UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
[ ] Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Commission File Number: 0-11914
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CAPRIUS, INC.
-------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-2457487
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, NJ 07024
------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 592-8838
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N/A
--------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed under Section 13 or 15 (d) of the Exchange Act 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
--- ---
State the number of shares outstanding of issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at Aug 11, 2005
Common Stock. Par value $0.01 3,321,673 shares
CAPRIUS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of June 30, 2005 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended June 30, 2005 and 2004 4
Condensed Consolidated Statement of Stockholders'
(Deficiency) Equity for the nine months ended June 30, 2005 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. CONTROLS & PROCEDURES 15
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS 15
ITEM 6. EXHIBITS 15
SIGNATURES 16
2
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,961,645
Accounts receivable, net of reserve for bad debts of $5,163 137,817
Inventories, net 579,314
Other current assets 26,399
----------------
Total current assets 2,705,175
----------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 182,689
Equipment for lease 76,666
Leasehold improvements 19,536
----------------
278,891
Less: accumulated depreciation 214,902
----------------
Property and equipment, net 63,989
----------------
OTHER ASSETS:
Goodwill 737,010
Intangible assets, net of accumulated amortization of $705,750 334,250
Other 13,330
----------------
Total other assets 1,084,590
----------------
TOTAL ASSETS $ 3,853,754
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 508,898
Accrued expenses 117,407
Accrued compensation 122,793
----------------
Total current liabilities 749,098
----------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value (stated value at $100)
Authorized - 1,000,000 shares Issued and
outstanding - Series A, none; Series B, convertible,
27,000 shares . Liquidation preference $2,700,000 2,700,000
Common stock, $.01 par value
Authorized - 50,000,000 shares, issued 3,322,798 shares
and outstanding 3,321,673 shares 33,228
Additional paid-in capital 74,241,755
Accumulated deficit (73,868,077)
Treasury stock (1,125 common shares, at cost) (2,250)
----------------
Total stockholders' equity 3,104,656
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,853,754
================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the nine months ended
------------------------------------ ------------------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
----------------- ----------------- ----------------- -----------------
REVENUES:
Product sales $ 185,878 $ 257,308 $ 622,486 $ 674,931
Equipment rental income 2,677 14,865 10,627 49,548
Consulting & royalty fees 15,157 12,500 77,810 37,500
----------------- ----------------- ----------------- -----------------
Total revenues 203,712 284,673 710,923 761,979
----------------- ----------------- ----------------- -----------------
OPERATING EXPENSES:
Cost of product sales and equipment rental income 121,420 177,204 451,810 551,382
Research and development 69,439 77,999 262,935 171,301
Selling, general and administrative 752,327 693,277 2,026,961 2,276,980
----------------- ----------------- ----------------- -----------------
Total operating expenses 943,186 948,480 2,741,706 2,999,663
----------------- ----------------- ----------------- -----------------
Operating loss (739,474) (663,807) (2,030,783) (2,237,684)
Other income - - 132,200 -
Interest income (expense), net 311 (67,515) (330,709) (70,500)
----------------- ----------------- ----------------- -----------------
Loss from continuing operations (739,163) (731,322) (2,229,292) (2,308,184)
Loss from operations of discontinued Strax Business - - - (28,425)
----------------- ----------------- ------------------------------------
Net loss (739,163) (731,322) (2,229,292) (2,336,609)
Beneficial conversion feature - Series C Mandatory
Convertible Preferred Stock (124,528) - (124,528) -
----------------- ----------------- ------------------------------------
Net loss attributable to common stockholders $ (863,691) $ (731,322) $(2,353,820) $(2,336,609)
================= ================= ================= =================
Net loss per basic and diluted common share
Continuing operations $ (0.26) $ (0.72) $ (1.21) $ (2.26)
Discontinued operations - - - (0.03)
----------------- ----------------- ----------------- -----------------
Net loss per basic and diluted common share (0.26) (0.72) (1.21) (2.29)
================= ================= ================= =================
Weighted average number of common shares outstanding,
basic and diluted 3,321,673 1,022,328 1,940,381 1,022,328
================= ================= ================= =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
(UNAUDITED)
Series B Convertible Series C Mandatory Convertible
Preferred Stock Preferred Stock Common Stock
----------------------------------------------------------------------------------------
Additional
Number Number Number Paid-in
