the agreement, AGB Securities and its representatives
will provide non-exclusive investment banking and financial advisory services
to
the Company in connection with the evaluation of its strategic options, which
may include, among others, acquisitions, business combinations, divestitures,
liquidations and capital events such as pursuing a capital raising or financing
transaction. In the event that any such transaction is consummated, the Company
will pay AGB Securities a fee in an amount up to 6% of the aggregate
consideration
Patient
Safety Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements - Unaudited
(continued)
March
31,
2006
received
by the Company in connection with each
transaction. The Company agreed to negotiate the fee with AGB Securities in
good
faith; provided, however, that the fee will not be less than 3% of the
consideration received by the Company from any contemplated transaction. In
addition to any fees that may be payable to AGB Securities, the Company agreed
to reimburse AGB Securities for all reasonable travel, legal and other
out-of-pocket expenses in performing the services required of AGB Securities
pursuant to the agreement. The initial term of the agreement is for 12 months
from April 18, 2006 and will thereafter be automatically extended monthly until
terminated by either party upon 30 days’ written notice to the other party. The
agreement does not contain any specific termination provisions.
Effective
April 21, 2006, Surgicount entered into an employment agreement with William
M.
Adams to employ Mr. Adams as Surgicount’s Chief Executive Officer. The term of
the employment agreement will end effective at midnight on April 17, 2009 unless
extended by the mutual written consent of Surgicount and Mr. Adams. Surgicount
agreed to pay Mr. Adams an annual base salary of $300,000 during the term of
the
employment agreement. Pursuant to the employment agreement, the Company granted
Mr. Adams options to purchase 300,000 shares of the Company’s common stock with
an exercise price of $3.50 per share. One-third of such options will vest
annually over three years. However, all of the options will vest immediately
upon a sale or exchange of 50% or more of Surgicount’s outstanding capital stock
or a joint venture by Surgicount with an unaffiliated entity involving 50%
or
more of Surgicount’s outstanding capital stock. Mr. Adams will also receive
$10,000 of restricted stock of the Company annually on April 30, 2007, April
18,
2008 and April 18, 2009. Additionally, Mr. Adams will receive options to
purchase an additional 100,000 shares of common stock of the Company with an
exercise price of $3.50 per share which will vest upon either of the following
events: (a) a sale or exchange of 50% or more of Surgicount’s outstanding
capital stock or a joint venture by Surgicount with an unaffiliated entity;
or
(b) if on or prior to December 31, 2008, Surgicount’s cumulative sales from the
inception of Surgicount equal or exceed $10 million.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes thereto contained elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve risks and
uncertainties. All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing
plans
are forward-looking statements. In many cases, you can identify forward-looking
statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
statements are only predictions. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those
projected in any forward-looking statements. In evaluating these statements,
you
should specifically consider various factors, including, but not limited to,
those set forth in Part II of this report under “Item 1A. Risk Factors” and
elsewhere in this report on Form 10-Q.
The
following “Overview” section is a brief summary of the significant issues
addressed in Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”).
Investors should read the relevant sections of the MD&A for a complete
discussion of the issues summarized below. The entire MD&A should be read in
conjunction with Item 1 of Part I of this report, “Financial
Statements.”
Overview
Until
March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation
(referred to herein as the “Company,”
“we,” “us,” and“our”),
elected to be a Business Development Company (“BDC”)
under
the Investment Company Act of 1940, as amended (the “1940
Act”).
On
March 30, 2005, stockholder approval was obtained to withdraw our election
to be
treated as a BDC and on March 31, 2005 we filed an election to withdraw our
election with the Securities and Exchange Commission. At March 31, 2006, 28.4%
of our assets on a consolidated basis with subsidiaries were comprised of
“investment securities” within the meaning of the 1940 Act. If
the
value of our assets that consist of “investment securities” were to exceed 40%
of our total assets (excluding government securities and cash items) on an
unconsolidated basis we could be required to re-register as an investment
company under the 1940 Act unless an exemption or exclusion applies.
Registration as an investment company would subject us to restrictions that
are
inconsistent with our fundamental business strategy of equity growth through
creating, building and operating companies
in the patient safety medical products industry. Registration under the 1940
Act
would also subject us to increased regulatory and compliance costs, and other
restrictions on the way we operate and would change the method of accounting
for
our assets under GAAP.
Our
operations currently focus on the acquisition of controlling interests in
companies and research and development of products and services in the health
care and medical products field, particularly the patient safety markets. In
the
past we also focused on the financial services and real estate industries.
On
October 2005 our Board of Directors authorized us to evaluate alternative
strategies for the divesture of our non-healthcare assets. As an extension
on
our prior focus on real estate, in March 2006 we acquired the remaining 50%
equity interest in Automotive Services Group, LLC (“ASG”)
and
upon doing so we entered the business of developing properties for the operation
of automated express car wash sites. However, on March 29, 2006, our Board
of
Directors determined to focus our business exclusively on the patient safety
medical products field. The Board of Directors is continuing to evaluate
available alternatives to determine the most beneficial method to divest ASG
and
our other real estate assets.
SurgiCount
Medical, Inc., developer of the Safety-SpongeTM
System,
Patient Safety Consulting Group, LLC, a healthcare consulting services company,
Automotive Services Group, Inc. (formerly Ault Glazer Bodnar Merchant Capital,
Inc.), a holding company for ASG, Ault Glazer Bodnar Capital Properties, LLC,
a
real estate development and management company, and ASG,
a
company formed to develop properties for the operation of automated car wash
sites,
are
wholly-owned operating subsidiaries, which were either acquired or created
to
enhance our ability to focus our efforts in each targeted industry. Currently,
we are evaluating ways in which to monetize our non-patient safety related
assets (the “non-core
assets”).
However, the divesture of any assets will be dependent on a number of factors
including: (1) lack of a liquid market to dispose of such assets; (2) potential
adverse tax effects from a disposition; and/or (3) our Board of Directors and
management may change their decision to dispose of certain of the assets.
Our
principal executive offices are located at 1800 Century Park East, Suite 200,
Los Angeles, California 90067. Our telephone number is (310) 895-7750. Our
website is located at http://www.patientsafetytechnologies.com.
Critical
accounting policies and estimates
The
below
discussion and analysis of our financial condition and results of operations
is
based upon the accompanying financial statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Critical
accounting policies are those that are both important to the presentation of
our
financial condition and results of operations and require management's most
difficult, complex, or subjective judgments. Our most critical accounting policy
relates to the valuation of our investments in non-marketable equity securities.
In
the
past we invested in illiquid equity securities acquired directly from issuers
in
private transactions. Our investments are generally subject to restrictions
on
resale or otherwise are illiquid and generally have no established trading
market. Additionally, many of the securities that we have invested in will
not
be eligible for sale to the public without registration under the Securities
Act
of 1933. Because of the type of investments that we made and the nature of
our
business, our valuation process requires an analysis of various factors.
Investments
in non-marketable securities are inherently risky and a number of the companies
we have invested in may fail. Their success (or lack thereof) is dependent
upon
product development, market acceptance, operational efficiency and other key
business success factors. In addition, depending on their future prospects,
they
may not be able to raise additional funds when needed or they may receive lower
valuations, with less favorable investment terms than in previous financings,
likely causing our investments to become impaired.
We
review
all of our investments quarterly for indicators of impairment; however, for
non-marketable equity securities, the impairment analysis requires significant
judgment to identify events or circumstances that would likely have a material
adverse effect on the fair value of the investment. The indicators that we
use
to identify those events or circumstances includes as relevant, the nature
and
value of any collateral, the portfolio company’s ability to make payments and
its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted value of the cash flows of the
portfolio company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of fair
value may differ materially from the values that would be assessed if a liquid
market for these securities existed.
Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which
case
we write the investment down to its impaired value. When a portfolio company
is
not considered viable from a financial or technological point of view, we write
down the entire investment since we consider the estimated fair market value
to
be nominal. If a portfolio company obtains additional funding at a valuation
lower than our carrying amount or requires a new round of equity funding to
stay
in operation and the new funding does not appear imminent, we presume that
the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise.
Security
investments which are publicly traded on a national securities exchange or
over-the-counter market are stated at the last reported sale price on the day
of
valuation or, if no sale was reported on that date, then the securities are
stated at the last quoted bid price. Management may determine, if appropriate,
to discount the value where there is an impediment to the marketability of
the
securities held.
Accounting
Developments
In
December 2004, Statement of Financial Accounting Standards ("SFAS")
No.
123(R), "Share-Based
Payment,"
which
addresses the accounting for employee stock options, was issued. SFAS 123(R)
revises the disclosure provisions of SFAS 123, "Accounting
for Stock Based Compensation"
and
supercedes Accounting Principles Board ("APB")
Opinion
No. 25, "Accounting
for Stock Issued to Employees."
SFAS
123(R) requires that the cost of all employee stock options, as well as other
equity-based compensation arrangements, be reflected in the financial statements
based on the estimated fair value of the awards. We elected early adoption
of
SFAS No. 123(R) as of January 1, 2005.
See
Note
2 to the condensed consolidated financial statements for a discussion of recent
accounting pronouncements.
Financial
Condition, Liquidity and Capital Resources
Our
cash
and marketable securities were $162,653 at March 31, 2006, versus $1,003,173
at
December 31, 2005. Total current liabilities were $5,059,141 at March 31, 2006,
versus $3,953,040 at December 31, 2005. Included in current liabilities at
March
31, 2006 and December 31, 2005 is a note payable, and accrued interest on such
note, payable to Winstar Communications, Inc. (“Winstar”)
in the
amount of $934,808 and $938,573, respectively. As discussed in Note 6 in
the notes to the accompanying condensed consolidated financial statements filed
with this Form 10-Q, the due date on the note payable to Winstar was February
28, 2002. However, as a result of the lawsuits filed against us by Jeffrey
A.
Leve and Jeffrey Leve Family Partnership, L.P. the due date of the note is
extended until the lawsuit discussed in Note 11 is settled. The note payable
has
a right of offset against certain representations and warranties made by Winstar
and we believe the amount of the offsets exceed the amount of the note payable.
It is our contention that the initial lawsuit filed on October 15, 2001,
impaired our ability to raise capital. This inability to raise capital
ultimately resulted in the premature liquidation of our investment in Excelsior
Radio Networks, Inc. (“Excelsior”)
at a
price that was significantly less than what we would have realized had we been
able to hold our investment until its subsequent sale to an unrelated third
party. Winstar does not agree with this belief and on February 3, 2006 Winstar
Global Media, Inc. (“WGM”)
filed a
lawsuit claiming that we were in default under the terms of the note.
Accordingly, the only offsets against the principal balance of the note
reflected in the accompanying financial statements relate to legal fees
attributed to our defense of the lawsuits filed against us. As of March 31,
2006, we had incurred $214,333 in legal fees attributed to our defense of
lawsuits
filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
and the
representations and warranties made by Winstar Radio Networks, Inc. These fees
have been offset against the note with the remaining principal balance of
$785,667 reflected as a note payable on the accompanying balance
sheet.
At
March
31, 2006 and December 31, 2005, we had $57,863 and $79,373, respectively, in
cash and cash equivalents. During 2005 our Board authorized us to invest our
cash balances in the public equity and debt markets as appropriate to maximize
the short-term return on such assets. Such investments are typically short-term
and focus on what we believe to be mispriced domestic public equities and
instruments.
In
August
2005, we entered into an agreement with the financial institution IXIS
Derivatives Inc.
to
borrow against securities which we hold. The agreement, which extended for
53
weeks, was subject to a premium of up to 6% of the amount of the borrowings
which is amortized on a straight line basis over the term of the agreement.
At
December 31, 2005, we terminated the August 2005 agreement with IXIS Derivatives
Inc. To the extent the agreement was terminated early, we did not incur a
premium for the amount of time that the agreement was terminated. The agreement
also provided that in addition to the securities held by the financial
institution, we pledge a total of 25% of the value of the securities in cash.
The pledged cash was reduced daily by the amount of the earned premium and
protected the financial institution from decreases in the market value of the
securities. Any decrease in the market value of the pledged securities in excess
of 5% over the securities notional value would require us to fund additional
monies, such that 25% of the initial borrowing, as adjusted by the earned
premium, was covered. If we failed to fund additional monies the financial
institution had the right to liquidate the pledged securities. In the event
the
proceeds from liquidation were insufficient to cover the amount of the
borrowings, the financial institution’s sole recourse was against the pledged
cash. During January 2006, we renewed our August 2005 agreement with IXIS
Derivatives Inc. to borrow against securities and during the three months ended
March 31, 2006, we received proceeds from such borrowings of approximately
$645,000, of which approximately $370,000 was repaid. Consequently we recorded
a
liability at March 31, 2006 of approximately $275,000 which is included in
current liabilities under the heading “Due to broker.”
