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, 2004
[ ] 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 12, 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 March 31, 2004 3
Condensed Consolidated Statements of Operations for the
three months and six months ended March 31, 2004 and 2003 4
Condensed Consolidated Statement of Stockholders
Equity for the six months ended March 31, 2004 5
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS & PROCEDURES 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
CAPRIUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2004
--------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,421
Accounts receivable, net of reserve
for bad debts of $5,163 22,054
Inventories 791,305
Other current assets 108,988
Due from sale of Strax 171,225
--------------
Total current assets 1,129,993
--------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 156,313
Equipment for lease 108,321
Leasehold improvements 18,262
--------------
282,896
Less: accumulated depreciation 166,023
--------------
Property and equipment, net 116,873
--------------
OTHER ASSETS:
Goodwill 737,010
Intangible assets,net of accumulated
amortization of $354,083 685,917
Other 13,330
-------------
Total other assets 1,436,257
-------------
TOTAL ASSETS $ 2,683,123
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,055,751
Accrued expenses 404,762
Accrued compensation 104,169
-------------
Total current liabilities 1,564,682
LONG-TERM LIABILITIES:
Notes payable - Related party, net of
unamortized discount of $24,355 475,645
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TOTAL LIABILITIES 2,040,327
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MINORITY INTEREST IN MCM SUBSIDIARY 20,000
-------------
STOCKHOLDERS' EQUITY:
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 67,608,658
Accumulated deficit (69,888,303)
Treasury stock (22,500 common shares, at cost) (2,250)
-------------
Total stockholders' equity 622,796
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,683,123
=============
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, 2004 March 31, 2003 March 31, 2004 March 31, 2003
--------------- --------------- --------------- ----------------
REVENUES:
Product sales $ 158,739 $ 191,060 $ 417,623 $ 317,534
Equipment rental income 16,334 6,781 34,683 15,209
Consulting fees 12,500 12,500 25,000 25,000
--------------- --------------- --------------- ----------------
Total revenues 187,573 210,341 477,306 357,743
--------------- --------------- ---------------- ----------------
OPERATING EXPENSES:
Cost of product sales and leased equipment 169,459 184,705 374,178 307,441
Research and development 53,707 34,536 93,302 104,405
Selling, general and administrative 909,467 805,145 1,583,703 2,341,746
--------------- --------------- --------------- ----------------
Total operating expenses 1,132,633 1,024,386 2,051,183 2,753,592
--------------- --------------- --------------- ----------------
Operating loss (945,060) (814,045) (1,573,877) (2,395,849)
Interest income (expense), net (2,551) 12,478 (2,985) 18,105
--------------- --------------- --------------- ----------------
Loss from continuing operations (947,611) (801,567) (1,576,862) (2,377,744)
Income from operations of discontinued TDM
business segment (including gain on disposal
of $3,050,350 in October 2002) - 68,839 - 3,192,587
Loss from operations of discontinued Strax Business - (48,895) (28,425) (51,646)
-------------------------------------------------------------------------
(Loss) income before minority interest (947,611) (781,623) (1,605,287) 763,197
Minority interest in net loss of consolidated
subsidiary - (81,485) - (245,676)
--------------- --------------- --------------- ---------------
Net (loss) income $ (947,611) $ (700,138) $ (1,605,287) $ 1,008,873
=============== =============== =============== ===============
Net (loss) income per basic and diluted common share
Continuing operations $ (0.05) $ (0.03) $ (0.08) $ (0.10)
Discontinued operations - - - 0.15
--------------- --------------- --------------- ---------------
Net (loss) income per basic and diluted
common share $ (0.05) $ (0.03) $ (0.08) $ 0.05
=============== =============== =============== ===============
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
(Unaudited)
Series B
Preferred Stock Common Stock
-------------------- --------------------- Additional
Number Number Paid-in Accumulated
of Shares Amount of Shares Amount Capital Deficit
-----------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 27,000 $ 2,700,000 20,469,062 $ 204,691 $ 67,581,258 $ (68,283,016)
Fair value of warrants issued in
connection with bridge financing 27,400
Net loss (1,605,287)
-----------------------------------------------------------------------------
BALANCE, MARCH 31, 2004 27,000 $ 2,700,000 20,469,062 $ 204,691 $ 67,608,658 $ (69,888,303)
=============================================================================
