FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED: September 30, 1998; 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 1-11352
-------
DynaGen, Inc.
-------------
(Exact name of registrant as specified in its charter)
Delaware 04-3029787
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
840 Memorial Drive
Cambridge, MA 02139
-------------------
(Address of principal executive offices, including zip code)
(617) 491-2527
--------------
(Registrant's telephone number, including area code)
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
--- ---
As of November 9, 1998, there were outstanding 27,500,449 shares of common
stock, $.01 par value per share.
DYNAGEN, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION (*)
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Loss 5
Condensed Consolidated Statements of Changes
in Stockholders' Equity 7
Condensed Consolidated Statements of
Cash Flows 8
Notes to Unaudited Condensed Consolidated
Financial Statements 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 24
PART II. OTHER INFORMATION
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 36
(*) The financial information at December 31, 1997 has been derived from
the audited financial statements at that date and should be read in
conjunction therewith. All other financial statements are unaudited.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DYNAGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
ASSETS
September 30, December 31,
1998 1997
------------- ------------
(As Restated)
Current assets:
Cash and cash equivalents $ 205,426 $ 697,045
Accounts receivable, net of
allowance for doubtful accounts
of $42,793 and $43,118 3,648,701 3,152,779
Rebates 628,172 713,976
Inventory (Note 3) 7,554,576 9,111,324
Notes receivable 360,000 110,000
Prepaid expenses and other
current assets 112,983 147,972
------------- ------------
Total current assets 12,509,858 13,933,096
------------- ------------
Property and equipment, net 1,760,612 1,772,878
------------- ------------
Other assets:
Customer lists, net of accumulated
amortization of $3,488,486 and
$1,361,200 (Note 2) 10,853,132 12,250,800
Goodwill, net of accumulated
amortization of $55,021 and
$22,751 (Note 2) 331,198 363,468
Patents and trademarks, net of
accumulated amortization of
$102,930 and $89,164 272,375 345,381
Deferred debt financing costs,
net of accumulated amortization 341,620 359,621
Deposits and other assets 81,317 322,870
------------- ------------
Total other assets 11,879,642 13,642,140
------------- ------------
$ 26,150,112 $ 29,348,114
============= ============
See accompanying notes to unaudited consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1998 1997
------------- ------------
(As Restated)
Current liabilities:
Bank overdraft $ 551,179 $ 142,616
Notes payable (Note 4) 8,815,947 8,348,333
Loan payable - bank 4,385,725 6,584,710
Accounts payable 4,079,900 6,390,421
Accrued payroll and
payroll taxes 244,388 95,312
Acquisition obligation (Note 2) 4,083,000 4,083,000
------------- ------------
Total current liabilities 22,160,139 25,644,392
Warrant put liability 812,680 750,594
Long term debt 578,500 328,500
------------- ------------
Total liabilities 23,551,319 26,723,486
------------- ------------
Stockholders' equity (Notes 1 and 2):
Preferred stock, $.01 par value,
10,000,000 shares authorized,
55,781 and 63,522 shares of
Series A through H outstanding
(liquidation value $5,582,132 and
$6,348,417 respectively) 558 635
Common stock, $.01 par value,
75,000,000 shares authorized,
26,388,260 and 4,315,137 shares
issued and outstanding
respectively 263,883 43,151
Additional paid-in capital 46,851,457 40,122,386
Accumulated deficit (44,517,105) (37,541,544)
------------- ------------
Total stockholders' equity 2,598,793 2,624,628
------------- ------------
$ 26,150,112 $ 29,348,114
============= ------------
See accompanying notes to unaudited consolidated financial statements.
4
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
-----------------------------------------
(Unaudited)
Nine Months Ended
---------------------------------------
September 30, September 30,
1998 1997
------------- -------------
Revenues:
Product sales $ 20,009,036 $ 7,355,636
Fees and Royalties 553 88,744
------------- -------------
Total revenues 20,009,589 7,444,380
------------- -------------
Costs and expenses:
Cost of sales 17,145,156 7,352,213
Research and development 430,774 2,369,821
Selling, general and
administrative 8,437,873 4,795,008
------------- -------------
Total costs and expenses 26,013,803 14,517,042
------------- -------------
Operating loss (6,004,214) (7,072,662)
------------- -------------
Other income (expense):
Investment income, net 297,894 112,170
Interest expense (902,256) (581,025)
Warrant put expense (62,086) (23,821)
Amortization of debt
financing costs (304,900) (47,366)
------------- -------------
Other income (expense), net (971,348) (540,042)
------------- -------------
Net loss (6,975,561) (7,612,704)
Less, returns to preferred stockholders:
Beneficial conversion feature 570,198 1,432,000
Dividends paid and accrued 126,006 94,000
------------- -------------
Net loss applicable to common stock $ (7,671,765) $ (9,138,704)
============= =============
Net loss per share - basic $ (0.45) $ (2.95)
============= =============
Weighted average shares outstanding 17,023,765 3,095,982
============= =============
See accompanying notes to unaudited consolidated financial statements.
