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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
[ ] 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
incorporation or organization) Identification No.)
1000 Winter Street
Suite 2700
Waltham, MA 02451
----------------------------------------
(Address of principal executive offices)
(781) 890-0021
---------------------------
(Issuer's telephone number)
Check whether the issuer (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 10, 2000 there were outstanding 89,446,443 shares of common
stock, $.01 par value per share.
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<PAGE>
DYNAGEN, INC.
FORM 10-QSB
QUARTERLY REPORT
SEPTEMBER 30, 2000
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 (Deficit) 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Unaudited Condensed Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults on Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
(*) The financial information at December 31, 1999 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNAGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
ASSETS
<TABLE><CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 382,340 $ 310,549
Accounts receivable, net of allowance for
doubtful accounts of $25,918 and $270,025 6,067,166 5,582,646
Rebates receivable 429,497 262,380
Inventory 8,292,544 7,148,604
Notes receivable 110,000 85,000
Prepaid expenses and other current assets 497,305 395,726
------------ ------------
Total current assets 15,778,852 13,784,905
------------ ------------
Property and equipment, net 3,824,584 3,852,842
------------ ------------
Other assets:
Customer lists, net of accumulated
amortization 1,698,739 2,385,098
Deferred debt financing costs, net of
accumulated amortization 639,119 885,988
Deposits and other assets 374,742 320,794
------------ ------------
Total other assets 2,712,600 3,591,880
------------ ------------
$ 22,316,036 $ 21,229,627
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE><CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current liabilities:
Bank overdraft $ 284,995 $ --
Notes payable and current portion
of long-term debt 8,453,130 9,826,615
Accounts payable and accrued expenses 6,127,339 5,070,285
Warrant put liability, current portion 667,667 --
Settlement obligation, current portion 15,725 14,806
------------ ------------
Total current liabilities 15,548,856 14,911,706
Warrant put liability, less current portion 395,312 984,769
Long term debt, less current portion 4,112,511 4,190,000
Settlement obligation, less current portion 455,698 467,589
------------ ------------
Total liabilities 20,512,377 20,554,064
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, 57,850 and 55,924
shares of Series A through M outstanding,
(liquidation value $5,784,880 and $6,468,214) 578 559
Common stock, $.01 par value, 125,000,000
shares authorized, 86,261,261 and 63,854,946
shares issued and outstanding 862,612 638,549
Additional paid-in capital 63,089,896 58,341,326
Accumulated deficit (62,149,427) (58,304,871)
------------ ------------
Total stockholders' equity 1,803,659 675,563
------------ ------------
$ 22,316,036 $ 21,229,627
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
-----------------------------------------
(Unaudited)
<TABLE><CAPTION>
Three Months Ended,
-------------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales, net $ 8,590,907 $ 7,368,820
Cost of sales 7,775,090 5,721,391
------------ ------------
Gross profit 815,817 1,647,429
------------ ------------
Operating expenses:
Selling, general and administrative 2,088,545 2,013,761
Research and development 446,323 699,397
------------ ------------
Total operating expenses 2,534,868 2,713,158
------------ ------------
Operating loss (1,719,051) (1,065,729)
------------ ------------
Other income (expense):
Investment income, net 6,489 6,417
Interest and financing expense (577,120) (603,882)
Miscellaneous income (expense): 23,548 (1,123)
------------ ------------
Other income (expense), net (547,083) (598,588)
------------ ------------
Net loss (2,266,134) (1,664,317)
Less returns to preferred stockholders:
Beneficial conversion feature 783,809 268,750
Dividends paid and accrued 41,779 60,549
------------ ------------
Net loss applicable to common stock $ (3,091,722) $ (1,993,616)
============ ============
Net loss per share-basic $ (0.04) $ (0.03)
============ ============
Weighted average shares outstanding 78,832,607 57,016,814
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
-----------------------------------------
(Unaudited)
<TABLE><CAPTION>
Nine Months Ended,
-------------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales, net $ 24,691,916 $ 20,974,657
Cost of sales 19,426,654 16,903,374
------------ ------------
Gross profit 5,265,262 4,071,283
------------ ------------
Operating expenses:
Selling, general and administrative 6,849,367 6,370,083
Research and development 1,513,912 1,198,033
Loss on impairment of customer lists -- 400,000
------------ ------------
