FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-25726
SEPRAGEN CORPORATION
(Name of small business issuer in its charter)
California 68-073366
(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, zip code)
Issuer's telephone number: (510) 476-0650
Securities registered pursuant to Section 12(b) of the Act:
Units, each consisting of one unit of Class A Common Stock,
no par value,
one Redeemable Class A Warrant and one Redeemable Class B Warrant;
Class A Common Stock, no par value;
Redeemable Class A Warrants, each Redeemable Class A Warrant,
entitling the holder to purchase one share of Class A Common Stock
and one Redeemable Class B Warrant;
Redeemable Class B Warrants, each Redeemable Class B Warrant
entitli
ng the holder to purchase one share of Class A Common Stock
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None.
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
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained herein, and no
disclosure will be contained, to the best of registrant's knowl-
edge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were:
$1,002,562.
The aggregate market value of Class A Common Stock (voting
stock) held by non-affiliates on March 31, 1997 was $2,963,347
(computed on the basis of the last sale price of a share of Class A
Common Stock on that date as reported in NASDAQ SmallCap Market
trading). In addition, non-affiliates held 302,267 shares Class B
and Class E Common Stock (voting stock) which are convertible into
Class A Common Stock, but are not registered under the Securities
Exchange Act of 1934, as amended, as of March 31, 1997.
The number of shares outstanding of each of the registrant's
classes of Common Stock at March 31, 1997, was:
Class A Common Stock 2,155,254
Class B Common Stock 701,177
Class E Common Stock 1,209,894
Transitional Small Business Disclosure Format Yes; X No
THIS REPORT INCLUDES A TOTAL OF 53 PAGES. EXHIBIT INDEX BEGINS ON
PAGE 49.
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PART I
Item 1. Description of Business
Company History
The Company was incorporated as a California corporation in
1985. Since 1986, it has operated as the developer, manufacturer,
assembler and distributor of products employing radial flow chroma-
tography ("RFC") technology.
The Company currently develops, assembles and markets liquid
chromatography columns and computer-controlled liquid chromatogra-
phy process systems for use in the separation and purification of
biopharmaceuticals and food and beverage products. The Company's
columns utilize RFC technology which the Company believes enables
the purification of greater quantities of molecules more effi-
ciently than with conventional axial flow chromatography. The
Company believes this feature gives RFC a measurable economic
advantage over axial flow chromatography. The Company believes its
experience in developing and refining RFC technology and delivering
RFC products to customers and its existing and pending patent
rights relating to RFC technology give it a competitive advantage
over others who may employ RFC technology in competition with the
Company.
Within the past two years, the Company has developed specific
applications of its separations technology for the food and bever-
age industry. The Sepralac(tm) process isolates high value pro-
teins from relatively low-value whey, a liquid byproduct of cheese
production. Whey currently sells for approximately 50 cents a
kilogram and is typically dried and processed into saleable prod-
ucts for human consumption or for animal feed. Management believes
isolated proteins in the whey can be utilized in infant formula and
other products for their nutritional, functional and, in some
cases, pharmaceutical value. The Company believes these proteins
can be used to manufacture a human infant formula that more closely
resembles the protein composition of mothers' milk and protein-
based fat or egg white substitute. Individual components within
the whey are valued at over $600 per kilogram. The Company has
engaged in evaluation studies with three large dairy product
companies to evaluate the Sepralac(tm) process.
The Company has successfully demonstrated in the lab a process
called Sepradebitt(tm) to debitter citrus juice. The Company has
begun to introduce the concept to juice processors for their
evaluation. Other food applications at an early stage of develop-
ment are the removal of certain flavors from beverages such as wine
and sake, improved sugar refining, the recovery of flavor extracts
from natural products and the isolation of nutritional products
from eggs, soy and bovine blood.
In addition to biopharmaceutical applications and food and
dairy applications, the Company is exploring the use of its RFC
technology in the environmental management industry. The Company
is attempting to develop a process for the removal of heavy metals
from liquid waste. The Company believes that rather than shipping
tankers full of wastewater, a small Sepragen cartridge of concen-
trated toxic metals could be transported to the recycling facility.
The Company's ability to develop and market its Sepralac(tm)
process for whey separation and other potential food and environ-
mental 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 indus-
tries, 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's products are currently utilized by several large
pharmaceutical companies. Of the 27 FDA approved biopharmaceu-
ticals, eight are produced using the Company's RFC technology.
From 1987, the year in which the Company began sales, through
December 31, 1996, the Company has sold approximately $9.1 million
of its RFC columns and systems, primarily for use in the
biopharmaceutical industry.
Chromatography Overview
The two principal methods for separation of components from
liquids are filtration and chromatography. Filtration is a physi-
cal separations technique which principally utilizes microporous
membranes to remove specifically-sized particles. Microporous
membranes are thin, film-like materials with millions of uniform
microscopic holes. Filtration occurs because molecules smaller
than the pores pass through the membrane while larger molecules are
restrained. Filtration's specificity is based on the size of the
molecule and is therefore less exacting since many different types
of molecules may be small enough to pass through the pores result-
ing in an impure product.
In contrast, chromatography is a chemical separations technol-
ogy which results in higher purity separation than physical separa-
tion technologies such as filtration. Chromatography is performed
in tubular columns containing chemically coated porous beads
(separations media). A liquid mixture containing the target
molecules is pumped through the separations media to a collection
channel at the bottom of the column. As the mixture flows through
the column, only the target molecules bind to the surface of the
separations media. Because the binding is chemical and not based
on size, the resulting purity of the end product is high.
Conventional axial flow chromatography is a process where the
liquid mixture is pumped vertically through the column. As axial
flow chromatography processes are increased in scale from labora-
tory quantities to clinical and commercial production quantities,
the capacity of the chromatography column must be increased. The
capacity can be increased in one of three ways: (i) the height of
the column can be increased, which increases the back pressure
required to pump the fluid through the column and lowers the
productivity; (ii) the diameter of the column can be increased
which results in inefficient separation; or (iii) the number of
columns can be increased which increases the capital and operating
costs.
The Company developed its RFC technology as a means of solving
the scale-up problems associated with axial flow chromatography.
In RFC, the flow of the liquid is perpendicular rather than paral-
lel to the axis of the column. The Company believes radial flow
technology offers higher volumetric productivity and several other
technical, economic and safety-related advantages over axial flow
chromatography. RFC permits the production volume to be increased
without any significant impairment to the quality of purification
and without the use of high hydrostatic pressure. Typically, axial
flow chromatography on a large scale is run at flow rates of
between 5 to 15 column volumes per hour. The flow rates typically
decrease as the column volume increases. RFC is routinely run at
between 20 to 75 column volumes per hour depending on the applica-
tion. As a result, greater quantities of purified molecules can be
produced more efficiently than with axial flow chromatography, and
the process makes more efficient use of the separations media. The
Company believes this feature gives RFC a measurable economic
advantage over axial flow chromatography. While still significant
at lower volumes, the importance of these advantages increases as
the volume of the molecules to be processed increases (or scaled
up ) to metric ton or kiloliter quantities and as the per unit cost
of processing such molecules grows relative to the selling price of
the compounds.
Strategy
The Company has undertaken to reposition itself strategically
in the two years since its 1995 initial public offering. Its
original strategy was to sell RFC equipment and instrumentation
primarily to the "scale-up end" of the rapidly growing
biopharmaceutical marketplace while researching applications in the
food and dairy markets. The Company and its competitors discovered
that while there has been tremendous growth in the biotechnology
industry, most of it has been at the research and development
levels and has not made a sizable impact on the manufacturing end
of the business. Accordingly, sales of commercial scale equipment
by the Company have been significantly less than the Company
anticipated. The Company believes that while long-term growth
prospects in this market are good, it has made short-term reduc-
tions in cost in this area. In the past two years, the Company has
developed Sepralac(tm) and Sepradebitt(tm) processes. Developing
separation solutions to large volume markets that do not have long
FDA approval hurdles. The Company believes that will allow it to
meet its near-term growth objectives. The business model that the
Company expects to negotiate for these proprietary processes would
include royalties in addition to equipment and resin sales, which
the Company believes could provide for an attractive return on
sales. The Company is currently in negotiations with a large dairy
ingredient producer for commercialization of the Sepralac(tm)
process. However, as of this date no agreements have been reached
with any producers and no assurance can be given that the commer-
cialization of the Sepralac(tm) or Sepradebitt(tm) processes will
provide significant revenues to the Company.
Biopharmaceutical Industry
The biopharmaceutical market encompasses biological drugs
derived from natural sources such as human plasma, plant and tissue
extracts to those derived from genetically engineered microorgan-
isms. Chromatography, because of its ability to specifically
isolate the desired molecules, is used extensively in the
biopharmaceutical industry to purify and isolate biological drugs.
Before a biopharmaceutical product can be sold commercially,
it must be approved by the Food and Drug Administration (the FDA )
which can take approximately seven to ten years. The FDA approval
process requires a number of well-defined phases. At each phase,
more of the biopharmaceutical product is required to be produced.
In the discovery state of the process, scientists isolate and
identify a candidate biomolecule with potential therapeutic appli-
cations. Also, it is necessary to develop an effective means of
isolating small quantities of the target molecule for testing from
cell culture fluid in which genetically engineered cells are grown.
After the therapeutic potential of a biomolecule has been
established, clinical trials are conducted to evaluate the safety
and efficacy of the biopharmaceutical in humans. A manufacturing
process is developed to produce increasing amounts of the pure
biopharmaceutical as the product passes through each phase of
clinical testing and after FDA approval into commercial manufac-
ture.
As the biopharmaceutical product moves through the FDA ap-
proval process, it becomes increasingly less likely that the
manufacturer will change either the manufacturing equipment or
process. This is because the onus is on the manufacturer to prove
that the changes have not effected the process or the product.
This can often be a time consuming and expensive diversion.
Accordingly, it is critical that the Company sell its products to
manufacturers for use in both laboratory-scale and pilot-scale
development of biopharmaceutical products so that its radial flow
columns and systems are part of a newly approved drug manufacturing
process.
Food and Beverage Industry
The Company believes its RFC technology can be used to develop
a broad range of high volume processes in the food and beverage
industry. RFC allows the production of substantially pure composi-
tions of molecules that have nutritional or other value and the
removal of substances from various foods and beverages that have
been identified as harmful or that adversely affect flavor or other
qualities. In many cases, processes for separating and purifying
or removing these molecules are either not currently available or
require relatively high levels of capital investment and ongoing
operating expenses.
Separating the Components of Whey.
The Company has developed a process called Sepralac(tm) for
separating and purifying the components of whey, a by-product of
cheese production. The whey is the liquid part of the milk remain-
ing after the curds used for the cheese have formed and been
separated. A substantial portion of the liquid whey is dried and
processed into salable products for human consumption or as animal
feed. The remainder of the whey is disposed of as waste.
Whey is comprised of several different components which in
their pure form have nutritional, functional and, in some cases,
pharmaceutical value. Whey sells for approximately $0.50 a
kilogram, but individual components within the whey are valued at
over $600 per kilogram. Conventional processing technologies do
not allow for economic separation and purification of each of the
components of the whey. As a result, whey is used currently in dry
form in whey protein concentrate ( WPC ) and whey protein isolate
( WPI ). WPI is a recent product introduction indicating an
industry trend towards higher value, higher purity and higher
protein content products. WPC and WPI are used in infant formula,
foods, soups, beverages and confectionery and bakery products for
their nutritional and functional properties including emulsifica-
tion, foaming and gelling. These properties can be improved if
certain protein components are either isolated in a pure form or
removed, depending on certain factors. For example, fat contained
in WPC reduces foamability which is a desired property in ice
creams, shakes and bakery products.
Using Sepragen's Sepralac(tm) process, the Company believes
individual whey components can be separated more economically. The
Company believes the isolated components can be used in a variety
of applications to produce improved end products or entirely new
products. There can be no assurance that commercial applications
for whey proteins isolated using the Company's Sepralac(tm) process
can be found, or that such proteins can be sold at prices in excess
of the costs of development.
Humanized Infant Formula. Commercial infant formula is made
from WPC and WPI which is fortified with vitamins and minerals.
Compared to human milk, the protein composition of this formula
contains certain undesirable components while other desirable
components are present in very small quantities. The Company
believes that having access to certain protein components that can
be separated using the Sepralac(tm) process will give the infant
formula manufacturer the ability to produce infant formula that
more closely resembles the protein composition of human milk.
Other Whey Applications. Having the ability to separate the
individual proteins in the whey potentially creates additional
applications for those proteins. Certain protein components could
be added to sports drinks to improve nutritional value without
curdling or "precipitating." Certain protein components could
replace egg whites since they provide better whippability and
gelation characteristics. Additional applications for protein
components include geriatric products where a specialized nutri-
tional profile is desired, meat products where enhanced binding is
required and ice creams and shakes where increased whippability is
desired.