5
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
-----------------------------------------
(Unaudited)
Three Months Ended
---------------------------------------
September 30, September 30,
1998 1997
------------- -------------
Revenues:
Product sales $ 6,617,614 $ 5,571,779
Fees and Royalties 188 38,086
------------- -------------
Total revenues 6,617,802 5,609,865
------------- -------------
Costs and expenses:
Cost of sales 6,076,656 4,644,546
Research and development 110,487 723,143
Selling, general and
administrative 3,206,820 2,546,360
------------- -------------
Total costs and expenses 9,393,963 7,914,049
------------- -------------
Operating loss (2,776,161) (2,304,184)
------------- -------------
Other income (expense):
Investment income, net 143,283 3,136
Interest expense (222,507) (464,538)
Warrant put expense (9,975) (23,821)
Amortization of debt
financing costs (235,609) (28,995)
------------- -------------
Other income, (expense), net (324,808) (514,218)
------------- -------------
Net loss (3,100,969) (2,818,402)
Less, returns to preferred stockholders:
Beneficial conversion feature 245,156 1,229,000
Dividends paid and accrued 28,357 73,000
------------- -------------
Net loss applicable to common stock $ (3,374,482) $ (4,120,402)
============= =============
Net loss per share - basic $ (0.14) $ (1.27)
============= =============
Weighted average shares outstanding 24,589,980 3,246,312
============= =============
See accompanying notes to unaudited consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and 1997 (Unaudited)
COMMON STOCK PREFERRED STOCK ADDITIONAL
COMPREHENSIVE --------------------- -------------------- PAID-IN
INCOME SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ---------- ------ ------- ------ ------------
Balance at
December 31, 1996 - 2,910,623 $ 29,106 - $ - $29,338,794
Shares issued in private
placements - 147,500 1,475 60,950 610 5,838,665
Stock issued for
Superior acquisition - 166,667 1,667 - - 4,998,333
Exercise of stock options - 150 2 - - 1,123
Issuance of common stock
purchase warrants - - - - - 450
Stock options issued for
services - - - - - 728,145
Stock issued for interest
obligation - 3,863 39 - - 49,099
Conversion of note payable - 98,959 990 - - 984,775
Conversion of Preferred
Stock and dividend - 23,249 233 (800) (8) (225)
Net loss $(7,612,704) - - - - -
Decrease in unrealized
gain on investment
securities (1,307) - - - - -
----------- ---------- -------- --------- ---------- -----------
Balance at
September 30, 1997 ($7,614,011) 3,351,011 $ 33,510 60,150 602 $41,939,161
=========== ========== ======== ========= ========== ===========
Balance at December 31, 1997
(As Restated) 4,315,137 $ 43,151 63,522 $ 635 $40,122,386
Stock issued for GDI
acquisition - - 12,000 120 1,199,880
Shares issued in private
placements - - 34,000 340 3,251,698
Stock issued for services 1,562,671 15,626 - - 655,585
Employee stock & stock options
granted for services 300,000 3,000 - - 128,400
Issuance of common stock
purchase warrants - - - - 182,500
Common stock issued
for interest 416,167 4,162 - - 139,528
Conversion of note payable
to preferred stock - - 4,500 45 449,955
Delayed registration
penalty - - - - (175,000)
Conversion of note payable
into common stock 1,798,526 17,986 - - 412,014
Conversion of family loans 1,560,000 15,600 - - 179,400
Conversion of preferred
stock 16,435,759 164,358 (58,241) (582) (163,777)
Adjustment due to change in
ownership of former subsidiary - - - - 468,888
Net loss 6,975,561 - - - - -
----------- ---------- -------- --------- ---------- -----------
Balance at
September 30, 1998 6,975,561 26,388,260 $263,883 55,781 $ 558 $46,851,457
=========== ========== ======== ========= ========== ===========
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and 1997 (Unaudited)(Continued)
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME TOTAL
------------- ---------- -----------
Balance at
December 31, 1996 $ (24,315,191) $ 1,307 $ 5,054,016
Shares issued in private
placements - - 5,840,750
Stock issued for
Superior acquisition - - 5,000,000
Exercise of stock options - - 1,125
Issuance of common stock
purchase warrants - - 450
Stock options issued for
services - - 728,145
Stock issued for interest
obligation - - 49,138
Conversion of note payable - - 985,765
Conversion of Preferred
Stock and dividend -
Net loss (7,612,704) - (7,612,704)
Decrease in unrealized
gain on investment
securities - (1,307) (1,307)
------------ ---------- -----------
Balance at
September 30, 1997 $ (31,927,895) $ - $10,045,378
============= =========== ==========
Balance at December 31, 1997
(As Restated) $ (37,541,544) $ - $ 2,624,628
Stock issued for GDI
acquisition - - 1,200,000
Shares issued in private
placements - - 3,252,038
Stock issued for services - - 671,212
Employee stock & stock options
granted for services - - 131,400
Issuance of common stock
purchase warrants - - 182,500
Common stock issued
for interest - - 143,690
Conversion of note payable
to preferred stock - - 450,000
Delayed registration
penalty - - (175,000)
Conversion of note payable
into common stock - - 430,000
Conversion of family loans - - 195,000
Conversion of preferred
stock - - -
Adjustment due to change in
ownership of former subsidiar 468,888
Net loss (6,975,561) - (6,975,561)
------------- ----------- ----------
Balance at
September 30, 1998 ($44,517,105)$ - $2,598,793
============ =========== ==========
See accompanying notes to unaudited consolidated financial statements.
7
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Nine Months Ended
---------------------------------------
September 30, September 30,
1998 1997
------------- -------------
Cash flows from operating activities:
Net loss $ (6,975,561) $ (7,612,704)
Adjustments to reconcile
net loss to net cash used for
operating activities:
Employee stock and stock
option grants 131,400 -
Depreciation and amortization 2,346,105 549,195
Stock options and warrants issued
for services 853,712 728,145
Amortization and accretion
of (discounts) premiums on
investment securities - (10,152)
Stock issued for
interest obligation 143,690 49,138
Write-off of patent costs 97,076 -
(Increase) decrease in operating assets:
Accounts receivable 259,332 (390,132)
Rebates 85,804 112,982
Inventory 2,608,532 (358,105)
Prepaid expenses and
other current assets 157,969 -
Deposits and other assets 226,944 (128,876)
Notes receivable (250,000) -
Increase (decrease) in operating liabilities:
Accounts payable and
accrued expenses (2,636,119) 2,315,208
------------- -------------
Net cash used for
operating activities (2,951,116) (4,745,301)
------------- -------------
Cash flows from investing activities:
Acquisition of Superior - (6,878,463)
Acquisition of GDI (756,406) -
Purchase of investment securities - (1,186,455)
Proceeds from sales and maturities
of investment securities - 4,200,000
Purchase of property and equipment 38,673 (783,268)
Increase in deposits - (200,000)
Increase in deferred financing and
acquisition costs (50,000) -
------------- -------------
Net cash provided (used) by
investing activities (767,733) (4,848,186)
------------- -------------
See accompanying notes to unaudited consolidated financial statements.
8
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
-----------------------------------------------------------
(Unaudited)
Nine Months Ended
---------------------------------------
September 30, September 30,
1998 1997
------------- -------------
Cash flows from financing activities:
Net proceeds on exercise of stock
warrants and options $ - $ 1,125
Net proceeds from issuance of
common stock and warrants - 854,250
Net proceeds from preferred stock 3,252,038 5,790,052
Proceeds from bank loan 1,214,280 -
Net proceeds from private
debt placements 1,200,000 2,696,898
Increase in deferred
financing costs - (419,002)
Net repayments of loan
payable-bank (2,430,984) (1,837,833)
Repayments of long-term debt (416,667) (416,667)
Increase in bank overdraft 408,563 844,509
------------ -------------
Net cash provided by
financing activities 3,227,230 7,513,332
------------ -------------
Net change in cash and cash equivalents (491,619) (2,080,155)
Cash and cash equivalents,
beginning of period 697,045 2,112,300
------------ -------------
Cash and cash equivalents,
end of period $ 205,426 $ 32,145
============ =============
Supplemental cash flow information:
Conversion of preferred stock
into common stock $ 164,358 $ 2,325
Common stock issued for
convertible note payable $ 430,000 $ 1,065,000
Conversion of related party loans $ 195,000 -
Conversion of note payable
to preferred stock $ 450,000 -
Debt issued for delayed
registration penalty $ 262,500
Interest paid $ 633,013 $ 549,527
Schedule of non-cash investing and financing activities:
On June 18, 1997 the Company purchased all of the common
stock of Superior Pharmaceutical Company, Inc. for
$16,250,000. In connection with the acquisition, non-cash
financing activities, liabilities assumed and goodwill
were as follows:
Fair value of assets acquired 10,913,834
Cash paid for common stock (6,250,000)
Common stock issued (5,000,000)
Note payable issued (5,000,000)
Liabilities assumed (8,263,477)
-------------
Goodwill and customer list (exclusive of
other acquisition cost of $694,890.00) $ 13,599,644
=============
March 2, 1998, the Company purchased the net
assets of GDLP for $2,350,000. In connection
with the acquisition, non-cash financing activities,
liabilities assumed and customer lists were as
follows: fair value of assets acquired $ 2,375,274
Cash paid (1,200,000)
Preferred stock issued (1,150,000)
Liabilities assumed (658,274)
-------------
Customer lists (exclusive of other
acquisition costs of $96,628) $ 633,000
=============
See accompanying notes to unaudited consolidated financial statements.
