<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, 1999
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)
2000 W. Cabot Boulevard, #170, Langhorne, Pennsylvania 19047-1811
(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, l999
Common Stock, $.01 par value 9,977,526
<PAGE> 2
ECOGEN INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
July 31, l999 and October 31, 1998....................................1
Unaudited Consolidated Condensed Statements of Operations for the
three months and nine months ended July 31, 1999
and 1998 .............................................................2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the nine months ended July 31, 1999........................3
Unaudited Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, 1999 and 1998......................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
<PAGE> 3
PART I - FINANCIAL INFORMATION
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JULY 31, OCTOBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,185,701 $ 2,009,437
Temporary investments -- 813,150
Trade receivables, net 2,938,480 3,338,897
Inventory, net 5,648,010 4,298,374
Prepaid expenses and other current assets 521,379 624,072
------------- -------------
Total current assets 10,293,570 11,083,930
Plant and equipment, net 2,602,695 2,771,255
Other assets, net 763,092 821,316
------------- -------------
$ 13,659,357 $ 14,676,501
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit due within one year 1,409,478 26,019
Accounts payable and accrued expenses 3,696,413 3,076,300
Deferred contract revenue -- 485,853
------------- -------------
Total current liabilities 5,105,891 3,588,172
Long-term debt 1,567,436 1,327,875
Long-term deferred revenue 1,388,009 1,301,333
Minority interest in subsidiary 1,533,854 1,533,854
------------- -------------
Total liabilities 9,595,190 7,751,234
------------- -------------
Stockholders' equity:
Preferred stock:
Series 1999 A 150 --
Series 1998 A -- 195
Series 1998 C 324 324
Common stock 99,775 82,426
Additional paid-in capital 124,529,960 122,162,964
Accumulated deficit (120,566,042) (114,665,164)
Other -- (655,478)
------------- -------------
Total stockholders' equity 4,064,167 6,925,072
------------- -------------
$ 13,659,357 $ 14,676,501
============= =============
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed
Financial Statements.
1
<PAGE> 4
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ 2,118,111 $ 1,617,813 $ 5,640,613 $ 6,673,566
Contract research revenue 30,000 506,471 626,277 4,748,059
------------ ------------ ------------ ------------
Total revenues 2,148,111 2,124,284 6,266,890 11,421,625
------------ ------------ ------------ ------------
Costs and expenses:
Cost of products sold 1,756,213 1,558,979 4,549,621 5,416,981
Research and development:
Funded by third parties 22,429 196,018 295,007 544,860
Self funded 621,655 637,471 1,686,498 2,176,496
Selling, general and administrative 1,869,690 1,642,890 5,056,915 5,250,949
------------ ------------ ------------ ------------
Total costs and expenses 4,269,987 4,035,358 11,588,041 13,389,286
------------ ------------ ------------ ------------
Operating loss (2,121,876) (1,911,074) (5,321,151) (1,967,661)
Other income (expense):
Interest expense, net (124,010) (18,467) (369,358) (290,377)
Other income 36,141 84,723 52,387 649,454
------------ ------------ ------------ ------------
Total other income (expense), net (87,869) 66,256 (316,971) 359,077
------------ ------------ ------------ ------------
Net loss (2,209,745) (1,844,818) (5,638,122) (1,608,584)
Dividends on preferred stock including assumed
incremental yield of $403,337 for the three and
nine-month period ended July 31, 1999 491,053 -- 666,094 --
------------ ------------ ------------ ------------
Net loss allocable to common stockholders $ (2,700,798) $ (1,844,818) $ (6,304,216) $ (1,608,584)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.29) $ (0.23) $ (0.70) $ (0.20)
============ ============ ============ ============
Basic and diluted weighted average number of
common shares outstanding 9,473,000 8,054,000 9,001,000 8,041,000
============ ============ ============ ============
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed
Financial Statements.
