Bio Plexus 10-Q 2002 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2002
Or
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                     to

Commission file number 0-24128

BIO-PLEXUS, INC.
(Exact name of Registrant as specified in its Charter)

Delaware	06-1211921
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

129 Reservoir Road, Vernon, Connecticut 06066
(Address of principal executive offices, including zip code)

(860) 870-6112
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [  ].

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Shares Outstanding
Class of Common Stock	As of August 14, 2002
Common Stock, $0.001 par value		11,539,941

BIO-PLEXUS, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

Document	1
Base	1
Cover Page	1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001	2
Condensed Statements of Operations (unaudited) for the three months ended June 30, 2002 and 2001	3
Condensed Statements of Operations (unaudited) for the six months ended June 30, 2002 and 2001	4
Condensed Statements of Cash Flows (unaudited) for the six months ended June 30, 2002 and 2001	5
Notes to Condensed Financial Statements (unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	15
Item 2. Changes in Securities	15
Item 3. Default Upon Senior Securities	15
Item 4. Submission of Matters to a Vote of Security Holders	15
Item 5. Other Information	15
Item 6. Exhibits and Reports on Form 8-K	15
Item 7. Signatures	16

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BIO-PLEXUS, INC.

CONDENSED BALANCE SHEETS

					June 30,			December 31,
					2002			2001
					(Unaudited)
				ASSETS
Current assets:
	Cash				$	2,325,000		$	953,000
	Accounts receivable, net					633,000			352,000
	Royalty receivables					153,000			163,000
	Inventories:
		Raw materials				715,000			1,015,000
		Work-in-process				513,000			360,000
		Finished goods				493,000			338,000
						1,721,000			1,713,000
	Other current assets					173,000			201,000
			Total current assets			5,005,000			3,382,000
Fixed assets, net						7,317,000			7,839,000
Deferred debt financing expenses, net of amortization						316,000			—
Patents, net of amortization						419,000			432,000
					$	13,057,000		$	11,653,000
				LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt				$	63,000		$	60,000
	Accounts payable and accrued expenses					603,000			353,000
	Deferred revenue					49,000			49,000
	Accrued vacation					36,000			35,000
	Other accrued employee costs					122,000			22,000
		Total current liabilities				873,000			519,000
Long-term debt, net						3,667,000			1,199,000
Shareholders’ equity:
	Common stock, $.001 par value, 25,000,000 authorized, 11,539,941 and 11,577,991 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively					12,000			12,000
	Paid-in-capital					99,234,000			99,321,000
	Deferred compensation, net					—			(508,000	)
	Accumulated deficit					(90,729,000	)		(88,890,000	)
		Total shareholders’ equity				8,517,000			9,935,000
					$	13,057,000		$	11,653,000

The accompanying notes are an integral part of these condensed financial statements.

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BIO-PLEXUS, INC.

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

			Three Months Ended June 30,
			2002			2001
Revenue:
	Product		$	1,884,000		$	1,332,000
	Services			—			85,000
	Royalties			159,000			70,000
		Total revenue		2,043,000			1,487,000
Costs and expenses:
	Product			1,183,000			1,069,000
	Services			6,000			103,000
	Pre-production manufacturing			53,000			—
	Research and development			223,000			293,000
	Deferred compensation amortization			372,000			—
	Selling, general and administrative			1,288,000			1,572,000
		Total operating costs and expenses		3,125,000			3,037,000
Operating loss				(1,082,000	)		(1,550,000	)
Financing Expenses:
	Amortization of deferred debt financing			4,000			61,000
	Other financing expense			33,000			681,000
	Other income			(9,000	)		(11,000	)
		Total financing expenses		28,000			731,000
Net loss			$	(1,110,000	)	$	(2,281,000	)
Net loss (basic and diluted) per common share			$	(0.10	)	$	(1.52	)
Weighted average common shares outstanding				11,549,584			1,500,216

The accompanying notes are an integral part of these condensed financial statements.

3

BIO-PLEXUS, INC.

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

			Six Months Ended June 30,
			2002			2001
Revenue:
	Product		$	3,583,000		$	2,586,000
	Services			—			200,000
	Royalties			368,000			121,000
		Total revenue		3,951,000			2,907,000
Costs and expenses:
	Product			2,173,000			1,908,000
	Services			10,000			103,000
	Pre-production manufacturing			224,000			—
	Research and development			509,000			688,000
	Deferred compensation amortization			421,000			—
	Selling, general and administrative			2,399,000			4,038,000
		Total operating costs and expenses		5,736,000			6,737,000
Operating loss				(1,785,000	)		(3,830,000	)
Financing Expenses:
	Amortization of deferred debt financing			4,000			121,000
	Other financing expense			63,000			1,329,000
	Other income			(13,000	)		(46,000	)
		Total financing expenses		54,000			1,404,000
Net loss			$	(1,839,000	)	$	(5,234,000	)
Net loss (basic and diluted) per common share			$	(0.16	)	$	(3.50	)
Weighted average common shares outstanding				11,559,482			1,496,849

The accompanying notes are an integral part of these condensed financial statements.