9
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
-------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
----------------------------------
The consolidated financial statements include the accounts of DynaGen,
Inc. (the Company) and its wholly-owned subsidiaries, Able Laboratories, Inc.
(Able), which is engaged in the manufacture of generic pharmaceuticals, Superior
Pharmaceutical Company (Superior) and Generic Distributors Incorporated (GDI),
which are engaged in the distribution of generic pharmaceuticals, and Apex
Pharmaceuticals, Inc., which is developing therapeutic products. The
consolidated financial statements no longer include the accounts of BioTrack for
the reason described below. The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statement
presentation. All significant intercompany balances and transactions have been
eliminated in consolidation. In March 1998, the Company acquired Generic
Distributors Limited Partnership which is engaged in the distribution of generic
pharmaceuticals. (See Note 2).
During the first and second quarter of 1998, the Company sold 300,000
shares of its BioTrack subsidiary's common stock, recognizing a gain of
$150,000, which is included in investment income. In addition, during this same
period, BioTrack sold shares of its common stock directly to outside investors.
Also, BioTrack redeemed 3,930,000 shares of its common stock held by the Company
for a $1,000,000 promissory note. This note has not been recognized in the
accompanying financial statements because of the uncertainty and risks inherent
in technology start-up companies. As a result of the ownership changes in
BioTrack described above, the Company adjusted its investment in BioTrack by
approximately $469,000 which was added to additional paid-in capital. The
Company's ownership interest in BioTrack at June 30, 1998 was approximately 29%.
Accordingly, BioTrack's financial statements are not included in the
accompanying consolidated financial statements. The Company's remaining
investment is carried on the equity basis of accounting.
The results of operations for the periods reported are not
necessarily indicative of those that may be expected for a full
10
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
year. In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair statement of operating
results for the interim periods presented have been made.
The financial information included in this report has been prepared in
conformity with the accounting policies reflected in the financial statements
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
FINANCIAL STATEMENT RESTATEMENT
-------------------------------
The accompanying financial statements have been restated from those
originally issued to reflect a change in accounting for the February 1996
issuance of a convertible note, as described in Note 6 to the December 31, 1997
financial statements. The convertible note could be converted at a discount to
the traded market price of the common stock into which the securities are
convertible. At the date of issuance, the company did not allocate any portion
of the proceeds received to the beneficial discount.
Subsequently, the Securities and Exchange Commission announced its
position that a beneficial conversion discount on convertible notes should be
computed based on the quoted market value of the Company's Common Stock and this
amount should be recognized as additional interest expense and an addition to
paid-in capital.
The Company estimated the amount of the beneficial conversion discount
at the date of issuance to be $985,000 and the financial statements have been
restated to comply with the accounting treatment described above. A summary of
the impact of the restatement on the Company's financial statements follows:
Period As Reported As Restated
- ------ ----------- -----------
December 31, 1997:
Additional paid-in capital $ 39,137,311 $ 40,122,386
Accumulated deficit $(36,556,469) $(37,541,544)
REVERSE STOCK SPLIT
-------------------
On March 4, 1998 the Company's Stockholders approved a 1 for 10 reverse
stock split of the common shares. All common stock information presented herein
has been retroactively adjusted to reflect the reverse stock split.
USE OF ESTIMATES
----------------
11
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the balance sheet date and reported amounts of revenues and
expenses during the reporting period. Material estimates that are particularly
susceptible to
12
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
significant change in the near term relate to the carrying values of rebates
receivable and intangible assets, the valuation of equity instruments issued by
the Company and the amount of obligations due as a result of defaults on certain
debt obligations. Actual results could differ from those estimates.
REBATES
-------
Rebates represent incentives provided by pharmaceutical suppliers to
the distributors based on purchases. Management has estimated its rebates based
upon agreements and purchases during the year. Actual rebates could be different
due to market volatility and whether the Company continues to use these
suppliers.
INVENTORY
---------
Inventory is valued at the lower of average cost or market on a
first-in first-out (FIFO) method.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost. Depreciation expense is
provided over the estimated useful lives of the assets using the straight-line
method. Leasehold improvements are amortized on the straight-line method over
the shorter of the estimated useful life of the asset or the life of the related
lease term.
CUSTOMER LISTS AND GOODWILL
---------------------------
Customer lists and goodwill are being amortized over estimated lives of
five and fifteen years, respectively. (See Note 2.)
REVENUE RECOGNITION
-------------------
Revenues from product sales are recognized when products are shipped.
Revenues from license fees and royalties are recognized as the terms of the
agreements are met.
EARNINGS PER SHARE
------------------
In February 1997, FASB issued SFAS No. 128, Earnings per Share, which
requires that earnings per share be calculated on a basic and a dilutive basis.
Basic earnings per share represents
13
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
income available to common stock divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would
result from the assumed conversion. The Statement is effective for interim and
annual periods ending after December 15, 1997, and requires the restatement of
all prior-period earnings per share data presented. Accordingly, the Company has
restated all earnings per share data presented herein.
For the three and nine months ended September 30, 1998 and 1997
options, warrants and put warrants, were anti-dilutive and excluded from the
diluted earnings per share computations.
The loss applicable to common stockholders has been increased by the
stated dividends on the convertible preferred stock and the amortization of
discounts on the convertible preferred stock due to the beneficial conversion
feature. Shares of common stock contingently issuable to the former stockholders
of Superior have not been included in diluted EPS because to do so would have
been anti-dilutive.
