<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 31, 1997
Commission File Number 1-9579
Ecogen Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2487948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2005 Cabot Boulevard West, Langhorne, Pennsylvania 19047
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (2l5) 757-l590
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5 (d) of the Securities Exchange Act of
l934 during the preceding l2 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___.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at September 1, l997
Common Stock, $.01 par value 8,026,646
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ECOGEN INC.
INDEX
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
July 31, l997 and October 3l, l996..................................................................1
Unaudited Consolidated Condensed Statements of Operations for the three
months and nine months ended July 31, 1997
and 1996 ...........................................................................................2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the nine months ended July 31, l997......................................................3
Unaudited Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, l997 and l996....................................................4
Notes to Unaudited Consolidated Condensed Financial
Statements..........................................................................................6
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition..............................................................10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................................................15
Item 2 - Changes in Securities ........................................................................15
Item 6(a) - Exhibits...................................................................................15
</TABLE>
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PART I -- FINANCIAL INFORMATION
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
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Assets JULY 31, OCTOBER 31,
1997 1996
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Current assets:
Cash, cash equivalents and temporary investments............................. $ 3,385,364 $ 9,611,111
Contract and trade receivables, net.......................................... 2,570,398 1,783,605
Inventory.................................................................... 7,980,641 6,854,472
Prepaid expenses and other current assets.................................... 412,343 493,519
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Total current assets 14,348,746 18,742,707
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Plant and equipment, net..................................................... 4,444,591 4,569,327
Intangible and other assets, net............................................. 768,528 549,210
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$ 19,561,865 $ 23,861,244
====================================================================================================================================
Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable and accrued expenses........................................ $ 4,475,142 $ 5,172,090
Deferred contract revenue.................................................... 1,765,057 1,101,367
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Total current liabilities 6,240,199 6,273,457
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Long-term debt................................................................ 987,121 1,297,469
Other long-term obligations................................................... 1,768,300 1,887,078
8% senior subordinated convertible note....................................... 1,500,000 --
Stockholders' equity:
Preferred stock, par value $.01 per share: authorized 7,500,000 shares
Series B convertible preferred stock - 350,000 shares authorized;
none and 5,834 shares issued and outstanding in 1997 and 1996,
respectively (liquidation value $20 per share)............................ -- 58
Common stock, par value $.01 per share; authorized 42,000,000 shares;
issued 8,118,610 and 7,928,171 shares in 1997 and 1996, respectively...... 81,186 79,282
Additional paid-in capital................................................... 117,913,818 117,548,065
Accumulated deficit.......................................................... (107,315,836) (101,741,946)
Other........................................................................ (1,612,923) (1,482,219)
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Total stockholders' equity 9,066,245 14,403,240
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$ 19,561,865 $ 23,861,244
====================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
1
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
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1997 1996 1997 1996
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Revenues:
Product sales, net................................................ $4,110,311 $4,592,207 $ 7,684,326 $ 8,512,271
Contract revenue.................................................. 719,877 772,163 2,143,940 1,464,134
License and other income.......................................... -- -- -- 5,013,049
Interest income, net.............................................. 56,989 179,684 174,653 458,494
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Total revenues 4,887,177 5,544,054 10,002,919 15,447,948
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Costs and expenses:
Cost of products sold............................................. 2,642,256 2,816,150 5,105,780 5,131,772
Research and development:
Funded by third parties.......................................... 291,163 251,311 878,692 631,037
Self funded...................................................... 863,980 878,485 3,101,110 2,781,824
Selling, general and administrative............................... 2,390,001 2,308,436 6,491,227 5,990,018
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Total costs and expenses 6,187,400 6,254,382 15,576,809 14,534,651
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Net income (loss) $(1,300,233) $(710,328) $(5,573,890) $ 913,297
====================================================================================================================================
Net income (loss) per common share
available to common stockholders $(0.16) $(0.09) $(0.70) $0.11
====================================================================================================================================
Weighted average number of common