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BIO-PLEXUS, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

				Six Months Ended June 30,
				2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss				$	(1,839,000	)	$	(5,234,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				574,000			308,000
	Recognition of stock-based compensation				421,000			—
	Amortization of deferred debt financing expenses				4,000			121,000
	Amortization of debt discount				—			219,000
	Decrease (increase) in assets:
			Accounts receivable, net and royalty receivables		(271,000	)		477,000
			Inventories		(7,000	)		850,000
			Other current assets		28,000			(49,000	)
	Increase (decrease) in liabilities:
			Accounts payable and accrued expenses		248,000			(419,000	)
			Accrued vacation and other accrued employee costs		102,000			2,000
			Deferred revenue		—			171,000
	Other, net				—			18,000
			Net cash used in operating activities		(740,000	)		(3,536,000	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases and construction of fixed assets, net					(35,000	)		(1,098,000	)
Cost of patents					(4,000	)		(46,000	)
			Net cash used in investing activities		(39,000	)		(1,144,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock					—			79,000
Accretion of accrued interest					—			1,385,000
Increase in notes payable					2,500,000			300,000
Payments of deferred financing costs					(320,000	)		—
Repayments of long-term debt					(29,000	)		(24,000	)
			Net cash (used in) provided by financing activities		2,151,000			1,740,000
			Net increase (decrease) in cash		1,372,000			(2,940,000	)
			Cash, beginning of period		953,000			4,003,000
			Cash, end of period	$	2,325,000		$	1,063,000
Supplemental cash flow disclosures:
		Cash payments of interest (net of amounts capitalized)		$	57,000		$	71,000
		Cash payments of income taxes			3,000			2,000

The accompanying notes are an integral part of these condensed financial statements.

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BIO-PLEXUS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The accompanying unaudited condensed interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and, in the opinion of the management of the Company, include all adjustments which are of a normal recurring nature, necessary for a fair presentation of financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and footnotes required for a presentation in accordance with accounting principles generally accepted in the United States of America. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s 2001 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

     Reclassifications — certain prior year amounts have been reclassified to conform to the current year presentation.

2. Earnings Per Share

     Basic Earnings Per Share (“EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. There were no dilutive common stock equivalents at June 30, 2002.

3. Segment Financial Data

     The Company’s operations consist of two business segments: Safety Medical Products and Accessories and Joint Venture Design & Development. The Safety Medical Products and Accessories segment includes operations associated with the manufacture of blood collection needles, needle holders and needle disposal containers. Starting in 2000, this segment also began to include royalty revenues. The Joint Venture Design & Development segment includes operations associated with product design and development, product licensing, and the design, development and construction of machinery and tooling in connection with joint venture partners.

     Distinct reporting by such segments was deemed necessary by management based on the significance of reported revenues and expenses and the Company’s intention to focus operating resources in both of these areas. For the periods presented, there were no intersegment revenues.

     Information with respect to each of the Company’s business segments is as follows:

   Segment Revenue

	Three Months Ended June 30,						Six Months Ended June 30,
	2002		2001		2000		2002		2001		2000
Safety Medical Products and Accessories	$	2,043,000	$	1,402,000	$	776,000	$	3,951,000	$	2,707,000	$	2,121,000
Joint Venture Design & Development		—		85,000		—		—		200,000		197,000
Total Revenue	$	2,043,000	$	1,487,000	$	776,000	$	3,951,000	$	2,907,000	$	2,318,000

   Major Customers

     There were three customers, domestic distributors of the Company’s products, Allegiance, Fisher Healthcare and Owens & Minor, that exceeded 10% of the Company’s Safety Medical Products and Accessories segment revenue for the periods presented. These distributors sell the Company’s products to hospitals and other users. If the Company lost one of these distributors, the hospitals and other users could still purchase the Company’s products from other

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distributors; however, the loss of business of any of the foregoing distributors could disrupt the Company’s business and possibly have a material adverse effect on the business and prospects of the Company. In the Joint Venture Design & Development segment, Johnson and Johnson Medical and Fresenius Medical Care Holdings contributed to more than 10% of the revenues associated with this segment for the periods presented. The first line of the following table represents the revenue associated with these major customers by segment:

