Looks like revenues are up and we have financing on the way!
DYNAGEN INC
Filed on May 15 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. Except for historical information contained herein, the matters discussed in the Liquidity and Capital Resources section below contain potential risks and uncertainties, including, without limitation, risks related to the Company's ability to successfully develop, test, produce and market its proposed products; obtain governmental approvals in a timely manner; identify and attract marketing partners to help commercialize the Company's products; attract and retain key employees; obtain meaningful patent protection or otherwise over the Company's proprietary technology; protect itself from product liability risks or limitations imposed due to potential health care reform; raise capital for future operations and commercialization of its products; integrate the products and personnel the Company acquired in the acquisition of Able Laboratories, Inc. ("Able"), Superior Pharmaceutical and GDI, Inc. and successfully respond to technological changes in the marketplace. Specifically, regulatory approvals of the Company's products are subject to factors beyond the Company's control, and there can be no assurance that such approvals will not be delayed or ultimately denied. The Company will need to attract marketing partners in order to exploit its products, and there can be no assurance that the Company will be successful in attracting such partners. Additional information on potential factors which could affect the Company's financial results are included in the Company's public filings with the Securities and Exchange Commission, including without limitation its Form 10-K for the period ended December 31, 1997.
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.
OVERVIEW
The Company develops and markets proprietary and generic therapeutic and diagnostic products for the human health care market. The Company has begun expanding its business focus from being a development and licensing company to building a diversified health care company focused on the manufacture and distribution of generic drug products and specialty pharmaceuticals as well as the continued development of therapeutic and diagnostic products. The Company intends to implement this strategy through the acquisition of businesses, technologies and products that the Company believes are undervalued 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.
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 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.
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
Three Month Period Ended March 31, 1998 as Compared With the Three Month Period Ended March 31, 1997
Revenues for the three month period ended March 31, 1998 were $6,961,625 versus $457,670 for the period ended March 31, 1997. The increase of $6,503,955 is primarily the result of product sales by the Company's wholly-owned generic pharmaceutical subsidiaries, Able (acquired in August 1996) and Superior (acquired in June 1997).
Cost of product sales was $5,558,562, or 80% of product sales for the three-month period ended March 31, 1998 compared to $453,545, or 99% of product sales for the three month period ended March 31, 1997 due to low production and sales levels at Able which did not support the fixed manufacturing costs of the Able facility.
Research and development expenses for the three month period ended March 31, 1998 were $226,617 versus $487,412 for the three month period ended March 31, 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 March 31, 1998 were $2,466,917 versus $1,474,930 for the three month ended March 31, 1997. The $991,987 increase is primarily due to Superior's selling, general and administrative expenses of $981,000.
Investment income was $53,006 for the three months ended March 31, 1998 as compared to $92,330 for the three month period ended March 31, 1997, as the Company had less funds available for investment. Interest and financing expenses of $348,953 for the three month period ended March 31, 1998, compared to $13,539 for
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS (Continued)
the three month period ended March 31, 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 March 31, 1998, the Company had a working capital deficit of $11,062,484, compared to working capital deficit of $11,711,296 at December 31, 1997. Cash was $440,643 at March 31, 1998 compared to $697,045 at December 31, 1997. Working capital was used primarily to fund the Company's operating losses, including approximately $360,000 of operating losses of its Able subsidiary, and research and development costs of approximately $227,000. The Company expects its cash needs for the next 12 months to be approximately $7,000,000. Of this amount, approximately $3,000,000 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. If the Company is not able to raise the needed financing, it may need to seek the protection of the bankruptcy courts. See "Special Considerations - Financial Condition of the Company."