shares outstanding 8,025,000 7,627,000 7,934,000 6,941,000
====================================================================================================================================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
2
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL OTHER
PREFERRED COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY TOTAL
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BALANCE NOVEMBER 1, 1996 $58 $79,282 $117,548,065 $(101,741,946) $(1,482,219) $14,403,240
Conversion of 5,834 shares of Series B
convertible stock to 44,030 shares
of common stock....................... (58) 440 (382) -- -- --
Dividends on preferred stock............ -- 46 12,088 -- -- 12,134
Issuance of 5,028 shares of common stock
for employee benefits................. -- 58 (32,193) -- 61,173 29,038
Issuance of 136,000 shares of common stock
in settlement of a royalty obligation... -- 1,360 386,240 -- -- 387,600
Foreign currency translation.............. -- -- -- -- (183,681) (183,681)
Net reduction in unrealized gain on
securities.............................. -- -- -- -- (8,196) (8,196)
Net loss.................................. -- -- -- (5,573,890) -- (5,573,890)
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BALANCE JULY 31, 1997 -- $81,186 $117,913,818 $(107,315,836) $(1,612,923) $9,066,245
===================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
3
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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NINE MONTHS ENDED
JULY 31,
1997 1996
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Cash flows from operating activities:
Net (loss) income.................................. ($5,573,890) $ 913,297
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization expense.......... 305,673 323,736
Other.......................................... 67,201 (2,635)
Changes in assets and liabilities net.............. (2,068,009) (2,647,139)
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Net cash used in operating activities (7,303,875) (1,412,741)
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Cash flows from investing activities:
Purchase of plant and equipment.................... (138,932) (510,232)
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Net cash used in investing activities (138,932) (510,232)
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Cash flows from financing activities:
Net proceeds from issuance of Series C preferred
stock............................................ -- 2,793,943
Net proceeds from issuance of common stock......... -- 9,335,266
Net proceeds from issuance of common shares under
stock option plan................................ 9,752 --
Net proceeds from issuance of Senior Subordinated
Convertible Note................................. 1,500,000 --
Purchase of treasury stock......................... -- (234,438)
Repayment of capital lease obligation.............. (291,477) (166,214)
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Net cash provided by financing activities 1,218,275 11,728,557
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Effect of foreign exchange rate changes on cash (1,215) (1,457)
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Net (decrease) increase in cash and cash equivalents.. (6,225,747) 9,804,127
Cash and cash equivalents, beginning of period........ 9,611,111 1,775,213
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Cash and cash equivalents, end of period $3,385,364 $11,579,340
===============================================================================
</TABLE>
(Continued)
4
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
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NINE MONTHS ENDED
JULY 31,
1997 1996
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Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and
other current assets..................................... $ 81,176 $ (27,985)
(Increase) decrease in inventory............................ (1,126,169) 67,109
Increase in receivables..................................... (889,694) (2,951,404)
Decrease in other assets.................................... 133,432 22,151
Decrease in accounts payable................................ --
and accrued expenses..................................... (781,057) (1,469,099)
Increase in deferred contract revenue....................... 663,690 1,770,145
Decrease in other long-term liabilities..................... (184,237) (57,756)
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Changes in assets and liabilities, net $(2,068,009) $(2,647,139)
=============================================================================================================
</TABLE>
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Noncash investing and financing activities:
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In the first nine months of fiscal 1996, debt totalling approximately $1,075,000
was incurred by the Company for the acquisition of equipment.
In the first nine months of fiscal 1997 and 1996, the Company issued 44,030 and
756,184 shares of its common stock upon conversion of the Company's convertible
preferred stock.
In the first nine months of fiscal 1997 and 1996, the Company issued 13,572 and
20,552 shares of common stock, respectively, as dividends on the Company's
preferred stock.
In the first nine months of fiscal 1997, the Company transferred 4,684 shares of
treasury stock to outstanding shares pursuant to certain employee benefit plans.
In the first nine months of fiscal 1997, the Company issued 136,000 shares of
common stock in satisfaction of future royalty obligations.
===============================================================================
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE> 8
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION:
The consolidated condensed financial statements include the accounts of
Ecogen Inc. ("Ecogen" or the "Company") and its wholly-owned and
majority-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying consolidated condensed financial statements include
all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the
consolidated results of operations and financial position for the
interim periods presented. The consolidated condensed financial
statements have been prepared in accordance with the requirements for
Form l0-Q and, therefore, do not include all disclosures of financial
information required by generally accepted accounting principles. These
consolidated condensed financial statements should be read in
conjunction with the Company's October 31, l996 consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K.
