-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ps6eOuzmJ8ABrRMQB2EhWke6XlhIBK1wpAVqchmpzkFDB8hhAp8L3slLY+Tjh0Nc pWTWEXo0467iZMwK7r3u6Q== 0000794154-96-000007.txt : 19961120 0000794154-96-000007.hdr.sgml : 19961120 ACCESSION NUMBER: 0000794154-96-000007 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961115 SROS: NASD SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEPRAGEN CORP CENTRAL INDEX KEY: 0000794154 STANDARD INDUSTRIAL CLASSIFICATION: TOTALIZING FLUID METERS & COUNTING DEVICES [3824] IRS NUMBER: 680073366 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14068 FILM NUMBER: 96667007 BUSINESS ADDRESS: STREET 1: 30689 HUNTWOOD DRIVE CITY: HAYWARD STATE: CA ZIP: 94544 BUSINESS PHONE: 5106360707 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-25726 SEPRAGEN CORPORATION (Exact name of small business issuer as specified in its charter) California 68-0073366 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30689 Huntwood Avenue, Hayward, California 94544 (Address of principal executive offices) (Issuer's telephone number (including area code): (510) 476-0650 (Former name, former address and former fiscal year if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the registrant's classes of Common equity, as of the latest practicable date: October 31, 1996 Class A Common Stock 2,142,506 Class B Common Stock 713,925 Class E Common Stock 1,203,719 THIS REPORT INCLUDES A TOTAL OF 11 PAGES. PART I - FINANCIAL INFORMATION Item 1. Financial Statements SEPRAGEN CORPORATION CONDENSED BALANCE SHEETS ASSETS September 30, 1996 December 31, 1995 (unaudited) Current Assets: Cash and cash equivalents $ 790,796 $ 23,364 Marketable securities -- 3,586,145 Accounts receivable, less allowance for doubtful accounts of $18,782 and $30,459 as of September 30, 1996 and December 31, 1995, respectively 305,478 278,688 Inventories 552,310 777,620 Prepaid expenses and other 11,733 57,130 Total current assets 1,660,317 4,722,947 Furniture and equipment, net 417,187 252,150 Intangible assets 111,709 111,709 $2,189,213 $5,086,806 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 69,186 $ 230,799 Accrued liabilities 31,076 174,395 Accrued payroll and benefits 88,211 80,633 Interest payable -- 4,285 Total current liabilities 188,473 490,112 Class E common stock, no par value - 1,600,000 shares authorized; 1,203,719 shares issued and outstanding at September 30, 1996 and December 31, 1995; redeemable at $.01 per share -- -- Shareholders' equity: Preferred stock, no par value - 5,000,000 shares authorized; none issued or outstanding at September 30, 1996 and December 31, 1995 -- -- Class A common stock, no par value - 20,000,000 shares authorized; 2,142,506 shares issued and outstanding at September 30, 1996 and December 31, 1995 8,774,283 8,353,737 Class B common stock, no par value - 2,600,000 shares authorized; 713,925 shares issued and outstanding at September 30, 1996 and December 31, 1995 4,139,410 4,559,956 Unrealized loss on available-for-sale securities -- (14,462) Accumulated deficit (10,912,953) (8,302,537) Total shareholders' equity 2,000,740 4,596,694 $2,189,213 $5,086,806 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Nine Months Ended Ended September 30, September 30, 1996 1996 1995 1996 1995 Revenues: Net Sales $ 142,375 $ 90,711 $1,005,156 $ 888,643 Costs and expenses: Cost of goods sold 104,456 154,978 742,386 563,201 Selling, general and administrative 563,917 593,778 1,789,267 1,463,382 Research and development 435,115 287,745 1,164,425 748,151 Total costs and expenses 1,103,488 1,036,501 3,696,078 2,774,734 Loss from operations (961,113) (945,790) (2,690,922) (1,886,091) Other income, net 9,954 72,471 80,505 12,960 Net loss $ (951,159) $(873,319)$(2,610,417) $(1,873,131) Net loss per common and common equivalent share $(.33) $(.31) $(.91) $(.87) Weighted average shares outstanding 2,856,431 2,855,032 2,856 431 2,141,595 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1996 1995 Cash flows from operating activities: Net loss $ (2,610,417) $ (1,873,131) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 65,085 18,356 Changes in assets and liabilities: Accounts receivable (26,790) (38,896) Inventories 225,310 (449,547) Prepaid expenses and other 45,397 45,341 Accounts payable (161,613) (161,811) Accrued liabilities (143,319) (213,077) Accrued payroll and benefits 7,578 (7,250) Interest payable (4,285) (18,667) Net cash used in operating activities (2,603,054) (2,698,682) Cash flows from investing activities: Acquisition of furniture and equipment (230,122) (60,162) Acquisition of marketable securities (549,514) -- Proceeds from sale of marketable securities 4,150,122 -- Net cash provided by (used in) investing activities 3,370,486 (60,162) Cash flows from financing activities: Proceeds from issuance of common stock -- 8,832,231 Repayment of bridge notes payable -- (1,550,000) Repayment of notes payable -- (25,000) Repayment of convertible note payable to shareholder -- (25,000) Repayment of convertible note -- (65,000) Net cash provided by financing activities -- 7,167,231 Net increase in cash 767,432 4,408,387 Cash and cash equivalents at the beginning of the period 23,364 240,472 Cash and cash equivalents at the end of the period $ 790,796 $ 4,648,859 Supplemental disclosure of non-cash financing activities: Conversion of note payable to shareholder and related interest to common stock -- $ 794,909 Deferred costs of securities registration offset against proceeds from issuance of common stock -- $ 478,494 Conversion of convertible note payable to shareholder and related interest to common stock -- $ 27,332 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 (Unaudited) Note 1 - Interim Financial Reporting. