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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: June 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.
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(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)
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 August 4, 2000 there were 75,445,713 outstanding shares of common stock,
$.01 par value per share.
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<PAGE>
DYNAGEN, INC.
FORM 10-QSB
QUARTERLY REPORT
JUNE 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 14
Item 2. Changes in Securities 15
Item 3. Defaults on Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
(*) 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
DYNAGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
-----------
ASSETS
<TABLE><CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 339,373 $ 310,549
Accounts receivable, net of
allowance for doubtful
accounts of $162,371
and $270,025 6,176,302 5,582,646
Rebates receivable 297,050 262,380
Inventory 8,953,070 7,148,604
Notes receivable 110,000 85,000
Prepaid expenses and other
current assets 692,230 395,726
----------- -----------
Total current assets 16,568,025 13,784,905
----------- -----------
Property and equipment, net 3,808,286 3,852,842
----------- -----------
Other assets:
Customer lists, net of
accumulated amortization 1,927,525 2,385,098
Deferred debt financing costs,
net of accumulated amortization 747,041 885,988
Deposits and other assets 204,016 320,794
----------- -----------
Total other assets 2,878,582 3,591,880
----------- -----------
$23,254,893 $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>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Current liabilities:
Bank overdraft $ 1,956,827 $ --
Notes payable and current portion of
long-term debt 9,467,567 9,826,615
Accounts payable and accrued expenses 4,235,971 5,070,285
Warrant put liability, current portion 667,667 --
Settlement obligation, current portion 15,523 14,806
----------- -----------
Total current liabilities 16,343,555 14,911,706
Warrant put liability, less current portion 382,265 984,769
Long term debt, less current portion 4,128,875 4,190,000
Settlement obligation, less current portion 459,645 467,589
----------- -----------
Total liabilities 21,314,340 20,554,064
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, 53,454 and 55,924
shares of Series A through L outstanding,
(liquidation value $5,619,357 and
$6,468,214) 534 559
Common stock, $.01 par value, 125,000,000
shares authorized, 74,251,545 and
63,854,946 shares issued and outstanding 742,515 638,549
Additional paid-in capital 61,080,797 58,341,326
Accumulated deficit (59,883,293) (58,304,871)
----------- -----------
Total stockholders' equity 1,940,553 675,563
----------- -----------
$23,254,893 $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,
------------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales, net $ 7,979,260 $ 6,581,040
Cost of sales 6,048,339 5,565,327
------------ ------------
Gross profit 1,930,921 1,015,713
------------ ------------
Operating expenses:
Selling, general and administrative 2,436,784 2,365,505
Research and development 759,840 322,282
------------ ------------
Total operating expenses 3,196,624 2,687,787
------------ ------------
Operating loss (1,265,703) (1,672,074)
------------ ------------
Other income (expense):
Investment income, net 7,707 2,162
Interest and financing expense (524,685) (376,972)
Miscellaneous income 749,675 445,070
------------ ------------
Other income (expense), net 232,697 70,260
------------ ------------
Net loss (1,033,006) (1,601,814)
Less returns to preferred stockholders:
Beneficial conversion feature 291,667 803,727
Dividends paid and accrued 34,812 31,992
------------ ------------
Net loss applicable to common stock $ (1,359,485) $ (2,437,533)
============ ============
Net loss per share-basic $ (0.02) $ (0.05)
============ ============
Weighted average shares outstanding 71,301,787 48,664,848
============ ============
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
5
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
-----------
<TABLE><CAPTION>
Six Months Ended,
------------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Sales, net $ 16,101,009 $ 13,605,837
Cost of sales 11,651,564 11,181,983
------------ ------------
