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 MARCH 31, 2005
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission File Number: 0-11914
CAPRIUS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2457487
-------- ------------
(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
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 May 11, 2005
Common Stock. Par value $0.01 3,321,673 shares *
* Gives retroactive effect to 1-for-20 reverse stock split,
effective April 5, 2005
CAPRIUS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of March 31, 2005 3
Condensed Consolidated Statements of Operations for the 4
three months and six months ended March 31, 2005 and 2004
Condensed Consolidated Statement of Stockholders' 5
(Deficiency) Equity for the six months ended March 31, 2005
Condensed Consolidated Statements of Cash Flows 6
for the six months ended March 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS & PROCEDURES 15
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,702,707
Accounts receivable, net of reserve for bad
debts of $5,163 258,016
Inventories, net 617,596
Other current assets 6,396
-------------
Total current assets 3,584,715
-------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 167,221
Equipment for lease 76,666
Leasehold improvements 19,536
-------------
263,423
Less: accumulated depreciation 209,254
-------------
Property and equipment, net 54,169
-------------
OTHER ASSETS:
Goodwill 737,010
Intangible assets, net of accumulated
amortization of $635,417 404,583
Other 13,330
-------------
Total other assets 1,154,923
-------------
TOTAL ASSETS $ 4,793,807
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 520,759
Accrued expenses 136,157
Accrued compensation 293,072
-------------
Total current liabilities 949,988
-------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value (stated value at $100)
Authorized - 1,000,000 shares
Issued and outstanding - Series A, none; Series B,
convertible, 27,000 shares. Liquidation preference
$2,700,000 2,700,000
Series C, convertible 66,681 shares. Liquidation
preference $6,668,100 6,668,100
Common stock, $.01 par value
Authorized - 50,000,000 shares, issued
1,023,453 shares and
outstanding 1,022,328 shares 10,235
Additional paid-in capital 67,596,648
Accumulated deficit (73,128,914)
Treasury stock (1,125 common shares, at cost) (2,250)
-------------
Total stockholders' equity 3,843,819
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,793,807
=============
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 six months ended
------------------------------------ ----------------------------------
March 31, 2005 March 31, 2004 March 31, 2005 March 31, 2004
-------------- -------------- -------------- --------------
REVENUES:
Product sales $ 199,700 $ 158,739 $ 436,608 $ 417,623
Equipment rental income 2,624 16,334 7,950 34,683
Consulting & royalty fees 42,228 12,500 62,653 25,000
-------------- -------------- -------------- --------------
Total revenues 244,552 187,573 507,211 477,306
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Cost of product sales and equipment rental income 168,596 169,459 330,390 374,178
Research and development 116,916 53,707 193,496 93,302
Selling, general and administrative 602,356 909,467 1,274,634 1,583,703
-------------- -------------- -------------- --------------
Total operating expenses 887,868 1,132,633 1,798,520 2,051,183
-------------- -------------- -------------- --------------
Operating loss (643,316) (945,060) (1,291,309) (1,573,877)
Other income 132,200 - 132,200 -
Interest expense, net (181,941) (2,551) (331,020) (2,985)
-------------- -------------- -------------- --------------
Loss from continuing operations (693,057) (947,611) (1,490,129) (1,576,862)
Loss from operations of discontinued Strax Business - - - (28,425)
-----------------------------------------------------------------------
Net loss $ (693,057) $ (947,611) $ (1,490,129) $ (1,605,287)
============== ============== ============== ==============
Net loss per basic and diluted common share
Continuing operations $ (0.47) $ (0.93) $ (1.19) $ (1.54)
Discontinued operations - - - (0.03)
-------------- -------------- -------------- --------------
Net loss per basic and diluted common share $ (0.47) $ (0.93) $ (1.19) $ (1.57)
============== ============== ============== ==============
Weighted average number of common shares outstanding,
basic and diluted 1,482,197 1,022,328 1,249,736 1,022,328
============== ============== ============== ==============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
(UNAUDITED)
Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Common Stock
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Number Number Number
of Shares Amount of Shares Amount of Shares Amount
