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, 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 July 30, 2004
Common Stock. Par value $0.01 20,446,562 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, 2004 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended June 30, 2004 and 2003. 4
Condensed Consolidated Statement of Stockholders' Equity
(Deficiency) for the nine months ended June 30, 2004 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. CONTROLS & PROCEDURES 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES IN SMALL BUSINESS ISSUERS PURCHASE
OF EQUITY SECURITIES 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2004
-------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 337,575
Accounts receivable, net of reserve for bad debts of $5,163 209,997
Inventories 741,802
Due from sale of Strax 169,458
Other current assets 117,112
Deferred financing cost, net of accumulated amortization
of $25,583 127,917
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Total current assets 1,703,861
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PROPERTY AND EQUIPMENT:
Office furniture and equipment 159,340
Equipment for lease 108,321
Leasehold improvements 18,359
-------------
286,020
Less: accumulated depreciation 176,939
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Property and equipment, net 109,081
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OTHER ASSETS:
Goodwill 737,010
Intangible assets, net of accumulated amortization of $424,417 615,583
Other 13,330
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Total other assets 1,365,923
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TOTAL ASSETS $ 3,178,865
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Secured convertible notes $ 1,500,000
Accounts payable 793,599
Accrued expenses 350,764
Accrued compensation 114,316
-------------
Total current liabilities 2,758,679
LONG-TERM LIABILITIES:
Notes payable - related parties, net of unamortized discount
of $19,788 480,212
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TOTAL LIABILITIES 3,238,891
-------------
MINORITY INTEREST IN MCM SUBSIDIARY 20,000
-------------
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 204,691
Additional paid-in capital 67,637,158
Accumulated deficit (70,619,625)
Treasury stock (22,500 common shares, at cost) (2,250)
-------------
Total stockholders' deficiency (80,026)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 3,178,865
=============
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, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
REVENUES:
Product sales $ 257,308 $ 93,449 $ 674,931 $ 410,983
Equipment rental income 14,865 13,826 49,548 29,035
Consulting fees 12,500 12,500 37,500 37,500
------------- ------------- ------------- -------------
Total revenues 284,673 119,775 761,979 477,518
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Cost of product sales and equipment rental income 177,204 74,204 551,382 381,645
Research and development 77,999 30,646 171,301 135,051
Selling, general and administrative 693,277 954,742 2,276,980 3,296,488
------------- ------------- ------------- -------------
Total operating expenses 948,480 1,059,592 2,999,663 3,813,184
------------- ------------- ------------- -------------
Operating loss (663,807) (939,817) (2,237,684) (3,335,666)
Interest expense, net (67,515) (20,019) (70,500) (1,914)
------------- ------------- ------------- -------------
Loss from continuing operations (731,322) (959,836) (2,308,184) (3,337,580)
Income from operations of discontinued TDM business
segment (including gain on disposal of $3,050,350
in October 2002) - - - 3,192,587
Loss from operations of discontinued Strax Business - (30,300) (28,425) (81,946)
------------- ------------- ------------- -------------
Loss before minority interest (731,322) (990,136) (2,336,609) (226,939)
Loss applicable to minority interest - 117,795 - 363,471
------------- ------------- ------------- -------------
Net (loss) income $ (731,322) $ (872,341) (2,336,609) $ 136,532
============= ============= ============= =============
Net income (loss) per basic and diluted common share
Continuing operations $ (0.04) $ (0.04) $ (0.11) $ (0.16)
Discontinued operations - - - 0.15
------------- ------------- ------------- -------------
Net income (loss) per basic and diluted common share $ (0.04) $ (0.04) $ (0.11) $ 0.01
============= ============= ============= =============
Weighted average number of common shares outstanding,
basic and diluted 20,446,562 20,396,562 20,446,562 20,396,562
============= ============= ============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
Series B Convertible
Preferred Stock Common Stock Treasury Stock Total
-------------------- -------------------- Additional ----------------- Stockholders'
Number Number Paid-in Accumulated Number Equity
of Shares Amount of Shares Amount Capital Deficit of Shares Amount (Deficiency)
--------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 27,000 $2,700,000 20,469,062 $204,691 $67,581,258 $(68,283,016) 22,500 $(2,250) $ 2,200,683