of Shares Amount of Shares Amount of Shares Amount Capital
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 (SEE NOTE 8) 27,000 $ 2,700,000 - $ - 1,023,453 $ 10,235 $ 68,031,614
Issuance Series C Mandatory Convertible
Preferred Stock (see Note 7) 45,000 4,500,000 (434,966)
Conversion of secured convertible notes
and bridge financing into Series C
Mandatory Convertible Preferred Stock 21,681 2,168,100
Conversion of Series C Preferred into
common stock (see Note 7) (66,681) (6,668,100) 2,299,345 22,993 6,645,107
NET LOSS
----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2005 27,000 $ 2,700,000 - $ - $ 3,322,798 $ 33,228 $ 74,241,755
========================================================================================
[TABLE CONTINUED]
Treasury Stock
---------------------- Total
Accumulated Number Stockholders'
Deficit of Shares Amount (Deficiency) Equity
-----------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 (SEE NOTE 8) $ (71,638,785) 1,125 $ (2,250) $ (899,186)
Issuance Series C Mandatory Convertible
Preferred Stock (see Note 7) 4,065,034
Conversion of secured convertible notes
and bridge financing into Series C
Mandatory Convertible Preferred Stock 2,168,100
Conversion of Series C Preferred into
common stock (see Note 7) -
NET LOSS (2,229,292)
-----------------------------------------------------------------
BALANCE, JUNE 30, 2005 $ (73,868,077) 1,125 $ (2,250) $ 3,104,656
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended June 30,
2005 2004
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,229,292) $ (2,336,609)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 165,220 7,613
Amortization of deferred financing costs 89,542 25,583
Depreciation and amortization 233,152 275,474
Interest on secured convertible notes 95,300 -
Changes in operating assets and liabilities:
Accounts receivable (64,334) (130,337)
Inventories 197,381 78,682
Other assets (11,177) (38,478)
Accounts payable and accrued expenses (728,660) (430,366)
--------------- ---------------
Net cash used in operating activities (2,252,868) (2,548,438)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Strax business 66,000 242,552
Acquisition of property and equipment (16,904) (6,358)
--------------- ---------------
Net cash provided by investing activities 49,096 236,194
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - related party - 500,000
Proceeds from issuance of secured convertible notes - 1,500,000
Financing fees in connection with secured convertible notes - (125,000)
Proceeds from short term loan 100,000 -
Repayment of short term loan (100,000) -
Proceeds from short term loans - related party 145,923 -
Repayment of short term loans - related party (73,123) -
Net proceeds from issuance of Series C Preferred Stock 4,065,034 -
--------------- ---------------
Net cash provided by financing activities 4,137,834 1,875,000
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,934,062 (437,244)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,583 774,819
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,961,645 $ 337,575
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 49,541 $ 11,642
=============== ===============
Cash paid for income taxes during the period $ 192,672 $ -
=============== ===============
NON CASH-FLOW ITEMS:
Transfer of net book value of certain equipment for leases to inventory $ 66,177 $ -
=============== ===============
Conversion of secured convertible notes and interest into equity $ 1,595,300 $ -
=============== ===============
Conversion of notes payable -related party into equity $ 500,000 $ -
=============== ===============
Conversion of short-term loans payable - related party into equity $ 72,800 $ -
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The condensed consolidated balance sheet as of June 30, 2005, the condensed
consolidated statements of operations for the three months ended June 30, 2005
and 2004 and for the nine month periods ended June 30, 2005 and 2004, the
condensed consolidated statement of stockholders' (deficiency) equity for the
nine month period ended June 30, 2005 and the condensed consolidated statements
of cash flows for the nine month periods ended June 30, 2005 and 2004, have been
prepared by the Company without audit. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
presentation of the Company's condensed financial position, results of
operations and cash flows not misleading. All such adjustments are of a normal
recurring nature. This quarterly report gives retroactive effect to the
Company's 1 for 20 reverse common stock split of April 5, 2005.
The accompanying condensed consolidated financial statements do not contain
all of the information and disclosures required by accounting principles
generally accepted in the United States of America and should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's annual report on Form 10-KSB for the fiscal year ended
September 30, 2004.
NOTE 2 - THE COMPANY
--------------------
Caprius, Inc. ("Caprius", the "Company", "we", "us" and "our") is engaged
in the infectious medical waste disposal business. In the first quarter of
Fiscal 2003, we acquired a majority interest in M.C.M. Environmental
Technologies, Inc. ("MCM") which developed, markets and sells the SteriMed and
SteriMed Junior compact systems that simultaneously shred and disinfect
Regulated Medical Waste. The SteriMed Systems are sold and leased in both the
domestic and international markets.