Debittering Citrus Juice.
The Company has successfully demonstrated in the lab a process
called Sepradebitt(tm) to debitter citrus juice. A patent was
applied for in December 1996. The Company has only recently begun
to introduce the process to juice processors for their evaluation
and no revenues have been generated from sales of such processes to
date. Orange processing in both California and Florida results in
unsqueezed juice that is too bitter to use. If processors could
use all of the juice in the orange, not just that obtained in the
first squeeze, their economics would improve. Additionally,
oranges grown in California go through a period of months when they
are too bitter to be processed into juice. Similarly, the bitter-
ness of grapefruit juice prevents its use as an ingredient in mixed
juice production. Debittering grapefruit juice may extend its
usage to new applications. The Company has only recently begun to
introduce the process to juice processors for their evaluation and
no revenues have been generated from the sale or license of this
process to date.
Other Food Applications.
Other food applications at an early stage of development are
the removal of certain flavors from beverages such as wine and
sake, improved sugar refining, the recovery of flavor extracts from
natural products and the isolation of nutritional proteins from
eggs, soy and bovine blood.
Environmental Industry
Major industrial companies, such as computer chip manufactur-
ers and chemical companies, pay recyclers to transport wastewater
in tankers from the manufacturing site to the reclamation facility.
Since the waste stream is dilute, the manufacturer is paying mostly
to transport the water.
The Company's RFC process might be used to concentrate the
toxic metals contained in the wastewater at the manufacturer's
site. The Company believes that instead of shipping tankers full
of wastewater, a small Sepragen cartridge of concentrated toxic
metals could be lifted out of the Company's columns and transported
to the recycling facility. The ability of the Company's columns to
concentrate toxic metals found in wastewater has been beta-site
tested at major manufacturers. In order to commercialize this
process, among other things, the Company needs to obtain regulatory
permits and have access to a recycling facility. No assurance can
be given that the Company will be able to obtain the necessary
permits or access to any recycling facility on terms that allow for
profitable development of the Company's technology for the environ-
mental industry.
Necessity of Alliances and Partnerships
The Company's ability to develop and market its Sepralac(tm)
process for whey separation and other potential food and environ-
mental products and processes will be substantially dependent upon
its ability to negotiate partnerships, joint ventures or strategic
alliances with established companies in each market. 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. While the Company
continues to have discussions with a number of different companies,
particularly those interested in its Sepralac(tm) process, it has
not established any partnerships, joint ventures or strategic
alliances in any industry group and there can be no assurance that
the Company will be able to do so in the future or that any such
partnership, joint venture or strategic alliance will be success-
ful.
Products and Systems
The Company is attempting to develop complete processes for
the food and environmental markets. However, for the biopharmaceu-
tical market, its current product offering includes the "tools"
needed to develop a process: workstations for control automation
and monitoring the separation processes; resins and other chroma-
tography media; and processes using RFC technology. The Company
currently markets its line of Superflo(r) RFC columns and its
QuantaSep(r) computer controlled system.
Superflo RFC Columns. The Company began marketing labora-
tory-scale RFC columns in 1987. Superflo(r) columns are now
available in laboratory-scale, pilot-scale and commercial-scale
configurations, from 50 milliliters to 350 liters in volume. The
Company believes the linear scalability of Superflo(r) columns from
laboratory-scale research and development work through commer-
cial-scale processing and manufacture operations is particularly
important to pharmaceutical and biotechnology companies seeking to
minimize the expense and time required for commercializing newly
discovered drugs. Of equal importance is the ability of Super-
flo(r) columns to be run in commercial-scale settings at relatively
high fluid flow rates and relatively low hydrostatic pressures. In
addition, Superflo(r) columns can be used with many different types
of separations media currently available for liquid chromatography
applications, such as ion exchange, affinity, hydrophobic, reverse
phase and other types of absorption/desorption reactions. Super-
flo(r) columns can be run manually, on the Company's QuantaSep(r)
system (discussed below) or on other chromatography systems.
Superflo(r) columns are available in both stainless steel and
high-grade plastic and are designed to comply with the FDA's
standards for Good Laboratory Practices ("GLP") and Good Manufac-
turing Practice ("GMP") for the manufacture of pharmaceuticals and
therapeutic drugs. The prices of Superflo(r) columns vary accord-
ing to material type and size. Prices range from $500 for labora-
tory models to more than $100,000 for larger models.
QuantaSep Computer-Controlled Liquid Chromatography Systems.
The Company commenced commercial shipments of its QuantaSep(r) 1000
computer-controlled chromatography workstation during 1992. The
system consists of hardware and electronics, software, pumps,
tubing, fittings, sensors, detectors and related equipment. This
system is capable of controlling the flow of multiple liquid inputs
through an array of up to three chromatography columns and several
process monitoring instruments. The QuantaSep(r) system allows the
benefit of computer controlled chemical process design and process-
ing to be applied to liquid chromatography.
Process development, particularly in the biopharmaceutical
industry, has traditionally required long periods to test alterna-
tive separation and purification processes. In addition, the
problems of converting laboratory-scale processes to operate at a
commercial scale require continual revision to the processes. The
QuantaSep(r) enables a user to automatically perform these tasks.
The QuantaSep's benchtop liquid chromatography system is designed
to work with the high flow rates provided by radial flow columns as
well as with the precision needed by new higher performance chroma-
tography media.
The QuantaSep 1000 can be used with pilot-scale columns
providing flow rates of up to one liter per minute. The current
version of the QuantaSep system is designed to facilitate the
development, optimization and scale-up of multi-step chromatography
protocols for many different types of target biomolecules and to
operate under the FDA's GLP and GMP drug development and manufac-
turing environments. The Company intends to further develop its
QuantaSep technology for application to commercial-scale processing
operations.
The QuantaSep system is available in several configurations
and can be used with axial flow as well as radial flow columns.
The price of the current QuantaSep 1000 version of the QuantaSep
system ranges from $75,000 to $125,000, depending on the various
features, sizes and options ordered.
Large Scale QuantaSep. In 1996, the Company developed a large
scale QuantaSep capable of delivering flow rates of up to 5 li-
ters/minute. This machine can be used to automate and control
manufacturing processes in the biopharmaceutical industry or for
pilot scale evaluations in food applications. It brings all the
process features of flexibility, ease of use and precision fluid
handling contained in the QuantaSep(r) to large scale use.
Version 2.0 Software. In 1996, the Company developed a new
software package for the QuantaSep system to address evolving needs
for the use of RFC technology in larger manufacturing processes in
biopharmaceutical and food applications. This "Windows" based
software allows a user to run a process, collect data, analyze data
and continuously monitor the process. It operates with a highly
interactive graphics process diagram "dashboard."
Separations Media. Based in part upon the technology acquired
in its purchase in June 1994 of certain assets of BPS Separations,
a U.K. company that went into receivership, the Company has com-
menced development of consumable resin or media products for
chromatography columns. The novel media named SepraSorb(tm) is
based on a "sponge" as opposed to a "bead" configuration. This
configuration has several significant advantages over conventional
resins for "front-end" (pre-chromatography) separations of crude
biological material. In a typical chromatographic separation
process, cell debris or aggregates are removed from the raw mate-
rial or feed stream prior to chromatography so as not to foul the
chromatography media. This step increases the cost of the opera-
tion and reduces yield because of product loss associated with this
step. The Company believes that the unique ability of the Sepra-
Sorb(tm) media to handle "dirty streams" without clogging will
eliminate various pre-chromatography steps and increase overall
yield and productivity of many purification processes. Tests show
that SepraSorb(tm) media in radial flow columns combine the advan-
tages of RFC and sponge media technologies and increase overall
productivity of the process. The Company has only recently commer-
cially introduced SepraSorb(tm) cartridges to the biopharmaceutical
market and there have been no sales of this product to date.
Customers, Sales and Marketing
The Company is currently marketing its products to the biotech
industry through three direct salespeople domestically, coupled
with distributors overseas that are supported by the Company's
staff located in Europe and Asia. The Company currently has no
written distribution contracts with any U.S. distributors. The
Company may also seek to enter into strategic alliances or contrac-
tual arrangements such as joint venture, licensing or similar
collaborative agreements with other companies having preestablished
marketing and distribution networks. If the Company enters into
contractual arrangements, the Company may lose some control over
part or all of the marketing and distribution of the Company's
products. There can be no assurance that the Company will be able
to enter into any such arrangements on terms acceptable to the
Company, or at all.
In 1996 approximately 62% of sales revenues were from sales to
customers in the United States and 38% to customers outside the
United States. Of the Company's 1996 sales revenues, over 23% were
attributable to production-scale chromatography column products,
less than 11% to laboratory-scale and pilot-scale chromatography
column products and the balance to QuantaSep systems. Approxi-
mately 90% of the sales were to biopharmaceutical or pharmaceutical
companies, and 10% of sales were to companies engaged in evaluation
studies for food and dairy separations applications of the Com-
pany's technology.
The Company's future growth and profitability will depend, in
large part, on the success of its personnel and others in fostering
acceptance among the various markets of the use of the Company's
products as an alternative to existing products (e.g., the use of
Superflo(r) columns as an alternative to the prevailing use of
axial flow chromatography columns) and in negotiating joint ven-
tures and alliances in the dairy, food, beverage and environmental
industries. The Company's success in marketing its products will
be substantially dependent on educating its targeted markets as to
the distinctive characteristics and perceived benefits of the
Company's products. There can be no assurance that the Company's
efforts or the efforts of others will be successful, that any of
the Company's proposed products will be favorably accepted among
the targeted markets, or that the Company's products will ever
achieve the level of sales necessary for the Company to operate
profitably.
Research and Development
The Company spent approximately $1,077,000 and $1,487,000 on
research and development for the years ended December 31, 1995 and
1996, respectively. Substantially all of the Company's research and
development expenditures to date have related to its RFC columns,
QuantaSep systems and Sepralac(tm) process, including related
purification technology.
The Company maintains an on-going research and development
program that covers the following areas:
(i) improvements and extensions of existing products which
exploit the Company's patents to address specific cus-
tomer needs;
(ii) continued development of separation media; and
(iii) continued development of commercial-scale liquid chroma-
tography processes based on RFC technology for food,
dairy and environmental applications.
Patents, Trademarks and Intellectual Property
The Company considers patent protection of its processes to be
important to its business prospects. The Company currently holds
twelve patents and three patent applications in the United States
relating to its technologies. In addition, the Company holds seven
patents and four patent applications in various foreign countries.
The first of the Company's patents was issued in 1986 for its
radial flow processes and method relating to purification columns.
Since then, the Company has successfully obtained patents for
various other technologies. The Company's patents are issued for
the following inventions and have the expiration dates indicated
(assuming all required maintenance fees are paid):
U.S. Patent Reg. Nos. 4,627,918 (11/4/05); 4,676,898
(11/4/05); 4,840,730 (11/4/05) and 4,865,729 (11/4/05)
cover different horizontal or radial flow chromatography
methods and apparatuses.
U.S. Patent Reg. No. 5,462,659 (6/15/13) covering axial
flow chromatography columns.
U.S. Patent Reg. No. 4,708,782 (9/15/06) covers a combi-
nation horizontal or radial flow chromatography column
and electrophoresis apparatus.
U.S. Patent Reg. Nos. 4,740,298 (11/4/05) and 4,867,947
(9/19/06) cover interface apparatuses for directing the
output of a chromatography column to a point of
use/detection and/or identification such as mass spec-
trometry device.
U.S. Patent Reg. No. 4,705,616 (9/15/06) covers a combi-
nation electrophoresis/ mass spectrometry probe for
performing the two processes of electrophoretic separa-
tion of a sample followed by introduction of the sepa-
rated sample to a mass spectrometry apparatus.
U.S. Patent Reg. No. 4,833,083 (11/04/05) covers a packed
bed bioreactor for anchorage or nonanchorage dependent
cells, or for immobilized enzymes, that is capable of
achieving high cell densities or concentrations of reac-
tion products.
U.S. Patent Reg. No. 5,492,723 (2/20/13) covers a method
of producing a cross-linked flexible sponge adsorbent
medium.
U.S. Patent Reg. No. 5,597,489 (3/02/15) covers a method
for removing contaminants from water.
The Company also has three patent applications pending before
the U.S. Patent and Trademark Office. The first relates to a
method for the sequential separation of whey proteins; the second
relates to a method of producing a cross-linked cellular sponge to
an absorbent medium; and the third relates to high throughput
debittering.
