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 DECEMBER 31, 2004
[ ] 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.
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(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
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(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 February 18, 2005
Common Stock. Par value $0.01 20,446,562 shares
CAPRIUS, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of December 31, 2004 3
Condensed Consolidated Statements of Operations for the 4
three months ended December 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the 5
three months ended December 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS & PROCEDURES 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 17
2
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
December 31, 2004
-----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,146
Accounts receivable, net of reserve for bad debts of $5,163 57,828
Inventories, net 754,685
Due from sale of Strax 33,000
Deferred financing costs, net of accumulated amortization of $102,333 51,167
Other current assets 6,223
------------
Total current assets 922,049
------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 167,221
Equipment for lease 76,666
Leasehold improvements 19,536
------------
263,423
Less: accumulated depreciation 203,839
------------
Property and equipment, net 59,584
------------
OTHER ASSETS:
Goodwill 737,010
Intangible assets, net of accumulated amortization of $565,083 474,917
Other 13,330
------------
Total other assets 1,225,257
------------
TOTAL ASSETS $ 2,206,890
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Secured convertible notes, net of unamortized discount of $100,000 $ 1,400,000
Notes payable - related party, net of unamortized discount of $10,653 628,140
Accounts payable 1,146,729
Accrued expenses 438,202
Accrued compensation 290,077
------------
Total current liabilities 3,903,148
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STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value
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 20,469,062 shares and
outstanding 20,446,562 shares 204,691
Additional paid-in capital 67,837,158
Accumulated deficit (72,435,857)
Treasury stock (22,500 common shares, at cost) (2,250)
------------
Total stockholders' deficiency (1,696,258)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,206,890
============
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
---------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
REVENUES:
Product sales $ 236,908 $ 258,884
Equipment rental income 5,326 18,349
Consulting and royalty fees 20,425 12,500
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Total revenues 262,659 289,733
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OPERATING EXPENSES:
Cost of product sales and equipment rental income 161,794 204,719
Research and development 76,580 39,595
Selling, general and administrative 672,278 674,236
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Total operating expenses 910,652 918,550
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Operating loss (647,993) (628,817)
Interest expense, net (149,079) (434)
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Loss from continuing operations (797,072) (629,251)
Loss from operations of discontinued
Strax business - (28,425)
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Net loss $ (797,072) $ (657,676)
============ ============
Net loss per basic and diluted common share:
Continuing operations $ (0.04) $ (0.03)
Discontinued operations - -
------------ ------------
Net loss per basic and diluted common share $ (0.04) $ (0.03)
============ ============
Weighted average number of common shares outstanding,
basic and diluted 20,446,562 20,446,562
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended December 31,
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (797,072) $ (657,676)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 54,567 -
Amoritization of deferred financing costs 38,375 -
Depreciation and amortization 81,422 62,328
Changes in operating assets and liabilities:
Accounts receivable 15,654 39,280
Inventories 22,011 2,432
Other assets 8,999 (105,408)
Accounts payable and accrued expenses 397,250 (205,461)
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Net cash used in operating activities (178,794) (864,505)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Strax business 33,000 213,190
Acquistion of property and equipment (1,436) (1,886)
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Net cash provided by investing activities 31,564 211,304
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - related party 138,793 -
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Net cash provided by financing activities 138,793 -
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NET DECREASE IN CASH AND CASH EQUIVALENTS (8,437) (653,201)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,583 774,819
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,146 $ 121,618
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ - $ 115
========== ==========
NON CASH-FLOW ITEM:
Transfer of net book value of certain equipment for leases
to inventory $ 66,177 $ -
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The condensed consolidated balance sheet as of December 31, 2004, and the
condensed consolidated statements of operations and cash flows for the three
month periods ended December 31, 2004 and 2003, 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.
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. Pursuant to its Letter of Intent with MCM, Caprius had
provided MCM with loans totaling $565,000, which loans were repaid upon closing
by a reduction in the cash portion of the purchase price. 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. For the six month period that commenced on July 17, 2004
and ends on January 17, 2005, pursuant to a Stockholders Agreement, the
stockholders of MCM (other than the Company) have the right to put all of their
MCM shares to MCM, and MCM has the right to call all of such shares not
currently owned by us. In accordance with the Stockholders Agreement dated
December 17, 2002, the party who first exercises its put or call rights is
required to accompany its notice of put or call with its proposal for the price
of the stock interest in MCM to be sold or purchased, as applicable. The
recipient is then required to give notice to the exercising party of its
proposed price for such interest. The parties shall then negotiate and agree
upon an agreed price. At our option, we may pay the purchase price for the
remaining MCM shares in cash or in shares of our common stock. Neither party
gave notice of its put or call.
