CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-25726
SEPRAGEN CORPORATION
(Exact name of small business issuer as specified in its charter)
California 68-0073366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30689 Huntwood Avenue, Hayward, California 94544
(Address of principal executive offices)
(Issuer's telephone number (including area code): (510) 476-0650)
(Former name, former address and former fiscal year if changed
since last report:
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the registrant's
classes of Common equity, as of the latest practicable date:
August 15,1998
Class A Common Stock 2,155,254
Class B Common Stock 701,177
Class E Common Stock 1,209,894
THIS REPORT INCLUDES A TOTAL OF 10 PAGES. THERE ARE NO EXHIBITS.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
SEPRAGEN CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
June 30, 1998
Current Assets:
Cash and cash equivalents $12,904
Accounts receivable, less
allowance for doubtful accounts
of $12,000 as of June 30, 1998 208,256
Inventories 244,162
Prepaid expenses and other 62,485
Total current assets 527,807
Furniture and equipment, net 220,653
Intangible assets 107,676
856,136
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 923,561
Bridge Loans, net of unamortized
discounts of $5,700 534,300
Customer deposits 55,800
Notes Payable, including $175,000
from shareholders 283,000
Accrued payroll and benefits 229,179
Accrued liabilities 57,217
Interest payable 64,131
Total current liabilities 2,147,188
Class E common stock, no par value -
1,600,000 shares authorized;
1,209,894 shares issued and
outstanding at June 30, 1998
redeemable at $.01 per share -
Shareholders' equity (deficit):
Preferred stock, no par value -
5,000,000 shares authorized;
none issued or outstanding at
June 30, 1998 -
Class A common stock, no par value
- 20,000,000 shares authorized;
2,155,254 shares issued and
outstanding at June 30, 1998 8,848,075
Class B common stock, no par value
- 2,600,000 shares authorized;
701,177 shares issued and
outstanding at June 30, 1998 4,065,618
Additional paid in capital 110,700
Accumulated deficit (14,315,445)
Total shareholders' equity
(deficit) (1,291,052)
856,136
The accompanying notes are an integral part of these condensed
financial statements.
Page 2
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three Months Six Months
Ended June 30 Ended June 30
1998 1997 1998 1997
Revenues:
Net Sales $211,471 $212,804 $843,804 $543,713
Costs and expenses:
Cost of goods sold 126,741 174,484 509,827 299,957
Selling, general
& administrative 311,570 317,223 605,516 803,268
Research and
development 191,430 259,994 404,524 511,940
Total costs and
expenses 629,741 751,701 1,519,867 1,615,165
Loss from operations (418,270) (538,897) (676,063) (1,071,452)
Other income -- - -- 40,000
Interest income,
(expense) net (20,000) 806 (109,282) 993
Net loss (438,270) (538,091) (785,345) (1,030,459)
Net loss per common
share, basic and
diluted $(.15) $(.19) $(.28) $(.36)
Weighted average
shares outstanding 2,856,431 2,856,431 2,856,431 2,856,431
The accompanying notes are an integral part of these condensed
financial statements.
Page 3
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
1998 1997
Cash flows from operating
activities:
Net Loss $ (785,345) $ (1,030,459)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
Amortization 138,047 68,013
Changes in assets and
liabilities:
Accounts receivable 362,612 43,390
Inventories 74,698 16,326
Prepaid expenses
and other (1) (9,868)
Accounts payable 287,307 403,451
Accrued liabilities (35,503) (45,291)
Accrued payroll and
benefits 84,040 11,499
Interest payable 39,282 --
Customer deposits (254,681) 107,866
Net cash used in operating
activities (89,544) (435,073)
Cash flows from financing
activities:
Proceeds from issuance of
notes payable to
shareholders 50,000 125,000
Proceeds from issuance
of notes payable 8,000 100,000
Net cash provided by
financing activities 58,000 225,000
Net increase (decrease) in
cash (31,544) (210,073)
Cash and cash equivalents at
the beginning of the period 44,448 217,057
Cash and cash equivalents at
the end of the period $ 12,904 $ 6,984
The accompanying notes are an integral part of these condensed
financial statements.
Page 4
<PAGE>
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 1998
Note 1 - Basis of Presentation
These condensed financial statements have been presented on a
going concern basis. Sepragen, ("the Company") has incurred
recurring losses and cash flow deficiencies from operations that
raise substantial doubt about its ability to continue as a going
concern. As of June 30, 1998, the Company had an accumulated
deficit of $14,315,445.
The Company will be required to conduct significant research,
development and testing activities which, together with expenses to
be incurred for manufacturing, the establishment of a large
marketing and distribution presence and other general and
administrative expenses, are expected to result in operating losses
for the next few years. Accordingly, there can be no assurance
that the Company will ever achieve profitable operations. The
Company will have to obtain additional financing to support its
operating needs beyond August 31,1998. The Company is currently
pursuing alternative funding sources to meet its cash flow needs,
including private debt and equity financing. Management intends to
use such funding to further its marketing efforts and expand sales.
