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: March 31, 1996; 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)
99 Erie Street
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 May 3, 1996, there were outstanding 26,925,810 shares of common stock,
$.01 par value per share.
DYNAGEN, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION (*)
Item 1. Financial Statements:
Condensed Balance Sheets 3
Condensed Statements of Loss 5
Condensed Statements of Changes in
Stockholders' Equity 7
Condensed Statements of Cash Flows 8
Notes to Unaudited Condensed Financial
Statements 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
(*) The financial information at June 30, 1995 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 BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents
(including interest-bearing
deposits of $2,991,000 and
$142,000) $ 3,514,866 $ 263,956
Investment securities available
for sale at fair value 8,481,816 4,201,876
Accounts receivable 34,483 28,971
Accrued interest receivable 12,550 86,653
Prepaid expenses and other
current assets 270,775 108,498
------------- ------------
Total current assets 12,314,490 4,689,954
------------- ------------
Property and equipment:
Laboratory equipment 220,164 220,164
Furniture and fixtures 164,835 143,091
Leasehold improvements 29,535 25,437
------------- ------------
414,534 388,692
Less accumulated depreciation
and amortization (268,895) (235,412)
------------- ------------
Net property and equipment 145,639 153,280
------------- ------------
Other assets:
Patents and trademarks, net of
accumulated amortization of
$62,804 and $46,024 269,523 268,809
Deferred debt financing costs,
net of accumulated amortization
of $22,892 (Note 4) 251,813 -
Deposits 1,978 1,978
------------- ------------
Total other assets 523,314 270,787
------------- ------------
$ 12,983,443 $ 5,114,021
------------- ------------
See accompanying notes to unaudited financial statements.
</TABLE>
3
DYNAGEN, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 255,549 $ 263,786
Accrued payroll and
payroll taxes 150,005 73,421
Deferred revenue 72,908 250,000
------------- ------------
Total current liabilities 478,462 587,207
Convertible note payable (Note 4) 2,000,000 -
------------- ----------
Total liabilities 2,478,462 587,207
------------- ------------
Stockholders' equity (Notes 3 and 4):
Preferred stock, $.01 par value,
10,000,000 shares authorized:
Series A convertible,
1,346,587 authorized,
1,178,264 shares issued
and outstanding
at liquidation value 3,461,150 -
Common stock, $.01 par value,
40,000,000 shares authorized,
26,908,699 and 21,448,487 shares
issued and outstanding 269,087 214,485
Additional paid-in capital 25,082,631 19,236,300
Accumulated deficit (18,309,375) (14,911,632)
------------- ------------
10,503,493 4,539,153
Unrealized gain (loss) on
investment securities 1,488 (12,339)
------------- ------------
Total stockholders' equity 10,504,981 4,526,814
------------- ------------
$ 12,983,443 $ 5,114,021
============= ============
See accompanying notes to unaudited financial statements.
</TABLE>
4
DYNAGEN, INC.
CONDENSED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
March 31, March 31,
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Fees and royalties $ 35,000 $ 250,000
Product sales 93,325 154,228
------------- -------------
Total revenues 128,325 404,228
------------- -------------
Costs and expenses:
Cost of sales 46,624 75,863
Research and development 851,686 340,160
Selling, general and
administrative 880,233 499,792
------------- -------------
Total costs and expenses 1,778,543 915,815
------------- -------------
Operating loss (1,650,218) (511,587)
------------- -------------
Other income (expense):
Investment income, net 109,183 69,328
Interest expense (Note 4) (24,000) -
Amortization of debt
financing costs (Note 4) (22,892) -
------------- -------------
Other income, net 62,291 69,328
------------- -------------
Net loss $ (1,587,927) $ (442,259)
============= =============
Net loss per share $ (.06) $ (.02)
============= =============
Weighted average shares outstanding
(Note 2) 26,061,519 21,174,535
============= =============
See accompanying notes to unaudited financial statements.
</TABLE>
5
DYNAGEN, INC.