Total operating expenses 8,363,279 7,968,116
------------ ------------
Operating loss (3,098,017) (3,896,833)
------------ ------------
Other income (expense):
Investment income, net 18,068 14,610
Interest and financing expense (1,549,253) (1,749,586)
Miscellaneous income 784,646 468,668
------------ ------------
Other income (expense), net (746,539) (1,266,308)
------------ ------------
Net loss (3,844,556) (5,163,141)
Less returns to preferred stockholders:
Beneficial conversion feature 1,075,476 1,264,127
Dividends paid and accrued 114,619 108,664
------------ ------------
Net loss applicable to common stock $ (5,034,651) $ (6,535,932)
============ ============
Net loss per share-basic $ (0.07) $ (0.13)
============ ============
Weighted average shares outstanding 72,799,689 48,541,680
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE><CAPTION>
Preferred Stock Common Stock
--------------------- -------------------------
Additional Accumulated
Shares Amount Shares Amount Paid-In Capital Deficit Total
--------- --------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 52,152 $ 521 37,612,612 $ 376,126 $ 47,181,545 $(50,153,553) $ (2,595,361)
Stock options and warrants
exercised -- -- 347,572 3,476 (3,376) -- 100
Shares issued in private placement 24,500 245 -- -- 5,138,239 -- 5,138,484
Conversion of preferred stock (35,227) (352) 11,615,331 116,154 (115,802) -- --
Conversion of debt -- -- 3,407,641 34,076 1,016,809 -- 1,050,885
Stock issued for bonus -- -- 125,000 1,250 27,500 -- 28,750
Stock issued for services -- -- 2,940,000 29,400 905,435 -- 934,835
Stock and warrants issued for
Superior Settlement -- -- 1,500,000 15,000 1,982,000 -- 1,997,000
Comprehensive Income: Net loss -- -- -- -- -- (5,163,141) (5,163,141)
--------- --------- ------------ ---------- ------------ ------------ ------------
Balance at September 30, 1999 41,425 $ 414 57,548,156 $ 575,482 $ 56,132,350 $(55,316,694) $ 1,391,552
========= ========= ============ ========== ============ ============ ============
Balance at December 31, 1999 55,924 $ 559 63,854,946 $ 638,549 $ 58,341,326 $(58,304,871) $ 675,563
Stock options and warrants
exercised -- -- 2,440,641 24,406 20,144 -- 44,550
Shares issued in private placement 30,600 306 -- -- 2,419,694 -- 2,420,000
Conversion of preferred stock (28,674) (287) 14,449,765 144,498 (144,211) -- --
Conversion of debt -- -- 4,364,909 43,649 1,687,679 -- 1,731,328
Stock and stock warrants issued
for services -- -- 1,151,000 11,510 765,264 -- 776,774
Comprehensive Income: Net loss -- -- -- -- -- (3,844,556) (3,844,556)
--------- --------- ------------ ---------- ------------ ------------ ------------
Balance at September 30, 2000 57,850 $ 578 86,261,261 $ 862,612 $ 63,089,896 $(62,149,427) $ 1,803,659
========= ========= ============ ========== ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
<TABLE><CAPTION>
Nine Months Ended
-------------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,844,556) $ (5,163,141)
Adjustments to reconcile net loss to net cash used
for operating activities:
Stock, stock options and warrants issued for services 776,774 963,585
Loss on impairment of customer lists -- 400,000
Depreciation and amortization 1,386,523 1,250,509
(Increase) decrease in operating assets:
Accounts receivable (484,520) (1,250,326)
Rebates receivable (167,117) 90,864
Inventory (1,143,940) (1,152,601)
Prepaid expenses and other current assets (101,579) (918,723)
Deposits and other assets (64,818) (81,147)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 1,286,642 867,633
Deferred revenue -- (100,000)
------------ ------------
Net cash used for operating activities (2,356,591) (5,093,347)
------------ ------------
Cash flows from investing activities:
Cash paid in Superior Settlement -- (1,500,000)
Purchase of property and equipment (335,957) (1,641,694)
(Increase) decrease in notes receivable (25,000) 63,500
------------ ------------
Net cash provided by (used for) investing activities (360,957) (3,078,194)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 44,550 100
Net proceeds from private stock placement 2,420,000 5,138,484
Net proceeds from debt placements 190,000 4,213,415
Payment of debt obligations (516,138) (372,177)
Repayments of settlement obligation (10,972) (53,900)
Net change in line of credit 376,904 (254,452)
Net change in accounts receivable factoring -- (89,187)
Increase in bank overdraft 284,995 195,001
------------ ------------
Net cash provided by financing activities 2,789,339 8,777,284
------------ ------------
Net change in cash and cash equivalents 71,791 605,743
Cash and cash equivalents at beginning of period 310,549 97,045
------------ ------------
Cash and cash equivalents at end of period $ 382,340 $ 702,788
============ ============
Supplemental cash flow information:
Interest paid $ 1,068,021 $ 828,158
Common stock issued on conversion of notes payable
and accrued interest 1,731,328 1,050,885
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE>
DYNAGEN, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Inc.