The Company intends to continue to pursue patent protection
for the various technologies it develops. There can be no assur-
ance that any of the Company's issued patents will afford protec-
tion against a competitor, that any patents issued or licensed to
the Company could not be designed around or invalidated or that the
Company's pending patent applications will result in issued pat-
ents. In addition, there can also be no assurance that any appli-
cation of the Company's technology will not infringe patents or
proprietary rights of others or that licenses that might be re-
quired for the Company's processes or products would be available
on reasonable terms. Furthermore, there can be no assurance that
challenges will not be instituted against the validity or enforce-
ability of any patent owned by the Company or, if instituted, that
such challenges will not be successful. The cost of litigation to
uphold the validity and prevent infringement can be substantial.
The Company believes that patents in certain foreign countries
are more difficult and expensive than obtaining domestic patents
because of differences in patent laws, and recognizes that its
patent position therefore may be stronger in the United States than
abroad. In addition, the protection provided by foreign patents,
once they are obtained, may be weaker than that provided by domes-
tic patents, with the attendant risks of infringement of the
Company's patents and loss of market share to infringing competi-
tion.
The Company also relies upon unpatented proprietary technol-
ogy, and in the future may determine in some cases that its inter-
est would be better served by reliance on trade secrets or
confidentiality agreements rather than patents. No assurance can
be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain
access to such proprietary technology or disclose such technology
or that the Company can meaningfully protect its rights in such
unpatented proprietary technology. To the extent that consultants
or other third parties apply technological information independ-
ently developed by them or by others to Company projects, disputes
may arise as to the proprietary rights to such information which
may not be resolved in favor of the Company.
The Company's name, helix logo, Superflo and QuantaSep trade-
marks are registered on the Principal Register of Trademarks
maintained by the U.S. Patent and Trademark Office, and applica-
tions to register the mark SepraSorb, Sepragen, S and Design and
Sepralac are pending.
Competition
The Company faces significant competition in three principal
areas of its business. With respect to the Company's liquid
chromatography equipment, resins and systems, competition comes
from companies that make liquid chromatography equipment and
systems and companies that make separation and purification equip-
ment and systems that compete with liquid chromatography. In the
market for liquid chromatography equipment and systems, the Com-
pany's major competitors are Pharmacia Biotech, Inc., Amicon (a
division of Millipore Corporation), BioSepra Inc., PerSeptive Bio-
systems, Inc. and a number of smaller companies. In particular,
the Company can expect intense competition from the fast flow
resins and scaled-up process systems and workstations being devel-
oped by Pharmacia, BioSepra and PerSeptive Biosystems. The Company
intends to compete through the introduction of innovative liquid
RFC products and systems that enable cost effective and large-scale
separation and purification systems.
With respect to the Company's liquid chromatography processes
under development for application in the food and dairy industries,
the Company will face competition from existing producers of whey
and other food ingredients who are attempting to develop existing
separation technology for fractionating dairy ingredients. Such
competitors include overseas companies Danmark Protein, New Zealand
Dairy Board and Immucell Corporation and Davisco International
Incorporated in the United States. In addition, the Company may
face competition from companies in the chromatography equipment
industry such as BioSepra, PerSeptive Biosystems and Pharmacia to
the extent the dairy and food industries begin using chromatography
separation processes in the future and from companies providing
competing technologies, such as membrane filtration and ion ex-
change, including APV Pasilac AS, Calgon Carbon Corporation,
Ionics, Incorporated and Osmonics, Inc., which are currently used
in food separation processes.
With respect to the Company's liquid chromatography processes
under development for application in the environmental management
industry, the Company will face competition from providers of
competing technologies currently utilized in the waste disposal
industry, including carbon absorption, membrane filtration, ion
exchange and precipitation. Such competitors will include large
established companies in the environmental industry such as Ionics,
United States Filter Corporation/Whittier, Inc. and Osmonics and
many smaller manufacturers. There can be no assurance that the
Company will be able to compete successfully in any of its target
markets.
Manufacturing and Supplies
The hardware for the Company's RFC columns and the software
and certain components for the QuantaSep system are produced by
third party contract manufacturers. The Company assembles the
products and performs quality control. The Company intends to
continue to enter into additional arrangements with third parties
to manufacture the components of its products according to specifi-
cations provided by the Company. For example, in 1996, the Company
signed an agreement with Thermax Ltd., a supplier of ion-exchange
resins headquartered in India, to manufacture certain of its
resins. The Company continues to monitor production at these
manufacturing facilities to assure compliance with product specifi-
cations. There can be no assurance that the Company will be able
to enter into future arrangements, on acceptable terms or at all,
for the manufacture of its products by others or that any manufac-
turer will be able to meet any demand for such products on a timely
or cost effective basis.
The Company currently relies and intends to continue to rely
on certain suppliers to provide substantially all of the materials
required to produce its products, including, but not limited to,
fabricated steel, plastics, wiring, circuitry and computer hard-
ware. The Company has been and expects to continue to be able to
obtain all materials needed for these purposes without any signifi-
cant interruption or sudden price increase, although there can be
no assurance thereof. The raw materials utilized in the manufac-
ture and assembly of the Company's products are readily available
from a wide variety of industry sources. The Company does not
believe its production depends on any single group of suppliers or
third party contract manufacturers.
In the future, the Company may decide to manufacture directly
certain of its existing or proposed products. Manufacture of the
Company's products will require expensive equipment and experienced
personnel. Although certain of the Company's officers have had
manufacturing experience with other companies, the Company has
limited manufacturing experience and capabilities. There can be no
assurance that the Company will be able to obtain the requisite
financing, attract or retain experienced personnel or be able to
establish a suitable manufacturing facility.
Employees
As of March 31, 1997, the Company employed a staff consisting
of 20 full-time employees and one part-time employee. In order to
maximize the efficiency of this small staff, most employees serve
in various functions as different needs arise. The Company has not
experienced any strikes or work stoppages and considers its rela-
tionship with its employees to be satisfactory. The Company's
employees are not covered by any collective bargaining agreement.
The Company intends to add additional employees on an as
needed basis in the areas of research, production, development,
marketing, sales and administration, including a Vice President of
Manufacturing and a Chief Financial Officer in the foreseeable
future. The Company's future success is substantially dependent on
its ability to attract and retain highly competent technical and
administrative personnel.
<PAGE>
Item 2. Description of Property
The Company leases approximately 23,000 square feet of assem-
bly, laboratory and office space in Hayward California for a
current annual rental of $76,900. Of this space, approximately
13,700 square feet are allocated to manufacturing, approximately
1,700 square feet to the Company's laboratories, and approximately
7,600 square feet to the Company's executive and administrative
offices. The term of the lease expires on September 30, 2000.
Item 3. Legal Proceedings
Neither the Company nor its officers or directors are parties
to any pending legal proceedings involving a matter the outcome of
which is expected to have a material adverse effect on the Com-
pany's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year ended December 31,
1996.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information.
The Company's IPO Units, Class A Common Stock, Class A War-
rants and Class B Warrants have been quoted on Nasdaq Small Cap
Market since March 23, 1995 (under the symbols SPGNU, SPGNA, SPGNW
and SPGNZ) and have been listed on the Pacific Stock Exchange (Tier
II) since November 22, 1995 (under the symbols SPN U TT, SPN TT,
SPN WS A TT and SPN WS B TT). The high and low bid prices for the
IPO Units, Class A Common Stock, Class A Warrants and Class B
Warrants as reported by Nasdaq since that date are indicated below.
Such prices are interdealer prices without markups, markdowns or
commissions, and may not necessarily represent actual transactions.
Class A Class A Class B
IPO Units Common Stock Warrants Warrants
1995 Low High Low High Low High Low High
First Quarter
(since March 23) $5.00 $5.75 $3.00 $3.75 $.75 $1.00 $.50 $.50
Second Quarter 5.00 5.50 3.25 3.50 .50 1.00 .50 1.25
Third Quarter 5.00 5.75 3.25 3.50 1.00 1.25 .50 .50
Fourth Quarter 4.00 5.69 2.00 3.63 .75 1.63 .50 .75
1996
First Quarter $3.50 $4.88 $1.50 $3.50 $ .81 $1.50 n/a n/a
Second Quarter 3.50 6.03 2.63 3.88 .94 1.25 $.75 $.88
Third Quarter 3.38 5.00 2.13 2.88 .75 1.00 .81 .81
Fourth Quarter 1.88 4.30 .88 2.38 .63 .88 .56 .81
As of March 31, 1997, the last sale price as reported by
Nasdaq for the IPO Units, the Class A Common Stock, the Class A
Warrants was $1.875, $1.375 and $.75, respectively and the last
sale price for the Class B Warrants on March 20, 1997, as reported
by Nasdaq, was $.563.
Prior to March 23, 1995, the Class A Common Stock, Class A
Warrants, Class B Warrants and IPO Units were not publicly traded.
There is no public market for Class B or Class E Common Stock and
Class E common is not transferrable.
(b) Holders. As of March 31, 1997, there were 32 record
holders of Class A Common Stock, 41 record holders of Class B
Common Stock and 64 record holders of Class E Common Stock. The
majority of the outstanding shares of Class A Common Stock are held
of record by nominee holders on behalf of a number of ultimate
beneficial owners which the Company has been informed exceeds 500.
(c) Dividends. The Company has never paid any cash dividends
on its Common Stock and does not anticipate that it will do so in
the foreseeable future.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
The following table sets forth selected financial information
with respect to the Company for each of the five year periods ended
December 31, 1996 which have been derived from the financial
statements of the Company, which have been audited by Coopers &
Lybrand L.L.P., independent certified public accountants, whose
report for the years ended December 31, 1996 and 1995 is included
elsewhere herein and includes an explanatory paragraph regarding
the Company's ability to continue as a going concern. The selected
financial data set forth below should be read in conjunction with
the financial statements of the Company and related notes thereto,
included elsewhere herein.
Selected Financial Data
Year Ended December 31
1996 1995 1994 1993 1992
Statements of Operations
Revenues $1,002,562 $1,046,256 $1,787,418 $1,314,790 $799,163
Net Loss $(3,579,049)$(2,912,857) $(862,289)
$(1,095,051) $(1,474,945)
Net Loss
Per Share $(1.25) $(1.25) $(1.17) $(1.49) $(2.21)
Weighted
Average number
of shares
outstanding 2,856,431 2,332,283 735,528 734,052 666,662
Balance Sheets
(December 31) 1996 1995 1994 1993 1992
Total
Assets $1,407,425 $5,086,806 $1,544,152 $631,934 $819,391
Total
Liabilities $375,318 $490,012 $3,196,117 $1,487,281 $726,812
Shareholders'
Equity
(Deficit) $1,032,107 $4,596,694
$(1,651,965) $(855,347) $92,579
The following table is included as an aid to understanding the
Company's operating results. The table sets forth the percentages
which each item bears to revenues and the percentage change in
dollar amounts from year to year.
Percentage
Year to Year Percentage
Relationship to Revenues Increase (Decrease)
Percent of Percent of Year Year
Revenues Revenues Ended Ended
Account Name 1996 1995 1996 1995
Revenues 100% 100% (4)% (41)%
Cost and Expenses
Cost of goods sold 84% 65% 23% (32)%
Selling, general
and administrative 234% 218% 3% 128%
Research and
development 148% 103% 38% 135%
Total costs
and expenses 466% 386% 16% 64%
Loss from operations (366)% (286)% 22% 345%
Interest expense (0)% (13)% (100)% (27)%
Interest income
and other, net 9% 21% 59% n/a
Net loss (357)% (278)% 23% 238%
General
The following discussion and analysis should be read in
conjunction with the financial statements and notes thereto appear-
ing elsewhere in this report.
The Company was founded in July 1985 and was engaged solely in
research and development operations until 1987. The Company
introduced its line of Superflo(r) radial flow chromatography
columns in 1987 and its QuantaSep(r) 1000 computer control and
automation system for liquid chromatography in September 1991.
From 1987 through December 31, 1996, the Company has achieved over
$9.1 million in sales while generating an accumulated shareholders'
deficit of $11.9 million. In March 1995, the Company completed its
initial public offering ("IPO") of 2,070,000 shares of Class A
Common Stock, 2,070,000 Class A Warrants and 2,070,000 Class B
Warrants and 2,070,000 units, including 270,000 units issued in
connection with overallotments ( IPO Units ), with each IPO Unit
consisting of one share of Class A Common Stock, one Class A
Warrant and one Class B Warrant. The IPO generated net proceeds to
the Company of $8,353,000 and included proceeds from the exercise
by the underwriter of its over-allotment option.
From the date of the completion of the IPO, the Company has
focused most of its expenditures on increasing its sales and
administrative staff. A substantial portion of the Company's sales
to date has been of laboratory-scale and pilot-scale Superflo(r)
columns to pharmaceutical and biotechnology companies seeking to
evaluate the Company's radial flow chromatography technology. The
Company believes that customer tests of these columns have gener-
ally been successful, and a number of pharmaceutical and biotech-
nology companies have purchased commercial-scale Superflo(r)
columns. In addition, the Company is currently negotiating with
several dairy industry concerns regarding the Sepralac(tm) process
for dairy whey separation. The Company is attempting to negotiate
an arrangement which will involve either a joint venture for
manufacture of various products or a license combined with the
purchase of equipment utilized in the process from the Company.