CONDENSED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Fees and royalties $ 310,000 $ 250,000
Product sales 151,180 223,493
------------ -------------
Total revenues 461,180 473,493
------------ -------------
Costs and expenses:
Cost of sales 75,461 119,611
Research and development 1,888,308 1,298,775
Selling, general and
administrative 2,068,966 1,522,472
------------ -------------
Total costs and expenses 4,032,735 2,940,858
------------ -------------
Operating loss (3,571,555) (2,467,365)
------------ -------------
Other income (expense):
Investment income, net 220,704 226,374
Interest expense (Note 4) (24,000) (196)
Amortization of debt
financing costs (Note 4) (22,892) -
------------ -------------
Other income, net 173,812 226,178
------------ -------------
Net loss $ (3,397,743) $ (2,241,187)
============ =============
Net loss per share $ (.14) $ (.11)
============ =============
Weighted average shares outstanding
(Note 2) 23,489,618 21,174,535
============ =============
See accompanying notes to unaudited financial statements.
</TABLE>
6
DYNAGEN, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK CONVERTIBLE PREFERRED STOCK ADDITIONAL
--------------------------- --------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 21,174,535 $ 211,745 -- $ -- $ 19,109,908
Change in unrealized gain
(loss) on investment
securities -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ --------- ----------- ------------
Balance at March 31, 1995 21,174,535 $ 211,745 -- $ -- $ 19,109,908
============ ============ ========= =========== ============
Balance at June 30, 1995 21,448,487 $ 214,485 -- $ -- $ 19,236,300
Change in unrealized gain
(loss) on investment
securities -- -- -- -- --
Exercise of underwriters'
warrants 503,982 5,040 -- -- 32,085
Exercise of public warrants 3,244,494 32,445 -- -- 3,822,762
Shares issued in private
placements 1,520,686 15,207 1,178,264 3,461,150 1,376,204
Exercise of stock options 73,800 738 -- -- 2,370
Employee stock and
stock option grants 117,250 1,172 -- -- 557,685
Stock options issued for
future services -- -- -- -- 55,225
Net loss -- -- -- -- --
------------ ------------ --------- ----------- ------------
Balance at March 31, 1996 26,908,699 $ 269,087 1,178,264 $ 3,461,150 $ 25,082,631
============ ============ ========= =========== ============
</TABLE>
DYNAGEN, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 1996 and 1995
(Unaudited)(Continued)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ACCUMULATED ON INVESTMENT
DEFICIT SECURITIES TOTAL
------------ ------------ ------------
<C> <C> <C>
Balance at June 30, 1994 $(11,869,249) $ (38,662) $ 7,413,742
Change in unrealized gain
(loss) on investment
securities -- 11,688 11,688
Net loss (2,241,187) -- (2,241,187)
------------ ------------ ------------
Balance at March 31, 1995 $(14,110,436) $ (26,974) $ 5,184,243
============ ============ ============
Balance at June 30, 1995 $(14,911,632) $ (12,339) $ 4,526,814
Change in unrealized gain
(loss) on investment
securities -- 13,827 13,827
Exercise of underwriters'
warrants -- -- 37,125
Exercise of public warrants -- -- 3,855,207
Shares issued in private
placements -- -- 4,852,561
Exercise of stock options -- -- 3,108
Employee stock and
stock option grants -- -- 558,857
Stock options issued for
future services -- -- 55,225
Net loss (3,397,743) -- (3,397,743)
------------ ------------ ------------
Balance at March 31, 1996 $(18,309,375) $ 1,488 $ 10,504,981
============ ============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
7
DYNAGEN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
March 31, March 31,
1996 1995
------------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,397,743) $ (2,241,187)
Adjustments to reconcile
net loss to net cash used for
operating activities:
Employee stock and
stock option grants 558,857 -
Depreciation and amortization 73,155 45,185
Amortization and accretion
of (discounts) premiums on
investment securities (74,767) 92,659
Write-off of patent costs 25,094 40,893
(Increase) decrease in operating assets:
Accounts receivable (5,512) 22,487
Prepaid expenses and
other current assets (32,949) 71,637
Increase (decrease) in operating
liabilities:
Accounts payable and
accrued expenses 68,347 (136,704)
Deferred revenue (177,092) 250,000
------------- -------------
Net cash used for
operating activities (2,962,610) (1,855,030)
------------- -------------
Cash flows from investing activities:
Purchase of investment securities (16,365,346) (2,491,000)
Proceeds from sales and maturities
of investment securities 12,174,000 4,500,000
Purchase of property and equipment (25,842) (14,725)
Patent and trademark costs (42,588) (51,028)
Decrease in deposits - 9,325
------------- -------------
Net cash provided by (used
for) investing activities (4,259,776) 1,952,572
------------- -------------
</TABLE>
(Continued)
See accompanying notes to unaudited financial statements.