Gross profit 4,449,445 2,423,854
------------ ------------
Operating expenses:
Selling, general and administrative 4,760,822 4,356,322
Research and development 1,067,589 498,636
Loss on impairment of customer lists -- 400,000
------------ ------------
Total operating expenses 5,828,411 5,254,958
------------ ------------
Operating loss (1,378,966) (2,831,104)
------------ ------------
Other income (expense):
Investment income, net 11,579 8,193
Interest and financing expense (972,133) (1,145,704)
Miscellaneous income 761,098 469,791
------------ ------------
Other income (expense), net (199,456) (667,720)
------------ ------------
Net loss (1,578,422) (3,498,824)
Less returns to preferred stockholders:
Beneficial conversion feature 291,667 995,377
Dividends paid and accrued 72,840 48,115
------------ ------------
Net loss applicable to common stock $ (1,942,929) $ (4,542,316)
============ ============
Net loss per share-basic $ (0.03) $ (0.10)
============ ============
Weighted average shares outstanding 68,806,766 44,303,126
============ ============
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
6
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Six Months Ended June 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>
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 -- -- 345,488 3,455 (3,355) -- 100
Shares issued in private placement 3,000 30 -- -- 2,999,970 -- 3,000,000
Conversion of preferred stock (33,027) (330) 10,258,055 102,581 (102,251) -- --
Conversion of debt -- -- 3,407,641 34,076 1,016,810 -- 1,050,886
Stock issued for bonus -- -- 125,000 1,250 27,500 -- 28,750
Stock issued for services -- -- 2,790,000 27,900 837,935 -- 865,835
Stock and warrants issued for
Superior Settlement -- -- 1,500,000 15,000 1,982,000 -- 1,997,000
Comprehensive Income: Net loss -- -- -- -- -- (3,498,824) (3,498,824)
------------ -------- ------------ -------- ------------ ------------ ------------
Balance at June 30, 1999 22,125 $ 221 56,038,796 $560,388 $ 53,940,154 $(53,652,377) $ 848,386
============ ======== ============ ======== ============ ============ ============
Balance at December 31, 1999 55,924 $ 559 63,854,946 $638,549 $ 58,341,326 $(58,304,871) $ 675,563
Conversion of preferred stock (7,470) (75) 4,650,490 46,505 (46,430) -- --
Shares issued in private placement 5,000 50 -- -- 449,950 -- 450,000
Conversion of debt -- -- 3,854,909 38,549 1,533,539 -- 1,572,088
Stock and stock warrants issued
for services -- -- 1,151,000 11,510 765,264 -- 776,774
Stock options and warrants
exercised -- -- 740,200 7,402 37,148 -- 44,550
Comprehensive Income: Net loss -- -- -- -- -- (1,578,422) (1,578,422)
------------ -------- ------------ -------- ------------ ------------ ------------
Balance at June 30, 2000 53,454 $ 534 74,251,545 $742,515 $ 61,080,797 $(59,883,293) $ 1,940,553
============ ======== ============ ======== ============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
7
<PAGE>
DYNAGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE><CAPTION>
Six Months Ended
--------------------------
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,578,422) $(3,498,824)
Adjustments to reconcile net loss to net cash used for
operating activities:
Stock, stock options and warrants issued for services 776,774 894,585
Loss on impairment of customer lists -- 400,000
Depreciation and amortization 874,600 938,366
(Increase) decrease in operating assets:
Accounts receivable (593,656) (123,848)
Rebates receivable (34,670) 39,504
Inventory (1,804,466) (1,475,156)
Prepaid expenses and other current assets (296,504) (701,416)
Deposits and other assets 105,908 (513,970)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (642,226) 750,322
Deferred revenue -- (100,000)
----------- -----------
Net cash used for operating activities (3,192,662) (3,390,437)
----------- -----------
Cash flows from investing activities:
Cash paid in Superior Settlement -- (1,500,000)
Purchase of property and equipment (157,491) (1,397,046)
(Increase) decrease in notes receivable (25,000) --
----------- -----------
Net cash provided by (used for) investing activities (182,491) (2,897,046)
----------- -----------
Cash flows from financing activities:
Net proceeds from stock warrants and options 44,550 100
Net proceeds from private stock placement 450,000 3,000,000
Net proceeds from debt placements 840,000 4,705,000