2
<PAGE> 5
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Convertible Additional Other
Preferred Common Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity Total
---------- -------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance November 1, 1998 $ 519 $ 82,426 $122,162,964 $(114,665,164) $ (655,478) $ 6,925,267
Private placement of 500,000 shares of
common stock, net of issuance costs -- 5,000 1,530,208 -- -- 1,535,208
Private placement of 15,000 shares of
convertible preferred stock, net of
issuance costs (including 20,000 shares
of common stock paid as a placement fee) 150 200 1,356,650 -- -- 1,357,000
Issuance of 1,738 shares of common stock
and transfer of 5,037 shares of treasury
stock for employee benefits -- 17 (52,527) -- 65,783 13,273
Dividends on preferred stock -- 635 108,662 (262,756) -- (153,459)
Conversion of 19,500 shares of Series A
convertible preferred stock to 1,155,975
shares of common stock (195) 11,408 (600,908) -- 589,695 --
Issuance of 8,887 shares of common stock
in connection with consulting agreement -- 89 24,911 -- -- 25,000
Net loss -- -- -- (5,638,122) -- (5,638,122)
---------- -------- ------------ ------------- ------------ -----------
Balance July 31, 1999 $ 474 $ 99,775 $124,529,960 $(120,566,042) $ -- $ 4,064,167
========== ======== ============ ============= ============ ===========
</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,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,638,122) $(1,608,584)
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 524,026 580,245
Noncash interest and compensation expense 250,846 286,573
Other 76,015 (2,740)
Changes in assets and liabilities, net of effects of disposition in 1998 (981,807) (71,723)
----------- -----------
Net cash used in operating activities (5,769,042) (1,378,497)
----------- -----------
Cash flows from investing activities:
Proceeds from maturity of temporary investments 813,150 --
Purchase of plant and equipment (50,656) (64,461)
Net proceeds from sale of pheromone product line -- 1,659,410
Purchase of temporary investment -- (799,424)
----------- -----------
Net cash provided by investing activities 762,494 795,525
----------- -----------
Cash flows from financing activities:
Proceeds from sale of equity securities, net of issuance costs 2,892,208 1,822,300
Proceeds from line of credit, net 1,583,459 --
Net proceeds from issuance of common shares under stock option plan 4,449 10,565
Repayment of capital lease obligation (297,304) (436,562)
----------- -----------
Net cash provided by financing activities 4,182,812 1,396,303
----------- -----------
Net (decrease) increase in cash and cash equivalents (823,736) 813,331
Cash and cash equivalents, beginning of period 2,009,437 2,373,945
----------- -----------
Cash and cash equivalents, end of period $ 1,185,701 $ 3,187,276
=========== ===========
</TABLE>
(Continued)
4
<PAGE> 7
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Nine months ended
July 31,
1999 1998
----------- -----------
<S> <C> <C>
Changes in assets and liabilities, net of effects of disposition:
Decrease (increase) in trade receivables $ 400,417 $ (20,715)
(Increase) decrease in inventory (1,349,636) 22,892
Decrease (increase) in prepaid expenses and
other current assets 102,692 (426,940)
(Increase) decrease in other assets (11,441) 289,416
Increase (decrease) in accounts payable
and accrued expenses 362,014 (218,316)
(Decrease) increase in deferred contract revenue (485,853) 13,951
Decrease in other long-term liabilities -- 267,989
----------- -----------
Changes in assets and liabilities, net of effects of disposition $ (981,807) $ (71,723)
=========== ===========
----------- -----------
Interest paid $ 144,422 $ 105,633
=========== ===========
</TABLE>
Noncash investing and financing activities:
In the first nine months of fiscal 1999, the Company issued 1,155,975 shares
of its common stock upon conversion of the Company's Series 1998-A
convertible preferred stock of which 46,924 shares were transferred from
treasury stock.
In the first nine months of fiscal 1999, the Company issued 63,506 shares of
common stock, as dividends on the Company's Series 1998-A convertible
preferred stock.
In the first nine months of fiscal 1999, the Company transferred 5,037 shares
of treasury stock to outstanding shares and issued 1,738 shares of common
stock pursuant to certain employee benefit plans.
In the first nine months of fiscal 1998, the Company transferred 5,582 shares
of treasury stock to outstanding shares pursuant to certain employee benefit
plans.
In the first nine months of fiscal 1999, the Company purchased $304,810 of
plant and equipment under capital leases.
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, 1999 AND 1998
(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, 1998 consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K.
The results of operations for the interim periods ended July 31, 1999 are
not necessarily indicative of the operating results for the full year.
Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS 130 had no
impact on the Company's results of operations for the three and nine
months ended July 31, 1999 and an immaterial impact for the three and
nine months ended July 31, 1998. The net loss is substantially equal to
the comprehensive loss for the periods.