-------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 (SEE NOTE 10) 27,000 $ 2,700,000 - $ - 1,023,453 $ 10,235
Issuance Series C Mandatory Convertible 45,000 4,500,000
Preferred Stock (see Note 7)
Conversion of secured convertible notes 21,681 2,168,100
and bridge financing into Series C
Mandatory Convertible Preferred Stock
NET LOSS
BALANCE, MARCH 31, 2005 27,000 $ 2,700,000 66,681 $ 6,668,100 1,023,453 $ 10,235
===============================================================================
(TABLE CONTINUED)
Treasury Stock
-------------------------
Additional Total
Paid-in Accumulated Number Stockholders'
Capital Deficit of Shares Amount (Deficiency) Equity
---------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 (SEE NOTE 10) $ 68,031,614 $ (71,638,785) 1,125 $ (2,250) $ (899,186)
Issuance Series C Mandatory Convertible (434,966) 4,065,034
Preferred Stock (see Note 7)
Conversion of secured convertible notes 2,168,100
and bridge financing into Series C
Mandatory Convertible Preferred Stock
NET LOSS (1,490,129) (1,490,129)
BALANCE, MARCH 31, 2005 $ 67,596,648 $ (73,128,914) 1,125 $ (2,250) $ 3,843,819
=================================================================================
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)
Six Months Ended March 31,
2005 2004
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,490,129) (1,605,287)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 165,220 3,045
Amortization of deferred financing costs 89,542 -
Depreciation and amortization 157,171 194,224
Interest on secured convertible notes 95,300 -
Changes in operating assets and liabilities:
Accounts receivable (184,533) 57,606
Inventories 159,099 29,179
Other assets 8,826 (30,354)
Accounts payable and accrued expenses (527,770) (124,362)
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Net cash used in operating activities (1,527,274) (1,475,949)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Strax business 66,000 240,785
Acquisition of property and equipment (1,436) (3,234)
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Net cash provided by investing activities 64,564 237,551
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - related party - 500,000
Proceeds from short term loan 100,000 -
Repayment of short term loan (100,000) -
Proceeds from short term loans - related party 145,923 -
Repayment of short term loans - related party (73,123) -
Net proceeds from issuance of Series C Preferred Stock 4,065,034 -
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Net cash provided by financing activities 4,137,834 500,000
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,675,124 (738,398)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,583 774,819
------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,702,707 $ 36,421
============= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 33,508 $ 7,015
============= ===========
Cash paid for income taxes during the period $ 192,672 $ -
============= ===========
NON CASH-FLOW ITEMS:
Transfer of net book value of certain equipment for leases to inventory $ 66,177 $ -
============= ===========
Conversion of secured convertible notes and interest into equity $ 1,595,300 $ -
============= ===========
Conversion of notes payable -related party into equity $ 500,000 $ -
============= ===========
Conversion of short-term loans payable - related party into equity $ 72,800 $ -
============= ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
CAPRIUS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The condensed consolidated balance sheet as of March 31, 2005 and the
condensed consolidated statements of operations for the three month periods
ended March 31, 2005 and 2004, and for the six month periods ended March 31,
2005 and 2004, the condensed consolidated statement of stockholders' equity for
the six month period ended March 31, 2005 and the condensed consolidated
statements of cash flows for the six month period ended March 31, 2005 and 2004,
have been prepared by the Company without audit. In the opinion of management,
the information contained herein reflects all adjustments necessary to make the
presentation of the Company's condensed financial position, results of
operations and cash flows not misleading. All such adjustments are of a normal
recurring nature. This quarterly report gives retroactive effect to the
Company's 1-for-20 reverse common stock split of April 5, 2005.
The accompanying condensed consolidated financial statements do not
contain all of the information and disclosures required by accounting principles
generally accepted in the United States of America and should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's annual report on Form 10-KSB for the fiscal year ended
September 30, 2004.
