<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, 1998
Commission File Number 1-9579
Ecogen Inc.
-----------
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 22-2487948
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
2005 Cabot Boulevard West, Langhorne, Pennsylvania 19047
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(Address of principal executive offices) (Zip Code)
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<TABLE>
<S> <C>
Registrant's telephone number,
including area code (2l5) 757-l590
--------------
</TABLE>
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:
<TABLE>
<CAPTION>
Class Outstanding at September 1, l998
----- --------------------------------
<S> <C>
Common Stock, $.01 par value 8,033,956
</TABLE>
<PAGE> 2
ECOGEN INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
<S> <C>
Unaudited Consolidated Condensed Balance Sheets as of
July 31, l998 and October 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Condensed Statements of Operations
for the three months and nine months ended July 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the nine months ended July 31, 1998.......... . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Condensed Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 6(a) - Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6(b) - Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
Assets
JULY 31, 1998 OCTOBER 31,
PRO FORMA ACTUAL 1997
(see note 6)
- - ---------------------------------------------------------------------------------------------------------------------------------
Current assets:
<S> <C> <C> <C>
Cash, cash equivalents and temporary investments.............. $3,187,276 $3,187,276 $2,373,945
Temporary investments......................................... 799,424 799,424 -
Trade receivables, net........................................ 1,790,229 1,790,229 1,769,514
Inventory, net................................................ 6,628,481 6,628,481 8,356,767
Prepaid expenses and other current assets..................... 998,167 998,167 571,227
- - ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 13,403,577 13,403,577 13,071,453
- - ---------------------------------------------------------------------------------------------------------------------------------
Plant and equipment, net......................................... 2,913,538 2,913,538 3,649,579
Intangible and other assets, net................................. 544,530 544,530 837,020
- - ---------------------------------------------------------------------------------------------------------------------------------
$16,861,645 $16,861,645 $17,558,052
=================================================================================================================================
Liabilities and Stockholders' Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses....................... $4,269,616 $4,269,616 $5,043,626
Deferred contract revenue................................... 971,745 971,745 957,794
- - ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,241,361 5,241,361 6,001,420
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Long-term debt 514,706 3,734,954 3,916,432
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Other long-term obligations 2,776,105 2,776,105 2,770,548
- - ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
7,500,000 shares:
Series 1998 A convertible preferred stock; 35,000
shares authorized; 20,000 shares issued and
outstanding in 1998 (liquidation value $100 per
share).................................................. 200 200 -
Series 1998 C convertible preferred stock: 50,000
shares authorized; 32,354 pro forma shares issued
in 1998 (liquidation value $100 per share).............. 324 - -
Common stock, par value $.01 per share;
authorized 42,000,000 shares; issued 8,142,573
shares in 1998 and 8,118,573 shares in 1997.............. 81,426 81,426 81,186
Additional paid-in capital.................................... 122,776,380 119,556,456 117,861,372
Accumulated deficit........................................... (113,160,622) (113,160,622) (111,552,038)
Other......................................................... (1,368,235) (1,368,235) (1,520,869)
- - ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,329,473 5,109,225 4,869,651
- - ---------------------------------------------------------------------------------------------------------------------------------
$16,861,645 $16,861,645 $17,558,052
=================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
1
<PAGE> 4
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Product sales, net.......................... $1,617,813 $4,110,311 $6,673,566 $7,684,326
Research contract revenue................... 506,471 719,877 4,748,059 2,143,940
License and other income.................... 84,723 - 649,454 -
Interest income, net........................ - 56,989 - 174,653
- - -------------------------------------------------------------------------------------------------------------------------------
Total revenues 2,209,007 4,887,177 12,071,079 10,002,919
- - -------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of products sold....................... 1,558,979 2,642,256 5,416,981 5,105,780
Research and development:
Funded by third parties................... 196,018 291,163 544,860 878,692
Self funded............................... 637,471 863,980 2,176,496 2,891,481
Selling, general and administrative......... 1,642,890 2,390,001 5,250,949 6,491,227
Special charges............................. - - - 209,629
Interest expense, net....................... 18,467 - 290,377 -
- - -------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,053,825 6,187,400 13,679,663 15,576,809
- - -------------------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------