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.
(Continued)
6
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONT.
NET LOSS PER COMMON SHARE:
Basic net loss per share is based on net loss allocable to common
stockholders for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted loss per
share is based on net loss allocable to common stockholders for the
relevant period divided by common shares outstanding and other potential
common shares if they are dilutive.
The assumed conversion of the convertible preferred stock in fiscal 1999
and the convertible note in fiscal 1998 into common shares and adding
back the dividends and interest expense incurred during the three-month
and nine-month periods ended July 31, 1999 and 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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the reported amounts in the
1998 financial statements to conform to the 1999 classifications.
(2) INVENTORY
At July 31, l999, inventory consisted of raw materials of $.6 million,
work-in-progress of $.7 million and finished products of $4.3 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 nine months of fiscal 1998; of which an
aggregate of $3.0 million was earned and recorded as research contract
revenue during the first nine months of fiscal 1998, since the Company
had no continuing obligations with respect to such amounts. Total
research contract revenue from Monsanto was $.5 million and $4.7 million
during the nine months ended July 31, 1999 and 1998, respectively. The
amended research contract ended in January 1999.
(Continued)
7
<PAGE> 10
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (CONTINUED)
(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 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 July 31, 1999, the balance
outstanding under the line was $2.7 million. Further, at July 31, 1999 a
$.5 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, with which the Company is in
compliance as of July 31, 1999.
(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, 1997, are as
follows, excluding the non-recurring gain on the sale of $.5 million:
<TABLE>
<CAPTION>
Nine Months Ended July 31, 1998
$(in thousands except per share data)
<S> <C>
Total revenues $ 9,376
Net loss allocable to common
stockholders (2,375)
Basic and diluted net
loss per share (.30)
=======
</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
During the first nine months of fiscal 1999, the Company issued 1,155,975
shares of its common stock in exchange for 19,500 shares of the Company's
Series 1998-A 8% convertible preferred stock issued in June 1998. The
Company also issued 63,506 shares of its common stock in payment of
cumulative dividends at the time of conversion.
In fiscal 1999 the vesting schedule on 100,000 shares of common stock
granted to an officer in fiscal 1998 was accelerated, to become
immediately vested. As a result, the remaining deferred compensation was
recorded as expense during the second quarter of fiscal 1999.
In April 1999 the Company's stockholders approved the 1999 stock option
plan ("1999 Option Plan") under which 1,500,000 shares of common stock
may be issued. The Option Plan permits the granting of both incentive
stock options and non-statutory stock options. The option price of the
shares for incentive stock options may not be less than the fair market
value of such stock at the grant date as determined under the 1999 Option
Plan. Options are exercisable over a period determined by the Board of
Directors, but not longer than ten years after grant date. Upon the
approval of the 1999 Option Plan, 825,000 options available for grant
under the 1998 stock option plan were cancelled. During fiscal 1999, the
Board of Directors, under the 1999 Option Plan, approved the granting to
employees of stock options to acquire 860,000 shares of the Company's
common stock at $2.50 per share, the market value on the day of the
grant. The Board of Directors also approved the granting of stock options
to acquire 100,000 shares of the Company's stock at $2.50 per share, the
market value on the day of the grant, to a consultant to the Company. The
resulting compensation expense will be recorded ratably over the
three-year vesting period.
In May 1999, the Company sold 15,000 shares of Series 1999-A 7%
convertible preferred stock, stated value $100 per share, to an
institutional investor for net proceeds of $1.4 million. The holder of
the preferred stock was issued five-year warrants to purchase 120,000
shares of common stock at $3.98 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 $3.69 per share or 95% of
the average market price, as defined in the agreement, over a twenty-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.
(Continued)
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (CONTINUED)
(6) STOCKHOLDERS' EQUITY, CONT.
common stock underlying the warrants and the convertible preferred stock
Included in the fee paid to the placement agent in connection with the
transaction were 20,000 shares of the Company's common stock. In
accordance with the terms of the Series 1999-A Preferred Stock the
Company is required to recognize an assumed incremental yield of $.8
million, of which $.4 million was recognized in the third quarter of
fiscal 1999 (calculated at the date of issuance based on the conversion
formula in the agreement). Such amounts are being amortized as preferred
stock dividends over a seven-month period beginning with the date of
issuance.