	Three Months Ended June 30,						Six Months Ended June 30,
Total Revenue Major Customers:	2002		2001		2000		2002		2001		2000
Safety Medical Products and Accessories to Major Customers	$	1,356,000	$	1,022,000	$	683,000	$	2,613,000	$	1,891,000	$	1,849,000
Other Safety Medical Domestic Sales		528,000		310,000		93,000		970,000		695,000		272,000
Royalties		159,000		70,000		—		368,000		121,000		—
Total Safety Medical Product Revenues		2,043,000		1,402,000		776,000		3,951,000		2,707,000		2,121,000
Joint Venture Design & Development		—		85,000		—		—		200,000		197,000
Total Revenue	$	2,043,000	$	1,487,000	$	776,000	$	3,951,000	$	2,907,000	$	2,318,000

   Segment Profit (Loss)

	Three Months Ended June 30,									Six Months Ended June 30,
	2002			2001			2000			2002			2001			2000
Safety Medical Products and Accessories	$	860,000		$	333,000		$	434,000		$	1,778,000		$	799,000		$	1,037,000
Joint Venture Design & Development		(6,000	)		(18,000	)		—			(10,000	)		97,000			162,000
Total Gross Margin		854,000			315,000			434,000			1,768,000			896,000			1,199,000
Selling, General and Administrative Expenses		1,288,000			1,572,000			2,015,000			2,399,000			4,038,000			3,590,000
Deferred Compensation Amortization		372,000			—			—			421,000			—			—
Pre-production Manufacturing		53,000			—			—			224,000			—			—
Research and Development		223,000			293,000			235,000			509,000			688,000			557,000
Financing Expenses		28,000			731,000			1,125,000			54,000			1,404,000			2,832,000
Net Loss	$	(1,110,000	)	$	(2,281,000	)	$	(2,941,000	)	$	(1,839,000	)	$	(5,234,000	)	$	(5,780,000	)

   Segment Capital Expenditures

	Three Months Ended June 30,						Six Months Ended June 30,
	2002		2001		2000		2002		2001		2000
Safety Medical Products and Accessories	$	12,000	$	338,000	$	598,000	$	35,000	$	1,098,000	$	853,000
Joint Venture Design & Development		—		—		—		—		—		—
Total Capital Expenditures	$	12,000	$	338,000	$	598,000	$	35,000	$	1,098,000	$	853,000

     There has been no material change in identifiable assets related to reportable segments since the 2001 Annual Report.

4. Change in Control

     The information in this footnote is based, in part, upon the Schedule 13D filed on June 3, 2002 with the Securities and Exchange Commission on behalf of ComVest Venture Partners, L.P., a limited partnership organized under the laws of Delaware (“ComVest”), ComVest Management, LLC, a limited liability company organized under the laws of Delaware (“ComVest Management”), RMC Capital, LLC, a limited liability company organized under the laws of Georgia, Michael S. Falk (“Falk”) and Robert Priddy (“Priddy”), as amended by Amendment No. 1 filed June 28, 2002 (collectively the “ComVest 13D Filing”). ComVest, ComVest Management, RMC, Falk and Priddy are referred to as the “Reporting Persons.”

     ComVest Management is the general partner of ComVest, and ComVest Management is wholly-owned by Commonwealth Associates Management Company, Inc., a corporation organized under the laws of New York (“CAMC”). The managers of ComVest Management are Travis L. Provow, Falk and Keith Rosenbloom (“Rosenbloom”). Rosenbloom and Harold Blue are directors, and Falk is Chairman, of CAMC. Mr. Falk is also the principal stockholder of CAMC. The sole officer of CAMC is Joseph Wynne, Chief Financial Officer. The

7

managers of RMC are Priddy, Kikie Priddy, Sharon Acks and Michael Acks. Mr. Priddy is also the Chairman and principal member of RMC.

     Pursuant to an agreement, dated as of May 24, 2002 (the “ComVest Purchase Agreement”), Appaloosa Management L.P. (the “Manager”), on behalf of Appaloosa Investment Limited Partnership I (“AALP”) and Palomino Fund Ltd (“Palomino”) for which it acts as investment advisor, sold an aggregate of 9,840,285 shares (4,929,717 from AALP and 4,910,568 from Palomino) of the Company’s common stock (the “Shares”) and warrants to purchase 1,314,060 shares (700,394 from AALP and 613,666 from Palomino) of the Company’s common stock having an exercise price of $2.283 (the “Warrants,” and collectively with the Shares, the “Securities”) for an aggregate purchase price of $5,000,000, a portion of which were acquired by the Reporting Persons. ComVest, Priddy and RMC purchased, respectively, 4,172,281, 1,312,038 and 1,312,038 of the Shares, and 557,161, 175,208, and 175,208 of the Warrants. ComVest, Priddy and RMC paid $2,120,000, $666,667, and $666,667, respectively for the Securities.