COMPREHENSIVE INCOME
--------------------
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain FASB statements, however, require entities to
report specific changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company adopted these disclosure requirements
in the first quarter of 1998 and has presented comparative disclosure for the
nine monthes ended September 30, 1997. There is no other comprehensive income
for the nine months ended September 30, 1998.
14
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
2. BUSINESS ACQUISITIONS
SUPERIOR PHARMACEUTICAL COMPANY
-------------------------------
On June 18, 1997, the Company acquired all of the outstanding stock of
Superior Pharmaceutical Company ("Superior"), a distributor of generic
pharmaceutical products. The Company paid the shareholders of Superior
$6,250,000 in cash, $5,000,000 in three year secured promissory notes and
166,667 shares of it's common stock with a guaranteed value of $5,000,000. The
secured promissory notes were subsequently reduced by $400,000 due to a
deficiency in the required net worth of Superior as of the acquisition date.
DynaGen is obligated to issue to the shareholders up to an additional 1,666,667
shares of its common stock after twelve months if its common stock is not
trading at an average of at least $30.00 per share for 10 consecutive trading
days. The merger agreement provides further that DynaGen shall pay to the former
Superior stockholders the difference between $5,000,000 and the current
aggregate market value of the shares issued to the former Superior stockholders.
DynaGen is obligated to register the shares within eleven months after the
closing of the acquisition. The Company recorded a $4,083,000 acquisition
obligation at December 31, 1997 based on the difference between the current
estimated fair value of the 1,833,334 shares of common stock issued and issuable
and the guaranteed value of $5,000,000. The former shareholders of Superior, who
remain as senior management at Superior, may also receive certain incentive
payments based on Superior's performance during the three years following the
closing of the acquisition. Any such payments will be charged to expense when
incurred. DynaGen contributed $1,750,000 in additional capital to Superior
immediately following the closing.
On July 31, 1998, the Company signed a Contingent Settlement Agreement
with the selling shareholders of Superior which provides for an overall
reduction in purchase price of $4,900,000 through waiver of any additional stock
or cash payment. The Agreement also provides for a payment of $4,200,000, which
represents the remaining amount due on the original selling shareholder notes by
September 30, 1998.
The Superior acquisition has been accounted for as a purchase. The
results of operations of Superior have been included in the Company's
consolidated financial statements since the date of acquisition. The purchase
price allocation was based on the
15
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
estimated fair values at the date of acquisition. The Company allocated
$13,612,000 of the purchase price to customer lists based on an independent
appraisal, which is being amortized on a straight-line basis over five years.
Amortization of customer lists amounted to $2,041,800 for the nine months ended
September 30, 1998. In addition, the Company recorded goodwill of $386,219,
which is being amortized on a straight-line basis over 15 years. Amortization
expense for the nine months ended September 30, 1998 was $19,362.
GENERIC DISTRIBUTORS, INC.
--------------------------
On March 2, 1998, the Company through its subsidiary, Generic
Distributions, Incorporated (GDI), completed the acquisition of substantially
all of the assets and liabilities of Generic Distributors Limited Partnership
(GDLP), of Monroe, LA. In connection with the acquisition, the Company paid the
limited partnership $1,200,000 in cash, and $1,050,000 in Series E Convertible
Preferred Shares and 1,500 shares of Series F Convertible Preferred Stock valued
at $100,000, for a total purchase price of $2,350,000. The Series E Preferred
Shares are convertible beginning 12 months from the closing into the Company's
common shares at the then prevailing market prices. The Series F Preferred Stock
is convertible into $100,000 in value of the Company's Common Stock commencing
120 days after the closing. In connection with the transaction, GDI received
$1,200,000 in a five-year term loan from Fleet Bank. The loan carries interest
of LIBOR plus 3%, is payable in quarterly installments of principal and interest
and matures on April 26, 2003. Fleet Bank also established a revolving line of
credit for general working capital in the amount of $300,000. The line bears
interest at LIBOR plus 2-1/2%. The loans are secured by all of the assets of GDI
and the Company's subsidiary, Able Laboratories, Inc., and a pledge of all of
the common stock of GDI, and are guaranteed by the Company. In addition, the
Company entered into employment and consulting agreements with the sellers which
provide, among other things, for annual compensation and a signing bonus of
1,500 shares of Series F Preferred Stock, convertible into $100,000 of the
Company's Common Stock commencing 120 days after the closing.
The GDI acquisition has been accounted for as a purchase. The results
of operations of GDI have been included in the Company's consolidated financial
statements since the date of acquisition. The purchase price allocation was
based on the estimated fair values at the date of acquisition. The Company
allocated $729,618
16
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
of the purchase price to customer lists, based on an independent appraisal,
which is being amortized on a straight line basis over five years. Amortization
of customer lists amounted to $85,486 for the nine months ended September 30,
1998.
Unaudited proforma consolidated operating results for the Company,
assuming the acquisitions of Superior and GDI had been made as of the beginning
of the most recent fiscal year for each of the periods presented, are as
follows:
Nine Months Ended
-----------------
September 30, 1998 September 30, 1997
------------------ ------------------
Revenues $21,903,312 $25,010,420
Net loss (7,562,796) (10,259,021)
Net loss per share (0.44) (3.32)
Three Months Ended
------------------
September 30, 1998 September 30, 1997
------------------ ------------------
Revenues $ 7,330,802 $ 7,905,244
Net loss (3,274,585) (4,505,311)
Net loss per share (0.13) (1.45)
The unaudited proforma information is not necessarily indicative either
of the actual results of operations that would have occurred had the purchases
been made as of the beginning of each of the fiscal periods presented or of
future results of operations of the combined companies.
3. INVENTORY
Inventory consists of the following:
September 30, December 31,
------------- ------------
1998 1997
---- ----
Raw materials $ 453,893 $ 311,166
Work-in-progress 224,870 136,240
Finished goods 6,875,813 8,663,918
---------- ----------
$7,554,576 $9,111,324
========== ==========
17
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
4. DEBT
Notes payable consist of the following:
September 30, December 31,
------------- ------------
1998 1997
---- ----
Convertible note payable $ 535,000 $ 535,000
Bridge loans 300,000 630,000
Notes payable - Superior
acquisition 3,766,667 4,183,333
Secured debt - Fleet Bank 1,214,280 -
Senior subordinated debt 3,000,000 3,000,000
---------- ----------
$8,815,947 $8,348,333
5. SUBSEQUENT EVENTS
In October 1998, the Company, through its Able Laboratories, Inc.
subsidiary (Able), refinanced its existing short-term financing agreement with
Porter Capital with a short-term financing agreement with K&L Financial, Inc.
(K&L) whereby Able will finance its outstanding accounts receivable through K&L.