Payment of debt obligations (356,774) (430,720)
Repayments of settlement obligation (7,227) --
Net change in line of credit 476,601 (214,105)
Net change in accounts receivable factoring -- (117,515)
Increase in bank overdraft 1,956,827 645,962
----------- -----------
Net cash provided by financing activities 3,403,977 7,588,722
----------- -----------
Net change in cash and cash equivalents 28,824 1,301,239
Cash and cash equivalents at beginning of period 310,549 97,045
----------- -----------
Cash and cash equivalents at end of period $ 339,373 $ 1,398,284
=========== ===========
Supplemental cash flow information:
Interest paid 643,357 $ 651,504
Common stock issued for notes payable and
accrued interest 1,572,088 1,050,886
</TABLE>
See accompanying notes to unaudited condensed
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:
June 30, December 31,
2000 1999
---------- ----------
Raw materials $1,092,502 $ 752,627
Work-in-progress 42,629 35,345
Finished goods 7,817,939 6,360,632
---------- ----------
$8,953,070 $7,148,604
========== ==========
3. PROPERTY AND EQUIPMENT
June 30, December 31,
2000 1999
---------- ----------
Machinery and equipment $2,848,856 $2,811,296
Furniture, fixtures, and computers 1,151,115 1,146,223
Leasehold improvements 1,381,885 1,266,846
---------- ----------
5,381,856 5,224,365
Less accumulated depreciation and
amortization (1,573,570) (1,371,523)
---------- ----------
$3,808,286 $3,852,842
========== ==========
4 DEBT
Notes payable consist of the following:
June 30, December 31,
2000 1999
---------- ----------
Bridge loans $1,150,740 $1,006,389
Machinery & equipment financing 150,000 150,000
9% convertible debenture -- 980,000
NJEDA bonds 1,940,000 2,000,000
Working capital loan - BankBoston 8,106,827 7,630,226
Senior subordinated debt 2,248,875 2,250,000
---------- ----------
Total 13,596,442 14,016,615
Less current portion 9,467,567 9,826,615
---------- ----------
Long-term debt $4,128,875 $4,190,000
========== ==========
As of June 30, 2000, the Company was in default of certain loan
covenants under its working capital loan, as a result the Company and the bank
have agreed to limit the borrowing on this line to $8.5 million. The Company has
indicated to the bank that it will seek an alternate lender to maximize its
borrowing on its assets.
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 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 or
after 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. 10
<PAGE>
6. SUBSEQUENT EVENTS
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.
In July 2000, the Company issued 88,102 shares upon conversion of its
Series I Preferred Stock and 1,106,066 shares of common stock upon conversion of
its Series J Preferred Stock.
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.
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;
11
<PAGE>
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;
o and intense regulation by government agencies may delay our
efforts to commercialize our proposed drug products.
Because of the foregoing and other factors, we may experience material
fluctuations in our future operating 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, Incorporated.
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 may 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 June 30, 2000
------------------------------------------------------
Revenues for the three-month period ended June 30, 2000 were $7,979,260
compared to $6,581,040 for the period ended June 30, 1999. The increase of
$1,398,220 or 21% is primarily the result of improved sales of Able products.
Cost of sales was $6,048,339 or 76% of sales for the three-month period
ended June 30, 2000, compared to $5,565,327 or 85% of sales for the period ended
June 30, 1999. The Company improved its gross profit margin to 24% primarily due
to the higher margins of the new products introduced by Able Laboratories.
Management anticipates that the gross profit margin will continue to improve as
additional new products are introduced during the latter part of fiscal 2000.
Selling, general and administrative expenses for the three-month period
ended June 30, 2000 were $2,436,784 compared to $2,365,505 for the three-month
period ended June 30, 1999. Expenses for the period ended June 30, 2000 included
additional professional fees and other expenses related to the Company's annual
meeting.