The Company expects that its ability to expand markets for its
processes and products to food, beverage, and environmental custom-
ers will substantially depend upon its ability to gain industry
acceptance of its separation processes through forming partnerships
or alliances with established companies in each market.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
In 1996, net sales decreased by $44,000 or 4% from 1995. The
decrease is due to the fact that the decision to buy Radial Flow
(RFC) equipment has more to do with where a drug is in the FDA
process than with the desirable features of the RFC products.
Since the RFC's advantages appear only at large scale, when a drug
is in the pre-clinical and early clinical stages where small
volumes of drug are sufficient, RFC products do not offer signifi-
cant advantage. As more drugs move through the FDA approval
process into Phase three clinical trials and commercial production,
(i.e., to large scale production), the competitive advantages of
RFC with regards to linear productivity become significant and,
thus, the Company hopes its orders pick up.
The biotech industry has been turning to outsourcing for its
early clinical production. Major drug companies have an overcapac-
ity of production facilities and pick up the slack by manufacturing
for smaller companies. Several companies dedicated to manufactur-
ing have also arisen over the past few years. However, as drug
approvals are received, the Company expects it customers to invest
in their own manufacturing capacities increasing demand for prod-
ucts sold by the Company.
The Company faces competition from major companies which
provide products from lab-scale to industrial-scale and have
enormous marketing power. The Company is thus shifting its strat-
egy to get into the food and environmental areas through more
aggressive research and development in order to derive more of its
revenues from these markets.
Gross margin decreased by $199,000 or 55% from 1995. As a
percentage of sales, gross margin decreased from 35% to 16%. The
decrease in gross margin is due to the higher cost of customizing
the software for large QuantaSep products shipped in late 1996, and
the increase in inventory reserve for slow moving and obsolete
inventory.
Selling, general and administrative expenses increased by
$64,000. The increase was primarily due to higher rent and other
expenses related to the Company's new facility.
Research and development expenses increased by $410,000 from
$1,077,000 in 1995 to $1,487,000 in 1996. the increase was attrib-
utable to expenditures related to the development of Sepralac,
SepraSorb, Sepradebitt and further development of QuantaSep prod-
ucts.
Net loss for 1996 was $3,579,000 compared to a net loss of
$2,913,000 for 1995. The increase in net loss was due to lower
margins and higher expenses.
In the year ended December 31, 1996, sales to the Company's
three largest customers accounted for 53% of total sales. Histori-
cally, the Company has concentrated its sales with a few customers
who took delivery for the Company's largest columns and who do not
make regular large purchases from the Company in succeeding years.
For the years ended December 31, 1995 and 1996, sales of the
Company's products to foreign markets accounted for approximately
41% and 38%, respectively, of the Company's sales. Foreign sales
expose the Company to certain risks, including the difficulty and
expense of maintaining foreign sales distribution channels, barri-
ers to trade, potential fluctuations in foreign currency exchange
rates, political and economic instability, availability of suitable
export financing, accounts receivable collections, tariff regula-
tions, foreign taxes, export licensing requirements and other
United States and foreign regulations that may apply to the export
of its products. In addition, the Company may experience difficul-
ties in providing prompt and cost-effective service of its products
in foreign countries. The Company does not carry insurance against
such risks. The occurrence of any one or more of these events may
individually or in the aggregate have a material adverse effect
upon the Company's business, operations and financial condition.
The Company attempts to mitigate risks applicable to foreign sales
by effecting foreign sales through established independent distrib-
utors with greater experience and resources for dealing with
foreign customers and foreign trade issues, and by denominating all
sales contracts in U.S. dollars, thereby minimizing risks from
foreign currency exchange fluctuations.
Charge to Income in the Event of Conversion of Class E Common Stock
The shares of Class E Common Stock and all shares issuable
upon the exercise of options to purchase Class E Common Stock will
be automatically converted into Class B Common Stock if and only
if: (a) the Company's net income before provision for income taxes
and exclusive of any extraordinary earnings or charges which would
result from the conversion of the Class E Common Stock (as derived
from the Company's financial statements audited by the Company's
independent accountants) meets certain thresholds commencing at
$4.0 million for the fiscal year ending December 31, 1997 and
increasing to $8.1 million for the fiscal year ending December 31,
1999; or (b) the Bid Price of the Company's Class A Common Stock
for 30 consecutive trading days shall average in excess of certain
prices (ranging from $12.50 to $20.00 per share) during specified
periods following March 23, 1995. There can be no assurance that
such earnings and market price levels will be attained or that any
or all of the Class E Shares will be converted into Class B Common
Stock.
In the event any shares of Class E Common Stock are converted
to Class B Common Stock and such shares are held by officers,
directors or employees of, or consultants to, the Company,
compensation expense will be recorded for financial reporting
purposes as required by generally accepted accounting principles
("GAAP"). Therefore, in the event the Company attains any of the
earnings thresholds or the Company's Class A Common Stock meets
certain minimum prices required for the conversion of the Class E
Common Stock, such conversion will be deemed additional compensa-
tion expense of the Company. Accordingly, the Company may, in the
event of the conversion of Class E Common Stock, recognize during
the periods in which the earnings thresholds are met or are proba-
ble of being met or such minimum bid prices are attained, a sub-
stantial earnings charge equal to the fair market value of the
Class E Common Stock converted, which charge will have the effect
of substantially increasing the Company's loss or reducing or
eliminating earnings, if any, at such time. The conversion of
Class E Common Stock would have a dilutive effect on earnings
(loss) per share as a result of the increase in the number of
outstanding shares. Although the amount of compensation expense
recognized by the Company will not affect the Company's total
shareholders' equity or its working capital, it will increase the
accumulated deficit and may have a depressive effect on the market
price of the Company's securities. See Note 10 of the Notes to
Financial Statements.
A total of 1,209,894 shares of Common Stock held by the 64
shareholders who owned shares of the Company prior to the IPO have
been designated as Class E Common Stock. The Class E Common Stock
was created in September 1994 to fund a restricted stock dividend
with respect to the outstanding shares of Class B Common Stock.
The shares of Class E Common Stock are entitled to five votes per
share on all matters to be voted on by shareholders; provided, that
in a election of directors, each shareholder is entitled to cumula-
tive voting. Shares of Class E Common Stock have no right to share
in dividends or other distributions and are redeemable by the
Company at $.01 per share in the event certain earning thresholds
or the price of the Company's Class A Common Stock does not attain
certain targets over the next five years. If such earning thresh-
olds or price targets are attained on or before December 31, 1999,
the Class E Common Stock will be automatically converted into
shares of Class B Common Stock.
One-half of the then outstanding shares of Class E Common
Stock and one-half of shares issuable upon the exercise of options
to purchase Class E Common Stock will be automatically converted
into Class B Common Stock if and only if:
(a) The Company's net income before provision for income taxes
and exclusive of any extraordinary earnings or charges which
would result from the conversion of the Class E Shares (as
derived from the Company's financial statements audited by the
Company's independent accountants) ("Minimum Pretax Income")
amounts to at least $4.0 million for the fiscal year ending
December 31, 1997, provided that if additional shares are
issued, earnings must increase in accordance with the formula
set forth below; or
(b) The Minimum Pretax Income amounts to at least $5.6 million
for the fiscal year ending December 31, 1998, provided that if
additional shares are issued, earnings must increase in accor-
dance with the formula set forth below; or
(c) The Minimum Pretax Income amounts to at least $8.1 million
for the fiscal year ending December 31, 1999, provided that if
additional shares are issued, earnings must increase in accor-
dance with the formula set forth below; or
(d) The "Bid Price" (as defined herein) of the Company's Class
A Common Stock for any 30 consecutive trading days shall
average in excess of $16.50 during the period commencing with
the October 23, 1996 and ending March 23, 1998 (subject to
adjustment in the event of any reverse stock splits or similar
events).
For this purpose, the Bid Price is the closing bid price of
the Class A Common Stock in the over-the-counter market, as re-
ported by Nasdaq, or the closing sale price if listed on the Nasdaq
National Market System or a national stock exchange.
All shares of Class E Common Stock will be converted into
Class B Common Stock if:
(a) The Minimum Pretax Income amounts to at least $4.9 million
for the fiscal year ending December 31, 1997, provided that if
additional shares are issued, earnings must increase in accor-
dance with the formula set forth below; or
(b) The Minimum Pretax Income amounts to at least $6.8 million
for the fiscal year ending December 31, 1998, provided that if
additional shares are issued, earnings must increase in accor-
dance with the formula set forth below; or
(c) The Minimum Pretax Income amounts to at least $9.7 million
for the fiscal year ending December 31, 1999, provided that if
additional shares are issued, earnings must increase in accor-
dance with the formula set forth below; or
(d) The Bid Price of the Company's Class A Common Stock for
any 30 consecutive business days shall average in excess of
$20.00 during the period commencing with October 23, 1996 and
ending March 23, 1998.
The "Minimum Pretax Income" amounts set forth above will be
adjusted by multiplying the amount shown for each fiscal year by a
fraction, (i) the numerator of which is the weighted average number
of shares of all classes of common stock of the Company outstanding
during the fiscal year for which the determination is being made
(including Class E Common Stock, but excluding any shares of common
stock issued upon exercise of options subject to the Company's 1994
Stock Option Plan adopted August 30, 1994, as amended), and (ii)
the denominator of which is the sum of: (a) the number of shares of
all classes of Common Stock outstanding as of March 23, 1995 and
(b) the number of shares of Class A Common Stock sold pursuant to
the IPO. Minimum Pretax Income will be calculated exclusive of any
extraordinary earnings or extraordinary charges, including but not
limited to any charge to income resulting from the conversion of
Class E Common Stock to Class B Common Stock or any charge to
income resulting from the issuance of equity securities (restricted
or otherwise) to the Company's directors, employees or consultants.
In the event the foregoing earnings or market price levels set
forth above are not met by December 31, 1999, all shares of Class E
Common Stock will be immediately redeemed by the Company at $.01
per share after March 31, 2000. The earnings levels and the share
prices set forth above were determined by negotiation between the
Company and Blair and should not be construed to imply or predict
any future earnings by the Company or any increase in the market
price of its securities. There can be no assurance that such
earnings and market price levels will be attained or that any or
all of the Class E Shares will be converted into Class B Common
Stock.
Inflation
The Company believes that the impact of inflation on its
operations since its inception has not been material.
Volatility of Sales
In the last several years, the Company has experienced a
relative increase in customer equipment orders in the third and
fourth quarters and a relative decrease in orders in the first and
second quarters. The Company believes this fluctuation relates to
capital appropriations and spending cycles in the biopharmaceutical
business.
Liquidity and Capital Resources
The Company had working capital of $513,000 and $4,233,000 on
December 31, 1996 and 1995, respectively. The decrease in the
working capital of $3,720,000 reflects the net use of 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 Superflo(r) columns and QuantaSep(r) systems,
loans from its principal shareholders, 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, the Company's expenditures have exceeded
its revenues. Prior to the IPO, the Company financed its opera-
tions 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 Environmental Technologies Corporation ("Romic"), an entity
controlled by Mr. Schneider. In addition, the Company has histori-
cally relied on customers to provide purchase price advances for
development and scale-up of its radial flow chromatography columns.
As of December 31, 1996, the Company had shareholders' equity of
$1,032,107.
As of December 31, 1996, the Company had a working capital
balance of approximately $513,000. For the year ended December 31,
1996, net cash used in operating activities was $3,145,142. This
negative cash out flow 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 any
growth in demand for its products from the dairy, food and bever-
age, pharmaceutical and biotechnology industries 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 applica-
tions 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 $302,728 in inventory from December 31, 1995
to December 31, 1996 was due primarily to the shipment of two large
QuantaSep Systems and the booking of inventory reserves for slow
moving and demonstration inventory.
As of December 31, 1996, the Company had no borrowings.
During 1996, the Company paid $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 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. 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 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, there can be no assurance that
the Company will meet the criteria for continued listing of securi-
ties 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. If the Company should become 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.
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 introduction 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 develop-
mental 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 assur-
ance 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 manage-
ment). The Company's ability to develop and market its Sepra-
lac(tm) process for whey separation and other potential food and
environmental products and processes will be substantially depend-
ent upon its ability to negotiate partnerships, joint ventures or
alliances with established companies in each market. In particu-
lar, the Company will be reliant on such joint venture partners or
allied companies for both market introduction, operational assis-
tance and financial assistance. The Company believes that develop-
ment, 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 devel-
oped 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 underly-
ing 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 expection 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 identi-
fied 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 opera-
tions past June 1, 1997. Although the Company is attempting to
secure such financing, there can be no assurance that such financ-
ing will be available to Company on reasonable terms or at all. If
the Company is unable to secure such capital it will likely 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 6 "Management's Discus-
sion and Analysis or Plan of Operation-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. See Item 1 "Business-Competi-
tion."