("GDI"), both of which are engaged in the distribution of generic
pharmaceuticals, and Apex Pharmaceuticals, Inc. which is developing therapeutic
products. All significant intercompany balances and transactions have been
eliminated in consolidation.
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
conformance with the accounting policies reflected in the financial statements
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999 filed with Securities and Exchange Commission.
USE OF ESTIMATES
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 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 materially from those
estimates.
EARNINGS PER SHARE
Basic earnings per share represents 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 issuance.
For all periods presented, options, warrants, put warrants, convertible
debt and convertible preferred stock 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 convertible preferred stock due to beneficial conversion features.
9
<PAGE>
2. INVENTORY
Inventory consists of the following:
September 30, December 31,
2000 1999
------------ ------------
Raw materials $ 1,008,308 $ 752,627
Work-in-progress 40,009 35,345
Finished goods 7,244,227 6,360,632
------------ ------------
$ 8,292,544 $ 7,148,604
============ ============
3. PROPERTY AND EQUIPMENT
September 30, December 31,
2000 1999
------------ ------------
Machinery and equipment $ 2,922,659 $ 2,811,296
Furniture, fixtures, and computers 1,222,930 1,146,223
Leasehold improvements 1,414,732 1,266,846
------------ ------------
5,560,321 5,224,365
Less accumulated depreciation
and amortization (1,735,737) (1,371,523)
------------ ------------
$ 3,824,584 $ 3,852,842
============ ============
4. DEBT
Notes payable consist of the following:
September 30, December 31,
2000 1999
------------ ------------
Bridge loans $ 236,000 $ 1,006,389
Machinery & equipment financing 150,000 150,000
9% convertible debenture -- 980,000
NJEDA bonds 1,923,636 2,000,000
Working capital loan - Fleet Capital 8,007,130 7,630,226
Senior subordinated debt 2,248,875 2,250,000
------------ ------------
Total 12,565,641 14,016,615
Less current portion 8,453,130 9,826,615
------------ ------------
Long-term debt $ 4,112,511 $ 4,190,000
============ ============
As of September 30, 2000, the Company was in default of certain loan
covenants and as a result the Company and the bank have entered into a
forbearance agreement. Under this agreement, the bank has increased the interest
rate on the line to its base rate plus 4% (13.5% at September 30, 2000), charged
us certain fees and is gradually reducing the borrowing limit on the line. As of
November 1, 2000, our borrowing limit has been reduced to $7,500,000. The limit
on the line will be further reduced to $7,000,000 on November 16, 2000,
$6,750,000 on December 1, 2000, $6,500,000 on December 15, 2000 and $6,250,000
on January 1, 2001. Under the agreement, the line matures on January 15, 2001.
10
<PAGE>
5. PREFERRED STOCK
During April and May 2000, the Company received $500,000 through the
sale of 500 shares of its Series J Preferred Stock. The Company incurred $50,000
in expenses related to the completion of the financing. The shares of Series J
Preferred Stock are convertible into common stock at 80% of the average closing
bid price of the common stock for the five trading days immediately preceding
the conversion notice from the investor. The conversion can take place on the
earlier of (1) 90 days from the original issue date, or (2) the date on which a
registration statement is declared effective by the Securities and Exchange
Commission.
During July 2000, the Company received net proceeds of $1,220,000 from
the sale of preferred stock to a single investor. The Company incurred $150,000
in expenses related to the completion of this financing. In addition, the
Company converted a $750,000 bridge loan received during the second quarter from
the same investor, into preferred stock. The Company issued 25,600 shares of
Series M Convertible Preferred Stock at $100 per share in exchange for the total
proceeds of $2,120,000 from the placements of its Series M Preferred Stock. The
Series M Preferred Stock carries a dividend of 4% and is convertible into common
stock at a conversion price equal to 80% of the average of the three lowest
prices per share during the five consecutive trading days prior to conversion.