     As part of the transaction, and in accordance with the terms of the ComVest Purchase Agreement, Harold S. Blue, President of Commonwealth Associates, LP (an affiliate of ComVest) became Chairman of the Company’s Board of Directors, and Dr. Richard Corbin, a dentist in private practice and designee of ComVest, became a Director, replacing James Bolin and Ken Maiman, Appaloosa’s representatives on the Company’s Board of Directors.

     As part of the transaction, certain officers (John Metz and Brian Herrman) and a director (Scott Tepper) of the Company participated as investors by purchasing in the aggregate, 143,780 shares, for a total purchase price of $73,333.

     As a result of the foregoing, there was a change in control of the Company in that the Reporting Persons acquired control of the Company from the Manager as a result of their acquisition of the Securities.

5.     ComVest Private Placement Transaction and Commonwealth Advisory Agreement

     On June 19, 2002, the Company closed on $2.5 million in new debt financing. The debt financing was provided pursuant to a Securities Purchase Agreement with the investors named therein (together, the “Investors”) and ComVest Venture Partners, L.P. (“ComVest”), in its capacity as administrative agent to the Investors, dated as of June 18, 2002 (the “Securities Purchase Agreement”). Under the Securities Purchase Agreement, the Company sold to the Investors 25 Units (the “Units”), each Unit consisting of a $100,000 Senior Subordinated 7% Non-Convertible Promissory Note due in full on December 18, 2004 (the “Notes”), and warrants to purchase 50,000 shares of common stock of the Company at an exercise price of $1.00 per share (the “Warrants”). The total number of warrants to purchase shares of common stock was therefore 1,250,000. The Company is permitted to convert the Notes into common shares upon the occurrence of certain future events, and at certain conversion prices, described in the Securities Purchase Agreement (the “Conversion Shares”). After fees and closing costs, the net proceeds to the Company were $2,180,500. In addition, certain officers (John Metz and Brian Herrman) and a director (Scott Tepper) of the Company participated as investors in the Securities Purchase Agreement, by purchasing, in aggregate, 0.367 units, for a total value of $36,667.

     The Notes bear interest at the rate of 7% per annum, which shall accrue through the earlier of (i) the date on which the Notes are converted; (ii) December 18, 2004; (iii) the date on which the Company consummates a merger, combination or sale of all or substantially all of the assets of the Company; or (iv) upon the acquisition of more than 50% of the voting power or interest of the Company by the purchase by a single entity or person or “group” existing pursuant to Section 13 (d) of the Securities Exchange Act of 1934, as amended.

     The Notes rank senior to all other indebtedness for money borrowed of the Company, and are secured by a first perfected priority lien and security interest (the “Security Interest”) in certain collateral of the Company pursuant to the terms and conditions of a Security Agreement, dated as of June 18, 2002, by and among the Company, each of the Investors and ComVest, in its capacity as administrative agent for the Investors. The Notes are also secured by a second mortgage on the Company’s headquarters located in Vernon, Connecticut and owned by the Company. In the event the Company establishes a revolving credit facility with an institutional lender for a maximum of $2,000,000, and repayment of such credit facility is secured by certain collateral of the Company, including accounts receivable and inventory (the “Lender Collateral”), then the Security Interest shall automatically become subordinate to the

8

Lender’s first perfected priority lien and security interest only with respect to the Lender Collateral, so that repayment of the Notes shall be secured by a second perfected lien and security interest only with respect to the Lender Collateral. The Notes contain optional and automatic conversion provisions.

     The Warrants are exercisable at a per share exercise price of $1.00. The Warrants expire on December 18, 2004 and contain a cashless exercise feature. In the event the Notes are repaid in full on or prior to December 18, 2002, the Company shall have the right to redeem 50% of each Warrant at a price of $.01 per Warrant Share.

     Commonwealth Associates, LP, an affiliate of ComVest, has been retained by the Company as a financial advisor to assist in its efforts to raise additional debt financing and explore strategic alternatives to enhance shareholder value. Pursuant to an Advisory Agreement by and between the Company and Commonwealth Associates L.P. (“Commonwealth”) dated as of May 10, 2002 (the “Advisory Agreement”), Commonwealth agreed to act as financial advisor to the Company. During the term of the Advisory Agreement and for a period of six months thereafter, Commonwealth has a right of first refusal to act as exclusive placement agent or financial advisor in connection with any private placement by the Company in excess of $1,000,000. As compensation for services rendered to the Company under the Advisory Agreement, Commonwealth is to be paid $10,000 per month, and Commonwealth received a warrant to purchase 1,000,000 shares of the Company’s common stock at a per share exercise price of $1.00 (the “Advisor Warrant”).