It is uncertain, however, whether the Company will be successful
in such pursuits. No adjustments have been made to the
accompanying condensed financial statements for this uncertainty.
Note 2 - Interim Financial Reporting
The accompanying unaudited interim financial statements have
been prepared pursuant to the rules and regulations for reporting
on Form 10-QSB. Accordingly, certain information and footnotes
required by generally accepted accounting principles have been
condensed or omitted. These interim statements should be read in
conjunction with the financial statements and the notes thereto,
included in the Sepragen Corporation's (the "Company's") Annual
Report on Form 10-KSB for the year ended December 31, 1997.
Note 3 - Net Loss Per Share.
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earning per Share for all periods
presented. The adoption of SFAS No. 128 had no impact on
previously reported loss per share for the three months ended June
30, 1997. In accordance with SFAS No. 128, primary earnings (loss)
per share has been replaced with basic earnings (loss) per share,
and fully diluted earnings (loss) per share has been replaced with
diluted earnings (loss) per share which includes potentially
dilutive securities such as outstanding options and convertible
securities, using the treasury stock method. The assumed exercise
of options and warrants and assumed conversion of convertible
securities have not been included in the calculation of diluted
loss per share as the effect would be anti-dilutive.
Note 4 - The "Year 2000 Problem", dates following December 31, 1999
and beyond:
Many existing computer systems and applications,
and other devices, use only two digits to identify a year in the
date field, without considering the impact of the upcoming change
in the century. Such systems and applications could fail or create
erroneous results unless corrected. The Company relies on its
internal financial systems and external systems of business
enterprises such as customers, suppliers, creditors, and financial
organizations both domestically and globally, directly and
indirectly for accurate exchange of data. The Company has evaluated
such systems and believe the cost of addressing the business
enterprises such as customers, suppliers, creditors, and financial
organizations both domestically and globally, directly and
indirectly for accurate exchange of data. The Company has evaluated
such systems and believe the cost of addressing the "Year 2000
Problem" will not have a material adverse affect on the result of
operations of financial position of the Company. However, even
though the internal systems of the Company are not materially
affected by the Year 2000 issue the Company could be affected
through disruption in the operation of the enterprises with which
the Company interacts.
Page 5
<PAGE>
Note 5 - Inventory.
Inventories consist of the following at June 30, 1998:
Raw Materials $198,336
Finished Goods 45,826
$244,162
Note 6 - Notes Payable
In May 1997, the Company borrowed $100,000 from a shareholder
of the Company, payable with interest at 9.5% per annum and was due
April 10, 1998.
In June 1997, the Company borrowed $25,000 from a shareholder
of the Company, payable with interest at 9.5% per annum due on
March 1, 1999.
In June 1997, the Company issued a note payable of $100,000 to
an unrelated party. The note bears interest of 9.5% per annum due
on December 31, 1998.
In March 1998, the Company borrowed $50,000 from a shareholder
of the Company, payable with interest at 9.5% per annum due on
March 1, 1999.
In March 1998, the Company borrowed $8,000 from an unrelated
party, payable with interest of 9.5% per annum and is due August
31, 1998.
The notes payable originally due on April 10, 1998 is now
past due and subject to collection and additional costs. Terms for
repayment and extension are being negotiated.
Note 7 - Bridge Notes Payable
In November 1997, the Company completed its private placement
of bridge of 54 bridge units. Each unit consists of a bridge note
in the face amount of $10,000 which bears interest at an annual
rate of 10% and warrants to purchase 5,000 shares of Class A Common
Stock at $1.25 per share. The warrants are immediately exercisable
and expire five years from the date of issuance. No warrants have
been exercised as of June 30, 1998. The bridge notes are payable
upon the earlier of six months from issuance or completion of any
subsequent offering of equity securities with at least $1,000,000
in gross proceeds. As of June 30, 1998, $540,000 of offering
proceeds were received from the bridge financing including $55,000
from related parties. Direct debt issuance costs related to these
notes totaled $35,000. The aggregated fair value of the warrants
issued in connection with the financing was $110,700 and is being
amortized, along with the issuance costs, to operations as
additional interest expense over the term of the notes. For the
six months ended June 30, 1998 the Company amortized $70,000 of
issuance cost to operations.
Page 6
<PAGE>
Item 2. Management's Discussion and Analysis.
First six months of 1998 compared to first six months of 1997.
Net sales increased by $300,000 or 55% from $544,000 the first
half of 1997 to $844,000 in the first half of 1998. The increase
in sales is primarily due to the increase of sales of its core
products, Radial Flow Chromatography (RFC) equipment and a small
contribution from revenues from Sepralac evaluation license fees.