In December 2002, the Company closed the acquisition of our initial
investment of 57.53% of the capital stock of MCM for a purchase price of $2.4
million. MCM wholly-owns MCM Environmental Technologies Ltd., an Israeli
corporation, which initially developed the SteriMed Systems. Upon closing, our
designees were elected to three of the five seats on MCM's Board of Directors,
with George Aaron, President and CEO, and Jonathan Joels, CFO, filling two
seats. Additionally, as part of the transaction, certain debt of MCM to its
existing stockholders and to certain third parties was converted to equity in
MCM or restructured. As part of the Stockholders Agreement dated December 17,
2002, there were certain provisions relating to performance adjustments for the
twenty four month period post closing. As a consequence, the Company's ownership
interest increased by 5% in the fiscal year 2004.
During the first quarter of fiscal year 2005, an agreement was reached
between the Company and the 20% minority ownership of an MCM subsidiary which
has been dormant since inception. The minority shareholders shall be repaid
their initial investment, by way of a credit towards the site installation
expense of SteriMed units that they are purchasing for their dialysis centers.
This subsidiary was dissolved on February 9, 2005.
NOTE 3 - SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
Stock Based Compensation
At June 30, 2005, the Company had three stock based compensation plans (one
incentive and nonqualified, one employee and one non-employee director plan).
The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and complies with the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based Compensation"
7
as amended by SFAS No. 148, "Accounting for Stock-based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123, issued in December
2002. Under APB Opinion No. 25, compensation expense is based on the difference,
if any, generally on the date of grant, between the fair value of our stock and
the exercise price of the option. No stock-based employee compensation cost is
reflected within the statement of operations for the three and nine month
periods ended June 30, 2005 and 2004.
If the Company had elected to recognize compensation costs for the
Company's option plans using the fair value method at the grant dates, the
effect on the Company's net loss and loss per share for the periods shown below
would have been as follows:
Three months ended June 30, Nine months ended June 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net loss attributable to
common stockholders as reported $ (863,691) $ (731,322) $ (2,353,820) $ (2,336,609)
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
related tax effects (748) (16,051) (2,243) (43,425)
------------- ------------- ------------- -------------
Pro forma net loss attributable to (864,439) (747,373) (2,356,063) (2,380,034)
common stockholders
Basic and diluted loss attributable
to common stockholders
As reported $ (0.26) $ (0.72) $ (1.21) $ (2.29)
Pro forma $ (0.26) $ (0.73) $ (1.21) $ (2.33)
Loss Per Share
The Company follows Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share", which provides for the calculation of "basic" and
"diluted" earnings (loss) per share. Basic loss per share is computed by
dividing loss available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur through the effect of common shares issuable
upon the exercise of stock options and warrants and convertible securities. For
the periods ended June 30, 2005 and 2004, potential common shares amount to
1,020,660 and 909,311 respectively, and have not been included in the
computation of diluted loss per share since the effect would be antidilutive.
8
Revenue Recognition
The medical infectious waste business recognizes revenues from either the
sale or rental of its SteriMed units. Revenues for sales are recognized at the
time that the unit is shipped to the customer. Rental revenues are recognized
based upon either services provided for each month of activity or evenly over
the year in the event that a fixed rental agreement is in place.
NOTE 4 - INVENTORIES
--------------------
Inventories consist of the following, net of reserves of approximately
$34,200 at June 30, 2005:
Raw materials $ 258,379
Finished goods 320,935
---------
$ 579,314
=========
NOTE 5 - NOTES PAYABLE
----------------------
On February 2, 2005, the Company raised $100,000 through the issuance of 8%
Senior Secured Convertible Promissory Notes, repayable, together with interest
to April 3, 2005, subject to prepayment in the event of an equity financing in
excess of $2 Million, or conversion by the investors into shares of the
Company's common stock at a conversion price of $3.00 per share. The lenders
also received warrants to purchase 5,000 shares of the Company's common stock
exercisable at $5.60 per share for a period of five years. The allocated fair
value of these warrants are deemed to be immaterial. On February 17, 2005 the
Company repaid this loan together with interest.
