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: September 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:
November 13,1998
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 60 PAGES. THE INDEX TO EXHIBITS IS ON
PAGE 14.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
SEPRAGEN CORPORATION
CONDENSED BALANCE SHEET
ASSETS
September
30, 1998
Current Assets:
Cash and cash equivalents. $ 206,197
Accounts receivable, less allowance
for doubtful accounts of $12,000 as
of September 30, 1998 180,799
Inventories 231,355
Prepaid expenses and other. 39,509
Total current assets. 657,860
Furniture and equipment, net 198,157
Intangible assets 101,432
957,449
LIABILITIES AND DEFICIT IN SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 827,895
Bridge Loans, net 522,800
Customer deposits 75,800
Notes Payable, including $280,000 from
shareholders 380,000
Accrued payroll and benefits 122,283
Accrued liabilities 66,487
Interest payable 38,327
Total current liabilities 2,033,592
Commitments
Class E common stock, no par value
- 1,600,000 shares authorized;
1,209,894 shares issued and
outstanding at September 30,
1998, redeemable at $.01 per share 0
Deficit in Shareholders' equity:
Preferred stock, no par value -
5,000,000 shares authorized; and
175,439 convertible, preferred
issued and outstanding 500,000
Class A common stock, no par value
-20,000,000 shares authorized;
2,155,254 shares issued and
outstanding 8,848,075
Class B common stock, no par value -
2,600,000 shares authorized; 701,177
shares issued and outstanding 4,065,618
Additional paid in capital 202,220
Accumulated deficit (14,692,056)
Total deficit in shareholders' equity (1,076,143)
957,449
The accompanying notes are an integral part of these condensed financial
statements.
Page 2
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
Revenues:
Net Sales $356,395 $188,264 1,200,199 731,977
Costs and expenses:
Cost of goods sold 139,564 112,317 649,391 412,274
Selling, general and
administrative 352,014 311,791 957,530 1,115,059
Research and development 172,759 157,881 577,283 669,821
Total costs and expenses 664,337 581,989 2,184,204 2,197,154
Loss from operations (307,942) (393,725) (984,005) (1,465,177)
Other income -- 32,804 -- 72,804
Interest income,
(expense) net (68,669) 25 (177,951) 1,018
Net loss (376,611) (360,896) (1,161,956) (1,391,355)
Net loss per common
share, basic and
diluted $(.13) $(.13) $(.41) $(.49)
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
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
1998 1997
Cash flows from operating
activities:
Net Loss $(1,161,956) $(1,391,355)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
Amortization 177,057 102,036
Changes in assets and
liabilities:
Accounts receivable. 390,069 54,679
Inventories 87,505 23,789
Prepaid expenses and
other (22,975) 2,131
Accounts payable 191,641 453,835
Accrued liabilities. (26,233) (25,704)
Accrued payroll and (22,856) 6,180
benefits.
Interest payable (16,522) 0
Customer deposits (234,681) 285,709
Net cash used in operating
activities (638,951) (488,700)
Cash flows from financing
activities:
Proceeds from issuance of
preferred stock 500,000 0
Proceeds from notes payable
to shareholders 155,000 125,000
Proceeds from issuance of
notes payable 0 100,000
Net proceeds from bridge
notes payable 115,700 207,000
Proceeds from issuance of
convertible secured
promissory Note, net 540,000 0
Retirement of bridge debt (510,000) 0
Net cash provided by financing
activities 800,700 432,000
Net increase (decrease) in cash 161,749 (56,700)
Cash and cash equivalents at the
beginning of the period 44,448 217,057
Cash and cash equivalents at the
end of the period. $ 206,197 $ 160,357
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 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 September 30,
1998, the Company had an accumulated deficit of $14,692,056.
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 foreseeable future.
Accordingly, there can be no assurance that the Company will ever
achieve profitable operations. The Company will have to obtain
additional financing to support its operating needs beyond December
31,1998. 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 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 September 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 believes 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, although 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.
Note 5 - Notes Payable
Between May 1997 and August 1998, the Company borrowed an aggregate
of $380,000 of which 280,000 are from shareholders of the Company,
payable with interest at 9.5% per annum due on March 1, 1999 and 100,000
from an unrelated party payable with interest at 9.5% per annum due on
December 31, 1998. The repayment of these notes is subordinate to the
claims of the note described in Note 6.