K&L will advance funds equal to 80% of invoice value upon receipt of invoices
from Able. Upon payment in full from Able's customers, K&L will remit the
balance due Able less K&L's net charge of 1% per each 10 days outstanding. K&L
has the right to reject any or all accounts receivable tendered from Able. No
assurance can be given that K&L will accept any or all of Able's outstanding
accounts receivable. The term of this agreement is twelve months.
In October, 1998, the Company, through its Able Laboratories, Inc.
subsidiary (Able), refinanced its existing machinery & equipment financing
agreement with Porter Capital with a machinery & equipment financing agreement
with Triple L, Ltd. (Triple L). Net proceeds from this refinancing totalled
$303,500.
In November 1998, the Company's Executive Vice President, who is also a
director, invested $50,000 in the Company and purchased shares of BioTrack, Inc.
owned by the Company. Also, in connection with the subordinated loan of $150,000
by the spouse of the Chief Executive Officer and Chairman of the Company, the
Company transferred shares of BioTrack, Inc. to the investor.
18
On November 5, 1998, the Company accepted the resignation of Indu A.
Muni, Ph.D. as President, Chief Executive Officer, Treasurer and Director. On
November 6, 1998, Mr. C. Robert Cusick, who had been serving since May 1998 as
Chairman of the board of directors, was appointed Chief Executive Officer of the
Company.
19
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE ON FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. Except for historical
information contained herein, the matters discussed below contain potential
risks and uncertainties, including, without limitation, risks related to the
Company's ability to successfully develop, test, produce and market its proposed
products; obtain governmental approvals in a timely manner; identify and attract
marketing partners to help commercialize the Company's products; attract and
retain key employees; obtain meaningful patent protection or otherwise over the
Company's proprietary technology; protect itself from product liability risks or
limitations imposed due to potential health care reform; raise capital for
future operations and commercialization of its products; integrate the products
and personnel the Company acquired in the acquisition of Able Laboratories,
Inc., Superior and GDI, and successfully respond to technological changes in the
marketplace. Specifically, regulatory approvals of the Company's products are
subject to factors beyond the Company's control, and there can be no assurance
that such approvals will not be delayed or ultimately denied. The Company will
need to attract marketing partners in order to exploit its products, and there
can be no assurance that the Company will be successful in attracting such
partners.
SPECIAL CONSIDERATIONS
During the nine months ended September 30, 1998, DynaGen, Inc.
("DynaGen" or the "Company") experienced continued losses from operations and
substantial and continuing dilution to existing stockholders due to the below
market conversion features of convertible securities sold by the Company. The
following special considerations should be carefully noted by the reader:
20
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
FINANCIAL CONDITION OF THE COMPANY
- ----------------------------------
For the three months ended September 30, 1998, the Company incurred net
losses of approximately $3,100,969. As of September 30, 1998, the Company had
approximately $205,426 in cash and cash equivalents and a net worth of
$2,598,993. The Company's current liabilities, as of such date, aggregated
$22,160,139. The Company expects its operating cash needs for the next twelve
months to be approximately $6,000,000. The Company does not presently have
adequate cash from operations to meet these needs. In order to meet its needs
for cash to fund its operations, the Company must obtain additional financing
and renegotiate the terms of its current arrangements with creditors. The
Company is presently in default under a number of its arrangements, agreements
and instruments with creditors, with the result that the Company's obligations
under such agreements and instruments may be accelerated.
The Company's independent auditors have issued an opinion on the
financial statements of the Company, as of December 31, 1997 and for the year
then ended, which includes an explanatory paragraph expressing substantial doubt
about the Company's ability to continue as a going concern. If the Company is
unable to obtain significant additional financing or to renegotiate its
arrangements with existing creditors, it may be obliged to seek protection from
its creditors under the bankruptcy laws. See "Management's Discussion and
Analysis - Liquidity and Capital Resources;" the financial statements and notes
thereto included as part of this Report.
COMPANY'S COMMON STOCK DELISTED FROM NASDAQ STOCK MARKET
- --------------------------------------------------------
On October 7, 1998 the Company was informed by the NASDAQ Stock Market
that the Company's Common Stock does not meet the applicable listing requirement
and is therefore delisted as of the end of the day. The Company continues to
trade on the Boston Stock Exchange and the OTC Bulletin Board. The delisting
could have a material adverse effect on the liquidity of the Common Stock and on
the Company's ability to raise capital necessary for the Company's continued
operations.
ADVERSE CONSEQUENCES ASSOCIATED WITH THE OBLIGATION TO ISSUE A
- --------------------------------------------------------------
SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK UPON CONVERSION OF
- ---------------------------------------------------------------
CONVERTIBLE SECURITIES
- ----------------------
21
The Company is obligated to issue a substantial number of shares of
Common Stock upon the conversion or exercise of its
22
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued
September 30, 1998
-------------------------------------------------------------
outstanding warrants, rights, convertible preferred stock and a convertible
note. The price which the Company may receive for the Common Stock issuable upon
exercise of such options and warrants will, in all likelihood, be less than the
market price of the Common Stock at the time of such exercise. Consequently, for
the life of such options and warrants the holders thereof may have been given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Common Stock.
The exercise of all of the aforementioned securities may also adversely
affect the terms under which the Company could obtain additional equity capital.
In all likelihood, the Company would be able to obtain additional equity capital
on terms more favorable to the Company at the time the holders of such
securities choose to exercise them. In addition, should a significant number of
these securities be exercised, the resulting increase in the amount of the
Common Stock in the public market could have a substantial dilutive effect on
the Company's outstanding Common Stock.
The information set forth below should be read in connection with the
financial statements and notes thereto, as well as other information contained
in this Report which could have a material adverse effect on the Company's
financial condition and results of operations. The reader's attention is
directed, in particular, to the matters described under the headings "Special
Considerations" and "Liquidity and Capital Resources" contained elsewhere in
this Report.
23
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
OVERVIEW
The Company develops and markets generic and specialty products. The
Company has changed its focus from being a development and licensing company to
building a business focused on the manufacture and distribution of generic drug
products and specialty pharmaceuticals. The Company is implementing this
strategy through the acquisition of businesses, technologies and products as
well as through internal product development. In August 1996, the Company
acquired the tablet business of Able Laboratories, Inc. ("Able"), a generic
pharmaceutical product subsidiary of Alpharma, Inc. In addition, the Company has
purchased all of the outstanding shares of Superior Pharmaceutical Company
("Superior"), a distributor of generic pharmaceuticals. In March 1998, the
Company, through its wholly-owned subsidiary, Generic Distributors Incorporated
("GDI"), completed the acquisition of Generic Distributors Limited Partnership
("GDI").
