x
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|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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¨
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|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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Delaware
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|
13-3419202
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(State
or other jurisdiction of incorporation or
organization)
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|
(I.R.S.
Employer Identification
Number)
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Large
accelerated filer ¨
|
|
Accelerated
filer ¨
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Non-accelerated filer ¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company x
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Page
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||
PART
I – FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
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1
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Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
22
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Item
4T.
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Controls
and Procedures
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22
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PART
II – OTHER INFORMATION
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||
Item
1.
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Legal
Proceedings
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23
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Item
1A.
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Risk
Factors
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23
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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23
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Item
3.
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Defaults
Upon Senior Securities
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23
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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Item
5.
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Other
Information
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24
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Item
6.
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Exhibits
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24
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SIGNATURES
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25
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March 31,
|
December 31,
|
||||||
2008
|
2007
|
||||||
ASSETS
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|||||||
CURRENT
ASSETS
|
|||||||
Cash
and cash equivalents
|
$
|
155,828
|
$
|
405,413
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|||
Accounts
receivable
|
149,592
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71,840
|
|||||
Prepaid
expenses
|
71,481
|
104,723
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|||||
TOTAL
CURRENT ASSETS
|
376,901
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581,976
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|||||
Restricted
certificate of deposit
|
87,500
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87,500
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|||||
Notes
receivable
|
153,545
|
153,545
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|||||
Property
and equipment, net
|
695,540
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663,391
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|||||
Assets
held for sale, net
|
90,000
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405,986
|
|||||
Goodwill
|
1,832,027
|
1,832,027
|
|||||
Patents,
net
|
3,682,673
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3,763,908
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|||||
Long-term
investment
|
666,667
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666,667
|
|||||
Other assets
|
19,174
|
19,174
|
|||||
TOTAL
ASSETS
|
$
|
7,604,027
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$
|
8,174,174
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|||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
CURRENT
LIABILITIES
|
|||||||
Notes
payable, current portion
|
$
|
1,571,082
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$
|
1,172,380
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|||
Accounts
payable
|
1,022,620
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708,593
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|||||
Accrued
liabilities
|
622,612
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520,749
|
|||||
TOTAL
CURRENT LIABILITIES
|
3,216,314
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2,401,722
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|||||
