As
filed
with the Securities and Exchange Commission on November 13, 2007
Registration
No. 333-132849
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
SB-2
POST-EFFECTIVE
AMENDMENT NO. 2
TO
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
––––––––––––––––
CAPRIUS,
INC.
(Name
of
Small Business Issuer in Its Charter)
________________
|
|
________________
|
Delaware
(State
or other jurisdiction of incorporation or organization
|
3845
(Primary
Standard Industrial Classification Code Number
|
22-2457487
(I.R.S.
Employer
Identification
Number
|
________________
|
|
________________
|
One
University Plaza, Suite 400
Hackensack,
New Jersey 07601
(201)
342-0900
(Address
and Telephone Number of Principal Executive Offices and Principal
Place of
Business)
|
________________
|
Jonathan
Joels
Treasurer
and Chief Financial Officer
One
University Plaza, Suite 400
Hackensack,
New Jersey 07601
(201)
342-0900
(Name,
Address and Telephone Number of Agent For Service)
|
________________
|
Copies
to:
Bruce
A. Rich, Esq.
Thelen
Reid Brown Raysman & Steiner LLP
875
Third Avenue
New
York, New York 10022
(212)
603-2000
|
________________
|
Approximate
Date of Proposed Sale to the Public:
from time to time
after the effective date of this Registration
Statement.
|
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, please check the following box and list
the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box.
o
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a),
may determine.
SUBJECT
TO COMPLETION NOVEMBER 13, 2007
PROSPECTUS
3,176,281 shares
of Common Stock
CAPRIUS,
INC.
This
prospectus relates to the sale or other disposition by the selling stockholders
identified on pages 36 to 38 of this prospectus, or their transferees, of
up to
3,176,281 shares of our common stock, which includes (i) 376,200 outstanding
shares, (ii) 1,949,330 shares underlying shares of our Series D Convertible
Preferred Stock and (iii) 850,751 shares issuable upon exercise of
warrants. These dispositions may be at fixed prices, at prevailing
market prices at the time of sale, at prices related to the prevailing market
price, at varying prices determined at the time of sale, or at negotiated
prices.
We
will
receive no proceeds from the sale or other disposition of the shares, or
interests therein, by the selling stockholders. However, we will
receive proceeds in the amount of $1,076,723 assuming the cash exercise of
all
of the warrants held by the selling stockholders, subject to certain of the
warrants being exercised under a “cashless exercise” right.
Our
common stock is traded on the over-the-counter electronic bulletin
board. Our trading symbol is CAPS. On
November 6, 2007, the last bid price as reported was $0.85 per
share.
The
selling stockholders, and any participating broker-dealers may be deemed
to be
“underwriters” within the meaning of the Securities Act of 1933, and any
commissions or discounts given to any such broker-dealer may be regarded
as
underwriting commissions or discounts under the Securities Act. The
selling stockholders have informed us that they do not have any agreement
or
understanding, directly or indirectly, with any person to distribute their
common stock.
Brokers
or dealers effecting transaction in the shares should confirm the registration
of these securities under the securities laws of the states in which
transactions occur or the existence of our exemption from
registration.
An
investment in shares of our common stock involves a high degree of
risk. We urge you to carefully consider the Risk Factors beginning on
page 4
.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a
criminal offense.
November
__, 2007
This
summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information that
you should consider before investing in the common stock. You should
carefully read the entire prospectus, including “Risk Factors” and the
Consolidated Financial Statements, before making an investment
decision
.
THE
COMPANY
Background
Caprius,
Inc. 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 (together, the “SteriMed
Systems”) that simultaneously shred and disinfect regulated medical waste
(“RMW”). The SteriMed Systems are sold and leased in both the
domestic and international markets.
Our
principal business office is located at
One University Plaza, Suite 400, Hackensack, New
Jersey 07601, and our telephone number at that address is (201)
342-0900. Our internet website is www.caprius.com. The
information contained on our website is not incorporated by reference in
this
prospectus and should not be considered a part of this prospectus.
In
this
prospectus, “Caprius,” the “Company,” “we,” “us” and “our” refer to Caprius,
Inc. and, unless the context otherwise indicates, our subsidiary
MCM.
History
We
were
founded in 1983 and until June 1999 essentially operated in the business
of
developing specialized medical imaging systems, as well as operating
the Strax Institute (“Strax”), a comprehensive breast imaging
center. In June 1999, we acquired Opus Diagnostics, Inc and began
manufacturing and selling medical diagnostic assays constituting the therapeutic
drug monitoring (“TDM”) Business. In October 2002, we sold the
TDM business. The Strax Institute was sold in September 2003.
Acquisition
of M.C.M. Environmental Technologies, Inc.
In
December 2002, we 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, our then chairman, and Jonathan Joels, our CFO, filling two seats.
Additionally, as part of the acquisition, certain debt of MCM to its existing
stockholders and to certain third-parties was converted to equity in MCM
or
restructured. Pursuant to our Letter of Intent with MCM, we 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. Our ownership
interest in MCM has increased to 96.66% by reason of conversion of loans
we had
made to MCM and our meeting cash calls of MCM.
SteriMed
Systems
We
developed and market worldwide the SteriMed and SteriMed Junior compact
units. These units simultaneously shred and disinfect RMW, reducing
its volume up to 90%, and rendering it harmless for disposal as ordinary
waste. The SteriMed Systems are patented, environmentally-friendly,
on-site disinfecting and destruction units that can process regulated clinical
waste, including sharps, dialysis filters, pads, bandages, plastic tubing
and
even glass, in a 15 minute cycle. The units, comparable in size
to
a
washer-dryer, simultaneously shred, grind, mix and disinfect the waste with
the
proprietary Ster-Cid® solution. After treatment, the material may be discarded
as conventional solid waste, in accordance with appropriate regulatory
requirements.
The
SteriMed Systems enable generators of RMW, such as clinics and hospitals,
to
significantly reduce cost for treatment and disposal of RMW, eliminate the
potential liability associated with the regulated “cradle to
grave”
tracking system involved in the transport of RMW, and treat in-house RMW
on-site
in an effective, safe and easy manner. As the technology for
disinfection is chemical-based, within the definitions used in the industry,
it
is considered as an alternative treatment technology.
The
SteriMed Systems are comprised of two different sized units, and the required
Ster-Cid® disinfectant solution can be utilized with both units. The
larger SteriMed can treat up to 18.5 gallons (70 liters) of medical waste
per
cycle. The smaller version, the SteriMed Junior, can treat 4 gallons
(15 liters) per cycle.
Ster-Cid®
is our proprietary disinfectant solution used in the SteriMed Systems. Ster-Cid®
is biodegradable and is registered with the U.S. Environmental Protection
Agency
(“U.S. EPA”) in accordance with the Federal Insecticide, Fungicide, Rodenticide
Act of 1972 (“FIFRA”). During the SteriMed disinfecting cycle, the
concentration of Ster-Cid® is approximately 0.5% of the total volume of
liquids. The Ster-Cid®
disinfectant
in
conjunction
with the SteriMed Systems has been tested in independent
laboratories. Results show that disinfection levels specified in the
U.S. EPA guidance document, “Report on State and Territorial Association on
Alternate Treatment Technologies” (“STAATT”), are met. Furthermore,
it is accepted by the waste water treatment authorities to discharge the
SteriMed effluent containing a low concentration of the disinfectant into
the
sewer system. STAATT is a worldwide organization involved in setting criteria
for efficacy of alternative medical waste treatment technologies.
Both
SteriMed units are safe and easy to operate requiring only a half day of
training. Once the cycle commences, the system is locked, and water
and Ster-Cid® are automatically released into the treatment
chamber. The shredding, grinding and mixing of the waste is then
initiated exposing all surfaces of the medical waste to the chemical solution
during a processing cycle which takes approximately 15 minutes. At
the end of each cycle, the disinfected waste is ready for disposal as regular
solid waste.
In
the
United States, the initial focus of marketing the SteriMed Systems has been
to
dialysis clinics on a lease or sales basis. We have also begun
initial installations in other new sectors such as surgical centers,
laboratories, plasmapheresis centers, and hospitals. Other potential markets
include blood banks, cruise ships and military medical facilities.
Internationally,
we continue to market our SteriMed Systems both directly and indirectly through
distributors. Our distributors are trained by us to enable them to
take on the responsibility for the installation and maintenance that are
required for the SteriMed Systems.
RECENT
DEVELOPMENTS
In
June
2007, pursuant to an Amendment to Royalty Agreement among us, our subsidiary
Opus Diagnostics Inc. and Seradyn, Inc. the parties terminated the Royalty
Agreement, dated October 9, 2002, upon Seradyn paying us $500,000 plus the
royalties due for the period from April 1, 2007 to May 15, 2007. We
had entered into the Royalty Agreement as part of the October 2002 sale of
the
TDM business to Seradyn.
PRIOR
PLACEMENTS
On
March
1, 2007, we closed a private placement of 10,000 shares of Series E Convertible
Preferred Stock (“Series E Preferred Stock”) and warrants for net proceeds of
approximately $2,350,000. The Series E Preferred Stock is convertible
into 6,250,000 shares of common stock, and the warrants are for the purchase
of
3,125,000 shares of common stock at $0.50 per share, exercisable for five
years,
subject to anti-dilution provisions therein. The net proceeds of the
placement were used to repay a $100,000 bridge loan and the balance is being
used for general working capital purposes, primarily for manufacturing and
marketing purposes.
In
February 2006, we received gross proceeds of $3.0 million upon issuance of
Series D Convertible Preferred Stock and warrants for the purchase of 850,751
shares of common stock at exercise prices ranging from $0.90 to $2.00
per share. The currently outstanding Series D Convertible Preferred
Stock is convertible into 3,370,286 shares of common stock, after giving
effect
to anti-dilution adjustments thereon and prior conversions into 376,200 shares
of common stock.
In
February 2005, we received gross proceeds of $4.5 million upon issuance of
Series C Convertible Preferred Stock and warrants for the purchase of
695,682 shares of common stock at exercise prices ranging from
$1.11
to
$1.66 per share, after giving effect to anti-dilution adjustments
thereon. In April 2005 all of the Series C Preferred Stock was
converted into common stock.
THE
OFFERING
Securities
Covered
Hereby
|
3,176,281
shares, which includes (i) 376,200 shares outstanding, (ii) 1,949,330
shares underlying Series D Convertible Preferred Stock and (iii)
850,751 shares subject to warrants.
|
|
In
February 2006, we received gross proceeds of $3.0 million upon
issuance of
Series D Convertible Preferred Stock and warrants for the purchase
of
850,751 shares of common stock at exercise prices ranging from
$0.90 to
$2.00 per share. The currently outstanding Series D Convertible
Preferred
Stock is convertible into 3,370,286 shares of common stock, after
giving
effect to anti-dilution adjustments thereon, of which 1,949,330
of such
underlying shares are registered herein, and prior conversions
of 376,200
shares.
|
Common
Stock Outstanding prior to the Offering
|
3,791,673
shares
|
Common
Stock to be Outstanding after the Offering
|
6,591,754 shares,
assuming the selling stockholders convert the portion of their
Series D
Convertible Preferred Stock included herein and exercise all their
warrants, and no conversion of other series of outstanding preferred
stock, including the balance of the Series D Convertible Preferred
Stock,
nor exercise of the other outstanding warrants and options.
|
Use
of
Proceeds
|
We
will receive no proceeds from the sale or other disposition of
the shares
of common stock covered hereby by the selling
stockholders. However, we will receive $1,076,723 if all of the
warrants for underlying shares included in this prospectus are
exercised
for cash. We will use these proceeds for general corporate
purposes.
|
OTC
Electronic Bulletin Board Symbol
|
“CAPS”
|
Although
we have been conducting our current operations for more than four years,
our
business has not yet produced any positive cash flow or profits. We
had net losses of approximately $3,396,000 or ($1.02) per share for the fiscal
year ended September 30, 2006 and approximately $2,037,000 or ($0.55) per
share for the nine months ended June 30, 2007. Our accountants’ report for the
2006 fiscal year expressed we had “suffered recurring losses from operations
which raises substantial doubt about (our) ability to continue as a going
concern.” Our ability to maintain and expand our operations depends
upon the generation of increased sales with positive cash flow and also the
raising of additional capital, as needed.
See
“RISK
FACTORS” for a discussion of the above factors and certain additional factors
that should be considered in evaluating an investment in the common
stock.
SUMMARY
FINANCIAL AND OPERATING INFORMATION
The
following selected financial information is derived from the Consolidated
Financial Statements appearing elsewhere in this prospectus and should be
read
in conjunction with the Consolidated Financial Statements, including the
notes
thereto, appearing elsewhere in this prospectus.
|
|
Year
Ended September 30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
|
|
|
(Unaudited)
|
|
Summary
of Operations
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
Total
revenues
|
|
$
|
1,235,469
|
|
|
$
|
848,802
|
|
|
$
|
1,823,777
|
|
|
$
|
833,502
|
|
Net
loss
|
|
|
(3,396,041
|
)
|
|
|
(2,538,408
|
)
|
|
|
(2,036,896
|
)
|
|
|
(2,092,064
|
)
|
Net
loss per common share (basic and
diluted)
|
|
$
|
(1.42
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.63
|
)
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
3,321,673
|
|
|
|
2,288,543
|
|
|
|
3,681,490
|
|
|
|
3,321,673
|
|
Statement
of Financial Position
|
|
As
of
September
30, 2006
|
|
|
As
of
June
30, 2007
|
|
|
|
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents
|
|
$
|
1,068,954
|
|
|
$
|
1,373,919
|
|
Total
assets
|
|
|
2,777,020
|
|
|
|
3,723,759
|
|
Working
capital
|
|
|
1,653,302
|
|
|
|
2,275,761
|
|
Long-term
debt
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity
|
|
|
2,159,491
|
|
|
|
2,725,359
|
|
RISK
FACTORS
The
shares of our common stock being offered for resale by the selling stockholders
are highly speculative in nature, involve a high degree of risk and should
be
purchased only by persons who can afford to lose the entire amount invested
in
the common stock. Before purchasing any of the shares of common
stock, you should carefully consider the following factors relating to our
business and prospects. If any of the following risks actually
occurs, our business, financial condition or operating results could be
materially adversely affected. In such case, the trading price of our
common stock could decline and you may lose all or part of your
investment. The risks and uncertainties described below are not the
only risks facing us.
Business
Risks
We
Have a History of Losses
To
date,
we have been unable to generate revenue sufficient to be
profitable. We had a net loss of approximately $3,396,000,
or $(1.02) per share, for the fiscal year ended September 30, 2006, compared
to
a net loss of approximately $2,538,000, or $(1.11) per share, for the fiscal
year ended September 30, 2005, and a net loss of approximately $2,037,000
or
$(0.55) per share, for the nine month period ended June 30, 2007. We
can expect to incur losses for the immediate foreseeable
future. There can be no assurance that we will achieve the level of
revenues needed to be profitable in the future or, if profitability is achieved,
that it will be sustained. Due to these losses, we have a continuing
need for additional capital.
Risk
of Need for Additional Financing
We
raised
gross proceeds of $2.5 million in a placement of Series E Convertible Preferred
Stock in the second quarter of fiscal 2007, gross proceeds of $3.0 million
in a
placement of Series D Convertible Preferred Stock in the second quarter of
fiscal 2006, and gross proceeds of $4.5 million in a placement of Series C
Preferred Stock in the second quarter of 2005. The net proceeds from
these placements should fulfill our capital needs through March 31, 2008
based
upon our present business plan. However, we expect to require
additional working capital or other funds in the near future should we need
to
modify our business plan. These funds are required to support our
marketing efforts, obtain additional regulatory approvals both domestically
and
overseas as well as to provide working capital for our manufacturing
purposes. In the event we are unable to achieve any market
penetration in the near term, secure regulatory approvals or build inventory
available for immediate delivery, our ability to secure future additional
funding could be severely jeopardized. No assurance can be given that
we will be successful in obtaining additional funds, whether publicly or
privately or through equity or debt. Any such financing could be
highly dilutive to stockholders.
Our
Lack of Operating History Makes Evaluation of our Business
Difficult.
The
MCM
business, our primary business, has yet to realize the acceptance in the
market
place that we had anticipated, so there is no meaningful historical financial
or
other information available upon which you can base your evaluation of this
business and its prospects. We acquired the MCM business in December
2002 and have generated insubstantial revenues to date from it.
We
have
so far been unable to attract and convince customers to switch from their
current method of dealing with the disposal of their medical waste to a new
technology and to adjust their current in-house system to adapt to our SteriMed
Systems. As a consequence, the revenue and income potential of our
business is unproven. Further, we cannot estimate the expenses for
operating the business. If we are incorrect in our estimates, it
could be detrimental to our business.
We
Expect our Manufacturing and Marketing Development Work for our MCM Business
to
Continue for Some Time, and our Manufacturing and Marketing may not Succeed
or
may be Significantly Delayed.
At
present, the SteriMed is manufactured at our own facility in
Israel. The SteriMed Junior is currently manufactured by a
third-party manufacturer in Israel. While we expect our manufacturing
and product development work to continue in Israel, due to the limited capacity
as well as the high costs of transportation from Israel, we continue to seek
sub-assembly manufacturers to enable us to reduce the cost of the SteriMed
Junior as well as
alternative
locations for the manufacture of our SteriMed Junior. As we receive
interest from these manufacturers, we will then undertake a detailed analysis
to
ensure that they are sufficiently qualified to manufacture our unit and that
their costs are acceptable to us. If we fail to effectively
manufacture or cause the manufacture of or fail to develop a market to increase
the manufacturing needs for our SteriMed Systems, we will likely be unable
to
recover the losses we will have incurred in attempting to produce and market
these products and technologies and may be unable to make sales or ever become
profitable.
Dependence
on Our Third-Party Component Suppliers
We
are
dependent on third-party suppliers for the components of our SteriMed and
SteriMed Junior Systems and also for the Ster-Cid® disinfectant. At
present there are no supply contracts in place and our requirements are
fulfilled against purchase orders. There can be no assurances that we
will have adequate supplies of materials. Although we believe that
the required components are readily available and can be provided by other
suppliers, delays may be incurred in establishing relationships or in waiting
for quality control assurance with other manufacturers for substitute
components.
We
Are Subject to Extensive Governmental Regulation with which it is Frequently
Difficult, Expensive And Time-Consuming to Comply.
The
medical waste management industry is subject to extensive U.S. EPA, state
and
local laws and regulations relating to the collection, packaging, labeling,
handling, documentation, reporting, treatment and disposal of regulated medical
waste. The use of the Ster-Cid®
disinfectant
in
the SteriMed Systems is registered with the U.S. EPA under FIFRA; however,
the
SteriMed Systems are not subject to U.S. EPA registration. Our
business requires us to comply with these extensive laws and regulations
and
also to obtain permits, authorizations, approvals, certificates or other
types
of governmental permission from all states and some local jurisdictions where
we
sell or lease the SteriMed Systems. The SteriMed has been approved
for marketing in 46 states and the SteriMed Junior in 42 states. It
is our objective to obtain approvals for marketing in the remaining
states. The Ster-Cid® has been registered in 50
states. Our ability to obtain such approvals in the remaining states
and the timing and cost to do so, if successful, cannot be easily determined
nor
can the receipt of ultimate approval be assumed.
In
markets outside the U.S., our ability to market the SteriMed Systems is governed
by the regulations of the specific country. In foreign countries, we
primarily market through distributors and we rely on them to obtain the
necessary regulatory approvals to permit the SteriMed Systems to be marketed
in
that country. We are therefore dependent on the distributors to
process these applications where required. In many of these
countries, we have no direct control or involvement in the approval process,
and
therefore we cannot estimate when our product will be available in that
market.
State
and
local regulations often change and new regulations are frequently
adopted. Changes in the applicable regulations could require us to
obtain new approvals or permits, to change the way in which we operate or
to
make changes to our SteriMed Systems. We might be unable to obtain
the new approvals or permits that we require and the cost of compliance with
new
or changed regulations could be significant. In the event we are not
in compliance, we can be subject to fines and administrative, civil or criminal
sanctions or suspension of our business.
The
approvals or permits that we require in foreign countries may be difficult
and
time-consuming to obtain. They may also contain conditions or
restrictions that limit our ability to operate efficiently, and they may
not be
issued as quickly as we need (or at all). If we cannot obtain the
approval or permits that we need when we need them, or if they contain
unfavorable conditions, it could substantially impair our ability to sell
the
SteriMed Systems in certain jurisdictions or to import the system into
the
United States.
We
May Not Be Able to Effectively Protect Our Intellectual Property Rights
and
Proprietary Technology, Which Could Have a Material Effect on Our Business
and
Make It Easier For Our Competitors to Duplicate Our
Products.
We
regard
certain aspects of our products, processes, services and technology as
proprietary, and we have trademarks and patents for certain aspects of
the
SteriMed Systems. Our ability to compete successfully will depend in
part on our ability to protect our proprietary rights and to operate without
infringing on the proprietary right of others, both in the United States
and
abroad. Our proprietary rights to Ster-Cid® relate to an exclusive worldwide
license that we had obtained from a third party manufacturer in Europe
to
purchase the Ster-Cid® disinfectant. The
patent
positions of medical waste technology companies generally involve complex
legal
and factual questions. While patents are important to our business,
the regulatory approvals are more critical in permitting us to market our
products. We may also apply in the future for patent protection for
uses, processes, products and systems that we develop. There can be
no assurance that any future patent for which we apply will be issued, that
any
existing patents issued will not be challenged, invalidated or circumvented,
that the rights granted thereunder will provide any competitive advantage,
that
third-parties will not infringe or misappropriate our proprietary rights
or that
third parties will not independently develop similar products, services and
technology. We may incur substantial costs in defending any patent or
license infringement suits or in asserting any patent or license rights,
including those granted by third parties, the expenditure of which we might
not
be able to afford. An adverse determination could subject us to
significant liabilities to third parties, require us to seek licenses from
or
pay royalties to third parties or require us to develop appropriate alternative
technology. There can be no assurance that any such licenses would be
available on acceptable terms or at all, or that we could develop alternate
technology at an acceptable price or at all. Any of these events
could have a material adverse effect on our business and
profitability.