The Company has financed its operations primarily through the proceeds
from its public and private stock offerings, a convertible note, bank debt and
other loans and limited revenues from product sales and technology license fees
and royalties. Management anticipates that revenues from product sales will not
be sufficient to fund its current operations or produce an operating profit
until such time as the Company is able to develop additional products, obtain
the necessary FDA approvals and establish acceptance of its products in their
respective markets and expand its distribution channels. The Company has
incurred losses since inception and expects to incur additional losses until
such time as it is able to successfully develop, manufacture, and sell or
license its existing and proposed products and technologies.
RESULTS OF OPERATIONS
Three Month Period Ended September 30, 1998 as Compared With the
- ----------------------------------------------------------------
Three Month Period Ended September 30, 1997
- -------------------------------------------
Revenues for the three month period ended September 30, 1998 were
$6,617,802 versus $5,609,865 for the period ended September 30, 1997. The
increase of $1,007,937 is primarily the result of product sales by the Company's
wholly-owned generic pharmaceutical subsidiaries, Superior (acquired in June
1997) and GDI (acquired in March 1998).
24
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
Cost of product sales was $6,076,656, or 92% of product sales for the
three-month period ended September 30, 1998 compared to $4,644,546, or 83% of
product sales for the three month period ended September 30, 1997 due to
increased sales of the newly acquired subsidiary, GDI.
Research and development expenses for the three month period ended
September 30, 1998 were $110,487 versus $723,143 for the three month period
ended September 30, 1997. 1997 R&D expenses were primarily the result of the
NicErase(R)-SL Phase 3 clinical trials, now concluded, and the NicErase(R)-SL
development program which has been discontinued. The Company is currently
developing several generic versions of branded pharmaceuticals to support its
generic drug business.
Selling, general and administrative expenses for the three month period
ended September 30, 1998 were $3,206,820 versus $2,546,360 for the three month
ended September 30, 1997. The increase is primarily due to GDI's selling,
general and administrative expenses.
Investment income was $143,283 for the three months ended September 30,
1998 as compared to $3,136 for the three month period ended September 30, 1997.
The increase is due to forgiveness of debt. Interest and financing expenses of
$468,091 for the three month period ended September 30, 1998, compared to
$517,354 for the three month period ended September 30, 1997, relate primarily
to private placements of equity as well as private debt financing for the
Superior and GDI acquisitions.
Nine Month Period Ended September 30, 1998 as Compared With the
- ---------------------------------------------------------------
Nine Month Period Ended September 30, 1997
- ------------------------------------------
Revenues for the nine month period ended September 30, 1998 were
$20,009,589 versus $7,444,380 for the period ended September 30, 1997. The
increase of $12,565,209 is primarily the result of product sales by the
Company's wholly-owned generic pharmaceutical subsidiaries, Superior (acquired
in June 1997) and GDI (acquired in March 1998).
Cost of product sales was $17,145,156, or 86% of product sales for the
nine month period ended September 30, 1998 compared to $7,352,213, or 99% of
product sales.
25
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
Research and development expenses for the nine month period ended
September 30, 1998 were $430,774 versus $2,369,821 for the nine month period
ended September 30, 1997. 1997 R&D expenses were primarily the result of the
NicErase(R)-SL Phase 3 clinical trials, now concluded, and the NicErase(R)-SL
development program which has been discontinued. The Company is currently
developing several generic versions of branded pharmaceuticals to support its
generic drug business.
Selling, general and administrative expenses for the nine month period
ended September 30, 1998 were $8,437,873 versus $4,795,008 for the nine months
ended September 30, 1997. The $3,642,865 increase is primarily due to Superior's
selling, general and administrative expenses of $3,150,000.
Investment income was $297,894 for the nine months ended September 30,
1998 as compared to $112,170 for the nine month period ended September 30, 1997
primarily due to the sale of BioTrack stock. Interest and financing expenses of
$1,269,242 for the nine month period ended September 30, 1998, compared to
$652,212 for the nine month period ended September 30, 1997, relate primarily to
private placements of equity as well as private debt financing for the Superior
and GDI acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had a working capital deficit of
$9,650,281, compared to working capital deficit of $11,711,296 at December 31,
1997. Cash was $205,426 at September 30, 1998 compared to $697,045 at December
31, 1997. Working capital was used primarily to fund the Company's operating
losses, including approximately $1,660,000 of operating losses of its Able
subsidiary. The Company expects its cash needs for the next 12 months to be
approximately $6,000,000. Of this amount, approximately $2,000,000 is expected
to be general and administrative and approximately $4,000,000 is expected to be
for working capital. The Company expects to generate the needed cash through
additional financing activities.
In June 1997, the Company completed the acquisition of Superior
Pharmaceutical Company, of Cincinnati, OH, for a purchase price of $16.25
million in cash, notes and stock. The Company guaranteed that the selling
shareholders would receive at least $5,000,000 in the stock value as of June
1998. The agreement provided that the Company make up any shortfall in this
guaranteed
26
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
stock value through the issuance of additional stock and cash. See "Special
Considerations - Contingent Obligation with Respect to Superior Acquisition."
The Company financed this acquisition by issuing Series A and Series B Preferred
Shares for proceeds of $6,100,000 and subordinated debt of $3,000,000 obtained
from two institutional lenders. The Company also invested $1,750,000 in Superior
towards working capital as required by the secured lender. Superior has a
$9,000,000 secured revolving facility through Huntington National Bank, of
Cincinnati, OH.
Subsequent to the acquisition of Superior in June 1997, Superior
experienced the loss of key personnel, declining revenues, erosion of margins
and an overall decline in its business. These factors have resulted in the
Company not meeting certain loan covenants stipulated by the secured and
subordinated lenders. As a result, the secured lender has agreed to extend the
credit line and upon review of the Company's performance may consider further
extension. The Company obtained a waiver and extension of the third and fourth
quarterly payments of $515,625 each to the selling shareholders which were due
on March 31, 1998 and June 30, 1998 respectively. The Huntington Bank agreement
provides that the selling shareholders of Superior may draw this payment out of
its operating cash flows provided that Superior and DynaGen meet the loan
covenants. The Company has also received an extension on the payment of the
$535,000 convertible note payable which matured on February 7, 1998.
On July 31, 1998, the Company entered into a contingent settlement
agreement with the selling shareholders of Superior which provides for an
overall reduction in purchase price of $4,900,000 through waiver of any
additional stock or cash payment. The agreement also provides for, and is
contingent upon, a payment of $3,800,000, which represents the remaining amount
due on the original selling shareholder notes, by September 30, 1998. There can
be no assurance that the Company will be able to obtain financing to meet the
obligations to pay the selling shareholders.