The results of operations for the interim period ended July 31, 1997
are not necessarily indicative of the operating results for the full
year.
OPERATIONS:
The Company is a biotechnology company specializing in the development
and marketing of environmentally compatible products for the control of
pests in agricultural and related markets. The Company has not yet
achieved profitable operations and there is no assurance that
profitable operations, if achieved, could be sustained on a continuing
basis. Further, the Company's future operations are dependent, among
other things, on the success of the Company's commercialization efforts
and market acceptance of the Company's products.
(Continued)
6
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS, CONTINUED
NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share adjusted for preferred stock
dividends of $1,815 and none, respectively, in the nine months and
three months ended July 31, 1997, and $116,700 and $13,572,
respectively, in the nine months and three months ended July 31, 1996,
is computed using the weighted average number of shares outstanding
during the period. Common stock equivalents are not included in the
computation of weighted average shares outstanding using the modified
treasury stock method since the effect would be anti-dilutive for both
primary and fully diluted earnings per share.
(2) INVENTORY
At July 31, l997, inventory consisted of raw materials of $2,313,981,
work-in-progress of $1,774,993 and finished products of $3,891,667.
(3) MONSANTO TRANSACTION
In January 1996, the Company entered into an agreement with Monsanto
Company ("Monsanto") for an equity investment, purchase of technology
and joint research and development arrangement relating to the
Company's proprietary Bacillus thuringiensis ("Bt") technology for
in-plant applications (collectively, the "Monsanto Transaction"). The
transaction included (i) the acquisition by Monsanto of certain rights
in the Company's Bt technology for an aggregate purchase price of $5.0
million in cash which was recorded as license and other income in the
first quarter of 1996; (ii) the sale by the Company to Monsanto of
943,397 shares of Common Stock at $10.60 per share for an aggregate
purchase price of $10.0 million in cash during the first quarter; and
(iii) a four-year research and development ("R&D") collaboration
arrangement with Monsanto for the further development of the Company's
Bt gene library for a minimum of $10.0 million, of which $2.9 million
and $3.0 million was received in the first nine months of 1997 and
1996, respectively and recorded as deferred contract revenue. Such
contract revenue is recorded as earned under the terms of the
agreement. Under this agreement, the Company recognized as contract
revenue approximately $2.1 million and $1.5 million in the nine months
ended July 31, 1997 and 1996, respectively. In the third quarter of
fiscal 1997, Monsanto prepaid the remainder of its fiscal 1997
obligation under the R&D contract representing the funding of expected
research costs under the contract through the first quarter of fiscal
1998. Subsequent to July 31, 1997, Monsanto advanced $1.0 million
(Continued)
7
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ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(3) MONSANTO TRANSACTION (CONTINUED)
of commercialization success fees which, under the agreement, were
payable at such time as Monsanto commercializes a product with Ecogen's
technology.
As part of the agreement, Monsanto has agreed to maintain its ownership
position during the term of the research and development agreement and
Monsanto is prohibited, during the first three years following the
closing, from acquiring more than 25% of the Company's voting stock
without the Company's consent, except in certain circumstances
primarily related to a change of control of the Company. Monsanto was
granted certain demand and piggyback registration rights with respect
to its shares. In addition, Monsanto has a right of first refusal to
purchase securities of the Company so as to maintain its ownership
percentage in the Company except in certain circumstances defined in
the applicable agreement. Further, Monsanto has the right to terminate
the R&D contract upon the occurrence of certain events involving a
change in control of the Company or a sale of substantially all of the
assets of the Company as defined in the agreement.
(4) LONG-TERM DEBT
In July 1997, the Company sold, in a private placement, a $1.5 million
8% senior subordinated convertible note (the "Note") to an
institutional shareholder of the Company. Assuming the conversion of
the Note, such shareholder would have a beneficial interest of 11%. The
Note is due in July 2002 and is convertible by the holder, at any time,
into shares of the Company's common stock at $3.00 per share. At the
Company's option, interest on the Note may be payable in cash or common
stock. The Company may redeem the Note, at its option, at any time
after July 2000 provided that the Company's common stock has traded for
a specified period for at least 150% of the conversion price. The
conversion price under certain circumstances is subject to adjustment.