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.
6
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Stock Based Compensation
At December 31, 2004, 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" 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
month periods ended December 31, 2004 and 2003.
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 December 31,
2004 2003
---------- ----------
Net loss as reported $ (797,072) $ (657,676)
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
related tax effects (818) (13,687)
---------- ----------
Pro forma net loss $ (797,890) $ (671,363)
========== ==========
Basic and diluted loss
per share of Common Stock
As reported $ (0.04) $ (0.03)
Pro forma $ (0.04) $ (0.03)
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 includes no dilution
and 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 December 31, 2004 and 2003,
potential common shares amount to 16,898,215 and 6,854,867 respectively, and
have not been included in the computation of diluted loss per share since the
effect would be antidilutive.
7
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.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company and its subsidiaries review the carrying
values of their long-lived assets (other than goodwill) for possible impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable. Any long-lived assets held for disposal
are reported at the lower of their carrying amounts or fair values less costs to
sell.
Goodwill and Other Intangibles
The Company has adopted the provisions of SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 is effective as to any business combination occurring after June 30,
2001 and certain transition provisions that affect accounting for business
combinations prior to June 30, 2001 are effective as of the date SFAS No. 142 is
applied in its entirety. Goodwill relating to acquisitions completed subsequent
to June 30, 2001 is not amortized and is subject to impairment testing. In
addition, effective January 1, 2002, the Company will no longer be required to
amortize goodwill and certain other intangibles assets relating to acquisitions
completed prior to July 1, 2001.
SFAS No. 142 provides, among other things, that goodwill and intangible
assets with indeterminate lives shall not be amortized. Goodwill shall be
assigned to a reporting unit and annually tested for impairment. Intangible
assets with determinate lives shall be amortized over their estimated useful
lives, with the useful lives reassessed continuously, and shall be assessed for
impairment under the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Goodwill is
also assessed for impairment on an interim basis when events and circumstances
warrant. The Company assesses whether an impairment loss should be recognized
and measured by comparing the fair value of the "reporting unit" to the carrying
value, including goodwill. If the carrying value exceeds fair value, then the
Company will compare the implied fair value of the goodwill (as defined in SFAS
No. 142) to the carrying amount of the goodwill. If the carrying amount of the
goodwill exceeds the implied fair value, then the goodwill will be adjusted to
the implied fair value. At September 30, 2004, goodwill results from the excess
of cost over the fair value of net assets acquired related to the MCM business.
NOTE 4 - INVENTORIES
--------------------
Inventories consist of the following, net of reserves of approximately
$34,200 for the period ended December 31, 2004:
December 31,
2004
----
Raw materials $315,523
Finished goods 439,162
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$754,685
========
NOTE 5 - NOTES PAYABLE
----------------------
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 proceeds were
used for general working capital. The Company granted a security interest in
8
substantially all of the assets of the Company. The Notes mature in one year and
can be converted into shares of common stock at the election of the investor at
any time using a conversion price of $0.20 per share. Certain conditions were
not met as of September 30, 2004, and therefore the conversion price was reduced
to $0.15 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. Amortization for the three month period ended December 31,
2004 amounted to $50,000 and that 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 fee and an expense allowance of one
percent of the gross proceeds and warrants valued at $28,500 using the Black
Scholes Model to purchase 1,425,000 shares of the Company's common stock at an
exercise price of $0.28 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. Amortization for the three month period ended December 31,
2004 amounted to $38,375 and that amount is included in interest expense, net in
the consolidated statement of operations. On February 15, the Company closed on
a $4.5 million preferred stock equity financing (see Note 9). 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.