Fair Value of warrants 27,400 27,400
issued in connection
with bridge financing
Fair value of warrants 28,500 28,500
issued in connection
with secured convertible
notes
NET LOSS (2,336,609) (2,336,609)
--------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2004 27,000 $2,700,000 20,469,062 $204,691 $67,637,158 $(70,619,625) 22,500 $(2,250) $ (80,026)
========================================================================================================
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)
For the nine months ended
June 30, 2004 June 30, 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,336,609) $ 136,532
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Minority interest in loss of MCM - (363,471)
Gain on sale of TDM business - (3,123,748)
Amortization of debt discount on bridge financing 7,613 24,059
Amortization of deferred financing cost 25,583 -
Depreciation and amortization 275,474 157,311
Changes in operating assets and liabilities:
Accounts receivable, net (130,337) (204,808)
Inventories 78,682 (206,507)
Other assets (38,478) 187,615
Accounts payable and accrued expenses (430,366) (12,689)
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Net cash used in operating activities (2,548,438) (3,405,706)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business - 5,400,000
Proceeds from sale of Strax business 242,552 -
Acquisition of property and equipment (6,358) -
Acquisition of MCM, net of cash acquired (including loans to MCM) - (278,338)
------------ ------------
Net cash provided by investing activities 236,194 5,121,662
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable-related parties 500,000
Proceeds from issuance of secured convertible notes 1,500,000 -
Financing fees in connection with secured convertible notes (125,000)
Repayment of debt and capital lease obligations - (560,736)
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Net cash provided by (used in) financing activities 1,875,000 (560,736)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (437,244) 1,155,220
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 774,819 505,282
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 337,575 $ 1,660,502
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 11,642 $ 11,135
============ ============
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, 2004, the condensed
consolidated statement of operations for the three and nine month periods ended
June 30, 2004 and 2003, the condensed consolidated statements of cash flows
for the nine month period ended June 30, 2004 and 2003, and the condensed
consolidated statement of stockholders' equity (deficiency) for the nine month
period ended June 30, 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.
The Company's 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, 2003. The results of operations for the three and nine month
periods ending June 30, 2004 and 2003 are not indicative of a full year or any
other interim period.
NOTE 2 - THE COMPANY
--------------------
Caprius, Inc. ("Caprius" or the "Company") is engaged in the medical
infectious waste disposal business. In the first quarter of Fiscal 2003,
Caprius, Inc. acquired a majority interest in M.C.M. Environmental Technologies,
Inc. ("MCM") which develops, markets and sells the SteriMed and SteriMed Junior
compact systems that simultaneously shred and disinfect Regulated Medical Waste.
The Company's unique SteriMed systems are sold in both the domestic and
international markets.
On December 17, 2002, the Company closed the acquisition of 57.53% of the
capital stock of MCM for a purchase price of $2.4 million. Upon closing,
Caprius' 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. For a six
month period commencing July 2004 and ending January 2005, pursuant to a
Stockholders Agreement, the stockholders of MCM (other than the Company) shall
have the right to put all of their MCM shares to MCM, and MCM shall have the
right to call all of such shares, at a price based upon a pre-determined
methodology calculated at such time. At the Company's option, the purchase price
for the remaining MCM shares may be paid in cash or the Company's common stock.
In June 1999, we acquired Opus Diagnostics Inc. ("Opus") and began
manufacturing and selling medical diagnostic assays constituting the Therapeutic
Drug Monitoring Business ("TDM"). On October 9, 2002, Opus sold the assets of
the TDM Business to Seradyn, Inc. ("Seradyn") pursuant to a Purchase and Sale
Agreement for a purchase price of $6,000,000 and entered into a Royalty Income
Agreement and a Consulting Agreement. The sale of the business has been
reflected as a discontinued operation in the accompanying condensed consolidated
financial statements.
Caprius, Inc. was founded in 1983 and through June 1999 essentially
operated in the business of developing specialized medical imaging systems, as
well as operating the Strax Institute ("Strax"), a comprehensive breast imaging
center. The Strax Institute was sold in September 2003 (see Note 9).
