-----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, NK3AjI1XibHPUOjI3s5Vkhja6HRawyIXn4QnRjiZBXpA/HPg3hdbsW/MSmvSyo9h UKrq6e4K80becFWLggFiZw== 0000794154-97-000008.txt : 19971119 0000794154-97-000008.hdr.sgml : 19971119 ACCESSION NUMBER: 0000794154-97-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971118 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: SEC FILE NUMBER: 001-14068 FILM NUMBER: 97723203 BUSINESS ADDRESS: STREET 1: 30689 HUNTWOOD DRIVE CITY: HAYWARD STATE: CA ZIP: 94544 BUSINESS PHONE: 5106360707 10QSB 1 CONFORMED COPY 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, 1997 [ ] 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 31,1997 Class A Common Stock 2,155,254 Class B Common Stock 701,177 Class E Common Stock 1,203,719 THIS REPORT INCLUDES A TOTAL OF 9 PAGES. THERE ARE NO EXHIBITS. PART I - FINANCIAL INFORMATION Item 1. - Financial Statements SEPRAGEN CORPORATION CONDENSED BALANCE SHEETS ASSETS September 30, 1997 December 31, 1996 (unaudited) Current Assets: Cash and cash equivalents $ 160,357 $ 217,057 Accounts receivable, less allowance for doubtful accounts of $12,000 as of September 30, 1997 and $10,296 as of December 31, 1996 129,126 183,805 Inventories 451,103 474,892 Deferred costs of bridge notes 18,000 - Prepaid expenses and other 10,502 12,633 Total current assets 769,088 888,387 Furniture and equipment, net 304,872 388,201 Intangible assets 112,130 130,837 1,186,090 1,407,425 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable 650,521 196,686 Accrued liabilities 41,961 67,665 Customer deposits 285,709 - Accrued payroll and benefits 117,147 110,967 Notes payable 100,000 - Notes payable to shareholders 125,000 - Bridge notes payable 225,000 - Total current liabilities 1,545,338 375,318 Class E common stock, no par value - 1,600,000 shares authorized; 1,203,719 and 1,209,894 shares issued and outstanding at - - September 30, 1997 and December 31, 1996, respectively; redeemable at $.01 per share Shareholders' equity (deficit): Preferred stock, no par value - 5,000,000 shares authorized; none issued or outstanding at September 30, 1997 and December 31, 1996, respectively - - Class A common stock, no par value - 20,000,000 shares authorized; 2,155,254 and 2,149,155 shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively 8,848,075 8,812,701 Class B common stock, no par value - 2,600,000 shares authorized; 701,177 and 707,276 shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively 4,065,618 4,100,992 Accumulated deficit (13,272,941) (22,881,586) Total shareholders' equity (deficit) (359,248) 1,032,107 1,186,090 1,407,425 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenues: Net Sales $ 188,264 $ 142,375 $ 731,977 $ 1,005,156 Costs and expenses: Cost of goods sold 112,317 104,456 412,274 742,386 Selling, general and administrative 311,791 563,917 1,115,059 1,789,267 Research and development 435,115 669,821 1,164,425 157,881 Total costs and expenses 581,989 1,103,488 2,197,154 3,696,922 Loss from operations (393,725) (961,113) (1,465,177) (2,690,922) Other income 32,804 9,954 72,804 -- Interest income, net 25 -- 1,018 80,505 Net loss (360,896) (951,159) (1,391,355) (2,610,417) Net loss per common and common equivalent share $(.13) $(.33) $(.49) $(.91) Weighted average shares outstanding 2,856,431 2,856,431 2,856,431 2,856,431 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, 1997 1996 Cash flows from operating activities: Net Loss $ (1,391,355) $ (2,610,417) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 83,329 65,085 Amortization of patent cost 18,707 -- Changes in assets and liabilities: Accounts receivable 54,679 (26,790) Inventories 23,789 225,310 Prepaid expenses and other 2,131 45,397 Accounts payable 453,835 (161,613) Accrued liabilities (25,704) (143,319) Accrued payroll and benefits 6,180 7,578 Interest payable -- (4,285) Customer deposits 285,709 -- Net cash used in operating activities (488,700) (2,603,054) Cash flows from investing activities: Acquisition of furniture and equipment -- (230,122) Acquisitions of marketable securities -- (549,514) Proceeds from sale of marketable securities -- 4,150,122 Net cash provided by investing activities -- 3,370,486 Cash flows from financing activities: Proceeds from issuance of notes payable to shareholders 125,000 -- Proceeds from issuance of notes payable 100,000 -- Proceeds from issuance of bridge notes payable 225,000 -- Deferred costs of bridge notes (18,000) -- Net cash provided by financing activities 432,000 -- Net increase (decrease) in cash (56,700) 767,432 Cash and cash equivalents at the beginning of the period 217,057 23,364 Cash and cash equivalents at the end of the period $ 160,357 $ 790,796 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, 1997 (Unaudited) Note 1 - Basis of Presentation These condensed financial statements have been presented on a going concern basis. Sepragen (the "Company") has incurred recurring losses and cash flow deficiencies from operations that raise substantial doubt about its ability to continue as a going concern. As of September 30, 1997, the Company had an accumulated deficit of $13,272,941. The Company will be required to conduct significant research, development 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, 1997. The Company is currently pursuing alternative funding sources to meet its cash flow needs, including private debt and equity financing. Management intends to use such funding to further its marketing efforts and expand sales. It is uncertain, however, whether the Company will be successful in such pursuits. No adjustments have been made to the accompanying condensed financial statements for this uncertainty. Note 2 - 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, 1996. The December 31, 1996 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. 