(TABLE CONTINUED)
Treasury Stock
---------------------- Total
Number Stockholders'
of Shares Amount Equity
----------------------------------------
BALANCE, SEPTEMBER 30, 2003 22,500 $ (2,250) $ 2,200,683
Fair value of warrants issued in
connection with bridge financing 27,400
Net loss (1,605,287)
----------------------------------------
BALANCE, MARCH 31, 2004 22,500 $ (2,250) $ 622,796
========================================
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,
2004 2003
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,605,287) $ 1,008,873
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Minority interest in loss of MCM - (245,676)
Gain on sale of TDM business - (3,123,748)
Amortization of discount on bridge financing 3,045 17,156
Depreciation and amortization 194,224 49,015
Changes in operating assets and liabilities:
Accounts receivable, net 57,606 (193,090)
Inventories 29,179 (33,308)
Other assets (30,354) 222,682
Accounts payable and accrued expenses (124,362) (40,964)
------------ -----------
Net cash used in operating activities (1,475,949) (2,339,060)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of TDM business - 5,400,000
Proceeds from sale of Strax business 240,785 -
Acquisition of property and equipment (3,234) -
Acquisition of MCM, net of cash acquired (including loans to MCM) - (278,338)
------------ -----------
Net cash provided by investing activities 237,551 5,121,662
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 500,000 -
Repayment of debt and capital lease obligations - (557,102)
------------ -----------
Net cash provided by (used in) financing activities 500,000 (557,102)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (738,398) 2,225,500
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 774,819 505,282
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 36,421 $ 2,730,782
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 7,015 $ 8,857
============ ===========
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, 2004, and the
condensed consolidated statement of operations for the three month periods ended
March 31, 2004 and 2003, and for the six month periods ended March 31, 2004 and
2003, the condensed consolidated statements of cash flows for the six month
period ended March 31, 2004 and 2003, and the condensed consolidated statement
of stockholder's equity for the six month period ended March 31, 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 accompanying condensed consolidated financial statements have been
prepared by the Company without audit and does 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.
NOTE 2 - THE COMPANY
Caprius, Inc. ("Caprius" or the "Company") was founded in 1983 and
through June 1999 essentially operated in the business of medical imaging
systems as well as healthcare imaging and rehabilitation services. On June 28,
1999, the Company acquired Opus Diagnostics Inc. ("Opus") and began
manufacturing and selling medical diagnostic assays constituting the Therapeutic
Drug Monitoring ("TDM") Business. In the first quarter of fiscal 2003, the
Company made major changes in its business through the October 2002 sale of the
TDM Business and the December 2002 purchase of a majority interest in M.C.M.
Environmental Technologies, Inc. ("MCM"). MCM has developed and markets
worldwide the SteriMed(R) and SteriMed Junior(R) compact systems that
simultaneously shred and disinfect on-site Regulated Medical Waste ("RMW"),
reducing the RMW volume up to 90% and rendering it harmless for disposal as
routine black bag waste. The SteriMed(R) systems utilize a proprietary
disinfectant, Ster-Cid(R) (for further information see Item 2).
Until fiscal year end 2003, the Company continued to own and operate a
comprehensive imaging center located in Lauderhill, Florida. Effective September
30, 2003, the Company completed the sale of the Strax Institute (see Note 8 Sale
of the Strax Institute).
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 19 months (July 2004) and ending 25 months (January
2005) from December 17, 2002, 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.
7
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.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-Based Compensation
At March 31, 2004, the Company had three stock based compensation plans
(one incentive and nonqualified, one employee and one non-employee director
plan). The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation" as amended by SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123, issued
in December 2002. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, generally on the date of grant, between the fair value of
our stock and the exercise price of the option. No stock-based employee
compensation cost is reflected within the statement of operations for the three
and six month periods ended March 31, 2004 and 2003.