NOTE 2 - THE COMPANY
--------------------
Caprius, Inc. ("Caprius", the "Company", "we", "us" and "our") is
engaged in the infectious medical waste disposal business. In the first quarter
of Fiscal 2003, we acquired a majority interest in M.C.M. Environmental
Technologies, Inc. ("MCM") which developed, markets and sells the SteriMed and
SteriMed Junior compact systems that simultaneously shred and disinfect
Regulated Medical Waste. The SteriMed Systems are sold and leased in both the
domestic and international markets.
In December 2002, the Company closed the acquisition of our initial
investment of 57.53% of the capital stock of MCM for a purchase price of $2.4
million. MCM wholly-owns MCM Environmental Technologies Ltd., an Israeli
corporation, which initially developed the SteriMed Systems. Upon closing, our
designees were elected to three of the five seats on MCM's Board of Directors,
with George Aaron, President and CEO, and Jonathan Joels, CFO, filling two
seats. Additionally, as part of the transaction, certain debt of MCM to its
existing stockholders and to certain third parties was converted to equity in
MCM or restructured. As part of the Stockholders Agreement dated December 17,
2002, there were certain provisions relating to performance adjustments for the
twenty four month period post closing. As a consequence, the Company's ownership
interest increased by 5% in the fiscal year 2004.
During the first quarter of fiscal year 2005, an agreement was reached
between the Company and the 20% minority ownership of an MCM subsidiary which
has been dormant since inception. The minority shareholders shall be repaid
their initial investment, by way of a credit towards the site installation
expense of SteriMed units that they are purchasing for their dialysis centers.
This subsidiary was dissolved on February 9, 2005.
NOTE 3 - SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
Stock Based Compensation
At March 31, 2005, the Company had three stock based compensation plans
(one incentive and nonqualified, one employee and one non-employee director
plan). The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
7
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 six month periods ended March 31, 2005 and 2004.
If the Company had elected to recognize compensation costs for the
Company's option plans using the fair value method at the grant dates, the
effect on the Company's net loss and loss per share for the periods shown below
would have been as follows:
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss as reported $ (693,057) $ (947,611) $ (1,490,129) $ (1,605,287)
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
related tax effects (748) (13,687) (1,495) (27,374)
------------ ------------ ----------- ------------
Pro forma net loss $ (693,805) $ (961,298) $ (1,491,624) $ (1,632,661)
============ ============ =========== ============
Basic and diluted loss
per share of Common Stock
As reported $ (0.47) $ (0.93) $ (1.19) $ (1.57)
Pro forma $ (0.47) $ (0.94) $ (1.19) $ (1.60)
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 March 31, 2005 and 2004,
potential common shares amount to 3,245,149 and 334,411 respectively, and have
not been included in the computation of diluted loss per share since the effect
would be antidilutive.
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.
8
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 at March 31, 2005:
Raw materials $276,499
Finished goods 341,097
--------
$617,596
========
NOTE 5 - NOTES PAYABLE
----------------------
On February 2, 2005, the Company raised $100,000 through the issuance
of 8% Senior Secured Convertible Promissory Notes, repayable, together with
interest to April 3, 2005, subject to prepayment in the event of an equity
financing in excess of $2 Million, or conversion by the investors into shares of
the Company's common stock at a conversion price of $3.00 per share. The lenders
also received warrants to purchase 5,000 shares of the Company's common stock
exercisable at $5.60 per share for a period of five years. The allocated fair
value of these warrants are deemed to be immaterial. On February 17, 2005 the
Company repaid this loan together with interest.
During the third quarter of fiscal 2004, the Company raised an
aggregate of $1.5 million through the issuance of 8% Senior Secured Convertible
Promissory Notes ("the Notes"), prior to underwriting fees and expenses. The
Company granted a security interest in substantially all of the assets of the
Company. The Notes were to mature in one year and convert into shares of common
stock at the election of the investor at any time at a conversion price of $4.00
9
per share, subject to reduction if certain conditions were not met as of
September 30, 2004. The conditions were not met and the conversion price was
reduced to $3.00 per share. The beneficial conversion feature of the Notes,
amounted to $200,000 and as such the amount was treated as a discount to debt
and a corresponding increase to paid-in capital. This amount is being amortized
over the life of the loan (which was accelerated to February 15, 2005).
