-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DImat7U5RYrPcYlqAlmbGtlsB7zL4lQc/yAHYezVLdhYuw60s3Tuk4oR44VOvg/R ryNDkfN4ywJtHwSc2vH5tQ== 0000857171-99-000002.txt : 19990106 0000857171-99-000002.hdr.sgml : 19990106 ACCESSION NUMBER: 0000857171-99-000002 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAGEN INC CENTRAL INDEX KEY: 0000857171 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 330659916 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-11352 FILM NUMBER: 99501049 BUSINESS ADDRESS: STREET 1: RIVERSIDE TECHNOLOGY CENTER STREET 2: 840 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6174912527 MAIL ADDRESS: STREET 1: RIVERSIDE TECHNOLOGY CENTER STREET 2: 840 MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-Q/A 1 DYNAGEN, INC. FORM 10-Q DATED 09/30/98 AS AMENDED FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: September 30, 1998; or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission File Number 1-11352 ------- DynaGen, Inc. ------------- (Exact name of registrant as specified in its charter) Delaware 04-3029787 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 840 Memorial Drive Cambridge, MA 02139 ------------------- (Address of principal executive offices, including zip code) (617) 491-2527 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of November 9, 1998, there were outstanding 27,500,449 shares of common stock, $.01 par value per share. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, the Registrant hereby amends its Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 by amending and restating Items 1 and 2 in their entirety as follows: PART I. FINANCIAL INFORMATION Item 1. Financial Statements DYNAGEN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited)
ASSETS September 30, December 31, 1998 1997 ------------- ------------ (As Restated) Current assets: Cash and cash equivalents $ 205,426 $ 697,045 Accounts receivable, net of allowance for doubtful accounts of $42,793 and $43,118 3,648,701 3,152,779 Rebates 628,172 713,976 Inventory (Note 3) 7,554,576 9,111,324 Notes receivable 360,000 110,000 Prepaid expenses and other current assets 112,983 147,972 ------------- ------------ Total current assets 12,509,858 13,933,096 ------------- ------------ Property and equipment, net 1,760,612 1,772,878 ------------- ------------ Other assets: Customer lists, net of accumulated amortization of $3,488,486 and $1,361,200 (Note 2) 10,853,132 12,250,800 Goodwill, net of accumulated amortization of $55,021 and $22,751 (Note 2) 331,198 363,468 Patents and trademarks, net of accumulated amortization of $102,930 and $89,164 272,375 345,381 Deferred debt financing costs, net of accumulated amortization 341,620 359,621 Deposits and other assets 81,317 322,870 ------------- ------------ Total other assets 11,879,642 13,642,140 ------------- ------------ $ 26,150,112 $ 29,348,114 ============= ============
See accompanying notes to unaudited consolidated financial statements. 3 CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 1998 1997 ------------- ------------ (As Restated) Current liabilities: Bank overdraft $ 551,179 $ 142,616 Notes payable (Note 4) 8,815,947 8,348,333 Loan payable - bank 4,385,725 6,584,710 Accounts payable 4,079,900 6,390,421 Accrued payroll and payroll taxes 244,388 95,312 Acquisition obligation (Note 2) 4,083,000 4,083,000 ------------- ------------ Total current liabilities 22,160,139 25,644,392 Warrant put liability 812,680 750,594 Long term debt 578,500 328,500 ------------- ------------ Total liabilities 23,551,319 26,723,486 ------------- ------------ Stockholders' equity (Notes 1 and 2): Preferred stock, $.01 par value, 10,000,000 shares authorized, 55,781 and 63,522 shares of Series A through H outstanding (liquidation value $5,582,132 and $6,348,417 respectively) 558 635 Common stock, $.01 par value, 75,000,000 shares authorized, 26,388,260 and 4,315,137 shares issued and outstanding respectively 263,883 43,151 Additional paid-in capital 46,851,457 40,122,386 Accumulated deficit (44,517,105) (37,541,544) ------------- ------------ Total stockholders' equity 2,598,793 2,624,628 ------------- ------------ $ 26,150,112 $ 29,348,114 ============= ------------
See accompanying notes to unaudited consolidated financial statements. 4 DYNAGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF LOSS ----------------------------------------- (Unaudited)
Nine Months Ended --------------------------------------- September 30, September 30, 1998 1997 ------------- ------------- Revenues: Product sales $ 20,009,036 $ 7,355,636 Fees and Royalties 553 88,744 ------------- ------------- Total revenues 20,009,589 7,444,380 ------------- ------------- Costs and expenses: Cost of sales 17,145,156 7,352,213 Research and development 430,774 2,369,821 Selling, general and administrative 8,437,873 4,795,008 ------------- ------------- Total costs and expenses 26,013,803 14,517,042 ------------- ------------- Operating loss (6,004,214) (7,072,662) ------------- ------------- Other income (expense): Investment income, net 297,894 112,170 Interest expense (902,256) (581,025) Warrant put expense (62,086) (23,821) Amortization of debt financing costs (304,900) (47,366) ------------- ------------- Other income (expense), net (971,348) (540,042) ------------- ------------- Net loss (6,975,561) (7,612,704) Less, returns to preferred stockholders: Beneficial conversion feature 570,198 1,432,000 Dividends paid and accrued 126,006 94,000 ------------- ------------- Net loss applicable to common stock $ (7,671,765) $ (9,138,704) ============= ============= Net loss per share - basic $ (0.45) $ (2.95) ============= ============= Weighted average shares outstanding 17,023,765 3,095,982 ============= =============