8
DYNAGEN, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Concluded)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
March 31, March 31,
1996 1995
------------- --------
<S> <C> <C>
Cash flows from financing activities:
Principal payments on capital
lease $ - $ (5,824)
Net proceeds from exercise
of warrants and options 3,895,440 -
Net proceeds from private debt
and equity placements 6,577,856 -
------------- -----------
Net cash provided by
(used for) financing
activities 10,473,296 (5,824)
------------- -------------
Net change in cash and cash equivalents 3,250,910 91,718
Cash and cash equivalents,
beginning of period 263,956 520,370
------------- -------------
Cash and cash equivalents,
end of period $ 3,514,866 $ 612,088
============= =============
Supplemental cash flow information:
Interest paid on capital lease $ - $ 196
Stock options issued in exchange
for future services 55,225 -
</TABLE>
See accompanying notes to unaudited financial statements.
9
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited 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.
The results of operations for the periods reported are not necessarily
indicative of those that may be expected for a full 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.
2. NET LOSS PER SHARE
Net loss per share is calculated based on the weighted average number
of common shares outstanding for the three and nine-month periods ended March
31, 1996 and 1995. The effect of all common stock equivalents have been excluded
from the calculation of the weighted average number of common shares outstanding
since their inclusion would be anti-dilutive.
3. COMMON STOCK, OPTIONS AND WARRANTS
On November 20, 1995, the Company entered into a one-year investment
banking agreement with the underwriter of the Company's prior public offerings
(the "Consultant"). As compensation for services to be rendered, the Company
granted the Consultant a warrant to purchase 400,000 shares of the Company's
common stock at an exercise price of $2.50 per share (such price approximating
the fair market value of $2.44 per share on the date of grant). The warrant is
exercisable over five years from the grant date. The shares underlying the
warrant were registered on Form S-3 declared effective on March 29, 1996.
10
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Continued)
In December 1995, the Company completed the redemption of its Class A
Redeemable Common Stock Purchase Warrants which were issued in the 1994 public
offering. Class A Warrants were exercised to purchase 3,241,194 shares of common
stock yielding net proceeds of $3,845,769 after deducting expenses. The
remaining 12,806 unexercised warrants were redeemed by the Company for $.01 per
warrant. In addition, 103,000 warrants issued to the underwriters of the 1994
public offering were exercised to acquire 503,982 shares of common stock using
their net exercise feature and payment to the Company of $37,125.
In February 1996, the Company granted to certain employees and a
consultant, bonus compensation paid in the form of the Company's common stock
and stock options. This bonus will result in the issuance of up to 182,250
shares of common stock to the employees and consultant. The Company has
recognized, in the quarter ending March 31, 1996, compensation expense of
$558,857 associated with the issuance of the common stock and stock options.
4. PRIVATE PLACEMENTS
On February 7, 1996, the Company raised, in a private placement,
approximately $3 million from the sale to a single investor of 579,626 shares of
the Company's common stock at a price of $1.72525 per share and the issuance of
a $2 million convertible note. Placement costs for this transaction were
$421,157 of which $146,452 was charged to additional paid-in capital and
$274,705 was capitalized as deferred debt financing costs. Deferred debt
financing costs are being amortized on a straight-line basis over the term of
the note. The note matures on February 7, 1998 and bears interest at 8% per
annum with interest payable quarterly. The note is convertible into shares of
common stock at any time at the option of the investor at a rate of 67% of the
average of the closing bid price per share of the Company's common stock for the
five (5) consecutive trading days ending one trading day prior to the date the
notice of conversion is received by the Company. The Company may require
conversion of the note at any time 120 days after a Registration Statement on
Form S-3 to register the resale of the 579,626 shares of common stock and the
shares issuable upon conversion of the note has been declared effective by the
Securities and Exchange Commission. A Registration Statement on Form S-3 was
declared effective on March 29, 1996.