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10- QSB. Accordingly, certain information and footnotes required by generally accepted accounting principles have been condensed or omitted. These interim statements should be read in conjunction with the financial statements and the notes thereto, included in the Sepragen Corporation's (the "Company's") Annual Report on Form 10-KSB for the year ended December 31, 1995. The December 31, 1995 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The unaudited interim condensed financial statements have been prepared on the same basis as the audited annual financial statements, and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. The Company's quarterly results may be subject to fluctuations. As a result, the Company believes its results of operations for the interim period are not necessarily indicative of the results expected for any future period. The Company will be required to conduct significant research, develop- ment and testing activities which, together with expenses to be incurred for manufacturing, the establishment of a large marketing and distribution presence and other general and administrative expenses, are expected to result in operating losses for the next few years. Accordingly, there can be no assurance that the Company will ever achieve profitable operations. The Company will have to obtain additional financing to support its operating needs beyond December 31, 1996. There can be no assurance that such additional financing will be obtained. Note 2 - Initial Public Offering. The Company's initial public offering was declared effective by the Securities and Exchange Commission on March 23, 1995. The offering of 1,800,000 Units, each consisting of one share of Class A common stock, one redeemable five year Class A warrant and one redeemable five year Class B warrant, provided net proceeds of $7,242,351 to the Company. On the effective date of the offering, the Company issued 57,224 shares of Class B common stock and 88,039 shares of Class E common stock in exchange for the cancellation of a note payable to a shareholder of $727,000 and related accrued interest of $67,909. In May, 1995 the underwriter exercised its overallotment option for 270,000 Units, generating an additional $1,181,386 of net proceeds to the Company. SEPRAGEN CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 (Unaudited) Note 3 - Net Loss Per Share. Net loss per common and common equivalent share is computed using the weighted average number of common shares and common equivalent shares outstanding during each period. Restricted shares issued as Class E common shares and contingent options are considered contingently issuable and, accordingly, are excluded from the weighted average number of common and common equivalent shares outstanding. For the periods ended September 30, 1996 and 1995 common equivalent shares relating to options have been excluded as they are anti-dilutive. Note 4 - Inventory. Inventories consist of the following: 9/30/96 12/31/95 Raw Materials $310,530 $459,474 Finished Goods 241,780 318,146 $552,310 $777,620 Note 5 - Stock Option Plan Effective June 28, 1996, the Company adopted a new 1996 Stock Option Plan which reserves an additional 250,000 shares of Class A common stock for future grant. The terms of this plan are similar to the 1994 Stock Option Plan. Options to purchase 134,524 shares have been granted under the plan. Item 2. Management's Discussion and Analysis. First nine months of 1996 compared to first nine months of 1995 Net sales increased by $117,000 or 13% from the first nine months of 1995. This increase in sales is due primarily to the shipment of two large QuantaSeps, a computer controlled liquid chromatography system. Gross margin decreased by $63,000 or 19% from the first nine months of the prior year, and as a percent of sales, decreased from 37% to 26%. This decrease was attributable to higher material cost and development of software for the large QuantaSeps. Selling, general and administrative expenses increased by $326,000 from $1,463,000 in the first nine months of 1995 to $1,789,000 in the first nine months of 1996. The increase was primarily due to: the hiring of additional personnel in sales and marketing, corporate development and administration; additional expenses related to training, advertising and promotion, public relations, product evaluation and demonstration; and increased legal, accounting, insurance costs. Research and development expenses increased by $416,000 or 56% from $748,000 in the first nine months of 1995 to $1,164,000 in the first nine months of 1996. The increase was attributable to expenditures related to