See accompanying notes to unaudited consolidated financial statements. 5 DYNAGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF LOSS ----------------------------------------- (Unaudited)
Three Months Ended --------------------------------------- September 30, September 30, 1998 1997 ------------- ------------- Revenues: Product sales $ 6,617,614 $ 5,571,779 Fees and Royalties 188 38,086 ------------- ------------- Total revenues 6,617,802 5,609,865 ------------- ------------- Costs and expenses: Cost of sales 6,076,656 4,644,546 Research and development 110,487 723,143 Selling, general and administrative 3,206,820 2,546,360 ------------- ------------- Total costs and expenses 9,393,963 7,914,049 ------------- ------------- Operating loss (2,776,161) (2,304,184) ------------- ------------- Other income (expense): Investment income, net 143,283 3,136 Interest expense (222,507) (464,538) Warrant put expense (9,975) (23,821) Amortization of debt financing costs (235,609) (28,995) ------------- ------------- Other income, (expense), net (324,808) (514,218) ------------- ------------- Net loss (3,100,969) (2,818,402) Less, returns to preferred stockholders: Beneficial conversion feature 245,156 1,229,000 Dividends paid and accrued 28,357 73,000 ------------- ------------- Net loss applicable to common stock $ (3,374,482) $ (4,120,402) ============= ============= Net loss per share - basic $ (0.14) $ (1.27) ============= ============= Weighted average shares outstanding 24,589,980 3,246,312 ============= =============
See accompanying notes to unaudited consolidated financial statements. 6
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Nine Months Ended September 30, 1998 and 1997 (Unaudited) COMMON STOCK PREFERRED STOCK ADDITIONAL COMPREHENSIVE --------------------- -------------------- PAID-IN INCOME SHARES AMOUNT SHARES AMOUNT CAPITAL ------------- ---------- ------ ------- ------ ------------ Balance at December 31, 1996 - 2,910,623 $ 29,106 - $ - $29,338,794 Shares issued in private placements - 147,500 1,475 60,950 610 5,838,665 Stock issued for Superior acquisition - 166,667 1,667 - - 4,998,333 Exercise of stock options - 150 2 - - 1,123 Issuance of common stock purchase warrants - - - - - 450 Stock options issued for services - - - - - 728,145 Stock issued for interest obligation - 3,863 39 - - 49,099 Conversion of note payable - 98,959 990 - - 984,775 Conversion of Preferred Stock and dividend - 23,249 233 (800) (8) (225) Net loss $(7,612,704) - - - - - Decrease in unrealized gain on investment securities (1,307) - - - - - ----------- ---------- -------- --------- ---------- ----------- Balance at September 30, 1997 ($7,614,011) 3,351,011 $ 33,510 60,150 602 $41,939,161 =========== ========== ======== ========= ========== =========== Balance at December 31, 1997 (As Restated) 4,315,137 $ 43,151 63,522 $ 635 $40,122,386 Stock issued for GDI acquisition - - 12,000 120 1,199,880 Shares issued in private placements - - 34,000 340 3,251,698 Stock issued for services 1,562,671 15,626 - - 655,585 Employee stock & stock options granted for services 300,000 3,000 - - 128,400 Issuance of common stock purchase warrants - - - - 182,500 Common stock issued for interest 416,167 4,162 - - 139,528 Conversion of note payable to preferred stock - - 4,500 45 449,955 Delayed registration penalty - - - - (175,000) Conversion of note payable into common stock 1,798,526 17,986 - - 412,014 Conversion of family loans 1,560,000 15,600 - - 179,400 Conversion of preferred stock 16,435,759 164,358 (58,241) (582) (163,777) Adjustment due to change in ownership of former subsidiary - - - - 468,888 Net loss 6,975,561 - - - - - ----------- ---------- -------- --------- ---------- ----------- Balance at September 30, 1998 6,975,561 26,388,260 $263,883 55,781 $ 558 $46,851,457 =========== ========== ======== ========= ========== ===========
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Nine Months Ended September 30, 1998 and 1997 (Unaudited)(Continued) ACCUMULATED OTHER ACCUMULATED COMPREHENSIVE DEFICIT INCOME TOTAL ------------- ---------- ----------- Balance at December 31, 1996 $ (24,315,191) $ 1,307 $ 5,054,016 Shares issued in private placements - - 5,840,750 Stock issued for Superior acquisition - - 5,000,000 Exercise of stock options - - 1,125 Issuance of common stock purchase warrants - - 450 Stock options issued for services - - 728,145 Stock issued for interest obligation - - 49,138 Conversion of note payable - - 985,765 Conversion of Preferred Stock and dividend - Net loss (7,612,704) - (7,612,704) Decrease in unrealized gain on investment securities - (1,307) (1,307) ------------ ---------- ----------- Balance at September 30, 1997 $ (31,927,895) $ - $10,045,378 ============= =========== ========== Balance at December 31, 1997 (As Restated) $ (37,541,544) $ - $ 2,624,628 Stock issued for GDI acquisition - - 1,200,000 Shares issued in private placements - - 3,252,038 Stock issued for services - - 671,212 Employee stock & stock options granted for services - - 131,400 Issuance of common stock purchase warrants - - 182,500 Common stock issued for interest - - 143,690 Conversion of note payable to preferred stock - - 450,000 Delayed registration penalty - - (175,000) Conversion of note payable into common stock - - 430,000 Conversion of family loans - - 195,000 Conversion of preferred stock - - - Adjustment due to change in ownership of former subsidiar 468,888 Net loss (6,975,561) - (6,975,561) ------------- ----------- ---------- Balance at September 30, 1998 ($44,517,105)$ - $2,598,793 ============ =========== ========== See accompanying notes to unaudited consolidated financial statements.