11
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Continued)
On February 21, 1996 and March 4, 1996, the Company issued, in private
placements, an aggregate of 388,500 shares of common stock and 1,178,264 shares
of the Company's newly-designated Series A preferred stock for aggregate
consideration of $3,500,000. Placement costs of $487,461 were charged to
additional paid-in capital. The preferred stock is convertible into common stock
100 days after initial issuance (May 31, 1996 and June 12, 1996 as to 673,294
shares and 504,970 shares of preferred stock, respectively). The preferred stock
is convertible into that number of shares of common stock obtained by dividing
the aggregate consideration paid for the preferred stock by 80% of the average
of the closing bid price per share of the Company's common stock for the five
(5) consecutive trading days ending one trading day prior to the date of the
conversion (the "Conversion Rate"). If any dividends are declared on the common
stock, the preferred stockholders are entitled to the amount of dividends as
would be declared payable on the number of shares of common stock into which the
shares of Series A preferred stock could be converted. Each share of preferred
stock has a liquidation value equal to $2.9375, the consideration paid per
share, plus any declared but unpaid dividends accruing to the preferred stock.
Holders of the preferred stock are also entitled to a vote equal to the number
of shares of common stock determined based on the Conversion Rate referred to
above. The holders of the preferred stock and common stock issued in this
transaction may require the Company to register these securities under the Act
under certain circumstances.
On February 2 and February 29, 1996, the Company issued, in a private
placement, 552,560 shares of common stock for aggregate consideration of
$1,000,000. Placement costs of $13,526 were charged to additional paid-in
capital.
12
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
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 in the Liquidity and Capital
Resources section 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; 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. Additional information on potential factors which
could affect the Company's financial results are included in the Company's
public filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 1996
As Compared With The Three-Month Period Ended March 31, 1995
Revenues in the third quarter of the year ending June 30, 1996 ("Fiscal
1996") were $128,000 versus $404,000 for the third quarter of the year ended
June 30, 1995 ("Fiscal 1995"). This decrease of $276,000 is a result of a
decrease in license fees of $215,000 and a decrease in product sales of $61,000.
The decrease in fee revenue is primarily due to the recognition of $250,000 in
fees from Bristol-Myers Products in Fiscal 1995. The decrease in product sales
resulted from lower product shipments in the third quarter of Fiscal 1996
compared to the same period of Fiscal 1995.
Cost of product sales for the third quarter of Fiscal 1996 was 50% of
product sales compared to 49% of product sales for the same period of Fiscal
1995.
13
DYNAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------------------------------------
Research and development expenses for the third quarter of Fiscal 1996
were $852,000 versus $340,000 for the same period of Fiscal 1995, an increase of
$512,000. This increase is the result of $285,000 in compensation expense
resulting from stock grants and additional product development costs of
$227,000, primarily for NicErase(R)-SL, as the Company has begun pivotal Phase 3
clinical trials. The Company has limited diagnostic product development
primarily to its NicCheck(R) product, a test to detect the presence of nicotine.
Such activities consisted of production of clinical supplies and initiation of a
multi-center clinical trial.
Selling, general and administrative expenses for the third quarter of
Fiscal 1996 were $880,000 versus $500,000 for the same period of Fiscal 1995, an
increase of $380,000. Selling, general and administrative expenses increased in
the following areas: staffing expenses - $331,000, outside consultants - $48,000
and business insurance - $16,000. These increases were offset by a net decrease
of $15,000 in other operating expenses. The increase in staffing expenses is
primarily due to the award of stock grants and stock options. Outside consultant
expenses are related to the development of strategic business alliances for
certain Company products. Insurance expense increased because the Company
obtained more comprehensive coverage.