We
may
have to resort to litigation to enforce our intellectual property rights,
protect our trade secrets, determine the validity and scope of the proprietary
rights of others, or defend ourselves from claims of infringement, invalidity
or
unenforceability. Litigation may be expensive and divert resources
even if we win. This could adversely affect our business, financial
condition and operating results such that it could cause us to reduce or
cease
operations.
We
May Not Be Able to Develop New Products That Achieve Market
Acceptance
Our
future growth and profitability depend in part on our ability to respond
to
technological changes and successfully develop and market new products that
achieve significant market acceptance. This industry has been
historically marked by very rapid technological change and the frequent
introductions of new products. There is no assurance that we will be
able to develop new products that will realize broad market
acceptance.
The
Nature of Our Business Exposes Us to Professional and Product Liability Claims,
Which Could Materially Adversely Impact Our Business and
Profitability
The
malfunction or misuse of our SteriMed Systems may result in damage to property
or persons, as well as violation of various health and safety regulations,
thereby subjecting us to possible liability. Although our insurance
coverage is in amounts and deductibles customary in the industry, there can
be
no assurance that such insurance will be sufficient to cover any potential
liability. We currently retain a claims made worldwide product
liability insurance policy. Further, in the event of either adverse
claim
experience
or insurance industry trends, we may in the future have difficulty in obtaining
product liability insurance or be forced to pay very high premiums, and there
can be no assurance that insurance coverage will continue to be available
on
commercially reasonable terms or at all. In addition, there can be no
assurance that insurance will adequately cover any product liability claim
against us. A successful product liability, environmental or other
claim with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on our business, financial condition
and
operations. To date, no claims have been made against
us. We believe that our insurance coverage is adequate to cover any
claims made, and we review our insurance requirement with our insurance broker
on an annual basis.
Other
Parties May Assert That Our Technology Infringes On Their Intellectual Property
Rights, Which Could Divert Management Time and Resources and Possibly Force
Us
To Redesign Our Products.
Developing
products based upon new technologies can result in litigation based on
allegations of patent and other intellectual property
infringement. While no infringement claims have been made or
threatened against us, we cannot assure you that third parties will not assert
infringement claims against us in the future, that assertions by such parties
will not result in costly litigation, or that they will not prevail in any
such
litigation. In addition, we cannot assure you that we will be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid infringement.
The
Loss of Certain Members of Our Management Team Could Adversely Affect Our
Business.
Our
success is highly dependent on the continued efforts of Dwight Morgan,
Chairman, President and Chief Executive Officer, George Aaron, Executive
Vice
President – International and Business Development, and Jonathan Joels, Chief
Financial Officer, Treasurer and Secretary, who are our key management
persons. Should
operations
expand, we will need to hire persons with a variety of skills and competition
for these skilled individuals could be intense. Neither Mr. Morgan,
Mr. Aaron, nor Mr. Joels plan to retire or leave us in the near
future. However, there can be no assurance that we will be successful
in attracting and/or retaining key personnel in the future. Our
failure to do so could adversely affect our business and financial
condition. We do not have employment agreements with or carry any
“key-man” insurance on the lives of any of our officers or
employees.
Dependence
on Principal Customers
Three
principal customers, Euromedic, which is a foreign distributor in Central
and
Eastern Europe, a major U.S. dialysis company and another U.S. customer
accounted for approximately 56% of our revenues from our SteriMed business
for
fiscal year 2006. Two customers including Euromedic accounted for
approximately 57% of our revenues in the nine months ended June 30,
2007. We are presently working on the expansion of our sales, both
internationally and domestically. In the first two quarters of fiscal
year 2007, we received orders for several SteriMed Systems from one of the
largest independent providers of dialysis services in the
U.S. However, no assurance can be given that these orders will be
shipped and accepted, or that future orders would be given. The loss
of any one of our principal customers or the inability to obtain or expand
our
sales to additional customers would have a significant adverse impact on
our
business.
Competition
There
are
numerous methods of handling and disposing of RMW, of which our technology
is
one of the available systems. We believe that our SteriMed Systems,
due to their ability to be used on site, competitive cost and ease of use,
offer
a significant advantage over RMW systems offered by our
competitors. We realize, however, there can be no assurance that a
different or new technology may not supplant us in the
market. Further, we cannot guarantee that in the event that we are
successful in the
deployment
of our systems in the marketplace, the predominant companies in the field,
which
have substantially greater resources and market visibility than us, will
not try
to develop similar systems.
Control
by a Lead Investor
An
investor group beneficially owns approximately 79.3% of the outstanding common
stock, including shares of common stock underlying Series D Preferred Stock
and
Series E Preferred Stock and warrants currently held by them, and have the
right
to vote approximately 35.8% of our aggregate voting
securities. Accordingly, this group could exercise a significant
voting block in the election of directors and other matters to be acted upon
by
stockholders. See “SECURITY OWNERSHIP.”
Increased
Cost and Management Time in Seeking Compliance with the Requirements of the
Sarbanes-Oxley Act of 2002
Currently
the SEC’s rules under Section 404 of the Sarbanes-Oxley Act of 2002 will require
us to have our management attest to the adequacy of our internal controls
in the
Form 10-KSB for the year ending September 30, 2008. No member of our
management has any experience in complying with Section 404 and we have not
yet
prepared an internal plan of action for compliance with requirements of Section
404. Furthermore, we may be required to make substantial changes to
our internal controls in order for our management to be able to attest that
as
of September 30, 2008, they are effective. Larger public companies
which have been required to comply with Section 404 have encountered significant
expenses, both from diversion of management time and attention, the acquisition
of new computer software, the employing of additional personnel and training
and
third party internal controls consultants. While our business is not
as sophisticated or complex as these larger companies, we anticipate it will
be
time consuming, costly and difficult for us to develop and implement the
internal controls necessary for our management to attest that they are effective
at September 30, 2008. We may need to hire additional financial
reporting and internal controls personnel, acquire software and retain a
third
party consultant during fiscal 2008. If our management is unable to
attest that our internal controls are effective as of September 30, 2008,
investors may react by selling our stock and causing its price to
fall.
Market
Risks
There
is Only a Volatile Limited Market for Our Common Stock
Recent
history relating to the market prices of public companies indicates that,
from
time to time, there may be periods of extreme volatility in the market price
of
our securities because of factors unrelated to the operating performance
of, or
announcements concerning, the issuers of the affected stock, and especially
for
stock traded on the OTC Bulletin Board. Our common stock is not
actively traded, and the bid and asked prices for our common stock have
fluctuated significantly. Since 2003, the common stock has traded on
the OTC Bulletin Board from a high of $6.80 to a low of $0.45 per
share. See “MARKET FOR OUR COMMON STOCK.” General market
price declines, market volatility, especially for low priced securities,
or
factors related to the general economy or to us in the future could adversely
affect the price of the common stock. With the low price of our
common stock, any securities placement by us would be very dilutive to existing
stockholders, thereby limiting the nature of future equity
placements.
The
Number of Shares Being Registered for Sale is Significant in Relation to
our
Trading Volume
All
of
the shares registered for sale on behalf of the selling stockholders are
“restricted securities” as that term is defined in Rule 144 under the Securities
Act. At October 31, 2007, we had 3,849,662 outstanding shares of
common stock and an aggregate of 17,775,741 shares of common stock reserved
for
the conversion of preferred stock and the exercise of options and
warrants. An aggregate of 2,800,081 of the 17,775,741 shares
reserved shares, plus an aggregate of 376,200 shares presently
outstanding, have been included in this prospectus. We filed a separate
registration statement for 10,365,891 of such
reserved
shares. We have filed this registration statement to register these
restricted shares for sale into the public market by the selling stockholders.
Considering the low trading volume in our common stock, the sale, or even
offer,
of a major portion of these shares in the market all at once or at about
the
same time, could depress the market price during the period the registration
statement remains effective and also could affect our ability to raise equity
capital.
We
Have Never Paid Dividends and We Do Not Anticipate Paying Dividends in the
Future
We
do not
believe that we will pay any cash dividends on our common stock in the
future. We have never declared any cash dividends on our common
stock, and if we were to become profitable, it would be expected that all
of
such earnings would be retained to support our business. Since we
have no plan to pay cash dividends, an investor would only realize income
from
his investment in our shares if there is a rise in the market price of our
common stock, which is uncertain and unpredictable. However, the
Series D Preferred Stock and the Series E Preferred Stock require us
to accrue dividends for those securities commencing October 1,
2007. See “DIVIDEND POLICY.”
Shares
Eligible for Future Sale Could Negatively Affect Your Investment in
Us
The
fact
that we are seeking additional capital through the sale of our securities,
including shares of our preferred stock, which include granting certain
registration rights to the investors, could negatively impact us. At
October 31, 2007, we had 795,067 shares of preferred stock authorized but
not
outstanding which our Board of Directors could issue without any approval
of
existing holders. The issuance of these shares, as well as the
issuance of any new shares, and any attempts to resell them could depress
the
market for the shares being registered under this prospectus.
We
Are Subject to Penny Stock Regulations and Restrictions
The
Securities and Exchange Commission has adopted regulations which generally
define Penny Stocks to be an equity security that has a market price less
than
$5.00 per share or an exercise price of less than $5.00 per share, subject
to
certain exemptions. As of November 6, 2007, the closing price for our
common stock was $0.85 per share and therefore, it is designated a “Penny
Stock.” As a Penny Stock, our common stock may become subject to Rule
15g-9 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or
the Penny Stock Rule. This rule imposes additional sales practice requirements
on broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a
broker-dealer must make a special suitability determination for the purchaser
and have
received
the purchaser’s written consent to the transaction prior to sale. As
a result, this rule may affect the ability of broker-dealers to sell our
securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
For
any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared
by
the Securities and Exchange Commission (“SEC”) relating to the penny stock
market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for
the
penny stock held in the account and information on the limited market in
penny
stock.
There
can
be no assurance that our common stock will qualify for exemption from the
penny
stock restrictions. In any event, even if our common stock were exempt from
the
Penny Stock restrictions, we would remain subject to Section 15(b)(6) of
the
Exchange Act, which gives the SEC the authority to restrict any person from
participating in a distribution of penny stock, if the SEC finds that such
a
restriction would be in the public interest.
Certain
Provisions of Our Charter Could Discourage Potential Acquisition Proposals
or
Change in Control
Certain
provisions of our Certificate of Incorporation and of Delaware law could
discourage potential acquisition proposals and could make it more difficult
for
a third-party to acquire or discourage a third party from attempting to acquire
control of us. These provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers at
a
price above the then current market value of the common stock. Our
Board of Directors, without further stockholder approval, may issue preferred
stock that would contain provisions that could have the effect of delaying
or
preventing a change in control or which may prevent or frustrate any attempt
by
stockholders to replace or remove the current management. The
issuance of additional shares of preferred stock could also adversely affect
the
voting power of the holders of common stock, including the loss of voting
control to others.
Information
included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the
future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and
describe our future plans, strategies and expectations, are generally
identifiable by use of the words
“may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend”
or “project” or the negative of these words or other variations on these words
or comparable terminology.
This
prospectus contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our
technology, (c) our manufacturing, (d) the regulation to which we are subject,
(e) anticipated trends in our industry and (f) our needs for working
capital. These statements may be found under “Management’s Discussion
and Analysis or Plan of Operations” and “Business,” as well as in this
prospectus generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under “Risk Factors”
and matters described in this prospectus generally. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this prospectus will in fact occur.
Except
as
otherwise required by applicable laws, we undertake no obligation to publicly
update or revise any forward-looking statements or the risk factors described
in
the prospectus, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this
prospectus.
We
will
not receive any portion of the proceeds from the sale or other disposition
of
the shares of common stock covered hereby, or interests therein, by the selling
stockholders. We may receive proceeds of up to $1,076,723 if all the
warrants held by the selling stockholders are exercised for
cash. Management currently anticipates that any such proceeds will be
utilized for working capital and other general corporate purposes. We
cannot estimate how many, if any, warrants may be exercised as a result of
this
offering or that they will be exercised for cash.
We
are
obligated to bear the expenses of the registration of the shares. We
anticipate that these expenses will be approximately $60,000.
We
have
never declared dividends or paid cash dividends on our common
stock. The Series D Preferred Stock provides for a cumulative
dividend of $0.67 per share commencing October 1, 2007, and the Series E
Preferred Stock provides for a cumulative dividend of $13.50 per share
commencing October 1, 2007. We intend to retain and use any
future earnings for the development and expansion of our business and do
not
anticipate paying any cash dividends on the common stock or the Series B
Preferred Stock in the foreseeable future.
Principal
Market and Market Prices
Our
common stock has traded in the over-the-counter market on the OTC Electronic
Bulletin Board (OTCBB) under the symbol CAPR until the April 5, 2005 reverse
split when our trading symbol was changed to CAPS.
The
following table sets forth, for the calendar quarters indicated, the reported
high and low bid quotations per share of the common stock as reported on
the
OTCBB. These quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions. These tables give retroactive effect to our 1-for-20
reverse common stock split on April 5, 2005.
Fiscal
Period
|
Fiscal
Year Ending
9/30/08
|
Fiscal
Year Ended
9/30/07
|
Fiscal
Year Ended
9/30/06
|
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
First
Quarter*
|
$1.01
|
$0.50
|
$0.65
|
$0.51
|
$2.45
|
$1.05
|
Second
Quarter
|
|
|
1.08
|
0.45
|
2.35
|
1.30
|
Third
Quarter
|
|
|
1.05
|
0.60
|
1.69
|
0.80
|
Fourth
Quarter
|
|
|
0.85
|
0.70
|
0.80
|
0.55
|
*
Reflects
prices through November 6, 2007
We
have
not paid any dividends on our shares of common stock since inception and
do not
expect to declare any dividends on our common stock in the foreseeable
future.
Approximate
Number of Holders of Our Common Stock
On
October 31, 2007, there were approximately 1,100 holders of record of our
common
stock. Since a large number of shares of common stock were held in
street or nominee name, it is believed that there are a substantial number
of
additional beneficial owners of our common stock.
CONDITION
AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the other financial information
appearing elsewhere in this prospectus. In addition to historical
information contained herein, the following discussion and other parts of
this
prospectus contain certain forward-looking statements that involve risks
and
uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements due to factors discussed under
“Risk
Factors”, as well as factors discussed elsewhere in this
prospectus. The cautionary statements made in this prospectus should
be read as being applicable to all related forward-looking statements wherever
they appear in this prospectus.
Results
of Operations
Our
product sales growth in the U.S. was negatively impacted by consolidation
in the
dialysis clinic market by several of our customers which caused them to place
their purchasing decisions on hold during the period ending with fiscal 2006.
We
have been actively pursuing new initiatives and we anticipate that these
will
enable us to show revenue growth during fiscal 2007. There is no
assurance that we will show revenue growth during the fiscal year 2007 or
that
any revenue growth will result in profitability.
Fiscal
Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30,
2005
Revenues
generated for fiscal year ended September 30, 2006 (“Fiscal 2006”) were
primarily generated by MCM product sales and rental revenues which totaled
$1,069,902 for Fiscal 2006 as compared with $740,796 for fiscal year ended
September 30, 2005 (“Fiscal 2005”). For Fiscal 2006, three customers accounted
for approximately 56% of the consolidated total revenue. For Fiscal
2005, three customers accounted for approximately 51% of the consolidated
total
revenue. Product sales for the Fiscal 2006 increased due to a change in the
product mix of units sold together with an increase in the sales of disposables
for the SteriMed units.
Consulting
and royalty income from the TDM Business which was sold in 2002 to Seradyn,
Inc.
totaled approximately $165,600 as compared to $108,000 for fiscal years ended
September 30, 2006 and 2005, respectively. The increase of approximately
$58,000
was attributable to the growth in sales of the diagnostic products underlying
our Royalty Agreement, as they become more widely distributed and
utilized.
Cost
of
product sales and equipment rental income aggregated approximately $803,000
as
compared to $491,000 during Fiscal 2006 and Fiscal 2005,
respectively. The increased costs of approximately $312,000 correlate
to the increase in revenues and the absorption of certain production expenses
incurred in Fiscal 2006 in order to enhance production
efficiencies.
Research
and development costs amounted to approximately $343,000 versus $325,000
for
Fiscal 2006 and Fiscal 2005, respectively. Research and development
costs are directly attributable to the development of manufacturing efficiencies
for the SteriMed systems.
Selling,
general and administrative expenses totaled $3,064,000 for Fiscal 2006 versus
$2,730,000 for Fiscal 2005. This increase is a result of additional
personnel costs (hiring of two additional employees and increased benefit
costs), as well as the related increase in travel and marketing expenses
incurred in order to facilitate the development of additional sales markets
for
our units.
In
2006,
management assessed our underlying fair value and determined the carrying
value,
including goodwill exceeded its fair value and as such management recorded
an
impairment charge to goodwill of $452,000. In 2005, management
recorded no such charge.
Other
income totaled $ 0 for Fiscal 2006 as compared to $482,200 for Fiscal
2005. Other income recorded in fiscal year 2005 resulted from the
favorable settlement of certain outstanding liabilities as well as an insurance
settlement of $350,000 for expenses incurred in defending prior litigations,
settled in Fiscal 2005.
Interest
income (expense), net totaled $29,693 for Fiscal 2006 versus ($323,026);
net of
interest income of approximately $30,000 for Fiscal 2005. In Fiscal
2006, we had no related debt borrowings.
The
net
loss totaled $3,396,041 for Fiscal 2006 versus $2,538,408 for Fiscal
2005.
Nine
Months Ended June 30, 2007 Compared to Nine Months Ended June 30,
2006
Revenues
generated from MCM product
sales totaled $1,699,812 for the nine months ended June 30, 2007 as compared
to
$713,819 for the nine months ended June 30, 2006. This increase in sales
is
attributed to our expanded penetration into several markets that we have
been
developing for our products. Consulting and royalty income from the
TDM Business, which was sold in 2002, totaled $123,965 for the nine months
ended
June 30, 2007 as compared to $119,683 for the nine months ended June 30,
2006. .
Cost
of
product sales amounted to $1,163,011 or 68.4% of total related revenues versus
$520,058 or 72.9% of total related revenues for the nine month periods ended
June 30, 2007 and 2006, respectively. We have not advanced to a level of
sales
for us to fully absorb the fixed costs related to our revenues. The
reduced percentage cost is due to the sales product mix, as well as our
initiatives to reduce costs as the number of units produced
increases.
Research
and development expense
decreased to $207,142 versus $261,598 for the nine month period ended June
30,
2007 as compared to the same period in 2006. This decrease is due to
the completion of the development work necessary for the ramp up of production
of the Sterimed and Sterimed Junior.
Selling,
general and administrative expenses totaled $2,994,634 for the nine months
ended
June 30, 2007 versus $2,170,936 for the nine months ended June 30,
2006. This increase is principally due to increased personnel, our
adoption of FAS 123R which requires the recording of stock based compensation
as
part of the statement of operations, in which $208,764 was recorded during
this
period and other costs in connection with sales and marketing.
Other
income totaled $500,000 for the nine months ended June 30, 2007 as compared
to
$0 for the nine months ended June 30, 2006. This resulted from the
termination of our Royalty Agreement with Seradyn within this
period.
Interest
income net, totaled $4,114 for
the nine months ended June 30, 2007 versus $27,026 for the nine months ended
June 30, 2006.
The
net loss amounted to $2,036,896 and
$2,092,064 for the nine month periods ended June 30, 2007 and 2006,
respectively.
Liquidity
and Capital Resources
At
June
30, 2007, our cash and cash equivalents position was $1,373,919.
Net
cash
used in operations for the nine months ended June 30, 2007 amounted to
$2,052,661. Net cash used in investing activities amounted to
$36,374. Net cash provided by financing activities amounted to
$2,394,000.
On
January 30, 2007, we borrowed the principal amount of $100,000 through
the
issuance of a 10% promissory note, payable on April 30, 2007. This
“bridge” loan was used for general working capital, until additional funding was
secured. This note, plus interest, was repaid in March 2007 upon the
placement of Series E Preferred Stock.
On
March
1, 2007, we closed on a $2.5 million Series E Preferred Stock equity financing
before financing related fees and expenses of approximately
$106,000. This placement consisted of 10,000 shares of Series E
Convertible Preferred Stock at $250 a share. Each share of the Series
E Preferred Stock is convertible into 625 shares of common stock, subject
to
customary anti-dilution provisions, or an aggregate of 6,250,000 shares
of
common stock. Commencing October 1, 2007, the holders of the Series E
Preferred Stock are entitled to receive a cash dividend at a per share
rate
equal to $13.50 per annum, and a liquidation preference of $250 per share
plus
accrued and unpaid dividends, and ranking pari passu with the Series B
and
Series D Preferred Stock. The Series E
Preferred
Stock votes on an as-converted basis with the common stock, and has a separate
vote with respect to matters directly affecting this Series. Neither
we nor the holders of the Series E Preferred Stock have the right to cause
the redemption thereof. The net proceeds will be used for general
working capital purposes and the repayment of the January 30, 2007 10%
Promissory Note as outlined above.