Amortization for the six month period ended March 31, 2005 amounted to $150,000
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 cash fee and an expense allowance of one percent of
the gross proceeds, plus warrants valued at $28,500 using the Black Scholes
Model to purchase 71,250 shares of the Company's common stock at an exercise
price of $5.60 per share for a period of five years. The total fees for the
offering were $125,000. The debt issuance costs are being amortized over the
term of the loan (which was accelerated to February 15, 2005). Amortization for
the six month period ended March 31, 2005 amounted to $89,542 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 7). As a condition of this financing, the holders of the
Notes amended and converted their Notes together with accrued interest, into an
aggregate of 15,953 shares of Series C Mandatory Convertible Preferred Stock and
the security interest was terminated.
NOTE 6 - NOTES PAYABLE - RELATED PARTY TRANSACTIONS
---------------------------------------------------
During 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 in Note 5. The lender also received warrants to purchase 355
shares of the Company's common stock exercisable at $5.60 per share for a period
of five years. The allocated fair value of the warrants associated with this
advance are deemed to be immaterial. These short-term loans were provided by an
executive officer, Mr. Koppel. As a condition of this financing, Mr. Koppel
exchanged 50% of his indebtedness for 34 shares of Series C Mandatory
Convertible Preferred Stock and on February 15, 2005 was paid the balance
inclusive of interest.
During the three month period ended December 31, 2004, the Company was
advanced the principal amount of $138,790 through short term loans until
additional equity funding was secured. The terms of the loans are identical to
the terms of the $100,000 8% Senior Secured Convertible Promissory Note in Note
5. The lenders also received warrants to purchase 6,940 shares of the Company's
common stock exercisable at $5.60 per share for a period of five years. The
allocated fair value of the warrants associated with this advance are deemed to
be immaterial. These short-term loans were provided by executive officers,
Messrs. Aaron, Joels, and Koppel who advanced $64,000, $62,350 and $12,440,
respectively. 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 on February 15, 2005 were paid the balance of
their notes inclusive of interest.
During the second quarter of fiscal 2004, the Company authorized a
short-term bridge loan for an aggregate of $500,000 through the issuance of loan
notes due on July 31, 2005. The majority of the funds were provided by
management of the Company. The loan notes bear interest at a rate of 11% per
annum and were secured by a first lien on any royalties received by Opus
Diagnostics Inc. from Seradyn, Inc. in accordance with their Royalty Agreement.
For every sixty dollars ($60.00) loaned, the lender received two warrants to
purchase one share of Common Stock, exercisable at $5.00 per share for a period
of five years. The warrants were valued at $27,400 using the Black Scholes Model
and such amount was treated as a discount to debt and a corresponding increase
to paid in capital. The discount is being amortized over the life of the loan
(which was accelerated to February 15, 2005). For the six month period ended
March 31, 2005, the Company recorded an additional interest expense related to
this discount of approximately $15,200. On February 15, 2005 the Company closed
on a $4.5 million preferred stock equity financing (see Note 7). As a condition
of this financing the holders of the Notes converted their notes, into an
aggregate of 5,000 shares of Series C Mandatory Convertible Preferred Stock and
the security interest was terminated.
10
NOTE 7 - EQUITY FINANCING
-------------------------
On February 15, 2005, the Company closed on a $4.5 million preferred
stock equity financing transaction before financing fees and expenses of
approximately $435,000. As part of this financing transaction, the Company
issued 45,000 shares of Series C Mandatory Convertible Preferred Stock ("Series
C Stock") at a stated value of $100 per share. The Company also issued Series A
Warrants to purchase an aggregate of 465,517 shares of common stock at an
exercise price of $5.60 per share for a period of five years. In addition, the
Company issued Series B Warrants to purchase an aggregate of 155,172 shares of
common stock at an exercise price of $2.90 per share for a period of five years
exercisable after nine months, subject to a termination condition as defined in
the warrant agreement. The Company determined that the preferred stock was
issued with an effective beneficial conversion feature of approximately $125,000
based upon the relative fair values of the preferred stock and warrants. The
Company calculated the fair values of the warrants using the Black Scholes
valuation model. Upon conversion of the Series C Stock to common shares the
Company shall record a deemed preferred stock dividend of approximately
$125,000; which represents the beneficial conversion feature of the Series C
Stock (See Note 11).