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 final-
ized and there can be no assurance that the terms of any such
alliance will produce profits for the Company. See Item 1
"Business-Necessity of Alliances and Partnerships".
<PAGE>
Item 7. Financial Statements
(a) Financial Statements. The financial statements of the
Company as of December 31, 1996 and 1995 and for the years then
ended have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report thereon. The financial
statements included in this section are as follows:
Page
Report of Independent Accountants 22
Balance Sheets as of December 31, 1996 and 1995 23
Statements of Operations for the years ended December 31,
1996 and 1995 24
Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1996 and 1995 25
Statements of Cash Flows for the years ended December 31,
1996 and 1995 26
Notes to Financial Statements 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Sepragen Corporation:
We have audited the accompanying balance sheets of Sepragen
Corporation (the "Company") as of December 31, 1996 and 1995, and
the related statements of operations, shareholders' equity (defi-
cit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial state-
ments based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Sepragen Corporation as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that Sepragen Corporation will continue as a going con-
cern. As more fully discussed in Note 1 to the financial state-
ments, 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. Management's plans in
regard to these matters are also described in Note 1. The finan-
cial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 28, 1997
<PAGE>
SEPRAGEN CORPORATION
BALANCE SHEET
ASSETS
December 31,
1996 1995
Current assets:
Cash $ 217,057 $23,364
Marketable securities -- 3,586,145
Accounts receivable, less
allowance for doubtful accounts
of $10,298 and $30,459
at December 31, 1996 and
1995, respectively 183,805 278,688
Inventories 474,892 777,620
Prepaid expenses and other 12,633 57,130
Total current assets 888,387 4,722,947
Furniture and equipment, net 388,201 252,150
Intangible assets, net 130,837 111,709
$1,407,425 $5,086,806
The accompanying notes are an integral part of these financial
statements.
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 196,686 $ 230,799
Accrued liabilities 67,665 174,395
Accrued payroll and benefits 110,967 80,633
Interest payable -- 4,285
Total current liabilities 375,318 490,112
Commitments (Note 9):
Class E common stock, no par value--
1,600,000 shares authorized;
1,209,894 shares issued and
outstanding at December 31,
1996 and 1995; redeemable at
$.01 per share (Note 10) -- --
Shareholders' equity (deficit):
Preferred stock, no par value--5,000,000
shares authorized; none issued and
outstanding at December 31,
1996 and 1995 -- --
Class A common stock, no par value--
20,000,000 shares authorized;
2,149,155 and 2,070,000 shares
issued and outstanding at December
31, 1996 and 1995 8,812,701 8,353,737
Class B common stock, no par value--
2,600,000 shares authorized;
707,276 and 786,431 shares
issued and outstanding at
December 31, 1996 and 1995 4,100,992 4,559,956
Net unrealized loss on available-
for-sale securities -- (14,462)
Accumulated deficit (11,881,586) (8,302,537)
Total shareholders'
equity (deficit) 1,032,107 4,596,694
$1,407,425 $5,086,806
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SEPRAGEN CORPORATION
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1995
For the Years
Ended December 31,
1996 1995
Revenues:
Net sales $ 1,002,562 $ 1,046,256
Costs and expenses:
Cost of goods sold 840,593 685,291
Selling, general, and
administrative 2,344,273 2,280,130
Research and development 1,487,231 1,077,342
Total costs and expenses 4,672,097 4,042,763
Loss from operations (3,669,535) (2,996,507)
Interest expense -- (138,482)
Interest income and other, net 90,486 222,132
Net loss $(3,579,049) $ (2,912,857)
Net loss per common and common
equivalent share (Note 1) (1.25) $ (1.25)
Weighted average shares
outstanding (Note 1) 2,856,431 2,332,283
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SEPRAGEN CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1996 and 1995
Net
unrealized
loss on
Common Stock available
Cls A Comn Cls B Comn Cls E Comn for-sale- Accum
Shares Amt Shares Amt Shares Amt securities Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
at January
1, 1995 722,776 $3,737,715 1,111,961 $(5,389,680) $(1,651,965)
Issuance of common
stock upon conversion
of note payable
to shareholder and
related interest 57,224 794,909 88,039 794,909
Issuance of common stock
for cash, net of
$478,494 of issuance
costs 2,070,000 $8,353,737 8,353,737
Issuance of common stock upon
conversion of note payable
and related interest 6,431 27,332 9,894 27,332
Net unrealized loss on available-
for-sale securities $(14,462) (14,462)
Net loss (2,912,857) (2,912,857)
Balance at December
31, 1995 2,070,000 8,353,737 786,431 4,559,956 1,209,894 $-- (14,462) (8,302,537) 4,596,694
Conversion of Class
B common stock
into Class A
common
stock 79,155 458,964 (79,155) (458,964) --
Net unrealized
gain on available-
for-sale securities 14,462 14,462
Net loss (3,579,049) (3,579,049)
Balance at December
31, 1996 2,149,155 $8,812,701 707,276 $4,100,992 1,209,894 $-- $-- $(11,881,586) $1,032,107
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SEPRAGEN CORPORATION
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
1996 1995
Cash flows from operating activities:
Net loss $ (3,579,049) $(2,912,857)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 104,845 30,428
Loss on disposal of fixed assets 1,748 --
Provision for obsolete
inventories 49,829 --
Changes in assets and liabilities:
Accounts receivable, net 94,883 31,092
Inventories 252,899 (527,767)
Prepaid expenses and other 44,497 48,620
Accounts payable (34,113) (92,531)
Accrued liabilities (106,730) (82,251)
Accrued payroll and benefits 30,334 6,303
Interest payable (4,285) (28,285)
Net cash used in
operating activities (3,145,142) (3,527,248)
Cash flows from investing activities:
Acquisitions of
marketable securities (2,454,383) (15,279,736)
Proceeds from sale of
marketable securities 6,054,990 11,679,129
Acquisitions of furniture
and equipment (238,634) (234,484)
Intangible assets (23,138) --
Net cash provided by
(used in)
investing activities 3,338,835 (3,835,091)
Cash flows from financing activities:
Proceeds from issuance
of common stock -- 8,832,231
Repayment of bridge notes payable -- (1,550,000)
Repayment of convertible
notes payable to shareholders -- (50,000)
Repayment of convertible
note payable -- (87,000)
Net cash provided by
financing activities -- 7,145,231
Net increase
(decrease) in cash 193,693 (217,108)
Cash at beginning of period 23,364 240,472
Cash at end of period $ 217,057 $23,364
Supplemental disclosure of cash flow information:
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 note payable
and related accrued interest
to common stock $ -- $27,332
Net unrealized gain (loss)
on marketable securities $14,462 $(14,462)
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Operations and Summary of Significant Accounting Policies:
Operations:
Sepragen Corporation (the "Company") develops, manufactures
and markets proprietary liquid chromatography columns and computer-
-controlled liquid chromatography process systems. These products
are used by the biopharmaceutical industry for the separation and
purification of a broad range of molecules. The Company believes
its products enable pharmaceutical companies to reduce time and
cost required to develop and manufacture biopharmaceuticals over
existing technologies.
Export sales for the Company (principally to Europe and Asia)
were $382,801 and $430,820 for the years ended December 31, 1996
and 1995, respectively. Export sales expose the Company to certain
risks, not limited to the difficulty and expense of maintaining
foreign sales distribution channels, barriers to trade, potential
fluctuations in foreign currency exchange rates and political and
economic instability.
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 market-
ing 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's financial
statements have been prepared assuming that the Company will
continue as a going concern. 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.
The Company's continued existence is dependent upon its ability to
increase operating revenues and/or raise additional equity capital
sufficient to generate enough cash flows to finance operations in
future periods. Management is currently in the process of seeking
additional equity financing with potential investors. There can be
no assurance that such additional financing will be obtained. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Summary of Significant Accounting Policies:
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Concentrations of Credit Risk: The Company performs ongoing
credit evaluations within the context of the industry in which it
operates. The Company maintains reserves for potential credit
losses on customer accounts, when deemed necessary, and such losses
have been within management's expectations.
Substantially all cash is on deposit with one financial
institution.
For the year ended December 31, 1996, two customers individu-
ally accounted for 34% and 11% of sales. For the year ended
December 31, 1995, the Company had five customers who individually
accounted for 24%, 18%, 14, 11% and 10% of sales. At December 31,
1996, three customers accounted for 74% of accounts receivable.
Cash and Cash Equivalents: The Company considers all highly
liquid investments with an original maturity of three months or
less to be cash equivalents.
Marketable Securities: Marketable securities, consisting
primarily of short-term bonds with original maturities of over
three months, are classified as available-for-sale and are carried
at fair market value. Net unrealized holding gains and losses are
reported as a separate component of shareholders' equity (deficit).
Interest income is accrued as earned.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Operations and Summary of Significant Accounting Policies:
(Continued)
Inventories: Inventories are stated at the lower of cost,
using the first-in, first-out method, or market.
Furniture and Equipment: Furniture and equipment are stated at
cost. Depreciation of furniture and equipment is computed using the
straight-line method over the estimated useful lives of the assets
which range from two to five years. Maintenance and repairs are
charged to expense as incurred while major improvements are capi-
talized. Leasehold improvements are amortized over their useful
lives or lease term, whichever is shorter.
Costs of assets disposed of and the related amounts of accumu-
lated depreciation are eliminated from the accounts in the year of
disposition, and any resulting gain or loss is included in opera-
tions.
Intangible Assets: Intangible assets, consisting of internal
and purchased patent application costs, are recorded at cost. These
assets are being amortized on the straight-line basis over the
estimated useful lives of the patents of approximately seven years.
Income Taxes: The Company uses an asset and liability approach
to financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for differ-
ences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the period
plus or minus the change in deferred tax assets and liabilities
during the period.
Revenue Recognition: The Company recognizes revenue from
product sales upon shipment and customer acceptance. For custom
sales under contract, revenue is recognized using the percent
complete method, with recognition deferred until the Company has
received customer acceptance, as specified in the related con-
tracts.
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. Class A
warrants are exercisable to purchase one share of Class A common
stock and one Class B warrant. Class B warrants are exercisable to
purchase one share of Class A common stock. In May, 1995, the
underwriter exercised its overallotment option for 270,000 Units,
generating an additional $1,111,386 of net proceeds to the Company.
At December 31, 1996, 2,070,000 Units with related Class A and B
warrants were outstanding as a result of the initial public offer-
ing and the overallotment transaction. See Note 5 for a discussion
of additional warrants issued and outstanding at December 31, 1996.
As part of the underwriting agreement for the initial public
offering, the Company granted the underwriter a Unit purchase
option to purchase 180,000 Units at $7.25 per Unit. The Unit
purchase options become exercisable on March 23, 1997.
Deferred Costs of Securities Registration: The costs associ-
ated with the Company's initial public offering were accrued as
incurred and recorded as a reduction to the proceeds of the offer-
ing upon closing.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Operations and Summary of Significant Accounting Policies:
(Continued)
Per Share Data: Net loss per common and common equivalent
share is computed using the weighted average number of common
shares and dilutive common equivalent shares outstanding during
each period. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares is-
sued during the 12-month period prior to the initial filing date of
the Company's initial public offering have been included in the
calculation as if they were outstanding for all periods presented
using the treasury stock method, including the effect of the
assumed conversion of convertible debt and the estimated public
offering price per share. Restricted shares issued as Class E
common stock and contingent options are considered contingently
issuable and, accordingly, are excluded from the weighted average
number of common and common equivalent shares outstanding.
New Statements of Financial Accounting Standards: In February
of 1997, Statement of Financial Accounting Standards No. 128, (SFAS
128), "Earnings Per Share" was issued and is effective for finan-
cial statements issued for periods ending after December 15, 1997.
SFAS 128 supersedes APB No. 15 "Earnings per Share", and simplifies
the computation of earnings per share (EPS) by replacing the
"primary" EPS requirements of APB No. 15 with a "basic" EPS compu-
tation based upon weighted-average shares outstanding. The Company
believes that the implementation of this new pronouncement will not
have a material impact on the amounts calculated under the current
EPS methodology.
2. Marketable Securities:
Investments in available-for-sale securities at December 31,
1995 were as follows:
Gross
Unrealized Fair
Cost Losses Value
Debt
securities $3,600,607 $14,462 $3,586,145
There were no marketable securities held by the Company on
December 31, 1996.