Net loss ($1,844,818) ($1,300,223) ($1,608,584) ($5,573,890)
================================================================================================================================
Basic and diluted net loss per common share
available to common stockholders ($0.23) ($0.16) ($0.20) ($0.70)
================================================================================================================================
Weighted average number of common
shares outstanding 8,054,000 8,025,000 8,041,000 7,934,000
================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
2
<PAGE> 5
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JULY 31, 1998
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED COMMON
STOCK STOCK
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE NOVEMBER 1, 1997 - $81,186
Transfer of 5,582 shares of treasury stock for employee benefits
and exercise of stock options...................................... - -
Private placement of 20,000 shares of convertible preferred stock,
net of issuance costs............................................ 200 -
Issuance of 24,000 shares of common stock as part of fees associated
with private placement............................................. - 240
Net reduction in unrealized gain on securities........................ - -
Net loss.............................................................. - -
- - --------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1998 200 81,426
==============================================================================================================
Conversion of convertible note for 32,354 shares of
preferred stock.................................................... 324 -
- - --------------------------------------------------------------------------------------------------------------
PRO FORMA BALANCE JULY 31, 1998 $524 $81,426
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE NOVEMBER 1, 1997 $117,861,372 ($111,552,038)
Transfer of 5,582 shares of treasury stock for employee benefits
and exercise of stock options...................................... (126,976) -
Private placement of 20,000 shares of convertible preferred stock,
net of issuance costs............................................ 1,822,300 -
Issuance of 24,000 shares of common stock as part of fees associated
with private placement............................................. (240) -
Net reduction in unrealized gain on securities........................ - -
Net loss.............................................................. - (1,608,584)
- - ----------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1998 119,556,456 (113,160,622)
======================================================================================================================
Conversion of convertible note for 32,354 shares of
preferred stock.................................................... 3,219,924 -
- - ----------------------------------------------------------------------------------------------------------------------
PRO FORMA BALANCE JULY 31, 1998 $122,776,380 ($113,160,622)
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
OTHER
STOCKHOLDERS'
EQUITY TOTAL
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE NOVEMBER 1, 1997 ($1,520,869) $4,869,651
Transfer of 5,582 shares of treasury stock for employee benefits
and exercise of stock options...................................... 156,798 29,822
Private placement of 20,000 shares of convertible preferred stock,
net of issuance costs............................................ - 1,822,500
Issuance of 24,000 shares of common stock as part of fees associated
with private placement............................................. - -
Net reduction in unrealized gain on securities........................ (4,164) (4,164)
Net loss.............................................................. - (1,608,584)
- - -------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1998 (1,368,235) 5,109,225
===================================================================================================================
Conversion of convertible note for 32,354 shares of
preferred stock.................................................... - 3,220,248
- - -------------------------------------------------------------------------------------------------------------------
PRO FORMA BALANCE JULY 31, 1998 ($1,368,235) $8,329,473
===================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
3
<PAGE> 6
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JULY 31,
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... ($1,608,584) ($5,573,890)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Gain on sale of assets................................................. (562,268) -
Depreciation and amortization expense.................................. 580,245 305,673
Noncash interest expense............................................... 286,573 -
Other.................................................................. (2,740) 65,986
Changes in assets and liabilities, net of effects of disposition............ (71,723) (2,102,859)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,378,497) (7,305,090)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of plant and equipment.............................................. (64,461) (138,932)
Net proceeds from sale of pheromone product line............................. 1,659,410 -
Purchase of temporary investment............................................. (799,424) -
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 795,525 (138,932)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of convertible preferred stock, net of issuance costs..... 1,822,300 -
Net proceeds from issuance of Senior Subordinated Convertible Note........... - 1,500,000