the development of the Sepralac process for dairy whey fractionation and expenditures related to the development of a special adsorbent SepraSorb media. Third quarter 1996 compared to third quarter 1995. Net sales increased by $52,000 or 57% from the third quarter of 1995. The increase in sales was due to fees paid for evaluation of the whey process. Gross margin increased by $102,000 from a negative margin of $64,000 in the third quarter of 1995 to a positive margin of $38,000 in the third quarter of 1996. The increase was due to lower inventory reserves for slow moving inventory and the low cost of goods associated with the income derived from evaluation of the whey process. Selling, general and administrative expenses decreased by $30,000 from $594,000 in the third quarter of 1995 to $564,000 in the third quarter of 1996. The decrease was mainly due to reduction of the number of sales and marketing personnel compared to the number of personnel in 1995. Research and development expenses increased by $147,000 from $288,000 in the third quarter of 1995 to $435,000 in the third quarter of 1996. The increase was attributable to additional expenditures related to the development of Sepralac, SepraSorb and completion of the QuantaSep software and other related products. Inflation The Company believes that the impact of inflation on its operations since its inception has not been material. Liquidity and Capital Resources. The Company had working capital of $1,472,000 on September 30, 1996 and $4,233,000 on December 31, 1995. The decrease in the working capital of $2,761,000 reflects the use of net cash in operating activities and leasehold improvements. Since the IPO, the Company has funded its working capital requirements substantially from the net cash proceeds from the IPO. Prior to the IPO, the Company had funded its activities primarily through sales of its SuperfloR columns and QuantaSepR systems, loans from its principal share- holders, and private placements of securities. The IPO generated net proceeds of $7,242,000 and the exercise by the underwriter of its over- allotment option generated additional net proceeds of $1,111,000. From its inception in 1985 until the IPO, the Company's expenditures have exceeded its revenues. Prior to the IPO, the Company financed its operations primarily through private equity placements in an aggregate amount of approximately $3,971,000, a substantial portion of which was purchased by H. Michael Schneider, the secretary and a director of the Company until October 1, 1995, and his affiliates, including Romic Environ- mental Technologies Corporation ("Romic"), an entity controlled by Mr. Schneider. In addition, the Company has historically relied on customers to provide purchase price advances for development and scale-up of its radial flow chromatography columns. As of September 30, 1996, the Company had shareholders' equity of approximately $2,001,000. As of September 30, 1996, the Company had a working capital balance of approximately $1,472,000. For the nine months of 1996, net cash used in operating activities was $2,603,000. This negative cash out flow of working capital from operations must be reversed and working capital increased significantly in order for the Company to fund the level of manufacturing and marketing required to meet the anticipated growth in demand for its products from the pharmaceutical and biotechnology indus- tries during the next two years. Moreover, the Company requires additional funds to extend the use of its technology to new applications within the pharmaceutical and biotechnology industries as well as to applications within the food and dairy and environmental industries and to attract the interest of strategic partners in one or more of these markets. The decrease of $225,000 in inventory from December 31, 1995 to September 30, 1996 was due primarily to the shipment of two large Quanta- Sep Systems and the booking of inventory reserves for slow moving and demonstration inventory. As of September 30, 1996, the Company had no borrowings. During fiscal year 1996, the Company is committed to pay approximately $245,000 as compensation for its current executive officers. The Company expects to hire additional executive officers as the need arises. The Company's financing requirements may vary materially from those now planned because of results and changes in the focus and direction of research and development programs, relationships with strategic partners, competitive advances, technological change, changes in the Company's mar- keting strategy and other factors, many of which will be beyond the Company's control. Based on the Company's current operating plan, the Company believes that its cash and cash equivalents, together with trade credit arrangements and cash flow generated from operations, will be sufficient to fund the Company's operations for the three month period following September 30, 1996. Accordingly, the Company will have to obtain additional financing to support its operations. There is no assurance, however, that such financing will be obtained. The Company's cash requirements may vary materially from those planned because of factors such as the