The Company continues to operate its Able Laboratories, Inc.
manufacturing facility for manufacture and distribution of generic drugs. Able
has a working capital deficit and management expects Able will require
27
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
approximately $4,000,000 in the next 12 months to continue operations. No
assurance can be given that such financing will be available upon reasonable
terms.
The Company's private placement of Series A and Series B Preferred
Stock allowed investors to convert into shares of common stock at a floating
discount to the market of approximately 25%. The stock price was depressed due
to below-market conversions and selling of common shares by the holders of
Series A and Series B Preferred Stock. This investment, along with the
outlicensing of the Company's lead product, NicErase(R)-SL, and continued losses
at both DynaGen and Able, resulted in a severe negative impact on the Company's
stock price. As a result, the Company reached its limit of 75,000,000 authorized
shares. On March 4, 1998, the Company held a special meeting of stockholders and
approved a one for ten reverse split of its outstanding shares. As a result, at
the effective date of the reverse split, March 10, 1998, 75,000,000 shares of
common stock, $0.01 par value per share, were authorized, and approximately
7,500,000 were issued and outstanding. As of November 9, 1998, there were
27,500,449 shares of Common Stock outstanding. This increase is primarily due to
conversions of preferred stock.
Management has initiated intensive reviews of its operations and is
implementing plans to cure defaults, raise additional equity, and improve the
liquidity and cash resources for general working capital purposes. Specifically,
at the corporate level, the Company has discontinued all R&D activity either
through terminating the programs or outlicensing the products to other
companies. The Company's lead product to date, NicErase(R)-SL, has been licensed
to Nastech Pharmaceutical, of Hauppauge, NY. The Company has reduced its
workforce by approximately 40 employees through termination and attrition. The
Company has sublet approximately 8,000 square feet of its Cambridge, MA
headquarters and is also negotiating to sublease all or part of the remaining
space in that facility to further reduce its overhead expenses. In 1998,
management expects to maintain a staff of approximately seven full-time and four
part-time employees to manage the corporate functions of the Company. Management
is also actively reviewing every cost center for further cost reductions.
In November 1997, the Company initiated similar measures at its Able
manufacturing facility. The Company has reduced Able's workforce by 50 percent
through terminations and attrition.
28
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Management has actively initiated programs to increase sales of Able's products
to existing customers and is seeking to bring back customers Able has lost over
the past two years. The Company is also renegotiating its development agreement
with Kali Laboratories to minimize further cash outlays for product development.
The Company has also received offers from a service contractor for clinical
testing in return for deferred compensation, warrants and royalty payments on
new products. The Company has also initiated a modest internal R&D program at
Able to develop prescription drugs which do not require FDA approval. These
so-called "grandfathered" products are expected to generate revenues by June
1999.
Management, in conjunction with key personnel at Superior, has
implemented a program to reverse the decline in the general business of
Superior. Specific actions taken at Superior include recruitment of key
personnel, review of the product line, reduction in the selling, general and
administrative expenses and an aggressive program to seek competitive business
in both the government and corporate sectors. Superior is also negotiating
supply agreements with its primary vendors to obtain more favorable terms, which
would improve the gross margins and make Superior more competitive in the
marketplace.
To date, the Company has met substantially all of its requirements for
capital through the sale of its securities. The negative impact of the events in
1997 has severely limited the Company's ability to raise further capital in a
conventional sale of its securities. The Company plans to raise capital in order
to finance the working capital requirements. There can be no assurance that the
Company will be able to secure additional financing or that such financing will
be available on favorable terms. Between April 30, 1998 and October 31, 1998,
the Company raised $2,000,000 through the sale of convertible preferred stock,
$450,000 in Limited Recourse Notes, and $700,000 through factoring and leasing
arrangements.
Management believes that such financing will create additional common
shares in the market and could result in further depression of the stock price,
making it even more difficult to raise capital. Therefore, the Company intends
to seek financing primarily from sources who will be long-term investors. In
view of the Company's current stock price and its financial condition, it is
exceedingly difficult to find such investors. However, the Company has had
limited and preliminary discussions with investors and believes that additional
financing could become available over the next several weeks. The Company plans
to use the interim financing for general working capital, partial payment to its
creditors and the
29
limited internal R&D program at Able.
30
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company is also pursuing additional sources of capital for the
long-term needs of the Company. The Company has engaged an investment banking
firm to seek conventional investments. There is no assurance that such financing
will be available, and if available will be on terms favorable to the Company.
The Company has also been working with its trade creditors to reduce
its obligations. A substantial majority of the creditors have accepted the
Company's payments plans, which include periodic payments, discounts of amounts
outstanding and acceptance of Company shares.
YEAR 2000
- ---------
Computer systems and software products that were designed to accept
entries of only two digits in the "year" date code field may be unable to
properly process date information beyond the year 1999. The Company does not
believe that any material year 2000 issues exist with software contained within
its product manufacturing or distribution processes. The Company is in the
process of working with suppliers and other third parties upon which it is
dependent to determine the extent of their Year 2000 compliance. Although the
company's assessment of its Year 2000 readiness is not complete, based on its
investigation to date the Company does not expect the total cost of Year 2000
compliance to have a material adverse effect on the Company's business, results
of operations or financial condition. There can be no assurance, however, that
the Company's Year 2000 compliance program will be implemented successfully or
on a timely basis, or that systems operated by third parties with which the
Company's systems interface will be Year 2000 compliant. Inability of the
Company to correct any Year 2000 problems affecting its products, its internal
systems or its communications with third parties could have a material adverse
effect on the Company's business, results of operations and financial condition.
31
DYNAGEN, INC.
PART II. OTHER INFORMATION
-------------------------------------------------------------
Item 2. Changes in Securities
---------------------
a. Not applicable.
b. Not applicable.
c. Sales of Unregistered Securities - In the three
months ended September 30, 1998 the Company sold the
following securities:
On July 22, 1998, the Company sold 4,750 shares of
Series H Convertible Preferred Stock to an
unafilliated accredited investor in a private
placement. The Company received aggregate proceeds
of $475,000 from the sale.
On August 26, 1998, the Company issued a Warrant to
purchase 150,000 shares of Common Stock to Michael
Sorrell, a former director of the Company, in
consideration for service provided. This Warrant is
exercisable at $0.50 per share.
On August 1, 1998 the Company issued a Warrant to
purchase 200,000 shares of the Company's Common Stock
to Fortress Financial for $0.15 per share, in
consideration of investment banking services
provided.
On August 18, 1998 the Company issued a Warrant to
purchase 37,500 shares of the Company's Common Stock
to Carolyn Cusick in connection with her loan to the
Company. This Warrant is exercisable at $0.40 per
share.