Note 6 - Bridge Notes Payable
In August 1998, the Company completed a debt-refinancing
transaction whereby the Company borrowed $550,000 from Mr. K. Charles
Janac pursuant to a Convertible Secured Promissory Note issued by the
Company (the "Note") in the principal amount of $550,000 and bearing
interest at the rate of 9.75% per annum. The Note is convertible into
shares of Class A Common Stock at the option of Mr. Janac at any time
before December 15, 1998 by converting the principal balance and any
unpaid interest due under the Note into Class A Common Stock at the rate
of $0.468 per share. In addition, as further consideration for the loan
of funds to the Company, the Company issued to Mr. Janac a warrant,
exercisable at any time on or before August 18, 2003, to purchase up to
234,667 shares of Class A Common Stock at $.468 per share (the
"Warrants"). The total number of shares of Class A Common Stock
issuable upon conversion of the Note or exercise of the Warrants are
subject to adjustment in the event of recapitalization, stock dividends,
or similar events. As security for the Note, the Company entered into a
Security Agreement granting Mr. Janac a first priority security interest
in the property, tangible and intangible, of the Company, as well as a
Patent and Trademark Mortgage granting Mr. Janac a security interest in
all the patents and trademarks of the Company.
All principal and accrued interest under the Note is due and
payable on or before December 15, 1998.
The business address of Mr. Janac is 651 River Oaks Parkway, San
Jose, CA 95134.
The Company used the funds loaned by Mr. Janac to retire
$532,242.47 of existing debt incurred by the Company in connection with
a certain bridge financing originally undertaken by the Company in
October of 1997, to pay legal fees and costs of the transaction, and
approximately $7,000 was utilized for working capital.
The fair value of the warrants (calculated using the Black Scholes
Pricing Model) is $91,520 and is being amortized over the remaining term
of the loan, 4 months. Amortization for the three and nine months ended
September 30, 1998 was $34,320. In addition, the Company secured payment
extensions on the remaining $30,000 in bridge loans through March 31,
1999.
Note 7 - Convertible Preferred Stock
On September 1, 1998, the Company sold 175,439 Shares of Series A
Preferred Stock.
All of the shares of Series A Preferred Stock were sold to Anchor
Products Limited of Hamilton, New Zealand ("Anchor"). The acquisition
of Series A Preferred Stock by Anchor was consummated in connection with
the execution of a Commercial License Agreement between the Company and
Anchor, whereby the Company licensed Anchor a technology that isolates
proteins from whey, a low value cheese by-product. The shares of Series
A Preferred Stock were sold for cash in the aggregate amount of $500,000
($2.85 per share). There were no underwriting discounts or commissions
paid in connection with the transaction.
The shares of Series A Preferred Stock were sold pursuant to
exemptions from registration under Section 4(2) and Regulation S under
the Securities Act of 1933, in a transaction that was not publicly
offered. Anchor is a New Zealand corporation.
The Company's Series A Preferred Stock provides for both a 7%
dividend and liquidation preferences. The dividend is payable from time
to time at the election of the Board of Directors of the Company subject
to the Company retaining sufficient earnings and profits. The Preferred
Stock is also convertible on or before September 30, 2000 into Class A
Common Stock, at the conversion rate of $2.86 per share. On any
voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the holders of Series A Preferred Shares shall receive, out of
the assets of the Company, the sum of $2.86 per Series A Preferred
Share, plus an amount equal to any dividends accrued and unpaid on those
Series A Preferred Shares, before any payment shall be made or any
assets distributed to the holders of Common Stock. The Series A
Preferred Shares shall be redeemable at the option of the holders of the
Series A Preferred Shares commencing September 30, 2003 and expiring
December 31, 2008, at the cash price of $2.86 per share, plus any
accrued and unpaid dividends on the Series A Preferred Shares which are
redeemed. In addition, each share of Series A Preferred Stock shall be
automatically converted into one (1) share of Class A Common Stock, if
not previously redeemed, on January 1, 2009, or at any time the closing
bid price per share of the Company's Class A Common Stock shall average
at least $3.86 per share over ninety (90) consecutive trading days prior
to January 1, 2004. The conversion ratio for the Series A Preferred
Stock shall be adjusted in the event of recapitalization, stock
dividend, or any similar event effecting the Class A Common Stock.
