<PAGE>
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, 2000
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Commission File Number 1-9579
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Ecogen Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2487948
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 W. Cabot Boulevard, Suite #170, Langhorne, Pennsylvania 19047
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (215) 757-1590
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No ___.
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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 8, 2000
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Common Stock, $.01 par value 13,194,441
<PAGE>
ECOGEN INC.
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INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
July 31, 2000 and October 31, 1999............................................................ 1
Unaudited Consolidated Condensed Statements of Operations for the three
months and nine months ended July 31, 2000 and 1999........................................... 2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the nine months ended July 31, 2000................................................ 3
Unaudited Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, 2000 and 1999.............................................. 4
Notes to Unaudited Consolidated Condensed Financial
Statements.................................................................................... 6
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition................................................... 12
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........................................................ 18
</TABLE>
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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Assets July 31, October 31,
2000 1999
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<S> <C> <C>
Current assets:
Trade receivables, net $ 1,985,049 $ 1,685,950
Inventory, net 3,676,118 5,358,017
Prepaid expenses and other current assets 399,238 387,043
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Total current assets 6,060,405 7,431,010
Plant and equipment, net 1,899,575 2,374,462
Intangible and other assets, net 2,853,749 656,800
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$ 10,813,729 $ 10,462,272
============================================================================================================
Liabilities and Stockholders' Equity
------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt 2,805,353 2,193,145
Accounts payable and accrued expenses 4,737,643 4,010,120
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Total current liabilities 7,542,996 6,203,265
Long-term debt 67,472 250,186
Long-term deferred revenue 1,552,426 1,451,928
Minority interest in subsidiary 1,533,854 1,533,854
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Total liabilities 10,696,748 9,439,233
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Stockholders' equity:
Preferred stock:
Series 2000 A 130 -
Series 1999 A - 150
Series 1998 C 324 324
Common stock 126,332 99,859
Additional paid-in capital 129,306,413 124,554,877
Accumulated deficit (129,316,218) (123,632,171)
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Total stockholders' equity 116,981 1,023,039
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$ 10,813,729 $ 10,462,272
============================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
1
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues:
Product sales, net $1,808,157 $2,118,111 $5,283,781 $5,640,613
Contract research - 30,000 50,000 626,277
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Total revenues 1,808,157 2,148,111 5,333,781 6,266,890
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Costs and expenses:
Cost of products sold 1,625,073 1,756,213 4,523,463 4,549,621
Research and development:
Funded by third parties - 22,429 295,007
Self funded 417,510 621,655 1,321,900 1,686,498
Selling, general and administrative 1,391,832 1,869,690 4,192,826 5,056,915
Amortization of intangibles 62,454 - 104,090 -
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Total costs and expenses 3,496,869 4,269,987 10,142,279 11,588,041
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Operating loss (1,688,712) (2,121,876) (4,808,498) (5,321,151)
Other income (expense):
Interest expense, net (227,092) (124,010) (639,164) (369,358)
Other income - 36,141 43,427 52,387
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Total other expense, net (227,092) (87,869) (595,737) (316,971)
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Net loss (1,915,804) (2,209,745) (5,404,235) (5,638,122)
Dividends on preferred stock including assumed
incremental yield of $267,148 and $403,337 and
$611,622 and $403,337 in the three and nine
months of fiscal 2000 and 1999, respectively 381,400 491,053 891,434 666,094
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Net loss allocable to common stockholders ($2,297,204) ($2,700,798) ($6,295,669) ($6,304,216)
===================================================================================================================================
Basic and diluted net loss per common share ($0.18) ($0.29) ($0.55) ($0.70)
===================================================================================================================================
Weighted average number of common shares
outstanding 12,466,000 9,473,000 11,508,000 9,001,000
===================================================================================================================================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
2
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended July 31, 2000
<TABLE>
<CAPTION>
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Convertible Additional
Preferred Common Paid in Accumulated
Stock Stock Capital Deficit Total
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<S> <C> <C> <C> <C> <C>
Balance November 1, 1999 $ 474 $99,859 $124,554,877 ($123,632,171) $ 1,023,039
Dividends on preferred stock - 584 86,653 (279,812) (192,575)
Stock options granted under a consulting agreement - - 30,120 - 30,120
Conversion of 15,000 shares of Series 1999 A convertible
preferred stock to 984,732 shares of common stock (150) 9,847 (9,697) - -
Conversion of 2000 shares of Series 2000A convertible
preferred stock to 217,329 shares of common stock (20) 2,173 (2,153)
Issuance of 200,000 warrants in connection with a
loan agreement - - 183,556 - 183,556
Issuance of 15,544 shares of common stock for
employee benefits - 155 39,676 - 39,831
Issuance of 1,351,351 shares of common stock for
acquisition of certain assets - 13,514 3,024,231 - 3,037,745
Private placement of 15,000 shares of convertible
preferred stock, net of issuance costs,
including 20,000 shares of common stock 150 200 1,399,150 - 1,399,500
Net loss - - - (5,404,235) (5,404,235)
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Balance July 31, 2000 $ 454 $126,332 $ 129,306,413 ($129,316,218) $ 116,981
===================================================================================================================================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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Nine months ended
July 31,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss ($5,404,235) ($5,638,122)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense 551,917 524,026
Noncash interest and other expense 268,070 250,846
Other - 76,015
Changes in assets and liabilities, net of acquisition 3,046,023 (981,807)
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Net cash used in operating activities (1,538,225) (5,769,042)
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Cash flows from investing activities:
Proceeds from maturity of temporary investments - 813,150
Purchase of plant and equipment (45,601) (50,656)
Acquisition, net (285,000) -
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Net cash (used in) provided by investing activities (330,601) 762,494
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Cash flows from financing activities:
Proceeds from bank loan 1,500,000 -
(Repayments) proceeds of line of credit, net (887,792) 1,583,459
Repayment of capital lease obligations (182,714) (297,304)
Proceeds from sale of equity securities, net of issuance costs 1,399,500 2,892,208
Net proceeds from issuance of common shares under stock option plan 39,832 4,449
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Net cash provided by financing activities 1,868,826 4,182,812
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Net decrease in cash, - (823,736)
Cash and cash equivalents, beginning of period - 2,009,437
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Cash and cash equivalents, end of period $ - $ 1,185,701
=============================================================================================================================
</TABLE>
(Continued)
4
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
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Nine months ended
July 31,
2000 1999
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<S> <C> <C>
Changes in assets and liabilities, net of acquisition:
(Increase) decrease in receivables ($299,099) $400,417
Decrease (increase) in inventory 2,604,644 (1,349,636)
(Increase) decrease in prepaid expenses and
other current assets (12,195) 102,692
Decrease (increase) in other assets 122,064 (11,441)
Increase in accounts payable
and accrued expenses 630,609 362,014
Decrease in deferred contract revenue - (485,853)
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Changes in assets and liabilities, net $3,046,023 ($981,807)
============================================================================================================================
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Interest Paid $ 271,708 $ 144,422
============================================================================================================================
Noncash investing and financing activities:
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</TABLE>
In the first nine months of fiscal 2000 and 1999, the Company issued 1,202,061
and 1,155,975 shares of its common stock upon conversion of the Company's
convertible preferred stock, respectively, of which 46,924 shares were
transferred from treasury stock in fiscal 1999.