In July 1999, the Company sold 500,000 shares of common stock to an
institutional investor in a private placement for $3.09 per share for net
proceeds of $1.5 million.
(7) COMMITMENTS AND CONTINGENCIES
At July 31, 1999, the Company had outstanding a $.5 million letter of
credit, to secure a contract manufacturing agreement, under the Company's
line of credit as described in note 4 above.
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, 1999 AND 1998
OVERVIEW
For the first nine months of fiscal 1999, total revenues decreased 45% from
$11.4 million in fiscal 1998 to $6.3 million in fiscal 1999. Contract research
revenue decreased $4.1 million to $.6 million in the first nine months of fiscal
1999 compared to $4.7 million in the first nine months of fiscal 1998. The
decrease was primarily the result of the expiration in January 1999 of the
research and development agreement with Monsanto Company (Monsanto) that had
contributed more than $10 million in research contract revenue to the Company
over its three-year term. Product sales decreased $1.0 million or 15% from $6.7
million to $5.6 million for the nine months ended July 31, 1998 and 1999,
respectively. The first nine months of fiscal 1998 included approximately $2.0
million in net product sales of pheromone products, a product line that was sold
in the second quarter of fiscal 1998. On a pro forma basis, assuming the
pheromone product line had been sold at the beginning of fiscal 1998, continuing
product sales increased 22% from $4.6 million to $5.6 million for the nine
months ended July 31, 1998 and 1999, respectively.
During the first nine months of fiscal 1999, the Company realized a reduction in
operating expenses of $.9 million or 12% from $8.0 million in the year-ago
period to $7.0 million in fiscal 1999. Operating loss was $3.4 million higher in
fiscal 1999 due substantially to the lower contract research revenue in fiscal
1999. The Company reported a net loss allocable to common stockholders of $(6.3)
million or $(0.70) per basic and diluted share in the first nine months of
fiscal 1999 compared to a net loss allocable to common stockholders of $(1.6)
million or $(0.20) per share in the comparable period in fiscal 1998. Weighted
average shares outstanding were 9.0 million and 8.0 million in the first nine
months of fiscal 1999 and 1998, respectively.
NINE MONTHS ENDED JULY 31, 1999 AND 1998
REVENUES
On a pro forma basis, assuming the sale of the pheromone product line had taken
place at the beginning of the 1998 fiscal year, net product sales increased 22%
during the nine months ended July 31, 1999, principally due to volume increases.
Sales of the Company's Bt product line, representing 90% of total sales,
increased 30% due principally to an increase in sales of Lepinox WDG, a new Bt
bioinsecticide for control of caterpillars in sweet corn, turf and other row
crops and bollworm and budworm in cotton and non-agricultural markets.
Biofungicide sales, representing 5% of total sales, decreased 34% due to a
decrease in volume of sales of AQ10 in the first nine months of fiscal 1999.
Newly introduced soil amendments represented 4% of total sales in the first nine
months of fiscal 1999.
Contract research revenues decreased $4.1 million in the current nine-month
period, due primarily to higher payments in fiscal 1998 from Monsanto under a
research and development contract which expired in January 1999. As a result of
11
<PAGE> 14
the expiration of the Monsanto research and development contract, it is
anticipated that research contract revenue will be substantially lower in fiscal
2000.
COSTS AND EXPENSES
Cost of continuing products sold increased 14% in the first nine months of
fiscal 1999 compared to the same period in fiscal 1998 due primarily to
increased sales. Gross margins on continuing product sales increased to 19% in
the first nine months of fiscal 1999 compared to 14% in fiscal 1998. This
increase in gross margins on product sales was due to improved margins on the
Company's Bt product line.
Total operating expenses were $7.0 million in the first nine months of fiscal
1999 compared to $8.0 million in 1998, a decrease of $.9 million or 12%.