In
June
2007, we received $500,000 from Seradyn, Inc. as a lump sum payment upon
the
termination of the Royalty Agreement, plus an additional $29,500 representing
royalties due for prior periods.
Going
Concern and Management’s Plan
We
continue to incur significant operating losses. In addition, we are a
defendant in an action seeking damages in excess of
$400,000. Although we believe we have a meritorious defense against
such a lawsuit, an unfavorable outcome of such action would have a materially
adverse impact on our business. In order to fund our additional cash
requirements, we continue to pursue efforts to identify additional funds
through
various funding options. Given the low market price and current
volume of business, there is no assurance that we will be able to obtain
such
additional funding or on terms not highly dilutive to current stockholders,
and
the lack of additional capital could have a material adverse impact on our
business. If we are unable to generate sufficient cash flows from our business
operations or raise additional funding to continue our operations, we will
have
to implement a plan to drastically curtail operations to reduce operating
costs
until sufficient additional capital is raised. There can be no assurance
that
such a plan, if implemented, will be successful. The aforementioned
factors raise substantial doubt about our ability to continue as a going
concern.
Obligations
Our
principal contractual commitments include payments under operating
leases.
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 as of
September 30. The valuation will be based upon estimates of the
market value of the unit.
3. Off-balance
sheet arrangements
We
have
no off-balance sheet arrangements, financings or other relationships with
unconsolidated entities known “Special Purpose Entities.”
Recent
Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections.” This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for
and
reporting of a change in accounting principle. The statement applies
to all voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual instance that
the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. This statement is effective for accounting changes and
corrections of errors made in the fiscal years beginning after December 15,
2005. Management does not believe this pronouncement will have a
material impact on our consolidated results of operations and financial
condition.
In
September 2005, the Financial Accounting Standards Board (“FASB”) ratified the
Emerging Issues Task Force’s (“EITF”) Issue No. 05-7. “Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues”, which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower
should
recognize a beneficial conversion feature, not a debt extinguishments, if
a debt
modification increases the intrinsic value of the debt. In September 2005,
the
FASB ratified the following consensus reached in EITF Issue 05-08 (“Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”):
a) the issuance of convertible debt with a beneficial conversion feature
results
in a basis difference in applying FASB Statement of Financial Accounting
Standards SFAS No. 109, Accounting for Income Taxes. Recognition of
such a feature effectively creates a debt instrument and a separate equity
instrument for book purposes, whereas the convertible debt is treated entirely
as a debt instrument for income tax purposes; b) The resulting basis difference
should be deemed a temporary difference because it will result in a taxable
amount when the recorded amount of the liability is recovered or settled;
and c)
Recognition of deferred taxes for the temporary difference should be reported
as
an adjustment to additional paid-in capital. Both of these issues are
effective in the first interim or annual reporting period commencing after
December 15, 2005, with early application permitted. The effect of
applying the consensus should be accounted for retroactively to all debt
instruments containing a beneficial conversion feature that are subject to
EITF
Issue 00-27, “Application of Issue No. 98-5 to Certain Convertible Debt
Instruments” (and thus is applicable to debt instruments converted or
extinguished in prior periods but which are still presented in
the
financial statements). These pronouncements had a material impact on
our consolidated results of operations and financial condition.
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid
Financial Instruments (“SFAS 155”), which eliminates the exemption from applying
SFAS 133 to interests in securitized financial assets so that similar
instruments are accounted for similarly regardless of the form of the
instruments. SFAS 155 also allows the election of fair value measurement
at
acquisition, at issuance, or when a previously recognized financial instrument
is subject to a re-measurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year
that
begins after September 15, 2006. Early adoption is permitted. The adoption
of SFAS 155 is not expected to have a material effect on our consolidated
results of operations and financial condition
In
March 2006, the FASB issued Statement of Financial Accounting Standard 156
- Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value. SFAS 156 permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at fair value.
Adoption is required as of the beginning of the first fiscal year that begins
after September 15, 2006. Early adoption is permitted. The adoption of SFAS
156 is not expected to have a material effect on our consolidated results
of
operations and financial condition.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This Interpretation
shall
be effective for fiscal years beginning after December 15, 2006. Earlier
adoption is permitted as of the beginning of an enterprise’s fiscal year,
provided the enterprise has not yet issued financial statements, including
financial statements for any interim period for that fiscal year. The cumulative
effects, if any, of applying this Interpretation will be recorded as an
adjustment to retained earnings as of the
beginning
of the period of adoption. The adoption of FIN 48 is not expected to have
a
material effect on our consolidated results of operations and financial
condition.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
157,
“Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements
and
accordingly, does not require any new fair value measurements. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are in the process of evaluating the
impact of the adoption of SFAS No. 157 will have on our consolidated results
of
operations and financial condition and are currently not in a position to
determine such effect.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin No.
108
(“SAB 108”) which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 becomes effective in fiscal
2007. Adoption of SAB 108 is not expected to have a material impact on our
consolidated results of operations and financial position.
On
October 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”), which is a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No.
123”). SFAS No. 123R supersedes APB No. 25, “Accounting for Stock
Issued to Employees”, and amends SFAS No. 95, “Statement of Cash
Flows.” SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock
options,
to be recognized in the financial statements based upon their fair
values. As a result, the intrinsic value method of accounting for
stock options with pro forma footnote disclosure, as allowed for under SFAS
No.
123, is no longer permitted.
In
December 2006, FASB issued FASB Staff Position EITF 00-19-2 “Accounting for
Registration Payment Arrangements,” which specifies that the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement should be separately recognized and measured
in
accordance with SFAS No. 5, “Accounting for Contingencies.” Adoption of EITF
00-19-02 is required for fiscal years beginning after December 15, 2006.
We are
currently evaluating the expected effect of EITF 00-19-02 on our consolidated
financial statements and are currently not yet in a position to determine
such
effects.
On
February 15, 2007, FASB issued SFAS No. 159, entitled “The Fair Value Option for
Financial Assets and Financial Liabilities.” The guidance in SFAS No.
159 “allows” reporting entities to “choose” to measure many financial
instruments and certain other items at fair value. The objective
underlying the development of this literature is to improve financial reporting
by providing reporting entities with the opportunity to reduce volatility
in
reported earnings that results from measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions,
using
the guidance in SFAS No. 133, as amended, entitled “Accounting for Derivative
Instruments and Hedging Activities”. The provisions of SFAS No. 159 are
applicable to all reporting entities and is effective as of the beginning
of the
first fiscal year that begins subsequent to November 15, 2007. We do not
believe
this new accounting standard will have a material impact on our financial
condition or results of operations
We
adopted SFAS No. 123R using the modified prospective method, which requires
us
to record compensation expense for all awards granted after the date of
adoption, and for the unvested portion of previously granted awards that
remain
outstanding at the date of adoption. Accordingly, prior period
amounts have not been restated to reflect the adoption of SFAS No.
123R. After assessing alternative valuation models and amortization
assumptions, we chose to continue using the Black-Scholes valuation model
and
recognition of compensation expense over the requisite service period of
the
grant.
Inflation
To
date,
inflation has not had a material effect on our business. We believe
that the effects of future inflation may be minimized by controlling costs
and
increasing our manufacturing efficiency through the increase of our product
sales.
Background
Caprius,
Inc. (“Caprius”, the “Company”, “we”, “us” and “our”) is engaged in the
infectious medical waste disposal business, through our subsidiary 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, we 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, our then chairman, and Jonathan Joels, our CFO, filling two seats.
Additionally, as part of the acquisition, certain debt of MCM to its existing
stockholders and to certain third-parties was converted to equity in MCM
or
restructured. Pursuant to our Letter of Intent with MCM, we 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. Our ownership
interest in MCM has increased to 96.66% by reason of conversion of loans
we had
made to MCM and our meeting cash calls of MCM.
Caprius,
Inc. was founded in 1983, and until June 1999 essentially operated in the
business of developing specialized medical imaging systems, as well as operating
the Strax Institute, a comprehensive breast imaging center. In June
1999, we acquired Opus Diagnostics, Inc. and began manufacturing and selling
medical diagnostic assays constituting the therapeutic drug monitoring (“TDM”)
Business. In October 2002, we sold the TDM business. The
Strax Institute was sold in September 2003.
Background
of the Regulated Medical Waste Industry in the United
States
In
1988,
the Federal Government passed the Medical Waste Tracking Act
(“MWTA”). This Act defined medical waste and the types of medical
waste that were to be regulated. In addition to defining categories
of medical waste, the law mandated that generators of Regulated Medical Waste
(“RMW”) be responsible for and adhere to strict guidelines and procedures when
disposing of RMW. The mandates included a “cradle to grave”
responsibility for any RMW produced by a facility, the necessity to track
the
disposal of RMW and defined standards for segregating, packaging, labeling
and
transporting of RMW.
The
MWTA
led to the development of individual state laws regulating how RMW is to
be
disposed of. As a result of these laws, it became necessary for
medical waste generating facilities to institute new procedures and processes
for transporting medical waste from the facility to an offsite treatment
and
disposal center, or obtain their own on-site system for treatment and disposal
acceptable to the regulators. By 1999, Health Care Without Harm, a
coalition of 440 member organizations, estimated that 250,000 tons of RMW
was
produced annually in the United States of America or worldwide.
The
other
major impact on the RMW market was the adoption of the Clean Air Amendments
of
1997. This Act dramatically reduced or eliminated the type of
emissions that are permitted from the incineration of RMW. Due to
this, those generators of RMW, which were incinerating their waste, were
forced
into costly upgrades of their incinerators or to find other methods of
disposal. Hospital incinerators decreased from 6,200 in 1988 to 115
in 2003 (Mackinac Chapter, Sierra Club Newsletter Aug-Oct 2003).
Most
generators of RMW use waste management firms to transport, treat and dispose
of
their waste. Due to legislative and other market factors, the costs
for this type of service have been increasing at a dramatic pace. At
the same time, many medical waste generators are coming under increasing
pressure to reduce expenses as a result of the decreasing percentage of
reimbursement from Medicare and
other
third party providers. Additionally, the added liability of RMW
generators as a result of the “cradle to grave” manifest requirement has made it
more attractive to use on-site medical waste disinfection methods that do
not
require manifest systems as the resultant waste is disinfected. The
combination of these pressures is forcing medical waste generators to seek
innovative methods for their waste disposal. MCM has identified and
is working with specific segments and niches within the RMW market on which
it
feels it might capitalize. The specifics of these will be discussed
in the Marketing section.
Background
of the Regulated Medical Waste Industry Outside of the United
States
The
industrialized countries of the European Union and Japan are implementing
medical waste laws that are or will be similar to U.S.
regulations. In 1994, the European Commission implemented a directive
where member states had to adhere to the provisions of the United Nations
Economic Commission for Europe (“UNECE”) European Agreement on the International
Carriage of Dangerous Goods by Road. This requires that clinical or
medical waste would be packed, marked, labeled and documented according to
defined specifications including provisions of weight. Regulations
and cost factors have prompted European RMW generators to seek alternative
medical waste disposal options. MCM recognizes an excellent
opportunity for SteriMed sales in Europe, and is working with regulators,
potential joint venture partners and distributors.
Throughout
the less industrialized and third world countries, the disposal of hospital
waste is coming under increasing scrutiny and regulations. Many
countries are in the process of updating and enforcing regulations regarding
the
disposal of RMW. MCM has been establishing relationships worldwide
directly or through distributors in many of these countries. Additional
information will be addressed in the Marketing section.
The
MCM SteriMed Systems
We
developed and market worldwide the SteriMed and SteriMed Junior compact
units. These units simultaneously shred and disinfect RMW, reducing
its volume up to 90%, and rendering it harmless for disposal as ordinary
waste. The SteriMed Systems are patented, environmentally-friendly,
on-site disinfecting and destruction units that can process regulated clinical
waste, including sharps, dialysis filters, pads, bandages, plastic tubing
and
even glass, in a 15 minute cycle. The units, comparable in size to a
washer-dryer, simultaneously shred, grind, mix and disinfect the waste with
the
proprietary Ster-Cid® solution. After treatment, the material may be discarded
as conventional solid waste, in accordance with appropriate regulatory
requirements.
The
SteriMed Systems enable generators of RMW, such as clinics and hospitals,
to
significantly reduce costs for treatment and disposal of RMW, eliminate the
potential liability associated with the regulated “cradle to grave” tracking
system involved in the transport of RMW, and treat in-house RMW on-site in
an
effective, safe and easy manner. As the technology for disinfection
is chemical-based, within the definitions used in the industry, it is considered
as an alternative treatment technology.
The
SteriMed Systems are comprised of two different sized units, and the required
Ster-Cid® disinfectant solution can be utilized with both units. The
larger SteriMed can treat up to 18.5 gallons (70 liters) of medical waste
per
cycle. The smaller version, the SteriMed Junior, can treat 4 gallons
(15 liters) per cycle.
Ster-Cid®
is our proprietary disinfectant solution used in the SteriMed Systems. Ster-Cid®
is biodegradable and is registered with the U.S. Environmental Protection
Agency
(“U.S. EPA”) in accordance with the Federal Insecticide, Fungicide, Rodenticide
Act of 1972 (“FIFRA”). During the SteriMed disinfecting cycle, the
concentration of Ster-Cid® is approximately 0.5% of the total volume of
liquids. The Ster-Cid®
disinfectant
in
conjunction
with the SteriMed Systems has been tested in independent
laboratories. Results show that disinfection levels specified in the
U.S. EPA guidance document, “Report on State and Territorial Association on
Alternate Treatment Technologies”
(STAATT”),
are met. Furthermore, it is accepted by the waste water treatment
authorities to discharge the SteriMed effluent containing a low concentration
of
the disinfectant into the sewer system. STAATT is a worldwide organization
involved in setting criteria for efficacy of alternative medical waste treatment
technologies.
Both
SteriMed units are safe and easy to operate requiring only a half day of
training. Once the cycle commences, the system is locked, and water
and Ster-Cid® are automatically released into the treatment
chamber. The shredding, grinding and mixing of the waste is then
initiated exposing all surfaces of the medical waste to the chemical solution
during the 15 minute processing cycle. At the end of each cycle, the
disinfected waste is ready for disposal as regular solid waste.
In
the
United States, the initial focus of marketing the SteriMed Systems has been
to
dialysis clinics on a lease or sales basis. We have also begun
initial installations in other new sectors such as surgical centers,
laboratories, plasmapheresis centers, and hospitals. Other potential markets
include blood banks, cruise ships and military medical facilities.
Internationally,
we continue to market our SteriMed Systems both directly and indirectly through
distributors. Our distributors are trained by us to enable them to
take on the responsibility for the installation and maintenance that are
required for the SteriMed Systems.
Regulations
and Regulatory Compliance for Alternative Medical Waste Treatment Technologies
in the United States
Our
use
of the Ster-Cid® disinfectant in the SteriMed Systems is registered by the U.S.
EPA under FIFRA. The Ster-Cid® disinfectant is considered a
pesticide, and is registered under FIFRA Number 71814. FIFRA gives
the federal government control over the distribution, sale and use of
pesticides. All pesticides used in the U.S. must be registered
(licensed) by the U.S. EPA under FIFRA. Registration of pesticides is
to seek assurance that they will be properly labeled, and if used in accordance
with label specifications, will not cause unreasonable harm to the
environment.
The
SteriMed Systems are regulated at the state level by the individual states’
Environmental, Conservation, Natural Resources, or Health
Department. Each state has its own specific approval requirements for
alternative treatment technologies. Generally, most states require an
application for registration or approval be submitted along with back up
information, including but not limited to operating manuals, service manuals,
and procedures. Additionally, many states require contingency and
safety plans be submitted, and that efficacy testing be
performed. MCM has demonstrated through efficacy testing that it can
inactivate the 4Log10 concentration of
Bacillus atrophaeus
(
formerly
Bacillus subtilis)
spores and a 6Log10 concentration of
Geobacillus stearothermophillus. This meets or exceeds most state regulatory
requirements.
The
SteriMed has been approved for marketing in 46 states and the SteriMed
Junior in 42 states. The Ster-Cid® disinfectant has been registered
in 50 states. We are currently seeking approvals for marketing in the
remaining states.
Local
and
county level authorities generally require that discharge permits be obtained
from waste water treatment authorities by all facilities that discharge a
substantial amount of liquids or specifically regulated substances into the
sewer system. The SteriMed Systems process effluent has been
characterized and found to be within the lower range of the general discharge
limits set forth by the National Pollutant Discharge Elimination System (NPDES)
Permitting Program, which are used to establish waste water treatment
authorities’ discharge limits.
These
approvals allow the SteriMed Systems effluent to be discharged into a municipal
sewer and the treated disinfected shredded waste disposed of as ordinary
waste.
The
process used by the SteriMed Systems, unlike many other waste medical disposal
technologies, is not subject to the Clean Air Act Amendments of 1990 because
there is no incineration or generation of toxic fumes in the
process. It is also not subject to the Hazardous Materials
Transportation Authorization Act of 1994 as there is no transportation of
hazardous waste involved.
Regulations
and Regulatory Compliance for Alternative Medical Waste Treatment Technologies
outside of the United States
CE
Mark
compliancy is a requirement for equipment sold in the European Union
(“EU”). The SteriMed Systems are CE Mark compliant as well as ISO
Certified, 9001:2000 and 14001:2004. In order to meet the specific
regulatory requirements of the individual members of the EU, MCM will undertake
further efficacy testing where necessary in order to demonstrate that the
SteriMed Systems conform to all the standards in the specific EU member
country. Outside of the EU, we are required to review and meet
whatever the specific standards a country may impose. In countries
where we have distributors, they are required to obtain the necessary regulatory
approvals on our behalf at their expense. The Company has
received approval to market its Sterimed Systems in the United Kingdom and
Hungary.
Competition
RMW
has
routinely been treated and disposed of by of incineration. Due to the
pollution generated by medical waste incinerators, novel technologies have
been
developed for the disposal of RMW. Some of the issues
confronting
these technologies are: energy requirements, space requirements, unpleasant
odor, radiation exposure, excessive heat, volume capacity and reduction,
steam
and vapor containment, and chemical pollution. The use of the
SteriMed Systems eliminates concern about these issues: space and energy
requirements are minimal, there are no odors, radiation, steam, vapor or
heat
generated, solid waste volume is reduced by up to 90% and the disinfecting
chemical is biodegradable. The following are the various competitive
technologies:
Autoclave
(steam under pressure): Autoclaves and retort systems are the most
common alternative method to incineration used to treat medical
waste. Autoclaves are widely accepted because they have historically
been used to sterilize medical instruments. However, there are
drawbacks as autoclaves may have limitations on the type of waste they can
treat, the ability to achieve volume reduction, and odors generated as a
result
of the process. During the December 2005 meeting of STAATT, the efficacy
of
autoclaves has come under scrutiny due to inherent inability of autoclaves
to
physically destroy the waste.
Microwave
Technology: Microwave technology is a process of disinfection that
exposes material to moist heat and steam generated by microwave
energy. The waves of microwave energy cycle rapidly between positive
and negative at very high frequency, around 2.45 billion times per second.
This
generates the heat needed to change water to steam and carry out the
disinfection process at a temperature between 95 and 100 degrees
centigrade. Use of this technology requires that proper precautions
be taken to exclude the treatment of hazardous material so that toxic emissions
do not occur. Also offensive odors may be generated around the
unit. The capital cost is relatively high.
Thermal
Processes: Thermal processes are dry heat processes and do not use
water or steam, but forced convection, circulating heated air around the
waste
or using radiant heaters. Companies have developed both large and
small dry-heat systems, operating at temperatures between 350
o
F-700
o
F. Use
of
dry heat requires longer treatment times as the fluids trapped in the medical
waste must be heated to create the steam required for disinfection.
High
Heat
Thermal Processes: High heat thermal processes operate at or above incineration
temperatures, from 1,000
o
F to 15,000
o
F. Pyrolysis,
which does not include combustion or burning, contains chemical reactions
that
create gaseous and residual waste products. The emissions are lower
than that created by incineration, but the pyrolysis demands heat generation
by
resistance heating such as
with
bio-oxidation, induction heating, natural gas or a combination of plasma,
resistance hearing and superheated steam.
Radiation: Electron
beam technology creates ionized radiation, damaging cells of
microorganisms. Workers must be protected with shields and remain in
areas secured from the radiation.
Chemical
Technologies: Disinfecting chemical agents that integrate shredding and mixing
to ensure adequate exposure are used by a variety of
competitors. Chlorine based chemicals, using sodium hypochlorite and
chlorine dioxide, are somewhat controversial as to their environmental effects
and their impact on wastewater. Non-chloride technologies are varied
and include peracetic acid, ozone gas, lime based dry powder, acid and metal
catalysts as well as alkaline hydrolysis technology used for tissue and animal
waste.
Among
the
competitors in the infectious medical waste business are Stericycle, Inc.,
Sanitec, Inc. Saniflash Pty Ltd., AduroMed Corp., Meteka GmbH, Tecno Service
First Srl
(Newster
srl), Ecodas, Waste Processing Solutions Company, and Waste Reduction,
Inc.