6. SUBSEQUENT EVENTS
On November 3, 2000, the Company announced that it signed an agreement
with RxBazaar.com, Inc. to sell its wholly-owned subsidiary, Superior
Pharmaceutical Company, for cash and assumption of debt. As of June 2000, the
total value of the transaction was approximately $12.25 million, consisting of a
cash payment of $4,000,000, assumption of DynaGen's senior subordinated debt of
approximately $2.25 million and payment by RxBazaar of intercompany accounts in
the approximate amount of $6,000,000. The transaction is contingent, among other
things, on the approval of DynaGen's stockholders and on RxBazaar's obtaining
sufficient debt and equity financing. DynaGen has scheduled a meeting of its
stockholders on November 27, 2000 to vote on the proposed sale. As of October 1,
2000, DynaGen beneficially owned 1,700,000 shares or 8.9% of the common stock of
RxBazaar.com and has a warrant to purchase an additional 1,200,000 shares at a
price of $2.50 per share.
DynaGen is also negotiating with another third party for the sale of
its other distribution subsidiary, Generic Distributors, Inc. The sale of
Generic Distributors is expected to close prior to the sale of Superior. With
the sale of its two distribution subsidiaries, DynaGen hopes to eliminate all of
its existing senior bank debt and senior subordinated debt, and improve its
ability to focus on its core business of generic drug development and
manufacturing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999.
11
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward-looking"
information that involves risks and uncertainties . In particular, statements
contained in this Form 10-QSB which are not historical facts constitute
forward-looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate", "continue", and similar words. You should
read statements that contain these words carefully because they: (1) discuss our
future expectations; (2) contain projections of our future operating results or
financial condition; or (3) state other "forward-looking" information. Various
factors listed below, as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause our actual
results to be materially worse than the expectations we describe in our
forward-looking statements.
Each forward-looking statement should be read in conjunction with the
consolidated financial statements and notes thereto in Part I, Item 1, of this
Quarterly Report and with the information contained in Item 2, including, but
not limited to, the factors set forth below, together with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999, including, but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."
In addition to the risks and uncertainties posed generally by the
generic drug industry, we face the following risks and uncertainties:
o our auditors have expressed doubt about our ability to continue
as a going concern;
o if we cannot raise significant additional funds, then we will
have to substantially curtail our operations and investors could
lose their investment;
o if we continue to incur losses, then the value of our common
stock will likely decline;
o we face intense competition from other manufacturers of generic
drugs;
o if the Boston Stock Exchange were to delist our common stock, we
will have greater difficulty raising the capital we need to
continue operations;
o if our common stock becomes subject to penny stock rules,
investors may have greater difficulty selling their shares;
o we are obligated to issue a large number of shares of common
stock;
o the value of the common stock fluctuates widely and investors
could lose money on their investment in our stock;
o we may face product liability for which we are not adequately
insured; and
o intense regulation by government agencies may delay our efforts
to commercialize our proposed drug products.
12
<PAGE>
Because of the foregoing and other factors, we may experience material
fluctuations in our futureoperating results on a quarterly or annual basis which
could materially adversely affect our business, financial condition, operating
results and stock price.
OVERVIEW
DynaGen makes and sells generic drugs for the human health care market.
In 1996, we shifted our business focus from being a development and licensing
company to building a company focused on the manufacture and distribution of
generic drug products and specialty pharmaceuticals. In August 1996, we acquired
the tablet business of Able Laboratories, Inc., a generic pharmaceutical product
subsidiary of Alpharma, Inc. In addition, we acquired Superior Pharmaceutical
Company, a distributor of generic pharmaceuticals, in June 1997. In March 1998,
we acquired Generic Distributors Limited Partnership through our wholly-owned
subsidiary, Generic Distributors, Inc.
On November 3, 2000, the Company announced that it signed an agreement
with RxBazaar.com, Inc. to sell its wholly-owned subsidiary, Superior
Pharmaceutical Company, for cash and assumption of debt. As of June 30, 2000,
the total value of the transaction was approximately $12.25 million, consisting
of a cash payment of $4,000,000, assumption of DynaGen's senior subordinated
debt of approximately $2.25 million and payment by RxBazaar of intercompany
accounts in the approximate amount of $6,000,000. The transaction is contingent,
among other things, on the approval of DynaGen's stockholders and on RxBazaar's
obtaining sufficient debt and equity financing. DynaGen has scheduled a meeting
of its stockholders on November 27, 2000 to vote on the proposed sale.