Simultaneously, the Company converted the short-term secured debt
outstanding in the aggregate of approximately $2.1 million inclusive of
interest, together with $72,962 of unsecured indebtedness, into 21,681 shares of
Series C Stock. As part of the condition for raising the equity financing,
holders of a majority of the outstanding shares irrevocably undertook to effect
a 1:20 reverse stock split of any outstanding shares of common stock ("the
Reverse Split"). Upon the effectiveness of the Reverse Split ("the Mandatory
Conversion Date"), the new equity investors and the debt holders who converted
their debt agreed to automatically convert their Series C Stock into common
shares at a conversion price of $2.90 per share and/or 2,299,345 shares of the
Company's common stock (post reverse split), subject to adjustment in certain
circumstances, (see Note 11). The Company also agreed to increase the number of
independent directors by one additional director.
NOTE 8 - OTHER INCOME
---------------------
During the second quarter of fiscal 2005, the Company recorded income
of $132,200 as a result of favorable settlements of certain outstanding accounts
payable balances.
NOTE 9 - ECONOMIC DEPENDENCY
----------------------------
For the six months ended March 31, 2005, revenue from four customers
was approximately $221,000 $91,000, $63,000 and $55,000 which represented
approximately 85% of the total revenue. At March 31, 2005 accounts receivable
from these customers were approximately $175,000, $0, $42,000, and $25,000
respectively.
For the six months ended March 31, 2004, revenue from two customers was
approximately $237,000 and $124,000, which represented approximately 76% of the
total revenue.
NOTE 10 - 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.
11
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 11 - SUBSEQUENT EVENT
--------------------------
On April 5, 2005, the Company effected the Reverse Split. On such date,
the 66,681 outstanding shares of Series C Stock automatically converted into
2,299,345 shares of the Company's common stock. As a result of the Reverse
Split, the Company has outstanding 3,321,673 shares of common stock. The reverse
split did not change the number of authorized shares of common and preferred
stock. All share and per share information in the accompanying financial
statements have been restated to reflect the 1 for 20 reverse stock split.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Quarterly Report of Form 10-QSB to make applicable and take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and accordingly
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. Our
expectations, beliefs and projections are expressed in good faith and are
believed by us to have a reasonable basis, including without limitation,
management's examination of historical operating trends, data contained in our
records and other data available from third parties, but there can be no
assurance that management's expectation, beliefs or projections will result or
be achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in our view, could
cause actual results to differ materially from those discussed in the
forward-looking statements: technological advances by our competitors, changes
in health care reform, including reimbursement programs, changes to regulatory
requirements relating to environmental approvals for the treatment of infectious
medical waste, capital needs to fund any delays or extensions of development
programs, delays in the manufacture of new and existing products by us or third
party contractors, the loss of any key employees, the outcome of existing
litigations, delays in obtaining federal, state or local regulatory clearance
for new installations and operations, changes in governmental regulations, the
location of the MCM business in Israel, and availability of capital on terms
satisfactory to us. We are also subject to numerous Risk Factors relating to
manufacturing, regulatory, financial resources and personnel as described in the
Company's Form SB-2 (File No. 333-124096) dated April 15, 2005) as filed with
the Securities and Exchange Commission. We disclaim any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
12
RESULTS OF OPERATIONS
As more fully described in the Form 10-KSB for fiscal year ended September 30,
2004, our continuing operation is classified as medical infectious waste
business.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------------
Revenues generated from MCM product sales totaled $199,700 for the
three months ended March 31, 2005 as compared to $158,739 for the three months
ended March 31, 2004. Revenues generated from MCM rentals totaled $2,624 as
compared to $16,334 for the comparable periods. Consulting and royalty income
from the TDM Business, which was sold in 2002, totaled $42,228 as compared to
$12,500 for the three months ended March 31, 2005 and 2004.