Research and development costs decreased $.7 million or 27% due principally to
lower personnel costs. The Company's commitment to provide research services to
Monsanto has expired and the Company's technology continues to approach
commercialization, therefore requiring less activity in basic research and
process development. Research and development costs are expected to continue to
decline for the remainder of fiscal 1999 when compared to the same period of
fiscal 1998. Selling, general and administrative expenses were $5.1 million in
the first nine months of fiscal 1999 compared to $5.3 million in 1998,
representing a decrease of $.2 million or 4%. Selling and marketing costs were
consistent from fiscal 1998 to fiscal 1999. A decrease of $.3 million as a
result of the sale of the pheromone product line was offset by higher
advertising costs resulting from higher continuing product sales. The Company
expects higher selling and marketing expenses during the remainder of fiscal
1999 due to staff increases and special promotional programs to support its
distributors' efforts in introducing the Company's biopesticides. General and
administrative expenses decreased 10% due to cost containment efforts
implemented for fiscal 1999 including salaries and related costs and outside
services. Pro forma operating expenses, assuming the sale of the pheromone
product line had taken place at the beginning of fiscal 1998, decreased 7% for
the nine months ended July 31, 1999.
OTHER INCOME (EXPENSE)
In April 1998, the Company sold its pheromone product line to a newly-formed
company for aggregate net proceeds of $2.4 million and recognized a gain on sale
of $.5 million which was recorded as other income (expense), net in the
accompanying consolidated financial statements during the second quarter of
fiscal 1998.
NET LOSS
Net loss allocable to common stockholders for the nine months ended July 31,
1999 was $(6.3) million, compared to a net loss of $(1.6) million for the same
period in fiscal 1998. Basic and diluted net loss per share for the nine months
ended July 31, 1999 was $(.70), compared to a net loss per share of $(.20) on
weighted average shares outstanding of 9.0 million and 8.0 million in the first
nine months of 1999 and 1998, respectively. Fiscal 1999 net loss allocable to
common stockholders included preferred stock dividends of $263,000 and an
assumed incremental yield of $403,000.
Pro forma net loss and net loss per share in fiscal 1998, adjusted for the sale
of the pheromone product line, was $(2.4) million and $(.30) per share,
respectively.
12
<PAGE> 15
THREE MONTHS ENDED JULY 31, 1999 AND 1998
REVENUES
Net product sales increased 31% during the three months ended July 31, 1999 to
$2.1 million compared with $1.6 million in the third quarter of 1998 principally
due to increased volume. Sales of the Company's Bt product line, representing
94% of total sales, increased $.7 million due principally to an increase in
sales of Lepinox which was newly introduced in the fourth quarter of fiscal
1998. Biofungicide sales, representing 1% of total sales, decreased $.3 million
due to lower sales of AQ10. Newly introduced soil amendments represented 4% of
total sales in the third quarter of fiscal 1999.
Contract research revenues decreased $.5 million in the three-month period ended
July 31, 1999, due to the expiration of the research and development contract
with Monsanto in January 1999.
COSTS AND EXPENSES
Cost of products sold increased 13% in the third quarter of fiscal 1999 compared
to fiscal 1998 due to the increase in product sales. Gross margins on product
sales increased to 17% in the third quarter of fiscal 1999 compared to 4% in the
same period in fiscal 1998. This increase was due to higher unit volume, which
increased overhead absorption, and improved margins on the Company's Bt product
line.
Total operating expenses were $2.5 million in the third quarter of fiscal 1999
and fiscal 1998. Research and development costs decreased $.2 million or 23% as
a result of lower personnel and related costs. Selling and marketing expenses
increased 30%, principally as a result of recent staff increases and special
promotional programs. General and administrative expenses decreased 4% due to
personnel reductions and lower outside services.
OTHER INCOME (EXPENSE)
Net interest expense was $.1 million during the three months ended July 31, 1999
compared to $18 thousand in the third quarter of fiscal 1998 due primarily to an
increase in long-term debt.
NET LOSS
Net loss allocable to common stockholders for the three months ended July 31,
1999 was $(2.7) million, compared to a net loss of $(1.8) million for the same
period in fiscal 1998. Basic and diluted net loss per share for the three months
ended July 31, 1999 was $(.29), compared to net loss per share of $(.23) on
weighted average shares outstanding of 9.5 million and 8.1 million in the third
quarter of fiscal 1999 and 1998, respectively. The fiscal 1999 period included
preferred stock dividends of $88,000 and an assumed incremental yield of
$403,000.
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. 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
13
<PAGE> 16
level of insect pressure in grower areas. In addition, 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.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, cash and liquid investments decreased $1.6 million from
October 31, 1998 and net borrowing under long-term debt facilities increased
$1.3 million. Further, $2.9 million was raised in net proceeds from the sale of
equity securities in fiscal 1999. The $5.8 million in cash was used to fund
operations.