DynaGen is also negotiating with another third party for the sale of
its other distribution subsidiary, Generic Distributors, Inc. The sale of
Generic Distributors is expected to close prior to the sale of Superior. With
the sale of its two distribution subsidiaries, DynaGen hopes to eliminate all of
its existing senior bank debt and senior subordinated debt, and improve its
ability to focus on its core business of generic drug development and
manufacturing.
We have financed our operating losses primarily through the proceeds of
public and private stock offerings and debt offerings. We anticipate that
revenues from product sales will not be sufficient to fund our current
operations and produce an operating profit in fiscal 2000. We have incurred
losses since inception and may incur additional losses in the future.
Our history of operating losses raises substantial doubt about our
ability to continue operations. If we are unable to secure significant
additional financing or to renegotiate our agreements with our existing
creditors, we will have to curtail or suspend research and development and other
business activities. Our independent auditors issued an opinion on our financial
statements as of December 31, 1999 and for the year then ended which included an
explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern. See "-- Certain Factors That May Affect Future Results."
Results of Operations Three Months Ended September 30, 2000
-----------------------------------------------------------
Revenues for the three-month period ended September 30, 2000 were
$8,590,907 compared to $7,368,820 for the period ended September 30, 1999. The
increase of $1,222,087 or 17% is primarily the result of improved sales of Able
products.
Cost of sales was $7,775,090 or 91% of sales for the three-month period
ended September 30, 2000, compared to $5,721,391 or 78% of sales for the period
ending September 30, 1999. During the quarter ended September 30, 2000, we
initiated several sales promotions in an effort to reduce our inventory. These
promotions reduced our gross profit margin for the quarter.
13
<PAGE>
Selling, general and administrative expenses for the three-month period
ended September 30, 2000 were $2,088,545 compared to $2,013,761 for the
three-month period ended September 30, 1999.
Research and development expenses for the three-month period ended
September 30, 2000 were $446,323 compared to $699,397 for the three-month period
ended September 30, 1999 declining by 253,074 or 36% over last year. The
decrease is attributed to a timing difference, since the year to date research
and development expenses in the year 2000 have increased from last year.
Management has invested significant funds during 2000 into developing generic
drugs.
Interest and other income was $30,037 for the three-month period ended
September 30, 2000, compared to $5,294 for the three-month period ended
September 30, 1999. Other income in both periods consisted primarily of
forgiveness of debt. Interest and financing expense for the three month period
ended September 30, 2000 was $577,120 compared to $603,882 for the three-month
period ended September 30, 1999, a decrease of $26,762 or 4% over last year.
Interest saved as a result of converting certain debt obligations into equity
was offset by higher interest expense on our working capital line of credit.
The Company incurred a net loss of $2,266,134 or $0.04 per share for
the quarter ended September 30, 2000 compared to a net loss of $1,664,317 or
$.03 per share in the prior year. The decline in profits of $601,817 is a result
of low margins on certain sales due to promotions.
Results of Operations Nine Months Ended September 30, 2000
----------------------------------------------------------
Revenues for the nine-month period ended September 30, 2000 were
$24,691,916 compared to $20,974,657 for the period ended September 30, 1999. The
increase of $3,712,259 or 18% is primarily the result of sales of Able products.
Cost of sales was $19,426,654 or 79% of sales for the nine-month period
ended September 30, 2000, compared to $16,903,374, or 81% of sales for the
period ended September 30, 1999. The Company improved its gross profit margin to
21% due to the higher margins of new products manufactured at Able Laboratories.
Our year to date improvement in our gross profit margin was negatively impacted
by sales promotions we undertook in the quarter ended September 30, 2000.
Selling, general and administrative expenses for the nine month period
ended September 30, 2000 were $6,849,367 compared to $6,370,083 for the
nine-month period ended September 30, 1999. The increase in expenses of
$479,284, or 7.5% over last year, is primarily due to increases in sales
commissions and bad debt expenses.
Research and development expenses were $1,513,912 for the nine months
ended September 30, 2000 compared to $1,198,033 for the nine months ended
September 30, 1999. This increase of $315,879 reflects the Company's investment
in research and development for new products which are expected to be approved
by the FDA in the latter part of fiscal 2000 and early in fiscal 2001. We
anticipate that these new products will result in significant new sales.