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, 1997 and 1996 common equivalent shares relating to options have been excluded as they are anti-dilutive. Note 4 - Inventory. Inventories consist of the following: 9/30/97 12/31/96 Raw Materials $404,026 $294,424 Finished 47,077 180,468 Goods $451,103 $474,892 SEPRAGEN CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (Unaudited) Note 5 - Other Income Other income represents an insurance recovery in excess of net book value of lost demonstration equipment and a refund for tenant improvements, from the landlord. Note 6 - Related Party Transactions In May 1997, the Company borrowed $100,000 from a shareholder of the Company, payable with interest at 9.5% per annum and is due April 10, 1998. In June 1997, the Company borrowed $25,000 from a shareholder of the Company, payable with interest at 9.5% per annum and is due December 18, 1997. Note 7 - Notes Payable In June 1997, the Company issued a note payable of $100,000 to an unrelated party. The note bears interest of 9.5% per annum and is due on June 18, 1998. Note 8 - Bridge Notes Payable In September 1997, the Company commenced bridge financing of 55 bridge units. Each unit consists of a bridge note in the face amount of $10,000 which bears interest at an annual rate of 10% and warrants to purchase 5,000 shares of Class A Common Stock at $1.25 per share. The bridge notes are repayable upon the earlier of six months from issuance or completion of any subsequent offering of equity securities with at least $1,000,000 in gross proceeds. As of September 30, 1997, $225,000 of offering proceeds were received from the bridge financing. Debt issuance costs related to these notes of $18,000 were deferred as other current assets and are being amortized over the term of the notes. Item 2 . Management's Discussion and Analysis. First nine months of 1997 compared to first nine months of 1996. Net sales decreased by $273,000 or 27% from the first nine months of 1996. The decrease in sales is due primarily to the shipment of two large QuantaSep's, computer controlled liquid chromatography systems, in the first quarter of 1996. Gross Margin increased by $57,000 or 22% from the first three quarters of the prior year, and as percent of sales, increased from 26% to 44%. The increase in gross margin is primarily due to product mix. Selling, general and administrative expenses decreased by $674,000 from $1,789,000 to $1,115,000 in the first nine months of 1997. The decrease was primarily due to the reduction in head count in sales and marketing as well as the scaling back of advertising and promotion, travel and facility expenses, net of an increase in professional fees and costs for securities compliance matters and financing activities. Research and development expenses decreased by $494,000 from $1,164,000 in the first nine months of 1996 to $670,000 in the first nine months of 1997. The decrease was mainly due to the reduction in the cost of software development for the QuantaSep product, product development and reduction in head count. Third quarter 1997 compared to third quarter 1996. Net sales increased by $46,000 or 32% from the third quarter of 1996. The increase was due to increased shipment of the QuantaSep products. Gross margin increased by $38,000 or 100% in the third quarter of 1997 compared to the same period in 1996, and as a percent of sales, increased by 13% from 27% to 40%. The increase was due to reserve for slow moving and obsolete inventory which was recorded in the third quarter of 1996, with no corresponding increase in the reserve in 1997. Selling, general and administrative expenses decreased by $252,000 from $564,000 in the third quarter of 1996 to $312,000 in the third quarter of 1997. The decrease was primarily due to the reduction in head count, advertising, travel and professional fees. Research and development expenses decreased by $277,000 from $435,000 in the third quarter of 1996 to $158,000 in the third quarter of 1997. The decrease was mainly due to the reduction of software expenses and reduction of head count. 