7 DYNAGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited)
Nine Months Ended --------------------------------------- September 30, September 30, 1998 1997 ------------- ------------- Cash flows from operating activities: Net loss $ (6,975,561) $ (7,612,704) Adjustments to reconcile net loss to net cash used for operating activities: Employee stock and stock option grants 131,400 - Depreciation and amortization 2,346,105 549,195 Stock options and warrants issued for services 853,712 728,145 Amortization and accretion of (discounts) premiums on investment securities - (10,152) Stock issued for interest obligation 143,690 49,138 Write-off of patent costs 97,076 - (Increase) decrease in operating assets: Accounts receivable 259,332 (390,132) Rebates 85,804 112,982 Inventory 2,608,532 (358,105) Prepaid expenses and other current assets 157,969 - Deposits and other assets 226,944 (128,876) Notes receivable (250,000) - Increase (decrease) in operating liabilities: Accounts payable and accrued expenses (2,636,119) 2,315,208 ------------- ------------- Net cash used for operating activities (2,951,116) (4,745,301) ------------- ------------- Cash flows from investing activities: Acquisition of Superior - (6,878,463) Acquisition of GDI (756,406) - Purchase of investment securities - (1,186,455) Proceeds from sales and maturities of investment securities - 4,200,000 Purchase of property and equipment 38,673 (783,268) Increase in deposits - (200,000) Increase in deferred financing and acquisition costs (50,000) - ------------- ------------- Net cash provided (used) by investing activities (767,733) (4,848,186) ------------- -------------
See accompanying notes to unaudited consolidated financial statements. 8 DYNAGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded) ----------------------------------------------------------- (Unaudited)
Nine Months Ended --------------------------------------- September 30, September 30, 1998 1997 ------------- ------------- Cash flows from financing activities: Net proceeds on exercise of stock warrants and options $ - $ 1,125 Net proceeds from issuance of common stock and warrants - 854,250 Net proceeds from preferred stock 3,252,038 5,790,052 Proceeds from bank loan 1,214,280 - Net proceeds from private debt placements 1,200,000 2,696,898 Increase in deferred financing costs - (419,002) Net repayments of loan payable-bank (2,430,984) (1,837,833) Repayments of long-term debt (416,667) (416,667) Increase in bank overdraft 408,563 844,509 ------------ ------------- Net cash provided by financing activities 3,227,230 7,513,332 ------------ ------------- Net change in cash and cash equivalents (491,619) (2,080,155) Cash and cash equivalents, beginning of period 697,045 2,112,300 ------------ ------------- Cash and cash equivalents, end of period $ 205,426 $ 32,145 ============ ============= Supplemental cash flow information: Conversion of preferred stock into common stock $ 164,358 $ 2,325 Common stock issued for convertible note payable $ 430,000 $ 1,065,000 Conversion of related party loans $ 195,000 - Conversion of note payable to preferred stock $ 450,000 - Debt issued for delayed registration penalty $ 262,500 Interest paid $ 633,013 $ 549,527 Schedule of non-cash investing and financing activities: On June 18, 1997 the Company purchased all of the common stock of Superior Pharmaceutical Company, Inc. for $16,250,000. In connection with the acquisition, non-cash financing activities, liabilities assumed and goodwill were as follows: Fair value of assets acquired 10,913,834 Cash paid for common stock (6,250,000) Common stock issued (5,000,000) Note payable issued (5,000,000) Liabilities assumed (8,263,477) ------------- Goodwill and customer list (exclusive of other acquisition cost of $694,890.00) $ 13,599,644 ============= March 2, 1998, the Company purchased the net assets of GDLP for $2,350,000. In connection with the acquisition, non-cash financing activities, liabilities assumed and customer lists were as follows: fair value of assets acquired $ 2,375,274 Cash paid (1,200,000) Preferred stock issued (1,150,000) Liabilities assumed (658,274) ------------- Customer lists (exclusive of other acquisition costs of $96,628) $ 633,000 =============
See accompanying notes to unaudited consolidated financial statements. 9 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 ------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND BASIS OF PRESENTATION ---------------------------------- The consolidated financial statements include the accounts of DynaGen, Inc. (the Company) and its wholly-owned subsidiaries, Able Laboratories, Inc. (Able), which is engaged in the manufacture of generic pharmaceuticals, Superior Pharmaceutical Company (Superior) and Generic Distributors Incorporated (GDI), which are engaged in the distribution of generic pharmaceuticals, and Apex Pharmaceuticals, Inc., which is developing therapeutic products. The consolidated financial statements no longer include the accounts of BioTrack for the reason described below. The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statement presentation. All significant intercompany balances and transactions have been eliminated in consolidation. In March 1998, the Company acquired Generic Distributors Limited Partnership which is engaged in the distribution of generic pharmaceuticals. (See Note 2). During the first and second quarter of 1998, the Company sold 300,000 shares of its BioTrack subsidiary's common stock, recognizing a gain of $150,000, which is included in investment income. In addition, during this same period, BioTrack sold shares of its common stock directly to outside investors. Also, BioTrack redeemed 3,930,000 shares of its common stock held by the Company for a $1,000,000 promissory note. This note has not been recognized in the accompanying financial statements because of the uncertainty and risks inherent in technology start-up companies. As a result of the ownership changes in BioTrack described above, the Company adjusted its investment in BioTrack by approximately $469,000 which was added to additional paid-in capital. The Company's ownership interest in BioTrack at June 30, 1998 was approximately 29%. Accordingly, BioTrack's financial statements are not included in the accompanying consolidated financial statements. The Company's remaining investment is carried on the equity basis of accounting. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full 10 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- year. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of operating results for the interim periods presented have been made. The financial information included in this report has been prepared in conformity with the accounting policies reflected in the financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. FINANCIAL STATEMENT RESTATEMENT ------------------------------- The accompanying financial statements have been restated from those originally issued to reflect a change in accounting for the February 1996 issuance of a convertible note, as described in Note 6 to the December 31, 1997 financial statements. The convertible note could be converted at a discount to the traded market price of the common stock into which the securities are convertible. At the date of issuance, the company did not allocate any portion of the proceeds received to the beneficial discount. Subsequently, the Securities and Exchange Commission announced its position that a beneficial conversion discount on convertible notes should be computed based on the quoted market value of the Company's Common Stock and this amount should be recognized as additional interest expense and an addition to paid-in capital. The Company estimated the amount of the beneficial conversion discount at the date of issuance to be $985,000 and the financial statements have been restated to comply with the accounting treatment described above. A summary of the impact of the restatement on the Company's financial statements follows: Period As Reported As Restated - ------ ----------- ----------- December 31, 1997: Additional paid-in capital $ 39,137,311 $ 40,122,386 Accumulated deficit $(36,556,469) $(37,541,544) REVERSE STOCK SPLIT ------------------- On March 4, 1998 the Company's Stockholders approved a 1 for 10 reverse stock split of the common shares. All common stock information presented herein has been retroactively adjusted to reflect the reverse stock split. USE OF ESTIMATES ---------------- 11 In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to 12 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- significant change in the near term relate to the carrying