Notes
payable, less current portion
|
2,530,558
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2,530,558
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|||||
Deferred
tax liabilities
|
1,466,969
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1,499,329
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|||||
COMMITMENTS
AND CONTINGENCIES (Note 13)
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|||||||
STOCKHOLDERS'
EQUITY
|
|||||||
Convertible
preferred stock, $1.00 par value, cumulative 7% dividend: 1,000,000
shares
authorized; 10,950 issued and outstanding at March 31, 2008 and December
31, 2007 (Liquidation preference of $1,229,138 at March 31, 2008
and
December 31, 2007
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10,950
|
10,950
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|||||
Common
stock, $0.33 par value: 25,000,000 shares authorized; 12,079,602
shares
issued and outstanding at March 31, 2008; 12,054,602 shares issued
and
outstanding at December 31, 2007
|
3,986,269
|
3,978,019
|
|||||
Additional
paid-in capital
|
34,547,139
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34,320,134
|
|||||
Accumulated
deficit
|
(38,154,172
|
)
|
(36,566,538
|
)
|
|||
TOTAL
STOCKHOLDERS' EQUITY
|
390,186
|
1,742,565
|
|||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
7,604,027
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$
|
8,174,174
|
For The Three Months Ended March 31,
|
|||||||
2008
|
2007
|
||||||
REVENUES
|
$
|
500,159
|
$
|
307,158
|
|||
COST
OF SALES
|
393,291
|
214,210
|
|||||
Gross
margin
|
106,868
|
92,948
|
|||||
OPERATING
EXPENSES
|
|||||||
Salaries
and employee benefits
|
649,016
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524,339
|
|||||
Professional
fees
|
333,235
|
312,640
|
|||||
Rent
|
19,262
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38,582
|
|||||
Insurance
|
21,464
|
16,712
|
|||||
Taxes
other than income taxes
|
102
|
27,158
|
|||||
Amortization
of patents
|
81,235
|
81,235
|
|||||
General
and administrative
|
426,261
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194,516
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|||||
Total
operating expenses
|
1,530,575
|
1,195,182
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|||||
Operating
loss
|
(1,423,707
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)
|
(1,102,234
|
)
|
|||
OTHER
INCOME (EXPENSES)
|
|||||||
Interest,
dividend income and other
|
—
|
4,287
|
|||||
Realized
loss on assets held for sale, net
|
(24,578
|
)
|
—
|
||||
Interest
expense
|
(87,086
|
)
|
(267,584
|
)
|
|||
Unrealized
loss on assets held for sale, net
|
(65,460
|
)
|
—
|
||||
Loss
from continuing operations before income taxes
|
(1,600,831
|
)
|
(1,365,531
|
)
|
|||
Income
tax benefit
|
32,360
|
29,245
|
|||||
Loss
from continuing operations
|
(1,568,471
|
)
|
(1,336,286
|
)
|
|||
Loss
from discontinued operations
|
—
|
(88,767
|
)
|
||||
Net
loss
|
(1,568,471
|
)
|
(1,425,053
|
)
|
|||
Preferred
dividends
|
(19,163
|
)
|
(19,163
|
)
|
|||
Loss
applicable to common shareholders
|
$
|
(1,587,634
|
)
|
$
|
(1,444,216
|
)
|
|
Basic
and diluted net loss per common share
|
|||||||
Continuing
operations
|
$
|
(0.13
|
)
|
$
|
(0.18
|
)
|
|
Discontinued
operations
|
$
|
—
|
$
|
(0.01
|
)
|
||
Net
loss
|
$
|
(0.13
|
)
|
$
|
(0.19
|
)
|
|
Weighted
average common shares outstanding - basic and
diluted
|
12,079,602
|
7,789,581
|
For The Three Months Ended March 31,
|
|||||||
2008
|
2007
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(1,568,471
|
)
|
$
|
(1,425,053
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
Depreciation
|
76,379
|
31,911
|
|||||
Amortization
of patents
|
81,235
|
81,235
|
|||||
Non-cash
interest
|
—
|
169,427
|
|||||
Realized
loss on assets held for sale, net
|
24,578
|
—
|
|||||
Realized
loss on sale of property and equipment
|
526
|
—
|
|||||
Unrealized
loss on assets held for sale, net
|
65,460
|
—
|
|||||
Stock-based
compensation to employees and directors
|
200,505
|
249,900
|
|||||
Stock-based
compensation to consultants
|
—
|
61,703
|
|||||
Income
tax expense (benefit)
|
(32,360
|
)
|
(29,245
|
)
|
|||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
(77,752
|
)
|
(132,715
|
)
|
|||
Prepaid
expenses
|
33,242
|
141,194
|
|||||
Other
current assets
|
—
|
(3,495
|
)
|
||||
Assets
held for sale, net
|
—
|
10,909
|
|||||
Accounts
payable
|
314,027
|
(212,309
|
)
|
||||
Accrued
liabilities
|
136,613
|
85,345
|
|||||
Net
cash used in operating activities
|
(746,018
|
)
|
(971,193
|
)
|
|||
Cash
flows from investing activities:
|
|||||||
Purchase
of property and equipment
|
(109,054
|
)
|
(79,017
|
)
|
|||
Proceeds
from sale of assets held for sale, net
|
225,948
|
—
|
|||||
Net
cash provided by (used in) investing activities
|
116,894
|
(79,017
|
)
|
||||
Cash
flows from financing activities:
|
|||||||
Proceeds
from issuance of common stock and warrants
|
—
|
2,897,140
|
|||||
Proceeds
from notes payable
|
500,000
|
10,000
|
|||||
Payments
