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: June 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:
August 13, 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.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
SEPRAGEN CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
June 30, December
1997 31, 1996
(unaudited)
Current Assets:
Cash and cash equivalents $ 6,984 $ 217,057
Accounts receivable, less
allowance for doubtful accounts
of $12,000 as of June 30, 1997 140,415 183,805
and $10,296 as of December 31,
1996
Inventories 458,566 474,892
Prepaid expenses and other 22,501 12,633
Total current assets 628,466 888,387
Furniture and equipment, net 332,650 388,201
Intangible assets 118,375 130,837
1,079,491 1,407,425
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 600,137 196,686
Accrued liabilities 22,374 67,665
Customer deposit 107,866 --
Accrued payroll and benefits 122,466 110,967
Notes payable 100,000 --
Notes payable to shareholders 125,000 --
Total current liabilities 1,077,843 375,318
Class E common stock, no par value -
1,600,000 shares authorized;
1,203,719 and 1,209,894 shares
issued and outstanding at
June 30, 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 June 30,
1997 and at 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 June 30,
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 June 30, 1997
and at December 31, 1996 4,065,618 4,100,992
Accumulated deficit (12,912,045) (11,881,586)
Total shareholders' equity 1,648 1,032,107
1,079,491 1,407,425
The accompanying notes are an integral part of these condensed financial
statements.
Page 2
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Revenues:
Net Sales $212,804 $230,119 $543,713 $862,781
Costs and expenses:
Cost of goods sold 174,484 186,292 299,957 637,930
Selling, general
and administrative 317,223 587,499 803,268 1,225,350
Research and
development 259,994 366,472 511,940 729,310
Total costs and
expenses 751,701 1,140,263 1,615,165 2,592,590
Loss from
operations (538,897) (910,144) (1,071,452) (1,729,809)
Other income -- -- 40,000 --
Interest income, net 806 29,635 993 70,551
Net loss (538,091) (880,509) (1,030,459) (1,659,258)
Net loss per common and
common equivalent $(.19) $(.31) $(.36) $(.58)
share
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.
Page 3
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1997 1996
Cash flows from operating activities:
Net Loss $(1,030,459) $(1,659,258)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation 55,551 41,813
Amortization of patent cost 12,462 --
Changes in assets and liabilities:
Accounts receivable 43,390 (165,566)
Inventories 16,326 157,758
Prepaid expenses and other (9,868) 42,660
Accounts payable 403,451 (19,861)
Accrued liabilities (45,291) (145,435)
Accrued payroll and benefits 11,499 8,832
Interest payable -- (4,285)
Customer deposits 107,866 --
Net cash used in operating
activities (435,073) (1,743,342)
Cash flows from investing activities:
Acquisition of furniture and
equipment -- (227,711)
Acquisitions of marketable
securities -- (140,000)
Proceeds from sale of marketable
securities -- 3,409,613
Net cash provided by investing
activities -- 3,041,902
Cash flows from financing activities:
Proceeds from issuance of notes
payable to shareholders 125,000 --
Proceeds from issuance of notes
payable 100,000 --
Net cash provided by financing
activities 225,000 --
Net increase (decrease) in cash (210,073) 1,298,560
Cash and cash equivalents at the
beginning of the period 217,057 23,364
Cash and cash equivalents at the end of
the period $6,984 $ 1,321,924
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
<PAGE>
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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 June 30, 1997, the
Company had an accumulated deficit of $12,912,045.
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. Accord-
ingly, 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 August 31, 1997. The
Company is currently pursuing alternative funding sources to meet its
cash flow needs, including private debt and equity financing. Manage-
ment 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 uncer-
tainty.
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 gener-
ally 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 manage-
ment, 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 prin-
ciples. 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 - Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" and No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 128 establishes standards for computing
and presenting earnings per share ("EPS"), replacing the presentation of
primary EPS with a presentation of basic EPS. SFAS No. 129 consolidates
the existing disclosure requirements regarding an entity's capital
structure. SFAS No. 128 and 129 are effective for financial statements
issued for periods ending after December 15, 1997, and accordingly
management has not determined the effect, if any, on the Company's
financial statements for the three and six months ended June 30, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Compre-
hensive Income", and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 130 established standards
for reporting and display of comprehensive income and its components.