values of rebates receivable and intangible assets, the valuation of equity instruments issued by the Company and the amount of obligations due as a result of defaults on certain debt obligations. Actual results could differ from those estimates. REBATES ------- Rebates represent incentives provided by pharmaceutical suppliers to the distributors based on purchases. Management has estimated its rebates based upon agreements and purchases during the year. Actual rebates could be different due to market volatility and whether the Company continues to use these suppliers. INVENTORY --------- Inventory is valued at the lower of average cost or market on a first-in first-out (FIFO) method. PROPERTY AND EQUIPMENT ---------------------- Property and equipment are stated at cost. Depreciation expense is provided over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful life of the asset or the life of the related lease term. CUSTOMER LISTS AND GOODWILL --------------------------- Customer lists and goodwill are being amortized over estimated lives of five and fifteen years, respectively. (See Note 2.) REVENUE RECOGNITION ------------------- Revenues from product sales are recognized when products are shipped. Revenues from license fees and royalties are recognized as the terms of the agreements are met. EARNINGS PER SHARE ------------------ In February 1997, FASB issued SFAS No. 128, Earnings per Share, which requires that earnings per share be calculated on a basic and a dilutive basis. Basic earnings per share represents 13 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- income available to common stock divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. The Statement is effective for interim and annual periods ending after December 15, 1997, and requires the restatement of all prior-period earnings per share data presented. Accordingly, the Company has restated all earnings per share data presented herein. For the three and nine months ended September 30, 1998 and 1997 options, warrants and put warrants, were anti-dilutive and excluded from the diluted earnings per share computations. The loss applicable to common stockholders has been increased by the stated dividends on the convertible preferred stock and the amortization of discounts on the convertible preferred stock due to the beneficial conversion feature. Shares of common stock contingently issuable to the former stockholders of Superior have not been included in diluted EPS because to do so would have been anti-dilutive. COMPREHENSIVE INCOME -------------------- In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain FASB statements, however, require entities to report specific changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. SFAS No. 130 requires that all items of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, SFAS No. 130 requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company adopted these disclosure requirements in the first quarter of 1998 and has presented comparative disclosure for the nine monthes ended September 30, 1997. There is no other comprehensive income for the nine months ended September 30, 1998. 14 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- 2. BUSINESS ACQUISITIONS SUPERIOR PHARMACEUTICAL COMPANY ------------------------------- On June 18, 1997, the Company acquired all of the outstanding stock of Superior Pharmaceutical Company ("Superior"), a distributor of generic pharmaceutical products. The Company paid the shareholders of Superior $6,250,000 in cash, $5,000,000 in three year secured promissory notes and 166,667 shares of it's common stock with a guaranteed value of $5,000,000. The secured promissory notes were subsequently reduced by $400,000 due to a deficiency in the required net worth of Superior as of the acquisition date. DynaGen is obligated to issue to the shareholders up to an additional 1,666,667 shares of its common stock after twelve months if its common stock is not trading at an average of at least $30.00 per share for 10 consecutive trading days. The merger agreement provides further that DynaGen shall pay to the former Superior stockholders the difference between $5,000,000 and the current aggregate market value of the shares issued to the former Superior stockholders. DynaGen is obligated to register the shares within eleven months after the closing of the acquisition. The Company recorded a $4,083,000 acquisition obligation at December 31, 1997 based on the difference between the current estimated fair value of the 1,833,334 shares of common stock issued and issuable and the guaranteed value of $5,000,000. The former shareholders of Superior, who remain as senior management at Superior, may also receive certain incentive payments based on Superior's performance during the three years following the closing of the acquisition. Any such payments will be charged to expense when incurred. DynaGen contributed $1,750,000 in additional capital to Superior immediately following the closing. On July 31, 1998, the Company signed a Contingent Settlement Agreement with the selling shareholders of Superior which provides for an overall reduction in purchase price of $4,900,000 through waiver of any additional stock or cash payment. The Agreement also provides for a payment of $4,200,000, which represents the remaining amount due on the original selling shareholder notes by September 30, 1998. The Superior acquisition has been accounted for as a purchase. The results of operations of Superior have been included in the Company's consolidated financial statements since the date of acquisition. The purchase price allocation was based on the 15 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- estimated fair values at the date of acquisition. The Company allocated $13,612,000 of the purchase price to customer lists based on an independent appraisal, which is being amortized on a straight-line basis over five years. Amortization of customer lists amounted to $2,041,800 for the nine months ended September 30, 1998. In addition, the Company recorded goodwill of $386,219, which is being amortized on a straight-line basis over 15 years. Amortization expense for the nine months ended September 30, 1998 was $19,362. GENERIC DISTRIBUTORS, INC. -------------------------- On March 2, 1998, the Company through its subsidiary, Generic Distributions, Incorporated (GDI), completed the acquisition of substantially all of the assets and liabilities of Generic Distributors Limited Partnership (GDLP), of Monroe, LA. In connection with the acquisition, the Company paid the limited partnership $1,200,000 in cash, and $1,050,000 in Series E Convertible Preferred Shares and 1,500 shares of Series F Convertible Preferred Stock valued at $100,000, for a total purchase price of $2,350,000. The Series E Preferred Shares are convertible beginning 12 months from the closing into the Company's common shares at the then prevailing market prices. The Series F Preferred Stock is convertible into $100,000 in value of the Company's Common Stock commencing 120 days after the closing. In connection with the transaction, GDI received $1,200,000 in a five-year term loan from Fleet Bank. The loan carries interest of LIBOR plus 3%, is payable in quarterly installments of principal and interest and matures on April 26, 2003. Fleet Bank also established a revolving line of credit for general working capital in the amount of $300,000. The line bears interest at LIBOR plus 2-1/2%. The loans are secured by all of the assets of GDI and the Company's subsidiary, Able Laboratories, Inc., and a pledge of all of the common stock of GDI, and are guaranteed by the Company. In addition, the Company entered into employment and consulting agreements with the sellers which provide, among other things, for annual compensation and a signing bonus of 1,500 shares of Series F Preferred Stock, convertible into $100,000 of the Company's Common Stock commencing 120 days after the closing. The GDI acquisition has been accounted for as a purchase. The results of operations of GDI have been included in the Company's consolidated financial statements since the date of acquisition. The purchase price allocation was based on the estimated fair values at the date of acquisition. The Company allocated $729,618 16 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- of the purchase price to customer lists, based on an independent appraisal, which is being amortized on a straight line basis over five years. Amortization of customer lists amounted to $85,486 for the nine months ended September 30, 1998. Unaudited proforma consolidated operating results for the Company, assuming the acquisitions