CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB/A
(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.
<PAGE>
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.
<PAGE>
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 157,881 435,115 669,821 1,164,425
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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: December 12, 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 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>
<S> <C>
<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
0
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)
</TABLE>