The holder of the Note has certain demand and piggyback registration
rights and a right of first refusal under certain circumstances for
certain equity offerings.
In July 1996, the Company established a two year revolving working
capital line of credit with a commercial bank for up to $5,000,000.
Borrowings under this line are required to be fully collateralized by
certain of the Company's investments. As of July 31, 1997 there have
been no borrowings under this line of credit.
(Continued)
8
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ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(5) STOCKHOLDERS' EQUITY
PREFERRED STOCK
In November 1995, the Company raised $2.8 million, net of expenses,
from institutional investors from the private placement of 122,000
shares of 8% Series C Convertible Preferred Stock (the "Series C
Preferred Stock"). All of the Series C Preferred Stock has been
converted into shares of the Company's Common stock in accordance with
its terms.
During the first nine months of fiscal 1997 and 1996, the Company
issued 44,030 and 756,184 shares, respectively, of its common stock
upon conversion of the Company's Series B Convertible Preferred Stock
and Series C Convertible Preferred Stock. Further, in the first nine
months of fiscal 1997 and 1996, the Company issued 4,579 and 20,552
shares, respectively, of its common stock in payment of dividends on
its preferred stock.
COMMON STOCK
In December 1996, the Board of Directors granted the Company's U.S.
employees, excluding officers, the right to exchange 224,360 options at
exercise prices from $2.75 to $15.63 for new options at an exercise
price of $2.56, the fair market value at the new grant date. The new
options generally vest over a three year period.
In April 1997, the Company issued 136,000 unregistered shares of its
common stock in satisfaction of a royalty obligation. In exchange for
the common stock the Company also was assigned certain patents and
patent applications. In connection therewith, the Company recorded a
prepaid royalty of $387,600 during the second quarter of 1997. The
holder of the shares has certain demand and piggyback registration
rights with respect to the shares of common stock.
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1997 AND 1996
OVERVIEW
For the first nine months of fiscal 1997, total revenues decreased $5.4 million
from $15.4 million in fiscal 1996 to $10.0 million in fiscal 1997, due
principally to a nonrecurring upfront fee of $4.8 million from the Monsanto
Company recorded in the first quarter of fiscal 1996. Product sales decreased
10% from $8.5 million for the nine months ended July 31, 1996 to $7.7 million
for the nine months ended July 31, 1997. For the nine months ended July 31,
1997, the Company reported a net loss of ($5.6) million or ($.70) per share
compared to net income of $0.9 million or $.11 per share in the comparable
period in fiscal 1996 on weighted average shares of 7.9 million and 6.9 million,
respectively. The difference between the net loss of ($5.6) million for the nine
month period ended July 31, 1997 and the net income of $0.9 million for the same
period in fiscal 1996 is principally the $4.8 million in other revenue
recognized in January 1996 from the Company's strategic alliance with Monsanto
Company ("Monsanto") and $1.1 million of increased operating costs of which $.6
million relates to unexpected process development costs associated with
since-resolved manufacturing problems.
NINE MONTHS ENDED JULY 31, 1997 AND 1996
REVENUES
Net product sales decreased $.8 million or 10% to $7.7 million in the first nine
months of fiscal 1997 compared with $8.5 million in the comparable period in
fiscal 1996 due to a decrease of $2.9 million of product sales into the cotton
market replaced in part by sales of new products into the fruits and vegetables
market consistent with the Company's shift in strategic direction. Sales of the
Company's Bt product line, representing 42% of total sales, decreased $1.3
million or 29% due to decreased volume in the first nine months of fiscal 1997
from the comparable period in 1996 principally as a result of expected lower
sales of Condor, a Bt bioinsecticide, in the cotton market as a result of this
market adopting a greater use of transgenic Bt cotton seeds offset partially by
sales of Crymax, a new Bt bioinsecticide for the fruits and vegetables market.