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 a negative working capital of $776,000 on September 30, 1997 and positive working capital of $513,000 on December 31, 1996. The decrease in the working capital of $1,289,000 reflects the use of net cash in operating activities. Since the 1995 IPO, the Company has funded its working capital requirements substantially from the net cash proceeds from the IPO. The Company had borrowings of $125,000 from shareholders and $100,000 from a third party, outstanding as of September 30, 1997, to provide working capital for the Company. In September 1997, the Company commenced bridge financing of 55 bridge units. Each unit consists of a bridge note in the face amount of $10,000 which bears interest at an annual rate of 10% and warrants to purchase 5,000 shares of Class A Common Stock at $1.25 per share. The bridge notes are repayable upon the earlier of six months from issuance or completion of any subsequent offering of equity, securities with at least $1,000,000 in gross proceeds. As of September 30, 1997, $225,000 of offering proceeds were received from the bridge financing. Debt issuance costs related to these notes of $18,000 were deferred as other current assets and are being amortized over the term of the notes. During 1997, 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. Based on the Company's current operating plan, the Company believes that it will only be able to fund the Company's operations through December 31, 1997. Accordingly, the Company will have to obtain additional financing to support its operations. The Company is currently attempting to secure additional financing through either the sale of additional equity securities of the Company or some form of debt financing. There can be no assurance that the Company will be able to secure financing on reasonable terms at all. The IPO Units, Class A Common Stock and Class A and Class B warrants were listed on Nasdaq SmallCap Market until August 15, 1997. The Company's financial statements indicate it did not meet the asset requirements for continued listing of securities on Nasdaq SmallCap Market as of December 31, 1996 or the net asset and capital surplus requirements for continued listing as of June 30, 1997. The continued listing criteria for Nasdaq SmallCap Market generally include a minimum of $2,000,000 in total assets, $1,000,000 in capital surplus, a minimum bid price of $1.00 per share of common stock and 100,000 shares in the public float. In addition, the common stock must have at least two registered and active market makers and must be held by at least 300 holders and the market value of its public float must be at least $200,000. On August 15, 1997, Sepragen received a notification of delisting from Nasdaq, effective the same day. Since August 16, 1997, the IPO Units, Class A Common Stock and the warrants have been trading in the over-the-counter market. As a result, an investor will likely find it more difficult to dispose of or to obtain accurate quotations as to the value of the company's securities. It is also likely the Company's securities will also be less liquid with a resulting negative effect on the value of such securities and the ability of the Company to raise additional capital. The IPO Units, Class A Common Stock and the Class A and Class B warrants will currently remain listed on the Pacific Exchange ("PSE") Tier II. However, the Company does not meet the criteria for continued listing of securities on the PSE. The continued listing criteria for PSE generally include a minimum of $500,000 in net tangible assets, at least $2,000,000 in net worth, a minimum bid price of $1.00 per share of common stock, 300,000 shares in the public float and at least 250 public beneficial holders. On May 21, 1997, PSE notified the Company of its initiation of delisting proceedings. The Company submitted a detailed plan to meet the listing requirements. PSE has advised the Company of its decision to extend the time period to satisfy the listing requirements to December 2, 1997. The Company intends to increase its assets by selling additional equity securities of the Company or some form of debt financing. There can be no assurance that the Company's plan will be accepted by the PSE or that the Company will be successful in obtaining additional funds. The Company is also exploring alternatives available to the Company, including the possible sale of certain intellectual property or technology to obtain working capital. There is no assurance that such alternatives will be feasible or successful in increasing working capital or improving the Company's financial position. The Company's financing and cash requirements may vary materially from those now planned because of 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. 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 through purchase price advances or joint development projects with each party sharing some of the costs of development. 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 corporate partners in the industries comprising its primary target markets (biopharmaceutical, food, dairy and environmental management). The Company's ability to develop and market its Sepralaca process for whey separation and other potential food and environmental products and processes will be substantially dependent upon its ability to negotiate partnerships, joint ventures or alliances with established companies in each market. In particular, the Company will be reliant on such joint venture partners or allied companies for both market introduction, operational assistance and financial assistance. The Company believes that development, manufacturing and market introduction of products in these industries, will cost millions of dollars and require operational capabilities in excess of those currently available to the Company. 