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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 790,796 23,364
<SECURITIES> 0 3,586,145
<RECEIVABLES> 305,478 278,688
<ALLOWANCES> 18,782 30,459
<INVENTORY> 552,310 777,620
<CURRENT-ASSETS> 1,660,317 4,722,947
<PP&E> 417,187 252,150
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,189,213 5,086,806
<CURRENT-LIABILITIES> 188,473 490,112
<BONDS> 0 0
<COMMON> 12,913,693 12,913,693
0 0
0 0
<OTHER-SE> 0 (14,462)
<TOTAL-LIABILITY-AND-EQUITY> 2,189,213 5,086,806
<SALES> 1,005,156 1,046,256
<TOTAL-REVENUES> 1,085,661 1,268,388
<CGS> 742,386 685,291
<TOTAL-COSTS> 742,386 685,291
<OTHER-EXPENSES> 2,953,692 3,357,472
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 138,482
<INCOME-PRETAX> (2,610,417) (2,912,857)
<INCOME-TAX> (2,610,417) (2,912,857)
<INCOME-CONTINUING> (2,610,417) (2,912,857)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,610,417) (2,912,857)
<EPS-PRIMARY> (.91) (1.25)
<EPS-DILUTED> (.91) (1.25)
</TABLE>