Pheromone product sales, representing 35% of total sales, decreased $.9 million
or 25% principally due to decreased sales of NoMate PBW for control of pink
bollworm also in the cotton market, partially offset by sales of the Company's
new NoMate OLR product for control of the omnivorous leafroller in vine and tree
fruits. Biofungicide product sales, representing 23% of total sales increased
$1.4
10
<PAGE> 13
REVENUES (CONTINUED)
million or 350% due to increased volume of Ecogen's two new biofungicide
products, Aspire and AQ10. The Company expects that the shortfall in product
sales during the first nine months of fiscal 1997 over 1996 will be reversed in
the fourth quarter of 1997 where the Company expects to see growth in product
sales.
Other revenues decreased $4.6 million in the current period, due primarily to
$4.8 million in nonrecurring upfront fees recognized in the first nine months of
fiscal 1996 pursuant to the Company's strategic alliance with Monsanto. Research
contract revenue increased from $1.5 million to $2.1 million in the first nine
months of fiscal 1997 when compared to the same period in 1996, reflecting the
fact that fiscal 1997 represents the first full year of the Monsanto research
and development contract. Other income, exclusive of the non-recurring Monsanto
revenue, decreased $.4 million primarily as a result of decreased interest
income as a result of lower funds available for investments.
COSTS AND EXPENSES
Gross margins on product sales decreased to 34% in 1997 compared to 40% in 1996.
This decrease was due primarily to higher costs on initial production of new
products and lower sales of high margin pheromone NoMate products.
Total operating costs were $10.5 million in the first nine months of fiscal 1997
compared to $9.4 million in 1996 representing an increase of $1.1 million or
12%. Research and development costs increased $.6 million or 17% principally as
a result of increased process development costs for CRYMAX and Aspire, two of
the Company's new products. After the announcement of manufacturing problems
associated with equipment design failures, the Company began working on
developing alternative processes for the manufacturing of its new water
dispersible granule products. An alternative process is now in full scale
commercial production for both products. Selling, general and administration
expenses increased $.5 million or 8% primarily as a result of planned higher
marketing and promotional expenses including costs associated with significant
expansion to the Company's field sales force at the end of fiscal 1996, as the
Company aggressively launches several new products into the fruits and
vegetables market.
Net loss for the nine months ended July 31, 1997 was ($5.6) million, compared to
net income of $.9 million for the same period in 1996. Net loss per share was
($.70), compared to net income per share of $.11 on weighted average shares
outstanding of 7.9 million and 6.9 million, respectively, in the first nine
months of fiscal 1997 and 1996. Excluding the Monsanto nonrecurring upfront
payment in fiscal 1996, the net loss for the first nine months increased from
($3.9) million in fiscal 1996, compared to ($5.6) million in fiscal 1997
principally due to increased costs, lower margins and lower sales as discussed
above.
11
<PAGE> 14
THREE MONTHS ENDED JULY 31, 1997 AND 1996
REVENUES
Net product sales decreased $.5 million or 10% to $4.1 million compared with
$4.6 million in the third quarter of 1996. Sales of the Company's Bt product
line, representing 39% of total sales, decreased $.6 million or 27% due
primarily to decreased volume in the third quarter of fiscal 1997 from the
comparable period in 1996. Pheromone product sales, representing 36% of total
sales in the third quarter of fiscal 1997, decreased $.8 million or 35% due
primarily to decreased volume. The biofungicide product line, representing 25%
of product sales in the third quarter of fiscal 1997, increased $.9 million or
804% for the third quarter of 1996. The decrease in both the Bt product line and
the pheromone product lines is the result of lower sales into the cotton market
as discussed previously, partially offset by sales of new products into the
fruits and vegetables market. Biofungicide sales increased as a result of
increased volume as the Company continues commercial development of its two new
biofungicide products, Aspire and AQ10.
COSTS AND EXPENSES
Gross margins on product sales decreased to 36% in the third fiscal quarter of
1997 when compared to 39% gross margins in the same period in fiscal 1996.
Although gross margins for fiscal 1997 have decreased principally due to
production start-up costs, gross margins in the third quarter of 1997 improved
to 36% from 33% and 25%, respectively, in the previous two quarters in fiscal
1997. The third quarter margins were also negatively impacted by product mix, as
a result of lower sales of pheromone NoMate products that carry high margins.