and decrease on notes payable
|
(101,298
|
)
|
(450,000
|
)
|
|||
Payments
of preferred dividends
|
(19,163
|
)
|
—
|
||||
Net
cash provided by financing activities
|
379,539
|
2,457,140
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
(249,585
|
)
|
1,406,930
|
||||
Cash
and cash equivalents at beginning of period
|
405,413
|
3,775
|
|||||
Cash
and cash equivalents at end of period
|
$
|
155,828
|
$
|
1,410,705
|
|||
Supplemental
disclosures of cash flow information:
|
|||||||
Cash
paid during the period for interest
|
$
|
19,872
|
$
|
963
|
|||
Non
cash investing and financing activities:
|
|||||||
Issuance
of common stock in payment of accrued liabilities
|
$
|
34,750
|
$
|
—
|
|||
Dividends
accrued
|
$
|
—
|
$
|
19,163
|
Outstanding Options
|
||||||||||||||||
Shares
Available for
Grant
|
Number of
Shares
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contractual
Life (years)
|
Aggregate
Intrinsic
Value
|
||||||||||||
December
31, 2007
|
990
|
1,650,000
|
$
|
3.49
|
8.43
|
|||||||||||
|
||||||||||||||||
March
31, 2008
|
990
|
1,650,000
|
$
|
3.49
|
8.18
|
$
|
—
|
|||||||||
|
||||||||||||||||
Options
exercisable at:
|
||||||||||||||||
December
31, 2007
|
782,500
|
$
|
4.40
|
7.83
|
$
|
—
|
||||||||||
March
31, 2008
|
847,500
|
$
|
4.36
|
7.59
|
$
|
—
|
Three Months ended March 31,
|
|||||||
2008
|
2007
|
||||||
Weighted
average risk free interest rate
|
—
|
%
|
4.50
|
%
|
|||
Weighted
average life (in years)
|
—
|
5.00
|
|||||
Volatility
|
—
|
%
|
100
|
%
|
|||
Expected
dividend yield
|
—
|
%
|
0
|
%
|
|||
Weighted
average grant-date fair value per share of options granted
|
$
|
—
|
$
|
1.22
|
Nonvested Shares
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||
Nonvested at December 31,
2007
|
867,500
|
$
|
1.75
|
||||
Granted
|
—
|
$
|
—
|
||||
Vested
|
(65,000
|
)
|
$
|
2.27
|
|||
Cancelled
and forfeited
|
—
|
$
|
—
|
||||
Nonvested
at March 31, 2008
|
802,500
|
$
|
1.71
|
March 31,
2008
|
March 31,
2007
|
||||||
Warrants
|
6,114,521 |
4,589,641
|
|||||
Stock
options
|
1,650,000 |
1,590,000
|
|||||
Convertible
promissory notes
|
1,389,091 |
1,781,091
|
|||||
Convertible
preferred stock
|
246,375 |
246,375
|
|||||
9,399,987 |
8,207,107
|
Three Months Ended March 31,
|
|||||||
2008
|
2007
|
||||||
|
|
||||||
Operating
revenues
|
$
|
—
|
$
|
159,864
|
|||
Operating
expenses
|
—
|
134,929
|
|||||
Depreciation
and amortization
|
—
|
10,909
|
|||||
Interest
expense
|
—
|
102,793
|
|||||
Loss
from discontinued operations
|
$
|
—
|
$
|
(88,767
|
)
|
March 31, 2008
|
December 31,
2007
|
||||||
Patents
|
$
|
4,684,576
|
$
|
4,684,576
|
|||
Accumulated
amortization
|
(1,001,903
|
)
|
(920,668
|
)
|
|||
$
|
3,682,673
|
$
|
3,763,908
|
March 31,
2008
|
December 31,
2007
|
||||||
Notes
payable to Ault Glazer Capital Partners, LLC (a)
|
$
|
2,530,558
|
$
|
2,530,558
|
|||
Notes
payable to Herb Langsam (b)
|
600,000
|
600,000
|
|||||
Note
payable to Charles Kalina III (c)
|
400,000
|
400,000
|
|||||
Note
payable to Catalysis Offshore, Ltd (d)
|
250,000
|
—
|
|||||
Note
payable to Catalysis Partners, LLC (d)
|
250,000
|
—
|
|||||
Other
notes payable (e)
|
71,082
|
172,380
|
|||||
Total
notes payable
|
4,101,640
|
3,702,938
|
|||||
Less:
current portion
|
(1,571,082
|
)
|
(1,172,380
|
)
|
|||
Notes
payable – long-term portion
|
$
|
2,530,558
|
$
|
2,530,558
|
2007
|
$
|
1,571,082
|
||
2008
|
—
|
|||
2009
|
—
|
|||
2010
|
2,530,558
|
|||
$
|
4,101,640
|
(a) |
Effective
June 1, 2007, the entire unpaid principal and interest due under
note
payable agreements previously entered into with Ault Glazer Capital
Partners, LLC (formerly AGB Acquisition Fund) (the “Fund”)
a
related party, were restructured into a new Convertible Secured Promissory
Note (the "AG
Partners Convertible Note")
in
the principal amount of $2,530,558. The Fund is controlled by Milton
“Todd” Ault III, a former director of the Company and its former Chairman
and Chief Executive Officer and Louis Glazer, a director of the Company,
both of whom currently have a significant beneficial ownership interest
in
the Company’s common and preferred stock. The
AG Partners Convertible Note bears interest at the rate of 7% per
annum
and is due on the earlier of December 31, 2010, or the occurrence
of an
event of default. In the event that the average closing price of
the
Company’s common stock is in excess of $5.00 per share for thirty (30)
consecutive trading days, the Company will have the right to redeem
the
promissory note in shares or in cash. In the event of redemption
in
shares, the principal is convertible into shares of the Company’s common
stock at a conversion price of $2.50. The promissory note is secured
by
all of the Company’s assets. Should the Company raise up to $2,000,000 in
a new credit facility, including any replacement credit facilities,
the
Fund is required to subordinate its security interest in favor of
the new
credit facility. During the three months ended March 31, 2008, the
Company
incurred interest expense of $44,000 on the AG Partners Convertible
Note.
