UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-14068
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.)
14500 Doolittle Drive, San Leandro, California 94577
----------------------------------------------------
(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:
August 14, 2002
---------------
Class A Common Stock 11,311,848
Class B Common Stock 361,727
Page 1 of 11
PART I - FINANCIAL INFORMATION
- ------ ---------------------
Item 1. - Financial Statements
- ------- --------------------
SEPRAGEN CORPORATION
CONDENSED BALANCE SHEET
(UNAUDITED)
June 30, 2002
-------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................................ $ 90,702
Accounts receivable, less allowance for doubtful accounts
of $45,000 ......................................................................... 76,975
Notes receivable ..................................................................... 50,000
Inventories .......................................................................... 198,553
Prepaid expenses and other ........................................................... 18,000
------------
Total current assets ............................................................... 434,230
Furniture and equipment, net ......................................................... 70,634
Intangible assets .................................................................... 7,453
------------
512,317
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ..................................................................... $ 449,447
Notes Payable from shareholders ...................................................... 233,000
Accrued payroll and benefits ......................................................... 567,569
Accrued liabilities .................................................................. 148,086
Interest payable ..................................................................... 46,852
Customer deposit ..................................................................... 148,742
------------
Total current liabilities .......................................................... 1,593,696
------------
Redeemable 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; 11,311,848 shares issued and
outstanding ....................................................................... 15,492,506
Class B common stock, no par value - 2,600,000 shares authorized;
361,727 shares issued and outstanding ............................................. 2,097,393
Accumulated deficit .................................................................. (19,171,278)
------------
Shareholders' equity (deficit) ...................................................... (1,581,379)
------------
$ 512,317
============
The accompanying notes are an integral part of
this condensed financial statement.
Page 2 of 11
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Net Sales .............................................. $ 384,845 $ 156,867 $ 641,757 $ 510,818
------------ ------------ ------------ ------------
Cost of goods sold ..................................... 220,036 107,996 383,686 302,635
Gross profit ........................................... 164,809 48,871 258,071 208,183
Selling, general and administrative .................... 263,696 290,943 596,743 605,998
Research and development ............................... 131,915 136,812 254,407 259,623
Total expenses ...................................... 395,611 427,755 851,150 865,621
------------ ------------ ------------ ------------
Loss from operations ................................ (230,802) (378,884) (593,079) (657,438)
------------ ------------ ------------ ------------
Other income ............................................ --
Interest income, (expense) net .......................... (4,078) 0 (7,841) 0
------------ ------------ ------------ ------------
Net loss ...................................... (234,880) (378,884) (600,920) (657,438)
============ ============ ============ ============
Net loss per common share,
Basic and diluted .......................... $ (.02) $ (.04) $ (.05) $ (.08)
============ ============ ============ ============
Weighted average shares outstanding..................... 11,673,575 8,436,908 11,673,575 8,436,908
============ ============ ============ ============
The accompanying notes are an integral part of
this condensed financial statement.
Page 3 of 11
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net Loss .................................................................... (600,920) $(657,438)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation .............................................................. 13,461 27,071
Amortization .............................................................. 8,505 13,278
Non cash - stock compensation expense
Changes in assets and liabilities:
Accounts receivable ..................................................... 339,571 264,199
Notes receivable ........................................................ 0 0
Inventories ............................................................. 35,705 32,961
Prepaid expenses and other .............................................. 0 1,200
Accounts payable ........................................................ (63,340) 50,771
Accrued liabilities ..................................................... 79,709 (45,581)
Accrued payroll and benefits ............................................ 127,829 175,793
Interest payable ........................................................ 7,840 (1)
Customer deposits ....................................................... 47,420 1,234
--------- ---------
Net cash used in operating activities ................................ (4,220) (136,513)
--------- ---------
Cash flows from investing activities:
Acquisition of fixed assets .............................................. 0 (91,966)
--------- ---------
Net cash used by investing .......................................... 0 (91,966)
Proceeds from issuance of common stock ..................................... 0 0
Proceeds from exercise of warrants ......................................... 0 0
Proceeds from issuance of notes payable .................................... 18,000 205,000
Payment of notes payable to shareholders
Payment of notes payable
Net cash provided by financing activities ................................. 18,000 205,000
Net increase (decrease) in cash ..................................... 13,780 (23,479)
--------- ---------
Cash and cash equivalents at the beginning of the period.......................... 76,922 82,166
--------- ---------
Cash and cash equivalents at the end of the period ............................... 90,702 $ 58,687
========= =========
Supplemental disclosures of cash information:
Conversion of liabilities into Common Stock: $175,565
The accompanying notes are an integral part of
these condensed financial statements.