NOTE 6 - NOTES PAYABLE - RELATED PARTY TRANSACTIONS
---------------------------------------------------
During the three month period ended December 31, 2004, the Company was
advanced the principal amount of approximately $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 outlined in Note 9. 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
approximately $64,000, 62,350 and $12,440, respectively. These funds were
utilized for general working capital purposes. As a condition of this financing,
the holders of the Notes exchanged 50% of their indebtedness for 694 shares of
Series C Mandatory Convertible Preferred Stock and were paid the balance of
their notes inclusive of interest from the net proceeds of the $4.5 million
preferred stock equity financing of February 15, 2005 (see Note 9) and the
security interest was terminated.
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 funds were utilized primarily for general
working capital. 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 three
dollars ($3.00) loaned, the lender received two warrants to purchase one share
of Common Stock, exercisable at $0.25 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. For the
three month period ended December 31, 2004, the Company recorded an additional
interest expense related to this discount of approximately $4,600, and that
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 9). 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 - ECONOMIC DEPENDENCY
----------------------------
For the three months ended December 31, 2004, revenue from four customers
was approximately $91,000, $56,000, $42,000 and $41,000 which represented
approximately 88% of the total revenue. At December 31, 2004 accounts receivable
from these customers were approximately $0, $45,267, $0, and $0 respectively.
9
For the three months ended December 31, 2003, revenue from two customers
was approximately $121,000(2004 - $56,000) and $124,000 (2004 - $41,000), which
represented approximately 85% of the total revenue.
NOTE 8 - 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
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.
On September 30, 2004, our Board received a letter written from Mr.
Nelson's attorney making a demand that we institute a derivative action
substantially similar to the allegations presented in the Federal Derivative
Action. A draft complaint was included with the letter. An Independent Committee
of the Board responded to the letter within the stipulated 90 day period that
Mr. Nelson had requested, stating that the Independent Committee determined that
there was no basis for the Company to institute the derivative action as
demanded. There has been no further communication from Mr. Nelson's attorney.
The independent directors have 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 9 - SUBSEQUENT EVENTS
--------------------------
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 our common
10
stock at a conversion price of $0.15 per share. The lenders also received
warrants to purchase 100,000 shares of our common stock exercisable at $0.28 per
share for a period of five years. The allocated fair value of these warrants are
deemed to be immaterial. In the event that the loan is not repaid as of the due
date, then the lender shall receive a further 25,000 warrants per month, up to
an aggregate, including the initial 100,000 warrants, of 300,000 warrants. The
funds were utilized for general working capital. On February 17, 2005, the
Company repaid this loan together with interest.
On February 13, 2005, the Board of Directors approved the issuance of a
series of preferred stock to be designated as Series C Mandatory Convertible
Preferred Stock, $0.01 par value, stated value $100 per share, consisting of
75,000 shares with terms as set forth in the Certificate of Designations,
Preferences and Rights.
On February 15, 2005, the Company closed on a $4.5 million preferred stock
equity financing before financing related fees and expenses of approximately
$450,000. The Company issued 45,000 shares of Series C Mandatory Convertible
Preferred Stock at a stated value of $100 per share. The Company also issued
Series A Warrants to purchase an aggregate of 9,310,344 shares of common stock
at an exercise price of $0.28 per share for a period of five years. In addition,
the Company issued Series B Warrants to purchase an aggregate of 3,103,448
shares of common stock at an exercise price of $0.145 per share for a period of
five years exercisable after nine months, subject to a termination condition
defined under Warrant B, Section 18. Simultaneously, the Company converted the
short-term secured debt outstanding in the aggregate of $2 million, together
with $72,962 of unsecured indebtedness, into 21,681 shares of Series C Mandatory
Convertible Preferred 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.
At the time that the reverse split becomes effective, all of the preferred stock
issued to the new equity investors and the debt holders who converted their debt
will automatically convert into common shares at a conversion price of $0.145
per share and/or 2,299,345 shares of the Company's common stock (post reverse
split), subject to adjustment in certain circumstances. The Company also agreed
to increase the number of independent directors by one additional director.
During the period from January 1, 2005 through February 15, 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 outlined above. The allocated fair value of the warrants
associated with this advance are deemed to be immaterial. These short-term loan
was provided by an executive officer, Mr. Koppel. The funds were utilized for
general working capital purposes. As a condition of this financing, Mr. Koppel
exchanged 50% of his indebtedness for Series C Mandatory Convertible Preferred
Stock and on February 15, 2005 was paid the balance inclusive of interest.