We
had a
working capital deficit of approximately $4,535,909 at March 31, 2006 and we
continue to have recurring losses. In the past we have relied upon private
placements of equity and debt securities and we plan to rely on private
placements to fund our capital requirements in the future. We have received
shareholder approval to sell equity and/or debt securities of the Company up
to
$10 million in any calendar year to our former Chairman and Chief Executive
Officer, Milton “Todd” Ault, III, to the Company’s President and Secretary,
Lynne Silverstein, to our current Chairman and Chief Executive Officer and
the
Chief Health and Science Officer of our subsidiary Patient Safety Consulting
Group, LLC, Louis Glazer, and to the Manager of our subsidiary Ault Glazer
Bodnar Capital Properties, LLC and Mr. Glazer’s spouse, Melanie Glazer. If we
propose to sell more than $10 million of securities in a calendar year to such
persons additional shareholder approval would be required. We do not currently
anticipate selling equity or debt securities to these persons and, in the event
we elected to pursue such an investment, we cannot guarantee that such persons
would be willing to further invest in the Company. We have, however, received
funding from Ault Glazer Bodnar Acquisition Fund, LLC ("AGB
Acquisition Fund").
Ault
Glazer Bodnar & Company Investment Management, LLC (“AGB
& Company IM”)
is the
managing member of AGB Acquisition Fund. The managing member of AGB &
Company IM is Ault Glazer Bodnar & Company, Inc. (“AGB
& Company”).
The
Company’s former Chairman and Chief Executive Officer, Milton “Todd” Ault, III,
is Chairman, Chief Executive Officer and President of AGB &
Company.
On
April
7, 2005, we issued a $1,000,000 promissory note (the "Bodnar
Note")
to
Bodnar Capital Management, LLC, in consideration of a $1,000,000 loan from
Bodnar Capital Management, LLC. Steven J. Bodnar is a managing member of Bodnar
Capital Management, LLC. Mr. Bodnar, through Bodnar Capital Management, LLC,
is
one of our principal stockholders. The principal amount of the Bodnar Note
and
interest at the rate of 6% per annum is due on May 31, 2006. The obligations
under the Bodnar Note are secured by all real property owned by us.
On
January 12, 2006, Steven J. Caspi (“Caspi”) loaned $1,000,000 to ASG. As
consideration for the loan, ASG issued Caspi a promissory note in the principal
amount of $1,000,000 (the “Caspi
Note”)
and
granted Caspi a mortgage on certain real estate owned by ASG and a security
interest on all personal property and fixtures located on such real estate
as
security for the obligations under the Caspi Note. In addition, the Company
entered into an agreement guaranteeing ASG’s obligations pursuant to the Caspi
Note and Caspi received warrants to purchase 30,000 shares of the Company’s
common stock at an exercise price of $4.50 per share. The Company recorded
debt
discount in the amount of approximately $92,000 as the estimated value of the
warrants. The debt discount will be amortized as non-cash interest expense
over
the term of the debt using the effective interest method. Through March 31,
2006, interest expense of approximately $46,000 has been recorded from the
debt
discount amortization, and as of March 31, 2006, the remaining debt discount
balance of approximately $46,000 is reflected as a reduction of notes payable.
The Caspi Note accrues interest at the rate of 10% per annum, which together
with principal, is due to be repaid on July 13, 2006.
From
January 11, 2006 through March 31, 2006 AGB Acquisition Fund, a related party,
loaned the Company a total of approximately $443,000, of which approximately
$401,000 was repaid in cash. As consideration for the outstanding balance of
$42,000, the Company issued AGB Acquisition Fund secured promissory notes in
the
principal amount of $42,000 (the “AGB
Acquisition Fund Notes”),
and
entered into a security agreement granting AGB Acquisition Fund a security
interest in the Company’s personal property and fixtures, inventory, products
and proceeds as security for the Company’s obligations under the AGB Acquisition
Fund Notes. The AGB Acquisition Fund Notes accrue interest at the rate of 7%
per
annum, which together with principal are due to be repaid sixty days from the
dates the notes were issued and began to expire on April 24, 2006. At the option
of the Company, payments of principal and interest may be paid by exchange
of
any securities owned by the Company valued on the day before the maturity date
of the Note.
On
February 8, 2006, AGB Acquisition Fund loaned approximately $687,000 to ASG.
As
consideration for the loan, ASG issued AGB Acquisition Fund a secured promissory
note in the principal amount of approximately $687,000 (the “ASG Note”) and
granted a real estate mortgage in favor of AGB Acquisition Fund relating to
certain real property located in Jefferson County, Alabama (the “Property”). The
Note bears interest at the rate of 10% per annum and is due on April 10, 2006,
or within 30 days thereafter. AGB Acquisition Fund received warrants to purchase
20,608 shares of the Company’s common stock at an exercise price of $3.86 per
share as additional consideration for entering into the loan agreement. The
Company recorded debt discount in the amount of approximately $44,000 as the
estimated value of the warrants. The debt discount will be amortized as non-cash
interest expense over the term of the debt using the effective interest method.
Through March 31, 2006, interest expense of approximately $29,000 has been
recorded from the debt discount amortization, and as of March 31, 2006, the
remaining debt discount balance of approximately $15,000 is reflected as a
reduction of notes payable. As security for the performance of ASG’s obligations
pursuant to the Note, ASG granted AGB Acquisition Fund a security interest
in
all personal property and fixtures located at the ASG Property. During the
three
months ended March 31, 2006, the Company had incurred interest expense,
excluding amortization of debt discount, of approximately $10,000 on the Note,
all of which is accrued at March 31, 2006.
In
addition, as of March 31, 2006, AGB Acquisition Fund had loaned an aggregate
of
approximately $1,423,036 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 bears interest at the rate of 3% above the Prime Rate as
published in the Wall Street Journal (7.75% at March 31, 2006). All unpaid
principal, interest and charges under the Real Estate Note are due in full
on
July 31, 2010. The Real Estate Note is 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 AGB Acquisition Fund.
As
of
March 31, 2006, AGB Acquisition Fund had loaned an aggregate of approximately
$30,000 to the Company. The loans were advanced to the Company pursuant to
a
Revolving Line of Credit Agreement (the “Revolving
Line of Credit”)
entered
into with AGB Acquisition Fund on March 7, 2006. The Revolving Line of Credit
allows the Company to request advances of up to $500,000 from AGB Acquisition
Fund. The initial term of the Revolving Line of Credit is for a period of six
months and may be extended for one or more additional six month periods upon
mutual agreement of the parties. Each advance under the Revolving Line of Credit
is evidenced by a secured promissory note and a security agreement. The secured
promissory notes issued pursuant to the Revolving Line of Credit must be repaid
with interest at the Prime Rate plus 1% within 60 days from issuance and are
convertible into shares of the Company’s common stock at the option of AGB
Acquisition Fund at a price of $3.10 per share. The obligations of the Company
pursuant to such secured promissory notes are secured by the Company’s assets,
personal property and fixtures, inventory, products and proceeds therefrom.
Management
is currently seeking additional financing and believes that it will be
successful. However, in the event management is not successful in obtaining
additional financing, existing cash resources, together with proceeds from
investments and anticipated revenues from operations, may not be adequate to
fund our operations for the twelve months subsequent to December 31, 2005.
However, ultimately long-term liquidity is dependent on our ability to attain
future profitable operations. We intend to undertake additional debt or equity
financings to better enable us to grow and meet future operating and capital
requirements.
As
of
March 31, 2006, other than our office lease, we had no commitments not reflected
in our condensed consolidated financial statements.
Cash
and
cash equivalents decreased by $21,510 to $57,863 during the three months ended
March 31, 2006, compared to a decrease of $835,663 during the three months
ended
March 31, 2005.
Operating
activities provided $6,579 of cash during the three months ended March 31,
2006,
compared to using $280,578 during the three months ended March 31,
2005.
Operating
activities for the three months ended March 31, 2006, exclusive of changes
in
operating assets and liabilities, used $1,024,452 of cash, as the Company's
net
cash provided by operating activities of $6,579 included non-cash charges for
depreciation, amortization and interest of $164,999, realized losses of $136,262
and stock based compensation of $2,353,979. For the three months ended March
31,
2005, operating activities, exclusive of changes in operating assets and
liabilities, used $841,346 of cash, as the Company's net cash used in operating
activities of $280,578 included non-cash charges for depreciation and
amortization of $27,624, realized losses of $34,728 and stock based compensation
of $1,224,101.
Changes
in operating assets and liabilities produced cash of $1,031,031 during the
three
months ended March 31, 2006, principally due to net proceeds received from
marketable securities, and decreases in our receivables from investments which
were partially offset by decreases in the level of accounts payable and accrued
liabilities and amounts due to our broker. The amount due to our broker is
directly attributable to purchases of marketable investment securities that
were
purchased on margin or to securities that were margined subsequent to their
purchase. During the three months ended March 31, 2006 and year ended December
31, 2005, the Company invested its cash balances in the public equity and debt
markets in an attempt to maximize the short-term return on such assets. The
amount due to our broker varied throughout the year depending upon the aggregate
amount of marketable investment securities held by us and the level of borrowing
against our available-for-sale securities. The actual amount of marketable
investment securities held was influenced by several factors, including but
not
limited to, our expectations of potential returns available from what we
considered to be mispriced securities as well as the cash needs of our operating
activities. During times when we were heavily invested in marketable investment
securities our liquidity position was significantly reduced. To the extent
we
have a need for an excess cash balance to meet our financial obligations the
amount of securities purchased on margin will either decrease or disappear
altogether. However, if we are in a position where we have excess cash with
no
immediate need for liquidity, and we believe opportunities exist to maximize
the
short-term return on such assets then we may purchase marketable securities
on
margin.
During
the three months ended March 31, 2005, changes in operating assets and
liabilities produced cash of $560,768 primarily due to an increase in the level
of accounts payable and accrued expenses and amounts due broker which were
partially offset by net purchases of marketable securities.
The
principal factor in the $2,082,345 of cash used in investing activities during
the three months ended March 31, 2006 was the purchase of land of $1,696,945
and
capitalized construction costs of $317,309 related to ASG. The principal factor
in the $509,111 of cash used in investing activities during the three months
ended March 31, 2005 was due to our investment in Surgicount of $432,398
combined with purchases of long-term investments of $65,006.
Cash
provided by financing activities during the three months ended March 31, 2006,
of $2,054,256 resulted from the net proceeds from notes payable of $2,054,256.
Cash used in financing activities for the three months ended March 31, 2005,
of
$45,974 resulted primarily from the exercise of stock options of $26,250 and
payment of preferred dividends of $19,163. Additionally, as discussed above,
during the three months ended March 31, 2006 and 2005 the note payable to
Winstar was offset by certain payments made allowed for in the note
payable.
Investments
Our
financial condition is partially dependent on the success of our investments.
Short selling was a component of the Company’s investment strategy in the past
and these trades have ranged, in any particular month, from 0% to 20% of total
trading activity. The making of such investments entails significant risk that
the price of a security may increase resulting in the loss of or negative return
on the investment. We have not engaged in the practice of short selling since
the quarter ended September 30, 2005, and do not expect short selling to become
a significant component of our strategy in the future. On March 29, 2006 our
Board of Directors directed us to liquidate all of our investments and other
assets that do not relate to the patient safety medical products business.
Some
of our investments are subject to restrictions on resale under federal
securities laws and otherwise are illiquid, which will make it difficult to
dispose of the securities quickly. Since we will be forced liquidate some or
all
of the investments on an accelerated timeline, the proceeds of such liquidation
may be significantly less than the value at which we acquired the investments.
The following is a discussion of our most significant investments at March
31,
2006.
A
summary
of our investment portfolio, which at March 31, 2006 was valued at $4,985,616
and represented 31.3% of our total assets, is reflected below. Excluding our
real estate investments, our investment portfolio represents 28.3% of our total
assets. The investment portfolio is comprised of marketable securities of
$104,790 and long-term investments of $4,880,826. Our investments in marketable
securities that are bought and held principally for the purpose of selling
them
in the near-term are classified as trading securities. Our remaining investments
are classified as long-term investments.
| |
|
|
March
31,
|
|
| |
|
|
2006
|
|
|
Alacra
Corporation
|
|
$
|
1,000,000
|
|
|
Digicorp
|
|
|
2,772,793
|
|
|
IPEX,
Inc.
|
|
|
689,700
|
|
|
Real
Estate
|
|
|
481,033
|
|
|
Other
|
|
|
42,090
|
|
| |
|
$
|
4,985,616
|
|
Alacra
Corporation
At
March
31, 2006, we had an investment in Alacra Corporation (“Alacra”),
valued
at $1,000,000, which represents 6.3% of our total assets. On April 20, 2000,
we
purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
Alacra has recorded revenue growth in every year since the Company’s original
investment, further, 2005 revenues of approximately $16.5 million, were in
excess of the prior year’s revenues by approximately 45%. At December 31, 2005,
Alacra had total assets of approximately $3.5 million with total liabilities
of
approximately $6.0 million. Deferred revenue, which represents subscription
revenues are amortized over the term of the contract, which is generally one
year, and represented approximately $2.9 million of the total liabilities.