During the third quarter of fiscal 2004, the Company raised an aggregate of
$1.5 million through the issuance of 8% Senior Secured Convertible Promissory
Notes ("the Notes"), prior to underwriting fees and expenses. The Company
granted a security interest in substantially all of the assets of the Company.
The Notes were to mature in one year and convert into shares of common stock at
the election of the investor at any time at a conversion price of $4.00 per
share, subject to reduction if certain conditions were not met as of September
30, 2004. The conditions were not met and the conversion price was reduced to
$3.00 per share. The beneficial conversion feature of the Notes, amounted to
$200,000 and as such the amount was treated as a discount to debt and a
corresponding increase to paid-in capital. This amount is being amortized over
the life of the loan (which was accelerated to February 15, 2005). Amortization
for the nine month period ended June 30, 2005 amounted to $150,000 and such
amount is included in interest expense, net in the consolidated statement of
operations. The financing was arranged through Sands Brothers International Ltd.
("Sands") who were retained by the Company to act as selected dealer for the
sale and issuance of the Notes. Based upon the funds raised, Sands received a
six percent cash fee and an expense allowance of one percent of the gross
proceeds, plus warrants valued at $28,500 using the Black Scholes Model to
purchase 71,250 shares of the Company's common stock at an exercise price of
$5.60 per share for a period of five years. The total fees for the offering were
$125,000. The debt issuance costs are being amortized over the term of the loan
(which was accelerated to February 15, 2005). Amortization for the nine month
period ended June 30, 2005 amounted to $89,542 and such amount is included in
interest expense, net in the consolidated statement of operations. On February
15, 2005 the Company closed on a $4.5 million preferred stock equity financing
(see Note 7). As a condition of this financing, the holders of the Notes amended
and converted their Notes together with accrued interest, into an aggregate of
15,953 shares of Series C Mandatory Convertible Preferred Stock and the security
interest was terminated.
NOTE 6 - NOTES PAYABLE - RELATED PARTY TRANSACTIONS
---------------------------------------------------
During 2005, the Company was advanced the principal amount of approximately
$7,100 through short term loans until additional equity funding is secured. The
terms of the loans are identical to the terms of the $100,000 8% Senior Secured
Convertible Promissory Note in Note 5. The lender also received warrants to
purchase 355 shares of the Company's common stock exercisable at $5.60 per share
for a period of five years. The allocated fair value of the warrants associated
with this advance are deemed to be immaterial. These short-term loans were
provided by an executive officer, Mr. Koppel. On February 15, 2005 the Company
9
repaid these short-term loans in exchange for 34 shares of Series C Mandatory
Convertible Preferred Stock at a stated value of $100 per share, with the
remaining balance plus interest being paid in cash.
During the three month period ended December 31, 2004, the Company was
advanced the principal amount of $138,790 through short term loans until
additional equity funding was secured. The terms of the loans are identical to
the terms of the $100,000 8% Senior Secured Convertible Promissory Note in Note
5. The lenders also received warrants to purchase 6,940 shares of the Company's
common stock exercisable at $5.60 per share for a period of five years. The
allocated fair value of the warrants associated with this advance are deemed to
be immaterial. These short-term loans were provided by executive officers,
Messrs. Aaron, Joels, and Koppel who advanced $64,000, $62,350 and $12,440,
respectively. On February 15, 2005 the Company repaid these short-term loans in
exchange for 694 shares of Series C Mandatory Convertible Preferred Stock at a
stated value of $100 per share, with the remaining balance plus interest being
paid in cash.
During the second quarter of fiscal 2004, the Company authorized a
short-term bridge loan for an aggregate of $500,000 through the issuance of loan
notes due on July 31, 2005. The majority of the funds were provided by
management of the Company. The loan notes bear interest at a rate of 11% per
annum and were secured by a first lien on any royalties received by Opus
Diagnostics Inc. from Seradyn, Inc. in accordance with their Royalty Agreement.
For every sixty dollars ($60.00) loaned, the lender received two warrants to
purchase one share of Common Stock, exercisable at $5.00 per share for a period
of five years. The warrants were valued at $27,400 using the Black Scholes Model
and such amount was treated as a discount to debt and a corresponding increase
to paid in capital. The discount is being amortized over the life of the loan
(which was accelerated to February 15, 2005). For the nine month period ended
June 30, 2005, the Company recorded an additional interest expense related to
this discount of approximately $15,200. On February 15, 2005 the Company closed
on a $4.5 million preferred stock equity financing (see Note 7). As a condition
of this financing the holders of the Notes converted their notes, into an
aggregate of 5,000 shares of Series C Mandatory Convertible Preferred Stock and
the security interest was terminated.