7
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Stock-Based Compensation
At June 30, 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 and nine month
periods ended June 30, 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) income and (loss) income per share for the
periods shown below would have been as follows:
Three months ended June 30, Nine months ended June 30,
2004 2003 2004 2003
------------ ----------- ------------- -----------
Net (loss) income as Reported $ (731,322) $ (872,341) $ (2,336,609) $ 136,532
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
related tax effects (16,051) (28,399) (43,425) (85,197)
---------- ---------- ------------ ----------
Pro forma net (loss) income $ (747,373) $ (900,740) $ (2,380,034) $ 51,335
========== ========== ============ ==========
Basic and diluted (loss) income
per share of common stock
As reported $ (0.04) $ (0.04) $ (0.11) $ 0.01
Pro forma $ (0.04) $ (0.04) $ (0.11) $ 0.00
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 June 30, 2004 and 2003,
potential common shares amount to 13,524,672 shares versus 5,995,124
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 - INVENTORY
------------------
Inventories are accounted for at the lower of cost or market using the
first-in, first out ("FIFO") method. Inventories consisted of the following at
June 30, 2004:
Raw materials $271,300
Finished goods 470,502
--------
$741,802
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 fees and expenses. The Company granted a security
interest in 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. If certain
conditions are not met as of September 30, 2004, then the conversion price shall
be reduced to $0.15 per share. This reduction would result in an additional
charge of approximately $200,000 to the statement of operations at such time.
The financing was arranged through Sands Brothers International Ltd. ("Sands")
which has been 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 approximately $29,000 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 cost shall be amortized over the term of the loan.
Amortization for the three months ended June 30, 2004 amounted to $25,583.
NOTE 6 - NOTES PAYABLE - RELATED PARTY TRANSACTION
--------------------------------------------------
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 are 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 estimated fair
value of the warrants approximated $27,400 using the Black Scholes Model and
such amount shall be treated as a discount to debt and a corresponding increase
to paid in capital. The discount shall be amortized over the life of the loan.
For the nine months ended June 30, 2004, the Company recorded an additional
interest expense related to this discount of approximately $7,500, and that
amount is included in interest expense, net in the condensed consolidated
statement of operations.
9
NOTE 7 - ECONOMIC DEPENDENCY
----------------------------
For the nine months ended June 30, 2004, revenue from two customers was
approximately $486,000 ($305,000 for the nine months ended June 30, 2003 which
represented 64% of the total revenue) and $131,000 representing 64% and 17% of
total revenue, respectively. At June 30, 2004 accounts receivable from these
customers were approximately $169,000 and $0.
NOTE 8 - LITIGATION
-------------------
In June 2002, Jack Nelson, a former executive officer and director of the
Company, commenced two legal proceedings against the Company and George Aaron
and Jonathan Joels, executive officers, directors and principal stockholders of
the Company. The two complaints alleged that the individual defendants made
alleged misrepresentations to the plaintiff upon their acquisition of a
controlling interest in the Company in 1999 and thereafter made other alleged
misrepresentations and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and the Company. 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, the Company 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, the Company made a payment of
$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 the Company 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 their 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, the Company was served with a complaint naming the
Company and its 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 of the Company.
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.
In September 2002, BDC Corp., d/b/a BDC Consulting Corp., brought an action
against the Company and Mr. Aaron in the Circuit Court for the Seventeenth
Judicial Circuit, Broward County, Florida seeking an unspecified amount of
damages arising from the defendants' alleged tortious interference with a series
of agreements between the plaintiff and third party MCM pursuant to which the
plaintiff had intended to purchase MCM. See Note 2 of this report for
information regarding the Company's investment in MCM. Although the Company
believed there was no merit to the plaintiff's claim, in October 2003, the
Company and Mr. Aaron settled the action for the sum of $83,000 in order to
avoid a lengthy and expensive litigation. The purchaser of Strax is an entity
controlled by the same person who is a principal in BDC Corp. Under the
Company's Purchase Agreement with MCM, MCM, its subsidiaries and certain
pre-existing shareholders of MCM have certain obligations to indemnify the
Company with respect to damages, losses, liabilities, costs and expenses arising
out of any claim or controversy in respect to the BDC complaint. The Company has
made a claim for indemnification and is currently resolving this matter with the
indemnifying parties.
10
NOTE 9 - SALE OF STRAX
----------------------
Effective September 30, 2003, the Company sold its comprehensive breast
imaging business to EMT pursuant to a Stock Purchase Agreement dated September
30, 2003 (the "Purchase Agreement") among the Registrant, EMT and the other
parties thereto. The purchase price was $412,000. 50% of the purchase price was
paid on closing and the balance is payable in installments commencing January 1,
2004 and ending December 31, 2004, evidenced by a note secured by the accounts
receivables of Strax Institute, Inc. In addition, the Company was required to
provide certain specified transitional services for up to 180 days pursuant to a
Management Services Agreement.