On August 18, 1998 the Company issued a Warrant to
purchase 37,500 shares of the Company's Common Stock
to Porter Capital Corporation in connection with a
loan to the Company. This Warrant is exercisable at
$0.40 per share.
On September 29, 1998, the Company issued a 7%
Convertible Debenture in the principal amount of
$250,000 to a private investor. The Company received
aggregate proceeds of $250,000 from the sale. The
debenture may be converted into common stock or, at
the option of the investor, repaid through the
proceeds of future financing.
The foregoing transactions were effected by the
Company in reliance upon the exemption from a registration
under the Securities Act provided by Section 4(2) thereof.
Item 3. Defaults
--------
The Company has incurred recurring losses from operations
resulting in an accumulated deficit of $44,517,105 and a
working capital deficiency of $9,650,281 at September 30,
1998. In addition, the company is in default with respect to
certain covenants in its debt agreements and obligated to make
payments as follows:
32
DYNAGEN, INC.
PART II. OTHER INFORMATION
-------------------------------------------------------------
Sirrom Capital Corporation ("Sirrom") and Odyssey Investment
Partners, L.P. ("Odyssey") - The Company issued secured
promissory notes in the aggregate principal amount of
$3,000,000 on June 18, 1997 and were due June 17, 2002. In
addition, the Company issued stock warrants to purchase in the
aggregate 400,000 shares of the Company's common stock and
granted Sirrom and Odyssey the right to sell to the Company
the warrants (put warrants) under a put and substitution
agreement. At the time of issuance, $702,000 of the proceeds
was allocated to the put warrants, resulting in a discount on
the promissory notes.
The discount on the notes was being amortized to expense over
the term of the promissory notes. The Company is in default of
certain covenants in the loan agreement and has not obtained a
waiver of the defaults from the lender. Accordingly, the total
principal amount of the loan, $3,000,000, has been classified
as a current liability and the unamortized discount on the
loan has been charged to expense at March 31, 1998. (See Note
6.)
Superior Pharmaceutical Company - The Company acquired
Superior on June 18, 1997 for $16,500,000. The purchase price
was paid as follows: $6,500,000 in cash, $5,000,000 of 9.5%
secured promissory notes to the former Superior stockholders
due in quarterly installments through June 30, 2000 and common
stock of the Company with a guaranteed value of $5,000,000.
Quarterly payments on the secured promissory notes was due on
March 31, 1998 and June 30, 1998 and the Company received a
waiver and extension from the former stockholders of Superior.
The total unpaid amount of the secured promissory notes
$3,766,667 has been classified as a current liability.
The Company issued 166,667 shares of common stock to the
former Superior stockholders on the closing date. The
Agreement and plan of merger with the Superior stockholders
provided that at the first anniversary of the closing, June
18, 1998, the Superior stockholders would receive an
additional 1,666,667 shares of common stock, if the Company's
stock price was equal to or greater than $1.50. Any difference
between the value of
33
DYNAGEN, INC.
PART II. OTHER INFORMATION
-------------------------------------------------------------
the stock received and the $5,000,000 guaranteed value has to
be paid in cash. The common stock price did not reach the
specified level of $1.50 by June 18, 1998. Accordingly, the
Company has accrued a current liability to the former Superior
stockholders in the amount of $4,083,333 at March 31, 1998 and
reduced the amount originally added to additional paid-in
capital at the time of acquisition.
On July 31, 1998, the Company entered into a contingent
settlement agreement with the selling shareholders of Superior
which provides for an overall reduction in purchase price of
$4,900,000 through waiver of any additional stock or cash
payment. The Agreement also provides for a payment of
$4,200,000, which represents the remaining amount due on the
original selling shareholder notes. There can be no assurance
that the Company will be able to obtain financing to meet the
obligations to pay the selling shareholders.
Item 5. Other Information
On November 5, 1998, the Company accepted the resignation of
Indu A. Muni, Ph.D. as President, Chief Executive Officer,
Treasurer and Director. On November 6, 1998, Mr. C. Robert
Cusick, who had been serving since May 1998 as Chairman of the
board of directors, was appointed Chief Executive Officer of
the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
The following exhibits, required by Item 601 of Regulation s- K, are
filed as part of this Quarterly Report on Form 10-Q. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-K.
Exhibit
No. Description of Exhibit
- --- ----------------------
3a Restated Certificate of Incorporation (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998, as
amended, and incorporated herein by reference).
3b By-laws, as amended (filed as Exhibit 3b to Registrant's
Registration Statement on Form S-1, No. 33-46445, and
incorporated by reference).
34
4a Warrant dated August 26, 1998 in the name of Michael Sorrell to
purchase 150,000 shares of Common Stock.
4b Warranted dated August 1, 1998 in the name of Fortress Financial to
purchase 200,000 shares of Common Stock.
4c Warrant dated August 18, 1998 in the name of Carolyn Cusick to purchase
37,500 shares of Common Stock.
4d Warrant dated August 18, 1998 in the name of Porter Capital Corporation
to purchase 37,500 shares of Common Stock.
4e $250,000 7% Convertible Debenture in the name of Sovereign Partners
dated September 29, 1998.
10a Factoring Agreement dated October 2, 1998 with K & L Financial, Inc.
10b Asset Purchase Agreement and exhibits thereto dated October 2, 1998
with Triple L, Ltd.
27 Financial Data Schedules (filed in electronic form only)
(b) Reports on Form 8-K:
None.
35
SIGNATURES
Pursuant to the requirements 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.
DYNAGEN, INC.
By: /s/ Dhananjay G. Wadekar
--------------------------------
Dhananjay G. Wadekar
Executive Vice President
Date: November 14, 1998
36
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
3a Restated Certificate of Incorporation (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998, as
amended, and incorporated herein by reference).
3b By-laws, as amended (filed as Exhibit 3b to Registrant's
Registration Statement on Form S-1, No. 33-46445, and
incorporated by reference).
4a Warrant dated August 26, 1998 in the name of Michael Sorrell to
purchase 150,000 shares of Common Stock.
4b Warranted dated August 1, 1998 in the name of Fortress Financial to
purchase 200,000 shares of Common Stock.
4c Warrant dated August 18, 1998 in the name of Carolyn Cusick to purchase
37,500 shares of Common Stock.
4d Warrant dated August 18, 1998 in the name of Porter Capital Corporation
to purchase 37,500 shares of Common Stock.
4e $250,000 7% Convertible Debenture in the name of Sovereign Partners
dated September 29, 1998.
10a Factoring Agreement dated October 2, 1998 with K & L Financial, Inc.
10b Asset Purchase Agreement and exhibits thereto dated October 2, 1998
with Triple L, Ltd.
27 Financial Data Schedules (filed in electronic form only)
37