If the Company had elected to recognize compensation costs for the
Company's option plans using the fair value method at the grant dates, the
effect on the Company's net income (loss) and income (loss) per share for the
periods shown below would have been as follows:
Three months ended March 31, Six months ended March 31,
2004 2003 2004 2003
----------------- ----------------- --------------- ---------------
Net income (loss) as
Reported $ (947,611) $ (700,138) $ (1,605,287) $ 1,008,873
Deduct:
Stock-based employee
compensation determined
under fair value method
for all awards, net of
Related tax
effects (13,687) (27,846) (27,374) (55,691)
----------------- --------------- ------------- --------------
Pro forma net income (loss) $ (961,298) $ (727,984) $ (1,632,661) $ 953,182
================= =============== ============= ==============
Basic and diluted income
(loss) per share of Common
Stock
As reported $ (0.05) $ (0.03) $ (0.08) $ 0.05
Pro forma $ (0.05) $ (0.04) $ (0.08) $ 0.05
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 period ended March 31, 2004, potential
common shares amount to 5,524,672 shares 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 consist of the following:
March 31, 2004
--------------
Raw materials $ 208,100
Finished goods 583,205
---------
$ 791,305
=========
NOTE 5 - NOTES PAYABLE - RELATED PARTY TRANSACTION
--------------------------------------------------
During the second quarter of 2004, the Company authorized a short-term
bridge loan for an aggregate of up to $500,000 through the issuance of loan
notes due on July 31, 2005. The funds will be utilized primarily for general
working capital. The Company has raised the $500,000, the majority of which was
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 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 six months ended March 31, 2004, the Company recorded an additional
interest expense related to this discount of approximately $3,000, and that
amount is included in interest expense, net in the condensed consolidated
statement of operations.
NOTE 6 - ECONOMIC DEPENDENCY
----------------------------
For the six months ended March 31, 2004, revenue from two major
customers was approximately $124,000 and $237,000 representing 26% and 50% of
total revenue, respectively. For the six months ended March 31, 2003, revenue
from two major customers was approximately $255,000 and $ 45,000 representing
71% and 13% of total revenue, respectively. At March 31, 2004 and 2003, no
accounts receivable exist from these customers.
NOTE 7 - 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
9
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.
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.
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.
NOTE 8 - 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
10
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 six
months ended March 31, 2003 is as follows:
March 31,
2003
---------
Revenues $ 805,051
Operating expenses 856,697
---------
Loss from operations $ (51,646)
=========
NOTE 9 - SUBSEQUENT EVENT
-------------------------
During April and May 2004, the Company raised an aggregate of $1.4
million through the issuance of 8% Senior Secured Convertible Promissory Notes
("the Notes"), prior to fees and expenses. Under the terms of this financing,
the Company may raise a maximum of $1.5 million. 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. 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 will receive fees of six percent and an expense allowance of one
percent of the gross proceeds, and warrants to purchase up to 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.
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 and rehabilitation 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(R) 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(R) systems consist of two different sized units, and the
required Ster-Cid(R) disinfectant solution can be utilized with both units. The
larger SteriMed(R) can treat up to 18.5 gallons (70 liters) of medical waste per
cycle. The smaller version, SteriMed Junior(R), can treat up to 4 gallons (15
liters) per cycle.
The SteriMed(R) 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.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
-------------------------------------------------------------------------------
Revenues generated from product sales totaled $158,739 for the three
months ended March 31, 2004 as compared to $191,060 for the three months ended
March 31, 2003. Revenues generated from leased equipment rentals totaled $16,334
as compared to $6,781 for the comparable periods. Consulting income of $12,500
was generated for the three months ended March 31, 2004 and 2003 in connection
with the sale of the TDM Business.
Cost of product sales and leased equipment amounted to $169,459 or
90.3% of total revenues versus $184,705 or 87.8% of total revenues for the three
month period ended March 31, 2004 and 2003, respectively. The Company has not
advanced to a level of sales for the Company to fully absorb the fixed costs
related to its revenues.
Selling, general and administrative expenses totaled $909,467 for the
three months ended March 31, 2004 versus $805,145 for the three months ended
March 31, 2003. This increase reflects increased legal and professional expenses
during the quarter related to our public filings.
SIX MONTHS ENDED MARCH 31, 2004 COMPARED TO SIX MONTHS ENDED MARCH 31, 2003
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Revenues generated from product sales totaled $417,623 and $317,534 for
the six month periods ended March 31, 2004 and 2003, respectively. Revenues
generated from leased equipment rentals totaled $34,683 and $15,209 for the six
month periods ended March 31, 2004 and 2003, respectively. Consulting income of
$25,000 was generated for the six month periods ended March 31, 2004 and 2003 in
connection with the sale of the TDM business.