In June 1997, the Company completed the acquisition of Superior Pharmaceutical Company, of Cincinnati, Ohio, for a purchase price of $16.5 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 provides that the Company will make up any shortfall in this guaranteed stock value through the issuance of additional stock and cash. The Company is currently trying to renegotiate its obligations to the selling shareholders of Superior. No assurance can be given that the Company will be successful in this effort. If the Company is not able to renegotiate these obligations, it may need to seek the protection of the bankruptcy courts. See "Special Considerations - Contingent Obligation with Respect to Superior Acquisition." Superior markets and distributes generic prescription and over-the-counter pharmaceuticals to independent, chain and institutional pharmacies throughout the United States. The Company financed this
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
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, Ohio.
Furthermore, 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 that matured in April 1998 for 60 days and upon review of the Company's performance may consider further extension. The Company obtained a waiver and extension of the third quarterly payment of $515,625 to the selling shareholders which was due on March 31, 1998. 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.
The Company has begun initial discussions with the selling shareholders of Superior to renegotiate the additional payment of $4,000,000 due in June 1998. While these discussions have been positive, there is no assurance that the parties will come to an agreement or that such an agreement, if reached, will be on terms favorable to the Company. Failure to reach an agreement will result in further defaults on the Company's loan covenants and may allow the selling shareholders certain rights under the purchase and sale agreement, including but not limited to the pledge of all of Superior's shares. The selling shareholders, the secured lender and the subordinated lender have not informed the Company of their intentions to exercise their rights under various agreements. However, there is no assurance that the Company will successfully renegotiate the covenants. In such circumstances, the company will continue to show substantial working capital deficits and continue to be in default of its agreements. If the Company is not able to renegotiate with the selling shareholders of Superior or renegotiate or meet its obligations to Huntington National Bank, the Company may need to seek the protection of the bankruptcy courts.
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company continues to operate its Able Laboratories, Inc. manufacturing facility for manufacture and distribution of generic drugs. In March 1997, the Company entered into an agreement with Kali Laboratories for development and clinical testing of certain prescription pharmaceuticals. Under this agreement, Kali would be reimbursed for its development efforts on a milestone basis and receive royalties from the sale of the products. Able has a working capital deficit and management expects Able will require 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. If the Company cannot obtain sufficient financing or otherwise meet Able's requirements, the Company may be required to close that operation or seek protection of the bankruptcy courts.
The Company's private placement of Series A and Series B Preferred Shares 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 Shares. 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 March 31, 1998, there were 14,667,951 shares of Common Stock outstanding. This increase is 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 is also negotiating
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
to sublease all or part of its current facilities in Cambridge, MA 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 the same measures at its Able manufacturing facility. The Company has reduced its workforce by 50 percent through terminations and attrition. Management has actively initiated programs to increase sales of its products to existing customers and is seeking to bring back customers it 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 two service contractors 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 "grandfathered" products are expected to generate revenues by December 1998.
Management, in conjunction with key personnel at Superior, has implemented a program to reverse the decline in the general business of the Company. Specific actions taken at Superior include recruitment of key personnel, review of the product line, reduction in the G&A 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 will 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 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 its 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. Specifically, the Company is negotiating with an investment banker to provide the Company with intermediate financing. It is anticipated that this financing will be either
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
repaid or converted into equity at the option of the Company at least 12 months from the closing. Management believes that any financing which will create additional common shares in the market would only 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 those 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 the above-referenced investment banker and believes that the short-term financing could become available over the next several weeks. The Company plans to use the interim financing for general working capital, partial payment to the creditors and the limited internal R&D program at Able. If the Company cannot raise such financing, it may be forced to seek the protection of the bankruptcy courts. See "Special Considerations."
The Company is also pursuing additional sources of capital for the long-term needs of the Company. The Company has engaged a merchant banking firm to seek direct investments into its subsidiaries, specifically Able Laboratories, in return for equity and royalties. There is no assurance that such financing will be available, and if available will be on terms favorable to the Company. Furthermore, management has evaluated proposals which may include raising additional capital through the sale of registered securities. The Company has filed a registration statement on Form S-3 for the sale of Series C and Series D Convertible Preferred Shares. The registration statement has not been declared effective. The Company expected to raise substantial additional capital through this arrangement. If the Company cannot raise such financing, it may be forced to seek the protection of the bankruptcy courts. See "Special Considerations."