3. Inventories:
Inventories consist of the following:
At December 31,
1996 1995
Raw materials $ 294,424 $ 459,474
Finished goods 180,448 318,146
$474,872 $777,620
4. Furniture and Equipment:
Furniture and equipment consist of the following:
At December 31,
1996 1995
Office equipment $ 79,675 $ 116,054
Machinery 77,130 87,430
Furniture and fixtures 5,813 8,815
Lab equipment 114,033 57,299
Leasehold improvements 283,641 127,384
560,342 162,498
Less accumulated
depreciation
and amortization (172,141) (144,832)
$388,201 $252,150
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Notes Payable:
In June 1994, the Company issued a note payable of $25,000 to
an unrelated party, bearing interest of 7%. The note and related
accrued interest were converted to common stock in 1995. These
options were outstanding and exercisable at December 31, 1996.
In June 1994, the Company issued a convertible note payable
bearing interest of 10% to an unrelated party, for cash of $87,000.
In addition, the note holder received options to purchase 868
shares of Class B and E common stock at an exercise price of $4.25.
The note was repaid in 1995.
In November 1994, the Company completed a bridge financing of
31 bridge units. Each unit consisted of a bridge note in the face
amount of $50,000 which bore interest at an annual rate of 10% and
bridge warrants to purchase 25,000 shares of Class A common stock
at $3.00 per share. The bridge notes were repaid upon completion of
the Company's initial public offering in 1995. Upon completion of
the initial public offering, the bridge warrants were automatically
converted into Class A warrants on a one for one basis. These
warrants to purchase 775,000 shares of common stock were outstand-
ing at December 31, 1996, all of which are exercisable.
At December 31,1994, the Company had a note payable to a
shareholder of $727,000. This note bore interest of 10% and was
payable on demand. During 1995, the Company issued to this share-
holder 57,224 shares of Class B common stock and 88,039 shares of
Class E common stock in exchange for the cancellation of the note's
principal amount of $727,000 and the related accrued interest of
$67,909. As part of the consideration for the conversion of the
debt and accrued interest, the Company granted this shareholder
options to purchase 59,090 shares of Class B common stock and
90,910 shares of Class E common stock at $5.50 per share. These
options are immediately exercisable, on an all or none basis, and
terminate on January 15, 2000.
In June 1994, the Company issued convertible notes payable to
shareholders for cash of $50,000. The notes and related interest
were repaid during 1995.
Interest expense on related party debt was $9,265 in 1995.
6. Defined Contribution Plan:
In January 1996 the Company established a profit sharing plan
that covers substantially all officers and employees. Both the
Company and employees contribute to the Plan. The Company contrib-
utes up to $500 per employee per year and such contributions vest
20% a year over five years. The Company contributed $7,000 to the
Plan in 1996.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stock Options:
The Company has issued non-qualified stock options to purchase
shares of the Company's common stock to certain employees, consul-
tants, and directors. The options vest over a period of two to ten
years and expire through 1999. Shares sold under the existing stock
option agreements are subject to various restrictions as to resale
and right of repurchase by the Company. Generally, the exercise
price is not less than the fair value of the common stock at the
date of grant.
In August 1994 and June 1996, the Board of Directors of the
Company adopted the 1994 and 1996 Sepragen Corporation Stock Option
Plans (the "Stock Option Plans"). The Stock Option Plans provide
for the issuance of options covering up to 400,000 and 250,000
shares of Class A common stock (subject to adjustments in the event
of stock splits, stock dividends and similar dilutive events),
respectively. Options may be granted under the Stock Option Plans
to employees, officers or directors of, and consultants and advi-
sors to, the Company. Options will be granted under the Stock
Option Plans within the sole discretion of the Board of Directors.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stock Options: (Continued)
Options granted to employees may either be incentive stock
options (as defined in the Internal Revenue Code of 1986, as
amended) or nonqualified stock options. The purchase price of Class
A common stock subject to an option shall be determined by the
Board of Directors at the time of grant, provided that the purchase
price of incentive stock options is not less than the fair market
value of the Company's Class A common stock on the date of grant.
Subject to the foregoing, the terms of each option and the incre-
ments in which it is exercisable are determined by the Board of
Directors, provided that no option may be exercised before one year
or after ten years from the date of grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares
for which incentive stock options become exercisable for the first
time by an optionee during any calendar year exceeds $100,000, the
portion of such option which is in excess of the $100,000 limita-
tion will be treated as a nonqualified stock option. In addition,
if an optionee owns more than 10% of the total voting power of all
classes of the Company's stock at the time the individual is
granted an incentive stock option, the purchase price per share
cannot be less than 110% of the fair market value on the date of
grant and the term of the incentive stock option cannot exceed five
years from the date of grant.
The following table summarizes the Company's stock option
activity for the years ended December 31:
1996 1995
Weighted- Weighted-
Average Average
Exercise Exercise
Shares
Price Shares
Price
Outstanding at
beginning of year 575,766 $5.20 136,550 $5.68
Granted 231,311 2.12 540,730 5.13
Forfeited (94,963) 5.28 (101,514) 3.00
Outstanding at
end of year 712,114 $4.19 575,766 $5.20
Options exercisable
at year-end 423,993 375,403
<PAGE>
SEPRAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Stock Options: (Continued)
The following table summarizes information about the Company's
stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Number Weighted
Range of Outstanding Remaining Average Outstanding Average
Exercise at December Contrctual Exercise at December Exercise
Prices 31, 1996 Life Price 31, 1996 Price
$0.88 to $1.00 100,189 4.8 $0.88 4,289 $1.00
$2.38 to $3.88 156,092 4.2 3.07 27,342 3.30
$5.00 to $5.51 443,555 2.2 5.17 382,430 5.20
$9.02 to $10.06 12,278 1.1 9.83 9,932 9,78
$0.88 to $10.06 712,114 3.0 $4.19 423,993 $5.14
At December 31, 1996, the Company has a right to repurchase
1,494 shares of Class B common stock and 2,298 shares of Class E
common stock, held by the president of the Company, upon the
exercise of stock options granted to certain employees of the
Company, at a repurchase price of $.033 per share.
The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees", and related interpretations in accounting for
its Stock Option Plans. Compensation expense is recorded when the
exercise price of options is less than the fair value of the common
stock at the measurement date, or when options previously issued
are modified.
The following information is provided in accordance with SFAS
No. 123, "Accounting for Stock-based Compensation." If the compen-
sation cost for these plans had been determined based on the fair
value at the grant dates for awards consistent with the method of
SFAS Statement 123, the pro forma effect on the Company's net loss
and net loss per share in 1996 and 1995 would have been:
1996 1995
Net loss as reported $(3,579,049) $(2,912,857)
Pro forma $(3,778,976) $(3,657,382)
Net loss per share,
as reported $(1.25) $(1.25)
Pro forma $(1.32) $(1.57)
The weighted average fair value of options granted during 1996 and
1995 was $1.94 and $3.84, respectively. The fair value of each
option granted in 1996 and 1995 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
Risk free interest rate 5.3% to 6.8%
Expected life 2 to 6 years
Volatility 145.81%
Dividend yield --
The weighted average expected life was calculated based on the
estimated exercise behavior of the Company's employees, consul-
tants, and directors.
8. Income Taxes:
Deferred tax assets are comprised of the following:
At December 31,
1996 1995
Net operating loss carryforwards $4,036,400 $2,769,400
Intangibles 237,600 184,300
Research and development
credit carryforwards 193,100 171,300
Compensation related
to stock options 125,100 125,100
Other differences between
financial reporting
and tax basis of
assets and liabilities 92,500 44,300
4,684,700 3,294,400
Valuation allowance (4,684,700) (3,294,400)
Net deferred tax assets $ -- $ --
Due to the uncertainty of the realization of the net deferred
tax assets, the balance has been fully reserved. The change in the
valuation allowance from December 31, 1995 was an increase of
$1,390,300 and from December 31, 1994 was an increase of $1,135,-
800.
The difference between the income tax benefit at the Federal
statutory rate and the Company's effective tax rate is as follows:
For the years ended December 31:
1996 1995
Statutory federal income tax rate 34% 34%
State income taxes 6 6
Change in valuation allowance (40)% (40)%
-- --
At December 31, 1996, the Company had net operating loss
carryforwards available to reduce its future taxable income of
approximately $10,995,000, for federal income tax purposes, and
$4,853,000 for California state franchise purposes. These net
operating losses expire at various times through 2011.
At December 31, 1996, the Company had research and develop-
ment tax credit carryforwards of approximately $141,000 for federal
income tax purposes, and $52,000 for California state franchise tax
purposes. These credit carryforwards expire at various times
through 2011.
For federal and state tax purposes, the Company's net operat-
ing loss and tax credit carryforwards could be subject to certain
limitations on annual utilization due to changes in ownership, as
defined by federal and state laws.
9. Commitments:
The Company currently rents its office and production facil-
ity for an annual rental of $76,900 under an annual operating lease
which expires September 30, 2000. Rental expense for the years
ended December 31, 1996 and 1995 was $76,900 and $62,653, respec-
tively.
On August 30, 1994, the Company entered into employment
agreements with Vinit Saxena, its President, and Q. R. Miranda, its
Vice President, Corporate Research. The agreements are for a six -
year term in the case of Mr. Saxena (expiring September 2000) and a
three-year term in the case of Dr. Miranda (expiring September
1997). Mr. Saxena and Dr. Miranda are to receive salaries of
$125,000 and $90,000 per annum, respectively, plus bonuses up to
$25,000 and $18,000 per annum, respectively. In addition, the
agreements include certain other insurance and severance benefits.
10. Restricted Shares:
The Company has 1,209,894 restricted shares of Class E common
stock issued and outstanding at December 31, 1996. These shares
will convert to Class B common stock upon the Company's attainment
of certain predetermined earnings or market price targets. In the
event the Company attains any of the predetermined earnings or
market price targets, the fair market value of these shares at the
time they are converted to Class B common stock will be deemed
additional compensation expense to the Company to the extent such
shares are held by officers, directors, consultants or other
employees of the Company. The Company will, in such event, recog-
nize a substantial non-cash charge to earnings which could have the
effect of significantly increasing the Company's loss or reducing
or eliminating earnings, if any, at such time. If these predeter-
mined earnings and market price targets are not met by December 31,
1999, the shares will be redeemed by the Company at $.01 per share.
Item 8. Changes in and Disagreements with Accountants on Account-
ing and Financial Disclosure.
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The Company's Officers and Directors are elected annually to
serve until the next annual meeting of shareholders and thereafter
until their successors are elected. The number of Directors
presently authorized by the Bylaws of the Company is five.
Name, Offices and Position First
with the Company or Principal Became a
Occupation and Directorships Age Director
Vinit Saxena 41 1985
President, Chief Executive Officer, Chief Finan-
cial Officer, Chairman of the Board and Di-
rector of the Company since 1985. He is the
inventor of the Company's original radial
flow chromatography technology. His back-
ground includes several years as a biochemi-
cal engineer, product marketing manager, and
most recently as a product marketing manager
for industrial chromatography with Bio-Rad
Laboratories (from 1980-1984) and a manager
of production and bioengineering for Bio--
Response (now Baxter Healthcare) (from 1984--
1985). Mr. Saxena has an M.S. in Chemical
Engineering from Syracuse University and an
M.B.A. from the University of California at
Berkeley. Mr. Saxena also serves as a direc-
tor of Scan Incorporated of Mountain View,
California, a privately-held artificial in-
telligence medical imaging company.
<PAGE>
Armin Ramel* 71 1986
Director of the Company in September 1986 and was
elected as Secretary of the Company on 1995.
He has been employed since July 1993 as Vice
President of Product Development of Scios
Nova Inc., a publicly-held biotechnical com-
pany. From November 1982 to June 1993, Dr.
Ramel was employed by Genentech, his last
position there being Senior Director of the
Process Science Division from April 1991 to
June 1993. From 1969 to October 1982, Dr.
Ramel was employed in various positions at
Hoffmann - La Roche, Inc., his last position
there being Director of the Biopolymer Re-
search Department from 1977, to October 1982.
Prior to 1969, he was a professor at the
University of Basel, Switzerland and State
University of New York at Buffalo. Dr. Ramel
holds a Ph.D. in physical chemistry from the
University of Basel.
<PAGE>
Robert Leach* 53 1995
Director of the Company since October 1, 1995.