Investment income increased by $40,000 from $69,000 to $109,000 for the
third quarters of Fiscal 1995 and 1996, respectively, as the Company had greater
funds available for investment during the Fiscal 1996 period compared to the
same period of Fiscal 1995. In the third quarter of Fiscal 1996, the Company
incurred interest expense of $24,000 and debt financing costs of $22,892
associated with the private placement of a $2,000,000 convertible note. Debt
financing costs aggregating $274,705 are being amortized over a 24-month period.
Nine-Month Period Ended March 31, 1996
As Compared With The Nine-Month Period Ended March 31, 1995
Revenues in the first nine months of Fiscal 1996 were $461,000 versus
$473,000 for the first nine months of Fiscal 1995. This decrease of $12,000 is a
result of an increase in license fees of $60,000 offset by a $72,000 decrease in
product sales. The increase in fee revenue is attributable to license fees
received under a distribution arrangement for the Company's MycoAKT(R) products.
The decrease in product sales resulted from lower product shipments in the first
nine months of Fiscal 1996 compared to the same period of Fiscal 1995.
14
DYNAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------------------------------------
Cost of product sales for the first half of Fiscal 1996 was 50% of
product sales compared to 54% of product sales for the same period of Fiscal
1995. This decrease in the cost of sales percentage is primarily attributable to
a reallocation of certain manufacturing staff to product marketing and support
roles.
Research and development expenses for the first nine months of Fiscal
1996 were $1,888,000 versus $1,299,000 for the same period of Fiscal 1995, an
increase of $589,000. This increase is the result of $285,000 in compensation
expense resulting from stock grants and additional therapeutic product
development costs of $395,000, primarily for NicErase(R)-SL, as the Company has
begun pivotal Phase 3 clinical trials. These increases were offset by a decrease
of $91,000 in diagnostic product development costs. The Company has limited
diagnostic product development primarily to its NicCheck(R) product, a test to
detect the presence of nicotine. Such activities consisted of production of
clinical supplies and initiation of a multi-center clinical trial.
Selling, general and administrative expenses for the first nine months
of Fiscal 1996 were $2,069,000 versus $1,522,000 for the same period of Fiscal
1995, an increase of $547,000. Selling, general and administrative expenses
increased in the following areas: staffing expenses - $351,000, investor
relations expenses - $116,000, outside consultants - $55,000 and legal expenses
- - - $54,000. These increases were offset by a net decrease of $29,000 in other
operating expenses. In the first nine months of Fiscal 1996, investor relations
expenses were attributable to a new program designed to inform investors on
corporate developments and strategy. Legal expenses related primarily to
assistance with certain licensing arrangements, regulatory issues and stock
grants and stock options. The increase in staffing expenses is primarily due to
the award of stock grants and stock options. Outside consultant expenses are
related to the development of strategic business alliances for certain Company
products.
In the third quarter of Fiscal 1996, the Company incurred interest
expense of $24,000 and debt financing costs of $22,892 associated with the
private placement of a $2,000,000 convertible note. Debt financing costs
aggregating $274,705 are being amortized over a 24-month period.
15
DYNAGEN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had working capital of $11,836,000
versus working capital of $4,103,000 at June 30, 1995. Cash and investment
securities were $11,997,000 at March 31, 1996 as compared to $4,466,000 at June
30, 1995. The increases in working capital, cash and investment securities are
primarily the result of $3,892,000 raised from the exercise of the Company's
Class A and underwriters' warrants and $6,578,000 in net proceeds from private
placements of common stock, a convertible note and convertible preferred stock.
During the first nine months of Fiscal 1996, $2,963,000 was utilized in the
Company's research and development efforts and for other operating activities.
Management anticipates that the available working capital will be
sufficient to fund the current level of operations through September 1997. The
Company has realized limited revenues from the sale of its diagnostic products.
Its future prospects and revenue potential from product sales cannot be
determined with any certainty at this time. The Company's MycoDot(R) product is
currently distributed by several independent distributors in limited
territories. There can be no assurance that the present distributors' efforts
will prove successful, or that other marketing arrangements can be entered into
and, if so, prove successful. The Company continues to explore additional
sources of capital in order to fund additional product development efforts,
particularly its smoking cessation product, NicErase(R)-SL. There can be no
assurance that the Company will be able to secure additional financing or that
financing will be available on favorable terms. If the Company is unable to
obtain such other additional financing, the Company's ability to maintain its
current level of operations could be materially and adversely affected and the
Company may be required to reduce or eliminate certain expenditures, including
its research and development activity with respect to certain proposed products.
