UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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 Drive, 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:
30689 Huntwood Drive, Hayward, California 94544
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:
May 15, 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 11 PAGES.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SEPRAGEN CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
March 31, 1997 December 31, 1996
(unaudited)
Current Assets:
Cash and cash equivalents $ 62,159 $ 217,057
Accounts receivable, less allowance
for doubtful accounts of $10,298 as
of March 31, 1997 and
December 31, 1996 178,759 183,805
Inventories 492,448 474,892
Prepaid expenses and other 12,631 12,633
Total current assets 745,997 888,387
Furniture and equipment, net 364,937 388,201
Intangible assets 125,684 130,837
$1,236,618 $1,407,425
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 489,250 $ 196,686
Accrued liabilities 74,738 67,665
Accrued payroll and benefits 132,891 110,967
Total current liabilities 696,879 375,318
Class E common stock, no par value -
1,600,000 shares authorized;
1,203,719 and 1,209,894 shares
issued and outstanding at
March 31, 1997 and December 31,
1996, respectively;
redeemable at $.01 per share -- --
Shareholders' equity:
Preferred stock, no par value -
5,000,000 shares authorized; none
issued or outstanding at March 31,
1997 and December 31, 1996 -- --
Class A common stock, no par value -
20,000,000 shares authorized;
2,155,254 and 2,149,155 shares
issued and outstanding at March 31,
1997 and at December 31, 1996 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 March 31, 1997
and at December 31, 1996 4,065,618 4,100,992
Accumulated deficit (12,373,954) (11,881,586)
Total shareholders' equity 539,739 1,032,107
$1,236,618 $1,407,425
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1997 1996
Net Sales $330,909 $632,662
Costs and expenses:
Cost of goods sold 125,473 451,638
Selling, general and administrative 486,045 637,851
Research and development 251,946 362,838
Total costs and expenses 863,464 1,452,327
Loss from operations (532,555) (819,665)
Other income 40,000 --
Interest income, net 187 40,916
Net loss $(492,368) $ (778,749)
Net loss per common and common
equivalent share $(.17) $(.27)
Weighted average shares outstanding 2,856,431 2,856,431
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1997 1996
Cash flows from operating activities:
Net Loss $ (492,368) $ (778,749)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 23,264 23,271
Amortization of patent costs 5,153 --
Changes in assets and liabilities:
Accounts receivable 5,046 (300,483)
Inventories (17,556) 132,070
Prepaid expenses and other 2 32,460
Accounts payable 292,564 42,700
Accrued liabilities 7,073 (79,135)
Accrued payroll and benefits 21,924 8,208
Interest payable -- (4,285)
Net cash used in operating activities (154,898) (923,943)
Cash flows from investing activities:
Acquisition of furniture and equipment -- (220,371)
Acquisitions of marketable securities -- (259,514)
Proceeds from sale of marketable
securities -- 1,500,138
Net cash provided by investing activities -- 1,020,253
Net increase (decrease) in cash (154,898) 96,310
Cash and cash equivalents at the
beginning of the period 217,057 23,364
Cash and cash equivalents at the end
of the period $62,159 $119,674
Supplemental disclosure of non-cash financing activities:
Net unrealized gain on
available-for-sale securities -- $2,147
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 1997
(Unaudited)
Note 1 - Basis of Presentation
These condensed financial statements have been presented on a going
concern basis. 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 March 31, 1997, the
Company had an accumulated deficit of $12,282,340.
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 May 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 and profitability. 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 annual
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 March 31, 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:
Unaudited
3/31/97 12/31/96
Raw Materials $448,073 $294,424
Finished Goods 44,375 180,468
$492,448 $474,892
Note 5 - Other Income
Other income represents an insurance recovery in excess of
net book value of lost demonstration equipment.
<PAGE>
Item 2. Management's Discussion and Analysis.
First quarter 1997 compared to first quarter 1996
Net sales decreased by $302,000 or 48% from the first quarter of 1996.
The decrease in sales is due primarily to the shipment of two large
QuantaSeps, a computer controlled liquid chromatography system in the
first quarter of 1996.
Gross Margin increased by $24,000 or 13% from the first quarter of the
prior year, and as a percent of sales, increased from 29% to 62%. The
increase is primarily due to product mix.