of Superior and GDI had been made as of the beginning of the most recent fiscal year for each of the periods presented, are as follows: Nine Months Ended ----------------- September 30, 1998 September 30, 1997 ------------------ ------------------ Revenues $21,903,312 $25,010,420 Net loss (7,562,796) (10,259,021) Net loss per share (0.44) (3.32) Three Months Ended ------------------ September 30, 1998 September 30, 1997 ------------------ ------------------ Revenues $ 7,330,802 $ 7,905,244 Net loss (3,274,585) (4,505,311) Net loss per share (0.13) (1.45) The unaudited proforma information is not necessarily indicative either of the actual results of operations that would have occurred had the purchases been made as of the beginning of each of the fiscal periods presented or of future results of operations of the combined companies. The goodwill associated with the acquisition of Superior and GDI is a long-lived asset subject to the provisions of SFAS 121. SFAS 121 requires the owner of a long-lived asset to recognize an impairment loss if, and to the extent that, the expected future cash flows to be produced by the asset are less than the carrying amount of the asset. SFAS 121 also requires the Company to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may be not be recoverable. Because of the Company's continuing operating losses and negative cash flow, in November 1998 the Company undertook an impairment analysis of the intangible assets it acquired through the acquisitions of Superior and GDI. Based on its projections at that time of future cash flows to be produced by the acquired assets, the Company determined that the assets were not impaired. The Company intends to continue to evaluate its long-lived assets. If such assets were determined to be impaired, the Company would be required to recognize a loss in accordance with SFAS 121. Because a high percentage of the Company's assets are intangible assets subject to SFAS 121, this could have a material adverse effect on the Company's financial condition and results of operations. The Company's projections of future cash flows depend on a number of assumptions, including the following: 17 o The Company is presently developing several generic products intended to compete with proprietary drugs whose patent protection has expired or is due to expire in the near future. Based on its research, the Company believes that those companies that are among the first two or three suppliers of a given generic drug in the market are likely to obtain the greatest market share for that generic equivalent product. The Company intends to be among the first three suppliers to enter the market with certain of its proposed new generic products, and has projected revenues based on achieving this potentially favorable competitive position. o Generic drug products can be approved by the U.S. Food and Drug Administration in a significantly shorter time than new proprietary pharmaceutical products. The Company's projected revenues are based on achieving approvals for its developmental generic products within a six-month to two-year period, with most of the products elected to be approved in one year or less from the time development is begun. o While overall margins for generic products are generally lower than those for proprietary products, the Company believes that margins can be potentially higher than the industry norm in instances where competition is limited or where there are barriers to entry due to specialty manufacturing capabilities. The Company believes that certain of its products under development, such as suppository products, target market niches where competition is expected to be less intense than in the overall generic market. Also, state legislation increasingly requires substitution of generic products if available, even when the equivalent proprietary product is prescribed by the physician. The Company believes that this trend toward increased use of generic products will help the Company penetrate the market for those products where it is among the first two or three competitors to offer a generic substitute, and could contribute to lower sales and marketing expenses. The Company's revenue projections for those products where it believes it may attain such a favorable position reflects higher profit margins and lower sales and marketing costs than industry averages. The projected revenues for the Company's developmental generic products depend, in part, on the Company's ability to realize the benefits of each of the foregoing assumptions. The Company's inability for any reason to be among the first to market with its proposed products, delays in gaining regulatory approval of its products or the inability to realize higher than average profit margins could all adversely affect its ability to achieve the revenues necessary to cover the carrying value of its intangible assets. Recognition of an impairment loss under SFAS 121 could have a material adverse effect on the Company's financial condition and results of operations. 18 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- 3. INVENTORY Inventory consists of the following: September 30, December 31, ------------- ------------ 1998 1997 ---- ---- Raw materials $ 453,893 $ 311,166 Work-in-progress 224,870 136,240 Finished goods 6,875,813 8,663,918 ---------- ---------- $7,554,576 $9,111,324 ========== ========== 4. DEBT Notes payable consist of the following: September 30, December 31, ------------- ------------ 1998 1997 ---- ---- Convertible note payable $ 535,000 $ 535,000 Bridge loans 300,000 630,000 Notes payable - Superior acquisition 3,766,667 4,183,333 Secured debt - Fleet Bank 1,214,280 - Senior subordinated debt 3,000,000 3,000,000 ---------- ---------- $8,815,947 $8,348,333 5. SUBSEQUENT EVENTS In October 1998, the Company, through its Able Laboratories, Inc. subsidiary (Able), refinanced its existing short-term financing agreement with Porter Capital with a short-term financing agreement with K&L Financial, Inc. (K&L) whereby Able will finance its outstanding accounts receivable through K&L. K&L will advance funds equal to 80% of invoice value upon receipt of invoices from Able. Upon payment in full from Able's customers, K&L will remit the balance due Able less K&L's net charge of 1% per each 10 days outstanding. K&L has the right to reject any or all accounts receivable tendered from Able. No assurance can be given that K&L will accept any or all of Able's outstanding accounts receivable. The term of this agreement is twelve months. 19 In October, 1998, the Company, through its Able Laboratories, Inc. subsidiary (Able), refinanced its existing machinery & equipment financing agreement with Porter Capital with a machinery & equipment financing agreement with Triple L, Ltd. (Triple L). Net proceeds from this refinancing totalled $303,500. In November 1998, the Company's Executive Vice President, who is also a director, invested $50,000 in the Company and purchased shares of BioTrack, Inc. owned by the Company. Also, in connection with the subordinated loan of $150,000 by the spouse of the Chief Executive Officer and Chairman of the Company, the Company transferred shares of BioTrack, Inc. to the investor. On November 5, 1998, the Company accepted the resignation of Indu A. Muni, Ph.D. as President, Chief Executive Officer, Treasurer and Director. On November 6, 1998, Mr. C. Robert Cusick, who had been serving since May 1998 as Chairman of the board of directors, was appointed Chief Executive Officer of the Company. 