Total operating costs were $3.5 million in the third quarter of 1997 consistent
with the $3.4 million in operating costs in fiscal 1996. Operating costs had run
higher than 1996 in the first two quarters of 1997 as a result of process
development costs due to since-resolved manufacturing problems associated with
the Company's new products that was announced in the fourth quarter of fiscal
1996 and higher selling and marketing costs as a result of expansion of the
Company's field staff in the second half of 1996.
Net loss for the three months ended July 31, 1997 was ($1.3) million, compared
to net loss of ($.7) million for the same period in 1996. Net loss per share for
the three months ended July 31, 1997 was ($.16), compared to net loss per share
of ($.09) on weighted average shares outstanding of 8.0 million and 7.6 million,
respectively, in the third quarter of fiscal 1997 and 1996. The increase in the
net loss is principally attributable to lower product sales and lower gross
margins.
12
<PAGE> 15
SEASONALITY OF BUSINESS
The bulk of the Company's current products are presently marketed for
agricultural applications in the northern hemisphere, where the growing season
generally runs from spring through fall. Commercial introduction of the
Company's new products is contingent on, among other factors, completion of
field testing and receipt of required regulatory approvals. Unusual weather
conditions during field tests or failure to receive regulatory approvals prior
to the growing season may require additional field tests in subsequent growing
seasons, with resulting delays in product development and commercialization. In
addition, because of the seasonal nature of its business, the Company's product
revenues are likely to be concentrated in the fiscal quarters prior to and
during a particular growing season which may result in substantial variations in
quarter-to-quarter financial results. Product sales from year-to-year and
quarter-to-quarter are also affected by unusual weather conditions, such as
droughts or floods, and the level of insect pressure in grower areas.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had cash and liquid investments of $3.4 million,
representing a net decrease of $6.2 million from October 31, 1996. The decrease
was due to $7.3 million of cash used in operations and $.1 million used for
capital expenditures, offset by $1.2 million provided by financing activities.
Cash used in operations during the nine months ended July 31, 1997 principally
funded the net loss of $5.6 million, an increase in receivables of $.9 million
and an increase in inventory of $1.1 million cash provided by financing
activities in fiscal 1997 represents proceeds from the issuance of a Senior
Subordinated Convertible Note of $1.5 million partially offset by repayment of
capital lease obligations of $.3 million.
To date, the Company has not generated positive cash flow from operations. The
Company has financed its working capital needs primarily through private and
public offerings of equity securities, research contract revenues, license and
other fees and product sales. The Company believes that its existing working
capital and anticipated cash flows in fiscal 1997 should be sufficient to meet
its capital and liquidity requirements for fiscal 1997. The Company will need
additional financing to support current levels of product development and
commercialization in fiscal 1998. There is no assurance that such financing will
be available on terms acceptable to the Company or at all. The Company's working
capital and working capital requirements are affected by numerous factors and
there is no assurance that such factors will not have a negative impact on the
Company's liquidity. Principal among these are the success of its product
commercialization and marketing efforts and the efforts of its strategic
partners in commercializing and selling products based on the Company's
technology, the technological advantages and pricing of the Company's products,
economic and environmental considerations which impact agricultural crop
production and the agricultural sector
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
generally, competitive conditions in the agricultural pest control market, and
access to capital markets that can provide the Company with the resources
necessary to fund its strategic priorities. Over the long term, the Company's
liquidity is dependent on market acceptance of its products and technology.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Inventory increased $1.1 million from October 31, 1996 as a result of building
inventories of new products for the fall fruits and vegetables market. Trade
receivables increased $.9 million from the end of fiscal 1996 due to the
seasonality of sales. Accounts payable and accrued expenses decreased $.8
million from October 31, 1996 due to timing of payments to vendors and refunds
paid to distributors in the first quarter of fiscal 1997 for product returns in
the fourth quarter of fiscal 1996. Deferred contract revenue increased $.7
million during the nine months ended July 31, 1997 due to advanced payments from
Monsanto under the research and development agreement relating to certain Bt
technology for use in plants, net of earned contract revenue in fiscal 1997.