     Pursuant to the Securities Purchase Agreement, the Company agreed to file a registration statement on Form S-3 by September 18, 2002, covering the Conversion Shares, the Warrants, and the shares of Company common stock underlying the Advisor Warrant. In addition, the Company agreed to use its best efforts to cause the registration statement to become effective by December 18, 2002.

     Pursuant to the Securities Purchase Agreement, ComVest, Commonwealth and the Investors were also granted unlimited piggyback registration rights with respect to any registration statements filed by the Company after June 18, 2002. The piggyback registration rights are subject to customary limitations and exceptions.

     The information in this footnote is based, in part, upon the ComVest 13D Filing.

6. Restricted Stock Shares and Stock Options

     In accordance with the change in control transaction described in note 4 above, the 224,350 outstanding restricted stock shares of the Company became 100% vested as of May 24, 2002. At the time of the change in control, the unamortized balance of deferred compensation on the Balance Sheet was $356,000, representing the unvested shares of restricted stock. Because the change in control caused the immediate vesting of all unvested restricted stock, this resulted in an accelerated deferred compensation amortization charge of approximately $356,000 recorded in the accompanying condensed statements of operations for the three months ended June 30, 2002. In addition, the Company had 743,150 unvested incentive stock options, with an exercise price of $2.283 per share, which became fully vested and exercisable as of May 24, 2002 as a result of the above change in control transaction.

7. Net Operating Loss Carryforwards

     At December 31, 2001, the Company had available federal net operating loss (“NOL”) carryforwards of approximately $89,000,000. However, because of the ownership change in July 2001, the Company would have only been able to use just $1,300,000 (approximately) of its federal NOLs per year, for those federal NOLs generated prior to July 2001.

     As a result of the May 24, 2002 change-in-control transaction (described in note 4 above), the Company’s federal NOLs are subject to new annual limitations. The limitations, resulting from substantial ownership changes, are prescribed in Section 382 of the Internal Revenue Code (the “Section 382 Limitation”). The Section 382 Limitation is calculated by multiplying the fair market value of the Company immediately preceding the change in ownership, by the long-term, tax-exempt rate prescribed by the IRS. Because of the change in ownership in May 2002, and based on the Section 382 Limitation calculation, the Company will be allowed to use approximately $290, of its pre-May 2002 federal NOLs per year. The Company generated approximately $200,000 of federal NOL

9

carryforwards after the change of ownership (from May 25, 2002 to June 30, 2002). There are no limitations associated with the Company’s ability to utilize the additional federal NOLs.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are a designer, developer, manufacturer, seller and licensor of medical products designed to prevent the infection of healthcare workers through accidental needlesticks. Our products, unique among our competition, are based on a patented technology that internally blunts a needle prior to its removal from a patient, a major competitive advantage in management’s view. To our knowledge, these products are the only safety products on the market that render the needle safe (are activated) prior to removal from the patient. We have developed and sell our own lines of safety products, and also license our technology to other companies in specific market niches that do not compete with our own branded products.

     We currently utilize our technology to make blood collection needles (primarily for use by phlebotomists in the lab) and Winged Sets (used by phlebotomists and other medical personnel in hospitals and doctors’ offices). In addition to product sales, we license our technology to Johnson & Johnson Medical (“JJM”) and to TFX Medical (“TFX”), a division of Teleflex Incorporated, to apply the patented technology to various types of catheters. TFX manufactures the product under an exclusive sublicense to CR Bard. We are also developing a fistula needle for Fresenius Medical Care Holdings (“Fresenius”), under an exclusive licensing agreement. In support of our product manufacturing we also develop and build sophisticated, proprietary, production equipment to assemble our products. We hold patents on elements of these production processes.

     Growth in the blood collection needle market is being driven by state and federal OSHA (Occupational and Safety Health Administration) regulations and legislation. In November 2000, the Needlestick Safety and Prevention Act of 2000 was enacted, which requires OSHA to implement new standards for needlestick prevention. We believe that these new regulations will accelerate the sales of our safety needle products.

     Royalty revenues resulting from agreements with JJM and TFX continued to grow from $121,000 for the six months ended June 30, 2001 to $368,000 for the six months ended June 30, 2002.

     As a result of the transactions described in Note 4, whereby ComVest purchased all the shares of common stock previously owned by Appaloosa, there was a change in control of the Company on May 24, 2002.

General

     Besides our licenses with JJM & TFX, we design, develop, manufacture and sell our own line of safety medical products and accessories marketed under the Punctur-Guard® and Drop-It® brand names. Our first Punctur-Guard® product was a safety blood collection needle (“BCN”) used by phlebotomists to draw blood, introduced in 1996. We also began selling accessories (holders) in 1997. We manufacture and sell three varieties of these safety BCNs, three types of needle holders and a needle disposal container. Our second Punctur-Guard® product line, introduced in July 2001, is a safety Winged Set blood collection needle. A Winged Set is a small needle with a pair of plastic wings that give the healthcare worker the ability to control the needle for precise insertion into the patient’s vein. Its primary purpose is to draw blood from patients whose veins are more difficult to access, such as geriatric and pediatric patients. Both the BCN and the Winged Set are similar in appearance, size, performance and general operation to standard blood collection needles. This is important for the marketing of and training for the use of our products, which have a familiar look and usage to the products healthcare workers currently use.