The
Company has the right to have the preferred stock redeemed by Alacra for face
value plus accrued dividends beginning on December 31, 2006. In connection
with
this investment, the Company was granted observer rights on Alacra board of
directors meetings.
Alacra,
a
privately held company based in New York, is a global provider of business
and
financial information. Alacra provides a diverse portfolio of fast,
sophisticated online services that allow users to quickly find, analyze, package
and present business information. Alacra’s customers include more than 750
leading financial institutions, management consulting, law and accounting firms
and other corporations throughout the world. Currently, Alacra’s largest
customer segment is investment and commercial banking, followed closely by
management consulting, law and multi-national corporations.
Alacra’s
online service allows users to search via a set of tools designed to locate
and
extract business information from the Internet and from Alacra’s library of
content. Alacra’s team of information professionals selects, categorizes and
indexes more than 45,000 sites on the Web containing the most reliable and
comprehensive business information. Simultaneously, users can search more than
100 premium commercial databases that contain financial information, economic
data, business news, and investment and market research. Alacra provides
information in the required format, gleaned from such prestigious content
partners as Thomson Financial™, Barra, The Economist Intelligence Unit, Factiva,
Mergerstat® and many others.
The
information services industry is intensely competitive and we expect it to
remain so. Although Alacra has been in operation since 1996 they are
significantly smaller in terms of revenue than a large number of companies
offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
revenues that range anywhere from $100 million to several billion dollars,
as
reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
range of products and services, greater financial and marketing resources,
larger customer bases, greater name recognition, greater global reach and more
established relationships with potential customers than Alacra has. These larger
and better capitalized competitors may be better able to respond to changes
in
the financial services industry, to compete for skilled professionals, to
finance investment and acquisition opportunities, to fund internal growth and
to
compete for market share generally.
Digicorp
At
March
31, 2006, we had an investment in Digicorp valued at $2,772,793, which
represents 17.4% of our total assets. On December 29, 2004, we entered into
a
Common Stock Purchase Agreement with certain shareholders of Digicorp (the
"Digicorp
Agreement"),
to
purchase an aggregate of 3,453,527 shares of Digicorp common stock. We purchased
2,229,527 of such shares on December 29, 2004 (2,128,740 shares at a price
of
$0.135 per share and 100,787 shares at a price of $0.145 per share). We were
also required to purchase the remaining 1,224,000 shares from the selling
shareholders at a price of $0.145 per share at such time that Digicorp registers
the resale of the shares with the SEC. During December 2005 we amended the
Digicorp Agreement and an unrelated third party assumed the obligation to
purchase 1,000,000 of the remaining 1,224,000 shares from the selling
shareholders. Additionally, we extended loans of approximately $32,500 to the
selling shareholders from our working capital. Such loans represented the amount
of the remaining obligation to purchase 224,000 shares of Digicorp common stock
and are secured by the 224,000 shares of Digicorp common stock presently held
by
such selling shareholders. Digicorp’s common stock is traded on the OTC Bulletin
Board, which reported a closing price, at March 31, 2006, of $1.35. In
connection with the Digicorp Agreement, we were entitled to designate two
members to the Board of Directors of Digicorp. Our first designee, Melanie
Glazer, who is also manager of our subsidiary Ault Glazer Bodnar Capital
Properties, LLC, was appointed on December 29, 2004. Milton “Todd” Ault, III,
our former Chairman and Chief Executive Officer, was appointed Chief Executive
Officer of Digicorp on April 26, 2005. On July 16, 2005, Alice M. Campbell,
one
of our directors, and Mr. Ault was appointed to the Board of Directors of
Digicorp. On July 20, 2005, Lynne Silverstein, our President and Secretary,
was
appointed as a director of Digicorp, and William B. Horne, our Chief Financial
Officer, was appointed as a director and as Chief Financial Officer of Digicorp.
On September 30, 2005, Mr. Ault resigned from all positions with Digicorp and
Mr. Horne was appointed as the interim Chief Executive Officer. On December
29,
2005, William B. Horne resigned as Chief Executive Officer and Lynne Silverstein
and Melanie Glazer resigned as directors.
Since
June 30, 1995, Digicorp was in the developmental stage and had no operations
other than issuing shares of common stock for financing the preparation of
financial statements and for preparing filings for the SEC. On May 18, 2005,
Digicorp sold Bodnar Capital Management, LLC 2,941,176 shares of its common
stock and warrants to purchase an additional 3,000,000 shares of its common
stock with exercise prices ranging from $0.25 to $1.50 per share. Digicorp
received gross proceeds of approximately $500,000 from the sale of stock and
warrants to Bodnar Capital Management, LLC. As described above under “Financial
Condition,” Bodnar Capital Management, LLC also is one of our principal
stockholders. On October 27, 2005, Bodnar Capital Management, LLC canceled
the
warrants to purchase 3,000,000 shares of common stock in exchange for the
issuance of a warrant to purchase 500,000 shares of Digicorp’s common stock with
an exercise price of $0.01 per share.
On
September 19, 2005, upon entering into an asset purchase agreement with Philip
Gatch, who was appointed Digicorp’s Chief Technology Officer, Digicorp completed
the initial transaction to transform itself from that of a development stage
enterprise to a digital media and content delivery company. Digicorp issued
Mr.
Gatch 1,000,000 shares of its common stock as consideration for the assets
purchased, which consisted of the iCodemedia suite of websites and internet
properties and all related intellectual property (the “iCodemedia
Assets”).
The
iCodemedia suite of websites consists of the websites www.icodemedia.com,
www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com
and
www.tunespromo.com. Digicorp plans to use these websites and the related
intellectual property to provide a suite of applications and services to enable
content creators the ability to publish and deliver content to existing and
next
generation digital media devices, such as the Apple iPod and the Sony PSP,
based
upon the consumers’ expectation for broader and on-demand access to content and
services.
On
December 29, 2005, Digicorp acquired all of the issued and outstanding capital
stock of Rebel Crew Films, Inc., a California corporation (“Rebel
Crew Films”),
in
consideration for the issuance of 21,207,080 shares of Digicorp common stock
(the “Purchase
Price”)
to the
shareholders of Rebel Crew Films. From the Purchase Price, 4,000,000 shares
are
held in escrow pending satisfaction of certain performance milestones. In
addition, from the Purchase Price, 16,666,667 shares are subject to lock up
agreements as follows: (a) 3,333,333 shares are subject to lockup agreements
for
one year; (b) 6,666,667 shares are subject to lockup agreements for two years;
and (c) 6,666,667 shares, of which the 4,000,000 escrowed shares are a
component, are subject to lockup agreements for three years.
In
connection with the acquisition of Rebel Crew Films, on December 29, 2005
Digicorp entered into a Securities Purchase Agreement with one of the
shareholders of Rebel Crew Films, Rebel Holdings, LLC, pursuant to which
Digicorp purchased a $556,306.53 principal amount loan receivable owed by Rebel
Crew Films to Rebel Holdings, LLC in exchange for the issuance of a $556,306.53
principal amount secured convertible note to Rebel Holdings, LLC. The secured
convertible note accrues simple interest at the rate of 4.5%, matures on
December 29, 2010 and is secured by all of Digicorp’s assets now owned or
hereafter acquired. The secured convertible note is convertible into 500,000
shares of Digicorp common stock at the rate of $1.112614 per share. Jay Rifkin,
Digicorp’s Chief Executive Officer and one of its directors, is the sole
managing member of Rebel Holdings, LLC.
Rebel
Crew Films was founded in 2001 as a film licensing and distribution company
of
Latino home entertainment products. Rebel Crew Films currently maintains
approximately 300 Spanish language films and serves the some of the nation’s
largest wholesale, retail, catalog, and e-commerce accounts. Rebel Crew’s titles
can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and hundreds of
independent video outlets across the United States and Canada. We believe that
the acquisition will allow Digicorp to leverage Rebel Crew Films’ Latino content
and industry relationships with the iCodemedia Assets to create a compelling
digital media and content delivery company.
IPEX,
Inc.
At
March
31, 2006, we held 1,045,000 shares of common stock and warrants to purchase
787,500 shares of common stock at $1.00 per share of IPEX, Inc. (“IPEX”),
valued
at $689,700, which represents 4.3% of our total assets. IPEX's common stock
is
traded on the OTC Bulletin Board, which reported a closing price, at March
31,
2006, of $0.88. The warrants are exercisable for a period of five years and
are
callable by IPEX in certain instances. IPEX operates a Voice over Internet
Protocol ("VoIP")
routing
platform that directs telecommunication traffic. VoIP permits a user to send
voice, fax and other information over the Internet, rather than through a
regular telephone network system based on switches Pursuant to two separate
asset purchase agreements entered into during 2005, in consideration for
$6,000,000 of IPEX common stock and $275,000 cash, IPEX purchased certain
intellectual property assets that may be used to enhance, compact, store,
encrypt, stream and display digital image content over wireless networks and
over the Internet and for image enhancement, compacting and content protection
applications. On March 21, 2006 IPEX reported that it is in the process of
transferring ownership of such assets to its subsidiary RGB Channel, Inc. On
June 23, 2005, Alice M. Campbell, who is one of our directors, was appointed
to
the Board of Directors of IPEX. Ms. Campbell subsequently resigned from IPEX’s
Board effective February 2, 2006. In addition, from May 26, 2005 until July
20,
2005, Milton “Todd” Ault, III, our former Chairman and Chief Executive Officer,
served as interim Chief Executive Officer of IPEX and Mr. Ault has been a
director of IPEX since May 26, 2005.
The
Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
of $450,000. This investment was part of the private placement that IPEX
completed on March 18, 2005. The total amount of IPEX’s private placement was
for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
of
$259,980, resulting in net realized proceeds of $3,240,020. The common stock,
Series A and Series B Warrants were sold as Units, with each Unit consisting
of
two shares of common stock, one series A Warrant and one Series B Warrant.
Each
Series A Warrant entitles the holder to purchase one share of common stock
at
$1.50 per share, exercisable for a period of five years. Each Series B Warrant
entitles the holder to purchase one share of common stock at $2.00 per share,
exercisable for a period of five years. Subsequent to the effectiveness of
a
registration statement covering the re-sale of shares underlying the warrants,
the Series A and Series B Warrants are callable by IPEX, under certain
circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
respectively, for ten consecutive trading days. In such event IPEX must give
us
30 days prior written notice of its intention to call the warrants after which
it has the right to repurchase the warrants at a purchase price of $0.01 per
share of common stock then purchasable pursuant to the
warrants.
During such 30 day notice period we would have the right to exercise the
warrants. As of March 31, 2006 IPEX has not filed a registration statement
covering the re-sale of the shares underlying the warrants and accordingly
IPEX
does not have a right to call them. However, in the event the warrants are
called by IPEX, the warrants would be likely be in-the-money and we would likely
exercise the warrants. To the extent we did not have a sufficient amount of
cash
available to exercise the warrants we would most likely liquidate a portion
of
our existing shares in IPEX common stock to satisfy the exercise amount. On
March 21, 2006 IPEX sold $800,000 principal amount of 10% secured convertible
notes to four accredited investors in a private placement transaction. The
10%
secured convertible notes are convertible into either IPEX common stock at
a
price of $1.00 per share or into common stock of IPEX’s subsidiary RGB Channel,
Inc. at a conversion price equal to the lesser of (a) $0.50, or (b) the price
at
which, at any time while the 10% secured convertible notes are outstanding,
RGB
Channel, Inc. sells shares of its common stock or any other securities
convertible into or exchangeable for RGB Channel, Inc. common stock. The sale
by
IPEX of the 10% secured convertible notes caused an adjustment to the exercise
price of the Series A Warrants and the Series B Warrants to equal $1.00 per
share and an increase in the number of shares of common stock purchasable under
such Series A and B Warrants. Pursuant to such warrants that we own, we are
now
entitled to purchase a total of 787,500 shares of IPEX common stock at an
exercise price of $1.00 per share.
