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, 2001
[ ] 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
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(Exact name of small business issuer as specified in its charter)
California 68-0073366
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14500 Doolittle Drive, San Leandro, California 94577
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(Address of principal executive offices)
(Issuer's telephone number (including area code): (510) 667-1004
(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 14, 2001
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Class A Common Stock 10,985,731
Class B Common Stock 701,177
THIS REPORT INCLUDES A TOTAL OF 9 PAGES
PART I - FINANCIAL INFORMATION
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Item 1. - Financial Statements
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SEPRAGEN CORPORATION
CONDENSED BALANCE SHEET
(UNAUDITED)
September 30
2001
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ASSETS
Current Assets:
Cash and cash equivalents .................................................. $ 296,532
Accounts receivable, less allowance for doubtful accounts
of $40,000 ............................................................... 162,230
Notes Receivable ........................................................... 50,000
Inventories ................................................................ 368,936
Prepaid expenses and other ................................................. 47,286
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Total current assets ..................................................... 924,984
Furniture and equipment, net ............................................... 92,951
Intangible assets .......................................................... 24,919
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$ 1,042,854
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ........................................................... $ 456,734
Notes Payable, including $165,000 from shareholders ........................ 180,000
Accrued payroll and benefits ............................................... 324,452
Accrued liabilities ........................................................ 46,814
Interest payable ........................................................... 39,318
Customer deposit ........................................................... 197,206
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Total current liabilities ................................................ 1,244,524
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Redeemable Preferred stock, no par value - 5,000,000 shares
authorized; and 175,439 convertible, preferred issued and ............... 500,000
outstanding
Class A common stock, no par value - 20,000,000 shares ..................... 13,524,281
authorized; 10,985,731 shares issued and
outstanding ..............................................................
Class B common stock, no par value - 2,600,000 shares authorized;
701,177 shares issued and outstanding .................................... 4,065,618
Accumulated deficit ........................................................ (18,291,569)
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Shareholders' equity (deficit) ............................................ (201,670)
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$ 1,042,854
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The accompanying notes are an integral part of this
condensed financial statement.
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SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
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Revenues:
Net Sales ...................................................... $ 25,483 $ 313,732 $ 536,301 $ 1,034,209
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Costs and expenses:
Cost of goods sold ............................................. 14,031 161,748 316,666 598,520
Selling, general and administrative ............................ 308,376 346,900 914,374 1,102,828
Research and development ....................................... 126,823 166,747 386,446 499,714
Stock compensation expense ..................................... 0 0 0 0
Total costs and expenses ................................... 449,230 675,395 1,617,486 2,201,062
----------- ----------- ----------- -----------
Loss from operations ......................................... (423,747) (361,663) (1,081,185) (1,166,853)
----------- ----------- ----------- -----------
Other income ............................................... --
Interest income, (expense) net ............................... 0 0 0 (13,375)
----------- ----------- ----------- -----------
Net loss ..................................................... (423,747) (361,663) (1,081,185) (1,180,228)
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Net loss per common share,
Basic and diluted ............................................ $ (.04) $ (.04) $ (.12) $ (.16)
=========== =========== =========== ===========
Weighted average shares outstanding ............................ 9,560,241 8,523,575 8,762,741 7,587,386
The accompanying notes are an integral part of this
condensed financial statement.
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SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2001 2000
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Cash flows from operating activities:
Net Loss ................................................................................... $(1,081,185) $(1,180,228)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation .............................................................................. 34,032 110,476
Amortization .............................................................................. 20,311
Non cash - stock compensation expense ..................................................... 0 160,524
Changes in assets and liabilities:
Accounts receivable ...................................................................... 290,388 (50,560)
Inventories .............................................................................. (103,557) (53,552)
Prepaid expenses and other ............................................................... 1,200 (4,378)
Accounts payable ......................................................................... 19,178 (278,666)
Accrued liabilities ...................................................................... (45,056) (85,545)
Accrued payroll and benefits ............................................................. 199,965 7,966
Interest payable ......................................................................... 0 (17,754)
Customer deposits ........................................................................ 171,400 --
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Net cash used in operating activities .................................................. (493,324) (1,391,717)
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Cash flows from investing activities:
Acquisition of fixed assets ............................................................... (94,009) (17,742)
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Net cash used by investing ............................................................. (94,009) (17,742)
Proceeds from issuance of common stock ..................................................... 691,699 1,369,480
Proceeds from exercise of warrants ......................................................... 0 15,000
Proceeds from issuance of notes payable .................................................... 135,000 0
Payment of notes payable to shareholders ................................................... 0 (210,000)
Payment of notes payable ................................................................... (25,000) (40,000)
Net cash provided by financing activities ................................................. 801,699 1,134,480
Net increase (decrease) in cash ........................................................ 214,366 (274,979)
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Cash and cash equivalents at the beginning of the
period ........................................................................................ 82,166 358,233
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Cash and cash equivalents at the end of the period ............................................ $ 296,532 $ 83,254
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Supplemental disclosures of cash information:
Conversation of Note receivable into Common Stock ......................................... $ 50,000
Conversion of liabilities into Common Stock: .............................................. $ 175,565
The accompanying notes are an integral part of these
condensed financial statements.