NOTE 7 - EQUITY FINANCING
-------------------------
On February 15, 2005, the Company closed on a $4.5 million preferred stock
equity financing transaction before financing fees and expenses of approximately
$435,000. As part of this financing transaction, the Company issued 45,000
shares of Series C Mandatory Convertible Preferred Stock ("Series C Stock") at a
stated value of $100 per share. The Company also issued Series A Warrants to
purchase an aggregate of 465,517 shares of common stock at an exercise price of
$5.60 per share for a period of five years. In addition, the Company issued
Series B Warrants to purchase an aggregate of 155,172 shares of common stock at
an exercise price of $2.90 per share for a period of five years exercisable
after nine months, subject to a termination condition as defined in the warrant
agreement. The Company determined that the preferred stock was issued with an
effective beneficial conversion feature of approximately $125,000 based upon the
relative fair values of the preferred stock and warrants. The Company calculated
the fair values of the warrants using the Black Scholes valuation model. Upon
conversion of the Series C Stock to common shares on April 5, 2005 the Company
recorded a deemed preferred stock dividend of approximately $125,000; which
represents the beneficial conversion feature of the Series C Stock (See Note 8).
Simultaneously, the Company converted the short-term secured debt
outstanding in the aggregate of approximately $2.1 million inclusive of
interest, together with $72,962 of unsecured indebtedness, into 21,681 shares of
Series C Stock. As part of the condition for raising the equity financing,
holders of a majority of the outstanding shares irrevocably undertook to effect
a 1:20 reverse stock split of any outstanding shares of common stock ("the
Reverse Split"). Upon the effectiveness of the Reverse Split ("the Mandatory
Conversion Date"), the new equity investors and the debt holders who converted
their debt agreed to automatically convert their Series C Stock into common
shares at a conversion price of $2.90 per share and/or 2,299,345 shares of the
Company's common stock (post reverse split), subject to adjustment in certain
circumstances, (see Note 8). The Company also agreed to increase the number of
independent directors by one additional director.
10
NOTE 8 - REVERSE SPLIT
----------------------
On April 5, 2005, the Company effected the Reverse Split. On such date, the
66,681 outstanding shares of Series C Stock automatically converted into
2,299,345 shares of the Company's common stock. As a result of the Reverse
Split, the Company has outstanding 3,321,673 shares of common stock. The reverse
split did not change the number of authorized shares of common and preferred
stock. All share and per share information in the accompanying financial
statements have been restated to reflect the 1 for 20 reverse stock split.
NOTE 9 - OTHER INCOME
---------------------
During the second quarter of fiscal 2005, the Company recorded income of
$132,200 as a result of favorable settlements of certain outstanding accounts
payable balances.
NOTE 10 - ECONOMIC DEPENDENCY
-----------------------------
For the nine months ended June 30, 2005, revenue from four customers was
approximately $223,000 $91,000, $78,000 and $74,000 which represented
approximately 66% of the total revenue. At June 30, 2005 accounts receivable
from these customers were approximately $3,000, $0, $57,400, and $0
respectively.
For the nine months ended June 30, 2004, revenue from two customers was
approximately $486,000 and $131,000, which represented approximately 81% of the
total revenue.
NOTE 11 - LITIGATION
--------------------
In June 2002, Jack Nelson, a former Caprius executive officer and director,
commenced two legal proceedings against us and George Aaron and Jonathan Joels,
executive officers, directors and principal stockholders. The two complaints
alleged that the individual defendants made misrepresentations to the plaintiff
upon their acquisition of a controlling interest in the Company in 1999 and
thereafter made other alleged misrepresentations and engaged in mismanagement
and other misconduct and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and Caprius. One action was brought in Superior Court
of New Jersey, Bergen County ("State Court Action"), and the other was brought
as a derivative action in Federal District Court in New Jersey ("Federal
Derivative Action"). In September 2003, we resolved the State Court Action by
making an Offer of Judgment which was accepted by the plaintiff. Under the terms
of the Offer of Judgment, which was made without any admission or finding of
liability on part of the defendants, we paid $125,000 to the plaintiff and the
action was discontinued.