Net proceeds from issuance of common shares under stock option plan.......... 10,565 9,752
Repayment of capital lease obligation........................................ (436,562) (291,477)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,396,303 1,218,275
- - ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents............................ 813,331 (6,225,747)
Cash and cash equivalents, beginning of period.................................. 2,373,945 9,611,111
====================================================================================================================================
Cash and cash equivalents, end of period $3,187,276 $3,385,364
====================================================================================================================================
(Continued)
</TABLE>
4
<PAGE> 7
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JULY 31,
1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Changes in assets and liabilities, net of effects of disposition:
Increase in trade receivables............................................. ($20,715) ($889,694)
(Increase)decrease in inventory............................................ 22,892 (1,126,169)
(Increase) decrease in prepaid expenses and
other current assets.................................................... (426,940) 81,176
Decrease in other assets................................................... 289,416 133,432
Decrease in accounts payable
and accrued expenses.................................................... (218,316) (781,057)
Increase in deferred contract revenue...................................... 13,951 663,690
Increase (decrease) in other long-term liabilities......................... 267,989 (184,237)
==================================================================================================================================
Changes in assets and liabilities, net of effects of disposition ($71,723) ($2,102,859)
==================================================================================================================================
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest paid $105,633 $64,444
==================================================================================================================================
- - ----------------------------------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the first nine months of fiscal 1997, the Company issued 44,030 shares of
its common stock upon conversion of the Company's convertible preferred stock
and 13,572 shares of common stock as dividends on the Company's preferred
stock.
In the first nine months of fiscal 1998 and 1997, the Company transferred
5,582 and 4,684 shares, respectively, 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.
In the first nine months of fiscal 1998, the Company issued 24,000 shares of
common stock as part of the fees associated with a private placement.
=============================================================================
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, 1998 AND 1997
(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 10-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, 1997 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, 1998 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 for any of its fiscal years 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.
NET LOSS PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS No. 128"). The Company adopted SFAS No. 128 in the first quarter
of fiscal 1998.
Under SFAS No. 128, basic income (loss) per share is based on net income
(loss) for the relevant period, divided by the weighted average number of
common shares outstanding during the period. Diluted income (loss) per
share is based on net income (loss) for the relevant period divided by
common shares outstanding and other potential common shares if they are
dilutive.
(Continued)
6
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
CONTINUED
NET LOSS PER COMMON SHARE, CONT.
Because the Company reported a net loss per share, there is no difference
between the Company's historic net loss per share calculation and basic
and diluted net loss as calculated under SFAS No. 128 since all potential
common shares were anti-dilutive. The conversion of the $3.0 million
convertible note into 1.0 million common shares in accordance with the
terms of the note, and adding back the $.1 million and $.2 million of
interest expense incurred during the three-month and nine-month period
ended July 31, 1998 was not included in the net loss per share
calculation since the effect was anti-dilutive. Stock options and
warrants were not considered because they were anti-dilutive. Net loss
per share for the three months and nine months ended July 31, 1998 have
been adjusted for preferred stock dividends accrued which were not
material.
RECLASSIFICATIONS:
Certain reclassifications have been made to the reported amounts in the
1997 financial statements to conform to the 1998 classifications.
(2) INVENTORY
At July 31, l998, inventory consisted of raw materials of $.7 million,
work-in-progress of $.8 million and finished products of $5.1 million.
(3) MONSANTO TRANSACTION
In January 1996, the Company entered into agreements 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"). In January 1998, the Company
amended its research and development agreement with Monsanto. In
connection therewith, the Company received approximately $4.8 million in
cash payments during the first six months of fiscal 1998 of which an
aggregate of $3.0 million was earned and recorded as research contract
revenue during the first and second quarters of fiscal 1998 since
the Company had no continuing obligations with respect to such amounts.