20 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE ON FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. Except for historical information contained herein, the matters discussed below contain potential risks and uncertainties, including, without limitation, risks related to the Company's ability to successfully develop, test, produce and market its proposed products; obtain governmental approvals in a timely manner; identify and attract marketing partners to help commercialize the Company's products; attract and retain key employees; obtain meaningful patent protection or otherwise over the Company's proprietary technology; protect itself from product liability risks or limitations imposed due to potential health care reform; raise capital for future operations and commercialization of its products; integrate the products and personnel the Company acquired in the acquisition of Able Laboratories, Inc., Superior and GDI, and successfully respond to technological changes in the marketplace. Specifically, regulatory approvals of the Company's products are subject to factors beyond the Company's control, and there can be no assurance that such approvals will not be delayed or ultimately denied. The Company will need to attract marketing partners in order to exploit its products, and there can be no assurance that the Company will be successful in attracting such partners. SPECIAL CONSIDERATIONS During the nine months ended September 30, 1998, DynaGen, Inc. ("DynaGen" or the "Company") experienced continued losses from operations and substantial and continuing dilution to existing stockholders due to the below market conversion features of convertible securities sold by the Company. The following special considerations should be carefully noted by the reader: 21 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- FINANCIAL CONDITION OF THE COMPANY - ---------------------------------- For the three months ended September 30, 1998, the Company incurred net losses of approximately $3,100,969. As of September 30, 1998, the Company had approximately $205,426 in cash and cash equivalents and a net worth of $2,598,993. The Company's current liabilities, as of such date, aggregated $22,160,139. The Company expects its operating cash needs for the next twelve months to be approximately $6,000,000. The Company does not presently have adequate cash from operations to meet these needs. In order to meet its needs for cash to fund its operations, the Company must obtain additional financing and renegotiate the terms of its current arrangements with creditors. The Company is presently in default under a number of its arrangements, agreements and instruments with creditors, with the result that the Company's obligations under such agreements and instruments may be accelerated. The Company's independent auditors have issued an opinion on the financial statements of the Company, as of December 31, 1997 and for the year then ended, which includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. If the Company is unable to obtain significant additional financing or to renegotiate its arrangements with existing creditors, it may be obliged to seek protection from its creditors under the bankruptcy laws. See "Management's Discussion and Analysis - Liquidity and Capital Resources;" the financial statements and notes thereto included as part of this Report. COMPANY'S COMMON STOCK DELISTED FROM NASDAQ STOCK MARKET - -------------------------------------------------------- On October 7, 1998 the Company was informed by the NASDAQ Stock Market that the Company's Common Stock does not meet the applicable listing requirement and is therefore delisted as of the end of the day. The Company continues to trade on the Boston Stock Exchange and the OTC Bulletin Board. The delisting could have a material adverse effect on the liquidity of the Common Stock and on the Company's ability to raise capital necessary for the Company's continued operations. ADVERSE CONSEQUENCES ASSOCIATED WITH THE OBLIGATION TO ISSUE A - -------------------------------------------------------------- SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK UPON CONVERSION OF - --------------------------------------------------------------- CONVERTIBLE SECURITIES - ---------------------- 22 DYNAGEN, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - Continued September 30, 1998 ------------------------------------------------------------- The Company is obligated to issue a substantial number of shares of Common Stock upon the conversion or exercise of its outstanding warrants, rights, convertible preferred stock and a convertible note. The price which the Company may receive for the Common Stock issuable upon exercise of such options and warrants will, in all likelihood, be less than the market price of the Common Stock at the time of such exercise. Consequently, for the life of such options and warrants the holders thereof may have been given, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock. The exercise of all of the aforementioned securities may also adversely affect the terms under which the Company could obtain additional equity capital. In all likelihood, the Company would be able to obtain additional equity capital on terms more favorable to the Company at the time the holders of such securities choose to exercise them. In addition, should a significant number of these securities be exercised, the resulting increase in the amount of the Common Stock in the public market could have a substantial dilutive effect on the Company's outstanding Common Stock. The information set forth below should be read in connection with the financial statements and notes thereto, as well as other information contained in this Report which could have a material adverse effect on the Company's financial condition and results of operations. The reader's attention is directed, in particular, to the matters described under the headings "Special Considerations" and "Liquidity and Capital Resources" contained elsewhere in this Report. 23 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- OVERVIEW The Company develops and markets generic and specialty products. The Company has changed its focus from being a development and licensing company to building a business focused on the manufacture and distribution of generic drug products and specialty pharmaceuticals. The Company is implementing this strategy through the acquisition of businesses, technologies and products as well as through internal product development. In August 1996, the Company acquired the tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc. In addition, the Company has purchased all of the outstanding shares of Superior Pharmaceutical Company ("Superior"), a distributor of generic pharmaceuticals. In March 1998, the Company, through its wholly-owned subsidiary, Generic Distributors Incorporated ("GDI"), completed the acquisition of Generic Distributors Limited Partnership ("GDI"). The Company has financed its operations primarily through the proceeds from its public and private stock offerings, a convertible note, bank debt and other loans and limited revenues from product sales and technology license fees and royalties. Management anticipates that revenues from product sales will not be sufficient to fund its current operations or produce an operating profit until such time as the Company is able to develop additional products, obtain the necessary FDA approvals and establish acceptance of its products in their respective markets and expand its distribution channels. The Company has incurred losses since inception and expects to incur additional losses until such time as it is able to successfully develop, manufacture, and sell or license its existing and proposed products and technologies. RESULTS OF OPERATIONS Three Month Period Ended September 30, 1998 as Compared With the - ---------------------------------------------------------------- Three Month Period Ended September 30, 1997 - ------------------------------------------- Revenues for the three month period ended September 30, 1998 were $6,617,802 versus $5,609,865 for the period ended September 30, 1997. The increase of $1,007,937 is primarily the result of product sales by the Company's wholly-owned generic pharmaceutical subsidiaries, Superior (acquired in June 1997) and GDI (acquired in March 1998). 24 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- Cost of product sales was $6,076,656, or 92% of product sales for the three-month period ended September 30, 1998 compared to $4,644,546, or 83% of product sales for the three month period ended September 30, 1997 due to increased sales of the newly acquired subsidiary, GDI. Research and development expenses for the three month period ended September 30, 1998 were $110,487 versus $723,143 for the three month period ended September 30, 1997. 1997 R&D expenses were primarily the result of the NicErase(R)-SL Phase 3 clinical trials, now concluded, and the NicErase(R)-SL development program which has been discontinued. The Company is currently developing several generic versions of branded pharmaceuticals to support its generic drug business. Selling, general and administrative expenses for the three month period ended September 30, 1998 were $3,206,820 versus $2,546,360 for the three month ended September 30, 1997. The increase is primarily due to GDI's selling, general and administrative expenses. Investment income was $143,283 for the three months ended September 30, 1998 as compared to $3,136 for the three month period ended September 30, 1997. The increase is due to forgiveness of debt. Interest and financing expenses of $468,091 for the three month period ended September 30, 1998, compared to $517,354 for the three month period ended September 30, 1997, relate primarily to private placements of equity as well as private debt financing for the Superior and GDI acquisitions. Nine Month Period Ended September 30, 1998 as Compared With the - --------------------------------------------------------------- Nine Month Period Ended September 30, 1997 - ------------------------------------------ Revenues for the nine month period ended September 30, 1998 were $20,009,589 versus $7,444,380 for the period ended September 30, 1997. The increase of $12,565,209 is primarily the result of product sales by the Company's wholly-owned generic pharmaceutical subsidiaries, Superior (acquired in June 1997) and GDI (acquired in March 1998). Cost of product sales was $17,145,156, or 86% of product sales for the nine month period ended September 30, 1998 compared to $7,352,213, or 99% of product sales. 