timing of significant product orders, commercial acceptance of new products, patent developments and the intro- duction of competitive products. The Company currently has no credit facility with a bank or other financial institution. Historically, the Company and certain of its customers have jointly borne a substantial portion of developmental expenses on projects with such customers. There can be no assurance that such sharing of expenses will continue. The Company continues its efforts to increase sales of its existing products and to complete development and initiate marketing of its products and processes now under development. The Company is seeking to enter into strategic alliances with corpo- rate partners in the industries comprising its primary target markets (biopharmaceutical, food, dairy and environmental management). The Company hopes to enter into alliances that will provide funding to the Company for the development of new applications of its radial flow chromatography technology in return for royalty bearing licenses to the developed applica- tions. No assurance can be given, however, that the terms of any such alliance will be successfully negotiated or that any such alliance will be successful. The Company's Class A Common Stock, Class A Warrants, Class B Warrants and Units are quoted on the NASDAQ SmallCap Market and are listed on the Pacific Stock Exchange (Tier II). The Company entered into a lease for new facilities in Hayward, California with annual rent of $76,900 and relocated its facilities in February 1996. From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and develop- ment activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: the volatility of revenues and negative cash out flow discussed above; and changes in the focus and direction of research and development programs, relationships with strategic partners, competitive advances, technological change, changes in the Company's marketing strategy and other factors, many of which will be beyond the Company's control. PART II - OTHER INFORMATION Item 1 Legal Proceedings. Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are filed as part of this Report: 3.1(1) Restated Articles of Incorporation of the Company, as amended to date 3.2(2) Restated Bylaws, as amended to date 4.1(1) Form of Warrant Agreement among the Com- pany, the Underwriter and American Stock Transfer Company, including Forms of Class A Warrant Certificates and Class B Warrant Certificates 4.2(1) Form of Unit Option Agreement between the Company and the Underwriter 4.3(1) Form of Specimen Class A Common Stock Cer- tificate 4.4(1) Form of Specimen Class B Common Stock Certificate 4.5(1) Form of Specimen Class E Common Stock Certificate 4.6(1) Bridge Warrant Agreement, including forms of Bridge Warrant Certificate 10.1(2) Lease dated July 3, 1995 between Hayward Business Park, Inc. and the Company 10.2(1) Employment Agreement between the Company and Vinit Saxena effective September 1, 1994 10.3(1) Employment Agreement between the Company and Q. R. Miranda effective September 1, 1994 10.4(1) Form of Indemnification Agreement between the Company and each director and officer of the Company 10.5(1) Convertible Promissory Notes and Warrants 10.6(1) 1994 Stock Option Plan 10.7(3) Master Purchasing Agreement with Thermax Limited dated April 23, 1996 10.6(4) 1996 Stock Option Plan (1) These exhibits which are incorporated herein by reference were previously filed by the Company as exhibits to its Registration Statement on Form SB- 2 and Amendments Nos. 1, 2, 3, 4 and 5 and Post Effective No. 1 (File No. 33-86888). (2) These exhibits which are incorporated herein by reference were previously filed by the Company as exhibits to its Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995. (3) This exhibit which is incorporated herein by reference was previously filed by the Company as an exhibit to its Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (4) This exhibit which is incorporated herein by reference was previously filed by the Company as an exhibit to its Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996. Exhibits not listed above have been omitted because they are inapplicable or because the required information is given in the financial statements or notes thereto. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEPRAGEN CORPORATION Date: November 14, 1996 By: /s/Vinit Saxena Vinit Saxena Chief Executive Officer, President and Principal Financial and Chief Accounting Officer EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS ON FORM 10KSB FOR THE PERIOD ENDED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS YEAR DEC-31-1996 DEC-31-1995 SEP-30-1996 DEC-31-1995 790,796 23,364 0 3,586,145 305,478 278,688 18,782 30,459 552,310 777,620 1,660,317 4,722,947 417,187 252,150 0 0 2,189,213 5,086,806 188,473 490,112 0 0 12,913,693 12,913,693 0 0 0 0 0 (14,462) 2,189,213 5,086,806 1,005,156 1,046,256 1,085,661 1,268,388 742,386 685,291 742,386 685,291 2,953,692 3,357,472 0 0 0 138,482 (2,610,417) (2,912,857) (2,610,417) (2,912,857) (2,610,417) (2,912,857) 0 0 0 0 0 0 (2,610,417) (2,912,857) (.91) (1.25) (.91) (1.25)
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