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 hopes to enter into alliances that will provide funding to the Company for the development of new applications of its Radial Flow Chromatography (RFC) technology in return for agreements to purchase its equipment and royalty bearing licenses to the developed applications. Other Events: In September of 1997, the Company announced that the board of directors filled the two vacancies existing on the board of directors by electing two new members to the Company's board of directors, bringing the total number of members to five. The new members are Kris Venkat, Ph. D., D. SC. and Henry N. Edmunds, Ph. D. Dr. Venkat has been Chairman and Chief Executive officer of Phyton, Inc., a privately held company engaged in commercializing plant cell culture technology since 1992. From 1976 through 1990, Dr. Venkat served in various management positions with H. J. Heinz Company including corporate director of science and technology from 1986 to 1990. Dr. Venkat currently serves on the Board of Directors of Phyton, Inc., Androx Corporation, Biotechnology Trading Company, Biotechnology Consortium of India Limited and Krystos Group. Dr. Venkat also serves on the faculty of the department of chemical and biochemical engineering at Rutgers University. Dr. Venkat has a M.S. degree and Ph. D. in Biochemical Engineering from Rutgers University. Dr. Edmunds has served as Vice President of corporate development and Chief Financial Officer of SangStat Medical Corporation, a Menlo Park, California based company, since 1992. From 1985 until 1992, Dr. Edmunds was Director of Business Development and business manager for Genencor, Inc., a South San Francisco, California biotechnology company. Dr. Edmunds received his Ph. D. in Biochemistry from the University of California, Berkeley and his M.B.A. from the Stanford School of Business. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while such assumptions or bases are believed to be reasonable and are made in good faith, assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "estimate," "anticipate," and similar expressions may identify forward-looking statements. Taking into account the foregoing, the following are identified as some but not all of the important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of the Company: Inability to Secure Additional Capital. The Company has incurred operating losses each fiscal year since its inception. The Company must secure additional financing through either the sale of additional securities or debt financing to continue operations past January 1, 1998. Although the Company is attempting to secure such financing, there can be no assurance that such financing will be available to the Company on reasonable terms. If the Company is unable to secure such capital, it will not meet the net asset and capital and surplus levels required for continued listing of its securities on the Pacific Exchange Tier II, or getting re-listed on the Nasdaq SmallCap Market.. Competition. In both its biopharmaceutical industry market and in the market for its process systems for food, beverage, dairy and environmental industries, the Company faces intense competition from better capitalized competitors. Dependence on Joint Ventures and Strategic Partnerships. The Company's entry into the food, dairy and beverage market for its process systems will be substantially dependent upon its ability to enter into strategic partnerships, joint ventures or similar collaborative alliance with established companies in each market. As of the date of this report, no such alliances have been finalized and there can be no assurance that the terms of any such alliance will produce profits for the Company. 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 15, 1997 By: /s/Vinit Saxena Vinit Saxena Chief Executive Officer, President and Principal Financial and Chief Accounting Officer EX-10 2 [ARTICLE] 5 [LEGEND] THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR SEPTEMBER 30, 1997 AS FILED ON FORM 10QSB WITH THE SECURITIES EXCHANVE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. [/LEGEND] [PERIOD-TYPE] 9-MOS [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-END] SEP-30-1997 [CASH] 160,357 [SECURITIES] 0 [RECEIVABLES] 129,126 [ALLOWANCES] 12,000 [INVENTORY] 451,103 [CURRENT-ASSETS] 769,088 [PP&E] 304,872 [DEPRECIATION] 0 [TOTAL-ASSETS] 1,186,090 [CURRENT-LIABILITIES] 1,545,338 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 12,913,693 [OTHER-SE] (13,272,941) [TOTAL-LIABILITY-AND-EQUITY] 1,186,090 [SALES] 731,977 [TOTAL-REVENUES] 731,977 [CGS] 412,274 [TOTAL-COSTS] 412,274 [OTHER-EXPENSES] 1,784,880 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 0 [INCOME-PRETAX] (1,391,355) [INCOME-TAX] (1,391,355) [INCOME-CONTINUING] (1,391,355) [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] (1,391,355) [EPS-PRIMARY] (.49) [EPS-DILUTED] (.49)
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