16
DYNAGEN, INC.
PART II. OTHER INFORMATION
-------------------------------------------------------------
Item 1. Legal Proceedings
The Company is involved in certain legal proceedings
incidental to its normal business activities. While the
outcome of any such proceedings cannot be accurately
predicted, the Company does not believe the ultimate
resolution of any existing matters should have a material
adverse effect on its financial position or results of
operations.
Item 2. Changes in Securities
On February 7, 1996, the Company issued a $2 million
convertible note in a private placement to a single investor.
This note is convertible into shares of the Company's common
stock based on a pre-determined formula. The note may be
converted at any time by the note holder and the Company may
require conversion of the note any time after July 27, 1996.
In the event of a liquidation or dissolution of the Company,
the note holder would be paid prior to the holders of the
Company's common stock.
On February 21, 1996 and March 4, 1996, the Company issued an
aggregate of 1,178,264 shares of its newly- designated Series
A preferred stock. The shares of Series A preferred stock are
convertible into common stock at a pre-determined formula. The
Series A preferred stock does not pay a dividend, however, if
any dividend is declared on the Company's common stock, the
holders of Series A preferred stock are entitled to receive
any such dividends as if the Series A preferred stock had been
converted into common stock. In the event of a liquidation,
dissolution or winding up of the Company, the holders of
Series A preferred stock are entitled to receive before
payment is made to the holders of common stock the original
issue price per share of Series A preferred stock ($2.9375 per
share) plus any declared but unpaid dividends accruing on such
shares.
Information required by this Item may also be found in
Footnote Number 4, "Private Placements," appearing in the
"Notes to Unaudited Condensed Financial Statements" dated
March 31, 1996 which are included in Part I, Item 1 of this
Form 10-Q. Footnote Number 4 is incorporated by
reference into Part II, Item 2.
The Company previously filed a report on Form 8-K dated
February 2, 1996 that includes information and documents
related to the private placements.
17
DYNAGEN, INC.
PART II. OTHER INFORMATION
(Continued)
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
- - ------- --------------------------------------------------------------
4a Subscription Agreement between the Registrant and GFL
Performance Fund Limited, dated January 31, 1996 (filed as
Exhibit 4b to Registrant's Registration Statement on Form S-3
(File No. 333-1748) and incorporated herein by reference).
4b Note Purchase Agreement between the Registrant and GFL
Performance Fund Limited, dated January 31, 1996 (filed as
Exhibit 4c to Registrant's Registration Statement on Form S-3
(File No. 333-1748) and incorporated herein by reference).
4c Convertible Note issued by the Registrant to GFL Performance
Fund Limited, dated February 7, 1996 (filed as Exhibit 4d to
Registrant's Statement on Form S-3 (File No. 333-1748) and
incorporated herein by reference).
4d Registration Rights Agreement between the Registrant and GFL
Performance Fund Limited, dated February 7, 1996 (filed as
Exhibit 4e to Registrant's Registration Statement on Form S-3
(File No. 333-1748) and incorporated herein by reference).
4e Offshore Securities Subscription Agreement between the
Registrant and Julius Baer Securities Inc., dated February 16,
1996 (filed as Exhibit 4e to Registrant's Current Report on
Form 8-K dated February 2, 1996 and incorporated herein by
reference).
4f Offshore Securities Subscription Agreement between the
Registrant and Julius Baer Securities Inc., dated February 29,
1996 (filed as Exhibit 4f to Registrant's Current Report on
Form 8-K dated February 2, 1996 and incorporated herein by
reference).
4g Registration Rights Agreement between the Registrant and
Julius Baer Securities Inc., dated February 16, 1996 (filed as
Exhibit 4g to Registrant's Current Report on Form 8-K dated
February 2, 1996 and incorporated herein by reference).
18
DYNAGEN, INC.