We recorded an additional $400,000 of loss on impairment of Superior's
customer lists in the first quarter of 1999 based on our revised projections of
Superior's cash flows after reviewing Superior's performance during the first
quarter of 1999.
Interest and other income was $802,714 for the nine-months ended
September 30, 2000, compared to $483,278 for the nine-month period ended
September 30, 1999. Other income in 1999 consisted primarily of forgiveness of
debt and other income in the corresponding nine month period of 2000 consisted
of forgiveness of debt and termination of certain trade agreements. Interest and
financing expenses of $1,549,253 for the nine-month period ended September 30,
2000, compared to $1,749,586 for the nine-month period ended September 30, 1999.
Interest expense was higher in 1999 primarily due to first quarter 1999 interest
expense on obligations which were settled in 1999.
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The Company incurred a net loss of $3,844,556 or $0.07 per share for
the nine months ended September 30, 2000 compared to a net loss of $5,163,141 or
$.13 per share in the prior year. Overall the Company reduced its net loss by
$1,318,585 due to improved margins and a reduction of overall expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had working capital of $229,996 compared
to a working capital deficit of $1,126,801 at December 31, 1999. Cash was
$382,340 at September 30, 2000 compared to $310,549 at December 31, 1999.
Working capital increased primarily as a result of conversions of debt to equity
and proceeds from sales of preferred stock. We expect our cash needs for the
next 12 months to be approximately $4,000,000. We expect to generate the needed
cash through additional financing activities. If we are not able to raise the
needed financing, we will be forced to curtail or suspend our research and
development and other business activities. See "Certain Factors That May Affect
Future Results."
In November 1999, we secured a line of credit for working capital from
BankBoston, N.A. Borrowings (now Fleet Capital) under the line are secured by
substantially all the assets of the Company and its subsidiaries. Under this
agreement, we borrowed up to 85% of our eligible accounts receivable and 60% of
our eligible inventory. The bank has also extended a term loan secured by the
equipment at Able. We use this line of credit primarily for our working capital
needs.
As of September 30, 2000, the Company was in default of certain loan
covenants and as a result the Company and the bank have entered into a
forbearance agreement. Under this agreement, the bank has increased the interest
rate on the line to its base rate plus 4% (13.5% at September 30, 2000), charged
us certain fees and is gradually reducing the borrowing limit on the line. As of
November 1, 2000, our borrowing limit has been reduced to $7,500,000. The limit
on the line will be further reduced to $7,000,000 on November 16, 2000,
$6,750,000 on December 1, 2000, $6,500,000 on December 15, 2000 and $6,250,000
on January 1, 2001. Under the agreement, the line matures on January 15, 2001.
Under the forbearance agreement we can borrow up to 80% of our eligible
accounts receivable and 60% of our eligible inventory less $1,000,000. As of
November 1, 2000, the borrowings on inventory were reduced to 50% of our
eligible inventory less $1,000,000 and on December 1, 2000 will be further
reduced to 40% of our eligible inventory less $1,000,000.
On November 3, 2000, we announced an agreement to sell our Superior
Pharmaceutical Company subsidiary. In conjunction with this proposed
transaction, we expect to receive a purchase price of $6,248,875 consisting of
$4,000,000 in cash and the assumption of our 13.5% senior subordinated debt by
the purchaser, RxBazaar.com, Inc. On closing of the transaction, RxBazaar.com is
also required to settle the outstanding intercompany balances due to us. As of
September 30, 2000 Superior owed approximately $4,643,000 of trade payables to
Able Laboratories and DynaGen owed approximately $840,000 to Superior. The total
cash received at closing estimated at $7,803,000 as of September 30, 2000 will
be used to partially pay our Fleet Capital working capital line of credit
($8,007,130 at September 30, 2000) and our bank overdraft.
To date we have met substantially all of our capital requirements
through the sale of securities and loans convertible into common stock. The
negative impact of events in 1997, 1998 and 1999, has limited our ability to
raise capital in a conventional sale of our securities. However, we continue to
pursue additional sources of capital in order to fund the growth of Able's
generic drug business and its product development efforts. If we are unable to
obtain such additional financing, our ability to maintain our current level of
operations would be materially and adversely affected and we would be required
to reduce or eliminate certain expenditures, including research and development
activities with respect to certain proposed products. We cannot give any
assurance that we will raise the needed financing. If we cannot raise such
financing, we will not have adequate working capital for our operations. Under
such circumstances, we may have to seek protection of the bankruptcy courts.