Competitive
Features of the SteriMed Systems
Seizing
the opportunity afforded by the regulatory changes and pricing pressures
in the
healthcare industry, we are positioning our products as viable alternatives
to
the traditional medical waste disposal methods. The SteriMed Systems
seek to offer medical waste generators a true on-site option that is less
risky,
less expensive, and more environmentally friendly than the
alternatives. The main competitive advantages of the SteriMed Systems
are:
Safety
a)
|
No
need to pack containers of medical
waste
|
b)
|
No
need to transport infectious waste through facilities with
patients
|
c)
|
No
need to ship infectious medical waste on public
roads
|
d)
|
Environmentally
sound approach for disinfection – uses biodegradable chemicals; does not
release smoke, odor, steam or other emissions to the air; removes
the need
for incineration
|
e)
|
Quiet
system - noise level during cycle is approx. 64.1dB(A), regarded
below
levels of noise safety concerns by most government
regulations
|
Labor
a)
|
Reduce
the exposure to infectious medical waste by limiting the time an
employee
handles, stores and packs the waste
|
b)
|
No
need to administer and track waste that is shipped from the
facility
|
d)
|
Employees
can continue to perform their regular functions while the SteriMed
Systems
treatment cycle is operational
|
Convenience
a)
|
Rapid
deployment through our system designs that enable “same day” installation
and start up at a client’s site
|
b)
|
Easily
installed requiring only electricity, water and sewage outlet
which are
usually which are usually readily available. No special ventilation
or
lighting required
|
c)
|
Fast
cycle process times (approximately 15 minutes) that enables even
our
smallest system to generate a rapid throughput
capability
|
d)
|
Limited
training required for operators due to the fully automated systems
based
upon a one-touch start method
|
e)
|
Due
to their compact size, units can be strategically placed in a
health care
facility close to the waste generation
sites
|
f)
|
Due
to its compact size, the SteriMed System is also appropriate
for mobile
facilities such as cruise ships and naval
vessels.
|
Cost
Saving
a)
|
One
of the lowest capital costs for comprehensive onsite medical waste
systems
|
b)
|
Reduced
labor time as packaging for off site transportation is
eliminated
|
c)
|
No
transportation costs to incineration
site
|
d)
|
Our
business model allows for the SteriMed Systems to be leased to
U.S.
facilities generating the infectious clinical waste. This model
obviates the need for capital investment by users, and should also
reduce
previous operating expenses in disposing of medical
waste.
|
e)
|
Ability
to fix costs for a given period of time, avoiding future price
increases
and surcharges, while allowing for additional capacity at a low
variable
cost
|
f)
|
Energy
efficient systems that consume just pennies per cycle in electricity
and
water
|
Compliant
with Domestic and International Regulations
a)
|
Enable
infectious medical waste generating facilities to replace existing
systems
while meeting federal, state and local environmental as well
as health
regulations.
|
b)
|
Proprietary,
environmentally safe, 90% biodegradable chemical for disinfection
which
has been cleared for use in many foreign countries and which
is registered
in most states.
|
These
features are intended to make the use of the SteriMed Systems a very attractive
solution to health care organizations, especially those that are forced to
reconsider their current medical waste management programs. This is
primarily due to federal and state regulations or the ongoing pressures to
reduce their ever increasing operating costs.
Marketing
Strategy
We
have
designed and are implementing a marketing program based upon our SteriMed
Systems and its value proposition. Our overall marketing campaigns are also
focused on the value statement “…..
Is Green…….Saves Green
……”; a
statement that defines our business as one which helps our clients
simultaneously achieve their goals of sustainability through environmental
responsibility, and improved financial performance through the reduction
in
operating costs associated with waste treatment and disposal.
Our
marketing strategy is driven by a sales program with a four pronged approach
consisting of the following channels for product distribution: direct selling
to
end users of our products in the commercial market, direct selling to end
users
of our products in the government and defense industry, Sales to US based
and
foreign distributors of our products, and agent-based
representatives.
Direct
Selling to End Users in the Commercial Market
In
the
United States we employ sales personnel who are responsible for selling to
key
customers in our key applications. Our definition of a “key” customer
group are generators of medical waste with sites which best fit the capabilities
and capacity of our SteriMed Systems. Within the United States these “key”
applications are dialysis centers, small hospitals, surgical centers,
plasmapheresis centers, blood banks, commercial laboratories (both research
and
clinical) as well as independent physician group practices.
Many
of
these facilities are owned by regional, national or international corporations
operating numerous facilities. Focusing our sales efforts on this customer
profile affords us the opportunity to achieve multiple sales within the same
organization and enhances our ability to service and support our
customers. We are presently deploying our SteriMed Systems at several
dialysis centers in the
implementation
of this strategy which includes two companies that are leaders in the field
both
domestically and overseas.
Our
business marketing models in the U.S. are either lease or purchase of the
SteriMed Systems. A typical SteriMed lease (which, at the customer’s
option, can also include installation costs) is for a five year period. We
have
contacts with several leasing companies that offer this facility to our
customers, including options for both capital leases and off balance sheet
operating leases.
Direct
Selling to End Users in the Government and Defense
Industry
We
have
continued to build on our initiative to capture business with the government
and
defense industry. In Fiscal 2006, we shipped two SteriMed
Juniors to the United States Department of Defense for use by the U.S.
Navy. The first unit was for laboratory test and evaluation as part
of the U.S. Navy’s Shipboard Medical Waste Management Program. In September
2007, the second unit was deployed for shipboard evaluation on an LHD Class
flagship vessel within the U.S. Navy’s Expeditionary Strike Group. The SteriMed
System as deployed is a modified version of our commercial-off-the-shelf
(COTS)
system. The program for the Navy represents a significant opportunity for
us in
that the Navy is actively seeking a “total fleet solution” to medical waste
management problems. Of the medical waste processing systems
considered by the Navy, the SteriMed System ranked among the highest to meet
the
needs (sterilization capability, size, ability to reduce the volume of waste
and
ability to render the waste non-recognizable) identified for evaluation aboard
ship. Our SteriMed Junior was identified as a solution that achieved
the Navy’s cost, ship impact, and performance metrics. We are
actively supporting the Navy project in an attempt to earn this business
which
could result in the sales of multiple SteriMed systems. The Navy recently
placed an order for an additional SteriMed System as they continue their
evaluation program.
In
addition to these opportunities, we are actively marketing to other branches
of
the military, including ground based operations where the need to reduce
cost
and to improve the environmental impact of medical waste management are key
issues.
Sales
to US-based and Foreign Distributors
To
maximize and augment our sales efforts in the U.S., we have been actively
recruiting distributors. Ideally, we are seeking local and regional
distributors who will have the right to sell the SteriMed Systems and related
products within their prescribed geographical areas or business
sectors. In order to gain exclusivity, the distributor must commit to
minimum annual purchases. The distributor is obligated to work within
the guidelines and regulatory approvals set up and maintained by
us.
In
addition, we have a non-exclusive distribution agreement with certain divisions
of Fresenius Medical Care North America (“FMC”). FMC is permitted to
distribute our consumables, i.e. SterCid
®
and SteriMed
Filter
Bags throughout the U.S., Canada and the Caribbean Basin. This arrangement
provides an efficient logistical system for customers to access our consumables
as FMC has excellent penetration in the renal care market. FMC has
numerous distributions sites throughout its territory which speeds delivery
of
these critical consumables to our clients, while reducing our need to provide
a
costly, distribution network for this supply chain solution.
In
April
2007, we entered into a five year non-exclusive distribution agreement
with
McKesson Medical-Surgical, a leading provider of healthcare products and
services to surgical centers, granting McKesson distribution rights to
market
our SteriMed systems for on-site medical waste processing to ambulatory
surgical
centers in the United States.
In
May 2007, we entered into a
non-exclusive distribution agreement granting Henry Schein, Inc., one of
the
largest providers of healthcare products and services to office-based
practitioners in the
combined North American and European markets,
distribution rights to market MCM’s SteriMed line of on-site medical waste
processing units to dialysis clinics in the United States
.
Internationally,
we market our SteriMed Systems both directly and indirectly through
distributors. In order to gain exclusivity, the distributor must
commit to minimum annual purchases. In those countries where we have
distributors, it is their responsibility to market and support the sales
of the
SteriMed Systems at their own expense as well as obtain all regulatory approvals
which will be registered in the name of MCM.
We
currently have international distributorship arrangements in Mexico, Russia
and
the Caribbean. We also have distributor agreements in Hungary, Japan, Portugal
and South Africa (defined as South Africa Development Countries).
Agent-based
Representatives
Concurrent
to our direct sales in the U.S, we continue to actively recruit agents who
will
act as our selling representatives, thus reducing our cost of
sales. We presently utilize the services of these agents on both the
Eastern and Western coasts of the Unites States. These agents seek out
opportunities for SteriMed in their local markets and are compensated for
these
sales through an agent based commission fee. The criteria for the
selection of these agents is that they must have existing, strong, long-term
relationships with clients that are within our “key” applications as defined
herein.
Manufacturing
We
recognize that to be successful, we need to be able to supply manufactured
units
that are robust, cost effective, reliable intrinsically safe, and of world
class
quality
We
manufacture components for the SteriMed systems globally at several key
suppliers. These components are then assembled at either our facility in
Moshav
Moledet, Israel or at a contract manufacturing partner. The SteriMed
Junior is assembled by a third-party contract assembly company in
Israel. The SteriMed is assembled in house at our engineering
facility in Israel or at a contract assembly company as volume warrants.
We
continue to seek sub-assembly manufacturers to enable us to reduce the cost
of
the SteriMed Junior as well as seek alternative locations for its manufacture
and/or assembly in closer proximity to our customer base.
Our
assembly facility in Israel is operated under the strictest guidelines of
the
global quality standard of ISO 9001:2000 and ISO 14001:2004.
Approximately
half of the SteriMed Systems’ components are commercially available from
third-party suppliers. The remaining components are either generic with
modification or customized specifically for the SteriMed. Presently
we maintain an inventory of spare parts and supplies in our Hackensack, NJ
warehouse and at our facility in Moledet, Israel.
Maintenance
and Customer Service Model
Critical
to the successful use of the SteriMed Systems is the proper training of the
personnel carrying out the installation, operation and service of the equipment.
Our technical service staff assists clients in the installation of units
and the
training of their staff and on-site operators. This training program
is strongly geared to safety and maintenance to assure ongoing safe and smooth
operation of the unit. After installation and training, operation of the
unit is
monitored by our technical staff to assure proper performance. In the
U.S. our technical staff is on call around the clock to assist with any
questions or issues relating to the operation of our SteriMed Systems. Our
goal
is to minimize problems through ongoing training and strict adherence to
maintenance schedules. We provide our
customers
with a warranty covering non-wear parts and labor for one year. In the U.S.,
an
extended warranty program is available to our customers upon purchasing the
unit.
In
the
U.S., we recently launched an industry’s first, real time cellemetry
program. The latest versions of the SteriMed systems have embedded
wireless communication systems which communicate machine performance data
to
technical support personnel. This system provides us with real time
reporting on machine performance data, including service data, to enable
us to
provide same or next business day onsite support to the waste processing
equipment. The cellemetry system has resulted in improved machine
availability and customer satisfaction. Cellemetry is a part of our
overall customer service model and is available as an annual subscription
service to our customers after the expiration of the one year machine warranty
period.
Proprietary
Rights
There
exist various medical waste treatment technologies that can be combined and
employed in different ways, making trademarks and patents very important
pieces
of intellectual property to possess in the medical waste treatment
industry.
MCM
acquired and/or applied for trademarks and patents for our SteriMed and
Ster-Cid
®
products as indicated in the following tables. The validation for
patents is extended to fifteen years, provided an annual fee (on renewal
dates)
is paid in the respective country.
MCM
STERIMED – INTERNATIONAL CLASS 10 TRADEMARK
:
File
No.
|
Country
|
Application
No.
|
Application
Date
|
Trademark
No.
|
99205
|
Australia
|
813207
|
11/9/1999
|
813207
|
99202
|
Canada
|
1035658
|
11/12/1999
|
TMA 596,329
|
99203
|
Common European Market Trademarks (CTM)
|
1380195
|
11/11/1999
|
1380195
|
99215
|
Hungary
|
M-9905279
|
11/10/1999
|
164682
|
99200
|
Israel
|
131893
|
11/1/1999
|
131893
|
99204
|
Japan
|
11-103144
|
11/12/1999
|
4562185
|
99206
|
Mexico
|
412940
|
2/23/2001
|
656603
|
99217
|
Poland
|
Z-209696
|
11/10/1999
|
145760
|
99213
|
Russia
|
99719294
|
11/18/1999
|
200276
|
99201
|
U.S.A
|
75/904,150
|
1/29/2000
|
2,713,884
|
MCM
STER-CID
®
INTERNATIONAL CLASS 5 TRADEMARK
:
File
No.
|
Country
|
Application
No.
|
Application
Date
|
Trademark
No.
|
99205
|
Australia
|
813207
|
11/9/1999
|
813207
|
99202
|
Canada
|
1035658
|
11/12/1999
|
TMA
596,329
|
99203
|
Common
European Market Trademarks (CTM)
|
1380195
|
11/11/1999
|
1380195
|
99215
|
Hungary
|
M-9905279
|
11/10/1999
|
164682
|
99200
|
Israel
|
131893
|
11/1/1999
|
131893
|
99204
|
Japan
|
11-103144
|
11/12/1999
|
4562185
|
99206
|
Mexico
|
412940
|
2/23/2001
|
656603
|
99217
|
Poland
|
Z-209696
|
11/10/1999
|
145760
|
99213
|
Russia
|
99719294
|
11/18/1999
|
200276
|
99201
|
U.S.A
|
75/904,150
|
1/29/2000
|
2,713,884
|
MCM
STERIMED PATENTS & PATENT APPLICATIONS
:
File
No.
|
Country
|
Application
No.
|
Application
Date
|
Patent
No.
|
Dates
Patent Valid
|
9454
|
U.S.A
|
08/369,533
|
1/5/1995
|
5,620,654
|
4/15/1997
- 4/15/2014
|
9456
|
Canada
|
2,139,689
|
1/6/1995
|
2,139,689
|
10/5/1999
- 1/6/2015
|
9452
|
Australia
|
10096/95
|
1/9/1995
|
684,323
|
4/2/1998-1/9/2015
|
9453
|
Japan
|
7-011844
|
1/23/1995
|
3058401
|
4/21/2000-
1/27/2015
|
9346
|
Israel
|
108,311
|
1/10/1994
|
108,311
|
12/23/1999-1/10/2014
|
9455
|
Europe
|
95630001.6
|
1/5/1995
|
EP0662346
|
3/28/2001
- 1/5/2015 or according to National Phase
|
6.1 - 2114
|
Austria
|
|
1/5/1995
|
E200039
|
2/15/2001-1/5/2015
|
6.2 - 2115
|
Belgium
|
|
1/5/1995
|
10662346
|
2/15/2001-1/5/2015
|
6.3 - 2116
|
Germany
|
|
1/5/1995
|
DE69520458T2
|
2/15/2001-1/5/2015
|
6.4 - 2117
|
Spain
|
|
1/5/1995
|
EP0662346
|
2/15/2001-1/5/2015
|
6.5 - 2118
|
France
|
|
1/5/1995
|
EP0662346
|
2/15/2001-1/5/2015
|
6.6 - 2119
|
United Kingdom
|
|
1/5/1995
|
EP(UK)662346
|
2/15/2001-1/5/2015
|
6.7 - 2120
|
Italy
|
|
1/5/1995
|
0662346
|
2/15/2001-1/5/2015
|
6.8 - 2121
|
Netherlands
|
|
1/5/1995
|
EP0662346
|
2/15/2001-1/5/2015
|
MCM
STERIMED PATENT CORPORATION TREATY (“PCT”) INTERNATIONAL PHASE PATENTS
–PCT/IL02/00093
:
File
No.
|
Country
|
Application
No.
|
Application
Date
|
Patent
No.
|
Dates
Valid
(Patent or Application)
|
2338
|
Brazil
|
200300398
|
7/31/2003
|
P10206913-0
|
7/31/2003
- 2/4/2022
|
2339
|
Mexico
|
PA/a/2003/
006946
|
8/4/2003
|
Pending
|
8/4/2003
- 2/4/2022
|
2340
|
Russia
|
2003127023
|
9/4/2003
|
Pending
|
9/4/2003
- 2/4/2022
|
2341
|
South
Africa
|
2003/5602
|
7/21/2003
|
2003/5602
|
9/23/2003
- 2/4/2022
|
2342
|
Canada
|
2437219
|
8/1/2003
|
Pending
|
8/1/2003
- 2/4/2022
|
2343
|
China
|
02806986.2
|
9/22/2003
|
Pending
|
9/22/2003
- 2/4/2022
|
2712
|
Hong
Kong
|
4106248.3
|
8/20/2004
|
ZL028069862
|
6/14/2006-2/4/2022
|
2344
|
India
|
01389/
chenp/03
|
9/2/2003
|
Pending
|
9/2/2003
- 2/4/2022
|
File
No.
|
Country
|
Application
No.
|
Application
Date
|
Patent
No.
|
Dates
Valid
(Patent or Application)
|
2313/354
|
Europe
|
02711185.5
|
9/5/2003
|
P210477
PCT/EP
|
9/5/2003-
2/4/2022
|
2337
|
Australia
|
2002230065
|
2/4/2002
|
Pending
|
2/4/2002
- 2/4/2022
|
2373
|
USA
|
09/824,685
|
4/4/2001
|
6494391
|
12/17/2002
- 4/4/2021
|
We
maintain, in-house, a system that tracks all expiration dates for our trademarks
and patents. This internal tracking system alerts us when renewal
submissions are required.
Employees
As
of
October 31, 2007, we employed 19 full time employees and one part-time employee,
including four senior managers. Of these, eight employees are located
at our facility in Israel.
None
of
our employees is represented by any labor organization and we are not aware
of
any activities seeking such organization. We consider our relations
with employees to be good.
As
the
level of our activities grow, additional personnel may be required.
Properties
We
lease
approximately 4,200 square feet of office space in Hackensack, New Jersey
for
executive and administrative personnel pursuant to a lease that expires on
September 30, 2011 at a base monthly rental of approximately $7,500, plus
escalation. We also lease on a month to month basis approximately 400
square feet of space in Hackensack, NJ for warehousing purposes at a monthly
cost of $575.
In
Israel, we lease 2,300 square feet of industrial space at a monthly cost
of
approximately $1,000 and the lease expires on March 31, 2008.
Litigation
In
May 2006, Andre Sassoon and Andre
Sassoon International, Inc. (the “Plaintiffs”), filed a complaint against us,
our subsidiary, M.C.M. Environmental Technologies, Inc. (“MCM”), and George
Aaron, who was then our CEO(collectively, the “Company Defendants”) in the
Supreme Court of the State of New York, New York County, claiming that the
defendants had breached an agreement entered into as part of the December
2002
MCM acquisition to pay $400,000 as settlement of a note previously issued
by
MCM. The complaint also names all persons who were stockholders of
MCM at the time of our original investment in MCM in December
2002. In June 2006, the Plaintiffs filed an amended complaint to
include additional counts, alleging certain misrepresentations by the Company
Defendants related to the agreement with the Plaintiffs. The
Plaintiffs are seeking damages in excess of $400,000 or the stock interest
of
the MCM stockholders at the time of the Company’s
acquisition. Discovery has been undertaken. Based upon our
review of the amended complaint, we continue to believe the Plaintiffs’ claims
have no merit, and the Company Defendants will vigorously defend this
action. Accordingly, we have not recorded any accrual for this
litigation as of June 30, 2007.
Executive
Officers and Directors
As
of
October 31, 2007, our directors and executive officers were:
Name
|
Age
|
Position
|
|
|
|
Dwight
Morgan
|
46
|
Chairman
of the Board, President & CEO
|
|
|
|
George
Aaron
|
55
|
Executive
Vice President – International Business Development
|
|
|
|
Jonathan
Joels
|
51
|
Chief
Financial Officer, Treasurer,
Secretary
and Director
|
|
|
|
Kenneth
C. Leung (1)(2)
|
62
|
Director
|
|
|
|
Roger
W. Miller
|
61
|
Director
|
|
|
|
Sol
Triebwasser, Ph.D. (1)(2)
|
86
|
Director
|
____________________
(1) Member
of the Audit Committee
(2) Member
of the Compensation/Option Committee
The
principal occupations and brief summary of the background of each Director
and
executive officer is as follows:
Dwight
Morgan
. Mr. Morgan has been Chairman of the Board
since February 2007 and became President and CEO in November 2006. Mr. Morgan
has served as our Chief Engineering Consultant since 2003. From 1999 to
2003, he was a founder, President and Chief Operating Officer of POM Group,
which had developed an alternative metal fabricating technology. For
17 years to 1999, he served in various management positions at FANUC Robotics
North America, with his last position being General Manager – Automation System
Group. Mr. Morgan began his career in 1982 as a systems engineer at
General Motor Technical Center. Mr. Morgan is a member of the
Michigan Economic Development Corporation’s Advanced Manufacturing Strategic
Roundtable and is Chairman of the Corporate Development Committee of the
American Diabetes Association. Mr. Morgan received a BS in Mechanical
Engineering from Cornell University.
George
Aaron
.
Mr. Aaron has been Executive
Vice President – International Business Development since February 2007. Prior
thereto Mr. Aaron had served as Chairman of the Board since June 1999 and
as
President and CEO from 1999 to November 2006. He has served as a
Director since 1999 and had previously served as a Director from 1992 until
1996. From 1992 to 1998, Mr. Aaron was the co-Founder and CEO of
Portman Pharmaceuticals, Inc. and in 1994 co-founded CBD Technologies, Inc.
of
which he remains a Director. Mr. Aaron also serves on the Board of
Directors of DeveloGen AG, who merged with Peptor Ltd. (the company that
had
acquired Portman Pharmaceuticals). From 1983 to 1988, Mr. Aaron was
the Founder and CEO of Technogenetics Inc. (a diagnostic
company). Prior to
1983,
Mr.