Since 1992, Mr. Leach has been involved in
consulting and interim management responsi-
bilities for four start-up technology devel-
opment stage companies in transition. Since
September 1995, he has been the Chief Operat-
ing Officer of the U.C.S.D. CONNECT Program
in Technology and Entrepreneurship. Prior to
the CONNECT position, Mr. Leach's activities
included: (i) Hemagen Pfc/Ltd. of San Fran-
cisco, California, a company engaged in de-
velopment of drug delivery and diagnostic
imaging technology, where Mr. Leach served as
President from July of 1992 to February of
1993; (ii) Exogene Corporation of Monrovia,
California, a company researching metabolic
engineering technology, where Mr. Leach serv-
ed as Chief Executive Officer and Chairman of
the Board from February of 1993 to March of
1994; (iii) Synzyme Corporation of Irvine,
California, a company engaged in developing
products for the detoxification of blood
substitutes where Mr. Leach served as Chief
Executive Officer from July of 1994 to Decem-
ber of 1994; and (iv) Chromaxome Corporation
of San Diego, California, a company develop-
ing chemical agents from natural oceanic
sources for application to the drug industry,
where Mr. Leach has been Chairman of the
Board between March of 1995 until June 1996
when the Company was acquired by Houghton
Pharmaceutical. Mr. Leach was retained to
facilitate a restructuring or sale of Exogene
Corporation. The assets of Exogene Corpora-
tion were acquired by Parnassus, Inc. in
March of 1994 and Mr. Leach resigned as an
officer and director in March of 1994. Sub-
sequent to his resignation, Parnassus, Inc.
filed for protection under Chapter 7 of the
Bankruptcy Code in September 1994 and Exogene
Corporation filed for bankruptcy protection
under Chapter 7 of the Bankruptcy Code in
December 1994. From 1990 to 1992, Mr. Leach
was President and Chief Executive Officer of
Genencor International of Rochester, New
York, the second largest worldwide enzyme
producer. From 1982 through 1990, Mr. Leach
was President and Chief Executive Officer of
Genencor, Inc. of South San Francisco, Cali-
fornia, a company involved in producing non-
drug recombinant DNA products and the devel-
opment of protein engineering techniques.
Genencor, Inc. was acquired by Eastman Kodak
Company and Cultor, Ltd. in 1990. Mr. Leach
has a BS degree in Chemistry and an MBA from
Pennsylvania State University and is a member
of the American Chemical Society, the Ameri-
can Institute of Chemical Engineers, and is a
former chairman of the California Biotechnol-
ogy Association. Mr. Leach also serves on
the Board of Directors of Genomyx Corporation
of Foster City, California, since 1988, a
company which is engaged in manufacturing
sequencing instrumentation for the biotech-
nology industry.
<PAGE>
Quirin Miranda 57 n/a
Vice President of Corporate Research of the Com-
pany since October 1991. From February 1989
until December 1990, he co-founded and served
as President of Food Services Corporation, a
research company involved in developing mi-
crobiological processes for removing choles-
terol from various foods. During his associ-
ation with Food Services Corporation, Dr.
Miranda developed an enzyme-based technology
to remove cholesterol from food products.
Dr. Miranda was elected as a fellow of the
American Academy of Microbiology in 1979.
Dr. Miranda has over 20 years experience in
product development in the pharmaceutical and
diagnostic industries during which time he
was associated with Schering-Plough, Organon
Diagnostics, IDT (a division of Boehringer
Ingelheim), International Immunoassay Labora-
tories, and DDI Pharmaceuticals. He has a
Ph.D. in microbiology from the Victoria Uni-
versity of Manchester in the United Kingdom.
Dr. Miranda is a Fellow of the American Acad-
emy of Microbiology and the American Insti-
tute of Chemists.
* Member of the Compensation Committee and Audit Committee.
Werner Nielsen resigned as a director of the Company effective
November 1, 1996 to devote more time to his other business inter-
ests. No replacement director has been appointed.
The Company has two vacancies on the Board of Directors, which
vacancies will be filled by either a vote of the shareholders at a
special shareholders meeting or by approval of the Board of Direc-
tors prior to the Company's annual meeting in May of 1997. As of
this date, no candidates have been nominated for the director's
positions by management or any shareholder.
The Company is currently seeking to employ a Vice President of
Manufacturing and a Chief Financial Officer. Although the Company
has had discussions regarding such employment with certain individ-
uals, no assurance can be given that the Company will be able to
employ any of these or other individuals for these positions.
All directors hold office until the next annual meeting of
shareholders and the election and qualification of their succes-
sors. Directors receive compensation for serving on the Board of
Directors as described below. Pursuant to the Underwriting Agree-
ment with Blair, the Company is required to appoint a nominee of
Blair to the Board of Directors for a period of five years from
March 23, 1995. Blair has not yet selected such a designee. The
Company has established audit and compensation committees, a
majority of whose members must be non-employee directors. Dr.
Ramel and Mr. Leach serve on the audit and compensation committees.
Officers are elected annually by the Board of Directors and serve
at the discretion of the Board (and in the case of Mr. Saxena and
Dr. Miranda, pursuant to their employment agreements).
Indemnification
Pursuant to the Company's Articles of Incorporation, as
amended, Bylaws and certain written agreements dated October 27,
1994, officers and directors of the Company will be indemnified by
the Company to the fullest extent allowed under California law for
claims brought against them in their capacities as officers or
directors. The Company has elected not to obtain directors' and
officers' liability insurance at this time. No assurance can be
given that the Company will be able to obtain such insurance at a
price the Board of Directors determines is reasonable. Indemnifi-
cation will not be provided if the officer or director does not act
in good faith and in a manner reasonably believed to be in the best
interests of the Company, or, with respect to any criminal proceed-
ings, if the officer or director had no reasonable cause to believe
his conduct was lawful. Accordingly, indemnification may be sought
for liabilities arising under the Securities Act. The Underwriting
Agreement for the Company's IPO contains provisions under which the
Company and Blair have agreed to indemnify each other (including
officers and directors) for certain liabilities, including liabili-
ties under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for
directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commis-
sion, such indemnification is against public policy as expressed in
the Securities Act and may, therefore, be unenforceable.
Compensation of Directors
Members of the Board of Directors who are not employees of the
Company will receive an annual cash fee of $3,000 plus $500 for
each meeting of the Board of Directors and any of its committees
attended by such director, and will also be entitled to reimburse-
ment of reasonable expenses incurred in attending such meetings.
<PAGE>
Compensation of Executives
Employment Agreements
On August 30, 1994, the Company entered into employment
agreements with Mr. Vinit Saxena as its President and Chief Execu-
tive Officer, and Dr. Q. R. Miranda, its Vice President of Corpo-
rate Research. The agreements are for a six-year term in the case
of Mr. Saxena and a three-year term in the case of Dr. Miranda.
Mr. Saxena and Dr. Miranda are to receive salaries of $125,000 and
$90,000 per annum, respectively, plus bonuses up to $25,000 and
$18,000 per annum, respectively. Such compensation may be in-
creased and bonuses may be given upon the approval of the Board of
Directors of the Company. Mr. Saxena and Dr. Miranda have each
agreed to devote their full time and efforts to their employment
with the Company. Each of them will be entitled to participate in
employee benefit plans.
The Company has the right to terminate either agreement for
cause or as a result of death or permanent disability. Except in
the case of termination for cause, upon early termination of their
agreements, Mr. Saxena and Dr. Miranda will be entitled to receive
their salary plus fringe benefits for a period of 36 months and 12
months, respectively, from the date of termination and any bonuses
prorated through the date of termination, so long as they do not
violate the nondisclosure and nonsolicitation provisions of their
agreements; provided, however, any salary and benefits to be
received after termination will be reduced by any salary and
benefits such persons receive from any successor position during
the post-termination payment periods.
Mr. Saxena and Dr. Miranda have agreed not to disclose to
anyone confidential information of the Company during the term of
their employment or thereafter and will not compete with the
Company during the term of their employment. All work, research
and results thereof, including, without limitation, inventions,
processes or formulae, conceived or developed by Mr. Saxena or Dr.
Miranda during the term of employment which are related to the
business, research, and development work or field of operation of
the Company, shall be the property of the Company.
Key-Person Life Insurance
The Company has obtained key-person life insurance coverage in
the face amount of $2,000,000 on both Mr. Saxena and Dr. Miranda
naming the Company as beneficiary under such policies. The Company
has agreed with Blair to maintain such policies in force for at
least three years from March 23, 1995.
1994 Stock Option Plan
On August 30, 1994, the Board of Directors and the sharehold-
ers of the Company adopted and approved the 1994 Stock Option Plan.
The 1994 Stock Option Plan provides for the grant of incentive
stock options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and
non-qualified stock options ("NQSOs") to certain employees, offi-
cers, directors, consultants and agents of the Company. The
purpose of the 1994 Stock Option Plan is to attract and retain
qualified employees, agents, consultants, officers and directors.
The total number of shares of Class A Common Stock with
respect to which options may be granted under the 1994 Stock Option
Plan is 400,000. The shares subject to, and available under, the
1994 Stock Option Plan may consist, in whole or in part, of autho-
rized but unissued stock or treasury stock not reserved for any
other purpose. Any shares subject to an option that terminates,
expires or lapses for any reason, and any shares purchased upon
exercise of an option and subsequently repurchased by the Company
pursuant to the terms of the options, become available for grant
under the 1994 Stock Option Plan.
The 1994 Stock Option Plan is administered by the Board of
Directors of the Company, which determines, in its discretion,
among other things, the recipients of grants, whether a grant will
consist of ISOs or NQSOs, or a combination thereof, and the number
of shares of Class A Common Stock to be subject to such options.
The Board may, in its discretion, delegate its power, duties and
responsibilities under the 1994 Stock Option Plan to a committee
consisting of two or more directors who are "non-employee
directors" within the meaning of Rule 16b-3 promulgated under the
Exchange Act. The exercise price for ISOs must be at least 100% of
the fair market value per share of Class A Common Stock on the date
of grant, as determined by the Board.
Options may be exercisable for a term determined by the Board,
which may not be less than one year or greater than 10 years from
the date of grant. No options may be granted under the 1994 Stock
Option Plan later than 10 years after the 1994 Stock Option Plan's
effective date of August 30, 1994. ISOs are not transferable other
than by will or the laws of descent and distribution. NQSOs may be
transferred to the optionee's spouse or lineal descendants, subject
to certain restrictions. Options may be exercised during the
holder's lifetime only by the holder or his or her guardian or
legal representative. Options may be exercised only while the
original optionee has a relationship with the Company which confers
eligibility to be granted options or within 90 days after termina-
tion of such relationship with the Company, or up to six months
after death or total and permanent disability. In the event the
Company terminates such relationship between the original optionee
and the Company for cause (as defined in the 1994 Stock Option
Plan), all options granted to the optionee terminate immediately.
In the event of certain basic changes in the Company, including a
change in control of the Company (as defined in the 1994 Stock
Option Plan), at the discretion of the Board, the Board may make
certain adjustments to the outstanding stock options.
The 1994 Stock Option Plan contains certain limitations
applicable only to ISOs granted thereunder to satisfy specific
provisions of the Code. For example, the aggregate fair market
value, as of the date of grant, of the shares to which ISOs become
exercisable for the first time by an optionee during the calendar
year may not exceed $100,000. In addition, if an optionee owns
more than 10% of the Company's stock at the time the individual is
granted an ISO, the exercise price per share cannot be less than
110% of the fair market value per share and the term of the option
cannot exceed five years.
Options may be paid for in cash, by check or, in certain
instances, by delivering an assignment of shares of Class A Common
Stock having a value equal to the option price, or any combination
of the foregoing, as stipulated in the option agreement entered
into between the Company and the optionee. At the discretion of
the Board, the Company may loan to the optionee some or all of the
purchase price of the shares acquired upon exercise of an option
granted under the 1994 Stock Option Plan.
The Board may modify, suspend or terminate the 1994 Stock
Option Plan; provided, however, that certain material modifications
affecting the 1994 Stock Option Plan must be approved by the
shareholders, and any change in the 1994 Stock Option Plan that may
adversely affect an options rights under an option previously
granted under the 1994 Stock Option Plan requires the consent of
the optionee.
1996 Stock Option Plan
On June 28, 1996, the Board of Directors and the share-
holders of the Company adopted and approved the 1996 Stock Option
Plan. The 1996 Stock Option Plan provides for the grant of incen-
tive stock options ("ISOs") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and
non-qualified stock options ("NQSOs") to certain employees, offi-
cers, directors, consultants and agents of the Company. The
purpose of the Stock Option Plan is to attract and retain qualified
employees, agents, consultants, officers and directors. The terms
of this plan are substantially similar to the 1994 Stock Option
Plan.
The total number of shares of Class A Common Stock with
respect to which options may be granted under the 1996 Stock Option
Plan is 250,000. The shares subject to, and available under, the
1996 Stock Option Plan may consist, in whole or in part, of autho-
rized but unissued stock or treasury stock not reserved for any
other purpose. Any shares subject to an option that terminates,
expires or lapses for any reason, and any shares purchased upon
exercise of an option and subsequently repurchased by the Company
pursuant to the terms of the options, become available for grant
under the 1996 Stock Option Plan.
Options Granted under 1994 and 1996 Stock Option Plans
As of March 31, 1997, the Company had outstanding 312,055
options to purchase shares of Class A Common Stock to 18 employees
at $5.00 per share under the 1994 Stock Option Plan and 231,311
options to purchase shares of Class A Common Stock to 26 employees
at prices ranging from $.875 to $3.13 per share under the 1996
Stock Option Plan. See Compensation Tables.