PART II. OTHER INFORMATION
(Continued)
Exhibit
No. Description of Exhibit
- - ------- --------------------------------------------------------------
4h Registration Rights Agreement between the Registrant and
Julius Baer Securities Inc., dated February 29, 1996 (filed as
Exhibit 4h to Registrant's Current Report on Form 8-K dated
February 2, 1996 and incorporated herein by reference).
4i Investment Letter between the Registrant and Anker Bank, dated
January 26, 1996 (filed as Exhibit 4i to Registrant's Current
Report on Form 8-K dated February 2, 1996 and incorporated
herein by reference).
4j Investment Letter between the Registrant and Anker Bank, dated
February 26, 1996 (filed as Exhibit 4j to Registrant's Current
Report on Form 8-K dated February 2, 1996 and incorporated
herein by reference).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
During the quarter ended March 31, 1996, the Company filed on
March 21, 1996 a Current Report on Form 8-K dated February 2,
1996 reporting the completion of three private placements
raising gross proceeds of approximately $7,500,000 from the
sale of a combination of common stock, a convertible note and
convertible preferred stock.
19
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/ Indu A. Muni
---------------------------------------------------
Indu A. Muni, Ph.D.
President, Chief Executive Officer, and
Treasurer (Principal Executive, Financial, and
Accounting Officer)
Date: May 7, 1996
20
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- - ------- --------------------------------------------------------------
4a Subscription Agreement between the Registrant and GFL
Performance Fund Limited, dated January 31, 1996 (filed as
Exhibit 4b to Registrant's Registration Statement on Form S-3
(File No. 333-1748) and incorporated herein by reference).
4b Note Purchase Agreement between the Registrant and GFL
Performance Fund Limited, dated January 31, 1996 (filed as
Exhibit 4c to Registrant's Registration Statement on Form S-3
(File No. 333-1748) and incorporated herein by reference).
4c Convertible Note issued by the Registrant to GFL Performance
Fund Limited, dated February 7, 1996 (filed as Exhibit 4d to
Registrant's Statement on Form S-3 (File No. 333-1748) and
incorporated herein by reference).
4d Registration Rights Agreement between the Registrant and GFL
Performance Fund Limited, dated February 7, 1996 (filed as
Exhibit 4e to Registrant's Registration Statement on Form S-3
(File No. 333-1748) and incorporated herein by reference).
4e Offshore Securities Subscription Agreement between the
Registrant and Julius Baer Securities Inc., dated February 16,
1996 (filed as Exhibit 4e to Registrant's Current Report on
Form 8-K dated February 2, 1996 and incorporated herein by
reference).
4f Offshore Securities Subscription Agreement between the
Registrant and Julius Baer Securities Inc., dated February 29,
1996 (filed as Exhibit 4f to Registrant's Current Report on
Form 8-K dated February 2, 1996 and incorporated herein by
reference).
4g Registration Rights Agreement between the Registrant and
Julius Baer Securities Inc., dated February 16, 1996 (filed as
Exhibit 4g to Registrant's Current Report on Form 8-K dated
February 2, 1996 and incorporated herein by reference).
4h Registration Rights Agreement between the Registrant and
Julius Baer Securities Inc., dated February 29, 1996 (filed as
Exhibit 4h to Registrant's Current Report on Form 8-K dated
February 2, 1996 and incorporated herein by reference).
4i Investment Letter between the Registrant and Anker Bank, dated
January 26, 1996 (filed as Exhibit 4i to Registrant's Current
Report on Form 8-K dated February 2, 1996 and incorporated
herein by reference).
4j Investment Letter between the Registrant and Anker Bank, dated
February 26, 1996 (filed as Exhibit 4j to Registrant's Current
Report on Form 8-K dated February 2, 1996 and incorporated
herein by reference).
27 Financial Data Schedule (filed herewith).
21
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,514,866
<SECURITIES> 8,481,816
<RECEIVABLES> 34,483
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3,461,150
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<OTHER-SE> 6,774,744
<TOTAL-LIABILITY-AND-EQUITY> 12,983,443
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<TOTAL-REVENUES> 461,180
<CGS> 75,461
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