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.
MANAGEMENT PLANS
The following represents management's plans to improve the financial condition of the Company including curing defaults and obtaining waivers wherever applicable. These plans are targeted to the specific areas listed below.
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
GFL Performance Fund Limited - The Company has received an extension of the Company's payment obligation on February 7, 1998 (the maturity date). The Company is negotiating with GFL to retire this debt through conversion into common stock over the next several months. This would reduce or eliminate the cash payment obligation and reduce the total liabilities of the Company.
Sirrom and Odyssey - The Company continues to make monthly interest payments on its obligations to Sirrom and Odyssey. The defaults under the loan agreements include the company's filing for an extension of the due date of the Form 10-K and certain other financial covenants.
Management plans to improve upon its filing requirements by dedicating additional personnel to meet the reporting requirements. In addition, the company is negotiating with the former stockholders of Superior to extend the guaranteed stock payment due on June 17, 1998 which would require approximately $4,000,000 in cash. The Company has had preliminary discussions with Sirrom and Odyssey regarding the overall decline in the Company's stock price and the effect on their warrants. Management intends to discuss and negotiate with its lenders opportunities for participation in the Company's overall plan which could restore the economic benefits and obtain continued cooperation of Sirrom and Odyssey.
Superior Pharmaceutical Company - The Company has obtained a waiver from the former stockholders of Superior, waiving and extending the payment obligation on the note due on March 31, 1998. The Company is negotiating with the former stockholders, alternate ways in which it can meet its obligation of a guaranteed stock payment on June 17, 1998. These proposed alternatives include extension of the obligation, reduction or elimination of the cash payment in exchange for additional stock payments or converting the payment to convertible Preferred Stock. The former stockholders have indicated their willingness to entertain the alternative offers and work with management to come up with a comprehensive solution to the payment obligations which secures their benefits while allowing the Company to expand.
The Huntington National Bank- The Company is in discussions with investment bankers to raise additional equity for its ongoing operations. The net worth of the Company is less than $4,000,000 as required in the loan agreement with the bank. However, in the past the bank has considered subordinated debt, selling stockholder debt and the equity line available to the Company under its Series D preferred shares as equity capital and therefore applicable towards the net worth
DYNAGEN, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES (Continued)
requirements. Assuming that the bank continues to allow the subordinated debt in the net worth calculation and that the Company is successful in obtaining additional financing, the net worth deficiency will be corrected. In addition, the waiver of the former Superior stockholders will, in managements view, eliminate the defaults of the covenants with them.
SUSPENSION OF CONVERSION OF SERIES A AND B PREFERRED STOCK
On April 24, 1998, the Company suspended conversions of its Series A and B preferred Stock into the Company's Common Stock. The purpose of this suspension is to give the Company time to coordinate its efforts to negotiate orderly settlements of these outstanding convertible securities.
SUBSEQUENT EVENTS
On April 3, 1998 the Company sold $500,000 of its Series D convertible preferred stock to an unaffiliated investor. In connection with this financing, the investor also received an 8% debenture for $87,500.
On April 30, 1998 the Company borrowed $250,000 from an investor as a bridge loan. The loan is to be repaid from the proceeds of future private placements to be completed by the Company. The loan is secured by the pledge of substantially all of the common stock held by the Company's Chief Executive Officer and the Executive Vice President. If the Company is unable to repay this loan, the investor has an option to convert this loan into Series D preferred stock.
On April 30, 1998 the Company's Board of Directors unanimously voted to sell a portion of spin-off its majority-owned subsidiary, BioTrack, Inc. The Board, based on discussions with several potential investors of the Company as well as of BioTrack, believes that this action will facilitate the future financing of both companies. The Company's equity in BioTrack will be reduced to approximately 20% and the balance will be set aside for the inventors of the technology, investors and the BioTrack management.
DYNAGEN, INC.
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