Further, $1.7 million and $2.1 million was recorded as research contract
revenue principally relating to the Monsanto R&D contract during the
nine months ended July 31, 1998 and 1997, respectively. At July 31, 1998,
the balance of deferred contract revenue from Monsanto is $1.0 million
which will be recognized as revenue when earned through January 1999,
the remaining term of the amended R&D contract.
(4) LOAN AGREEMENT
In August 1998, the Company obtained a secured, revolving working capital
line of credit for up to $5.0 million with a financial institution. Up to
$1.0 million of the line may be used for letters of credit. The working
capital line
(Continued)
7
<PAGE> 10
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(4) LOAN AGREEMENT, CONT.
of credit is for a minimum of two years (subject to termination on certain
events of default), bears interest at prime plus 1.25% and is fully
collateralized by the Company's assets other than its intellectual
property rights. The lending formula is based on eligible receivables and
finished goods inventory. At September 11, 1998, the balance outstanding
under the line was $ 1.1 million, the minimum loan balance required under
the loan agreement. Further, at September 11, 1998 a $.7 million letter of
credit was outstanding under the line (see note 7 of notes to the
consolidated financial statements.) The loan agreement contains certain
financial covenants. The Company is in compliance with such covenants.
(5) SALE OF PHEROMONE PRODUCT LINE
In April 1998, the Company sold substantially all of the assets
(excluding trade accounts receivable) associated with the pheromone
product line to Scentry Biologicals, Inc. ("Scentry") for total
consideration of approximately $2.4 million. The consideration included
cash of $1.7 million and the assumption of $.7 million of liabilities.
The Company recognized a gain of $.5 million on the sale which is
included in license and other income in the accompanying consolidated
statements of operations. As part of the transaction, the Company entered
into a distribution agreement with Scentry for three pheromone products,
BeeScent(R) Attractant, NoMate(R) LRX MEC and NoMate BHF MEC in the
United States through December 2000. Scentry is a newly formed company,
the principals of which are the former manager of the Company's pheromone
production facility and a principal of one of the Company's distributors
in Central and South America. Unaudited pro forma consolidated results of
operations as if the product line was sold on November 1, 1996, are as
follows, excluding the non-recurring gain on the sale of $.5 million:
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1998 1997
---- -----
($ in thousands except per share data)
<S> <C> <C>
Total revenues $9,463 $7,703
Net loss (2,363) (5,790)
Basic and diluted net
loss per share (.29) (.73)
</TABLE>
The unaudited pro forma information is not necessarily indicative of the
results that would have been obtained had the disposition of the pheromone
product line actually occurred on the date indicated nor is it necessarily
indicative of the Company's future consolidated results of operations.
(Continued)
8
<PAGE> 11
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(6) STOCKHOLDERS' EQUITY
In June 1998, the Company sold 20,000 shares of Series 1998-A 8%
convertible preferred stock, stated value $100 per share, to an
institutional investor for net proceeds of $1.8 million. The holder of
the preferred stock was issued five-year warrants to purchase 180,000
shares of common stock at $3.525 per share. Dividends are payable
semi-annually in cash or stock at the option of the Company. The
preferred stock has no voting rights except with respect to certain
matters affecting the Company's preferred stock. At the election of the
holder, the preferred stock may be converted at various dates to shares
of the Company's common stock at the lesser of $3.39 per share (subject
to adjustment under certain circumstances) or an average market price, as
defined in the agreement, over a ten day period at the time of
conversion. The Company, at its option, may redeem the preferred stock at
125% of the stated value. If the Company is unable to issue sufficient
shares of common stock within a specified period of time
after the holder has requested conversion, the dividend rate may
increase and the Company may be required to issue additional warrants.
Further, in certain circumstances, all of which are in the control of the
Company, the Company may be required to redeem the shares at various
premiums over stated value. The holder of the preferred stock has certain
registration rights with respect to the shares of common stock underlying
the preferred stock and warrants. Included in the fee paid to the
placement agent in connection with the transaction were 24,000 shares of
the Company's common stock.