All the sales increase is attributable to the first quarter of
1998.
Gross Margin increased by $90,000 or 37% from $244,000 in the
first half of 1997 to $334,000 in the first half of 1998. The
increase in gross margin is primarily due to a higher production
volume and product mix. As a percentage of sales, gross margin
decreased by 5% from 45% in the first six months of 1997 to 40% in
the first six months of 1998.
Selling, general and administrative expenses decreased by
$197,000 from $803,000 in the first half of 1997 to $606,000 in the
first half of 1998. The decrease was primarily due to belt
tightening measures adopted in mid 1997 in administrative expenses
coupled with a reduction in head count in sales and marketing,
scaling back of advertising and promotion and travel expenses.
Research and development expenses decreased by $107,000 from
$512,000 in the first six months of 1997 to $405,000 in the first
six months of 1998. The decrease was mainly due to the reduction
in the cost of software development for the QuantaSep product.
Interest and other expense increased by $108,000 in the first
half of 1998 compared to the first half of 1997 due to amortization
of $70,000 of issuance cost and $38,000 interest expense related to
the bridge loans and notes payable.
Second quarter 1998 compared to second quarter 1997.
Net sales essentially remained unchanged at about $212,000
in the second quarter of 1998 and 1997.
Gross margin increased by $45,000 or 115% from $39,000 in the
second quarter of 1997 to $84,000 in the second quarter of 1998,
and as a percent of sales, increased by 22% from 18% to 40%. Part
of the increase in gross margin was due to additional software cost
associated with the 1997 shipment without incurring corresponding
costs in 1998. To a lesser extent, the higher margin was
attributable to product mix which includes a larger amount of
Sepralac evaluation fee receipt compared to that received in the
second quarter of 1997.
Selling, general and administrative expense decreased by
$6,000 or less than 1%. The reduction of head count and belt
tightening that was instituted at the beginning of the Second
quarter of 1997 was still in effect in the second quarter of 1998.
Research and development expenses decreased by $69,000 or 26%
from $260,000 in the second quarter of 1997 to $191,000 in the
second quarter of 1998. This decrease was mainly a result of a
reduction of software expenses and reduction in head count.
Inflation.
The Company believes that the impact of inflation on its
operations since its inception has not been material.
Page 7
<PAGE>
Liquidity and Capital Resources:
The Company use of cash for operations was $89,500 and
$435,100 during the six months ended June 30, 1998 and 1997,
respectively. Cash used in operation in the first half of 1998 was
the result of net loss incurred for the first six months of
$785,300, offset by net non-cash expense of $138,000, the net
change in operating assets and liabilities resulting in source of
cash of $557,800. Cash used inoperations in the first half of 1997
was the result of the net loss of $$1,030,400, offset by non-cash
expenses of $55,500, and change in operating assets and liabilities
resulting in a source of cash of $539,800.
Financing activities provided cash of $58,000 during the first
half ended June 30, 1998. The cash provided resulted from the
issuance of $58,000 in notes payable.
At June 30, 1998 the Company had cash and cash equivalents of
$12,900 and $44,400 on December 31, 1997. At June 30, 1998, the
Company had working capital deficit of $1,619,400, as compared to
working capital deficit of $902,000 at December 31, 1997. The
decrease in cash in the first half of 1998 is a result of the
aforementioned increase or decrease in cash from operating and
financing activities noted above. The decrease in working capital
for the first half is primarily a result of the net loss incurred
offset by non-cash charges.
This negative cash out flow from operations must be reversed
and working capital increased significantly in order for the
Company to fund its existing activities and to extend the use of
its technology to new applications in the food and dairy and
environmental industries, and to attract the interest of strategic
partners in one or more of these markets.
Based on the Company's current operating plan, the Company
believes that it will only be able to fund the Company's operations
through August 31, 1998. 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
debt financing.
Additionally, the Company is pursuing several alliances in the
dairy industry which if consummated successfully could potentially
contribute to increasing the Company's liquidity through licensing,
fees, revenue from product sales and royalty income. Sepragen has
signed evaluation agreements of the Sepralac process with two
companies.
There can be no assurance that the deal will be consummated or
that the Company will be able to secure financing on reasonable
terms or at all.
The IPO Units, Class A Common Stock and Class A and Class B
warrants were delisted from the Nasdaq SmallCap Market on August
15, 1997 and Pacific Stock Exchange ("PSE") on July 8, 1998. The
Company did not meet the requirements for continued listing of
securities on Nasdaq SmallCap Market and Pacific Stock Exchange.
Since August 16, 1997, the IPO Units, Class A Common Stock and the
warrants have been trading in the over-the-counter market. As a
result, an investor will likely find it more difficult to dispose
of or to obtain accurate quotations as to the value of the
company's securities. It is also likely the Company's securities
will also be less liquid with a resulting negative effect on the
value of such securities and the ability of the Company to raise
additional capital.