Other Outstanding Stock Options
In addition to the shares of Class A Common Stock with respect
to which options may be granted under the Company's Stock Option
Plans, the Board of Directors of the Company has granted non-
qualified options to various investors and current and former
directors, employees, and consultants to the Company to purchase an
aggregate of 70,849 shares of Class B Common Stock and 108,995
shares of Class E Common Stock at a weighted average exercise price
of $5.51 per share, of which options covering 69,925 shares of
Class B Common Stock and 107,573 shares of Class E Common Stock
shares were vested as of December 31, 1996 with a weighted average
exercise price of $5.45 per share.
401(k) Profit Sharing Plan
In 1995, the Company adopted a 401(k) profit sharing plan
under which employees may defer a portion of their salary. The
Plan did not become effective until 1996 and employee deferrals and
employer contributions of $73,000 were made in 1996.
<PAGE>
Summary Compensation Table
The following table sets forth all compensation paid for the
past three fiscal years to the chief executive officer and to
executive officers whose cash compensation exceeded $100,000 during
the fiscal year ended December 31, 1996.
Annual Compensation L-T Compensation
(a) (b) (c) (d) (g)
Securities
Name and underlying
Principal Position Year Salary (1)(2) Bonus Options/SARs(#)
Vinit Saxena,
President, Chief 1996 $127,051 $0 33,347
Executive Officer 1995 $118,044 $25,000 178,324
and Chief 1994 $67,018 -- --
Financial Officer
Quirin Miranda 1996 $95,042 $0 22,642
Vice President 1995 $88,867 $18,000 16,984
of Corporate 1994 $50,999 -- --
Research
(1) Includes all amounts paid or accrued and includes $500 and $400,
respectively, matching contributions to the Company's 401K Plan.
On August 30, 1994, Mr. Saxena waived all rights to deferred salary
of approximately $40,000. As of April 1995, Mr. Saxena's base
salary increased to $125,000 per year under his new employment
agreement. See "Employment Agreements."
(2) Includes health insurance costs for Mr. Saxena and his family in
the amounts of $7,018, $5,929 and $6,238 during 1994, 1995 and
1996, respectively.
(3) Includes health insurance costs for Mr. Miranda and his family in
the amounts of $5,999, $6,944 and $8,017 during 1994, 1995 and
1996, respectively.
Option/SAR Grants in Last Fiscal Year 1996
Individual Grants
(a) (b) (c) (d) (e)
Percent of
Total Options
Options SARs granted Exercise or
/SARs to employees base price Expiration
Name Granted in fiscal year ($/Sh) date
Vinit Saxena
President, Chief Executive
Officer, Chief Financial
Officer & Chairman
of the Board(1) 15,000 6% $3.130 6/13/01
3,947 2% $2.375 10/10/01
5,000 2% $0.875 12/20/01
9,400 4% $0.875 12/20/01
Quirin Miranda
Vice President
and Director(1) 10,000 4% $3.130 6/13/01
2,842 1% $2.375 10/10/01
3,000 1% $0.875 12/20/01
6,800 3% $0.875 12/20/01
Aggregated Option/SAR Exercises in Last Fiscal Year 1996 and
1996 Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Number
of Securities
Underlying Value of
Unexercised Uneercised
Shares Value Optns/SARs In-the-Money
Acquired on Realzd at FY -End Opts/SARs @ FYEnd
Excs(#)(1) ($) Unexbl Exbl Unexbl Exbl
Name
Vinit Saxena
President, Chief
Executive Officer,
Chief Financial
Officer & Chairman
of the Board 0 $0 33,347 178,324 $10,800(1) $0(1)
Quirin Miranda
Vice President
and Director 0 $0 22,642 16,984 $7,350(1) $0(1)
(1) Based on an assumed market value of $1.625 per share of Class A
Common Stock.
In the last three fiscal years, the Company has not paid or awarded
any other stock awards, options, stock appreciation rights, or other
long term incentive plan compensation to the executive officers named
above.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth certain information as to the
beneficial ownership of the Company's Common Stock as of March 31,
1997 of: (i) each person who is known by the Company to own benefi-
cially more than 5% of the outstanding shares of the Company's
Common Stock, (ii) each director of the Company and (iii) all
officers and directors of the Company as a group.
Name and Address of Number of Shares of Percentage of
Beneficial Owner Common Stock Common Stock
or Number Beneficially Beneficially Percentage of
in Group Owned (1) Owned (1) Voting Power
Vinit Saxena (2) 937,049 24.2% 35.5%
30689 Huntwood Drive
Hayward, CA 94544
Michael Schneider (3) 1,106,698 20.5% 31.2%
2081 Bay Road
East Palo Alto, CA 94303
Armin Ramel, Ph.D. (4) 52,997 1.2% n/a
4 Sandstone
Portola Valley, CA 94028
Quirin Miranda (5) 16,984 .4% n/a
30689 Huntwood Drive
Hayward, CA 94544
All directors and executive
officers as
a group (5 in number) 2,113,728 46.3% 66.7%
(1) Except as otherwise indicated, each of the parties listed has
sole voting and investment power with respect to all shares of
Common Stock indicated below. Beneficial ownership is calcu-
lated in accordance with Rule 13d-3(d) under the Securities
Exchange Act of 1934, as amended. The Company has three
classes of Common Stock outstanding, Class A, Class B and
Class E Common Stock. Amounts and percentages do not include
shares of Class A Common Stock issuable upon the exercise of
options which are not exercisable within 60 days of the date
of this Offering.
(2) Amounts and percentages include (i) 290,374 shares of Class B
Common Stock and 446,739 shares of Class E Common Stock each
of which are convertible into one share of Class A Common
Stock (each share of Class B and E Common Stock has five votes
per share); (ii) vested options to purchase 178,324 shares of
Class A Common Stock granted under the Company's 1994 Stock
Option Plan; (iii) vested options to purchase 5,470 shares of
Class A Common Stock, 1,770 shares of Class B Common Stock and
2,722 shares of Class E Common Stock held by Renu Saxena, an
employee of the Company and the spouse of Vinit Saxena; and
(iv) 14,984 shares owned jointly by Renu Saxena and Rakesh
Chabra (Renu Saxena's brother). The Company has a right to
repurchase shares from Mr. Saxena upon exercise of certain
options. See "Certain Relationships and Related Transactions-
-Founder's Stock Repurchase Agreement."
(3) Amounts and percentages include (i) 75,432 shares of Class B
Common Stock and 116,051 shares of Class E Common Stock; (ii)
262,051 shares of Class B Common Stock and 403,164 shares of
Class E Common Stock beneficially owned by Mr. Schneider or by
Romic Environmental Technologies Corporation ("Romic"), of
which Mr. Schneider is Chairman of the Board and a principal
shareholder, (iii) 59,010 shares of Class B Common Stock and
90,910 shares of Class E Common Stock issuable under an option
held by Romic, and (iv) 50,000 Class A Warrants. See "Certain
Relationships and Related Transactions--Relationship with
Romic Environmental Technologies Corporation."
(4) Amounts and percentages include 25,000 Class A Warrants and
vested options to purchase 2,997 shares of Class A Common
Stock granted under the Company's 1994 Stock Option Plan.
(5) Amounts and percentages include vested options to purchase
16,984 shares of Class A Common Stock granted under the Com-
pany's 1994 Stock Option Plan.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Founder's Stock Repurchase Agreement
In 1986, the Company entered into a Founder's Stock Repurchase
Agreement (the "Founder's Agreement") with Vinit Saxena, the
President, Chief Financial Officer, Chairman of the Board, and a
principal shareholder of the Company. The purpose of the Founder's
Agreement was to serve as an anti-dilution provision for the
benefit of those investors who purchased shares of Common Stock or
acquired stock options covering shares of Common Stock during the
term of the Agreement's effectiveness.
By its terms, the Founder's Agreement lapsed on March 10,
1989. However, pursuant to the terms of a Covenant for the Benefit
of Investors dated March 10, 1986, the Company has a continuing
right to repurchase certain shares of Common Stock held by Mr.
Saxena upon the exercise of stock options granted to certain
present and former employees by the Company during the period that
the Founder's Agreement was in effect. As of March 31, 1997, the
continuing right of the Company to repurchase such shares covers
1,494 shares of Class B Common Stock and 2,298 shares of Class E
Common Stock, for a total of 3,792 shares, at a repurchase price of
$.033 per share.
Relationship with Romic Environmental Technologies Corporation
On March 23, 1995, the Company issued Romic Environmental
Technologies Corporation ( Romic ) 57,224 shares of Class B Common
Stock and 88,039 shares of Class E Common Stock in exchange for
cancellation of outstanding indebtedness in the principal amount of
$727,000 and accrued interest of $67,909 thereon owed by the
Company to Romic. As additional consideration for the cancellation
of such indebtedness and accrued interest on such indebtedness, on
March 23, 1995, the Company granted Romic an option to purchase
59,090 shares of Class B Common Stock and 90,910 shares of Class E
Common Stock at $5.50 per share. The option is exercisable at any
time and terminates February 15, 2000.
Pursuant to management and consulting agreements with Romic,
the Company and Romic developed certain uses of RFC columns in the
environmental remediation field. On April 11, 1995, Romic assigned
all rights to such technology, including pending patent applica-
tions, to the Company.
Bridge Financing
In July 1994, H. Michael Schneider and Armin Ramel loaned the
Company $100,000 and $50,000, respectively (together, the "Share-
holder Loans"). The Shareholder Loans were made to the Company to
pay a portion of the expenses of the Company's IPO and for working
capital purposes and bore interest at the rate of 10% per annum.
Upon the closing of the private debt offering in November 1994, the
Shareholder Loans were exchanged for Bridge Notes of the same
principal amount and warrants to purchase 75,000 shares of Class A
Common Stock, of which Messrs. Schneider and Ramel received war-
rants to purchase 50,000 shares and 25,000 shares, respectively.
Upon the closing of the IPO, such warrants were automatically
converted into an aggregate of 75,000 Class A Warrants. The
Company repaid the principal and interest on the Bridge Notes upon
the closing of the IPO. See "Security Ownership of Certain Benefi-
cial Owners and Management.
<PAGE>
Item 13. 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. Exhibits designated with a "+"
constitute a management contract or compensatory plan or arrange-
ment required to be filed as an exhibit to this report pursuant to
Item 13 of Form 10-KSB.
(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 Com-
pany, 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
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
(1) These exhibits which are incorporated herein by refer-
ence were previously filed by the Company as exhibits
to its Registration Statement on Form SB-2 and Amend-
ments Nos. 1, 2, 3, 4 and 5 and Post Effective No. 1
(File No. 33-86888).
(2) These exhibits which are incorporated herein by refer-
ence 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 refer-
ence 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 refer-
ence 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.
October 9, 1996 Form 8-K, item 5.
No other Forms 8-K were filed in the fourth
quarter of 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly autho-
rized, on this 7th day of April, 1997.
SEPRAGEN CORPORATION
By: /s/ Vinit Saxena
Vinit Saxena
Chief Executive Officer and
President
Pursuant on the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the follow-
ing persons in the capacities and on the dates indicated.
/s/ Vinit Saxena April 7, 1997
Vinit Saxena
(Principal Executive Officer and Principal
Financial Officer)
Chief Executive Officer, President,
Chief Financial Officer, Chairman of
the Board, and Director
/s/ Armin Ramel April 7, 1997
Armin Ramel
Director and Secretary
/s/ Robert Leach April 7, 1997
Robert Leach
Director
<PAGE>
INDEX TO EXHIBITS
Exhibits incorporated by reference to a prior
filing are designated by a numbered footnote. Exhibits
designated with a "+" constitute a management contract or
compensatory plan or arrangement required to be filed as an
exhibit to this report pursuant to Item 13 of Form 10-KSB.
No. Description Sequential Page No.
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 Com-
pany, including Forms of Class A Warrant Certifi-
cates 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 Com-
pany 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
23.1 Consent of Coopers & Lybrand L.L.P.
51
27 Financial Data Schedule 53
(1) These exhibits which are incorporated herein by refer-
ence 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 refer-
ence 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 refer-
ence 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 refer-
ence were previously filed by the Company as exhibits to
its Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Sepragen Corporation on Form S-8 (File
Nos. 33-95182 and 333-11903) of our report, which includes an
explanatory paragraph regarding the Company's ability to continue
as a going concern, dated February 28, 1997, on our audits of
the financial statements of Sepragen Corporation as of December
31, 1996 and 1995, and for the years then ended, which report is
included in the Annual Report on Form 10-KSB.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
April 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR DECEMBER 31, 1996 AS FILED ON FORM 10-KSB WITH THE
SECURITIES EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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0
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<COMMON> 12,913,693
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