As
reflected in IPEX’s annual report on Form 10-KSB for the fiscal year ended
December 31, 2005, sales for the year ended December 31, 2005 rose to
$12,332,093 as compared to sales of $6,716,114 from the prior year ended
December 31, 2004. Due to prior working capital constraints IPEX could only
maintain selling to Tier 3 customers on a weekly net 5 basis. The additional
working capital provided by the private placement completed in March 2005
allowed IPEX to extend credit to Tier 2 carriers under net 15 terms and Tier
1
customers under net 30 terms therefore increasing the number of overall
customers.
Ault
Glazer Bodnar Capital Properties, LLC
At
March
31, 2006, we had several real estate investments, valued at $481,033, which
represents 3.0% of our total assets. We hold our real estate investments in
Ault
Glazer Bodnar Capital Properties, LLC (“AGB
Properties”),
a
Delaware limited liability company and a wholly owned subsidiary. AGB Properties
is in the process of liquidating its real estate holdings. AGB Properties’
primary focus was on the acquisition and management of income producing real
estate holdings. AGB Properties real estate holdings consist of approximately
8.5 acres of undeveloped land in Heber Springs, Arkansas, 0.61 acres of
undeveloped land in Springfield, Tennessee, and various loans secured by real
estate in Heber Springs, Arkansas. We expect that any future gain or loss
recognized on the liquidation of some or all of our real estate holdings would
be insignificant primarily due to the short period of time that the properties
were owned combined with the absence of any significant changes in property
values in the real estate markets where the real estate holdings are located.
Results
of Operations
We
account for our operations under accounting principles generally accepted in
the
United States. The principal measure of our financial performance is captioned
“Net loss attributable to common shareholders,” which is comprised of the
following:
| |
§
|
"Revenues,"
which is the amount we receive from sales of our
products;
|
| |
§
|
“Operating
expenses,” which are the related costs and expenses of operating our
business;
|
| |
§
|
“Interest,
dividend income and other, net,” which is the amount we receive from
interest and dividends from our short term investments and money
market
accounts, and our proportionate share of income or losses from investments
accounted for under the equity method of
accounting;
|
| |
§
|
“Realized
gains (losses) on investments, net,” which is the difference between the
proceeds received from dispositions of investments and their stated
cost;
and
|
| |
§
|
“Unrealized
gains (losses) on marketable securities, net,” which is the net change in
the fair value of our marketable securities, net of any (decrease)
increase in deferred income taxes that would become payable if the
unrealized appreciation were realized through the sale or other
disposition of the investment
portfolio.
|
“Realized
gains (losses) on investments, net” and “Unrealized gains (losses) on marketable
securities, net” are directly related. When a security is sold to realize a
gain, the net unrealized gain decreases and the net realized gain increases.
When a security is sold to realize a loss, the net unrealized gain increases
and
the net realized gain decreases.
We
generally earn interest income from loans, preferred stock, corporate bonds
and
other fixed income securities. The amount of interest income varies based upon
the average balance of our fixed income portfolio and the average yield on
this
portfolio.
Revenues
We
recognized revenues of $75,760 and $0 during the three months ended March 31,
2006 and 2005, respectively. Although none of the revenues that we recognized
during the three months ended March 31, 2006 related to sales of our
Safety-SpongeTM
System
we
expect to begin recognizing revenues from the Safety-SpongeTM
System
during the three month period ending June 30, 2006 based in part upon the
results of initial usage of the Safety-SpongeTM
System
in
hospital operating rooms. We expect these revenues will initially have an
insignificant impact on our results of operations, however, during the three
month period ending December 31, 2006 we expect that revenues from our
Safety-SpongeTM
System
will start to become a source of funds to cover a portion of our operating
costs.
Of
the
revenue earned during the three months ended March 31, 2006, $54,993 was the
result of a consulting agreement, consented to by IPEX, whereby Wolfgang
Grabher, the majority shareholder of IPEX, former President, former Chief
Executive Officer and former director of IPEX, retained us to serve as a
business consultant to IPEX. In consideration for the services, during December
2005, Mr. Grabher personally transferred us 500,000 shares of common stock
of
IPEX as a non-refundable consulting fee. Mr. Grabher owned 18,855,900 shares
of
IPEX's 28,195,566 outstanding shares of common stock. On December 14, 2005
Mr.
Grabher agreed to surrender 14,855,900 of the shares of IPEX common stock owned
by him to IPEX to be retired and returned to treasury. Such shares represented
49.4% of IPEX’s outstanding shares of common stock at the time. At March 31,
2006, we held 7.8% of IPEX’s outstanding shares of common stock. On June 30,
2005, we agreed with IPEX as to the scope of the consulting services and the
consideration for such services. At March 31, 2006, we had performed a
significant amount of the services stipulated under the terms of the consulting
agreement, including but not limited to: (i) a review of the business and
operations (ii) advice in connection with IPEX’s purchase of certain
intellectual property assets; (iii) the hiring by IPEX of a new Chief Executive
Officer, Chief Operating Officer and a Vice President of Research &
Development, none of which would be deemed related parties; and (iv) IPEX’s
appointment of two new members to its Board of Directors. We have deferred
approximately $48,882 of revenue relating to this consulting agreement which
management expects will be recognized during the three months ending June 30,
2006. We do not expect to enter into any additional consulting agreements with
IPEX or, other than the deferred revenue, expect to recognize any additional
revenue from IPEX. Our former Chairman and former Chief Executive Officer,
Mr.
Ault, has been a director of IPEX since May 26, 2005 and Mr. Ault served as
interim Chief Executive Officer of IPEX from May 26, 2005 until July 13, 2005.
Darrell W. Grimsley, Jr., Chief Executive Officer of our indirect wholly owned
subsidiary Automotive Services Group, LLC, served as a director of IPEX and
a
member of its Audit Committee from August 30, 2005 until February 2, 2006.
Alice
M. Campbell, a member of our Board of Directors and our audit and compensation
committees, served as a director of IPEX and chairman of its audit committee
from June 23, 2005 until February 2, 2006.
The
remaining revenue of $20,767, was generated from car wash services by our
wholly-owned operating subsidiary, ASG. ASG
was
formed to develop and operate automated car wash sites under the trade name
“Bubba’s Express Wash”.
ASG’s
first site, developed in Birmingham, Alabama, had its grand opening on March
8,
2006.
Expenses
Operating
expenses were $3,487,881 and $2,094,355 for
the three months ended March 31, 2006 and 2005, respectively.
The
increase in operating expenses for the three months ended March 31, 2006 when
compared to March 31, 2005, was primarily the result of salaries and employee
benefits, and to a lesser extent professional fees and amortization of our
patents. Until October 22, 2004, the date our shareholders approved certain
proposals relating to our restructuring plan to change from a business
development company to an operating company, our principal activities involved
the management of existing investments. As such, compensation expense was
primarily the salaries of our Chief Executive Officer and to a lesser extent
the
Chief Financial Officer. Since the restructuring plan, we have aggressively
focused on expanding into the health care and medical products field,
particularly the patient safety markets, and up until October 2005, the
financial services and real estate industries. We have hired personnel in order
to meet the increased needs of our patient safety business focus and this has
resulted in increases in almost every expense category.
A
majority of our operating expenses consist of employee compensation, which
increased by $1,239,934. Our Compensation Committee, which is comprised of
three
independent directors for purposes of AMEX rules, determines and recommends
to
our Board the cash and stock based compensation to be paid to our executive
officers and also reviews the amount of salary and bonus for each of our other
officers and employees. The most significant component of employee compensation
is stock based compensation expense. For the three months ended March 31, 2006,
we recorded $922,483 relating to grants of nonqualified stock options and
$1,013,484 related to restricted stock awards to our employees and non-employee
directors. During the three months ended March 31, 2005, we recorded $552,542
relating to grants of nonqualified stock options and $574,975 related to
restricted stock awards to our employees and non-employee directors. Thus,
the
increase in expenses related to the issuance of stock options and restricted
stock awards to our employees and non-employee directors amounted to $808,450.
The remaining increase in employee compensation of $431,484 is attributed to
a
non-recurring severance package paid to Milton “Todd” Ault III, our former
Chairman and Chief Executive Officer, of $180,000 and an increase in salaries
and benefits of $251,484 due to an increased number of employees. At March
31,
2006, we had 11 full time employees receiving compensation compared to 5 full
time employees, none of which were highly compensated executive officers, at
March 31, 2005.
At
March
31, 2006, three of our executives were covered under employment agreements.
Our
Chief Financial Officer, William B. Horne, is covered under a two year
employment agreement with annual base compensation of $150,000; our President
of
Sales and Marketing of Surgicount Medical, Inc., Richard Bertran, is covered
under a three year employment agreement with annual base compensation of
$200,000 and; our Chief Operating Officer of Surgicount Medical, Inc., James
Schafer, is covered under a two year employment agreement with annual base
compensation of $100,000. None of our other executives our currently covered
under an employment agreement, therefore, we are under no financial obligation,
other than monthly salaries, for our other executive officers. Currently,
monthly gross salaries for all of our employees are approximately $120,000.
We
believe, as with all our operating expenses, that our existing cash resources,
together with proceeds from investments, anticipated financings and expected
revenues from our operations, should be adequate to fund our salary obligations.
The
second largest component of our operating expenses is professional fees, which
increased by $55,336. As in the case of employee compensation, stock based
compensation expense is the most significant component of professional fees
for
the three months ended March 31, 2006. We incurred $418,012 and $96,584 relating
to the issuance of warrants during the three months ended March 31, 2006 and
2005, respectively. A significant amount of the warrants issued during the
three
months ended March 31, 2006, relate to a consulting agreement that we entered
into in February 2006 with Analog Ventures, LLC (“Analog
Ventures”)
whereby
Analog Ventures agreed to consult with us on matters relating primarily to
the
divestiture of our non-core assets and assist us in our efforts to focus our
business exclusively on the patient safety medical products field. As an
incentive for entering into the agreement, we agreed to issue Analog Ventures
a
warrant to purchase 175,000 shares of our common stock at an exercise price
of
$3.95, exercisable for 3 years. We recognized an expense of $404,917 related
to
these warrants.
The
increase in stock based compensation expense to consultants of $321,428 was
partially offset by a corresponding decrease in legal fees of $302,104. The
decrease in legal fees is primarily attributable to either the absence of or
significant reduction in the level of work during the three months ended March
31, 2006 on our proxy statements, registration statements and annual report.
These reports required significantly more time to prepare during the three
months ended March 31, 2005 due to our change from a business development
company to an operating company.
All
of
our stock based compensation issued to employees, non-employee directors and
consultants were expensed in accordance with SFAS 123(R). We valued the
nonqualified stock options and warrants using the Black-Scholes valuation model
assuming expected dividend yield, risk-free interest rate, expected life and
volatility of 0%, 3.75%, three to five years and 83% to 89%, respectively.
The
restricted stock awards were valued at the closing price on the date the
restricted shares were granted.
The
increase in amortization expense of our patents was caused by a full quarter
of
amortization during the three months ended March 31, 2006 as opposed to a
partial quarter during the three months ended March 31, 2005. The entire
capitalized costs of Surgicount’s patents, valued at $4,684,576, are being
amortized over their approximate useful life of 14.4 years. Since the Surgicount
patents were not acquired until the end of February 2005, amortization for
the
three months ended March 31, 2005 was only approximately $27,000 as opposed
to
approximately $81,000 during the three months ended March 31, 2006.
Interest,
dividend income and other, net
We
had
interest income of $1,094 and $28,602 for the three months ended March 31,
2006
and 2005, respectively.
The
decrease in interest income for the three months ended March 31, 2006 when
compared to March 31, 2005 was primarily the result of a decreased amount of
fixed income investments held throughout the period. At March 31, 2005, we
held
in marketable securities approximately $2.5 million in U.S. Treasuries as
opposed to no investments in U.S. Treasuries during the three months ended
March
31, 2006.
Realized
gains (losses) on investments, net
During
the three months ended March 31, 2006, we realized net losses of $136,262
primarily from the sale of 102,100 shares of Tuxis Corporation.
During
the three months ended March 31, 2005, we realized net losses of $34,728 from
the sale of our marketable securities.
We
have
relied and we continue to rely to a large extent upon proceeds from sales of
investments rather than investment income to defray a significant portion of
our
operating expenses. Because such sales cannot be predicted with certainty,
we
attempt to maintain adequate working capital to provide for fiscal periods
when
there are no such sales.