Page 4 of 11
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2002
Note 1 - Basis of Presentation
These condensed financial statements have been presented on a going
concern basis. Sepragen, ("the Company") has incurred recurring losses and cash
flow deficiencies from operations that raise substantial doubt about its ability
to continue as a going concern. As of June 30, 2002, the Company had an
accumulated deficit of $19,171,278
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
September 30, 2002. 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
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 six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001.
Note 3 - Notes Payable
On April 2002, the Company received proceeds from convertible notes
payable of $18,000 from a shareholder.
Note 4 - 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 six months
ended June 30, 2002 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 5 - 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 options and warrants and assumed conversion of
convertible securities have not been included in the calculation of diluted loss
at June 30, 2002 per share as the effect would be anti-dilutive.
Page 5 of 11
Note 6 - Intangible Assets:
A. Intangible assets consist of the following:
June 30, 2002
---------------------------------------------------------
Weighted
Gross Net Average
Intangible Accumulated Intangible Life
Assets Amortization Assets (Years)
------ ------------ ------ -------
Goodwill $ 0 $ 0 $ 0 -
Other Intangibles 194,018 185.565 7,453 7
-------- -------- --------
Total $194,018 $185,565 $ 7,453
======== ======== ========
December 31, 2001
---------------------------------------------------------
Weighted
Gross Net Average
Intangible Accumulated Intangible Life
Assets Amortization Assets (Years)
------ ------------ ------ -------
Goodwill 0 0 0
Other Intangibles 194,018 178,059 15,959 7
-------- -------- -------
Total $194,018 $178,059 $15,959
======== ======== =======
The Company adopted SFAS 142 on January 1, 2002. The Company does not have
goodwill, therefore is not affected by the new rules. Under the new rules
companies are no longer permitted to amortize intangible assets with indefinite
lives; instead they will be subject to periodic tests for impairment.
SFAS 12 supercedes APB Opinion #17, Intangible Assets. In accordance with SFAS
142 the Company also performed an impairment test of its intangible assets and
determined that no write-down was necessary. Below is a reconciliation of
previously reported net income and earnings per share to the amounts adjusted
for the exclusion of amortization expense for goodwill and the Company's trade
name, net of income tax.
Six Months Ended
June 30,
----------------------
2002 2001
--------- ---------
Reported net income (loss) $(600,920) $(657,438)
Goodwill and Company trade name
amortization, net of tax 0 0
--------- ---------
Adjusted net income (loss) $(600,920) $(657,438)
========= =========
Reported diluted earnings (loss)
per share $ (0.05) $ (0.08)
Goodwill and Company trade name
amortization, net of tax 0.0 0.0
--------- ---------
Adjusted diluted earnings (loss)
per share $ (0.05) $ (0.08)
========= =========
Estimated amortization expense for each of the next two years ended
December 31, is as follows:
2002 (12 months) $15,959
2003 0
Total $15,959
Page 6 of 11
Item 2. Management's Discussion and Analysis.
Critical Accounting Policies
Application of our accounting policies requires management to make
judgments and estimates about the amounts reflected in the financial statements.
Management uses historical experience and all available information to make
these estimates and judgments, although differing amounts could be reported if
there are changes in the assumptions and estimates. Estimates are used for, but
not limited to, the accounting for the allowance for doubtful accounts,
inventory allowances, restructuring costs, impairment costs, depreciation and
amortization, sales discounts and returns, warranty costs, taxes and
contingencies. Management has identified the following accounting policies as
critical to an understanding of our financial statements and/or as areas most
dependent on management's judgment and estimates.