Aaron was Founder and Partner in Portman Group, Inc. and headed international
business development at Schering Plough. Mr. Aaron is a graduate of the
University of Maryland.
Jonathan
Joels
.
Mr. Joels has been CFO,
Treasurer, Secretary and a Director since June 1999. From 1992 to
1998, Mr. Joels was the co-founder and CFO of Portman Pharmaceuticals, Inc.
and
in 1994 co-founded CBD Technologies, Inc. Mr. Joels’ previous
experience included serving as a principal in Portman Group, Inc., CFO of
London
& Leeds Corp. and Chartered Accountant positions with both Ernst & Young
and Hacker Young between 1977 and 1981. Mr. Joels qualified and was
admitted as a Chartered Accountant to the Institute of Chartered
Accountants
in England and Wales in 1981 and holds a BA Honors Degree in Accountancy
(1977)
from the City of London.
Kenneth
C. Leung.
Mr. Leung has been a Director since
December 6, 2006
.
Since 1995, Mr. Leung has been a Managing
Director of Sanders Morris Harris Group and is engaged in investment banking
in
environmental and alternative energy, and is the Chief Investment Officer
of its
Environmental Opportunity Funds. From 1978 to 1994, Mr. Leung had
served as a Managing Director at Smith Barney, and for more than ten years
prior
he served in different positions at other investment banking
institutions. He currently serves as Chairman of the Board of
American Ecology Corp., (NASDAQ: ECOL), and a director of SystemOne Technologies
Inc.(other OTC: STEK.PK) and AeroGrowth International, Inc. Mr. Leung
received an MBA in Finance from Columbia University and a BA in History from
Fordham University.
Roger
W. Miller.
Mr. Miller has been a Director
since February 23, 2007. Since 1992, Mr. Miller has been actively
involved as a manager of personal portfolios of investments in private
venture-stage companies and small public companies. Mr. Miller had
served as a director at some of these companies. He is also a financial
consultant and expert witness in valuation cases, merger-related transactions
and work-out and restructuring situations. Prior to 1992, Mr. Miller
held positions at Cambridge Capital where he was Co-Chairman of the private
equity affiliate of Baker, Nye and held the position of General Partner and
Managing Director at Salomon Brothers. Mr. Miller holds degrees in
both Law and Economics from Cambridge University and London University,
respectively.
Sol
Triebwasser, Ph.D.
Dr. Triebwasser has been a
Director since 1984. Until his retirement in 1996, Dr. Triebwasser
was Director of Technical Journals and Professional Relations for the IBM
Corporation in Yorktown Heights New York, which he joined after receiving
his
Ph.D. in physics from Columbia in 1952. He had managed various
projects in device research and applications at IBM, where he is currently
a
Research Staff member emeritus. Dr. Triebwasser is a fellow of the
Institute for Electrical and Electronic Engineers, the American Physical
Society
and the American Association for the Advancement of Science.
Mr.
Aaron
and Mr. Joels are brothers-in-law.
The
Board
of Directors met either in person or telephonically five times in the fiscal
year ended September 30, 2006. Each of the Directors attended at
least 75% of the meetings.
Board
Committees
The
Board
of Directors has standing Audit and Compensation/Option Committees.
The
Audit
Committee reviews with our independent public accountants the scope and timing
of the accountants’ audit services and any other services they are asked to
perform, their report on our financial statements following completion of
their
audit and our policies and procedures with respect to internal accounting
and
financial controls. In addition, the Audit Committee reviews the
independence of the independent public accountants and makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year. The Audit Committee met
six times
during
the fiscal year ended September 30, 2006. The audit committee has not
yet designated an “Audit Committee Financial Expert.”
The
Compensation/Option Committee reviews and recommends to the Board of Directors
the compensation and benefits of all of our officers, reviews general policy
matters relating to compensation and benefits of our employees and administers
our stock option plans.
Director
Compensation
Directors
who are also employees are not paid any fees or additional compensation for
services as members of our Board of Directors or any committee
thereof. Non-employee Board members are entitled to an annual fee of
$20,000 and 20,000 options under our 2002 Stock Option Plan, and may receive
additional option grants at the discretion of the Board.
Executive
Compensation
The
following table sets forth the aggregate cash compensation paid by us over
the
past three fiscal years to (i) our Chief Executive Officer and (ii) our most
highly compensated officers whose cash compensation exceeded $100,000 for
services performed during the year ended September 30, 2006.
Annual
Compensation
|
Long
Term Compensation
|
|
|
|
|
|
Awards
|
Payouts
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual
Compensation
($)
|
Restricted
Stock
Award(s)
($)
|
Securities
Underlying
Options
SARs
(#)
|
LTIP
Payouts
($)
|
All
Other
compensation
($)
|
George
Aaron
Chairman,
President/CEO
|
2006
2005
2004
|
240,000
240,000
240,000
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
Jonathan
Joels
CFO
|
2006
2005
2004
|
220,000
176,000
176,000
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
In
fiscal
2006 we reimbursed Messrs. Aaron, and Joels in the amounts of $1,000 and
$750
per month, respectively for automobile expenses excluding
insurance. Messrs. Aaron and Joels are reimbursed for other expenses
incurred by them on our behalf in accordance with our policies.
On
November 13, 2006, Dwight Morgan was appointed as our President and CEO at
an
annual base salary of $250,000. In addition, Mr. Morgan received a
sign-on bonus of $20,000 as well as a car allowance of $1,000 per
month. Upon commencement of his employment, Mr. Morgan was granted an
option for 350,000 shares of our common stock at an exercise price of $0.60
per
share (the fair market value on the date of grant), with vesting after six
months as to 1/8 of the options granted and the balance vesting at 1/48 per
month (of the total granted) over the next 42 months under our 2002 Stock
Option
Plan. Options for 206,050 of the 350,000 shares were subject to stockholder
approval of an increase in the number of shares of common stock underlying
the
Plan. These options were granted at an exercise price of $0.60 on February
26,
2007 when stockholder approval was received.
In
February 2007, upon becoming Executive Vice President – International Business
Development, Mr. Aaron’s compensation was changed to an annual base salary of
$137,000, incentive payments based upon the achievement of prescribed sales
milestones up to an additional $192,000, plus commissions.
We
do not
have any annuity, retirement, pension or deferred compensation plan or other
arrangements under which any executive officers are entitled to participate
without similar participation by other employees. As of September 30,
2006, under our 401(k) plan there was no matching contribution by the
Company.
Listed
below is information with respect to options for the above-named executive
officers as of September 30, 2006:
Options/SAR
Grants in Last Fiscal Year
|
Individual
Grants
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
|
|
|
|
Name
|
Number
of
Securities
Underlying
Options/SARS
Granted
(#)
|
%
of Total
Options/SARS
Granted
to
Employee(s)
in
Fiscal Year
|
Exercise
On
Base
Price
($/Sh) *
|
Expiration
Date
|
|
|
|
|
|
George
Aaron
|
100,000
|
28.3%
|
2.20
|
01/04/16
|
Jonathan
Joels
|
100,000
|
28.3%
|
2.20
|
01/04/16
|
*
Repriced to $1.10 as outlined in the Stock Options section
below
|
Aggregate
Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR
Values
|
Fiscal
Year End Option Value
|
Name
|
Shares
Acquired
or
Exercised
|
Value
Realized
|
Number
of Securities
Underlying
Unexercised
Options
at Sept. 30, 2006
Exercisable/Unexercisable
|
Value
of
Unexercised
In-the
Money
Options
at
Sept. 30, 2006
Exercisable
($)
|
|
|
|
|
|
George
Aaron
|
- 0 -
|
- 0 -
|
36,660/83,340
|
$-
0 -
|
Jonathan
Joels
|
- 0 -
|
- 0 -
|
36,660/83,340
|
$-
0 -
|
In
May
2002, our Board of Directors adopted the 2002 Stock Option Plan (“2002 Plan”)
which was ratified at our stockholder meeting of June 26, 2002. At September
30,
2006, 700,000 shares of common stock were reserved for issuance under the
2002
Plan, of which options for an aggregate of 506,050 shares were granted and
outstanding, and 193,950 shares were available for future
grants. Between October 1, 2006 and March 31, 2007, options were
granted under the 2002 Plan for an aggregate of 1,180,000 shares, of which
1,036,050 shares were granted subject to stockholder approval of an increase
in
the number of shares of common stock underlying the 2002 Plan. These options
which were granted to officers, directors and employees are at an exercise
price
ranging from $0.52 to $0.80 per share. They are for a 10 year term, vesting
after six months as to one-eighth of the options granted, and
the
balance vesting in equal monthly installments over the next forty-two
months. The vesting schedule of these options begins, on the date
approved by our Board of Directors. Using the Black Scholes Option pricing
model
we determined that the fair value of these options range from $0.32 to $0.38
per
share which equates to a fair value of approximately $371,000 On
December 1, 2006, the Board of Directors voted to amend the 2002 Plan by
increasing to 1,500,000 the total number of shares of common stock reserved
for
issuance thereunder, subject to stockholder approval, and on February 23,
2007,
the Board raised the number of shares to 2,500,000, subject to stockholder
approval. Stockholder approval was obtained as of February 26, 2007
by the written consent of the holders of more than a majority of outstanding
voting shares, and notice thereof was given to the other stockholders. Under
the
2002 Plan, options may be awarded to employees, directors and
consultants. These options may be qualified or not qualified pursuant
to the regulations of the Internal Revenue Code.
On
March 5, 2007, we re-priced options
for the purchase of an aggregate of 458,000 shares which were originally
granted
on January 4, 2006. The options were originally issued at an exercise
price of $2.20 per share and were repriced at $1.10 per share, representing
110%
of the then market price of the common stock. Using the Black Scholes
Option pricing model, we determined that the additional fair value of these
options due to the re-pricing is approximately $53,700. In the second quarter
of
fiscal 2007 we took a charge of $15,652 for those options which have previously
vested and the balance will be expensed over the remaining vesting period
of
these options.
During
1993, we adopted an employee stock option plan and a stock option plan for
non-employee directors. The employee stock option plan provides for
the granting of options to purchase not more than 50,000 shares of common
stock. These 1993 plans expired in May 2003. As of June
30, 2007, there remain options for 31,500 shares outstanding there under
at
exercise prices ranging from $3.00 to $5.00 per share, which terminate in
2010.
As
of
June 30, 2007, we had outstanding options granted outside our plans for an
aggregate of 130,000 shares of common stock at exercise prices ranging from
$0.70 to $1.75 per share, with expiration dates of September 2009 and July
2011.
Compensation
Committee Interlocks and Insider Participation
During
Fiscal 2006 members of our Compensation/Option Committee were Sol Triebwasser,
Ph.D. and Jeffrey Hymes, M.D., neither is an executive officer or employee
of
the Company or our subsidiaries.
The
following table sets forth, as of October 31, 2007, certain information
regarding the beneficial ownership of our common stock by (i) each person
who is
known by us to own beneficially more than five percent of the outstanding
common
stock, (ii) each of our directors and executive officers, and (iii) all
directors and executive officers as a group:
Name
and Address of
Beneficial
Owner*
|
Position
with Company
|
Amount
and Nature of
Beneficial
Ownership (1)
of
Common Stock
|
Percentage
of
Securities
***
|
|
|
|
|
Austin
W. Marxe and David M. Greenhouse
527
Madison Ave.
New
York, NY 10022
|
Holder
of over five percent
|
9,440,037(2)
|
79.3.%
|
|
|
|
|
Dolphin
Offshore Partners LP
120
East 17
th
Street
New
York, NY 10003
|
Holder
of over five percent
|
3,375,000(3)
|
46.7%
|
|
|
|
|
Bonanza
Master Fund Ltd.
300
Crescent Ct. Ste. 250
Dallas,
TX 75201
|
Holder
of over five percent
|
2,799,977(4)
|
44.6.%
|
|
|
|
|
Vision
Opportunity Master Fund Ltd
20
West 55
th
Street
New
York, NY 10019
|
Holder
of over five percent
|
423,000(5)
|
9.9%
|
|
|
|
|
Shrikant
Mehta
Combine
International
354
Indusco Court
Troy,
Michigan 48083
|
Holder
of over five percent
|
210,894
|
5.5%
|
|
|
|
|
Dwight
Morgan
|
Chairman
of the Board; Chief Executive Officer; President
|
113,944(6)
|
2.9%
|
|
|
|
|
George
Aaron
|
Director,
Executive Vice President
|
402,701(7)
|
10.0%
|
Name
and Address of
Beneficial Owner*
|
Position
with
Company
|
Amount
and
Nature of
Beneficial
Ownership (1) of
Common
Stock
|
Percentage
of
Securities***
|
|
|
|
|
Jonathan
Joels
|
Director;
Chief
Financial
Officer; Vice President; Treasurer; Secretary
|
397,915(8)
|
9.9%
|
|
|
|
|
Sol
Triebwasser, Ph.D.
|
Director
|
20,068(9)
|
**
|
|
|
|
|
Kenneth
C. Leung
|
Director
|
6,000(10)
|
**
|
|
|
|
|
Roger
W. Miller
|
Director
|
4,166(11)
|
**
|
|
|
|
|
All
executive officers and Directors as a group (6 persons)
|
|
944,794(12)
|
21.8%
|
*
|
Address
of all holders except those listed with a specific address
above is, One University Plaza, Suite 400, Hackensack, New Jersey
07601.
|
**
|
Less
than one percent (1%)
|
(1)
|
Includes
voting and investment power, except where otherwise noted. The
number of shares beneficially owned includes shares each beneficial
owner
and the group has the right to acquire within 60 days of October
31, 2007
pursuant to stock options, warrants and convertible
securities.
|
(2)
|
Consists
of (A)(i)1,034,482 shares direct, (ii)2,656,092 shares underlying
warrants
presently exercisable, (iii) 1,045,718 shares underlying Series
D
Convertible Preferred Stock and (iv) 2,343,750 shares underlying
Series E
Convertible Preferred Stock held by Special Situations Private
Equity
Fund, L.P., (B)(i) 317,037 shares direct, (ii) 814,274 shares underlying
warrants presently exercisable, (iii) 320,685 shares underlying
Series D
Convertible Preferred Stock and (iv) 718,750 shares underlying
Series E
Convertible Preferred Stock held by Special Situations Fund III,
QP, L.P.,
and (C)(i) 27,790 shares direct, (ii) 71,088 shares underlying
warrants
presently exercisable, (iii) 27,871 shares underlying Series D
Convertible
Preferred Stock and (iv) 62,500 shares underlying Series E Convertible
Preferred Stock held by Special Situations Fund III,
L.P. MGP Advisors Limited (“MGP”) is the general partner
of the Special Situations Fund III, QP, L.P. and the general partner
of
and investment adviser to the Special Situations Fund III,
L.P. AWM Investment Company, Inc. (“AWM”) is the general
partner of MGP and the investment adviser to the Special Situations
Fund
III, QP, L.P. and the Special Situations Private Equity Fund,
L.P. Austin W. Marxe and David M. Greenhouse are the principal
owners of MGP and AWM. Through their control of MGP and AWM,
Messrs. Marxe and Greenhouse share voting and investment control
over the
portfolio securities of each of the funds listed
above.
|
(3)
|
Consists
of (i) 2,250,000 shares underlying Series E Convertible Preferred
Stock
and (ii) 1,125,000 shares underlying warrants presently
exercisable.
|
(4)
|
Consists
of (i) 376,200 shares, (ii) 1,976,012 shares underlying Series
D
Convertible Preferred Stock and (iii) 447,765 shares underlying
warrants
presently exercisable.
|
(5)
|
Includes
416,621 shares underlying Series E Convertible Preferred Stock.
Excludes
(i) 333,379 shares underlying Series E Convertible Preferred Stock
and
(ii) 375,000 shares underlying warrants. Pursuant to a Letter Agreement,
dated February 27, 2007, between us and Vision Opportunity Master
Fund,
Ltd. (“Vision”), Vision covenanted not to convert its Series E Convertible
Preferred Stock or exercise its warrants if such conversion or
exercise
would cause its beneficial ownership to exceed 9.99%, which provision
Vision may waive, upon not less than 61 days prior notice to us,
as
reported in its Schedule 13G filed on March 12,
2007.
|
(6)
|
Includes
97,685 shares underlying options presently exercisable and excludes
276,056 shares underlying options which are currently not
exercisable.
|
(7)
|
Includes
(i) 353 shares in retirement accounts, (ii) 8,199 shares underlying
warrants presently exercisable, (iii) 5 shares jointly owned with
his wife
and (iv)162,690 shares underlying options presently exercisable,
and
excludes 307,310 shares underlying options which are currently
not
exercisable.
|
(8)
|
Includes
(i) 48,000 shares as trustee for his children, (ii) 8,616 shares
underlying warrants presently exercisable, (iii) 162,690 shares
underlying
options presently exercisable, (iv) 17,241 shares in a retirement
account,
and excludes 307,310 shares underlying options which are currently
not
exercisable.
|
(9)
|
Includes
19,998 shares underlying options presently exercisable and excludes
25,002
shares underlying options which are currently not
exercisable.
|
(10)
|
Includes
5,000 shares underlying options presently exercisable and excludes
15,000
shares underlying options which are currently not
exercisable.
|
(11)
|
Includes
4,166 shares underlying options presently exercisable and excludes
15,834
shares underlying options which are currently not
exercisable.
|
(12)
|
Includes
(i) 16,815 shares underlying warrants and (ii) 468,488 shares underlying
options presently exercisable, and excludes 946,512 shares underlying
options which are currently not
exercisable.
|
CERTAIN
RELATIONSHIPS
AND RELATED
TRANSACTIONS
During
the first two quarters of fiscal 2005, we received advances in the principal
amount of $145,923 through short term loans until additional equity funding
was
secured. The lenders also received warrants to purchase 7,295 shares
of 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, and Joels who advanced $64,000,
and $62,357 respectively. As a condition of this financing the holders of
the
Notes exchanged 50% of our indebtedness for 728 shares of Series C Mandatory
Convertible Preferred Stock and on February 15, 2005 were paid the balance
of
their notes inclusive of interest.
On
January 30, 2007, we borrowed the principal amount of $100,000 from Special
Situations Private Equity Fund L.P, which is a principal stockholder, through
the issuance of a 10% promissory note. This note plus interest of
$805.56 was repaid on the closing of the 2007 placement.
We
believe that the above referenced transactions were made on terms no less
favorable to us than could have been obtained from an unaffiliated third
party. Furthermore, any future transactions or loans between us and
our officers, directors, principal stockholders or affiliates will be on
terms
no less favorable to us than could be obtained from an unaffiliated third
party,
and will be approved by a majority of disinterested directors.
Common
Stock
We
are
authorized to issue 50,000,000 shares of common stock, $0.01 par value, of
which
3,849,662 shares were issued and outstanding as of September 30,
2007.
The
holders of common stock are entitled to one vote for each share held of record
on all matters to be voted by stockholders. There is no cumulative
voting with respect to the election of directors with the result that the
holders of more than 50% of the shares of common stock and other voting shares
voted for the election of directors can elect all of the directors.
The
holders of shares of common stock are entitled to dividends when and as declared
by the Board of Directors from funds legally available therefore, and, upon
liquidation are entitled to share pro rata in any distribution to holders
of
common stock, subject to the right of holders of outstanding preferred
stock. No dividends have ever been declared by the Board of Directors
on the common stock. See “Dividend Policy.” Holders of our
common stock have no preemptive rights. There are no conversion
rights or redemption or sinking fund provisions with respect to our common
stock. All of the outstanding shares of common stock are, and all
shares sold hereunder will be, when issued upon payment therefore, duly
authorized, validly issued, fully paid and non-assessable.
Preferred
Stock
We
are
authorized to issue 1,000,000 shares of preferred stock, par value $.01 per
share, of which 27,000 shares of Series B Preferred Stock, 194,933 shares
of
Series D Preferred Stock and 10,000 shares of Series E Preferred Stock were
outstanding at June 30, 2007. The Series B Preferred Stock ranks
senior to any other shares of preferred stock which may be created and the
common stock. It has a liquidation value of $100.00 per share, plus
accrued and unpaid dividends, is non-voting except if we propose an amendment
to
our Certificate of Incorporation which would adversely affect the rights
of the
holders of the Series B Preferred Stock, and is convertible into 57,989 shares
of our common stock, subject to customary anti-dilution
provisions. No fixed dividends are payable on the Series B Preferred
Stock, except that if a dividend is paid on the common stock, dividends are
paid
on the shares of Series B Preferred Stock as if they were converted into
shares
of common stock. The Series B Preferred Stock is convertible for ten
years from the date of purchase, August 18, 1997, and subject to mandatory
conversion upon a change of control or August 18, 2007, whichever occurs
first
On
February 16, 2006, we filed a Certificate of Designations authorizing the
Series
D Convertible Preferred Stock, consisting of 250,000 shares at a stated value
of
$12.40 per share, of which 194,933 shares were outstanding as of June 30,
2007. Pursuant to the 2006 preferred stock placement, we issued
241,933 shares of the Series D Preferred Stock, each share was initially
convertible into ten shares of common stock, subject to customary anti-dilution
provisions. By reason of these anti-dilution provisions, after the
2007 placement, each outstanding share of Series D Preferred Stock is
convertible into 17.29 shares of common stock, or an aggregate of 3,370,286
shares of common stock. These shares are subject to a mandatory
conversion commencing after the effective date of a registration statement
covering the underlying common stock if the average closing bid price of
the
common stock for 15 days in any 20 consecutive trading days (including the
last
five trading days) exceeds $2.68 per share and if the average daily trading
volume during such period exceeds 30,000 shares (subject to
adjustment). The holders of the Series D Preferred Stock are entitled
to an annual cumulative dividend of $0.67 per share, payable semi-annually,
commencing October 1, 2007. Neither we nor the holders of the Series
D Preferred Stock have the right to cause the redemption thereof.