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     The following table sets forth our revenue by product as a percentage of total revenue for the periods indicated:

Product Line	1999			2000			2001			Q2YTD - 2001			Q2YTD - 2002
BCN		61	%		70	%		61	%		68	%		48	%
Holders		15	%		22	%		18	%		23	%		14	%
Winged Set		—			—			7	%		1	%		29	%
Royalties		—			1	%		8	%		4	%		9	%
Services		22	%		5	%		5	%		7	%		-
Other		2	%		2	%		1	%		(3	)%		-
Total		100	%		100	%		100	%		100	%		100	%

     We have taken steps to reduce our dependence on both custom engineering revenue (“services”) as well as on our first generation proprietary products. BCN and Holders are both regarded as maturing product lines whereas we expect substantial future sales growth in the Winged Set product line that was launched in late 2001. In addition, royalty revenue, as a result of past joint venture projects, is also expected to increase going forward.

Results of Operations

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

     We had product sales of $1,884,000 for the three months ended June 30, 2002, compared with product sales of $1,332,000 for the comparable period in the prior year. The $552,000 (41%) increase was primarily due to the introduction of the new Winged Set intravenous product line in the third quarter of 2001. Total Winged Set sales for the three months ended June 30, 2002 were approximately $685,000.

     We had no revenues from services for the three months ended June 30, 2002, compared to $85,000 for the comparable period in the prior year. The second quarter 2001 service revenues were a result of the Fresenius product development project to develop extracorporeal therapy needles for the dialysis market.

     Our royalty revenue increased to $159,000 for the three months ended June 30, 2002, compared to $70,000 for the comparable period in the prior year. The $89,000 increase was attributable to increases in both JJM and TFX royalties recorded during the second quarter of 2002 over the second quarter of 2001.

     Product costs were $1,183,000 or 63% of product sales for the three months ended June 30, 2002, compared to $1,069,000 or 80% of product sales for the comparable period in the prior year. The decreased percentage in product costs resulted primarily from reductions in costs and efficiencies introduced in the last quarter of 2001, and higher production rates during the second quarter of 2002 as compared to the comparable period in the prior year.

     Service costs were $6,000 for the three months ended June 30, 2002, compared to $103,000 for the comparable period in the prior year. The second quarter 2002 costs represent engineering costs for the product development project with Fresenius to develop extracorporeal therapy needles for the dialysis market.

     Pre-production manufacturing costs were $53,000 for the three months ended June 30, 2002 and consisted of the pre-production and early production inventory write-offs associated with the new Winged Set product line. The original Winged Set product launched in the third quarter of 2001 was for a 23-gauge size needle. A new Winged Set product, the 21-gauge, was launched in the first quarter of 2002. The pre-production write-offs in the second quarter of 2002 were predominately associated with this new 21-gauge product launch. In addition to these pre-production product write-offs, we encountered quality control issues with the new Winged Set manufacturing processes in the first quarter that resulted in the need to add additional 100% inspections of product until the quality issues were resolved. This situation slowed our production volumes into the second quarter. We solved many of these production and quality control issues in the second quarter, resulting in the elimination of the majority of our 100% inspections and which further resulted in a substantial increase in production capacity of Winged Sets. We expect to continue to improve our manufacturing processes and are attempting to eliminate all the 100% inspections during the remainder of this year, which will result in lower unit production costs.

     Research and development expenses were $223,000 for the three months ended June 30, 2002, compared to $293,000 for the comparable period in the prior year. The $70,000 (24%) decrease in these costs resulted primarily

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from a reduction in engineering personnel, and also to reductions in purchased materials related to the development of the Winged Set product line.

     Deferred compensation amortization expenses were $372,000 for the three months ended June 30, 2002 compared to $0 for the comparable period in the prior year. These expenses were largely a result of the change-of-control transaction (see Note 4). At the time of the change in control, the unamortized balance of deferred compensation on the Balance Sheet was $356,000, representing the shares of restricted stock issued pursuant to the Company’s 2001 Stock Incentive Plan (the “Plan”), which were not yet vested. Under the terms of the Plan, the change in control caused the immediate vesting of all unvested restricted stock. This accelerated vesting resulted in an accelerated deferred compensation amortization charge of approximately $356,000 in the quarter ending June 30, 2002.