25 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- Research and development expenses for the nine month period ended September 30, 1998 were $430,774 versus $2,369,821 for the nine month period ended September 30, 1997. 1997 R&D expenses were primarily the result of the NicErase(R)-SL Phase 3 clinical trials, now concluded, and the NicErase(R)-SL development program which has been discontinued. The Company is currently developing several generic versions of branded pharmaceuticals to support its generic drug business. Selling, general and administrative expenses for the nine month period ended September 30, 1998 were $8,437,873 versus $4,795,008 for the nine months ended September 30, 1997. The $3,642,865 increase is primarily due to Superior's selling, general and administrative expenses of $3,150,000. Investment income was $297,894 for the nine months ended September 30, 1998 as compared to $112,170 for the nine month period ended September 30, 1997 primarily due to the sale of BioTrack stock. Interest and financing expenses of $1,269,242 for the nine month period ended September 30, 1998, compared to $652,212 for the nine month period ended September 30, 1997, relate primarily to private placements of equity as well as private debt financing for the Superior and GDI acquisitions. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had a working capital deficit of $9,650,281, compared to working capital deficit of $11,711,296 at December 31, 1997. Cash was $205,426 at September 30, 1998 compared to $697,045 at December 31, 1997. Working capital was used primarily to fund the Company's operating losses, including approximately $1,660,000 of operating losses of its Able subsidiary. The Company expects its cash needs for the next 12 months to be approximately $6,000,000. Of this amount, approximately $2,000,000 is expected to be general and administrative and approximately $4,000,000 is expected to be for working capital. The Company expects to generate the needed cash through additional financing activities. In June 1997, the Company completed the acquisition of Superior Pharmaceutical Company, of Cincinnati, OH, for a purchase price of $16.25 million in cash, notes and stock. The Company guaranteed that the selling shareholders would receive at least $5,000,000 in the stock value as of June 1998. The agreement provided that the Company make up any shortfall in this guaranteed 26 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES stock value through the issuance of additional stock and cash. See "Special Considerations - Contingent Obligation with Respect to Superior Acquisition." The Company financed this acquisition by issuing Series A and Series B Preferred Shares for proceeds of $6,100,000 and subordinated debt of $3,000,000 obtained from two institutional lenders. The Company also invested $1,750,000 in Superior towards working capital as required by the secured lender. Superior has a $9,000,000 secured revolving facility through Huntington National Bank, of Cincinnati, OH. Subsequent to the acquisition of Superior in June 1997, Superior experienced the loss of key personnel, declining revenues, erosion of margins and an overall decline in its business. These factors have resulted in the Company not meeting certain loan covenants stipulated by the secured and subordinated lenders. As a result, the secured lender has agreed to extend the credit line and upon review of the Company's performance may consider further extension. The Company obtained a waiver and extension of the third and fourth quarterly payments of $515,625 each to the selling shareholders which were due on March 31, 1998 and June 30, 1998 respectively. The Huntington Bank agreement provides that the selling shareholders of Superior may draw this payment out of its operating cash flows provided that Superior and DynaGen meet the loan covenants. The Company has also received an extension on the payment of the $535,000 convertible note payable which matured on February 7, 1998. On July 31, 1998, the Company entered into a contingent settlement agreement with the selling shareholders of Superior which provides for an overall reduction in purchase price of $4,900,000 through waiver of any additional stock or cash payment. The agreement also provides for, and is contingent upon, a payment of $3,800,000, which represents the remaining amount due on the original selling shareholder notes, by September 30, 1998. There can be no assurance that the Company will be able to obtain financing to meet the obligations to pay the selling shareholders. The Company continues to operate its Able Laboratories, Inc. manufacturing facility for manufacture and distribution of generic drugs. Able has a working capital deficit and management expects Able will require 27 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES approximately $4,000,000 in the next 12 months to continue operations. No assurance can be given that such financing will be available upon reasonable terms. The Company's private placement of Series A and Series B Preferred Stock allowed investors to convert into shares of common stock at a floating discount to the market of approximately 25%. The stock price was depressed due to below-market conversions and selling of common shares by the holders of Series A and Series B Preferred Stock. This investment, along with the outlicensing of the Company's lead product, NicErase(R)-SL, and continued losses at both DynaGen and Able, resulted in a severe negative impact on the Company's stock price. As a result, the Company reached its limit of 75,000,000 authorized shares. On March 4, 1998, the Company held a special meeting of stockholders and approved a one for ten reverse split of its outstanding shares. As a result, at the effective date of the reverse split, March 10, 1998, 75,000,000 shares of common stock, $0.01 par value per share, were authorized, and approximately 7,500,000 were issued and outstanding. As of November 9, 1998, there were 27,500,449 shares of Common Stock outstanding. This increase is primarily due to conversions of preferred stock. Management has initiated intensive reviews of its operations and is implementing plans to cure defaults, raise additional equity, and improve the liquidity and cash resources for general working capital purposes. Specifically, at the corporate level, the Company has discontinued all R&D activity either through terminating the programs or outlicensing the products to other companies. The Company's lead product to date, NicErase(R)-SL, has been licensed to Nastech Pharmaceutical, of Hauppauge, NY. The Company has reduced its workforce by approximately 40 employees through termination and attrition. The Company has sublet approximately 8,000 square feet of its Cambridge, MA headquarters and is also negotiating to sublease all or part of the remaining space in that facility to further reduce its overhead expenses. In 1998, management expects to maintain a staff of approximately seven full-time and four part-time employees to manage the corporate functions of the Company. Management is also actively reviewing every cost center for further cost reductions. In November 1997, the Company initiated similar measures at its Able manufacturing facility. The Company has reduced Able's workforce by 50 percent through terminations and attrition. 