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SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
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 going concern. As of September 30, 2001, the Company had an
accumulated deficit of $18,291,569
The Company will be required to conduct significant research,
development and testing activities which, together with expense to be incurred
for manufacturing, the establishment of 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, 2001. 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 marketing effort 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 in the United States of America have been condensed or
omitted. In the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. 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, 2000.
Note 3 - Notes Payable
Between January and September 2001, the Company borrowed an aggregate
of $135.000 of notes payable of which $110,000 was from shareholders of the
Company and $15,000 was from an unrelated party. In September 2001 the Company
paid $25,000 of notes payable to a shareholder.
Note 4 - Class A Common Stock:
In September 2001, the Company sold 2,990,000 shares of Class A Common
at $0.25 per share to seventeen investors and raised $747,500 in gross proceeds
and $691,699 in net proceeds. The Company also received a $50,000 note
receivable to purchase 200,000 shares of its Class A Common stock at $0.25 per
share.
Note 5- Segment Reporting
The company has two operating segments based on the nature of the
customer's industry, the biotech and food (dairy) and beverage segments. The
chief operating decision-maker is the Company's Chief Executive Officer who
regularly reviews segment performance. There was no revenue in the nine months
ended September 30, 2001 from the food and beverage segment. Selling, general
and administrative expenses are not allocated to individual segments. There are
no significant assets that are identifiable to a segment.
Note 6 - Loss per Share
Basic loss per share is calculated using the weighted average number of
common shares outstanding in the period. Diluted loss per share includes
potentially dilutive securities such as outstanding options and warrants, using
the "treasury stock" method and convertible securities using the "if converted"
method. The assumed exercise of 3,367,999 options and warrants and assumed
conversion of 175,439 convertible securities have not been included in the
calculation of diluted loss at September 30, 2001 per share as the effect would
be anti-dilutive.
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Item 2. Management's Discussion and Analysis.
First nine months of 2001 compared to first nine months of 2000.
The management of the Company has determined that there exists a
significant potential for revenue growth in the biotech sector via sales of its
existing products like columns and QuantaSeps and by addition of new products
though further development of existing patents. Similarly, there are
opportunities for developing a business in selling high value ingredients from
whey, soy, etc. for nutritional purposes. While both present potential for value
generation, the businesses are different and in management's opinion, each needs
to be financed and managed with focus. Significant capital will need to be
invested in each business for the potential to be realized. Management has
engaged the services of an investment banker for this purpose. Management has
also undertaken the task of raising additional interim funds to cover current
operating needs until such capital can be raised and the contemplated ramp up
started. To this end approximately $700,000 has been raised recently which will
enable the Company to ship products against its backlog of approximately
$700.000.
The results stated below reflect the cash-strapped operating state of
our Company over the last 9 months.
Our net sales decreased by $498,000 or 48% from $1,034,000 in the first
nine months of 2000 to $536,000 for the comparable period in 2001. The decline
in shipment was primarily due to cash shortage that hampered our ability to ship
orders on hand. With the raising of the interim funds we anticipate that we will
be able to meet our shipment obligations in the fourth quarter.
Gross profit decreased by $216,000 or 50% from $436,000 in the first
nine months of 2000 to $220,000 for the comparable period in 2001. The decrease
in gross profit was due to lower sales. As a percentage of sales gross profit
decreased by 1% from 42% in the first half of 2000 to 41% for the same period in
2001. The decrease of 1% was mainly due to lower volume resulting in higher
fixed cost.