In August 1998, the Company exchanged an 8% convertible secured note due
in October 2002 in the amount of $3.2 million for 32,354 shares of newly
issued 8% Series 1998-C convertible preferred stock with a stated value
of $100 per share. The holder of the Note is a principal stockholder of
the Company. Dividends on the preferred stock are payable semi-annually
in cash or shares of preferred stock at the option of the Company. The
preferred stock has no voting rights except with respect to certain
matters affecting the preferred stock. At the election of the holder,
the preferred stock may be converted into common stock of the Company at
any time and from time-to-time beginning in August 1999 at a conversion
price equal to the lesser of $2.125 per share (subject to adjustment
under certain circumstances) and the average market price, as defined in
the agreement, over a five day period at the time of conversion. The
Company, at its option, may require conversion of the preferred stock if
the average market value of the Company's common stock is greater than
$4.00 per share over a ten day period. The Company, at its option, may
redeem the preferred stock at 125% of the stated value. Furthermore, in
certain circumstances, all of which are in the control of the Company,
the Company may be required to redeem the preferred stock at various
premiums over stated value.
If the Company is unable to issue sufficient shares of common stock
within a specified period of time after the holder has requested
conversion, or the common stock has a market value of less than $1.00 per
share for thirty consecutive days, the dividend rate may increase and the
Company could be required to pay such dividends in cash. In such event
and if the unpaid
(Continued)
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS,
(CONTINUED)
(6) STOCKHOLDERS' EQUITY, CONT.
dividends exceed $37,500 for a period of 30 days, the Company may be
required to appoint two designees of the holders of a majority of the
outstanding preferred stock to the Company's Board of Directors.
Unaudited pro forma financial information as if the aforementioned
exchange had taken place on July 31, 1998 is presented in the unaudited
consolidated balance sheet at July 31, 1998. Pro forma basic and diluted
net loss per share has not been presented since the effect of conversion
would be anti-dilutive. The unaudited pro forma consolidated balance
sheet should be read in conjunction with the Company's October 31, 1997
historical consolidated financial statement and notes thereto included in
the Company's Annual Report on Form 10K.
(7) COMMITMENTS AND CONTINGENCIES
The Company has outstanding a $.7 million letter of credit under the
Company's line of credit as described in note 4 above. This letter of
credit replaces the letter of credit the Company had with a commercial
bank. As a result, the $.5 million certificate of deposit previously held
as collateral for the outstanding letter of credit has been reclassified
to temporary investments from other current assets.
10
<PAGE> 13
ECOGEN INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1998 AND 1997
OVERVIEW
For the first nine months of fiscal 1998, total revenues increased 21% from
$10.0 million in fiscal 1997 to $12.1 million in fiscal 1998. During fiscal
1998, the Company amended its research and development agreement with Monsanto
Company ("Monsanto") which resulted in $3.0 million of research contract
revenues recognized in the first and second quarter of fiscal 1998. There were
no comparable payments for the year-ago period. Research contract revenue was
$1.7 million in the first nine months of fiscal 1998 compared to $2.1 million
in fiscal 1997. Contract research under the recently amended agreement with
Monsanto will cease during the first quarter of 1999. Product sales decreased
13% or $1.0 million from $7.7 million for the nine-month period ended July 31,
1997 to $6.7 million for the comparable period in fiscal 1998. During the first
nine months of fiscal 1998, the Company also realized a reduction in operating
expenses, including research and development and selling, general and
administrative expenses, of $2.3 million or 22% to $8.0 from $10.3 million in
the year-ago period. As a result of increased revenues and decreased operating
expenses, the Company reported a net loss of ($1.6) million or ($.20) per basic
and diluted share in the first nine months of fiscal 1998 compared to a net
loss of ($5.6) million or ($.70) per share in the comparable period in fiscal
1997 on weighted average shares of 8.0 million and 7.9 million in the first
nine months of fiscal 1998 and 1997, respectively. On a pro forma basis,
assuming the sale of the pheromone product line had taken place on November 1,
1996, the beginning of the 1997 fiscal year, and excluding the $.5 million
non-recurring gain, the net loss was $2.4 million or ($.29) per share and $5.8
million or ($.73) per share for the nine months ended July 31, 1998 and 1997,
respectively.