The sale of the Strax business has been reflected as a discontinued
operation in the accompanying condensed consolidated financial statements.
Revenues from discontinued operations, which have been excluded from income from
continuing operations in the accompanying condensed consolidated statements of
operations for fiscal year 2002 is shown below. The effects of the discontinued
operations on net loss and per share data are reflected within the accompanying
condensed consolidated statements of operations.
A summary of operations of the Strax business segment for the nine months
ended June 30, 2003 is as follows:
Revenues $ 1,162,896
Operating expenses $ 1,244,842
-----------
Loss from operations $ (81,946)
===========
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
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, 2003 Form 10-KSB 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.
11
RESULTS OF OPERATIONS
As more fully described in the Form 10-KSB for fiscal year ended September
30, 2003, the Company's continuing operation is classified as medical infectious
waste business (the "MCM Business"). In the fiscal year ended September 30,
2002, the Company's operations were classified into two business segments:
imaging services ("Strax") and the therapeutic drug monitoring assay business
(the "TDM Business").
The Company disposed of its TDM Business in October, 2002 and of Strax
effective September 30, 2003. Operations related to the TDM Business and Strax
were reclassified to discontinued operations.
The Company's MCM Business is comprised of SteriMed systems which are
patented, environmentally-friendly, on-site disinfecting disposal units that can
process regulated clinical waste, including sharps, dialysis filters, pads,
bandages, plastic tubing and even glass, in a 12 minute cycle. The units,
comparable in size to a washer-dryer, simultaneously shred, grind, mix and
disinfect the waste with the proprietary Ster-Cid(R) solution. After treatment,
the material may be discarded as conventional solid waste, in accordance with
appropriate regulatory requirements. The resultant treated waste is as low as
10% of the original volume.
The SteriMed systems consist of two different sized units, and the required
Ster-Cid disinfectant solution can be utilized with both units. The larger
SteriMed can treat up to 18.5 gallons (70 liters) of medical waste per cycle.
The smaller version, SteriMed Junior, can treat up to 4 gallons (15 liters) per
cycle.
The SteriMed systems enable generators of RMW, such as clinics and
hospitals, to significantly reduce costs for treatment and disposal of RMW,
eliminate the liability associated with the regulated "cradle to grave" tracking
system involved in the treatment of RMW, and treat in house RMW on-site in an
effective, safe and easy manner.
As regulations for the disposal of RMW in this multi billion dollar
industry become more stringent, there are increasing opportunities for the
Company's unique SteriMed systems.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------
Revenues generated from product sales totaled $257,308 for the three months
ended June 30, 2004 as compared to $93,449 for the three months ended June 30,
2003. Revenues generated from leased equipment rentals totaled $14,865 as
compared to $13,826 for the comparable period. Consulting income of $12,500 was
generated for the three months ended June 30, 2004 and 2003 in connection with
the sale of the TDM Business.
Cost of product sales and leased equipment amounted to $177,204 or 62.2% of
total revenues versus $74,204 or 62.0% of total revenues for the three month
period ended June 30, 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 $693,277 for the three
months ended June 30, 2004 versus $954,742 for the three months ended June 30,
2003. A significant portion of this decrease was due to the reduction of legal
expenses relating to litigation defense costs as disclosed herein paid during
the three months ended June 30, 2004 as compared to the same period in the
previous year.
NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 2003
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Revenues generated from product sales totaled $674,931 and $410,983 for the
nine month periods ended June 30, 2004 and 2003, respectively. Revenues
generated from leased equipment rentals totaled $49,548 and $29,035 for the nine
month periods ended June 30, 2004 and 2003, respectively. Consulting income of
$37,500 was generated for the nine month periods ended June 30, 2004 and 2003 in
connection with the sale of the TDM business.
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Cost of product sales and leased equipment amounted to $551,382 or 72.4% of
total revenues versus $381,645 or 79.9% of total revenues for the nine month
period ended June 30, 2004 and 2003, respectively.
Selling, general and administrative expenses totaled $2,276,980 for the
nine months ended June 30, 2004 versus $3,296,488 for the nine months ended June
30, 2003. This decrease is due to a significant reduction for legal expenses
relating to litigation defense costs as disclosed herein as well as reduced
insurance expenses relating to changes in our business for the nine months ended
June 30, 2004 versus June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004 the Company's cash and cash equivalent position
approximated $337,600 versus $775,000 at September 30, 2003. This decrease is
principally due to the use of funds to support the Company's operating
activities.