In late February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128 "Earnings per Share". The Company is beginning to assess the
effect of this statement but does not believe the statement will have
significant impact because the Company's common stock equivalents are presently
anti-dilutive and therefore are excluded from earnings per share calculations.
The discussion set forth in this document contains forward looking statements
that involve a number of risks and uncertainties that could cause actual results
to differ materially from expected results. The Company intends to market and
sell a number of newly introduced products over the next several weeks and
months. These products, some of which utilize new formulations, have not to date
been produced on a commercial scale or produced on a commercial scale that has
been replicated. Certain of the manufacturing processes for such products
include newly developed equipment and techniques which may not be successfully
incorporated into the manufacturing process in time to meet targeted sales
opportunities. Additional risks and uncertainties include: (i) the market
acceptance of the Company's current and newly introduced products; (ii) the
efficacy, pricing, ease of use and performance of the Company's products; (iii)
the successful development, registration, commercialization and marketing of
technologically advanced new products; (iv) the continued and uninterrupted
supply of the Company's products from third party toll manufacturers and the
continued financial viability of such manufacturers; (v) economic and
environmental considerations which impact agricultural crop production and
agricultural crop protection including the amount of acres of target crops
planted, the cost and efficacy of competitive products, weather conditions and
the level of insect and disease infestation on target crops, and (vi) the
ability of the Company
14
<PAGE> 17
to fund its strategic priorities through operations or access to capital
markets.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
In June, 1997 the United States Patent and Trademark Office declared an
interference between an Ecogen patent application and a patent of Mycogen
Corporation regarding Bt gene Cry1F. The interference was declared as a result
of action taken by the Company to have the Patent Office declare that Ecogen,
not Mycogen, should be recognized as the first to invent the Cry1F gene and that
the Company should be awarded the patent with respect to Cry1F. An interference
is a proceeding in the Patent Office in which the Patent Office determines which
party was first to invent an invention. The Company is a defendant in a patent
infringement lawsuit brought by Mycogen Corporation in which Mycogen alleges
that Ecogen's Lepinox(TM) bioinsecticide infringes two Mycogen patents, one of
which is the subject of the interference. The lawsuit was filed by Mycogen in
the United States District Court for the Southern District of California and
seeks damages and injunctive relief. The Company has denied the allegations made
by Mycogen in the lawsuit and is vigorously defending the action and does not
expect that the outcome of the litigation will have a material adverse effect on
the Company's consolidated financial statements.
Item 2: Changes in Securities
On July 10, 1997, the Company and United Equities (Commodities) Company
("United Equities") entered into a Convertible Senior Subordinated Note Purchase
Agreement pursuant to which United Equities purchased $1.5 million aggregate
principal amount of the Company's 8% Convertible Senior Subordinated Note due
July 10, 2002 (the "Note"). The terms of the Note include interest of 8% per
annum payable in cash or common stock at the Company's option, conversion to
common stock at a conversion price of $3.00 per share which price may be
adjusted upon the occurrence of certain events, certain demand and piggyback
registration rights and a right of first refusal under certain circumstances for
certain equity offerings by the Company. The Company may redeem the Note, at its
option after July, 2000 provided that the Company's common stock has traded for
a specified period for at least 150% of the conversion price. The Note was
issued to United Equities in reliance upon the exemption from securities
registration afforded by Rule 506 under Regulation D under the Securities Act
1933, as amended.
15
<PAGE> 18
Item 6(a): Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation of Ecogen Inc.
(Form 10-Q for fiscal quarter ended January 31, 1996.)*
3.8 By-Laws of Ecogen Inc., as amended. (Form S-1 Registration
Statement.)*
27 Financial Data Schedule
- ----------
* These items are hereby incorporated by reference from the exhibits of
the filing or report indicated (except where noted, Commission File No.
1-9579, and File No. 33-40319 in the case of the Form S-1 Registration
Statement).
16
<PAGE> 19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 18, 1997
ECOGEN INC.
By: /s/ JAMES P. REILLY, JR.
-------------------------------
James P. Reilly, Jr.
Chairman and Chief Executive
Officer
By: /s/ MARY E. PAETZOLD
-------------------------------
Mary E. Paetzold
Vice President and Chief Financial
Officer
17
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