     Selling, general and administrative expenses were $1,288,000 for the three months ended June 30, 2002, compared with $1,572,000 for the comparable period in the prior year. The $284,000 (18%) decrease resulted from a decrease in legal fees of $100,000, a decrease in selling expenses of $70,000 due to the change in selling strategy in the latter half of 2001 (whereby we moved from a reliance on a direct sales force to a mix of independent specialty dealer representatives which reduced the number of direct sales personnel), a $24,000 decrease in general management bonuses, a $15,000 decrease in director fees and Board of Directors’ meeting expenses, and reductions in general and administrative personnel and expenses due to efficiencies.

     Financing expenses for the three months ended June 30, 2002 were $28,000 compared to $731,000 for the comparable period in the prior year. The significant $703,000 decrease resulted primarily from conversion of approximately 95% of our debt into equity on July 18, 2001, pursuant to our reorganization.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

     We had product sales of $3,583,000 for the six months ended June 30, 2002, compared with product sales of $2,586,000 for the comparable period in the prior year. The $997,000 (39%) increase was due to the introduction of the new Winged Set intravenous product line in the third quarter of 2001. Total Winged Set sales for the six months ended June 30, 2002 were approximately $1,148,000.

     We had no revenues from services for the six months ended June 30, 2002, compared to $200,000 for the comparable period in the prior year. The six months 2001 service revenues were a result of the Fresenius product development project to develop extracorporeal therapy needles for the dialysis market as well as $100,000 attributable to the completion of the Design, Development and Asset Transfer Agreement with JJM in the first quarter of 2001.

     Our royalty revenue increased substantially, to $368,000 for the six months ended June 30, 2002, compared to $121,000 for the comparable period in the prior year. The $247,000 increase was attributed to increases in both JJM and TFX royalties recorded during the first six months of 2002 over the comparable period in 2001.

     Product costs were $2,173,000 or 61% of product sales for the six months ended June 30, 2002, compared to $1,908,000 or 74% of product sales for the comparable period in the prior year. The decreased percentage in product costs resulted primarily from reductions in costs and efficiencies introduced in the last quarter of 2001, and from higher production rates during the six-month 2002 period as compared to the comparable period in the prior year.

     Service costs were $10,000 for the six months ended June 30, 2002, compared to $103,000 for the comparable period in the prior year. The 2002 costs represent engineering costs for the product development project with Fresenius to develop extracorporeal therapy needles for the dialysis market.

     Pre-production manufacturing costs were $224,000 for the six months ended June 30, 2002 and consisted of the pre-production and early production inventory write-offs associated with the new Winged Set product line. The original Winged Set product launched in July 2001 was for a 23-gauge size needle. A new Winged Set product, the 21-gauge, was launched in late January 2002. The pre-production write-offs in the second quarter of 2002 were predominately associated with this new 21-gauge product launch. In addition to these pre-production product write-offs, we encountered quality control issues with the new Winged Set manufacturing processes in the first quarter that resulted in the need to add additional 100% inspections of product until the quality issues were resolved. This

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situation slowed our production volumes into the second quarter. We solved many of these production and quality control issues in the second quarter, resulting in the elimination of the majority of our 100% inspections and which further resulted in a substantial increase in production capacity of Winged Sets. We expect to continue to improve our manufacturing processes and are attempting to eliminate the remaining 100% inspections during the remainder of this year, which will result in lower unit production costs.

     Research and development expenses were $509,000 for the six months ended June 30, 2002, compared to $688,000 for the comparable period in the prior year. The $179,000 (26%) decrease in these costs resulted primarily from a reduction in engineering personnel and a significant level of purchased materials related to the development of the new Winged Set product line in the first six months of 2001 that was not duplicated in 2002.

     Deferred compensation amortization expenses were $421,000 for the six months ended June 30, 2002 compared to $0 for the comparable period in the prior year. These expenses were largely a result of the change-of-control transaction on May 24, 2002 (see Note 4). At the time of the change in control, the unamortized balance of deferred compensation on the Balance Sheet was $356,000, representing the shares of restricted stock issued pursuant to the Plan which were not yet vested. Under the terms of the Plan the change in control caused the immediate vesting of all unvested restricted stock. This accelerated vesting resulted in an accelerated deferred compensation amortization charge of approximately $356,000 in the six months period ending June 30, 2002.

     Selling, general and administrative expenses were $2,399,000 for the six months ended June 30, 2002, compared with $4,038,000 for the comparable period in the prior year. This significant $1,639,000 (41%) decrease resulted from a decrease in legal fees of $618,000 (a portion of which, $540,000, was due to the prior year bankruptcy petition), a decrease in selling expenses of $256,000 due to the change in selling strategy in the latter half of 2001 (whereby we moved from a reliance on a direct sales force to a mix of independent specialty dealer representatives which reduced the number of direct sales personnel), a $171,000 decrease in general management bonuses, a $93,000 decrease in director fees and Board of Directors’ meeting expenses, and significant reductions in general and administrative personnel and expenses due to efficiencies.