Unrealized
gains (losses) on marketable securities, net
Unrealized
appreciation of investments increased by $76,915 during the three months ended
March 31, 2006, primarily due to the sale of 102,100 shares of Tuxis Corporation
common stock, which at December 31, 2005 had unrealized depreciation of
approximately $134,000. When we exit an investment and realize a loss, we make
an accounting entry to reverse any unrealized depreciation we had previously
recorded to reflect the depreciated value of the investment. The increase in
unrealized appreciation related to the sale of our shares of Tuxis common stock
was partially offset by a decrease in the value of the 95,000 shares of IPEX
common stock held as trading securities. IPEX common stock is traded on the
OTC
Bulletin Board, which reported a closing price, at December 31, 2005 of $2.38
per share compared with $0.88 per share at March 31, 2006. We valued our
holdings in IPEX at a discount to the closing prices, or $1.19 and $0.66 per
share at December 31, 2005 and March 31, 2006, respectively, due primarily
to
the limited average number of shares traded on the OTC Bulletin Board.
Unrealized
appreciation of investments increased by $343,587 during the three months ended
March 31, 2005, primarily due to the price appreciation of our marketable
securities
Accumulated
other comprehensive income
Unrealized
gains (losses) on our investments designated as available-for-sale are recorded
in accumulated other comprehensive income. At March 31, 2006, we classified
all
of our restricted holdings in IPEX and Digicorp as available-for-sale. At March
31, 2006, the unrealized gains (losses) on our restricted holdings in IPEX
and
Digicorp amounted to ($831,250) and $2,460,393, respectively, whereas at March
31, 2005, the unrealized gains (losses) on our restricted holdings in IPEX
and
Digicorp amounted to ($327,749) and $2,702,607, respectively. The cumulative
decrease in net unrealized gains amounts to $745,715.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Our
business activities contain elements of market risk. We consider a principal
type of market risk to be valuation risk. Investments and other assets are
valued at fair value as determined in good faith by our Board of Directors.
We
have
invested a substantial portion of our assets in private development stage or
start-up companies. These private businesses tend to be thinly capitalized,
unproven, small companies that lack management depth and have not attained
profitability or have no history of operations. Because of the speculative
nature and the lack of public market for these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. We expect that some of our venture capital investments will be
a
complete loss or will be unprofitable and that some will appear to be likely
to
become successful but never realize their potential.
Because
there is no public market for the equity interests of some of the small
companies in which we have invested, the valuation of such the equity interests
is subject to the estimate of our Board of Directors. In making its
determination, the Board may consider valuation information provided by an
independent third party or the portfolio company itself. In the absence of
a
readily ascertainable market value, the estimated value of our equity
investments may differ significantly from the values that would be placed on
them if a liquid market for the equity interests existed. Any changes in
valuation are recorded in our consolidated statements of operations as either
"Unrealized losses on marketable securities, net” or “Other comprehensive
income."
Item
4. 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 chief
financial officer of our disclosure controls and procedures (as defined in
Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that all information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is: (1)
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure;
and (2)
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. There was no change in our internal
controls or in other factors that could affect these controls during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
As
of the
date this report was filed, there have been no material developments in the
legal proceedings previously reported in our annual report on Form 10-K for
the
fiscal year ended December 31, 2005, which was filed with the Securities and
Exchange Commission on April 17, 2006.
Item
1A. Risk Factors.
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 not made any sales or generated any revenue to date from our Safety-Sponge™
System and a substantial amount of our revenue during the three months ended
March 31, 2006 is from a related party. Because of this, you should not rely
on
our historical results of operations as an indication of our future performance.
We
have
not made any sales or generated any revenue to date from our Safety-Sponge™
System. Further, of our $75,760 of revenue during the three months ended March
31, 2006, $54,993 was generated from a contract to provide management consulting
services to one of our portfolio companies IPEX, Inc., which is considered
a
related party. Our future success is dependent on our ability to develop our
patient-safety related assets into a successful business, which depends upon
wide-spread acceptance of and commercializing our Safety-Sponge™ System. None of
these factors is demonstrated by our historic performance to date and there
is
no assurance we will be able to accomplish them in order to sustain our
operations. As a result, you should not rely on our historical results of
operations as an indication of the future performance of our
business.
We
recently restructured our business strategy and objective and have limited
operating history under our new structure. If we cannot successfully implement
our new business structure the value of your investment in our business could
decline.
Upon
the
change of control that occurred in October 2004, we restructured our business
strategy and objective to focus on the medical products, healthcare solutions,
financial services and real estate industries instead of the radio and
telecommunications industries. Although we still own certain real estate assets,
we are no longer focusing on the financial services and real estate industries.
As of March 29, 2006, our Board of Directors determined to focus our business
exclusively on the patient safety medical products field. We have a limited
operating history under this new structure. Historically, we have not typically
invested in these industries and therefore our historical results of operations
should not be relied upon as an indication of our future financial performance.
If we do not successfully implement our new business structure the value of
your
investment in our business could decline substantially.
Withdrawal
of our election to be treated as a BDC may increase the risks to our
shareholders since we are no longer subject the regulatory restrictions or
financial reporting benefits of the 1940 Act.
Since
we
withdrew our election to be treated as a BDC, we are no longer subject to
regulation under the 1940 Act, which is designed to protect the interests of
investors in investment companies. As a non-BDC, we are no longer subject to
many of the regulatory, financial reporting and other requirements and
restrictions imposed by the 1940 Act including, but not limited to, limitations
on the amounts, types and prices at which we may issue securities, participation
in related party transactions, the payment of compensation to executives, and
the scope of eligible investments.
The
nature of our business has changed from investing in radio and
telecommunications companies with the goal of achieving gains on appreciation
and dividend income, to actively operating businesses in the medical products
and health care solutions industries, with the goal of generating income from
the operations of those businesses. No assurance can be given that our business
strategy or investment objectives will be achieved by withdrawing our election
to be treated as a BDC.
Further,
our election to withdraw as a BDC under the 1940 Act has resulted in a
significant change in our method of accounting. BDC financial statement
presentation and accounting utilizes the value method of accounting used by
investment companies, which allows BDCs to recognize income and value their
investments at market value as opposed to historical cost. As an operating
company, the required financial statement presentation and accounting for
securities held is either fair value or historical cost methods of accounting,
depending on the classification of the investment and our intent with respect
to
the period of time we intend to hold the investment.
A
change
in our method of accounting could reduce the market value of our investments
in
privately held companies by eliminating our ability to report an increase in
the
value of our holdings as they occur. Also, as an operating company, we have
to
consolidate our financial statements with subsidiaries, thus eliminating the
portfolio company reporting benefits available to BDCs.
Together
with our subsidiaries, we may have to take actions that are disruptive to our
business strategy to avoid registration under the 1940
Act.
The
1940
Act generally requires public companies that are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities
to
register as investment companies. A company may be deemed to be an investment
company if it owns “investment securities” with a value exceeding 40% of the
value of its total assets (excluding government securities and cash items)
on an
unconsolidated basis, unless an exemption or exclusion applies. Securities
issued by companies other than majority-owned subsidiaries are generally counted
as investment securities for purposes of the 1940 Act. While on an
unconsolidated basis, our subsidiaries’ assets which constitute investment
securities have not approached 40%, as of March 31, 2006, 28.4% of our assets
on
a consolidated basis with subsidiaries were comprised of investment securities.
If Patient Safety Technologies, Inc. or any of its subsidiaries were to own
investment securities with a value exceeding 40% of its total assets it could
require the subsidiary and/or Patient Safety Technologies, Inc. to register
as
an investment company under the 1940 Act. Registration as an investment company
would subject us to restrictions that are inconsistent with our fundamental
business strategy of equity growth through creating, building and operating
companies
in the medical products and healthcare services industries, particularly the
patient safety field. Moreover, registration under the 1940 Act would subject
us
to increased regulatory and compliance costs, and other restrictions on the
way
we operate. We
may
also have to take actions, including buying, refraining from buying, selling
or
refraining from selling securities, when we would otherwise not choose to do
so
in order to continue to avoid registration under the 1940 Act.
We
intend to undertake additional financings to meet our growth, operating and/or
capital needs, which may result in dilution to your ownership and voting
rights.
We
anticipate that revenue from our operations for the foreseeable future will
not
be sufficient to meet our growth, operating and/or capital requirements. We
believe that in order to have the financial resources to meet our operating
requirements for the next twelve months we will need to undertake additional
equity or debt financings to allow us to meet our future growth, operating
and/or capital requirements. We currently have no commitments for any such
financings. Any equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictive covenants or other adverse
terms with respect to raising future capital and other financial and operational
matters. We
may
not be able to obtain additional financing in sufficient amounts or on
acceptable terms when needed, which could adversely affect our operating results
and prospects. If we fail to arrange for sufficient capital in the future,
we
may be required to reduce the scope of our business activities until we can
obtain adequate financing.
We
have received shareholder approval to sell up to $10 million of equity and/or
debt securities to certain related parties
which may result in dilution to your ownership and voting rights or may result
in the incurrence of substantial debt.
We
have
received shareholder approval to sell equity and/or debt securities up to $10
million in any calendar year to Milton “Todd” Ault, III, Lynne Silverstein,
Louis Glazer, M.D., Ph.G., and Melanie Glazer. Mr. Ault is our former Chairman
and former Chief Executive Officer, Ms. Silverstein is our President and
Secretary, Mr. Glazer is our present Chairman and Chief Executive Officer and
the Chief Health and Science Officer of our subsidiary Patient Safety Consulting
Group, LLC, and Mrs. Glazer is the Manager of our subsidiary Ault Glazer Bodnar
Capital Properties, LLC and also is Mr. Glazer’s spouse. If we propose to sell
more than $10 million of securities in a calendar year to such persons
additional shareholder approval would be required. Although we do not currently
anticipate selling equity or debt securities to these persons if we do sell
any
such securities it will result in dilution to your ownership and voting rights
and/or possibly result in our incurring substantial debt. Any such equity
financing would result in dilution to existing stockholders and may involve
securities that have rights, preferences, or privileges that are senior to
our
common stock. Any such debt financing may be convertible into common stock
which
would result in dilution to our stockholders and would have rights that are
senior to our common stock. Further, any debt financing must be repaid
regardless of whether or not we generate profits or cash flows from our business
activities, which could strain our capital resources.
Should
the value of our patents be less than their purchase price, we could incur
significant impairment charges.
At
March
31, 2006, patents received in the acquisition of Surgicount Medical, Inc.,
net
of accumulated amortization, represented $4,332,556, or 27.2%, of our total
assets. We
perform an annual review in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist to determine if the recorded amount
of our patents is impaired. This determination requires significant judgment
and
changes in our estimates
and assumptions could materially affect the determination of fair value and/or
impairment of patents. We may incur charges for the impairment of our patents
in
the future if sales of our patient safety products, in particular our
Safety-Sponge™ System, fail to achieve our assumed revenue growth rates or
assumed operating margin results.
We
may not be able to effectively integrate our acquisition targets, which would
be
detrimental to our business.
On
February 25, 2005, we purchased Surgicount Medical, Inc., a holding company
for
intellectual property rights relating to our Safety-Sponge™ System. We
anticipate seeking other acquisitions in furtherance of our plan to acquire
assets and businesses in the patient safety medical products industry.
Acquisitions involve numerous risks, including potential difficulty in
integrating operations, technologies, systems, and products and services of
acquired companies, diversion of management’s attention and disruption of
operations, increased expenses and working capital requirements and the
potential loss of key employees and customers of acquired companies. In
addition, acquisitions involve financial risks, such as the potential
liabilities of the acquired businesses, the dilutive effect of the issuance
of
additional equity securities, the incurrence of additional debt, the financial
impact of transaction expenses and the amortization of goodwill and other
intangible assets involved in any transactions that are accounted for by using
the purchase method of accounting, and possible adverse tax and accounting
effects. Any of the foregoing could materially and adversely affect our
business.
Failure
to properly manage our potential growth would be detrimental to our
business.
Any
growth in our operations will place a significant strain on our resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employee base and
maintain close coordination among our technical, accounting, finance, marketing,
sales and editorial staffs. We cannot guarantee that we will be able to do
so,
or that if we are able to do so, we will be able to effectively integrate them
into our existing staff and systems. We may fail to adequately manage our
anticipated future growth. We will also need to continue to attract, retain
and
integrate personnel in all aspects of our operations. Failure to manage our
growth effectively could hurt our business.
If
the protection of our intellectual property rights is inadequate, our ability
to
compete successfully could be impaired.
In
connection with our purchase of Surgicount Medical, Inc., we acquired one
registered U.S. patent and one registered international patent of the
Safety-Sponge™
System. We regard our patents, copyrights, trademarks, trade secrets and similar
intellectual property as critical to our business. We rely on a combination
of
patent, trademark and copyright law and trade secret protection to protect
our
proprietary rights. Nevertheless, the steps we take to protect our proprietary
rights may be inadequate. Detection and elimination of unauthorized use of
our
products is difficult. We may not have the means, financial or otherwise, to
prosecute infringing uses of our intellectual property by third parties.