On May 3, 2004, the Court in the Federal Derivative Action granted the
motion made by us and Messrs. Aaron and Joels for judgment on the pleadings
based upon the pre-suit demand requirement and dismissed the plaintiff's
complaint without prejudice, but denied defendants' motion for judgment on the
pleadings based upon the Private Securities Litigation Reform Act. The Court
also granted the plaintiff's cross-motion to file an amended complaint to add
allegations of insider trading.
In September 2002, we were served with a complaint naming us and our
principal officers and directors in the Federal District Court of New Jersey as
a purported class action (the "Class Action"). The allegations in the complaint
cover the period between February 14, 2000 and June 20, 2002. The initial
plaintiff is a relative of the wife of the plaintiff in the State Court Action
and Federal Derivative Action. The allegations in the purported Class Action
were substantially similar to those in the other two Actions. The complaint
sought an unspecified amount of monetary damages, as well as the removal of the
defendant officers as shareholders.
On May 3, 2004, in a decision separate from the decision in the Federal
Derivative Action, the Court granted the defendants' motion and dismissed the
Class Action. The federal securities claims asserted by the plaintiffs were
dismissed with prejudice, and having dismissed all federal law claims, the Court
declined to exercise jurisdiction over the remaining state law claims and
11
dismissed those claims without prejudice. On May 14, 2004, the plaintiffs filed
a motion for reconsideration, which defendants opposed and subsequently this
motion for reargument was denied. The plaintiff did not file a notice of appeal
during the statutory time period.
The independent directors had authorized us to advance the legal expenses
of Messrs. Aaron and Joels in these litigations with respect to claims against
them in their corporate capacities, subject to review of the legal bills and
compliance with applicable law, and Messrs. Aaron and Joels will repay us in the
event it was determined that they were not entitled to be indemnified as to the
claim for which the advance was made.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
On April 18, 2005, the Company entered into an agreement, commencing May 1,
2005 for certain services related to investor relations and financial media
program for a one year period. The agreement is renewable unless terminated by
either party. According to the agreement, the Company agreed to pay fees of
$96,000 per annum in monthly installments of $8,000.
NOTE 13 - SUBSEQUENT EVENT
--------------------------
In July 2005, we entered into a Settlement Agreement and Policies Release
with the carrier of our Directors and Company Reimbursement Policies and shall
receive a payment of $350,000 under such Policies as a settlement of our claim
for expenses incurred in litigations described in Note 11. At that time, the
independent directors determined that we should not seek contribution from
Messrs. Aaron and Joels for any portion of our net costs in defending those
litigations. The Company did not advance any amounts to such individuals in
connection with the litigations.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Quarterly Report of Form 10-QSB to make applicable and take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and accordingly
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. Our
expectations, beliefs and projections are expressed in good faith and are
believed by us to have a reasonable basis, including without limitation,
management's examination of historical operating trends, data contained in our
records and other data available from third parties, but there can be no
assurance that management's expectation, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in our view, could
cause actual results to differ materially from those discussed in the
forward-looking statements: technological advances by our competitors, changes
in health care reform, including reimbursement programs, changes to regulatory
requirements relating to environmental approvals for the treatment of infectious
medical waste, capital needs to fund any delays or extensions of development
programs, delays in the manufacture of new and existing products by us or third
party contractors, the loss of any key employees, the outcome of existing
litigations, delays in obtaining federal, state or local regulatory clearance
for new installations and operations, changes in governmental regulations, the
location of the MCM business in Israel, and availability of capital on terms
satisfactory to us. We are also subject to numerous Risk Factors relating to
manufacturing, regulatory, financial resources and personnel as described in the
Company's Form SB-2 (File No. 333-124096) dated April 15, 2005 as filed with the
Securities and Exchange Commission. We disclaim any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
12
RESULTS OF OPERATIONS
As more fully described in the Form 10-KSB for fiscal year ended September
30, 2004, our continuing operation is classified as medical infectious waste
business.
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
-----------------------------------------------------------------------------
Revenues generated from MCM product sales totaled $185,878 for the three
months ended June 30, 2005 as compared to $257,308 for the three months ended
June 30, 2004. This decrease was a result of consolidation within our target
market of dialysis clinics, which included the acquisition of our largest client
in the US. Consequently, the client's scheduled rollout of units was placed on
hold. The revenues generated for the three months ended June 30, 2005 included
the Company's recent sale of a SteriMed system to a dialysis clinic on St. Croix
in the U.S. Virgin Islands. This marks the first sale of a SteriMed unit to a
customer in the U.S. Virgin Islands. Revenues generated from MCM rentals totaled
$2,677 as compared to $14,865 for the comparable periods. Consulting and royalty
income from the TDM Business, which was sold in 2002, totaled $15,157 as
compared to $12,500 for the three months ended June 30, 2005 and 2004.