Cost of product sales and leased equipment amounted to $168,596 or
69.0% of total revenues versus $169,459 or 90.4% of total revenues for the three
month period ended March 31, 2005 and 2004, respectively. We have not advanced
to a level of sales for us to fully absorb the fixed costs related to our
revenues.
Research and development expense increased to $116,916 versus $53,707
for the three month period ended March 31, 2005 as compared to the same period
in 2004. This was a result of our continuing efforts to improve our products,
streamline the manufacturing processes and reduce the product cost.
Selling, general and administrative expenses totaled $602,356 for the
three months ended March 31, 2005 versus $909,467 for the three months ended
March 31, 2004. This reduction was due to a significant decrease in the cost of
legal and accounting fees incurred primarily in connection with prior and
settled litigations.
Other income totaled $132,200 for the three months ended March 31, 2005
as compared to $0 for the three months ended March 31, 2004. This resulted from
the favorable settlement of certain outstanding liabilities.
Interest expense, net totaled $181,941 for the three months ended March
31, 2005 versus $2,551 for the three months ended March 31, 2004. The majority
of the interest expense incurred during the three month period ended March 31,
2005, related to interest fees and amortization in connection with the secured
convertible notes and bridge financing, which occurred in Fiscal 2004.
The net loss amounted to $693,057 and $947,611 for the three month
periods ended March 31, 2005 and 2004, respectively.
SIX MONTHS ENDED MARCH 31, 2005 COMPARED TO SIX MONTHS ENDED MARCH 31, 2004
---------------------------------------------------------------------------
Revenues generated from MCM product sales totaled $436,608 for the six
months ended March 31, 2005 as compared to $417,623 for the six months ended
March 31, 2004. Revenues generated from MCM rentals totaled $7,950 as compared
to $34,683 for the comparable periods. Consulting and royalty income from the
TDM Business, which was sold in 2002, totaled $62,653 as compared to $25,000 for
the six months ended March 31, 2005 and 2004.
Cost of product sales and leased equipment amounted to $330,390 or
65.2% of total revenues versus $374,178 or 78.4% of total revenues for the six
month period ended March 31, 2005 and 2004, respectively. We have not advanced
to a level of sales for us to fully absorb the fixed costs related to our
revenues.
Research and development expense increased to $193,496 versus $93,302
for the six month period ended March 31, 2005 as compared to the same period in
2004. This was a result of our continuing efforts to improve our products,
streamline the manufacturing processes and reduce the product cost.
Selling, general and administrative expenses totaled $1,274,634 for the
six months ended March 31, 2005 versus $1,583,703 for the six months ended March
31, 2004. This reduction was due to a significant decrease in the cost of legal
13
and accounting fees incurred primarily in connection with prior and settled
litigations.
Other income totaled $132,200 for the six months ended March 31, 2005
as compared to $0 for the six months ended March 31, 2004. This resulted from
the favorable settlement of certain outstanding liabilities.
Interest expense, net totaled $331,020 for the six months ended March
31, 2005 versus $2,985 for the six months ended March 31, 2004. The majority of
the interest expense incurred during the six month period ended March 31, 2005,
related to interest fees and amortization in connection with the secured
convertible notes and bridge financing, which occurred in Fiscal 2004.
The loss from continuing operations amounted to $1,490,129 and
$1,576,862 for the six month periods ended March 31, 2005 and 2004,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005 the Company's cash and cash equivalents position
approximated $2,703,000 versus $19,100 at December 31, 2004. As further
discussed below, on February 15, 2005 we received net proceeds of approximately
$4 million from the sale of Series C Preferred Stock and warrants, and
approximately $2.1 million of indebtedness was converted into or exchanged for
Series C Preferred Stock.
On January 14, 2005 we received advances of approximately $7,100
through short-term related party loans until additional equity funding was
secured. The terms of the loans are identical to the terms of the $100,000 8%
Senior Secured Convertible Promissory Note outlined in Note 5 to the Notes to
the Financial Statements in Item 1. These funds were utilized for general
working capital purposes. These loans were repaid on February 15, 2005 as part
of the Preferred Stock Equity Financing arrangement.