Further, effective patent, trademark, service mark, copyright and trade secret
protection may not be available in every country in which we will sell our
products and offer our services. If we are unable to protect or preserve the
value of our patents, trademarks, copyrights, trade secrets or other proprietary
rights for any reason, our business, operating results and financial condition
could be harmed.
Litigation
may be necessary in the future to enforce our intellectual property rights,
to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims that our products
infringe upon the proprietary rights of others or that proprietary rights that
we claim are invalid. Litigation could result in substantial costs and diversion
of resources and could harm our business, operating results and financial
condition regardless of the outcome of the litigation.
Other
parties may assert infringement or unfair competition claims against us. We
cannot predict whether third parties will assert claims of infringement against
us, or whether any future claims will prevent us from operating our business
as
planned. If we are forced to defend against third-party infringement claims,
whether they are with or without merit or are determined in our favor, we could
face expensive and time-consuming litigation, which could distract technical
and
management personnel. If an infringement claim is determined against us, we
may
be required to pay monetary damages or ongoing royalties. Further, as a result
of infringement claims, we may be required, or deem it advisable, to develop
non-infringing intellectual property or enter into costly royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms that are acceptable to us, or at all. If a third party
successfully asserts an infringement claim against us and we are required to
pay
monetary damages or royalties or we are unable to develop suitable
non-infringing alternatives or license the infringed or similar intellectual
property on reasonable terms on a timely basis, it could significantly harm
our
business.
There
are significant potential conflicts of interest with our officers, directors
and
our affiliated entities which could adversely affect our results from
operations.
Certain
of our officers, directors and/or their family members have existing
responsibilities and, in the future, may have additional responsibilities,
to
act and/or provide services as executive officers, directors, owners and/or
managers of Ault Glazer Bodnar & Company Investment Management LLC and/or
some of the companies in which we invest. We currently share office space with
Ault Glazer Bodnar & Company Investment Management LLC. William B. Horne,
our Chief Financial Officer, and Melanie Glazer, Manager of our subsidiary
Ault
Glazer Bodnar Capital Properties, LLC, are principals of Ault Glazer Bodnar
& Company Investment Management LLC. Mr. Horne devotes approximately 85% of
his time to our business, based on a 60-hour, 6-day workweek. Mrs. Glazer works
full time for Ault Glazer Bodnar Capital Properties, LLC. Mrs. Glazer is married
to Louis Glazer, M.D., Ph.G., our current Chairman and Chief Executive Officer
and Chief Health and Science Officer of Patient Safety Consulting Group, LLC.
Our former Chairman and Chief Executive Officer, Milton “Todd” Ault, III, also
is a principal of Ault Glazer Bodnar & Company Investment Management LLC.
Accordingly, certain conflicts of interest may arise from time to time with
our
officers, directors and Ault Glazer Bodnar & Company Investment Management
LLC.
Certain
conflicts of interest may also arise from time to time with our officers,
directors and the companies in which we invest. Of our $75,760 of revenue during
the three months ended March 31, 2006, $54,993 was generated from a contract
to
provide management consulting services to our portfolio company IPEX, Inc.
Mr.
Ault is currently a director of IPEX, Inc. and he served as interim Chief
Executive Officer of IPEX, Inc. from May 26, 2005 until July 13, 2005. From
May
28, 2005 until approximately December 14, 2005 Mr. Ault held an irrevocable
proxy to vote 67% of the outstanding shares of IPEX, Inc. owned by the former
Chief Executive Officer and a founder of IPEX, Inc. Darrell W. Grimsley, Jr.,
Chief Executive Officer of Automotive Services Group, LLC, a subsidiary which
is
wholly owned by Ault Glazer Bodnar Merchant Capital, Inc., served as a director
of IPEX, Inc. and a member of its Audit Committee from August 30, 2005 until
January 30, 2006. Ms. Campbell served as a director of IPEX, Inc. and Chairman
of its Audit Committee from June 23, 2005 until January 30, 2006. Mr. Horne
is
currently Chief Financial Officer and a director of our portfolio company
Digicorp. From September 30, 2005 until December 29, 2005, Mr. Horne also served
as Digicorp’s Chief Executive Officer and Chairman of Digicorp’s Board of
Directors. One of our directors and Audit Committee Chairman, Alice Campbell,
is
currently a director of Digicorp. Mr. Ault served as Chief Executive Officer
of
Digicorp from April 26, 2005 until September 30, 2005 and Chairman of Digicorp’s
Board of Directors from July 16, 2005 until September 30, 2005. Ms. Glazer
served as a director of Digicorp from December 30, 2004 until December 29,
2005
and Chairman of Digicorp’s Board of Directors from December 30, 2004 until July
16, 2005. Ms. Silverstein served as Secretary of Digicorp from April 26, 2005
until December 29, 2005. Mr. Grimsley served as a director of Digicorp from
July
16, 2005 until December 29, 2005.
Because
of these possible conflicts of interest, such individuals may direct potential
business and investment opportunities to other entities rather than to us,
which
may not be in the best interest of our stockholders. We will attempt to resolve
any such conflicts of interest in our favor. Our Board of Directors does not
believe that we have experienced any losses due to any conflicts of interest
with the business of Ault Glazer Bodnar & Company Investment Management LLC,
other than certain of our officers’ responsibility to devote their time to
provide management and administrative services to Ault Glazer Bodnar &
Company Investment Management LLC. and its clients from time-to-time. Similarly,
our Board of Directors does not believe that we have experienced any losses
due
to any conflicts of interest with the companies in which we hold investments
other than certain of our officers’ and directors’ responsibility to devote
their time to provide management services to some of such companies. However,
subject to applicable law, we may engage in transactions with Ault Glazer Bodnar
& Company Investment Management LLC. and other related parties in the
future. These related party transactions may raise conflicts of interest and,
although we do not have a formal policy to address such conflicts of interest,
our Audit Committee intends to evaluate relationships and transactions involving
conflicts of interest on a case-by-case basis and the approval of our Audit
Committee is required for all such transactions. The Audit Committee intends
that any related party transactions will be on terms and conditions no less
favorable to us than terms and conditions reasonably obtainable from third
parties and in accordance with applicable law.
Our
management has limited experience in managing and operating a public company.
Any failure to comply or adequately comply with federal securities laws, rules
or regulations could subject us to fines or regulatory actions, which may
materially adversely affect our business, results of operations and financial
condition.
Although
our present Chairman and Chief Executive Officer, Louis Glazer, M.D., Ph.G.,
has
extensive experience in the medical field, he has limited experience managing
and operating a public company. In addition, prior to the change in control
that
occurred in October 2004, other members of our current senior management were
primarily engaged in operating a private investment management firm. In this
capacity they developed a general understanding of the administrative and
regulatory environment in which public companies operate. However, our senior
management lacks practical experience operating a public company and relies
in
many instances on the professional experience and advice of third parties
including its consultants, attorneys and accountants. Failure to comply or
adequately comply with any laws, rules, or regulations applicable to our
business may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation, or financial condition.
We
have experienced turnover in our Chief Executive Officer position in recent
months and we are presently searching for a new Chief Executive Officer to
replace Dr. Louis Glazer. If we are not able to retain a new Chief Executive
Officer with significant professional experience in the patient safety or
medical markets and pubic market experience, we may have difficulty implementing
our business strategy.
Milton
“Todd” Ault, III resigned as our Chairman and Chief Executive Officer on January
9, 2006. On January 7, 2006, our Board of Directors appointed Louis Glazer,
M.D., Ph.G. as Chairman and Chief Executive Officer in anticipation of Mr.
Ault’s resignation. During March 2005, Dr. Glazer has indicated his intent to
resign as Chairman and Chief Executive Officer at such time that we retain
a
suitable candidate for the position of Chief Executive Officer. Our future
success is dependent on our ability to attract and retain such a candidate.
Although we do not believe we have experienced any losses or negative effects
from Mr. Ault’s resignation and we do not expect any adverse consequences from
the resignation of Dr. Glazer, if we are not able to retain a new Chief
Executive Officer with significant professional experience in the patient safety
or medical markets and public market experience, we may have difficulty
implementing our business strategy.
Our
former Chief Executive Officer controls a significant portion of our outstanding
common stock and his ownership interest may conflict with our other stockholders
who may be unable to influence management and exercise control over our
business.
As
of May
1, 2006, Milton “Todd” Ault, III, our former Chief Executive Officer and
Chairman, beneficially owned approximately 26.8% of our common stock. As a
result, Mr. Ault may be able to exert significant influence over our management
and policies to:
| |
·
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elect
or defeat the election of our directors;
|
| |
·
|
amend
or prevent amendment of our certificate of incorporation or bylaws;
|
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·
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effect
or prevent a merger, sale of assets or other corporate transaction;
and
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control
the outcome of any other matter submitted to the shareholders for
vote.
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Accordingly,
our other stockholders may be unable to influence management and exercise
control over our business.
RISKS
RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
BUSINESS
We
rely on a third party manufacturer and supplier to manufacture our
Safety-Sponge™ System, the loss of which may interrupt our
operations.
On
August
17, 2005, Surgicount entered into an agreement for A Plus International Inc.
to
be the exclusive manufacturer and provider of Surgicount’s Safety-Sponge™
products. In the event A Plus International Inc. does not meet the requirements
of the agreement, Surgicount may seek additional providers of the Safety-Sponge™
products. While our relationship with A Plus International Inc. is currently
on
good terms, we cannot assure you that we will be able to maintain our
relationship with A Plus International Inc. or secure additional suppliers
and
manufacturers on favorable terms as needed. Although we believe the materials
used in the manufacture of the Safety-Sponge™ System are readily available and
can be purchased and/or produced by multiple vendors, the loss of our agreement
with A Plus International Inc., the deterioration of our relationship with
A
Plus International Inc., changes in the specifications of components used in
our
products, or our failure to establish good relationships with major new
suppliers or manufacturers as needed, could have a material adverse effect
on
our business, financial condition and results of operations.
The
unpredictable product cycles of the medical device and healthcare-related
industries and uncertain demand for products could cause our revenues to
fluctuate.
Our
target customer base includes hospitals, physicians, nurses and clinics. The
medical device and healthcare-related industries are subject to rapid
technological changes, short product life cycles, frequent new product
introductions and evolving industry standards, as well as economic cycles.
If
the market for our products does not grow as rapidly as our management expects,
our revenues could be less than expected. We also face the risk that changes
in
the medical device industry, for example, cost-cutting measures, changes to
manufacturing
techniques
or production standards, could cause our manufacturing, design and engineering
capabilities to lose widespread market acceptance. If our products do not gain
market acceptance or suffer because of competing products, unfavorable
regulatory actions, alternative treatment methods or cures, product recalls
or
liability claims, they will no longer have the need for our products and we
may
experience a decline in revenues. Adverse economic conditions affecting the
medical device and healthcare-related industries, in general, or the market
for
our products in particular, could result in diminished sales, reduced profit
margins and a disruption in our business.
We
are subject to changes in the regulatory and economic environment in the
healthcare industry, which could adversely affect our
business.
The
healthcare industry in the United States continues to experience change. In
recent years, the United States Congress and state legislatures have introduced
and debated various healthcare reform proposals. Federal, state and local
government representatives will, in all likelihood, continue to review and
assess alternative healthcare delivery systems and payment methodologies, and
ongoing public debate of these issues is expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices,
the
relative costs associated with doing business and the amount of reimbursement
by
both government and third-party payors to persons providing medical services.
In
particular, the healthcare industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on healthcare companies
to
reduce healthcare costs. Managed care and other healthcare provider
organizations have grown substantially in terms of the percentage of the
population in the United States that receives medical benefits through such
organizations and in terms of the influence and control that they are able
to
exert over an increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow, increasing the
ability of these organizations to influence the practices and pricing involved
in the purchase of medical devices, including our products, which is expected
to
exert downward pressure on product margins. Both short-and long-term cost
containment pressures, as well as the possibility of continued regulatory
reform, may have an adverse impact on our business, financial condition and
operating results.
We
are subject to government regulation in the United States and abroad, which
can
be time consuming and costly to our business.
Our
products and operations are subject to extensive regulation by numerous
governmental authorities, including, but not limited to, the FDA and state
and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. The FDA administers the Food, Drug
and
Cosmetics Act (the “FDC
Act”).