Anchor may require the Company to immediately redeem the preferred
shares in the event of certain covenant breaches of the license
agreement by the Company. The Company is currently in compliance with
all such covenants and does not anticipate any breaches in the future.
Item 2 . Management's Discussion and Analysis.
First nine months of 1998 compared to first nine months of 1997.
Net sales increased by $468,000 or 64% from $732,000 in the first
nine months of 1997 to $ 1,200,000 for the comparable period in 1998.
The increase in sales is due to the increase of sales of its core
products, Radial Flow Chromatography (RFC) equipment and a $200,000
license fee for the Sepralac process received from Anchor products of
New Zealand.
Gross Margin increased by $231,000 or 72% from $320,000 in the
first nine months of 1997 to $551,000 in the first nine months of 1998.
The increase in gross margin is primarily due to a higher production
volume and revenue generated from license fee that does not have cost of
goods associated with it. As a percentage of sales, gross margin
increased slightly from 44% in the first three quarters of 1997 to 46%
for the comparable period in 1998, primarily due to the license fee
income which more than offset the lower margins realized from sales of
core products.
Selling, general and administrative expenses decreased by $158,000
from $1,115,000 in the first nine months of 1997 to $957,530 in the
first nine months of 1998. The decrease was primarily due to continued
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 partially offset
by $49,000 write-off of expenses related to the Company's financing
activities.
Research and development expenses decreased by $93,000 from
$670,000 in the first nine months of 1997 to $577,000 in the first nine
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 $179,000 in the first nine
months of 1998 compared to the first nine months of 1997 due to
amortization of $70,000 of issuance cost, amortization of the fair value
of warrants issued of $34,000 and $75,000 interest expense related to
the bridge loans and notes payable.
Third quarter 1998 compared to third quarter 1997.
Net sales increased by $168,000 from $188,000 in the third quarter
of 1997 to $356,000 in the third quarter of 1998. The increase in sales
is due to $200,000 license fee received for the Sepralac(R) Process
partially offset by small decrease in sales of the core products, Radial
Flow Chromatography (RFC) equipment.
Gross margin increased by $141,000 or 186% from $76,000 in the
third quarter of 1997 to $217,000 in the third quarter of 1998, and as a
percent of sales, increased by 21% from 40% to 61%. The higher margin
was attributable to the Sepralac license fee received in the third of
quarter of 1998, which more than offset the lower margins realized on
sales of core products.
Selling, general and administrative expense increased by $40,000 or
13%. The increase is due to a write-off of $49,000 legal, printing,
commission related to a private placement financing.
Research and development expenses increased by $15,000 or 9% from
$158,000 in the third quarter of 1997 to $173,000 in the third quarter
of 1998. This increase was due to a one time severance pay related to
the reorganization of the department.
Inflation.
The Company believes that the impact of inflation on its operations
since its inception has not been material.
Liquidity and Capital Resources:
The Company use of cash for operations was $639,000 and $488,000
during the nine months ended September 30, 1998 and 1997, respectively.
Cash used in operations in the first nine months of 1998 was the result
of net loss incurred for the nine six months of $1,162,000, offset by
net non-cash expense of $177,000, the net change in operating assets
and liabilities resulting in source of cash of $346,000. Cash used in
the first nine months of 1997 was the result of net loss incurred for
the nine months of $1,391,000, offset by net non-cash expenses of
$102,000, and the net change in operating assets and liabilities
resulting in source of cash of $801,000.
Financing activities provided cash of $800,700 during the first
nine months of 1998. The cash provided resulted from the subscription
proceeds for preferred stock of $500,000 and issuance of notes payable
of $300,700.
At September 30, 1998 the Company had cash and cash equivalents of
$206,200 as compared with $44,400 on December 31, 1997. At September
30, 1998, the Company had working capital deficit of $1,375,700, as
compared to working capital deficit of $902,000 at December 31, 1997.
The decrease in cash in the first nine months 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
nine months 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 juice 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
December 31, 1998. Accordingly, the Company will have to either turn
profitable or obtain additional funds to support its operations. The
Company is currently pursuing several avenues including increasing
revenues and reducing costs in order to turn profitable, secure funds
through additional strategic partnerships and secure either debt or
equity financing.