SFAS No. 131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
disclosed. SFAS No. 130 and 131 are effective for financial statements
issued for periods beginning after December 15, 1997, and accordingly,
management has not determined the effect, if any, on the Company's
financial statements for the three and six months ended June 30, 1997.
Page 5
<PAGE>
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 1997
(Unaudited)
Note 4 - 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 June 30, 1997 and 1996 common equivalent shares relating to
options have been excluded as they are anti-dilutive.
Note 5 - Inventory.
Inventories consist of the following:
6/30/97 12/31/96
Raw Materials $383,481 $294,424
Finished Goods 75,085 180,468
$458,566 $474,892
Note 6 - Other Income
Other income represents an insurance recovery in excess of net book
value of lost demonstration equipment.
Note 7 - 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 8 - 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.
Page 6
<PAGE>
Item 2. Management's Discussion and Analysis.
First six months of 1997 compared to first six months of 1996.
Net sales decreased by $319,000 or 37% from the first half 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 $19,000 or 8% from the first half of the
prior year, and as percent of sales, increased from 26% to 45%. The
increase in gross margin is primarily due to product mix.
Selling, general and administrative expenses decreased by $422,000
from $1,225,000 to $803,000 in the first half 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 $217,000 from
$729,000 in the first half of 1996 to $512,000 in the first half of
1997. The decrease was mainly due to the reduction in the cost of
software development for the QuantaSep product and reduction in head
count.
Second quarter 1997 compared to second quarter 1996.
Net sales decreased by $17,000 or 8% from the second quarter of
1996, due to lower shipment of the QuantaSep products.
Gross margin decreased by $5,500 or 13% from the first half of the
prior year, and as a percent of sales, decreased by 1% from 19% to 18%.
The decrease is due to product mix.
Selling, general and administrative expenses decreased by $270,000
from $587,000 in the first half of 1996 to $317,000 in the first half of
1997. The decrease was primarily due to the reduction in head count,
advertising, travel and professional fees.
Research and development expenses decreased by $106,000 from
$366,000 in the first half of 1996 to $260,000 in the first half 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 $449,000 on June 30,
1997 and positive working capital of $513,000 on December 31, 1996. The
decrease in the working capital of $962,000 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 third party outstanding as of June 30, 1997, to provide
working capital for the Company. 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.
Page 7
<PAGE>
Based on the Company's current operating plan, the Company believes
that it will only be able to fund the Company's operations through
August 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 meet the criteria for
continued listing of securities on Nasdaq or the PSE. These 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. 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 listings as of June 30, 1997 of either the Nasdaq SmallCap
Market or the PSE Tier II. 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 PSE Tier II. On June
13, 1997, Sepragen received a notification of delisting from Nasdaq,
effective June 20, 1997. At Sepragen's request, an oral hearing was
held on July 31, 1997 at the Nasdaq office in Washington, D. C. The
Company presented a detailed plan to meet the listing requirements. The
Company is awaiting the outcome of the hearing. On May 21, 1997, PSE
notified Sepragen of its initiation of delisting proceedings. The
Company submitted a plan for meeting the listing requirements. PSE has
advised Sepragen of its decision to extend the time period to satisfy
the listing requirements to October 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 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. There 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
Page 8
<PAGE>
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.
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 September 1,
1997. 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 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.
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: 8/15/97 By: /s/ Vinit Saxena
Vinit Saxena
Chief Executive Officer, President
and Principal Financial and Chief
Accounting
Officer
Page 9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SIX
MONTHS ENDED 6/30/97 AND THE YEAR ENDED 12/31/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,984
<SECURITIES> 0
<RECEIVABLES> 140,415
<ALLOWANCES> 12,000
<INVENTORY> 458,566
<CURRENT-ASSETS> 628,466
<PP&E> 332,650
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,079,491
<CURRENT-LIABILITIES> 1,077,843
<BONDS> 0
0
0
<COMMON> 12,913,693
<OTHER-SE> (12,912,045)
<TOTAL-LIABILITY-AND-EQUITY> 1,079,491
<SALES> 543,713
<TOTAL-REVENUES> 543,713
<CGS> 299,957
<TOTAL-COSTS> 299,957
<OTHER-EXPENSES> 1,315,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (993)
<INCOME-PRETAX> (1,030,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,030,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,030,459)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