The Company currently has no credit facility with a bank or
other financial institution. Historically, the Company and certain
of its customers have jointly borne a substantial portion of
developmental expenses on projects with such customers through
purchase price advances or joint development projects with each
party sharing some of the costs of development. There can be no
assurance that such sharing of expenses will continue. The Company
continues its efforts to increase sales of its existing products
and to complete development and initiate marketing of its products
and processes now under development.
The Company is seeking to enter into strategic alliances with
corporate partners in the industries comprising its primary target
markets (biopharmaceutical, food, dairy and environmental
management). The Company's ability to develop and market its
Sepralaca process for whey separation and other potential food and
environmental products and processes will be substantially
dependent upon its ability to negotiate partnerships, joint
ventures or alliances with established companies in each market.
In particular, the Company will be reliant on such joint venture
partners or allied companies for both market introduction,
operational assistance and financial assistance. The Company
believes that development, manufacturing and market introduction of
products in these industries, will cost millions of dollars and
require operational capabilities in excess of those currently
available to the Company. No assurance can be given, however, that
the terms of any such alliance will be successfully negotiated or
that any such alliance will be successful. The Company hopes to
enter into alliances that will provide funding to the Company for
the development of new applications of its Radial Flow
Chromatography (RFC) technology in return for agreements to
purchase its equipment and royalty bearing licenses to the
developed applications.
Page 8<PAGE>
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995.
This report contains or incorporates by reference forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases
underlying such forward-looking statement, the Company cautions
that, while such assumptions or bases are believed to be reasonable
and are made in good faith, assumed facts or bases almost always
vary from the actual results, and the differences between assumed
facts or bases and actual results can be material, depending upon
the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to
future results, such expectation or belief is expressed in good
faith and is believed to have a reasonable basis, but there can be
no assurance that the statement of expectation or belief will
result or be achieved or accomplished. The words "believe,"
"estimate," "anticipate," and similar expressions may identify
forward-looking statements.
Taking into account the foregoing, the following are
identified as some but not all of the important factors that could
cause actual results to differ materially from those expressed in
any forward-looking statement made by, or on behalf of the Company:
Inability to Secure Additional Capital. The Company has
incurred operating losses each fiscal year since its inception.
The Company must secure additional financing through either the
sale of additional securities or debt financing to continue
operations past September 1, 1998. Although the Company is
attempting to secure such financing, there can be no assurance that
such financing will be available to the Company on reasonable
terms. The Company has been delisted from the Nasdaq SmallCap
Market and the Pacific Stock Exchange. See Item 2 "Management's
Discussion and Analysis-Liquidity and Capital Resources."
Competition. In both its biopharmaceutical industry market
and in the market for its process systems for food, beverage, dairy
and environmental industries, the Company faces intense competition
from better capitalized competitors.
Dependence on Joint Ventures and Strategic Partnerships. The
Company's entry into the food, dairy and beverage market for its
process systems will be substantially dependent upon its ability to
enter into strategic partnerships, joint ventures or similar
collaborative alliance with established companies in each market.
As of the date of this report, no such alliances have been
finalized and there can be no assurance that the terms of any such
alliance will produce profits for the Company.
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Reports on Form 8-K
No reports filed this quarter
Page 9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEPRAGEN CORPORATION
DATE: August 15, 1998 By: /s/Vinit Saxena
Vinit Saxena
Chief Executive Officer,
President and
Principal Financial and Chief
Accounting Officer
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR JUNE 30, 1998 AS FILED ON FORM 10QSB WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 12,904 12,904
<SECURITIES> 0 0
<RECEIVABLES> 220,256 220,256
<ALLOWANCES> 12,000 12,000
<INVENTORY> 244,162 244,162
<CURRENT-ASSETS> 527,807 527,807
<PP&E> 220,653 220,653
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 856,136 856,136
<CURRENT-LIABILITIES> 2,147,188 2,147,188
<BONDS> 0 0
0 0
0 0
<COMMON> 13,024,393 13,024,393
<OTHER-SE> (14,315,445) (14,315,445)
<TOTAL-LIABILITY-AND-EQUITY> 856,136 856,136
<SALES> 211,471 843,804
<TOTAL-REVENUES> 211,471 843,804
<CGS> 126,741 509,827
<TOTAL-COSTS> 126,741 509,827
<OTHER-EXPENSES> 503,000 1,010,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,000 109,282
<INCOME-PRETAX> (438,270) (785,345)
<INCOME-TAX> (438,270) (785,345)
<INCOME-CONTINUING> (438,270) (785,345)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (438,270) (785,345)
<EPS-PRIMARY> (.15) (.28)
<EPS-DILUTED> (.15) (.28)
</TABLE>