Revenue Recognition--We generally recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed or
readily determinable, and collectibility is probable. Sales are recorded net of
sales returns and discounts. We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Impairment of Long-Lived Assets--We continually review the
recoverability of the carrying value of long-lived assets using the methodology
prescribed in Statement of Financial Accounting Standards (SFAS) 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets." We also
review long-lived assets and the related intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. Upon such an occurrence, recoverability of
these assets is determined by comparing the forecasted undiscounted net cash
flows to which the assets relate, to the carrying amount. If the asset is
determined to be unable to recover its carrying value, then intangible assets,
if any, are written down first, followed by the other long-lived assets to fair
value. Fair value is determined based on discounted cash flows, appraised values
or management's estimates, depending on the nature of the assets.
Deferred Tax Asset Valuation Allowance--We record a deferred tax asset
in jurisdictions where we generate a loss for income tax purposes. Due to
volatility in the industry within which we operate, we may record a valuation
allowance against these deferred tax assets in accordance with SFAS 109,
"Accounting for Income Taxes," when, in management's judgment, the deferred tax
assets may not be realized in the foreseeable future.
Inventories--Our inventories are stated at the lower of cost (first-in,
first-out method, or standard costing method) or market. Slow moving and
obsolete inventory are written off quarterly. To calculate the write-off amount,
we compare the current on-hand quantities with both the projected usages for a
two-year period and the actual usage over the past 12 months. On-hand quantities
greater than projected usage are calculated at the standard unit cost. The
engineering and purchasing departments review the initial list of slow-moving
and obsolete items to identify items that have alternative uses in new or
existing products. These items are then excluded from the analysis. The
remaining amount of slow-moving and obsolete inventory is then written off.
Additionally, non-cancelable open purchase orders for parts we are obligated to
purchase where demand has been reduced may be reserved. Reserves for open
purchase orders where the market price is lower than the purchase order price
are also established.
Accounts Receivable and Allowance for Doubtful Accounts--The Allowance
for Doubtful Accounts is established by analyzing each account that has a
balance over 90 days past due. Each account is individually assigned a
probability of collection. The total amount determined to be uncollectible in
the 90-days-past-due category is then reserved fully. The percentage of this
reserve to the 90-days-past-due total is then established as a guideline and
applied to the rest of the non-current accounts receivable balance. When other
circumstances suggest that a receivable may not be collectible, it is
immediately reserved for, even if the receivable is not yet in the
90-days-past-due category.
Recent Pronouncements and Accounting Changes--In July 2001, the
Financial Accounting Standards Board (FASB) issued SFAS 141, "Business
Combinations," and SFAS 142, "Goodwill and Other Intangible Assets." They also
issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" in October 2001.
SFAS 141 requires all business combinations initiated after June 30,
2001 to be accounted for under the purchase method. SFAS 141 supersedes APB
Opinion No. 16, "Business Combinations," and SFAS 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises," and is effective for all
business combinations initiated after June 30, 2001. We have not completed any
business combinations that were initiated subsequent to June 30, 2001. Business
combinations initiated after June 30, 2001, if any, will be accounted for under
the purchase method in accordance with SFAS 141.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, we are no longer
required to amortize goodwill and other intangible assets with indefinite lives;
rather, these intangible assets are subject to periodic testing for impairment.
SFAS 142 supersedes APB Opinion No. 17, "Intangible Assets". We adopted SFAS 142
effective January 1, 2002 and have ceased amortization of goodwill and other
intangible assets deemed to have an indefinite life. In accordance with SFAS
142, we also performed an impairment test of goodwill as of January 1, 2002 and
determined that no goodwill write-down was necessary.
Page 7 of 11
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded SFAS 121, and APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and in general are to be applied prospectively. We adopted SFAS 144
effective January 1, 2002, which did not have a material impact on our
consolidated results of operations and financial position.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies EITF Issue No.
94-3. SFAS 146 is effective for exit and disposal activities that are initiated
after December 31, 2002 and requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred, in
contrast to the date of an entity's commitment to an exit plan, as required by
EITF Issue 94-3. The Company will adopt the provisions of SFAS 146 effective
January 1, 2003.
First six months of 2002 compared to first six months of 2001.
- --------------------------------------------------------------
The management of the Company believes there is a significant potential
for revenue growth in the biotech sector via direct sales of our existing
products and by adding new products through further development of existing
patents.
The results stated below reflect the resource constrained operating
state of the Company over the last year. Such resource constraints has impeded
our inability to capitalize on the market opportunities as reflected in the
Company's diminished capacity to provide adequate resources for sales and
service, to pay vendors and suppliers and respond quickly to customers.