On
March
1, 2007, we closed a placement of 10,000 shares of Series E Convertible
Preferred Stock at $250 a share. Each share of the Series E Preferred
Stock is convertible into 625 shares of common stock, subject to customary
anti-dilution provisions, or an aggregate of 6,250,000 shares of common
stock. Commencing October 1, 2007, the holders of the Series E
Preferred Stock are entitled to receive a cash dividend at a per share rate
equal to $13.50 per annum, and a liquidation preference of $250 per share
plus
accrued and unpaid dividends, and ranking pari passu with the Series B and
Series D Preferred Stock. The Series E Preferred Stock votes on an
as-converted basis with the common stock, and has a separate vote with respect
to matters directly affecting this Series. Neither we nor the holders
of the Series E Preferred Stock have the right to cause the redemption
thereof.
We
may
issue the remaining authorized preferred stock in one or more series having
the
rights, privileges, and limitations, including voting rights, conversion
rights,
liquidation preferences, dividend rights and redemption rights, as may,
from
time to time, be determined by the Board of Directors. Preferred
stock may be issued in the future in connection with acquisitions, financings,
or other matters, as the Board of Directors deems appropriate. In the
event that we determine to issue any shares of preferred stock, a certificate
of
designation containing the rights, privileges and limitations of this series
of
preferred stock will be filed with the Secretary of State of the State
of
Delaware. The effect of this preferred stock designation power is
that our Board of Directors alone, subject to Federal securities laws,
applicable blue sky laws, and Delaware law, may be able to authorize the
issuance of preferred stock which could have the effect of delaying, deferring,
or preventing a change in control without further action by our stockholders,
and may adversely affect the voting and other rights of the holders of
our
common stock.
Transfer
Agent
American
Stock Transfer and Trust Company, New York, New York, is the transfer agent
for
our common stock.
The
selling stockholders are comprised of:
(i)
four
institutional investors which are registering for sale (A) 1,949,330 shares
of
common stock underlying Series D Convertible Preferred Stock (the “Series D
Preferred”) acquired in the February 2006 placement and by way of anti-dilution
provisions of the placement, (B) 671,646 shares underlying warrants exercisable
at prices ranging from $.90 to $1.40 per share (the “2006 Warrants”) acquired in
the February 2006 placement and (C) 376,200 shares issued upon prior conversions
of the Series D Preferred; and
;
(ii)
a
placement agent and eight designees of a second placement agent in the February
2006 placement who received warrants for the purchase of an aggregate of
179,105
shares (the “2006 Agent’s Warrants”).
None
of
the selling stockholders has held any position or office or had any material
relationship with us or any of our predecessors or affiliates within three
years
of the date of this prospectus other than Special Situations Private Equity
Fund, L.P. having made a $100,000 bridge loan to us in January 2007
that was repaid in March 2007 on the closing of the placement of Series E
convertible preferred stock (the “Series E Preferred).
The
following table sets forth, as of October 31, 2007, information with regard
to
the beneficial ownership of our common stock by each of the selling
stockholders. The term “selling stockholder” includes the
stockholders listed below and their respective transferees, assignees, pledges,
donees and other successors.
Because
the selling stockholders may offer all, some or none of their common stock,
no
definitive estimate as to the number of shares thereof that will be held
by the
selling stockholders after such offering can be provided and the following
table
has been prepared on the assumption that all shares of common stock offered
under this prospectus will be sold.
Name(1)
|
Shares
Beneficially
Owned
Prior
To
Offering(1)
|
Percent
Beneficially
Owned
Before
Offering
|
Shares
to
be
Offered
|
Amount
Beneficially
Owned
After
Offering(2)
|
Percent
Beneficially
Owned
After
Offering
|
Francis
Anderson (3)
|
5,500
|
*
|
1,000
|
4,500
|
*
|
Bonanza
Master Fund Ltd. (4)
|
2,799,977
|
44.6%
|
1,966,865
|
833,112
|
13.3%
|
Bonanza
Trust (5)
|
66,307
|
1.7%
|
7,451
|
58,856
|
1.5%
|
Carter
Securities LLC (6)
|
119,403
|
3.0%
|
119,403
|
-
|
*
|
Dinathus
Trust (7)
|
49,557
|
1.3%
|
7,451
|
42,106
|
1.1%
|
Harvey
Kohn (8)
|
29,844
|
*
|
13,000
|
16,844
|
*
|
Lewis
Mason (9)
|
8,400
|
*
|
8,400
|
-
|
*
|
Special
Situations Fund III LP (10)(11)
|
189,249
|
4.7%
|
20,597
|
168,652
|
4.2%
|
Special
Situations Fund III QP, L.P. (10)(12)
|
2,170,746
|
38.0%
|
236,973
|
1,933,773
|
33.9%
|
Special
Situations Private Equity Fund, L.P. (10)(13)
|
7,080,042
|
71.6%
|
772,741
|
6,307,301
|
63.7%
|
Mary
Ellen Spedale (14)
|
9,118
|
*
|
1,000
|
8,118
|
*
|
Cary
Sucoff (15)
|
28,089
|
*
|
13,000
|
15,089
|
*
|
Scott
Sucoff (16)
|
8,400
|
*
|
8,400
|
-
|
*
|
*
|
Less
than one percent (1%).
|
|
1.
|
Unless
otherwise indicated in the footnotes to this table, the persons
and
entities named in the table have sole voting and sole investment
power
with respect to all shares beneficially owned, subject to community
property laws where applicable. Beneficial ownership includes
shares of common stock underlying the Series D Preferred, Series
E
Preferred, options and warrants exercisable within 60 days from
October
31, 2007. Ownership is calculated based upon 3,849,662 shares
of common stock outstanding as of October 31,
2007.
|
|
2.
|
Assumes
the sale of all shares covered hereby. A portion of these
securities are included in a separate registration statement
that we filed
on behalf of the holders therein, see
No. 333-141647.
|
|
3.
|
Includes
(i) 1,000 shares underlying 2006 Agent’s Warrants registered herein and
(ii) 4,500 shares underlying other warrants. Does not include
4,368 shares underlying warrants beneficially owned by Mr.
Anderson’s wife
in which shares he disclaims any beneficial
ownership
.
|
|
4.
|
Includes
(i) 376,200 shares outstanding, (ii) 1,142,900 shares underlying
Series D Preferred, (iii) 447,765 shares underlying 2006 Warrants
registered herein, and (iv) 833,112 shares underlying Preferred
Stock. Bernay Box holds dispositive power and voting power over
these securities. This selling stockholder may not convert its
Series D Preferred nor exercise its 2006 Warrants to the extent
such
conversion or exercise would cause this selling stockholder,
together with
its affiliates, to beneficially own a number of shares of common
stock in
excess of 4.99% of our then outstanding shares following such
conversion
and/or exercise, including for purposes of such determination
shares of
common stock issuable upon conversion of the Series D Preferred
or
exercise of warrants which have not been exercised. This
selling stockholder has the right to increase its blocker percentage
to
between 5.0% and 9.99%, but it cannot waive its
blocker
.
|
|
5.
|
Includes
(i) 7,451 shares underlying 2006 Agent’s Warrants registered herein and
(iii) 58,856 shares underlying other warrants. Jeff
Zaluda, Trustee for Agent, has dispositive power and voting
power over
these securities
.
|
|
6.
|
Includes
119,403 shares underlying 2006 Agent’s Warrants registered
herein. John Lipman has dispositive power and voting power of
these securities
.
|
|
7.
|
Includes
(i) 7,451 shares underlying 2006 Agent’s Warrants included herein,
and (ii) 42,106 shares underlying other warrants. Deidre
Henderson as Trustee has dispositive power and voting power
over these
securities
.
|
|
8.
|
Includes
(i) 13,000 shares underlying 2006 Agent’s Warrants registered herein and
(ii) 16,844 shares held in a retirement account. This does not
include 78,027 shares underlying warrants beneficially owned
by Mr. Kohn’s
wife in which shares he disclaims beneficial
ownership
.
|
|
9.
|
Includes
8,400 shares underlying 2006 Agent’s Warrants. Does not include
45,316 shares underlying other warrants beneficially owned by Mr.
Mason’s wife in which shares he disclaims beneficial
ownership
.
|
|
10.
|
MGP
Advisors Limited (“MGP”) is the general partner of the Special Situations
Fund III, QP, L.P. and the general partner of and investment
adviser to
the Special Situations Fund III, L.P. AWM Investment Company,
Inc. (“AWM”) is the general partner of MGP and the investment adviser
to
the Special Situations Fund III, QP, L.P. and the Special Situations
Private Equity Fund, L.P. Austin W. Marxe and David M.
Greenhouse are the principal owners of MGP and AWM. Through
their control of MGP and AWM, Messrs. Marxe and Greenhouse
share
dispositive power and voting power over the portfolio securities
of each
of the funds listed above
.
|
|
11.
|
Includes
(i) 16,120 shares underlying Series D Preferred, (ii) 4,477
shares,
underlying 2006 Warrants, all registered herein, (iii) 27,790 shares
owned directly, (iv) 66,611 shares underlying Warrants, and
(v) 74,251 shares underlying Preferred
Stock
.
|
|
12.
|
Includes
(i) 185,480 shares underlying Series D Preferred, (ii) 51,493
shares
underlying 2006 Warrants, all registered herein, (iii) 317,037
shares
owned directly, (iv) 762,781 shares underlying Warrants, and
(v) 853,955 shares underlying Preferred
Stock.
|
|
13.
|
Includes
(i) 604,830 shares underlying Series D Preferred, (ii) 167,911
shares
underlying 2006 Warrants and all registered herein, (iii) 1,034,482
shares
owned directly, (iv) 2,488,181 shares underlying Warrants, and
(v) 2,784,638 shares underlying Preferred
Stock
.
|
|
14.
|
Includes
(i) 1,000 shares underlying 2006 Agent’s Warrants registered herein, and
(ii) 8,118 shares underlying other
warrants
.
|
|
15.
|
Includes
(i) 13,000 shares underlying 2006 Agent’s Warrants registered herein and
(ii) 15,089 shares held directly. Does not include 78,027
shares underlying warrants beneficially owned by Mr. Sucoff’s wife in
which shares he disclaims beneficial
ownership
.
|
|
16.
|
Includes
8,400 shares underlying 2006 Agent’s Warrants registered
herein.
|
Under
the
terms of the Registration Rights Agreements entered into as part of the
Series C
Placement and Series D Placements, we were obligated to file registration
statements and we agreed to keep the registration statements effective
until all
the shares from these Placements have been sold or such shares may be sold
without the volume restrictions under Rule 144(k) of the Securities Act,
otherwise, we are obligated to make pro rata cash payments to each of the
investors in the Placement, as liquidated damages. We decided to file this
registration statement with respect to our obligations under the Registration
Rights Agreements for the 2005 Placement and the 2006
Placement
.
The
Registration Rights Agreements also provide that we pay all fees and expenses
incident to the registration statement, other than brokerage commissions
and
underwriting discounts of the selling stockholders on the sale of their
shares.
We
do not have any arrangement with any broker-dealer for it to act as an
underwriter for the sale of the shares included herein for any of the selling
stockholders. Each of the selling stockholders purchased or received
the shares offered by it in this prospectus in the ordinary course of business,
and at the time of purchase of such shares, it had no agreements or
understandings, directly or indirectly, with any person for the distribution
of
such shares.
The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock
or
interests in shares of common stock received after the date of this prospectus
from a selling shareholder as a gift, pledge, partnership distribution or
other
transfer, may, from time to time, sell, transfer or otherwise dispose
of any or all of their shares of common stock or interests in shares
of common stock on any stock exchange, market or trading facility on which
the
shares are traded or in private transactions. These dispositions may
be at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the
time
of sale, or at negotiated prices.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchases;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales effected after the date the registration statement
of which
this prospectus is a part is declared effective by the
SEC;
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per share;
and
|
|
·
|
a
combination of any such methods of
sale.
|
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured
parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling
stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers
to
participate in sales. Broker-dealers may receive commissions or
discounts from the selling stockholders (or, if any broker-dealer acts as
agent
for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions
and discounts to exceed what is customary in the types of transactions
involved.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The
selling stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or
more
derivative securities which require the delivery to such broker-dealer or
other
financial institution of shares offered by this prospectus, which shares
such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common
stock
offered by them will be the purchase price of the common stock less discounts
or
commissions, if any. Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject,
in
whole or in part, any proposed purchase of common stock to be made directly
or
through agents. We will not receive any of the proceeds from this
offering. Upon any exercise of the warrants by payment of cash, however,
we will
receive the exercise price of the warrants.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of
the
Securities Act. Any discounts, commissions, concessions or profit
they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling stockholders who are
“underwriters” within the meaning of Section 2(11) of the Securities Act will be
subject to the prospectus delivery requirements of the Securities
Act. Each selling stockholder has informed us that it does not have
any written or oral agreement or understanding, directly or indirectly, with
any
person to distribute the common stock.
To
the
extent required, the shares of our common stock to be sold, the names of
the
selling stockholders, the respective purchase prices and public offering
prices,
the names of any agents, dealer or underwriter, any applicable commissions
or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We
have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to
the
activities of the selling stockholders and their
affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented
or
amended from time to time) available to the selling stockholders for the
purpose
of satisfying the prospectus delivery requirements of the Securities
Act. The selling stockholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
We
have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating
to the
registration of the shares offered by this prospectus.
We
have
agreed with the selling stockholders to keep the registration statement of
which
this prospectus constitutes a part effective until the earlier of (1) such
time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
Thelen
Reid Brown Raysman & Steiner LLP, New York, New York passed upon the
validity of the common stock being offered hereby.
Included
in the Prospectus constituting part of this Registration Statement are
consolidated financial statements for fiscal 2006 and 2005, which have been
audited by Marcum & Kliegman LLP, an independent registered public
accounting firm, to the extent and for the periods set forth in their respective
report appearing elsewhere herein, and are included in reliance upon such
report
given upon the authority of such firms as experts in accounting and
auditing.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act with respect to the common stock offered hereby. This prospectus,
which constitutes part of the registration statement, does not contain all
of
the information set forth in the registration statement and the exhibits
and
schedule thereto, certain parts of which are omitted in accordance with the
rules and regulations of
the
SEC. For further information regarding our common stock and our
company, please review the registration statement, including exhibits, schedules
and reports filed as a part thereof. Statements in this prospectus as
to the contents of any contract or other document filed as an exhibit to
the
registration statement, set forth the material terms of such contract or
other
document but are not necessarily complete, and in each instance reference
is
made to the copy of such document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We
are
also subject to the informational requirements of the Exchange Act which
requires us to file reports, proxy statements and other information with
the
SEC. Such reports, proxy statements and other information along with
the registration statement, including the exhibits and schedules thereto,
may be
inspected at public reference facilities of the SEC at 100 F Street N.E ,
Washington D.C. 20549. Copies of such material can be obtained from
the Public Reference Section of the SEC at prescribed rates. You may
call the SEC at 1-800-SEC-0330 for further information on the operation of
the
public reference room. Because we file documents electronically with
the SEC, you may also obtain this information by visiting the SEC’s Internet
website at
http://www.sec.gov
.
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
– F-20
|
|
|
|
F-21
|
|
|
|
F-22
|
|
|
|
F-23
|
|
|
|
F-24
|
|
|
|
F-25
– F-29
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Board of Directors of
Caprius,
Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheet of Caprius, Inc. and
Subsidiaries (the “Company”) as of September 30, 2006, and the related
consolidated statements of operations, stockholders’ equity (deficiency), and
cash flows for the years ended September 30, 2006 and 2005. These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Caprius,
Inc.
and Subsidiaries as of September 30, 2006, and the consolidated results of
their
operations and their cash flows for the years ended September 30, 2006 and
2005
in conformity with accounting principles generally accepted in the United
States
of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed
in Note A to the consolidated financial statements, the Company has
suffered recurring losses from operations which raises substantial doubt
about
its ability to continue as a going concern. Management’s plans
in regard to this matter are also described in Note A. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Marcum
& Kliegman LLP
New
York,
New York
November
17, 2006
|
CONSOLIDATED
BALANCE SHEET
|
September
30, 2006
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,068,954
|
|
Accounts
receivable, net of reserve for bad debts of $ 5,163
|
|
|
249,761
|
|
Inventories,
net
|
|
|
952,116
|
|
Total
current assets
|
|
|
2,270,831
|
|
|
|
|
|
|
|
Property
and Equipment:
|
|
|
|
|
Office
furniture and equipment
|
|
|
230,604
|
|
Equipment
for lease
|
|
|
23,500
|
|
Leasehold
improvements
|
|
|
29,003
|
|
|
|
|
|
283,107
|
|
Less: accumulated
depreciation
|
|
|
202,781
|
|
Property and equipment, net
|
|
|
80,326
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Goodwill
|
|
|
285,010
|
|
Intangible
assets, net
|
|
|
120,083
|
|
Other
|
|
|
|
20,770
|
|
Total
other assets
|
|
|
425,863
|
|
Total
Assets
|
|
$
|
2,777,020
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
$
|
383,458
|
|
Accrued
expenses
|
|
|
59,402
|
|
Accrued
compensation
|
|
|
174,669
|
|
Total
current liabilities
|
|
|
617,529
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
-
|
|
|
|
|
|
|
|
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
|
|
Series
D, stated value $12.40, convertible, 241,933 shares
|
|
|
3,000,000
|
|
Common
stock, $.01 par value
|
|
|
|
|
Authorized
- 50,000,000 shares, issued 3,322,798 shares and outstanding
3,321,673 shares
|
|
|
33,228
|
|
Additional
paid-in capital
|
|
|
74,001,747
|
|
Accumulated
deficit
|
|
|
(77,573,234
|
)
|
Treasury
stock (1,125 common shares, at cost)
|
|
|
(2,250
|
)
|
Total
stockholders’ equity
|
|
|
2,159,491
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
2,777,020
|
|
The
accompanying notes are an integral part of these consolidated
financial
statements.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
For
the years ended
|
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Product
sales
|
|
$
|
1,069,902
|
|
|
$
|
727,491
|
|
Equipment
rental income
|
|
|
-
|
|
|
|
13,305
|
|
Consulting
and royalty fees
|
|
|
165,567
|
|
|
|
108,006
|
|
Total
revenues
|
|
|
1,235,469
|
|
|
|
848,802
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of product sales and equipment rental income
|
|
|
802,532
|
|
|
|
490,827
|
|
Research
and development
|
|
|
342,587
|
|
|
|
325,486
|
|
Selling,
general and administrative; includes stock based compensation
of $52,642 in 2006
|
|
|
3,064,084
|
|
|
|
2,730,071
|
|
Impairment
of goodwill
|
|
|
452,000
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
4,661,203
|
|
|
|
3,546,384
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3,425,734
|
)
|
|
|
(2,697,582
|
)
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
482,200
|
|
Interest
income
|
|
|
29,693
|
|
|
|
30,477
|
|
Interest
expense
|
|
|
-
|
|
|
|
353,503
|
|
Net
loss
|
|
|
(3,396,041
|
)
|
|
|
(2,538,408
|
)
|
|
|
|
|
|
|
|
|
|
Deemed
Dividend - Series D Convertible Preferred Stock
|
|
|
(1,317,061
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature - Series C Convertible Preferred Stock
|
|
|
-
|
|
|
|
(124,528
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(4,713,102
|
)
|
|
$
|
(2,662,936
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per basic and diluted common share
|
|
$
|
(1.42
|
)
|
|
$
|
(1.16
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
3,321,673
|
|
|
|
2,288,543
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY)
|
|
|
Series
B Convertible
|
|
|
Series
C Convertible
|
|
|
Series
D Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Number
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
of
Shares
|
|
|
Amount
|
|
|
(Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October
1,
2004
|
|
|
27,000
|
|
|
$
|
2,700,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,023,453
|
|
|
$
|
10,235
|
|
|
$
|
68,031,614
|
|
|
$
|
(71,638,785
|
)
|
|
|
1,125
|
|
|
$
|
(2,250
|
)
|
|
$
|
(899,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Series
C
Manadatory
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,065,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of
secured
convertible
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
bridge
financing
into
Series
C
Mandatory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
21,681
|
|
|
|
2,168,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,168,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of
Series
C
Preferred
into
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
|
|
|
|
|
|
|
|
(66,681
|
)
|
|
|
(6,668,100
|
)
|
|
|
|
|
|
|
|
|
|
|
2,299,345
|
|
|
|
22,993
|
|
|
|
6,645,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,538,408
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,538,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September
30,
2005
|
|
|
27,000
|
|
|
$
|
2,700,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,322,798
|
|
|
$
|
33,228
|
|
|
$
|
74,241,755
|
|
|
$
|
(74,177,193
|
)
|
|
|
1,125
|
|
|
$
|
(2,250
|
)
|
|
$
|
2,795,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Series
D
Convertible
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,933
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
(292,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,707,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
of stock
options
to
Consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,396,041
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,396,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September
30,
2006
|
|
|
27,000
|
|
|
$
|
2,700,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
241,933
|
|
|
$
|
3,000,000
|
|
|
|
3,322,798
|
|
|
$
|
33,228
|
|
|
$
|
74,001,747
|
|
|
$
|
(77,573,234
|
)
|
|
|
1,125
|
|
|
$
|
(2,250
|
)
|
|
$
|
2,159,491
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
For
the Years Ended
|
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,396,041
|
)
|
|
$
|
(2,538,408
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
165,220
|
|
Amortization
of deferred financing costs
|
|
|
-
|
|
|
|
89,542
|
|
Depreciation
and amortization
|
|
|
177,671
|
|
|
|
310,693
|
|
Impairment
of goodwill
|
|
|
452,000
|
|
|
|
-
|
|
Stock
based compensation expense
|
|
|
52,642
|
|
|
|
-
|
|
Interest
on secured convertible notes
|
|
|
-
|
|
|
|
95,300
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(122,509
|
)
|
|
|
(53,769
|
)
|
Inventories,
net
|
|
|
(283,500
|
)
|
|
|
108,079
|
|
Other
assets
|
|
|
29,758
|
|
|
|
(14,536
|
)
|
Accounts
payable and accrued expenses
|
|
|
239,932
|
|
|
|
(1,100,161
|
)
|
Net
cash used in operating activities
|
|
|
(2,850,047
|
)
|
|
|
(2,938,040
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of Strax business
|
|
|
-
|
|
|
|
66,000
|
|
Acquisition
of property and equipment
|
|
|
(42,147
|
)
|
|
|
(32,139
|
)
|
Increase
in security deposit
|
|
|
(3,360
|
)
|
|
|
(4,080
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(45,507
|
)
|
|
|
29,781
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short term loan
|
|
|
-
|
|
|
|
100,000
|
|
Repayment
of short term loan
|
|
|
-
|
|
|
|
(100,000
|
)
|
Proceeds
from short term loans - related party
|
|
|
-
|
|
|
|
145,923
|
|
Repayment
of short term loans - related party
|
|
|
-
|
|
|
|
(73,123
|
)
|
Net
proceeds from issuance of Series C Preferred Stock
|
|
|
-
|
|
|
|
4,065,034
|
|
Net
proceeds from issuance of Series D Preferred Stock
|
|
|
2,707,350
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,707,350
|
|
|
|
4,137,834
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(188,204
|
)
|
|
|
1,229,575
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
1,257,158
|
|
|
|
27,583
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
1,068,954
|
|
|
$
|
1,257,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
49,541
|
|
Cash
paid for income taxes
|
|
$
|
3,110
|
|
|
$
|
192,672
|
|
|
|
|
|
|
|
|
|
|
Non
Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of net book value of certain equipment for leases to
inventory
|
|
$
|
-
|
|
|
$
|
66,177
|
|
Conversion
of secured convertible notes into equity
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
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 consolidated
financial
statements.