     Financing expenses for the six months ended June 30, 2002 were $54,000 compared to $1,404,000 for the comparable period in the prior year. The significant $1,350,000 decrease resulted primarily from conversion of approximately 95% of our debt into equity on July 18, 2001, pursuant to our reorganization.

Liquidity and Capital Resources

     As of June 30, 2002, we had cash on hand of $2,325,000, as compared to $953,000 at December 31, 2001 resulting in net cash provided of $1,372,000. The increase was primarily a result of $2,180,500 of net cash proceeds associated with our financing transaction with ComVest (see Note 5), less our operating losses. For the foreseeable future, we will continue to generate operating losses. We have substantially reduced our monthly net usage of cash (“burn rate”) through a combination of reductions in operating expenses in the latter half of 2001and in the later part of the second quarter of 2002, and an increase in both product sales and royalty revenues during the same period. Our burn rate includes operating expenses and maintenance levels of capital expenditures (excluding capital expenditures for product improvement and expansion purposes, described below). The monthly burn rate was reduced from approximately $500,000 per month (excluding legal fees for the first quarter and reorganization costs) for the period January through September 2001, to approximately $100,000 per month for the period October 2001 through March 2002. The burn rate in the second quarter of 2002 increased to approximately $210,000 per month, as a result of the following factors: (1) purchasing additional inventory to replace those associated with our pre-production write-offs described elsewhere in this report, and to support expected growing sales levels, (2) the hiring of additional temporary production workers to support the additional 100% inventory inspections described elsewhere in this report, and (3) a build-up of Winged Set inventories deemed necessary to support our customers. We expect that our burn rate will return to the $100,000 per month level for the foreseeable future. However, the continuation of this reduced burn rate is dependent on future product sales staying consistent with the last six months ended June 2002, and our ability to operate our business at the reduced level of costs and expenditures of the last six months ended June 2002.

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     We expect that sales of our products will continue to grow in 2002. If sales continue to increase, accounts receivable and inventories are expected to increase as well, which could increase our burn rate. In addition, we expect that expenditures for capital equipment needed for product improvement and expansion purposes will be approximately $700,000 for the remainder of 2002. Based on all of these factors, we believe that we have sufficient funds to support operations into the third quarter of 2003. We are attempting to secure current asset financing from a bank or other institutional lender to finance our expected growth in accounts receivable and inventory. Although no assurance can be given that such current asset financing can be obtained, we believe that such financing would provide sufficient funds to support operations into the foreseeable future.

Forward Looking Statements

     The discussions set forth herein contain certain statements which are not historical facts and are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by the use of such terminology as “believes,” “expects,” “may,” “should,” “anticipates,” “plans,” “estimates,” and “intends” or derivations or negatives thereof or comparable terminology. Accordingly, such statements involve risks (known and unknown) and uncertainties. The forward-looking statements are based on assumptions that we believe are reasonable based on the best information currently available. However, there are a number of risks associated with these assumptions. These risks and uncertainties include our ability maintain our estimated monthly “burn rate”; our ability to obtain current asset financing to finance the growth in accounts receivable and inventory; the effect on suppliers, customers, employees, and others because of our receipt of a going concern opinion from our auditors for the year ended December 31, 2001; the extent of acceptance of our products by healthcare professionals; our ability to protect our proprietary technology; availability of qualified personnel; changes in, or failure to comply with government regulations; general economic and business conditions; competitive factors, which could result in downward pressure on prices or the introduction of competing products into the marketplace; reliance on certain critical suppliers, some of whom are currently sole source suppliers; and other risk factors and uncertainties in this report, described from time to time in our other Securities and Exchange Commission filings, or discussed in our press releases. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

     We are not party to any litigation or legal proceedings.

Item 2.Changes in Securities

     None.

Item 3.Default Upon Senior Securities

     None.

Item 4.Submission of Matters to a Vote of Security Holders

     None.

Item 5.Other Information

     None.

Item 6.Exhibits and Reports on Form 8-K

(a)     Exhibits

Exhibit
No	Description
99.1	Certificate of Officer John S. Metz
99.1	Certificate of Officer Brian J. Herman

(b)     Reports on Form 8-K

The Registrant filed the following Report on Form 8-K during the quarter for which this Report is filed:

May 24, 2002

June 19, 2002

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Item 7.Signatures

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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 authorized.

BIO-PLEXUS, INC. (REGISTRANT)

By:       /s/           John S. Metz               

                          John S. Metz
           President, Chief Executive Officer
                          and Director

Dated: August 14, 2002

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