In August 1998, the Company obtained a secured working capital line of credit
for up to $5.0 million from a financial institution, of which $2.7 million is
outstanding at July 31, 1999. Also outstanding under the line of credit was a
$.5 million letter of credit. In May 1999, the Company raised net proceeds of
$1.4 million pursuant to a private placement of convertible preferred stock to
an institutional investor, of which $.6 million was used to pay down amounts
outstanding under the working capital line of credit. In accordance with the
terms of the preferred stock, the Company is required to recognize a non-cash,
assumed incremental yield of approximately $.8 million, of which $.4 million was
recognized in the third quarter of fiscal 1999, calculated at the date of
issuance based on 95% of the average conversion feature, as defined in the
agreement. In July 1999 the Company raised net proceeds of $1.5 million pursuant
to a private placement of common stock.
To date, the Company has not generated positive cash flow from operations. The
Company believes that its existing working capital and amounts available under
its working capital line of credit should be sufficient to meet its capital and
liquidity requirements through fiscal year 1999 based on reduced spending
levels, if necessary. However, 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 when necessary to fund its strategic priorities. There is no assurance
that access to capital markets will be available on terms acceptable to the
Company or at all. Over the long term, the Company's liquidity is dependent on
market acceptance of its products and technology.
YEAR 2000
The Company may be impacted by the inability of computer software and other
business systems to properly identify the Year 2000 due to programming
conventions. The Company has undertaken initiatives to ensure that its systems
are Year 2000 compliant. The Company has completed its Year 2000 assessment of
internal hardware and software including testing such systems and believes that
it is Year 2000 compliant. The cost of Year 2000 modifications has not been
significant. The Company has contacted major customers and vendors to assess
their status as to Year 2000 compliance. Although this process has been
completed,
14
<PAGE> 17
there is no assurance that service interruptions will not occur from vendors,
suppliers or service providers, including financial institutions or governments
which could have a material adverse effect on consolidated results of
operations, financial conditions, and cash flows. Although a formal contingency
plan has not been developed, the Company believes that alternative suppliers
exist if service from our current suppliers is interrupted.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts receivable decreased $.4 million when compared to October 31, 1998, the
end of the Company's fiscal year, due to timing of collection of receivables.
Inventory increased $1.3 million at July 31, 1999 when compared to October 31,
1998 as the Company built inventory for the agricultural growing season in North
America. Accounts payable and accrued expenses increased $.6 million due
principally to the timing of payments to vendors. Deferred contract revenue
decreased $.5 million at July 31, 1999 when compared to October 31, 1998 due to
the expiration of the Monsanto research and development agreement in the first
quarter of fiscal 1999.
FORWARD LOOKING STATEMENTS
The discussion set forth by the Company in this document contains
forward-looking statements. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than historical
facts. Although the Company believes that its expectations are based on
reasonable assumptions, the Company operates in a high technology, emerging
market environment that involves 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 new and recently introduced products.
Some of these products utilize new formulations which 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 are being incorporated into
commercial scale manufacturing processes. Risks and uncertainties associated
with the successful commercialization of the products include: (i) the
successful scale-up of the Company's manufacturing process in time to meet
targeted sales opportunities; (ii) the market acceptance of the Company's
current and newly introduced products; (iii) the efficacy, pricing, ease of use
and performance of the Company's products; (iv) the successful development,
registration, commercialization and marketing of technologically advanced new
products; (v) the continued and uninterrupted supply of the Company's products
from third-party toll manufacturers and the continued financial viability of
such manufacturers; (vi) economic and environmental considerations which impact
agricultural crop production and agricultural crop protection, including the
number 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 (vii) the ability of the Company to fund its strategic
priorities through operations or access to capital markets, and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. The Company does not undertake to update the results
discussed herein as a result of changes in risks or operating results.
15
<PAGE> 18
PART II - OTHER INFORMATION
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)*
3.2 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)*
3.5 Corrected Certificate of Designation, preferences and Rights of
Series 1999-A Convertible Preferred Stock (Form 10-Q for fiscal
quarter ended April 30, 1999)*
27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
Rider 1 A Current Report on Form 8-K was filed on August 11, 1999, with
respect to the sale of 500,000 shares of its Common Stock to an
accredited investor at purchase price of $3.09 per share.
* 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, 1999
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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<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
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