Under
the FDC Act, most medical devices must receive FDA clearance through the
Section 510(k) notification process (“510(k)”)
or the
more lengthy premarket approval (“PMA”)
process
before they can be sold in the United States. All of our products, currently
consisting only of the Safety-Sponge™ System, must receive 510(k) clearance or
PMA approval. The Safety-Sponge™ System has already received 501(k) exempt
status from the FDA. To obtain 510(k) marketing clearance, a company must show
that a new product is “substantially equivalent” in terms of safety and
effectiveness to a product already legally marketed and which does not require
a
PMA. Therefore, it is not always necessary to prove the actual safety and
effectiveness of the new product in order to obtain 510(k) clearance for such
product. To obtain a PMA, we must submit extensive data, including clinical
trial data, to prove the safety, effectiveness and clinical utility of our
products. The process of obtaining such clearances or approvals can be
time-consuming and expensive, and there can be no assurance that all clearances
or approvals sought by us will be granted or that FDA review will not involve
delays adversely affecting the marketing and sale of our products. FDA’s quality
system regulations also require companies to adhere to certain good
manufacturing practices requirements, which include testing, quality control,
storage, and documentation procedures. Compliance with applicable regulatory
requirements is monitored through periodic site inspections by the FDA. In
addition, we are required to comply with FDA requirements for labeling and
promotion. The Federal Trade Commission also regulates most device advertising.
In
addition, international regulatory bodies often establish varying regulations
governing product testing and licensing standards, manufacturing compliance,
such as compliance with ISO 9001 standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. Our inability or failure
to
comply with the varying regulations or the imposition of new regulations could
restrict our ability to sell our products internationally and thereby adversely
affect our business, financial condition and operating results.
Failure
to comply with applicable federal, state or foreign laws or regulations could
subject us to enforcement actions, including, but not limited to, product
seizures, injunctions, recalls, possible withdrawal of product clearances,
civil
penalties and criminal prosecutions, any one or more of which could have a
material adverse effect on our business, financial condition and operating
results. Federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes, as are
administrative interpretations of regulatory requirements. Any such changes
may
have a material adverse effect on our business, financial condition and
operating results.
We
are subject to intense competition in the medical products and health-care
related markets, which could harm our business.
The
medical products and healthcare solutions industry is highly competitive. We
compete against other medical products and healthcare solutions companies,
some
of which are much larger and have significantly greater financial resources,
management resources, research and development staffs, sales and marketing
organizations and experience in the medical products and healthcare solutions
industries than us. In addition, these companies compete with us to acquire
technologies from universities and research laboratories. We also compete
against large companies that seek to license medical products and healthcare
solutions technologies for themselves. We cannot assure you that we will be
able
to successfully compete against these competitors in the acquisition,
development, or commercialization of any medical products and healthcare
solutions, funding of medical products and healthcare solutions companies or
marketing of our products and solutions. If we cannot compete effectively
against our competitors, our business, financial condition and results of
operations may be materially adversely affected.
We
may be subject to product liability claims and if our insurance is not
sufficient to cover product liability claims our business and financial
condition will be materially adversely affected.
The
nature of our business exposes us to potential product liability risks, which
are inherent in the distribution of medical equipment and healthcare products.
We may not be able to avoid product liability exposure, since third parties
develop and manufacture our equipment and products. If a product liability
claim
is successfully brought against us or any third party manufacturer then we
would
experience adverse consequences to our reputation, we might be required to
pay
damages, our insurance, legal and other expenses would increase, we might lose
customers and/or suppliers and there may be other adverse results.
Through
our subsidiary Surgicount Medical, Inc. we have general liability insurance
to
cover claims up to $1,000,000. This insurance covers the clinical trial/time
study relating to the bar coding of surgical sponges only. In addition, A Plus
International, Inc., the manufacturer of our surgical sponges, maintains general
liability insurance for claims up to $4,000,000 that covers product liability
claims against Surgicount Medical, Inc. There can be no assurance that one
or
more liability claims will not exceed the coverage limits of any of such
policies. If we or our manufacturer are subjected to product liability claims,
the result of such claims could harm our reputation and lead to less acceptance
of our products in the healthcare products market. In addition, if our insurance
or our manufacturer’s insurance is not sufficient to cover product liability
claims, our business and financial condition will be materially adversely
affected.
RISKS
RELATED TO OUR INVESTMENTS
We
may experience fluctuations in our quarterly results due to the success rate
of
investments we hold.
We
may
experience fluctuations in our quarterly operating results due to a number
of
factors, including the success rate of our current investments, variations
in
and the timing of the recognition of realized and unrealized gains or losses,
and general economic conditions. As a result of these factors, results for
any
period should not be relied upon as being indicative of performance in future
periods.
We
have invested in non-marketable investment securities which may subject us
to
significant impairment charges.
We
have
invested in illiquid equity securities acquired directly from issuers in private
transactions. At March 31, 2006, 31.3% of our assets on a consolidated basis
with subsidiaries was comprised of investment securities, the majority of which
are illiquid investments. Investments in illiquid, or non-marketable, securities
are inherently risky and a number of the companies we invest in are expected
to
fail. We review all of our investments quarterly for indicators of impairment;
however, for non-marketable equity securities, the impairment analysis requires
significant judgment to identify events or circumstances that would likely
have
a material adverse effect on the fair value of the investment. The indicators
we
use to identify those events or circumstances include as relevant, the nature
and value of any collateral, the portfolio company’s ability to make payments
and its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted cash flows of the portfolio
company and other relevant factors. Because such valuations are inherently
uncertain and may be based on estimates, our determinations of fair value may
differ materially from the values that would be assessed if a ready market
for
these securities existed. Investments identified as having an indicator of
impairment are subject to further analysis to determine if the investment is
other than temporarily impaired, in which case we write the investment down
to
its impaired value. When a company in which we hold investments is not
considered viable from a financial or technological point of view, we write
down
the entire investment since we consider the estimated fair market value to
be
nominal. Although we only recognized a $50,000 impairment charge for the fiscal
year ended December 31, 2005, since a significant amount of our assets are
comprised of non-marketable investment securities, any future impairment charges
from the write down in value of these securities will most likely have a
material adverse affect on our financial condition.
Economic
recessions or downturns could impair investments and harm our operating results.
Many
of
the companies in which we have made investments may be susceptible to economic
slowdowns or recessions. An economic slowdown may affect the ability of a
company to engage in a liquidity event such as a sale, recapitalization, or
initial public offering. Our nonperforming assets are likely to increase and
the
value of our investments is likely to decrease during these periods. These
conditions could lead to financial losses in our investments and a decrease
in
our revenues, net income, and assets. Our investments also may be affected
by
current and future market conditions. Significant changes in the capital markets
could have an effect on the valuations of private companies and on the potential
for liquidity events involving such companies. This could affect the amount
and
timing of gains or losses realized on our investments.
Investing
in private companies involves a high degree of risk.
Our
assets include an investment in a private company, a 1.6% equity interest in
Alacra Corporation. Investments in private businesses involve a high degree
of
business and financial risk, which can result in substantial losses and
accordingly should be considered speculative. Because of the speculative nature
and the lack of a public market for this investment, there is significantly
greater risk of loss than is the case with traditional investment securities.
We
expect that some of our investments will be a complete loss or will be
unprofitable and that some will appear to be likely to become successful but
never realize their potential. During the year ended December 31, 2005, we
wrote
off our investment in the private company China Nurse LLC. The amount of the
loss was $50,000. We have in the past relied, and we continue to rely to a
large
extent, upon proceeds from sales of investments rather than investment income
or
revenue generated from operating activities to defray a significant portion
of
our operating expenses.
The
lack of liquidity in our investments may adversely affect our business.
A
portion
of our investments consist of securities acquired directly from the issuer
in
private transactions. Some of these investments are subject to restrictions
on
resale and/or otherwise are illiquid. While most of these
investments
are in publicly traded companies, the trading volume in such companies’
securities is low which reduces the liquidity of the investment. Additionally,
many of such securities are not eligible for sale to the public without
registration under the Securities Act of 1933, which could prevent or delay
any
sale by us of such investments or reduce the amount of proceeds that might
otherwise be realized therefrom. Restricted securities generally sell at a
price
lower than similar securities not subject to restrictions on resale. The
illiquidity of our investments may adversely affect our ability to dispose
of
debt and equity securities at times when it may be otherwise advantageous for
us
to liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of our investments, the proceeds of such liquidation
may
be significantly less than the value at which we acquired those
investments.
We
may not realize gains from our equity investments.
Our
investments are primarily in equity securities of other companies. These equity
interests may not appreciate in value and, in fact, may decline in value.
Accordingly, we may not be able to realize gains from our equity interests,
and
any gains that we do realize on the disposition of any equity interests may
not
be sufficient to offset any other losses we experience.
There
is uncertainty regarding the value of our investments that are not publicly
trades securities, which could adversely affect the determination of our asset
value.
The
fair
value of investments that are not publicly traded securities is not readily
determinable. Therefore, we value these securities at fair value as determined
in good faith by our Board of Directors. The types of factors that our Board
of
Directors takes into account include, as relevant, the nature and value of
any
collateral, the portfolio company’s ability to make payments and its earnings,
the markets in which the portfolio company does business, comparison to
valuations of publicly traded companies, comparisons to recent sales of
comparable companies, the discounted value of the cash flows of the portfolio
company and other relevant factors. Because such valuations are inherently
uncertain and may be based on estimates, our determinations of fair value may
differ materially from the values that would be assessed if a ready market
for
these securities existed.
We
borrow money, which magnifies the potential for gain or loss on amounts invested
and may increase the risk of investing in us.
Borrowings,
also known as leverage, magnify the potential for gain or loss on amounts
invested and, therefore, increase the risks associated with investing in our
securities. We may borrow from and issue senior debt securities to banks,
insurance companies, and other lenders. Lenders of these senior securities
have
fixed dollar claims on our consolidated assets that are superior to the claims
of our common shareholders. If the value of our consolidated assets increases,
then leveraging would cause the value of our consolidated assets to increase
more sharply than it would have had we not leveraged. Conversely, if the value
of our consolidated assets decreases, leveraging would cause the value of our
consolidated net assets to decline more sharply than it otherwise would have
had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed.
RISKS
RELATED TO OUR REAL ESTATE HOLDINGS
The
value of real estate fluctuates depending on conditions in the general economy
and the real estate business. These conditions may limit revenues from our
real
estate properties and available cash.
The
value
of our real estate holdings is affected by many factors including, but not
limited to: national, regional and local economic conditions; consequences
of
any armed conflict involving or terrorist attacks against the United States;
our
ability to secure adequate insurance; local conditions such as an oversupply
of
space or a reduction in demand for real estate in a particular area; competition
from other available space; whether tenants consider a property attractive;
the
financial condition of tenants, including the extent of tenant bankruptcies
or
defaults;
whether we are able to pass some or all of any increased operating costs through
to tenants; how well we manage our properties; fluctuations in interest rates;
changes in real estate taxes and other expenses; changes in market rental rates;
the timing and costs associated with property improvements and rentals; changes
in taxation or zoning laws; government regulation; potential liability under
environmental or other laws or regulations; and general competitive factors.
The
rents we expect to receive and the occupancy levels at our properties may not
materialize as a result of adverse changes in any of these factors. If our
rental revenue fails to materialize, we generally would expect to have less
cash
available to pay our operating costs. In addition, some expenses, including
mortgage payments, real estate taxes and maintenance costs, generally do not
decline when the related rents decline.
Our
current real estate holdings are concentrated in Heber Springs, Arkansas and
Springfield, Tennessee. Adverse circumstances affecting these areas generally
could adversely affect our business.
A
significant proportion of our real estate investments are in Heber Springs,
Arkansas and Springfield, Tennessee and are affected by the economic cycles
and
risks inherent to those regions. Like other real estate markets, the real estate
markets in these areas have experienced economic downturns in the past, and
we
cannot predict how the current economic conditions will impact these markets
in
both the short and long term. Further declines in the economy or a decline
in
the real estate markets in these areas could hurt our financial performance
and
the value of our properties. The factors affecting economic conditions in these
regions include: business layoffs or downsizing; industry slowdowns; relocations
of businesses; changing demographics; and any oversupply of or reduced demand
for real estate.
RISKS
RELATED TO OUR CAR WASH BUSINESS
If
a competing car wash facility is opened within the service area of one of our
express car wash sites our car wash business may lose
revenue.