We are currently negotiating the sale of our Generic Distributors
subsidiary for cash and the forgiveness of our intercompany payable to Generic
Distributors. Proceeds from this sale will also be used to pay our Fleet Capital
Working Capital line of credit.
The payoff of our working capital line of credit and the assumption of
our senior subordinated debt by RxBazaar.com would enable our Able Laboratories
subsidiary to further maximize their borrowing ability on their accounts
receivable, inventory and fixed assets subject only to our existing New Jersey
Economic Development Authority Bonds.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 4, 2000, Don Couvillon, Sidney Johnson, and Generic Distributors
Limited Partnership (collectively, "Claimants") filed for arbitration with the
American Arbitration Association in Atlanta, Georgia. Claimants alleged that
DynaGen, Generic Distributors, Inc., and Superior Pharmaceutical Co.
(collectively, "Respondents") breached the parties' March 2, 1998 Asset Purchase
Agreement by refusing to pay certain compensation totaling $1,383,332.00.
DynaGen and other respondents denied liability and countersued Claimants for
fraud in inducing the Asset Purchase Agreement, breach of contract, negligent
misrepsentation, and a judgment of rescission. On June 6, 2000, Couvillon and
Johnson filed a related action in Federal District Court in Monroe, Louisiana
against DynaGen, Generic Distributors, Inc., and Superior Pharmaceutical Co.,
and later dismissed their pending claims in the Atlanta arbitration. Couvillon
and Johnson alleged breaches of compensation provisions in their employment and
consulting contracts, respectively, and each demanded $116,666.00. DynaGen
denied liability and countersued for fraud in the inducement and negligent
misrepresentations. DynaGen intends to defend and prosecute both matters
vigorously.
We are also involved in certain other legal proceedings from time to
time incidental to our normal business activities. While the outcome of any such
proceedings cannot be accurately predicted, we do not believe the ultimate
resolution of any existing matters should have a material adverse effect on our
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Sales of unregistered Securities. In the three months ended
Sepember 30, 2000, the Company sold the following securities:
During July 2000, the Company received net proceeds of $1,220,000 from
the sale of preferred stock to a single investor. The Company incurred $150,000
in expenses related to the completion of this financing. In addition, the
Company converted a $750,000 bridge loan received during the second quarter from
the same investor, into preferred stock. The Company issued 25,600 shares of
Series M Convertible Preferred Stock at $100 per share in exchange for the total
proceeds of $2,120,000 from the placements of its Series M Preferred Stock. The
Series M Preferred Stock carries a dividend of 4% and is convertible into common
stock at a conversion price equal to 80% of the average of the three lowest
prices per share during the five consecutive trading days prior to conversion.
We relied on one or more exemptions from registration under the
Securities Act of 1933, including the section (2) exemption, for the sale of
Series M Preferred Stock.
In October 2000, the Company granted two options to purchase a total of
1,600,000 shares to two directors at an exercise price of $0.13. These options
have a term of ten years and are immediately exercisable in full.
During the quarter ending September 30, 2000, the Company issued
3,256,829 shares of common stock upon the exercise of options and warrants and
conversion of convertible debt and equity securities.
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ITEM 3. DEFAULTS ON SENIOR SECURITIES
In November 1999, we secured a line of credit for working capital from
BankBoston N.A. (now Fleet Capital) Borrowings under the line are secured by
substantially all the assets of DynaGen and its subsidiaries. The bank also
extended a term loan secured by equipment at Able, which is being amortized over
12 months.
As of September 30, 2000, we are in default of certain loan covenants,
and as a result entered into a forbearance agreement with the bank. Under this
agreement, the bank has increased the interest rate on the line to its base rate
plus 4% (13.5% at September 30, 2000), charged us certain fees and is gradually
reducing the borrowing limit on the line. As of November 1, 2000, our borrowing
limit has been reduced to $7,500,000. The limit on the line will be further
reduced to $7,000,000 on November 16, 2000, $6,750,000 on December 1, 2000,
$6,500,000 on December 15, 2000 and $6,250,000 on January 1, 2001. Under the
agreement, the line matures on January 15, 2001. We have indicated to the bank
that we will seek an alternate lender to maximize our borrowing on our assets.