Cost of product sales and leased equipment amounted to $374,178 or
78.4% of total revenues versus $307,441 or 85.9% of total revenues for the six
month period ended March 31, 2004 and 2003, respectively.
12
Selling, general and administrative expenses totaled $1,583,703 for the
six months ended March 31, 2004 versus $2,341,746 for the six months ended March
31, 2003. This decrease is due to the non payment of incentive performance
compensation of $332,000 and the effects of other costs savings initiatives
implemented by management.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004 the Company's cash and cash equivalent position
approximated $36,400 versus $775,000 at September 30, 2003. This decrease is
principally due to the use of funds to support the Company's operating
activities.
The Company has for the past several years met its need for capital in
its various businesses through loans from officers, directors and related
parties other than the monies received from the sale of the TDM business, which
were primarily used to finance the recently acquired MCM business. Due to the
poor equity market for companies such as Caprius, there has been significant
difficulty in obtaining funds from traditional sources.
During the second quarter of 2004, the Company authorized a short-term
bridge loan for an aggregate of up to $500,000 through the issuance of loan
notes due on July 31, 2005. The funds were utilized primarily for general
working capital. The Company has raised the $500,000, the majority of which was
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.
During April and May 2004, the Company secured additional financing of
$1.4 million in the form of 8% Senior Secured Convertible Promissory Notes,
prior to fees and expenses. Under the terms of this financing, the Company may
raise a maximum of $1.5 million. The funds will be used for the expansion of the
medical infectious waste disposal business and for working capital needs.
In light of the cash requirements needed to develop the MCM business,
the Company is actively seeking funding. The Company will continue its efforts
to seek additional 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 expand
its marketing efforts and for the manufacture of its SteriMed(R) System as well
as for general working capital requirements. To date, Management, their
affiliates, and Sands 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 March 31, 2004 have concluded that the Company's
disclosure controls and procedures are adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
are recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, particularly during the period in which
this quarterly report has been prepared.
The Company's principal executive officer and principal financial
officer have concluded that there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls for the quarter ended March 31, 2004, the date of their most recent
13
evaluation of such controls, and that there were no significant deficiencies or
material weaknesses in the Company's internal controls.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2002, Jack Nelson, a former 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.
For further information regarding these litigations, reference is made
to Item 3 of the Company's Form 10 KSB.
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.
14
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 Item 1 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
10.1 Securities Purchase Agreement, dated April 16, 2004, between
the Company and the investors (incorporated by reference to
Exhibit 10.1 to Registrant's Form 8-K for an event of April
27, 2004 (the May 2004 Form 8-K")).
10.2 Form of 8% Senior Secured Convertible Promissory Notes
(incorporated by reference to Exhibit 10.2 to Registrants
May 2004 Form 8-K).
10.3 Security and Pledge Agreement, dated April 26, 2004, by the
Company in favor of CAP Agent Associates, LLC (incorporated
by reference to Exhibit 10.3 to Registrants May 2004 Form
8-K).
10.4 Registration Rights Agreement, dated April 25, 2004, by and
among the Company, the purchasers of the Notes, and Sands
Brothers International, Ltd. ("SBIL") incorporated by
reference to Exhibit 10.4 to Registrants May 2004 Form 8-K).
10.5 Dealer Agreement, dated April 12, 2004, between the Company
and SBIL (incorporated by reference to Exhibit 10.5 to
Registrants May 2004 Form 8-K).
10.6 Common Stock Purchase Warrant Agreement, dated April 26,
2004, between the Company and SBIL (incorporated by
reference to Exhibit 10.6 to Registrants May 2004 Form 8-K).
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:
(1) On February 18, 2004, the Company filed a current report on Form
8-K to report an event of February 13, 2004 in Item 9, through the issuance of a
press release, announcing preliminary unaudited financials for fiscal year ended
September 30, 2003 and the reason for the delay in filing its annual report.
(2) On March 19, 2004, the Company filed a current report on Form 8-K
for an event of March 15, 2004 in Item 4, reporting a change of the Company's
accountants.
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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: May 14, 2004 /s/George Aaron
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George Aaron
President & Chief Executive Officer
Date: May 14, 2004 /s/Jonathan Joels
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Jonathan Joels
Chief Financial Officer