28 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Management has actively initiated programs to increase sales of Able's products to existing customers and is seeking to bring back customers Able has lost over the past two years. The Company is also renegotiating its development agreement with Kali Laboratories to minimize further cash outlays for product development. The Company has also received offers from a service contractor for clinical testing in return for deferred compensation, warrants and royalty payments on new products. The Company has also initiated a modest internal R&D program at Able to develop prescription drugs which do not require FDA approval. These so-called "grandfathered" products are expected to generate revenues by June 1999. Management, in conjunction with key personnel at Superior, has implemented a program to reverse the decline in the general business of Superior. Specific actions taken at Superior include recruitment of key personnel, review of the product line, reduction in the selling, general and administrative expenses and an aggressive program to seek competitive business in both the government and corporate sectors. Superior is also negotiating supply agreements with its primary vendors to obtain more favorable terms, which would improve the gross margins and make Superior more competitive in the marketplace. To date, the Company has met substantially all of its requirements for capital through the sale of its securities. The negative impact of the events in 1997 has severely limited the Company's ability to raise further capital in a conventional sale of its securities. The Company plans to raise capital in order to finance the working capital requirements. There can be no assurance that the Company will be able to secure additional financing or that such financing will be available on favorable terms. Between April 30, 1998 and October 31, 1998, the Company raised $2,000,000 through the sale of convertible preferred stock, $450,000 in Limited Recourse Notes, and $700,000 through factoring and leasing arrangements. Management believes that such financing will create additional common shares in the market and could result in further depression of the stock price, making it even more difficult to raise capital. Therefore, the Company intends to seek financing primarily from sources who will be long-term investors. In view of the Company's current stock price and its financial condition, it is exceedingly difficult to find such investors. However, the Company has had limited and preliminary discussions with investors and believes that additional financing could become available over the next several weeks. The Company plans to use the interim financing for general working capital, partial payment to its creditors and the limited internal R&D program at Able. Impairment Analysis of Intangible Assets - ---------------------------------------- SFAS 121 requires the owner of a long-lived asset to recognize an impairment loss if, and to the extent that, the expected future cash flows to be produced by a given asset are less than the carrying amount of the asset. SFAS 121 also requires the owner to review its long-lived assets for impairment 29 whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In light of the Company's continuing operating losses and negative cash flow, in August 1998 the Company undertook an impairment analysis of the intangible assets it acquired through the acquisitions of Superior and GD1. Based on its projections at that time of future cash flows to be produced by the acquired assets, the Company determined that the assets were not impaired. The Company's projections of future cash flows depend on a number of assumptions, including the following: o The Company is presently developing several generic products intended to compete with proprietary drugs whose patent protection has expired or is due to expire in the near future. Based on its research, the Company believes that those companies that are among the first two or three suppliers of a given generic drug in the market are likely to obtain the greatest market share for that generic equivalent product. The Company intends to be among the first three suppliers to enter the market with certain of its proposed new generic products, and has projected revenues based on achieving this potentially favorable competitive position. o Generic drug products can be approved by the U.S. Food and Drug Administration in a significantly shorter time than new proprietary pharmaceutical products. The Company's projected revenues are based on achieving approvals for its developmental generic products within a six-month to two-year period, with most of the products expected to be approved in one year or less from the time development is begun. o While overall margins for generic products are generally lower than those for proprietary products, the Company believes that margins can be potentially higher than the industry norm in instances where competition is limited or where there are barriers to entry due to specialty manufacturing capabilities. The Company believes that certain of its products under development, such as suppository products, target market niches where competition is expected to be less intense than in the overall generic market. Also, state legislation increasingly requires substitution of generic products if available, even when the equivalent proprietary product is prescribed by the physician. The Company believes that this trend toward increased use of generic products will help the Company penetrate the market for those products where it is among the first two or three competitors to offer a generic substitute, and could contribute to lower sales and marketing expenses. The Company's revenue projections for those products where it believes it may attain such a favorable position reflects higher profit margins and lower sales and marketing costs than industry averages. The projected revenues for the Company's developmental generic products depend, in part, on the Company's ability to realize the benefits of each of the foregoing assumptions. The Company's inability for any reason to be among the first to market with its proposed products, delays in gaining regulatory approval of its products or the inability to realize higher than average profit margins could all adversely affect its ability to achieve the revenues necessary to cover the carrying value of its intangible assets. The Company intends to continue to evaluate its long-lived assets. If such assets were determined to be impaired, the Company would be required to recognize a loss in accordance with SFAS 121. Because a Leigh percentage of the Company's assets are intangible assets subject to SFAS 121, this could have a material adverse effect on the Company's financial condition and results of operations. See "Risk Factors - -Intangible Assets Subject to Impairment Loss; Risks of Non-Compliance With SFAS 121." 30 DYNAGEN, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company is also pursuing additional sources of capital for the long-term needs of the Company. The Company has engaged an investment banking firm to seek conventional investments. There is no assurance that such financing will be available, and if available will be on terms favorable to the Company. The Company has also been working with its trade creditors to reduce its obligations. A substantial majority of the creditors have accepted the Company's payments plans, which include periodic payments, discounts of amounts outstanding and acceptance of Company shares. YEAR 2000 - --------- Computer systems and software products that were designed to accept entries of only two digits in the "year" date code field may be unable to properly process date information beyond the year 1999. The Company does not believe that any material year 2000 issues exist with software contained within its product manufacturing or distribution processes. The Company is in the process of working with suppliers and other third parties upon which it is dependent to determine the extent of their Year 2000 compliance. Although the company's assessment of its Year 2000 readiness is not complete, based on its investigation to date the Company does not expect the total cost of Year 2000 compliance to have a material adverse effect on the Company's business, results of operations or financial condition. There can be no assurance, however, that the Company's Year 2000 compliance program will be implemented successfully or on a timely basis, or that systems operated by third parties with which the Company's systems interface will be Year 2000 compliant. Inability of the Company to correct any Year 2000 problems affecting its products, its internal systems or its communications with third parties could have a material adverse effect on the Company's business, results of operations and financial condition. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DYNAGEN, INC. By: /s/ Dhananjay G. Wadekar -------------------------------- Dhananjay G. Wadekar Executive Vice President Date: January 5, 1999 36 -----END PRIVACY-ENHANCED MESSAGE-----