Despite increases in rent, and over head, selling, general and
administrative expenses decreased by $189,000 from $1,103,000 in the first nine
months of 2000 to $914,000 for the comparable period in 2000. The decrease is
primarily attributable to selling and marketing expenses such as commission,
travel and advertising.
Research and development expenses decreased by $113,000 from $500,000
in the first nine months of 2000 to $386,000 in the first nine months of 2001 as
a result of belt tightening.
Net loss decreased by 8%from $1,180,000 in the first nine months of
2000 to $1,081,000 for the comparable period in 2001. The decrease in loss is
due to lower department expenses partially offset by lower gross profit.
Three months ended September 2001 compared to three months of ended September
30, 2000
While backlog rose to approximately $700,000, our net sales decreased
by $289,000 or 92% from $314,000 in the third quarter of 2000 to $25,000 for the
third quarter of 2001. The decrease was due to delay in shipments that we
anticipate will be cleared as a result of the interim funds raised.
Our gross profit decreased by $141,000 from $152,000 in third quarter
of 2000 to $11,000 for the third quarter of 2001. The decrease in gross profit
was mainly due to lower volume.
Our selling, general and administrative expense decreased by $39,000
from $347,000 in the third quarter of 2000 to $308,000 in the third quarter of
2001. The decrease is primarily due to lower expense in marketing, commission
and travel.
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Our research and development expenses decreased by $40,000 from
$167,000 in the third quarter of 2000 to $127,000 in the third quarter as a
result of belt tightening.
Our net loss for the third quarter increased by $63,000 or 17% from
$362,000 in the third quarter of 2000 to $424,000 in the third quarter of 2001.
The increase in loss was due to lower sales partially offset by lower expenses.
Looking forward, on the premise of revitalizing the Company through
recapitalization, management believes that the Company can attract additional
talent to reinvigorate customer interest and upon consummation of the financing
will be positioned to grow.
Inflation.
We believe that the impact of inflation on its operations since its
inception has not been material.
Liquidity and Capital Resources:
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We used cash of $493,000 and $1,392,000 for operations during the first
nine months of 2001 and 2000, respectively. Cash used in operations in the first
nine months of 2001 was the result of net loss incurred for the nine months of
$1,081,000 offset by net non-cash expense of $54,000, and the net change in
operating assets and liabilities resulting in source of cash of $534,000. Cash
used in operation in the first nine months of 2000 was the result of net loss
incurred for the nine months of 2000 of $1,180,000, offset by net non-cash
expenses of $271,000, and the net change in operating assets and liabilities
resulting in use of cash of $483,000.
Investing activities used cash of $94,000 in the first nine months of
2001 and $18,000 for the comparable period in 2000.
Financing activities provided cash of $802,000 and $1,134,000 during
the first nine months of 2001 and 2000, respectively. The cash provided in the
first nine months of 2001 resulted from issuance of convertible notes payable of
$135,000 partially offset by $25,000 retirement of notes payable and net
proceeds of $692,000 from issuance of common stock. The cash provided in the
first nine months of 2000 was due to proceeds from issuance of common stock of
$1,384,000 partially offset by $250,000 retirement of notes payable.
At September 30, 2001 we had cash and cash equivalents of $297,000 as
compared with $82,000 on December 31, 2000. At September 30, 2001, we had a
working capital deficit of $320,000, as compared to working capital of $60,000
at December 31, 2000. The decrease in cash in the first nine months of 2001 was
a result of the aforementioned increases and decreases in cash from operating,
investing and financing activities noted above.
Clearly our working capital must increase significantly to fund the
level of manufacturing and marketing required to meet any growth in demand for
our products in the nutritional and biotech industries during the next several
years. Moreover, we require additional funds to market and develop products as
stated earlier.
Since we do not have credit facilities, most of the required growth
capital would have to come from customers/partners and equity financing. No
assurance can be given, however, that the terms of any contemplated financing or
alliances will be successfully negotiated or that such financing will be
successful in generating the revenue required to make us profitable.
7
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
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Securities Litigation Reform Act of 1995.
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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, we caution 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, we express 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.
OTHER INFORMATION
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Item 1. Legal Proceedings Not Applicable
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Item 2. Defaults Upon Senior Securities Not Applicable
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Item 3. Submission of Matters to a vote of Security Holders Not Applicable
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Item 4. Other Information Not Applicable
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8
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 14, 2001
By: /s/ VINIT SAXENA
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Vinit Saxena
Chief Executive Officer
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