In April 1998, the Company sold its pheromone product line to a newly-formed
company for aggregate net consideration of $2.4 million and recognized a gain
on sale of $.5 million. The Company has agreed to distribute certain of the
pheromone products in the United States through December 31, 2000.
NINE MONTHS ENDED JULY 31, 1998 AND 1997
REVENUES
Net product sales decreased 13% during the nine months ended July 31, 1998 to
$6.7 million compared with $7.7 million in the first nine months of 1997, due
primarily to lower volume. Sales of the Company's Bt product line, representing
58% of total sales, increased 19% in 1998. Higher sales of CRYMAX, the Company's
new Bt bioinsecticide for control of caterpillars in the vegetable, tree nut and
vine market and higher international sales were partially offset by lower sales
into the row crop market caused by severe drought conditions in the South and
Mid South, particularly in Texas. Pheromone product sales, representing 36% of
total sales, decreased $.3 million or 11% in the first nine months of fiscal
1998. As a result of the sale of the pheromone product line during the second
quarter of fiscal 1998 there were no significant sales of pheromone products in
the third quarter. Biofungicide sales, representing 6% of total sales, decreased
$1.4 million in 1998
11
<PAGE> 14
due to carryover inventory at the Company's distributor for Aspire, a
biofungicide for control of post harvest rot disease, offset in part by
increased sales of AQ10, for control of powdery mildew.
Research contract revenues increased $2.6 million in the current nine-month
period, due primarily to the payments from Monsanto during the first half of
fiscal 1998 described above as a result of an amendment to the Company's
research and development contract. It is anticipated that revenue from Monsanto
will be substantially lower in fiscal 1999. The increase in license and other
revenue is the result of the $.5 million gain on sale of the pheromone product
line.
COSTS AND EXPENSES
Cost of products sold increased 6% in the first nine months of fiscal 1998
compared to the comparable period in fiscal 1997. Gross margins on product sales
decreased to 19% in the first nine months of fiscal 1998 compared to 34% in
fiscal 1997. The lower gross margins in fiscal 1998 were due principally to
product mix as a result of higher low margin international sales and lower sales
of biofungicide products which are high margin products, and higher fixed
manufacturing charges.
Total operating expenses, consisting of research and development and selling,
general and administrative expenses were $8.0 million in the first nine months
of fiscal 1998 compared to $10.3 million in the nine months ended July 31, 1997,
a decrease of $2.3 million or 22%. Research and development costs decreased $1.0
million or 28% due principally to lower process development and start-up costs
and lower personnel costs as a result of the shut-down of a research lab in
Israel and reduced basic research activity. Research and development costs are
expected to continue to decrease as a result of these factors in fiscal 1998
when compared to fiscal 1997. Fiscal 1997 included higher process development
costs as a result of the since resolved problem with the Company's scale-up of
its new water dispersible (WDG) formulation. Selling, general and administrative
expenses were $5.3 million in the first nine months of fiscal 1998 compared to
$6.5 million in 1997, representing a decrease of $1.2 million or 19%. Selling
and marketing costs decreased 20% and general and administrative expenses
decreased 18% due to cost containment efforts including salaries and related
costs, outside services and advertising and promotional expenses due in part to
the sale of the pheromone business. The Company expects that these same factors
will continue to drive a decline in operating expenses throughout fiscal 1998.
Net interest expense was $.3 million during the nine months ended July 31, 1998
compared to net interest income of $.2 million in the comparable period of
fiscal 1997 due to increased levels of long-term obligations and decreased funds
available for investment.