During the three months ended March 31, 2007, the Company incurred
interest expense of $58,000 related to the notes previously entered
into
with the Fund that were replaced by the AG Partners Convertible
Note.
|
(b) |
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 had a maturity date of
November
1, 2006. This note was not repaid by the scheduled maturity and to
date
has not been extended, therefore the Langsam Note is recorded in
current
liabilities. Accordingly, the note is currently in default and therefore
accruing interest at the rate of 16% per annum. Pursuant to the terms
of a
Security Agreement dated May 1, 2006, the Company granted the Herbert
Langsam Revocable Trust a security interest in all of the Company’s assets
as collateral for the satisfaction and performance of the Company’s
obligations pursuant to the Langsam
Note.
|
(c) |
On
July 12, 2006 the Company, executed a Convertible Promissory Note
in the
principal amount of $250,000 in favor of Charles J. Kalina, III,
an
existing shareholder of the Company. On November 3, 2006 the balance
due
under the $250,000 Convertible Promissory Note was added to a new
Convertible Promissory Note in the principal amount of $400,000 (the
“Kalina
Note”),
pursuant to which the Company received proceeds of approximately
$150,000.
The Second Kalina Note bears interest at the rate of 12% per annum
and was
due on January 31, 2008. The Company is in the process of restructuring
the debt that is owed to Mr. Kalina through the issuance of the Company’s
common stock. Mr. Kalina received warrants to purchase 250,000 shares
of
the Company’s common stock at an exercise price of $1.25 per share as
additional consideration for entering into the loan agreement. During
the
three months ended March 31, 2008 and 2007, the Company incurred
interest
expense, excluding amortization of debt discount of $12,000 and $12,000,
respectively, on the Second Kalina Note. At March 31, 2008 and December
31, 2007 accrued interest on the Second Kalina Note totaled $20,000
and
$8,000, respectively.
|
(e) |
On
November 1, 2006 we entered into a Convertible Promissory Note with
Michael G. Sedlak in the principal amount of $71,000 (the “Sedlak
Note”).
The Sedlak Note, which was not paid by its scheduled maturity date,
January 31, 2008, accrues interest at the rate of 12% per
annum.
|
March 31, 2008
|
December 31,
2007
|
||||||
Accrued interest
|
$
|
235,663
|
$
|
168,449
|
|||
Accrued dividends
on preferred stock
|
134,138
|
134,138
|
|||||
Accrued
salaries
|
230,252
|
212,000
|
|||||
Other
|
22,559
|
6,162
|
|||||
$
|
622,612
|
$
|
520,749
|
|
§
|
"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;
|
|
§
|
“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.
|
Exhibit
Number
|
Description
|
|
31.1*
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a)
|
|
31.2*
|
Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a)
|
|
32.1*
|
Certification
of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code
|
|
32.2*
|
Certification
of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code
|
|
PATIENT
SAFETY TECHNOLOGIES, INC.
|
|
Date:
May 20, 2008
|
By:
|
/s/
William Adams
|
|
William
Adams
|
|
|
Chief
Executive Officer
|
|
Date:
May 20, 2008
|
By:
|
/s/
William B. Horne
|
|
William
B. Horne
|
|
|
Chief
Financial Officer and
Principal
Accounting Officer
|