Our net sales have increased by $131,000 or 26% from $511,000 in the
first six months of 2001 to $642,000 for the comparable period in 2002 as we
start to ship from the record booking in the first quarter of 2002.
Gross profit increased by $50,000 or 24% from $208,000 in the first
half of 2001 to $258,000 for the comparable period in 2002. The increase in
gross profit was due to higher sales. As a percentage of sales, gross profit
remained the same at 40%.
In keeping with constraint of expenses, selling, general and
administrative expenses decreased by $9,000 from $606,000 in the first six
months of 2001 to $597,000 for the comparable period in 2002.
Research and development expenses decreased by $6,000 from $260,000 in
the first six months of 2001 to $254,000 in the first six months of 2002.
Overall, net loss decreased by $56,000 or 9% from $657,000 in the first
six months of 2001 to $601,000 for the comparable period in 2002. The decrease
in loss is due to higher revenue and lower expenses.
Three months ended June 30, 2002 compared to three months of ended
- ------------------------------------------------------------------
June 30, 2001:
- --------------
Focus in the biotech market has resulted in net sales increase by
$228,000 or 145% from $157,000 in the second quarter of 2001 to $385,000 for the
second quarter of 2002.
Our gross profit increased by $116,000 from $49,000 in second quarter
of 2001 to $165,000 for the second quarter of 2002. As a percentage of sales,
gross profit increased by 12% from 31% in the second quarter of 2001 to 43% in
the second quarter of 2002. The increase in gross profit was mainly due to
higher volume resulting in lower unit fixed cost and product mix.
Belt tightening accounted for having selling, general and
administrative expenses decrease by $27,000 from $291,000 in the second quarter
of 2001 to $264,000 in the second quarter of 2002.
Page 8 of 11
Our research and development expenses decreased by $5,000 from $137,000
in the second quarter of 2001 to $132,000 in the second quarter 0f 2002.
Our net loss for the second quarter decreased by $144,000 or 38% from
$379,000 in the second quarter of 2001 to $235,000 in the second quarter of
2002. The decrease in loss was due to higher revenue and lower expenses.
Inflation.
- ----------
We believe that the impact of inflation on its operations since its
inception has not been material.
Liquidity and Capital Resources:
- --------------------------------
We used cash of $4,000 and $137,000 for operations during the first six
months of 2002 and 2001, respectively. Cash used in operations in the first six
months of 2002 was the result of net loss incurred for the six months of
$601,000 offset by net non-cash expense of $22,000, and the net change in
operating assets and liabilities resulting in source of cash of $575,000. Cash
used in operations in the first six months of 2001 was the result of net loss
incurred for the six months of $657,000 offset by net non-cash expense of
$40,000, and the net change in operating assets and liabilities resulting in
source of cash of $480,000.
Investing activities used cash of $92,000 in the first half of 2001.
Financing activities provided cash of $18,000 and $205,000 during the
first six months of 2002 and 2001, respectively. The cash provided in the first
six months of 2002 and 2001 resulted from issuance of convertible notes payable.
At June 30, 2002 we had cash and cash equivalents of $91,000 as
compared with $77,000 on December 31, 2001. At June 30, 2002, we had a working
capital deficit of $1,081,000, as compared to working capital deficit of
$580,000 at December 31, 2001. The increase in cash in the first six months of
2002 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 and 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.
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, 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 expresses 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.
Page 9 of 11
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings Not Applicable
- ------- -----------------
Item 2. Defaults Upon Senior Securities Not Applicable
- ------- -------------------------------
Item 3. Submission of Matters to a vote of Security Holders Not Applicable
- ------- ---------------------------------------------------
Item 4. Other Information Not Applicable
- ------- -----------------
Page 10 of 11
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sepragen Corporation(the "Company")
on Form 10-QSB for the period ending June 30, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we certify, pursuant
to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Vinit Saxena August 14, 2002
- -------------------------------------
Vinit Saxena
Chief Executive Officer
/s/ Henry N. Edmunds, Ph.D. August 14, 2002
- -------------------------------------
Henry N. Edmunds, Ph. D.
Chief Financial Officer
Page 11 of 11