Net loss for the nine months ended July 31, 1998 was ($1.6) million, compared to
a net loss of ($5.6) million for the same period in fiscal 1997. Basic and
diluted net loss per share for the nine months ended July 31, 1998 was ($.20),
compared to net loss per share of ($.70) on weighted average shares outstanding
of 8.0 million and 7.9 million in the first nine months of fiscal 1998 and 1997,
respectively.
12
<PAGE> 15
THREE MONTHS ENDED JULY 31, 1998 AND 1997
REVENUES
Net product sales decreased 61% during the three months ended July 31, 1998 to
$1.6 million compared with $4.1 million in the third quarter of 1997 principally
due to volume. Pheromone product sales were $1.5 million in the third quarter of
fiscal 1997 whereas the third quarter of fiscal 1998 saw virtually no sales of
pheromone products as a result of the sale of the pheromone product line during
the second quarter of fiscal 1998. Continuing product sales decreased 39%
principally due to volume. Sales of the Company's Bt product line, representing
79% of continuing sales, decreased $.3 million due principally to a decrease in
sales of Condor, the Company's Bt bioinsecticide for control of caterpillars, in
the row crop market due to severe weather conditions including the drought in
Texas offset, in part, by higher sales of other Bt bioinsecticides. Biofungicide
sales, representing 19% of total sales, decreased $.7 million due to lower sales
of Aspire as a result of carryover inventory at the Company's distributor.
Research contract revenues decreased $.2 million in the three-month period ended
July 31, 1998, due to lower research contract revenue under the Monsanto R&D
contract.
COSTS AND EXPENSES
Cost of products sold decreased 41% in the third quarter of fiscal 1998 compared
to 1997 due to the decrease in product sales. Gross margins on product sales
decreased to 4% in the third quarter of fiscal 1998 compared to 36% in the
comparable period in fiscal 1997. This decrease was due primarily to product mix
including lower sales during the third quarter of fiscal 1998 of the Company's
Aspire biofungicide product, which is a high margin product and fixed
manufacturing charges as a higher percentage of lower sales.
Total operating expenses were $2.5 million in the third quarter of fiscal 1998
compared to $3.5 million in 1997, a decrease of 29%. Research and development
costs decreased $.3 million or 28% as a result of the same factors discussed
above for the nine month period ended July 31,1998. Selling, general and
administrative expenses were $1.6 million in the third quarter of fiscal 1998
compared to $2.4 million in 1997, representing a decrease of $.8 million or 31%
principally as a result of lower selling and marketing expense including
principally promotional rebates, in part as a result of the sale of the
pheromone product line.
Net interest expense was $18 thousand during the three months ended July 31,
1998 compared to $.1 million in interest income in fiscal 1997 due primarily to
an increase in long-term debt.
Net loss for the three months ended July 31, 1998 was ($1.8) million, compared
to a net loss of ($1.3) million for the same period in fiscal 1997. Basic and
diluted net loss per share for the three months ended July 31, 1998 was ($.23),
compared to net loss per share of ($.16) on weighted average shares outstanding
of 8.0 million in both the third quarter of fiscal 1998 and 1997. On a pro forma
basis, adjusted for the sale of the pheromone business, net loss for the quarter
was ($1.6) million or ($.20) per share, basic and diluted.
13
<PAGE> 16
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 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, 1998, the Company had cash and liquid investments of $4.0 million,
an increase of $1.6 million from October 31, 1997. $1.7 million of cash used in
operations, $.1 million for capital expenditures and $.4 million for repayment
of capital lease obligations substantially were funded by $1.7 million in
proceeds from the sale of the pheromone product line and $1.8 million net
proceeds from the sale of preferred stock to an institutional investor. In
August 1998, the Company obtained a secured working capital line of credit for
up to $5.0 million from a financial institution. Also in August 1998, the holder
of the Company's 8% secured convertible note exchanged such note for 1998 Series
C, 8% convertible preferred stock. (See Note 6 of notes to unaudited
consolidated condensed financial statements.)