Our
indirect wholly owned subsidiary Automotive Services Group, LLC (“ASG”)
is in
the business of operating express car wash facilities. ASG’s first express car
wash site, developed in Birmingham, Alabama, had its grand opening on March
8,
2006. ASG chooses locations for its express car wash sites based on the
locations’ high visibility and proximity to high automobile traffic. Competitors
may develop facilities offering similar services within the service area of
ASG’s express car wash facilities, which could cause ASG’s car wash facilities
to lose revenue. ASG will attempt to mitigate this risk during site due
diligence, conducting discussions with local permitting and zoning personnel
to
determine if competing facilities have been planned or requested within the
relevant service area. However, such due diligence, no matter how extensive,
may
not always reveal any planned competing businesses in a particular service
area.
In addition, a competing car wash site may be developed after ASG begins
operating a car wash in a particular service area. If competing facilities
are
developed in the same service area as one or more of ASG’s express car wash
sites, it could cause ASG to lose a significant amount of revenue and may
require ASG to close one or more express car wash sites.
Adverse
weather conditions may cause ASG’s express car was sites to lose revenue.
Automobile
owners generally do not wash their vehicles during extreme weather conditions.
During rainy periods automobile owners do not generally wash their vehicles
because rain and mud causes the vehicles to quickly become dirty again. During
periods of severe drought automobile owners may not desire to wash their
vehicles because they do not want to endure extreme outdoor temperatures.
Further during severe drought conditions local governments tend to impose
restrictions on when and in what amounts residents can use water. Any such
adverse weather conditions may cause unpredictable business cycles for ASG
and
may cause ASG’s express car wash sites to lose a significant amount of revenue.
RISKS
RELATED TO OUR COMMON STOCK
Our
historic stock price has been volatile and the future market price for our
common stock may continue to be volatile. Further, the limited market for our
shares will make our price more volatile. This may make it difficult for you
to
sell our common stock for a positive return on your investment.
The
public market for our common stock has historically been very volatile. Over
the
past two fiscal years and the subsequent interim quarterly periods, the market
price for our common stock has ranged from $0.30 to $7.33 (as adjusted to
reflect a
3:1
forward stock split effective April 5, 2005).
Any
future market price for our shares may continue to be very volatile. This price
volatility may make it more difficult for you to sell shares when you want
at
prices you find attractive. We do not know of any one particular factor that
has
caused volatility in our stock price. However, the stock market in general
has
experienced extreme price and volume fluctuations that often are unrelated
or
disproportionate to the operating performance of companies. Broad market factors
and the investing public’s negative perception of our business may reduce our
stock price, regardless of our operating performance. Further, the market for
our common stock is limited and we cannot assure you that a larger market will
ever be developed or maintained. Our common stock is currently listed on the
American Stock Exchange (“AMEX”).
As of
May 5, 2006, the average daily trading volume of our common stock over the
past
three months was approximately 8,700 shares. The last reported sales price
for
our common stock on May 5, 2006, was $3.18 per share. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, this may make it difficult or impossible
for you to sell our common stock.
If
we fail to meet continued listing standards of AMEX, our common stock may be
delisted which would have a material adverse effect on the price of our common
stock.
Our
common stock is currently traded on the American Stock Exchange (“AMEX”) under
the symbol “PST”. In order for our securities to be eligible for continued
listing on AMEX, we must remain in compliance with certain listing standards.
On
June 24, 2004, we received a letter from AMEX inquiring as to our ability to
remain listed. Specifically, AMEX indicated that our common stock was subject
to
delisting under sections 1003(a)(i) and 1003(a)(ii) of AMEX’s Company Guide
because our stockholders’ equity was below the level required by AMEX’s
continued listing standards. Our stockholders’ equity fell below the required
standard due to years of continued losses. On September 15, 2004, AMEX notified
us that it had accepted our proposed plan to comply with AMEX’s continued
listing standards. Significant events which increased our stockholders’ equity
in excess
of
AMEX’s continued listing standards were the completion of an approximately $4
million equity financing combined with the acquisition of Surgicount Medical,
Inc. which was done primarily through the issuance of common stock. AMEX will
normally consider suspending dealings in, or removing from the listing of,
securities of a company under Section 1003(a)(i) for a company that has
stockholders' equity of less than $2,000,000 if such company has sustained
losses from continuing operations and/or net losses in two of its three most
recent fiscal years; or under Section 1003(a)(ii) for a company that has
stockholders' equity of less than $4,000,000 if such company has sustained
losses from continuing operations and/or net losses in three of its four most
recent fiscal years. As of June 30, 2005, our second consecutive quarter in
which our stockholders’ equity was in excess of $4,000,000, we believe we have
re-gained compliance with AMEX’s continued listing requirements. As of March 31,
2006, our stockholders’ equity was still in excess of that
required
under Section 1003(a)(ii) of AMEX’s Company Guide. During April 2006 AMEX
notified us that we have been removed from AMEX’s continued listing standards
deficiency list based on financial results reported in our Form 10-K for the
year ended December 31, 2005. If we were to again become noncompliant with
AMEX’s continued listing requirements, our common stock may be delisted which
would have a material adverse affect on the price and liquidity of our common
stock.
If
we are delisted from AMEX, our common stock may be subject to the “penny stock”
rules of the SEC, which would make transactions in our common stock cumbersome
and may reduce the value of an investment in our stock.
The
SEC
has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that has a market price
of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, Rule 15g-9 require:
| |
·
|
that
a broker or dealer approve a person's account for transactions in
penny
stocks; and
|
| |
·
|
the
broker or dealer receive from the investor a written agreement to
the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
|
In
order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
| |
·
|
obtain
financial information and investment experience objectives of the
person;
and
|
| |
·
|
make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the risks
of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
| |
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
| |
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Generally,
brokers may be less willing to execute transactions in securities subject to
the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On
March
15, 2006 the Company, Automotive Services Group, Inc. (formerly Ault Glazer
Bodnar Merchant Capital, Inc.), a wholly owned subsidiary of the Company
(“Automotive
Services Group”),
Automotive Services Group, LLC (“ASG”)
and
Darell W. Grimsley, Jr. entered into a Unit Purchase Agreement (the “Agreement”)
for AGB
Merchant Capital to purchase a 50% equity interest (the “Membership
Interest”)
in ASG
from Mr. Grimsley. As consideration for the Membership Interest the Company
issued Mr. Grimsley 200,000 shares of the Company’s common stock. Mr. Grimsley
will continue to act as Chairman and Chief Executive Officer of Automotive
Services Group. The issuance of the above shares to Mr. Grimsley was exempt
from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 promulgated thereunder. No advertising or general
solicitation was employed in offering the securities and Mr. Grimsley
represented that he is an accredited investor and that he is able to bear the
economic risk of his investment.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
|
Exhibit
Number
|
|
Description
|
|
2.3
|
|
Unit
Purchase Agreement dated March 14, 2006 by and between Automotive
Services
Group, LLC, Darell W. Grimsley, Ault Glazer Bodnar Merchant Capital,
Inc.
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 17, 2006)
|
|
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
|
|
$1,000,000
principal amount Promissory Note dated April 7, 2005 issued to Bodnar
Capital Management, LLC (Incorporated by reference to the Company’s
current report on Form 8-K filed with the Securities and Exchange
Commission on April 13, 2005)
|
|
4.4
|
|
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)
|
|
4.5
|
|
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)
|
|
4.6
|
|
Real
Estate Note dated July 27, 2005 in the principal amount of $480,000
issued
by Automotive Services Group, LLC to Ault Glazer Bodnar Acquisition
Fund,
LLC (Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on September 29,
2005)
|
|
4.7
|
|
Addendum
I dated August 10, 2005 to Real Estate Note issued by Automotive
Services
Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on September 29,
2005)
|
|
4.8
|
|
Addendum
II to Real Estate Note issued by Automotive Services Group, LLC to
Ault
Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on September 29, 2005)
|
|
4.9
|
|
Addendum
III to Real Estate Note 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 December 23, 2005)
|
|
4.10
|
|
Addendum
IV to Real Estate Note 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 December 23, 2005)
|
|
4.11
|
|
Addendum
V to Real Estate Note 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 December 23, 2005)
|
|
4.12
|
|
Addendum
VI dated January 10, 2006 to Real Estate Note 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 6,
2006)
|
|
4.13
|
|
Addendum
VII dated February 1, 2006 to Real Estate Note 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 6,
2006)
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4.14
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Promissory
Note in the principal amount of $130,000 issued January 5, 2006 to
Glazer
Family Partnership LP (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission on
January 10, 2006)
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4.15
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Secured
Promissory Note in the principal amount of $150,000 issued January
11,
2006 to Ault Glazer Bodnar Acquisition Fund (Incorporated by reference
to
the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on January 18, 2006)
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4.16
|
|
Promissory
Note in the principal amount of $1,000,000 issued January 12, 2006
by
Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on January 18, 2006)
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4.17
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|
Secured
Promissory Note in the principal amount of $85,000 issued January
19, 2006
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 January 24, 2006)
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4.18
|
|
Secured
Promissory Note in the principal amount of $25,000 issued January
26 2006
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 1, 2006)
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4.19
|
|
Secured
Promissory Note in the principal amount of $35,000 issued January
27, 2006
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 1, 2006)
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|
4.20
|
|
Secured
Promissory Note in the principal amount of $45,750 issued February
1, 2006
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 6, 2006)
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4.21
|
|
Secured
Promissory Note in the principal amount of $65,000 issued February
2, 2006
to Ault Glazer Bodnar & Company, Inc. (Incorporated by reference to
the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 6, 2006)
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4.22
|
|
Promissory
Note dated February 8, 2006 issued by Automotive Services Group,
LLC to
Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference
to the
Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 14, 2006)
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4.21
|
|
Secured
Promissory Note in the principal amount of $65,000 issued February
2, 2006
to Ault Glazer Bodnar & Company, Inc. (Incorporated by reference to
the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 6, 2006)
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4.22
|
|
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)
|
|
4.23
|
|
Secured
Promissory Note in the principal amount of $12,000 issued February
23,
2006 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 March 1, 2006)
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|
4.24
|
|
Secured
Promissory Note in the principal amount of $60,000 issued February
28,
2006 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 March 1, 2006)
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4.25
|
|
Secured
Promissory Note in the principal amount of $30,000 issued March 6,
2006 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 March 8, 2006)
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4.26
|
|
Revolving
Line of Credit Agreement dated and effective as of March 7, 2006
by and
between Ault Glazer Bodnar Acquisition Fund LLC and Patient Safety
Technologies, Inc. (Incorporated by reference to the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission
on
March 8, 2006)
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10.7
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|
Amended
Employment Agreement entered into as of January 30, 2006 between
Automotive Services Group, LLC and D.W. Grimsley, Jr. (Incorporated
by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on February 1, 2006)
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|
10.20
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|
Security
Agreement by and between Glazer Family Partnership LP 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
January 10, 2006)
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10.21
|
|
Security
Agreement by and between Ault Glazer Bodnar Acquisition Fund 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 January 18, 2006)
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10.22
|
|
Real
Estate Mortgage dated January 12, 2006 in favor of Steven J. Caspi
(Incorporated by reference to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission on January 18,
2006)
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|
10.23
|
|
Continuing
Guaranty dated January 12, 2006 of Patient Safety Technologies in
connection with the $1,000,000 Promissory Note issued January 12,
2006 by
Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
reference to the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on January 18, 2006)
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|
10.24
|
|
Security
Agreement 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 January 24, 2006)
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|
10.25
|
|
Security
Agreement dated January 26, 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 February 1, 2006)
|
|
10.26
|
|
Security
Agreement dated January 27, 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 February 1, 2006)
|
|
10.27
|
|
Security
Agreement dated February 1, 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 February 6, 2006)
|
|
10.28
|
|
Security
Agreement dated February 2, 2006 by and between Ault Glazer Bodnar
&
Company, Inc. 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 February 6, 2006)
|
|
10.29
|
|
Real
Estate Mortgage executed as of February 8, 2006 by Automotive Services
Group, LLC in favor of 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)
|
|
10.30
|
|
Security
Agreement dated February 23, 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 1, 2006)
|
|
10.31
|
|
Security
Agreement dated February 28, 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 1, 2006)
|
|
10.32
|
|
Security
Agreement dated March 6, 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)
|
|
10.33
*
|
|
Engagement
Letter dated February 10, 2006 between Analog Ventures, LLC and Patient
Safety Technologies, Inc.
|
|
31.1*
|
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a)
|
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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 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
|
____________________
*
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
PATIENT
SAFETY TECHNOLOGIES, INC.
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| |
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| |
|
|
Date:
May 19, 2006
|
By:
/s/ Louis Glazer,
M.D.
|
| |
Louis
Glazer, M.D., Ph.G.
|
| |
Chief
Executive Officer and
|
| |
Chairman
of the Board
|
|
Date:
May 19, 2006
|
By: /s/
William
B.
Horne
|
| |
William
B. Horne
|
| |
Chief
Financial Officer
|