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. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's 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 the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: technological
advances by the Company's 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
11
needs to fund any delays or extensions of development programs, delays in the
manufacture of new and existing products by the Company 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 the Company. The Company is also subject to numerous Risk Factors relating to
manufacturing, regulatory, financial resources and personnel as defined in the
Company's September 30, 2004 Form 10KSB as filed with the Securities and
Exchange Commission. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
RESULTS OF OPERATIONS
As more fully described in the Form 10-KSB for fiscal year ended September
30, 2004, the Company's continuing operation is classified as medical infectious
waste business.
THREE MONTHS DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2003
-------------------------------------------------------------------------------
Revenues generated from MCM product sales totaled $236,908 for the three
months ended December 31, 2004 as compared to $258,884 for the three months
ended December 31, 2003. Revenues generated from MCM rentals totaled $5,326 as
compared to $18,349 for the comparable periods. Consulting and royalty income
totaled $20,425 as compared to $12,500 for the three months ended December 31,
2004 and 2003 in connection with the sale of the TDM Business.
Cost of product sales and leased equipment amounted to $161,794 or 61.6% of
total revenues versus $204,719 or 70.1% of total revenues for the three month
period ended December 31, 2004 and 2003, respectively. The Company has not
advanced to a level of sales for the Company to fully absorb the fixed costs
related to its revenues.
Selling, general and administrative expenses totaled $672,278 for the three
months ended December 31, 2004 versus $674,236 for the three months ended
December 31, 2003.
Interest expense, net totaled $149,079 for the three months ended December
31, 2004 versus $434 for the three months ended December 31, 2003. The majority
of the interest expense incurred during the three month period ended December
31, 2004, related to interest fees and amortization in connection with the
secured convertible notes and bridge financing, which occurred in Fiscal 2004.
The operating loss from operations amounted to $647,993 and $628,817 for
the three month periods ended December 31, 2004 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company's cash and cash equivalents position
approximated $19,100 versus $27,600 at September 30, 2004. As further discussed
below, on February 15, 2005 the Company received gross proceeds of $4.5 million,
under a preferred stock equity financing.
During the three month period ended December 31, 2004, the Company was
advanced the principal amount of approximately $138,800 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 9. 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, the Company 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 $ 0.15 per share.
Thus loan was repaid on February 15, 2005 as part of the Preferred Stock Equity
Financing arrangement.
12
On February 15, 2005, the Company closed on a $4.5 million preferred stock
equity financing, before financing related fees and expenses of approximately
10% (see Note 9). As part of this financing, the Company agreed to 30% warrant
coverage for the purchase of common stock at an exercise price of $0.28 per
share for a period of five years. The Company also agreed to a second warrant
with 10% coverage for the purchase of common stock at $0.145 per share for a
period of five years exercisable after 9 months. Simultaneously, the Company
converted the short-term secured debt outstanding in the aggregate of $2 million
together with $72,962 into 21,681 shares of Series C Mandatory Convertible
Preferred Stock as the new equity investors. 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. At the time that the reverse split becomes effective,
all of the preferred stock issued to the new equity investors and the debt
holders who converted their debt will automatically convert into common shares.
Additionally, the holders of the $1.5 million 8% Senior Secured Convertible
Promissory Notes, exchanged their indebtedness for 15,953 shares of Series C
Mandatory Convertible Preferred Stock. Further, the Company satisfied the
related party debt with a combination of 5,728 shares of Series C Mandatory
Convertible Preferred Stock and cash consideration. In addition certain accounts
payable and accrued expenses were required to be paid as defined under the
Agreement. The Company also agreed to increase the number of independent
directors by one additional director and obtain a listing on the Nasdaq Small
Cap Market. The net cash proceeds from the equity financing will provide the
funds necessary to expand our business as well as meeting our needs to satisfy
specific outstanding obligations and accrued expenses. Specifically, the funds
will be 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 build a meaningful 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 exists great opportunities for its 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.
The Company has for the past several years met its need for capital in its
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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, management
evaluates our estimates and assumptions, including but not limited to those
related to revenue recognition and the impairment of long-lived assets, goodwill
and other intangible assets. Management bases its estimates on historical
experience and various other assumptions that it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
1. Revenue recognition
The infectious medical waste business recognizes revenues from either the
sale or rental of our SteriMed Systems. 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.