The Company has not generated positive cash flow from operations in any fiscal
year. The Company has financed its working capital needs primarily through
private and public offerings of equity securities, research revenues and license
and other fees from research and development alliances and product sales. The
Company believes that its existing working capital and funds available under its
working capital line of credit should be sufficient to meet its capital and
liquidity requirements for at least the next twelve months. 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 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 decreased $1.6 million at July 31, 1998 when compared to October 31,
1997 primarily as a result of the sale of the pheromone product line. Other
current assets increased $.5 million as a result of a reclassification from
long-term other assets. Accounts payable and accrued expenses decreased $.8
million due principally to the assumption of certain liabilities by the
purchaser of the pheromone product line.
14
<PAGE> 17
YEAR 2000
The Company has completed an initial assessment of its Year 2000 status and
plans to contact major customers and vendors to assess their status as to Year
2000 compliance. The Year 2000 plan is expected to be implemented and completed
in fiscal 1999. Although the Company is in the process of upgrading or replacing
certain hardware and software, management believes the financial impact of
making the required system changes is not expected to be material to the
Company's consolidated financial position, results of operations or cash flows.
However, there is no assurance that service interruptions will not occur from
suppliers or service providers such as banks and government. The Company
believes that there exists alternative suppliers and, therefore, interruptions,
if any, from suppliers should be temporary.
FORWARD LOOKING STATEMENTS
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 to fund its strategic priorities through operations or
access to capital markets.
15
<PAGE> 18
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6(a) Exhibits
Exhibit No. Description
- - ----------------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Ecogen Inc. (Form 10-Q
for fiscal quarter ended January 31, 1996)*
3.2 By-laws of Ecogen Inc., as amended (Form S-1 Registration
Statement, File No. 33-14119)*
3.3 Certificate of Designations, Preferences and Rights of Series
1998-A Convertible Preferred Stock (Form 10-Q for fiscal
quarter ended April 30, 1998)*
3.4 Certificate of Designations, Preferences and Rights of Series
1998-C Convertible Preferred Stock (Form 8-K, dated September
2, 1998)*
27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
</TABLE>
A Current Report on Form 8-K was filed on September 2, 1998 with respect to:
(i) the obtainment by the Company of a secured, revolving loan valued at up to
$5,000,000 from Congress Financial Corporation; and (ii) the issuance by the
Company of 32,354 shares of newly issued 8% Series 1998-C Convertible Preferred
Stock to United Equities (Commodities) Company in exchange for an 8% secured
convertible note due October 31, 2002 in the amount of $3,235,400 held by
United Equities (Commodities) Company.
A Current Report on Form 8-K was filed on May 15, 1998 with respect to the sale
by the Company of substantially all of the assets (other than receivables from
product sales) associated with the Company's pheromone product line to Scentry
Biologicals Inc. An unaudited pro forma condensed consolidated balance sheet
as of January 31, 1998 and unaudited pro forma condensed consolidated
statements of operations for the year ended October 31, 1997 and the
three-month period ended January 31, 1998 were filed as part of such Current
Report.
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated and are made part of this report.
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 14, 1998
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-1-1997
<PERIOD-END> JUL-31-1998
<CASH> 3,187,276
<SECURITIES> 799,424
<RECEIVABLES> 1,804,357
<ALLOWANCES> 14,128
<INVENTORY> 6,628,481
<CURRENT-ASSETS> 13,403,577
<PP&E> 8,567,649
<DEPRECIATION> (5,654,111)
<TOTAL-ASSETS> 16,861,645
<CURRENT-LIABILITIES> 5,241,361
<BONDS> 0
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<COMMON> 81,426
<OTHER-SE> 5,027,599
<TOTAL-LIABILITY-AND-EQUITY> 16,861,645
<SALES> 6,673,566
<TOTAL-REVENUES> 12,071,079
<CGS> 5,416,981
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