Under the forbearance agreement we can borrow up to 80% of our eligible
accounts receivable and 60% of our eligible inventory less $1,000,000. As of
November 1, 2000, borrowings on inventory were reduced to 50% of our eligible
inventory less $1,000,000 and on December 1, 2000 will be further reduced to 40%
of our eligible inventory less $1,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) List of Exhibits
The following exhibits, required by Item 601 of Regulation S-B, are
filed as part of this Quarterly Report on Form 10-QSB. Exhibit numbers, where
applicable, in the left column correspond to those of Item 601 of Regulation
S-B.
Exhibit
No. Description of Exhibit
-------------------------------------------------
3.1 Restated Certificate on Incorporated (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998, as
amended on September 14, 1998, and incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May 31,
2000 (filed as Exhibit 3.2 to the Company's Report on Form 10-QSB for
the Quarter ended June 30, 2000, and incorporated herein by reference).
3.3 Amended and Restated By-laws dated as of May 26, 2000 (filed as Exhibit
3.3 to the Company's Report on Form 10-QSB for the Quarter ended June
30, 2000, and incorporated herein by reference).
4.1 Certificate of Designations, Preferences and Rights of Series M
Preferred Stock (filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-3, No. 333-46116 and incorporated herein by
reference).
10.1 Stock Option in the name of Howard Schneider, dated October 13, 2000.
10.2 Stock Option in the name of Dhananjay G. Wadekar, dated October 13,
2000.
10.3 Convertible Preferred Stock Purchase Agreement for Series M Preferred
Stock dated July 17, 2000 (filed as Exhibit 4.5 to the Company's
Registration statement on Form S-3, No. 333-46116 and incorporated
herein by reference).
10.4 Registration Rights Agreement for Series M Preferred Stock dated July
17, 2000 (filed as Exhibit 4.7 to the Company's Registration Statement
on Form S-3, No. 333-46116 and incorporated herein by reference).
10.5 Agreement and Plan of Merger dated October 20, 2000 concerning the sale
of Superior (filed with the Company's definitive proxy statement filed
as of November 3, 2000 and incorporated herein by reference).
10.6 Forbearance Agreement and Amendment dated August 31, 2000 concerning
the loan agreement with Fleet National Bank (formerly known as
BankBoston, N.A.).
27.1 Financial Data Schedule.
--------------------
* Indicates management compensatory contract.
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SIGNATURES
In accordance with the requirements of the Exchange, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYNAGEN, INC.
DATED: November 14, 2000 By: /s/ Dhananjay G. Wadekar
------------------------
Dhananjay G. Wadekar
Executive Vice President
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EXHIBIT INDEX
Exhibit
No. Description of Exhibit
-------------------------------------------------
3.1 Restated Certificate on Incorporated (filed as Exhibit 3a to the
Company's Report on Form 10-Q for the Quarter ended June 30, 1998, as
amended on September 14, 1998, and incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May 31,
2000 (filed as Exhibit 3.2 to the Company's Report on Form 10-QSB for
the Quarter ended June 30, 2000, and incorporated herein by reference).
3.3 Amended and Restated By-laws dated as of May 26, 2000 (filed as Exhibit
3.3 to the Company's Report on Form 10-QSB for the Quarter ended June
30, 2000, and incorporated herein by reference).
4.1 Certificate of Designations, Preferences and Rights of Series M
Preferred Stock (filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-3, No. 333-46116 and incorporated herein by
reference).
10.1* Stock Option in the name of Howard Schneider, dated October 13, 2000.
10.2* Stock Option in the name of Dhananjay G. Wadekar, dated October 13,
2000.
10.3 Convertible Preferred Stock Purchase Agreement for Series M Preferred
Stock dated July 17, 2000 (filed as Exhibit 4.5 to the Company's
Registration statement on Form S-3, No. 333-46116 and incorporated
herein by reference).
10.4 Registration Rights Agreement for Series M Preferred Stock dated July
17, 2000 (filed as Exhibit 4.7 to the Company's Registration Statement
on Form S-3, No. 333-46116 and incorporated herein by reference).
10.5 Agreement and Plan of Merger dated October 20, 2000 concerning the sale
of Superior (filed with the Company's definitive proxy statement filed
as of November 3, 2000 and incorporated herein by reference).
10.6 Forbearance Agreement and Amendment dated August 31, 2000 concerning
the loan agreement with Fleet National Bank (formerly known as
BankBoston, N.A.).
27.1 Financial Data Schedule.
--------------------
* Indicates management compensatory contract.
19