Following this strategy, on August 25, 1998, the Company announced
the signing of a license agreement with Anchor Products. Under this
agreement, Anchor Products will have exclusive manufacturing rights to
the Sepralac(R) process in Australia and New Zealand and non-exclusive
worldwide marketing rights to products produced by the Sepralac(R)
Process. In return, the Company has received $700,000 out of a total of
about $1 million from Anchor Products, comprised of a license fee of
$200,000 and an equity investment of $500,000 for the purchase of
175,439 redeemable, cumulative, preferred stock at $2.85 per share. The
preferred stock is convertible into common stock (on share for share
basis) at any time within the next 2 years and extendible for a further
1 year at the Company's option.
On October 15, 1998, the Company announced a licensing agreement
for the Sepralac(R) Process with Carberry Milk Products of Ballineen,
County Cork, Ireland. Under the agreement, Carberry will have
manufacturing and marketing rights to certain products produced from the
Sepralac(R) Process. In return, the Company will receive a license fee
of $350,000 payable $200,000 before January 1, 1999 and the balance over
the term of the agreement. Further, Carberry agreed to an initial
purchase of equipment worth approximately $100,000.
The evaluation agreement to commercialize the Sepralac(R) Process
between Sepragen Corporation and California Gold Dairy Products of
Petaluma, California by mutual agreement was terminated on September 8,
1998.
A technical evaluation agreement for the Debitt(R) Process, a
debittering and deacidification process using Sepragen Corporation's
RFC(R) Column, has been signed with Tropicana products.
The Company currently has no credit facility with a bank or other
financial institution. Further, the Company's stock is traded over-the-
counter and as such there is limited liquidity in the Company's stock
which makes financing difficult.
The Company is seeking to enter into strategic alliances with
corporate partners in the industries comprising its primary target
markets (biopharmaceutical, food, dairy and juice). The Company's
ability to further develop and market its Sepralaca Process for whey
separation and other potential food and juice 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 additional
alliances will be successfully negotiated or that such alliance will be
successful in generating the revenue required to make the Company
profitable.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995.
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Where any such forward-looking statement includes a
statement of the assumptions or bases underlying such forward-looking
statement, the Company cautions that, while such assumptions or bases
are believed to be reasonable and are made in good faith, assumed facts
or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-
looking statement, the Company or its management expresses an
expectation or belief as to future results, such expectation or belief
is expressed in good faith and is believed to have a reasonable basis,
but there can be no assurance that the statement of expectation or
belief will result or be achieved or accomplished. The words "believe,"
"estimate," "anticipate," and similar expressions may identify forward-
looking statements.
Taking into account the foregoing, the following are identified as
some but not all of the important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of the Company:
Inability to Secure Additional Capital. The Company has incurred
operating losses each fiscal year since its inception. The Company must
secure additional financing through either the sale of additional
securities or debt financing to continue operations past January 1,
1999. 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, two licensing agreements have been signed but there can be no
assurance that the terms of any such alliance will produce profits for
the Company nor can there be assurance that additional joint ventures or
alliances will be signed.
Management Reorganization: Since September 5, 1998, Dr. Q.R.
Miranda, Vice President of Research and Development has not been
employed by Sepragen Corporation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
See footnotes 6 and 7 of the financial statements.
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. Exhibits and Reports on Form 8-K
(a) Exhibits
4.8 Warrant Agreement with Charles Janac
10.9 Convertible Secured Promissory Note issued by the
Company to Charles Janac
10.10 Security Agreement with Charles Janac
10.11 Patent and Trademark Mortgage
(b) Reports on Form 8-K
Form 8-K, dated August 14, 1998, Items 5, 7 and 9.
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: November 19, 1998 By: /s/Vinit Saxena
Vinit Saxena
Chief Executive Officer, President and
Principal Financial and Chief
Accounting Officer
INDEX TO EXHIBITS
Sequential Page No.
4.8 Warrant Agreement with Charles Janac 14
10.9 Convertible Secured Promissory Note issued
by the Company to Charles Janac 24
10.10 Security Agreement with Charles Janac 29
10.11 Patent and Trademark Mortgage 45