Cost of product sales and leased equipment amounted to $121,420 or 64.4%
of total related revenues versus $177,204 or 65.1% of total related revenues for
the three month period ended June 30, 2005 and 2004, respectively. We have not
advanced to a level of sales for us to fully absorb the fixed costs related to
our revenues.
Research and development expense decreased to $69,439 versus $77,999 for
the three month period ended June 30, 2005 as compared to the same period in
2004.
Selling, general and administrative expenses totaled $752,327 for the three
months ended June 30, 2005 versus $693,277 for the three months ended June 30,
2004. This increase was due to legal and professional fees in connection with
the Company's Registration Statement, which was declared effective on May 10,
2005, and the Company's retention of an investor relations firm.
Interest income, net totaled $311 (net of interest expense of $16,943) for
the three months ended June 30, 2005 versus $67,515 interest expense, net
totaled for the three months ended June 30, 2004. There was no outstanding debt
during the three months ended June 30, 2005.
The net loss amounted to $739,163 and $731,322 for the three month periods
ended June 30, 2005 and 2004, respectively.
NINE MONTHS ENDED JUNE 30, 2005 COMPARED TO NINE MONTHS ENDED JUNE 30, 2004
---------------------------------------------------------------------------
Revenues generated from MCM product sales totaled $622,486 for the nine
months ended June 30, 2005 as compared to $674,931 for the nine months ended
June 30, 2004. Revenues generated from MCM rentals totaled $ 10,627 as compared
to $49,548 for the comparable periods. Consulting and royalty income from the
TDM Business, which was sold in 2002, totaled $77,810 as compared to $37,500 for
the nine months ended June 30, 2005 and 2004.
Cost of product sales and leased equipment amounted to $451,810 or 71.4% of
total related revenues versus $551,382 or 76.1% of total related revenues for
the nine month period ended June 30, 2005 and 2004, respectively. We have not
advanced to a level of sales for us to fully absorb the fixed costs related to
our revenues.
Research and development expense increased to $ 262,935 versus $171,301 for
the nine month period ended June 30, 2005 as compared to the same period in
2004. This was a result of our continuing efforts to improve our products,
streamline the manufacturing processes and reduce the product cost.
13
Selling, general and administrative expenses totaled $2,026,961 for the
nine months ended June 30, 2005 versus $2,276,980 for the nine months ended June
30, 2004. This reduction was due to a decrease in the cost of legal and
accounting fees incurred primarily in connection with prior and settled
litigations.
Other income totaled $132,200 for the nine months ended June 30, 2005 as
compared to $0 for the nine months ended June 30, 2004. This resulted from the
favorable settlement of certain outstanding liabilities.
Interest expense, net totaled $ 330,709 for the nine months ended June 30,
2005 versus $70,500 for the nine months ended June 30, 2004. The majority of the
interest expense incurred during the nine month period ended June 30, 2005,
related to interest fees and amortization in connection with the secured
convertible notes and bridge financing, which occurred in the year ended
September 30, 2004.
The loss from continuing operations amounted to $2,229,292 and $2,308,184
for the nine month periods ended June 30, 2005 and 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005 the Company's cash and cash equivalents position
approximated $1,962,000 versus $28,000 at September 30, 2004. As further
discussed below, on February 15, 2005 we received net proceeds of approximately
$4 million from the sale of Series C Preferred Stock and warrants, and
approximately $2.1 million of indebtedness was converted into or exchanged for
Series C Preferred Stock.
On January 14, 2005 we received advances of approximately $7,100 through
short-term related party loans until additional equity funding was secured. The
terms of the loans are identical to the terms of the $100,000 8% Senior Secured
Convertible Promissory Note outlined in Note 5 to the Notes to the Financial
Statements in Item 1. These funds were utilized for general working capital
purposes. These loans were repaid on February 15, 2005 as part of the Preferred
Stock Equity Financing arrangement.