|
Notes
to the Consolidated Financial Statements
(NOTE
A) - Business and Basis of Presentation
Caprius,
Inc. and Subsidiaries (“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. After the close of the 2002 fiscal year, ended
September 30, 2002, the Company made major changes in its business through
the
sale of the TDM Business and the purchase of 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. Until the end of 2003 fiscal year ended
September 30, 2003, the Company continued to own and operate a comprehensive
imaging center located in Lauderhill, Florida. On September 30, 2003, the
Company completed the sale of the Strax Institute (“Strax”) to Eastern Medical
Technologies. The sale consisted of the business of the Strax Institute
comprehensive breast imaging center located in Lauderhill,
Florida. During the fiscal years ended September 30, 2006, and
September 30, 2005 the Company’s operations were in the infectious medical waste
disposal business.
The
Company has business operations located in Israel. Although the
region is considered to be economically stable, it is always possible that
unanticipated events in foreign countries could disrupt the Company’s
operations.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern, which contemplates the realization
and satisfaction of liabilities and commitments in the normal course of
business. The Company has incurred substantial recurring losses,
which raises substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The Company
has available cash and cash equivalents of approximately $1,069,000 at September
30,2006. The Company intends to utilize these funds for working capital purposes
to continue developing the business of MCM. In order to fund the cash
requirements of the Company beyond such date, the Company continues to pursue
efforts to identify additional funds through various funding options, including
banking facilities and equity offerings. There can be no assurance
that such funding initiatives will be successful and any equity placement
could
result in substantial dilution to current stockholders.
(NOTE
B) - Summary of Significant Accounting Policies
[1]
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
wholly or majority owned subsidiaries. All significant intercompany balances
and
transactions have been eliminated in consolidation.
[2]
Revenue Recognition
Revenues
from the MCM medical waste business are recognized when SteriMed units are
either sold or rented to customers. 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.
[3]
Cash
Equivalents
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
[4]
Accounts Receivable and Allowance for Doubtful Accounts:
The
Company recognizes an allowance for doubtful accounts to ensure that accounts
receivable are not overstated due to uncollectibility. Bad debt
reserves are maintained for all customers based on a variety of factors,
including the length of time the receivables are past due, significant one-time
events and historical experience. An
additional
reserve for individual accounts is recorded when the Company becomes aware
of a
customer’s inability to meet its financial obligation, such as in the case of
bankruptcy filings or deterioration in the customer’s operating results or
financial position. If the circumstances related to customers change,
estimates of the recoverability of receivables would be further
adjusted.
[5]
Product Warranties
The
estimated future warranty obligations related to the product sales are provided
by charges to operations in the period in which the related revenue is
recognized. The basic warranty covers parts and labor for one year, thereafter
extended warranties are available. These charges were immaterial in each
of the
years ended September 30, 2006 and 2005.
[6]
Shipping and Handling Costs
The
Company includes shipping and handling costs in the statement of operations
as
part of cost of sales. These costs were immaterial for the years ended September
30, 2006 and 2005.
[7]
Inventories
Inventories
are accounted for at the lower of cost or market using the first-in, first-out
(“FIFO”) method. The Company’s policy is to reserve or writeoff surplus or
obsolete inventory. Inventory is comprised of materials, labor and manufacturing
overhead costs.
[8]
Property and Equipment
Office
furniture and equipment, equipment for lease and leasehold improvements are
recorded at cost. Depreciation and amortization are computed by the
straight-line method over the estimated lives of the applicable assets, or
term
of the lease, if applicable. Expenditures for maintenance and
repairs that do not improve or extend the life of the expected assets are
expensed to operations, while expenditures for major upgrades to existing
items
are capitalized.
Asset
Classification
|
Useful
Lives
|
|
|
Office
furniture and equipment
Leasehold
improvements
|
3-5
years
Term
of Lease
|
Equipment
for lease
|
5
years
|
[9]
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.
[10]
Goodwill and Other Intangibles
At
September 30, 2006, goodwill results from the excess of cost over the fair
value
of net assets acquired related to the MCM business. 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. 144, “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.
[11]
Net
Loss Per Share
Net
loss
per share is computed in accordance with Statement of Financial Standards
No.
128, “Earning Per Share” (“SFAS No. 128”). SFAS No. 128 requires the
presentation of both basic and diluted earnings per share.
Basic
net
loss per common share was computed using the weighted average common shares
outstanding during 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, warrants and convertible
securities. For the year ended September 30, 2006, potential common
shares amount to 4,804,015 shares, as compared to 1,020,660 for the year
ended
September 30, 2005 and have not been included in the computation of diluted
loss
per share since the effect would be anti-dilutive.
[12]
Income Taxes
The
Company provides for federal and state income taxes currently payable, as
well
as for those deferred because of timing differences between reporting income
and
expenses for financial statement purposes versus tax
purposes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the carrying
amount
of assets and liabilities for financial reporting purposes and the amounts
used
for income tax purposes. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income
in the
years in which those temporary differences are expected to be recoverable
or
settled. The effect of a change in tax rates is recognized as income
or expense in the period of the change. A valuation allowance is
established, when necessary, to reduce deferred income tax assets to the
amount
that is more likely than not to be realized.
[13]
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[14]
Fair
Value of Financial Instruments
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair values
because of the short-term nature of those instruments.
[15]
Foreign Currency
The
Company follows the provisions of SFAS No. 52, “Foreign Currency
Translation.” The functional currency of the Company’s foreign
subsidiary is the U.S. dollar. All foreign currency asset and
liability amounts are re-measured into U.S. dollars at end-of-period exchange
rates, except for certain assets, which are measured at historical
rates. Foreign currency income and expense are re-measured at average
exchange rates in effect during the year, except for expenses related to
balance
sheet amounts re-measured at historical exchange rates. Exchange
gains and losses arising from re-measurement of foreign currency-denominated
monetary assets and liabilities are included in operations in the period
in
which they occur. Exchange gains and losses included in the
accompanying consolidated statements of operations are immaterial for the
years
ended September 30, 2006 and 2005.
[16]
Research and Development Costs
All
research and development costs are charged to operations as
incurred. Research and development expenditures were approximately
$343,000 and $ 325,000 for the fiscal years ended September 30, 2006 and
2005,
respectively.
[17]
Recent Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Correction.” This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for
and
reporting of a
change
in
accounting principle. The statements applies to all voluntary changes
in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not
include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be
followed. This statement is effective for accounting changes and
corrections of errors made in the fiscal years beginning after December 15,
2005. Management does not believe this pronouncement will have a
material impact on the Company’s consolidated results of operations and
financial condition.
In
September 2005, the Financial Accounting Standards Board (“FASB”) ratified the
Emerging Issues Task Force’s (“EITF”) Issue No. 05-7. “Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues”, which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower
should
recognize a beneficial conversion feature, not a debt extinguishment, if
a debt
modification increases the intrinsic value of the debt. In September 2005,
the
FASB ratified the following consensus reached in EITF Issue 05-08 (“Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”):
a) the issuance of convertible debt with a beneficial conversion feature
results
in a basis difference in applying FASB Statement of Financial Accounting
Standards SFAS No. 109, Accounting for Income Taxes. Recognition of
such a feature effectively creates a debt instrument and a separate equity
instrument for book purposes’, whereas the convertible debt is treated entirely
as a debt instrument for income tax purposes; b) The resulting basis difference
should be deemed a temporary difference because it will result in a taxable
amount when the recorded amount of the liability is recovered or settled;
and c)
Recognition of deferred taxes for the temporary difference should be reported
as
an adjustment to additional paid-in capital. Both of these issues are
effective in the first interim or annual reporting period commencing after
December 15, 2005, with early application permitted. The effect of
applying the consensus should be accounted for retroactively to all debt
instruments containing a beneficial conversion feature that are subject to
EITF
Issue 00-27, “Application of Issue No. 98-5 to Certain Convertible Debt
Instruments” (and thus is applicable to debt instruments converted or
extinguished in prior periods but which are still presented in the financial
statements). These pronouncements had a material impact on the
Company’s consolidated results of operations and financial
condition.
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid
Financial Instruments (“SFAS 155”), which eliminates the exemption from applying
SFAS 133 to interests in securitized financial assets so that similar
instruments are accounted for similarly regardless of the form of the
instruments. SFAS 155 also allows the election of fair value measurement
at
acquisition, at issuance, or when a previously recognized financial instrument
is subject to a re-measurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year
that
begins after September 15, 2006. Early adoption is permitted. The adoption
of SFAS 155 is not expected to have a material effect on the Company’s
consolidated results of operations and financial condition
In
March 2006, the FASB issued Statement of Financial Accounting Standard 156
- Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value. SFAS 156 permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at fair value.
Adoption is required as of the beginning of the first fiscal year that begins
after September 15, 2006. Early adoption is permitted. The adoption of SFAS
156 is not expected to have a material effect on the Company’s consolidated
results of operations and financial condition.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This Interpretation
shall
be effective for fiscal years beginning after December 15, 2006. Earlier
adoption is permitted as of the beginning of an enterprise’s fiscal year,
provided the enterprise has not yet issued financial statements, including
financial statements for any interim period for that fiscal year. The cumulative
effects, if any, of applying this Interpretation will be recorded as an
adjustment to retained earnings as of the beginning of the period of
adoption. The adoption of FIN 48 is not expected to have a material
effect on the Company’s consolidated results of operations and financial
condition.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
157,
“Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements
and
accordingly, does not require any new fair value
measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company are in the process of
evaluating the impact of the adoption of SFAS No. 157 will have on the Company’s
consolidated results of operations and financial condition and is
currently not in a position to determine such effect.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin No.
108
(“SAB 108”) which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 becomes effective in fiscal
2007. Adoption of SAB 108 is not expected to have a material impact on the
Company’s consolidated results of operations and financial
position.
[18]
Stock-Based Compensation
The
Company accounts for stock-based compensation under the intrinsic value method
in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock
Issued to Employees” and related interpretations.
FASB
issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure.” SFAS No. 148, which amends SFAS No. 123, requires the measurement
of the fair value of stock options or warrants to be included in the statement
of operations or disclosed in the notes to
financial
statements. The Company records its stock-based
compensation under the Accounting Principles Board (APB) No. 25 and elected
the
disclosure-only alternative under SFAS No. 148. The Company has
computed the pro forma disclosures under SFAS No. 148 for options and warrants
granted using the Black-Scholes option pricing model for the years ended
September 30, 2006 and 2005. The assumptions used during
the years ended September 30, 2006 and 2005 were as follows:
|
September
30,
|
|
2006
|
2005
|
Risk
free interest rate
|
4.00
– 5.00%
|
4.00
–5.00%
|
Expected
dividend yield
|
--
|
--
|
Expected
lives
|
3
to 10 years
|
10
years
|
Expected
volatility
|
29
– 77%
|
29
– 80%
|
Weighted
average value of grants per share
|
$2.08
|
$3.32
|
Weighted
average remaining contractual life of options outstanding
(years)
|
7.67
|
6.35
|
The
pro
forma effect of applying FAS No. 148 is as follows:
|
For
the years ended
|
|
September
30,
|
|
2006
|
2005
|
Net
loss attributable to common stockholders as reported
|
$(4,713,102)
|
$(2,662,936)
|
Add: Stock
based employee compensation expense, included in reported
loss.
|
--
|
--
|
Less:
Stock-based employee compensation as determined under
fair
value based method for all awards.
|
(91,668)
|
(2,991)
|
Pro
forma net loss
|
$(4,804,770)
|
$(2,665,927)
|
|
|
|
Net
Loss per share:
|
|
|
Basic
and diluted loss attributable to common stockholders – as
reported
|
$(1.42)
|
$
(1.16)
|
Basic
and diluted loss attributable to common stockholders - pro
forma
|
$(1.45)
|
$
(1.16)
|
The
Company will implement FAS 123R in the first quarter of fiscal year
2007. The statement requires Companies to expense the value of
employee stock options and similar awards. Under FAS 123R share-based
payment awards result in a cost that will measure at fair value on the awards’
grant date based on the estimated number of awards that are expected to
vest. Compensation cost for awards that vest will not be reversed if
the awards expire with being exercised. The Company will adopt FAS
123R using the modified prospective method. The impact of this
statement will require the Company to record a charge for the fair value
of
stock options granted on a prospective basis, over the vesting
period.
[19]
Concentration of Credit Risk and Significant Customers
Statement
of Financial Accounting Standards No. 105, “Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
with
Concentrations of Credit Risk,” requires disclosure of any significant
off-balance-sheet and credit risk concentrations. Although collateral
is not required, the Company periodically reviews its accounts receivable
and
provides estimated reserves for potential credit losses.
Financial
instruments which potentially expose the Company to concentration of credit
risk
are mainly comprised of trade accounts receivable. Management
believes its credit policies are prudent and reflect normal industry terms
and
business risk. The Company does not anticipate non-performance by the
counter parties and, accordingly, does not require collateral. The
Company maintains reserves for potential credit losses and historically such
losses, in the aggregate, have not exceeded management’s
expectations. The Company purchases a substantial amount of its
inventory products from one principal supplier. If in the future the
supplier were to cease to supply these inventory products, management believes
there are alternative vendors available to meet its needs. For the year ended
September 30, 2006, three customers accounted for $299,000, $233,000 and
$165,000 of the consolidated total revenue, which represented approximately
56%
of the total revenue. The customer with sales of $165,000 for the year ended
September 30, 2006 has an outstanding accounts receivable balance as of
September 30, 2006 of approximately $46,000. For the year ended
September 30, 2005, three customers accounted for approximately 51% of the
consolidated total revenue. There were no outstanding accounts
receivable balance due from these three customers as of September 30,
2005.
The
Company maintains cash deposits with financial institutions, which from time
to
time may exceed Federally insured limits. The Company has not
experienced any losses and believes it is not exposed to any significant
credit
risk from cash. At September 30, 2006, the Company has cash balances
on deposit in one account with a financial institution in excess of the
Federally insured limits by a total of approximately $739,000.
[20]
Goodwill
At
September 30, 2006, as defined under SFAS No, 142, the Company has assessed
the
carrying value of goodwill. The Company has determined that the
carrying amount of the goodwill exceeds the implied fair value and as such
has
recorded an impairment charge to goodwill of $452,000 at September 30,
2006. The impairment charge is reflected in the consolidated
statement of operations for the year ended September 30, 2006.
[21]
Intangible Assets
Intangible
assets consist of technology, customer relationships and permits, and are
amortized on a straight-line basis over their estimated useful lives of three
to
five years. The carrying value of intangible assets will be reviewed annually
by
the Company to ensure that impairments are recognized when the future operating
cash flows expected to be derived from such intangible assets are less than
carrying value. Total amortization expense related to the other
intangible assets was approximately $144,000 for the year ended September
30,
2006 and $281,000 for the year ended September 30, 2005. Intangible
assets are summarized as follows:
|
|
Accumulated
|
Sept
30, 2006
|
Asset
Type
|
Cost
|
Amortization
|
Net
Book Value
|
Technology
|
$550,000
|
$550,000
|
$ -
|
Permits
|
290,000
|
219,917
|
70,083
|
Customer
Relationships
|
200,000
|
150,000
|
50,000
|
|
$1,040,000
|
$919,917
|
$120,083
|
Expected
amortization over the next two years is as follows:
Fiscal
Period
|
Amortization
|
|
|
2007
|
98,000
|
2008
|
22,083
|
|
$120,083
|
(NOTE
C) -Inventories
Inventories
consist of the following, net of reserve of approximately $31,000 as of
September 30, 2006:
Raw
materials
|
$719,116
|
Finished
goods
|
233,000
|
|
$952,116
|
(NOTE
D) - Notes Payable, Related Party
During
the first two quarters of fiscal 2005, the Company was advanced the principal
amount of $145,923 through short term loans at 8% per annum until additional
equity funding was secured. The lenders also received warrants to
purchase 7,295 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, $62,357 and
$19,566, respectively. As a condition of this financing the holders
of the Notes exchanged 50% of the Company’s indebtedness for 728 shares of
Series C Mandatory Convertible Preferred Stock and on February 15, 2005 were
paid the balance of their notes inclusive of interest.
(NOTE
E
)
-
E
quity Financing
On
February 17, 2006, the Company closed on a $3.0 million preferred stock equity
financing transaction before financing fees and expenses of approximately
$293,000. As part of this financing transaction, the Company issued 241,933
shares of Series D Convertible Preferred Stock, convertible into 2,419,330
shares of common stock, par value $0.01 per share. The Company also
issued Series A Warrants to purchase an aggregate of 223,881 shares of common
stock at an exercise price of $1.50 per share for a period of five
years. In addition, the Company issued Series B Warrants to purchase
an aggregate of 447,764 shares of common stock at an exercise price of $2.00
per
share for a period of five years. The Company has determined that the
preferred stock was issued with an effective beneficial conversion feature
of
approximately $1,300,000 based upon the relative fair values of the preferred
stock and warrants using the Black Scholes valuation model. As such, this
beneficial conversion feature is recorded as a deemed Preferred Stock
dividend. Pursuant to the Company’s obligation to register the Series
D Convertible Preferred Stock, the Company filed a Registration Statement
which
was declared effective on April 6, 2006. The Company has also issued
warrants to purchase an aggregate of 119,403 shares of common stock at an
exercise price of $1.68 per share for a period of five years as part of the
placement fee, to a placement agent and warrants to purchase an aggregate
of
59,702 shares of common stock at an exercise price of $2.00 per share for
a
period of five years as part of the placement fee, to another selected dealer
and its designees for this placement.
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 conversion of the Series
C
Stock was subject to the effectiveness of a 1:20 reverse split of the Company’s
common stock. 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 value of the warrants using the Black Scholes valuation
model.
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 F). The Company also agreed to
increase the number of independent directors by one additional
director.
(NOTE
F
)
- Reverse
Split
On
April
5, 2005, the Company effected the Reverse Split. On such date, the
66,681 outstanding shares of Series C Stock automatically converted into
2,299,345 shares of the Company’s common stock. As a result of the
Reverse Split, the Company has outstanding 3,321,673 shares of common
stock. The reverse split did not change the number of authorized
shares of common and preferred stock. All share and per share
information in the accompanying financial statements have been restated to
reflect the 1 for 20 reverse stock split.
(NOTE
G
)
-
Employee Benefits
The
Company sponsors a Qualified Retirement Plan under section 401(k) of the
Internal Revenue Code. Caprius employees become eligible for
participation after completing 3 months of service and attaining the age
of
twenty-one. For the years ended September 30, 2006 and 2005 the
Company has not adopted a matching option to the plan.
(NOTE
H) - Income Taxes
At
September 30, 2006, the Company had a deferred tax asset totaling approximately
$14,950,000 due primarily to net operating loss carryovers in the United
States. A valuation allowance was recorded in 2006 for the full
amount of this asset due to uncertainty as to the realization of the
benefit. The change in the valuation allowance in 2006 increased by
approximately $780,000.