12
<PAGE>
Research and development expenses for the three-month period ended June
30, 2000 were $759,840 compared to $322,282 for the three-month period ended
June 30, 1999. All of these expenses relate to research which is currently being
conducted at Able Laboratories to develop generic drugs. Management invested
significant funds during the second quarter of 2000 into new products.
Interest and other income was $757,382 for the three-month period ended
June 30, 2000, compared to $447,232 for the three-month period ended June 30,
1999. Other income in 1999 consisted primarily of forgiveness of debt and other
income in the corresponding three month period of 2000 consisted of forgiveness
of debt and termination of certain trade agreements. Interest and financing
expenses increased by $147,713 to $524,685 for the three-month period ended June
30, 2000 from $376,972 for the three-month period ended June 30, 1999. This
increase in interest expense is primarily attributable to a higher average
balance on the Company's working capital line and the June 23, 1999 borrowing
from the New Jersey Economic Development Authority. We also issued several
warrants in connection with debt placements, the values of which are included in
our financing costs.
The Company incurred a net loss of $1,033,006 or $.02 per share for the
quarter ended June 30, 2000 compared to a net loss of $1,601,814 or $.05 per
share in the prior year. Overall the Company reduced its net loss by $569,000
while increasing its investment in research and development by $438,000.
Results of Operations Six Months Ended June 30, 2000
----------------------------------------------------
Revenues for the six-month period ended June 30, 2000 were $16,101,009
compared to $13,605,837 for the period ended June 30, 1999. The increase of
$2,495,172 or 18% is primarily the result of sales of Able products.
Cost of sales was $11,651,564 or 72% of sales for the six-month period
ended June 30, 2000, compared to $11,181,983, or 82% of sales for the period
ended June 30, 1999. The Company improved its gross profit margin to 28% due to
the higher margins of new products manufactured at Able Laboratories.
Research and development expenses were $1,067,589 for the six months
ended June 30, 2000 compared to $498,636 for the six months ended June 30, 1999.
This increase of $568,953 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 anticipate that would result in additional new
sales.
Selling, general and administrative expenses for the six-month period
ended June 30, 2000 were $4,760,822 compared to $4,356,322 for the six-month
period ended June 30, 1999. The increase in expenses of $404,500 is primarily
due to increases in sales commissions and promotions, and bad debt expenses.
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 $772,677 for the six-months ended June
30, 2000, compared to $477,984 for the six-month period ended June 30, 1999.
Other income in 1999 consisted primarily of forgiveness of debt and other income
in the corresponding six month period of 2000 consisted of forgiveness of debt
and termination of certain trade agreements. Interest and financing expenses of
$972,133 for the six-month period ended June 30, 2000, compared to $1,145,704
for the six-month period ended June 30, 1999. Interest expense was higher in
1999 due to first quarter 1999 interest expense on obligations which were
settled in 1999. We also issued several warrants in connection with debt
placements, the values of which are included in our financing costs.
The Company incurred a net loss of $1,578,422 or $.03 per share for the
six months ended June 30, 2000 compared to a net loss of $3,498,824 or $.10 per
share in the prior year. Overall the Company reduced its net loss by $1,920,402
due to improved margins and a reduction of overall expenses.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had working capital of $224,470 compared to a
working capital deficit of $1,126,801 at December 31, 1999. Cash was $339,373 at
June 30, 2000 compared to $310,549 at December 31, 1999. Working capital
increased primarily as a result of conversions of debt to equity. 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 under the line are secured by substantially all the
assets of the Company and its subsidiaries. Under this agreement, we can borrow
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 June 30, 2000, the Company was in default of certain loan
covenants, as a result the Company and the bank have agreed to limit the
borrowing on this line to $8.5 million. The Company has indicated to the bank
that it will seek an alternate lender to maximize its borrowing on its assets.
The Company expects to achieve this in the next several months.