On February 2, 2005 we raised $100,000 through the issuance of an 8%
Senior Secured Convertible Promissory Note, due April 3, 2005, subject to
repayment in the event of an equity financing in excess of $2 million or
conversion by the investors to shares of our common stock at $ 3.00 per share.
This loan was repaid on February 17, 2005 as part of the Preferred Stock Equity
Financing arrangement.
On February 15, 2005, the Company closed on a $4.5 million preferred
stock equity financing before financing related fees and expenses of
approximately $435,000. The Company issued 45,000 shares of Series C Mandatory
Convertible Preferred Stock at a stated value of $100 per share. The Company
also issued Series A Warrants to purchase an aggregate of 465,517 shares of
common stock at an exercise price of $5.60 per share for a period of five years.
In addition, the Company issued Series B Warrants to purchase an aggregate of
155,172 shares of common stock at an exercise price of $2.90 per share for a
period of five years exercisable after nine months, subject to a termination
condition as defined in the warrant. Simultaneously, the Company converted the
short-term secured debt outstanding in the aggregate of approximately $2.1
million inclusive of interest, together with $72,962 of unsecured indebtedness,
into 21,681 shares of Series C 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. Under the terms of the $4.5 million
Preferred Stock Equity Financing, the new equity investors and the debt holders
who converted their debt agreed to automatically convert their Preferred Stock
into common shares, effective April 5, 2005, at a conversion price of $2.90 per
share and/or 2,299,345 shares of the Company's common stock (post reverse
split), subject to adjustment in certain circumstances, see Note 11 to the
accompanying financial statements.
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. The net proceeds from these placements should fulfill our
capital needs through March 31, 2006, based upon our present business plan. 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
14
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 our business. We may also use our resources to develop
further versions of our SteriMed System if it is determined that there is a
market for such a product.
We had for the past several years met our need for capital in our
various businesses through loans from officers, directors and related parties
other than the monies received from the sale of the TDM business, which were
primarily used to finance the acquired MCM business on December 17, 2002. We may
require additional working capital or other funds, in the near future should we
modify our current business plan or undertake any acquisitions.
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.
ITEM 3. CONTROLS & PROCEDURES
Our principal executive officer and principal financial officer, based
on their evaluation of our disclosure controls and procedures (as defined in
Rules 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of 1934) as of
March 31, 2005, have concluded that our disclosure controls and procedures are
adequate and effective to ensure that material information relating to us and
our consolidated subsidiaries are recorded, processed, summarized and reported
within the time periods specified by the SEC's rules and forms, particularly
during the period in which this quarterly report has been prepared.
Our principal executive officer and principal financial officer have
concluded that there were no significant changes in our internal controls or in
other factors that could significantly affect these controls for the quarter
ended March 31, 2005, the date of their most recent evaluation of such controls,
and that there were no significant deficiencies or material weaknesses in our
internal controls.
15
PART II: OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
References made to the Form 8-K filed for an event of February 15, 2005
to report the issuance of an aggregate of 66,681 shares of Series C Mandatory
Convertible Preferred Stock and associated warrants to purchase shares of common
stock.
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 April 5, 2005, we filed a current report on Form 8-K to report an
event of April 5, 2005 in Item 8.01, whereby we amended our Certificate
of Incorporation to provide for a one-for-twenty reverse split of our
outstanding Common Stock. Upon the effective date, post split shares
Common Stock began trading on the OTC Bulleting Board under the symbol
of CAPS.
On February 18, 2005, we filed a current report on Form 8-K to report
an event of February 15, 2005 in item 3.02 whereby we completed a $4.5
million equity financing. The placement consisted of the sale of 45,000
shares of newly-created Series C Preferred Stock together with warrants
to a group of investors. As a condition of the financing, we proposed a
reverse stock split of 1:20 to facilitate the number of shares
outstanding.
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: May 11, 2005 /s/ George Aaron
-----------------------------------
George Aaron
President & Chief Executive Officer
Date: May 11, 2005 /s/ Jonathan Joels
-----------------------------------
Jonathan Joels
Chief Financial Officer
17