The
Company does not file its tax return on a consolidated basis as United States
tax rules prohibit the consolidation of its foreign subsidiary. The
Company’s Israeli subsidiary has net operating loss carryforwards for tax
purposes in the amount of approximately $ 7,800,000. The Company
recorded a full valuation allowance for these carryforward losses.
At
September 30, 2006, the Company had available net operating loss carryforwards
for United States tax purposes, expiring through 2025 of approximately $40
million. The Internal Revenue Code contains provisions which will
limit the net operating loss carry forward available for further use if
significant changes in ownership interest of the Company occurs. Due to the
significance of the Company’s historical losses it has not undertaken an
evaluation to determine whether the Company has triggered any limitations
on the
use of the net operating loss carryforwards.
As
a
result of the Company’s significant operating loss carryforwards and the
corresponding valuation allowance, no income tax benefit has been recorded
at
September 30, 2006 and 2005. The provision for income taxes using the
statutory Federal tax rate as compared to the Company’s effective tax rate is
summarized as follows:
|
September
30,
|
|
2006
|
2005
|
Tax
benefit at statutory rate
|
(34.0%)
|
(34.0%)
|
Adjustments
for change in valuation allowance
|
|
|
|
|
|
(NOTE
I) - Commitments and Contingencies
[1]
Operating leases
The
Company leases facilities under non-cancelable operating leases expiring
at
various dates through fiscal 2011. Facility leases require the
Company to pay certain insurance, maintenance and real estate
taxes. Lease expense for all facility leases totaled approximately
$122,000 and $126,000 for the years ended September 30, 2006 and 2005,
respectively, and was recorded as part of selling, general and administrative
expenses within the consolidated statement of
operations.
Future
minimum rental commitments under operating leases are as follows:
Fiscal
Year
|
Amount
|
|
|
2007
|
$105,742
|
2008
|
93,983
|
2009
|
96,071
|
2010
|
98,160
|
2011
|
100,248
|
On
June
16, 2006, the Company entered into an agreement for certain services related
to
investor relations and financial media programs for a one year period, which
either party may cancel upon 30 days written notice. In addition, the Company
will issue options to purchase an aggregate of 30,000 shares of common stock
at
an exercise price of $1.75 per share for a period of five years. On July
28,
2006 these options were granted with a valuation of $10,500 using the
Black-Scholes model and will vest at 50% after six months, and additional
25%
after nine months and the remaining 25% after one year, assuming the agreement
is still in effect.
[2] Legal
proceedings
On
May
11, 2006, the Company, MCM and George Aaron, as CEO of the Company (the “Company
Defendants”) were served with a complaint by Andre Sassoon and Andre Sassoon
International, Inc. (the “Plaintiffs”) that was filed in the Supreme Court of
the State of New York in the County of New York. The complaint
also named all persons who were existing stockholders of MCM at the time
of our
original investment in MCM in December 2002. On June 28, 2006, the Plaintiffs
filed an amended complaint to include additional counts. The
Plaintiffs are seeking damages in excess of $400,000 or the stock interest
of
the existing stockholders at the time of the Company’s
acquisition. On July 31, 2006, the Company Defendants filed an answer
denying the allegations in the amended complaint. Initial discovery requests
have been made. The Company Defendants continue to believe that there is
no
merit to the allegations contained in the amended complaint as to them, and
they
will vigorously defend this action.
Our
independent directors have authorized us to indemnify Mr. Aaron with respect
to
the Sassoon litigation, subject to limitations under applicable law and our
by-laws.
In
July
2005, we entered into a Settlement Agreement and Polices Release with the
carrier of our Directors and Company Reimbursement Polices and received a
payment of $350,000 under such Policies
as
a
settlement of our claim for expenses incurred in prior litigations with a
former
Caprius executive officer and director. The settlement fee received in July
2005
from the insurance company has been recorded as part of other income in the
consolidated statement of operations for the year ended September 30,
2005.
(NOTE
J)
– Capital Transactions
[1]
Preferred
Stock – Class B
On
August
18, 1997, the Company entered into various agreements with General Electric
Company (“GE”) including an agreement whereby GE purchased 27,000 shares of
newly issued Series B Convertible Redeemable Preferred Stock (the “Series B
Preferred Stock”) for $2,700,000.
The
Series B Preferred Stock consists of 27,000 shares, ranks senior to any other
shares of preferred stock which may be created and the Common
Stock. It has a liquidation value of $100.00 per share, plus accrued
and unpaid dividends, is non-voting except if the Company proposes an amendment
to its Certificate of Incorporation which would adversely affect the rights
of
the holders of the Series B Preferred Stock, and is convertible into 57,989
shares of Common Stock, subject to customary anti-dilution
provisions. No fixed dividends are payable on the Series B Preferred
Stock, except that if a dividend is paid on the Common Stock, dividends are
paid
on the shares of Series B Preferred Stock as if they were converted into
shares
of Common Stock.
[2]
Warrants
On
February 17, 2006, the Company closed on a $3.0 million preferred stock equity
financing transaction before financing fees and expenses of approximately
$293,000. In association with this financing the Company issued
Series A Warrants to purchase and aggregate of 223,881 shares of common stock
at
an exercise price of $1.50 for a period of five years. In addition,
the Company issued Series B Warrants to purchase an aggregate of 447,764
shares
of common stock at an exercise price of $2.00 per share for a period of five
years. The Company has also issued warrants to purchase an aggregate of 119,403
shares of common stock at an exercise price of $1.68 per share and an aggregate
of 59,702 shares of common stock at an exercise price of $2.00 per share
as part
of the placement fee for the transaction. All warrants associated
with this transaction are for a period of five years, and expire in February
2011.
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. In association with this financing, the Company 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. In addition, the
Company issued warrants to purchase an aggregate of 75,000 shares of common
stock at an exercise price of $5.60 for a period of five years, as part of
the
placement fee for this transaction. All warrants
associated with this transaction expire in 2010.
In
connection with the issuance of 8% Senior Secured Promissory Notes in February
2005, the Company issued warrants to purchase 5,000 shares of the Company’s
common stock at an exercise price of $5.60 per share for a period of five
years. These warrants expire in February 2010.
In
connection with short-term loans received by the Company from related parties
in
Fiscal 2005, the Company issued warrants to purchase 7,295 shares of the
Company’s common stock exercisable at $5.60 per share for a period of five
years. These warrants expire in February 2010.
In
connection with the issuance of 8% Senior Secured Convertible Promissory
Notes
in Fiscal 2004, the Company issued warrants 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. These warrants
expire at various dates through June 2009.
In
connection with a bridge financing entered into during fiscal 2004, the Company
issued warrants to purchase 16,662 shares of common stock at an exercise
price
of $5.00 per share for a period of five years. These warrants expire
in January 2009.
In
connection with the MCM financing entered into during fiscal 2002, The Company
issued warrants to purchases 12,500 shares of common stock at an exercise
price
of $1.80 per share for a period of five years. These warrants expire
in September 2007.
Warrants
issued are as follows:
|
Number
of
Shares
|
Warrant
Price
Per
Share
|
Weighted
Average
Exercise
Price
Per
Share
|
|
|
|
|
Balance
October 1, 2004
|
160,519
|
$1.60
- $15.00
|
$5.95
|
Granted
in 2005
|
707,984
|
$2.90
- $ 5.60
|
$5.01
|
Forfeited/Expired
in 2005
|
(45,107)
|
$4.00- $15.00
|
$9.45
|
Balance,
September 30, 2005
|
823,396
|
$1.60
- $5.60
|
$4.95
|
Granted
in 2006
|
850,750
|
$1.50
- $2.00
|
$1.82
|
Forfeited/Expired
in 2006
|
(15,000)
|
$1.60
|
$1.60
|
|
|
|
|
Balance,
September 30, 2006
|
1,659,146
|
$1.50
– $5.60
|
$3.38
|
[3]
Stock
options
During
2002, the Company adopted a stock option plan for both employees and
non-employee directors. The employee and non-employee Directors stock
option plan provides for the granting of options to purchase not more than
75,000 shares (amended to 700,000 shares on November 18, 2005) of common
stock. The options issued under the plan may be incentive or
nonqualified options. The exercise price for any options will be
determined by the option committee. The plan expires May 15,
2012. During October 2002, the Company granted a total of 48,050
options to officers, directors, and employees under the 2002
plan. During May 2004, 3,750 options priced at $4.00 were granted to
a director of the Company. These options vested one third on the
grant date with the balance vesting over a two year period in equal
installments. All of these options expire 10 years after the date of
grant and were granted at fair market value or higher at the time of
grant. All options are exercisable at $3.00 per share vesting one
third immediately and the balance equally over a two year period. On
January 4, 2006, the Company granted options for the purchase of an aggregate
of
458,000 shares (consisting of 393,000 to employees/directors and 65,000 to
non-contractual consultants) of common stock under the Company’s 2002 Amended
Stock Option Plan. These options are for a 10 year term, vesting
after six months as to one-eighth of the options granted, and the balance
vesting in equal monthly installments over the next forty-two months at an
exercise price of $2.20 per share. Using the Black Scholes Option
pricing model the Company has determined that the fair value of these awards
is
$1.36 per share which equates to a combined fair value of $535,366 for the
options granted to employees/directors and $88,547 for options granted to
consultants. Effective October 1, 2006, the Company will adopt the
provision of FAS No.
123R
“Share-Based Payment” using the modified prospective method and the
Black-Scholes option pricing model and record stock-based compensation expense
as part of the statement of operations. As of September 30, 2006, there were
506,050 options outstanding under the 2002 plan, exercisable at prices from
$3.00 to $4.00 per share
During
1993, the Company adopted an employee stock option plan and a stock option
plan
for non-employee directors. The employee stock option plan provides
for the granting of options to purchase not more than 50,000 shares of common
stock. The options issued under the plan may be incentive or
nonqualified options. The exercise price for any incentive options
cannot be less than the fair market value of the stock on the date of the
grant,
while the exercise price for nonqualified options will be determined by the
option committee. The Directors’ stock option plan provides for the
granting of options to purchase not more than 10,000 shares of common
stock. In accordance with the Plan, the exercise price for shares
granted under the Directors’ plan cannot be less than the fair market value of
the stock on the date of the grant.
Stock
option transactions under the 2002 plan are as follows:
|
Number
of
Shares
|
Option
Price
Per
Share
|
Weighted
Average
Exercise
Price
Per
Share
|
|
|
|
|
Balance
October 1, 2004
|
51,800
|
$3.00
- $4.00
|
$3.07
|
Granted
in 2005
|
-
|
-
|
-
|
Balance,
September 30, 2005
|
51,800
|
$3.00
- $4.00
|
$3.07
|
Granted
in 2006
|
458,000
|
$2.20
|
$2.20
|
Forfeited/Expired
in 2006
|
(3,750)
|
$3.00
|
$3.00
|
|
|
|
|
Balance,
September 30, 2006
|
506,050
|
$2.20
- $4.00
|
$2.28
|
Stock
option transactions not covered under the years 2002 and 1993 option plans
in
the fiscal year 2005 and 2006 are as follows:
|
Number
of
Shares
|
Option
Price
Per
Share
|
Weighted
Average
Exercise
Price
Per
Share
|
|
|
|
|
Balance,
October 1, 2004
|
52,654
|
$2.00-
$402.00
|
$3.40
|
Forfeited/Expired
in 2005
|
(64)
|
$402.00
|
$402.00
|
Balance,
September 30, 2005
|
52,500
|
$2.00-$3.00
|
$2.95
|
Granted
in 2006
|
130,000
|
$0.70-
$1.75
|
$0.94
|
Forfeited/Expired
in 2006
|
(52,500)
|
$2.00-
$3.00
|
$2.95
|
|
|
|
|
Balance,
September 30, 2006
|
130,000
|
$0.70–
$1.75
|
$0.94
|
Stock
Option Transactions Under the 1993 Plan:
|
Number
of
Shares
|
Option
Price
Per
Share
|
Weighted
Average
Exercise
Price
Per
Share
|
|
|
|
|
Balance,
October 1, 2004
|
36,350
|
$3.00
-$100.00
|
$4.60
|
Forfeited/Expired
in 2005
|
(1,375)
|
$3.00 - $100.00
|
$10.32
|
Balance,
September 30, 2005
|
34,975
|
$3.00
- $100.00
|
$4.27
|
|
Number
of
Shares
|
Option
Price
Per
Share
|
Weighted
Average
Exercise
Price
Per
Share
|
|
Forfeited/Expired
in 2006
|
(3,475)
|
$3.00
- $100.00
|
$11.48
|
|
|
|
|
Balance,
September 30, 2006
|
31,500
|
$3.00
- $5.00
|
$3.48
|
The
following table summarizes information about stock options outstanding at
September 30, 2006:
|
|
Outstanding
Options
|
|
|
|
Weighted-
|
|
|
|
Number
|
Average
|
Weighted-
|
Range
of
|
|
Outstanding
at
|
Remaining
|
Average
|
Exercise
|
|
September
30,
|
Contractual
|
Exercise
|
Prices
|
|
2006
|
Life
(years)
|
Price
|
|
|
|
|
|
$0.70
|
|
100,000
|
3.00
|
$
0.70
|
1.75
|
|
30,000
|
4.83
|
1.75
|
2.20
|
|
458,000
|
9.33
|
2.20
|
3.00
– 5.00
|
|
79,550
|
5.03
|
3.24
|
|
|
|
|
|
$0.70
- $5.00
|
|
667,550
|
7.67
|
$2.08
|
|
|
|
|
|
|
Exercisable
Options
|
|
|
|
Weighted-
|
|
|
|
Number
|
Average
|
Weighted-
|
Range
of
|
|
Outstanding
at
|
Remaining
|
Average
|
Exercise
|
|
September
30,
|
Contractual
|
Exercise
|
Prices
|
|
2006
|
Life
(years)
|
Price
|
|
|
|
|
|
$0.70
|
|
100,000
|
3.00
|
0.70
|
2.20
|
|
76,303
|
9.33
|
2.20
|
3.00
– 5.00
|
|
79,550
|
5.03
|
3.24
|
|
|
|
|
|
$0.70
- $5.00
|
|
255,853
|
5.37
|
1.94
|
Total
stock options vested and exercisable at September 30,
2006
|
|
Range
of
Exercise
Price
Per
Share
|
Weighted
Average
Exercise
Price
Per
Share
|
|
|
|
|
Plan
shares
|
155,853
|
$2.20-$5.00
|
$2.73
|
Non-plan
shares
|
100,000
|
0.70
|
$0.70
|
|
255,853
|
$0.70
- $5.00
|
$1.94
|
(NOTE
K) - Acquisition of majority interest in
MCM
Environmental Technologies, Inc.
In
December 2002, the Company closed the acquisition of its initial investment
of
57.53% of the capital stock of MCM Environmental Technologies Inc (“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, the Company 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 each of the fiscal years ended September 30, 2004 and 2005.
Additionally ,during the fiscal year ended September 30, 2005 the Company’s
ownership interest increased by an additional 29.13% with the conversion
of
various loans made to MCM and cash calls made by MCM, which increased the
company’s ownership to 96.66%
(NOTE
L) – Sale of Strax
Effective
September 30, 2003, the Company sold its comprehensive breast imaging business,
to Eastern Medical Technologies, Inc., a Delaware corporation
(“EMT”), pursuant to a Stock Purchase Agreement dated September 30, 2003 (the
“Purchase Agreement”) among the Company, EMT and the other parties
thereto. The purchase price was $412,000. In addition, the Company
was required to provide certain specified transitional services for up to
180
days pursuant to a Management Services Agreement. During the first quarter
of
fiscal year 2005, the parties agreed to settle the net outstanding balance
in a
lump sum payment of $66,000 which was paid in two equal installments in December
2004 and January 2005, and is included as consulting and royalty fees in
the
statement of operations.
(NOTE
M) –Geographic Information
The
Company does not have reportable operating Segments as defined in the Statements
of Financial Accounting No.131 “Disclosures about Segments of an Enterprise and
related information” The method for attributing revenues to individual customers
is based as to the destination to which finished goods are shipped.
The
Company operates facilities in the United States of America and Israel. The
following is a summary of information by area for the years ended September
30,
2006 and 2005.
For
the years ended September 30,
|
2006
|
2005
|
Net
Revenues:
|
|
|
Israel
|
$490,096
|
$398,215
|
United
States
|
745,373
|
450,587
|
Revenues
as reported in the accompanying financial statements
|
$1,235,469
|
$848,802
|
|
|
|
|
September
30, 2006
|
Identifiable
Assets:
|
|
Israel
|
$962,732
|
United
States
|
1,814,288
|
Total
Assets as reported in the accompanying financial
statements
|
$2,777,020
|
|
CONDENSED
CONSOLIDATED BALANCE SHEET
|
June
30, 2007
|
(Unaudited)
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,373,919
|
|
Accounts
receivable, net
|
|
|
721,772
|
|
Inventories,
net
|
|
|
1,178,470
|
|
Total
current assets
|
|
|
3,274,161
|
|
|
|
|
|
|
Property
and Equipment:
|
|
|
|
|
Office
furniture and equipment
|
|
|
270,449
|
|
Leasehold
improvements
|
|
|
29,816
|
|
|
|
|
300,265
|
|
Less: accumulated
depreciation
|
|
|
198,746
|
|
Property and equipment, net
|
|
|
101,519
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Goodwill
|
|
|
285,010
|
|
Intangible
assets, net
|
|
|
46,583
|
|
Other
|
|
|
16,486
|
|
Total
other assets
|
|
|
348,079
|
|
Total
Assets
|
|
$
|
3,723,759
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
$
|
689,608
|
|
Accrued
expenses
|
|
|
89,386
|
|
Accrued
compensation
|
|
|
219,406
|
|
Total
current liabilities
|
|
|
998,400
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
-
|
|
|
|
|
|
|
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
|
|
Series
D, stated value $12.40, convertible, 194,933 shares
|
|
|
2,417,200
|
|
Series
E, stated value $250.00, convertible, 10,000 shares
|
|
|
2,500,000
|
|
Common
stock, $.01 par value
|
|
|
|
|
Authorized
- 50,000,000 shares, issued 3,792,798 shares and outstanding
3,791,673 shares
|
|
|
37,928
|
|
Additional
paid-in capital
|
|
|
74,682,611
|
|
Accumulated
deficit
|
|
|
(79,610,130
|
)
|
Treasury
stock (1,125 common shares, at cost)
|
|
|
(2,250
|
)
|
Total
stockholders’ equity
|
|
|
2,725,359
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
3,723,759
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
For
the nine months ended
|
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Product
sales
|
|
$
|
1,699,812
|
|
|
$
|
713,819
|
|
Consulting
and royalty fees
|
|
|
123,965
|
|
|
|
119,683
|
|
Total
revenues
|
|
|
1,823,777
|
|
|
|
833,502
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
1,163,011
|
|
|
|
520,058
|
|
Research
and development
|
|
|
207,142
|
|
|
|
261,598
|
|
Selling,
general and administrative, includes stock-based compensation
of $208,764
for the nine months ended June 30, 2007
|
|
|
2,994,634
|
|
|
|
2,170,936
|
|
Total
operating expenses
|
|
|
4,364,787
|
|
|
|
2,952,592
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,541,010
|
)
|
|
|
(2,119,090
|
)
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense), income
|
|
|
4,114
|
|
|
|
27,026
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,036,896
|
)
|
|
|
(2,092,064
|
)
|
|
|
|
|
|
|
|
|
|
Deemed
Dividend - Series D Convertible Preferred Stock
|
|
|
-
|
|
|
|
(1,317,061
|
)
|
Deemed
Dividend - Series E Convertible Preferred Stock
|
|
|
(2,346,938
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(4,383,834
|
)
|
|
$
|
(3,409,125
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per basic and diluted common share
|
|
$
|
(1.19
|
)
|
|
$
|
(1.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
3,681,490
|
|
|
|
3,321,673
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
|
FOR
THE NINE MONTHS ENDED JUNE 30, 2007
|
(Unaudited)
|
|
|
Series
B Convertible
|
|
|
Series
D Convertible
|
|
|
Series
E Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Number
|
|
|
|
|
|
Stockholders'
|
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 1, 2006
|
|
|
27,000
|
|
|
$
|
2,700,000
|
|
|
|
241,933
|
|
|
$
|
3,000,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,322,798
|
|
|
$
|
33,228
|
|
|
$
|
74,001,747
|
|
|
$
|
(77,573,234
|
)
|
|
|
1,125
|
|
|
$
|
(2,250
|
)
|
|
$
|
2,159,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of
Series
D
Preferred
Stock to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
|
|
|
|
|
|
|
|
(47,000
|
)
|
|
|
(582,800
|
)
|
|
|
|
|
|
|
|
|
|
|
470,000
|
|
|
|
4,700
|
|
|
|
578,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of
Series
E
Preferred
Stock,
net
(See Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
(106,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,394,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of
SFAS
123 (R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
Compensation
pursuant
to
SFAS
123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,036,896
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,036,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June
30, 2007
|
|
|
27,000
|
|
|
$
|
2,700,000
|
|
|
|
194,933
|
|
|
$
|
2,417,200
|
|
|
|
10,000
|
|
|
$
|
2,500,000
|
|
|
|
3,792,798
|
|
|
$
|
37,928
|
|
|
$
|
74,682,611
|
|
|
$
|
(79,610,130
|
)
|
|
|
1,125
|
|
|
$
|
(2,250
|
)
|
|
$
|
2,725,359
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|