2. Goodwill and other intangibles
Goodwill and other intangibles associated with the MCM acquisition will be
subject to an annual assessment for impairment by applying a fair-value based
test. The valuation will be based upon estimates of future income of the
reporting unit and estimates of the market value of the unit.
13
ITEM 3. CONTROLS & PROCEDURES
The Company's principal executive officer and principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of
1934) as of December 31, 2004 have concluded that the Company's disclosure
controls and procedures are adequate and effective to ensure that material
information relating to the Company and its 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.
The Company's principal executive officer and principal financial officer
have concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls for
the quarter ended December 31, 2004, the date of their most recent evaluation of
such controls, and that there were no significant deficiencies or material
weaknesses in the Company's internal controls.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
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.
On September 30, 2004, our Board received a letter written from Mr.
Nelson's attorney making a demand that we institute a derivative action
substantially similar to the allegations presented in the Federal Derivative
Action. A draft complaint was included with the letter. An Independent Committee
of the Board responded to the letter within the stipulated 90 day period that
14
Mr. Nelson had requested, stating that the Independent Committee determined that
there was no basis for the Company to institute the derivative action as
demanded. There has been no further communication from Mr. Nelson's attorney.
The independent directors have 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------
(a) Exhibits
3.1 Certificate of Designations, Preferences and Rights of Series C
Mandatory Convertible Preferred Stock (incorporated by reference
to Exhibit 3.1 to Registrant's Form 8-K filed for an event of
February 15, 2005)
4.1 Form of Series A Warrant (granted February 15, 2005)
(incorporated by reference to Exhibit 4.1 to Registrant's Form
8-K filed for an event of February 15, 2005).
4.2 Form of Series B Warrant (granted February 15, 2005)
(incorporated by reference to Exhibit 4.2 to Registrant's Form
8-K filed for an event of February 15, 2005).
4.3 Form of Dealer Warrant (granted February 15, 2005) (incorporated
by reference to Exhibit 4.3 to Registrant's Form 8-K filed for
an event of February 15, 2005).
4.4 Form of Lock-Up Agreement with George Aaron and Jonathan Joels
(incorporated by reference to Exhibit 4.4 to Registrant's Form
8-K filed for an event of February 15, 2005).
10.1 Purchase Agreement for the sale of 45,000 shares of Series C
Mandatory Convertible Preferred Stock and Series A and Series B
warrants (incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K filed for an event of February 15, 2005).
10.2 Registration Rights Agreement, dated February 15, 2005, by and
among the Registrant and note holders (incorporated by reference
to Exhibit 10.2 to Registrant's Form 8-K filed for an event of
February 15, 2005).
10.3 Amendment and Conversion Agreement, dated February 15, 2005, by
and among the Registrant and note holders(incorporated by
reference to Exhibit 10.3 to Registrant's Form 8-K filed for an
event of February 15, 2005).
10.4 Exchange Agreement, dated February 15, 2005, by and among the
Registrant and certain lenders (incorporated by reference to
Exhibit 10.4 to Registrant's Form 8-K filed for an event of
February 15, 2005).
10.5 Registration Rights Agreement, dated February 15, 2005, by and
among the Registrant and note holders (incorporated by reference
to Exhibit 10.5 to Registrant's Form 8-K filed for an event of
February 15, 2005).
10.6.1 Financial Advisory Agreement, dated January 11, 2005, between
the Registrant and Laidlaw & Company (UK) Ltd. (incorporated by
reference to Exhibit 10.6.1 to Registrant's Form 8-K filed for
an event of February 15, 2005).
15
10.6.2 Amendment to Financial Advisory Agreement, dated February 9,
2005 (incorporated by reference to Exhibit 10.6.2 to
Registrant's Form 8-K filed for an event of February 15, 2005).
31.1* Rule 13a-14(a)/15d-14(a) Certification
31.2* Rule 13a-14(a)/15d-14(a) Certification
32* Section 1350 - Certification
* filed herewith
(b) Reports on Form 8-K:
None
16
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)
Date: February 22, 2005 /s/ George Aaron
-----------------------------------
George Aaron
President & Chief Executive Officer
Date: February 22, 2005 /s/ Jonathan Joels
-----------------------------------
Jonathan Joels
Chief Financial Officer
17