During the third quarter of fiscal 2004, the Company secured additional
financing of $1.5 million in the form of 8% Senior Secured Convertible
Promissory Notes, prior to placement fees of approximately $125,000. The funds
are being used for the expansion of the medical infectious waste disposal
business and for working capital needs.
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 are 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.
In light of the cash requirements needed to expand the MCM business, the
Company is actively seeking additional funding. The Company will continue its
efforts to seek funds through funding options, including banking facilities,
equipment financing, government-funded grants and private equity offerings.
There can be no assurance that such funding initiatives will be successful due
to the difficulty in raising equity from third parties given the Company's low
stock price and current revenue base, and if successful, will not be dilutive to
existing stockholders. These funds are required to permit the Company to broaden
its marketing efforts, provide capital for the manufacture of its SteriMed
systems, and for general working capital. The Company may also require funds for
future acquisitions to complement its existing business. To date, management,
their affiliates, and the recent placement have been the primary resources of
funding. In addition, depending upon the outcome of the pending legal actions,
additional funding for legal expenses could also be required. Consequently, the
Company's viability could be threatened. Accordingly, the auditors' report on
the Fiscal 2003 financial statements included an explanatory paragraph
expressing a substantial doubt about the Company's ability to continue as a
going concern.
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 June 30, 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 June 30, 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.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2002, Jack Nelson, a former executive officer and director of the
Company, commenced two legal proceedings against the Company and George Aaron
and Jonathan Joels, executive officers, directors and principal stockholders of
the Company. The two complaints alleged that the individual defendants made
alleged misrepresentations to the plaintiff upon their acquisition of a
controlling interest in the Company in 1999 and thereafter made other alleged
misrepresentations and took other actions as to the plaintiff to the supposed
detriment of the plaintiff and the Company. 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"). The counts in the complaints were for breach of contract,
breach of fiduciary duty and misrepresentation. The complaint in the Federal
Derivative Action also alleged that certain actions by the defendants in
connection with the 1999 acquisition transaction and also as Company officers
violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO).
No amount of damages was specified in either action.
On or about September 5, 2003, the Company 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 the part of the defendants, the Company made a payment of
$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 the Company and Messrs. Aaron and Joels for judgment on the
pleadings based upon the pre-suit requirement and dismissed the plaintiff's
complaint without prejudice, but denied their 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, the Company was served with a complaint naming the
Company and its 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 of the Company. On April 9,
2003, an amended complaint was filed in the purported Class Action naming an
additional plaintiff. On September 23, 2003, the Court entered an order: (1)
appointing lead plaintiffs; and (2) appointing the plaintiffs' law firm to act
as lead counsel for the class. On November 21, 2003, the defendants made a
motion to dismiss the purported Class Action.
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.
For further information regarding these litigations, reference is made to
Item 3 of the Company's Form 10 KSB and to Note 8 of this report.
The independent directors have authorized the Company 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 the
Company in the event it was determined that they were not entitled to be
indemnified as to the claim for which the advance was made.
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ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES
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OF EQUITY SECURITIES
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c) During third quarter fiscal 2004, the Company sold an aggregate of $1.5
million of 8% Senior Secured Convertible Promissory Notes ("the Notes"), prior
to fees and expenses. The Company granted a security interest in 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. If certain conditions are not
met as of September 30, 2004, then the conversion price shall be reduced to
$0.15 per share. Sands Brothers International Ltd. ("Sands") acted 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 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. Each
Note purchaser entered into a Purchase Agreement in which he represented, among
other things, as to his status as an "accredited investor" under Regulation D
and his awareness of the restrictions on resale or other transfer of the Notes
and the underlying shares of Common Stock. The placement claimed exemption from
the registration provisions of the Securities Act of 1933 by reason of Section
4(2) thereof and Rule 144 thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(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
*filed herewith
(b) Reports on Form 8-K:
On May 3, 2004, the Company filed a current report on Form 8-K to
report an event of April 27, 2004 in Item 5, whereby the Company issued
and sold a series of 8% Senior Secured Convertible Promissory Notes.
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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.
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(Registrant)
Date: August 12, 2004 /s/ George Aaron
----------------
George Aaron
President & Chief Executive Officer
Date: August 12, 2004 /s/ Jonathan Joels
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Jonathan Joels
Chief Financial Officer
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