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. See
"Certain Factors That May Affect Future Results."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 12, 1999, we commenced a civil lawsuit against Kali
Laboratories, Inc., its principal officer, and two of its employees in the
Superior Court of New Jersey, Chancery Division, in Middlesex County. The
litigation arises out of the Company's 1997 agreement with Kali for the
development and marketing of seven products. The Complaint sought to 1) recover
monetary damages for defendants' breaches of contract and confidentiality,
misappropriation of DynaGen's intellectual property, and unfair dealing and 2)
enjoin the defendants from using DynaGen's intellectual property for their
purposes. In May of 1999, the defendants filed counterclaims against DynaGen and
three of our corporate officers. In its counterclaim, Kali claims monetary
damages for breach of contract, and alleges ownership of the intellectual
property. The employee defendants, who are former employees of DynaGen, claim to
have been defamed and wrongfully terminated. DynaGen and its officers share a
common legal defense to these counterclaims, and we intend to vigorously defend
against them.
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
misrepresentation, 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.
14
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ITEM 2. CHANGE IN SECURITIES
a. Not applicable
b. Sales of unregistered Securities. In the three months ended June
30, 2000, the Company sold the following securities:
During April and May 2000, we recieved $500,000 through the sale of 500
shares of our Series J Preferred Stock. 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 or after 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.
In May 2000, we issued 2,948,909 shares of common stock as a result of
conversion of our 9% convertible debentures together with accrued interest.
During the quarter ended June 30, 2000, we issued 687,292 shares of
common stock upon the exercise of options and warrants and conversion of
convertible debt and equity securities.
We relied on one or more exemptions from registration under the
Securities Act of 1933, including the section 4(2) exemption, for the sale of
Series J Preferred stock.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
In November 1999, we secured a line of credit for working capital from
BankBoston N.A. 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 June 30, 2000, we are in default of certain loan covenants, and
as a result we have agreed with the bank to limit the borrowing on this line to
$8.5 million. We have indicated to the bank that we will seek a replacement
lender in order to maximize our ability to borrow on our assets. Initially we
expected to reach an agreement with a replacement lender by August 2000,
however, we may not meet that schedule. We are continuing to work with the bank
to seek an alternate lender and expect to achieve this in the next several
months.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 31, 2000 we held our annual meeting of stockholders. The
stockholders elected a board of directors for the ensuing year. In addition, the
stockholders also approved an amendment to our restated certificate of
incorporation to increase the authorized number of shares of common stock from
75,000,000 to 125,000,000 , and approved an amendment to our restated
certificate of incorporation to change the name of the company to Able
Laboratories, Inc. The results for each of these proposals were as follows:
Proposal 1: To elect a board of directors for the ensuing year:
Name For Abstain
-------------------- ---------- -------
C. Robert Cusick 58,391,222 247,557
James B. Klint 58,391,542 247,237
F. Howard Schneider 58,351,975 289,804
Harry Silverman 58,492,580 146,199
Dhananjay G. Wadekar 58,392,330 246,449
Proposal 2: To amend the certificate of incorporation to increase the
number of authorized shares of common stock:
For................................................................ 56,592,406
----------
Against............................................................ 1,687,668
----------
Abstain............................................................ 358,705
----------
As stated in our proxy statement, the stockholders approved an amendment
to our certificate of incorporation to change the name of the company at such
time as the board of directors elected to do so.
15
<PAGE>
Proposal 3: To amend the certificate of incorporation to change the
name of the company to Able Laboratories, Inc.:
For................................................................ 58,172,354
----------
Against............................................................ 202,402
----------
Abstain............................................................ 264,023
----------
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 of Incorporation (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 by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May 31,
2000.
3.3 Amended and Restated By-laws dated as of May 26, 2000.
27.1 Financial Data Schedule
--------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
16
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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
Duly Authorized Officer and
Principal Financial and
Accounting Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
----------------------------------------
3.1 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 on September 14, 1998, and incorporated by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May 31,
2000.
3.3 Amended and Restated By-laws dated as of May 26, 2000.
27.1 Financial Data Schedule
--------------
* Indicates a mangement contract or any compensatory plan, contract or
arrangement.