On February 2, 2005 we raised $100,000 through the issuance of an 8% Senior
Secured Convertible Promissory Note, due April 3, 2005, subject to repayment in
the event of an equity financing in excess of $2 million or conversion by the
investors to shares of our common stock at $ 3.00 per share. This loan was
repaid on February 17, 2005 as part of the Preferred Stock Equity Financing
arrangement.
On February 15, 2005, we closed on a $4.5 million preferred stock equity
financing before financing related fees and expenses of approximately $435,000.
The Company issued 45,000 shares of Series C Mandatory Convertible Preferred
Stock ("Series C Preferred Stock") at a stated value of $100 per share, together
with Series A Warrants to purchase an aggregate of 465,517 shares of common
stock at an exercise price of $5.60 per share for a period of five years, and
Series B Warrants to purchase an aggregate of 155,172 shares of common stock at
an exercise price of $2.90 per share for a period of five years exercisable
after nine months, subject to a termination condition as defined in the warrant.
Simultaneously, the outstanding short-term secured debt in the aggregate of
approximately $2.1 million inclusive of interest, together with $72,962 of
unsecured indebtedness, were converted into 21,681 shares of Series C Preferred
Stock. Under the terms of the Series C Preferred Stock, upon the reverse stock
split, effective April 5, 2005, the outstanding Series C Preferred Stock was
converted into 2,299,345 shares of the Company's common stock at a conversion
price of $2.90 per share.
The net cash proceeds from the equity financing should provide the funds
necessary to expand our business as well as meeting our needs to satisfy
specific outstanding obligations and accrued expenses, through June 30, 2006,
based upon our present business plan. Specifically, the funds are being used to
increase our marketing effort both in the US and overseas markets. The
availability of this working capital will also permit us to build inventory to
fulfill both current and future needs arising from our increased marketing
efforts. In addition, as we start to increase our penetration in the US market,
we will need to expand our customer service and technical support capabilities
to meet the needs of our clients. Similarly, in overseas markets, resources will
be required to obtain regulatory approvals in markets where we believe there
14
exists great opportunities for our business. We may also use our resources to
develop further versions of our SteriMed System if it is determined that there
is a market for such a product.
We had for the past several years met our need for capital in our various
businesses through loans from officers, directors and related parties other than
the monies received from the sale of the TDM business, which were primarily used
to finance the acquired MCM business on December 17, 2002, and the February 2005
preferred stock equity financing. As our activities expand, we may require
additional working capital or other funds within the next 12 months and there
can be no assurance that we will be successful in obtaining the needed capital,
and if obtained, on terms that may not be highly dilutive to existing
stockholders.
ITEM 3. CONTROLS & PROCEDURES
Our principal executive officer and principal financial officer, based on
their evaluation of our disclosure controls and procedures (as defined in Rules
13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of 1934) as of June 30,
2005, have concluded that our disclosure controls and procedures are adequate
and effective to ensure that material information relating to us and our
consolidated subsidiaries are recorded, processed, summarized and reported
within the time periods specified by the SEC's rules and forms, particularly
during the period in which this quarterly report has been prepared.
Our principal executive officer and principal financial officer have
concluded that there were no significant changes in our internal controls or in
other factors that could significantly affect these controls for the quarter
ended June 30, 2005, the date of their most recent evaluation of such controls,
and that there were no significant deficiencies or material weaknesses in our
internal controls.
PART II: OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Reference is made to Note 8 to the financial statements herein and to the
Form 8-K filed for an event of April 5, 2005 to report the conversion of our
Series C Mandatory Convertible Preferred Stock and a 1 for 20 reverse split of
our common stock. These transactions were exempt from registration under the
Securities Act of 1933 by reason of Section 3(a)(9) thereof.
ITEM 6. EXHIBITS
(a) Exhibits
31.1* Rule 13a-14(a)/15d-14(a) Certification
31.2* Rule 13a-14(a)/15d-14(a) Certification
32* Section 1350 - Certification
10.1* Settlement Agreement and Policies Release by and among Admiral
Insurance Company and Caprius, Inc. and certain Caprius directors
and officers including George Aaron, Jonathan Joels, Shrikant Mehta,
and Sanjay Mody.
* filed herewith
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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.
Caprius, Inc.
-------------
(Registrant)
/s/ George Aaron
------------------
Date: August 11, 2005 George Aaron
President & Chief Executive Officer
Date: August 11, 2005 /s/ Jonathan Joels
------------------
Jonathan Joels
Chief Financial Officer
16