Selling, general and administrative expenses decreased by $152,000 from
$638,000 in the first quarter of 1996 to $486,000 in the first quarter
of 1997. The decrease was primarily due to the reduction in the number
of personnel in sales and marketing, as well as scaling back of
advertising and promotion, travel and facility expenses, net of an
increase in professional fees and costs for securities compliance
matters.
Research and development expenses decreased by $111,000 from $363,000 in
the first quarter of 1996 to $252,000 in the first quarter of 1997. The
decrease was mainly due to the reduction in the cost of software
development for the QuantaSep product.
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 $141,000 on March 31, 1997 and
$513,000 on December 31, 1996. The decrease in the working capital of
$372,000 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 increase in inventory form December 31, 1996 to March 31, 1997
was due primarily to build a large QuantaSep System scheduled to ship in
the second quarter of 1997.
As of March 31, 1997, the Company had no borrowings. 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 will only be able to fund the Company's operations through May 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 or at all.
While the IPO Units, Class A Common Stock and Class A and Class B
Warrants have been listed on Nasdaq SmallCap Market and the Pacific
Exchange ( PSE ) Tier II, the Company does not currently meet the
criteria for continued listing of securities on Nasdaq or the PSE.
These continued listing criteria for Nasdaq Small Cap Market generally
include a minimum of $2,000,000 in total assets, $1,000,000 in capital
and 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. If an issuer does not meet the $1.00 minimum bid
price standard, it may, however, remain on Nasdaq if the market value of
its public float is at least $1,000,000 and the issuer has capital and
surplus of at least $2,000,000. The continued listing criteria for the
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. The Company's financial statements indicate it did
not meet the net asset requirements for continued listing on Nasdaq
SmallCap Market as of December 31, 1996 or the net asset and capital
surplus requirements for continuing listing as of March 31, 1997. If
the Company remains unable to meet the continued listing criteria of
Nasdaq and the PSE and is delisted therefrom, trading, if any, in the
IPO Units, Class A Common Stock and the Warrants would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets"
or, if then available, the "OTC Bulletin Board Service." As a result,
an investor would likely find it more difficult to dispose of, or to
obtain accurate quotations as to the value of, the Company's securities.
The Company's securities would 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.
As indicated above, the Company does not currently meet the listing
requirements for the NASDAQ SmallCap Market or the Tier II PSE. Nasdaq
has requested that the submit a plan for meeting the listing
requirements and the Company has submitted a plan to Nasdaq 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 NASDAQ 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. The can be no assurance that such alternatives will be
feasible or successful in increasing working capital or 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 Sepralac(TM) 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
RFC technology in return for agreements to purchase its equipment and
royalty bearing licenses to the developed applications.
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," "expect," "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 June 1, 1997.
Although the Company is attempting to secure such financing, there can
be no assurance that such financing will be available to Company on
reasonable terms or at all. 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 Nasdaq SmallCap
Market and the Pacific Exchange Tier II. See Item 2 "Management's
Discussion and Analysis-Liquidity and Capital Resources."
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.
<PAGE>
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
Each exhibit identified below is filed as part of this report.
Exhibits incorporated by reference to a prior filing are designated by a
numbered footnote.
(a) Exhibits.
The following exhibits are filed as part of this Report:
1.1(1) Form of Underwriting Agreement
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 Company, 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 Certificate
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
10.8(4) 1996 Stock Option Plan
27 Financial Data Schedule
(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) 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 March
31, 1996.
(4) 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 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: May 15, 1997 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
FINANCIAL STATEMENTS FOR MARCH 31, 1997 AS FILED ON FORM 10QSB WITHT HE
SECURITIES EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000794154
<NAME> SEPRAGEN CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 62,159
<SECURITIES> 0
<RECEIVABLES> 178,759
<ALLOWANCES> 10,298
<INVENTORY> 492,448
<CURRENT-ASSETS> 745,997
<PP&E> 364,937
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,236,618
<CURRENT-LIABILITIES> 696,879
<BONDS> 0
0
0
<COMMON> 12,913,693
<OTHER-SE> (12,373,954)
<TOTAL-LIABILITY-AND-EQUITY> 539,739
<SALES> 330,909
<TOTAL-REVENUES> 330,909
<CGS> 125,473
<TOTAL-COSTS> 125,473
<OTHER-EXPENSES> 737,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (492,368)
<INCOME-TAX> (492,368)
<INCOME-CONTINUING> (492,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (492,368)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