In the first nine months of fiscal 2000 and 1999, the Company issued 58,403
and 63,506 shares of common stock, respectively, as dividends on the Company's
preferred stock.
In the first nine months of fiscal 1999, the Company transferred 5,037 shares
of treasury stock to outstanding shares pursuant to certain employee benefit
plans.
In the first nine months of fiscal 2000, the Company issued 15,544 common
shares pursuant to employees benefits plans.
In the first nine months of fiscal 1999, the Company purchased $195,281 of
plant and equipment under capital leases.
In February 2000, the Company issued 1,351,351 shares of its common stock in
connection with an acquisition.
In the first nine months of fiscal 2000, the Company issued 20,000 shares of
its common stock as a fee in connection with the issuance of preferred stock
and issued warrants to purchase 200,000 shares of common stock in connection
with a loan agreement.
===============================================================================
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
July 31, 2000 and 1999
(1) Basis of Presentation and Summary of Significant Accounting Policies
--------------------------------------------------------------------
Organization, Liquidity, 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, 1999 consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K.
Since its inception, the Company's source of funds has been primarily
dependent on private and public offerings of equity securities, revenues
from research and development alliances, and product sales. In 1998, the
Company obtained a two-year working capital line of credit; such credit
facility expires in November 2000 and approximately $.9 million is
outstanding under that credit facility as of August 31, 2000. Presently,
the Company is not in compliance with the financial covenants of the
agreement. Accordingly, the Company's working capital line of credit needs
to be refinanced in the near term. (See Note 5 of the Notes to the
Unaudited Consolidated Condensed Financial Statements.)
The Company believes that amounts available under its working capital line
of credit should be sufficient to meet its capital and liquidity
requirements through fiscal 2000. The Company continues to evaluate various
programs to raise additional funds, pursue strategic initiatives and
refinance its working capital facility. Janney Montgomery Scott has been
engaged to assist the Company with its strategic initiatives including the
sale of certain assets. The Company is also implementing cost saving
measures to conserve cash until the closing of any transaction for the sale
of assets. At this time the Company is unable to predict whether it will be
successful in its efforts. If the Company is not successful in obtaining
additional funding, the Company may not be able to continue in existence.
The results of operations for the interim period ended July 31, 2000 are
not necessarily indicative of the operating results for the full year.
6
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
---------------------------------------------------------------------------
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:
Basic 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 conversion of the convertible preferred stock in fiscal 2000 and 1999
into common shares and adding back the dividends incurred during the three-
month and nine-month periods ended July 31, 2000 and 1999, was not included
in the net loss per share calculation since the effect was anti-dilutive.
Contingent shares, stock options and warrants were not considered because
they were anti-dilutive.
(2) Inventory
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At July 31, 2000, inventory consisted of raw materials of $.5 million,
work-in-progress of $.7 million and finished products of $2.5 million.
(3) Intangibles and Other Assets, Net
---------------------------------
At July 31, 2000, intangible and other assets, net consisted of the
following:
Product Registrations $ 1,512,300
Trademarks 192,627
Prepaid Royalties 767,653
Other 380,030
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$ 2,852,610
===========
7
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements, Continued
(4) 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.
This amended R&D Contract ended in January 1999. During the nine months
ended July 31, 1999, $.5 million was recorded as contract research
revenue principally relating to such Monsanto R&D contract.
(5) Loan Agreements
---------------
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 expires in November 2000 (subject to earlier
termination on certain events of default), bears interest at prime plus
3.25% and is fully collateralized by the Company's assets, other than
certain of its intellectual property rights. The lending formula is based
on 80% of eligible receivables and 22% of finished goods inventory. At
August 31, 2000, the balance outstanding under the line was $.9 million.
The loan agreement contains certain financial covenants and has certain
restrictions on the Company's ability to pay dividends on its common
stock. At July 31, 2000 the Company was not in compliance with such
covenants. As a result of the Company's non compliance with such
covenants, the lender, at its option, may discontinue making loans and
liquidate the collateral.
On December 24, 1999, the Company obtained a secured loan for $1.5
million with a financial institution that is controlled by a principal
stockholder of the Company. The loan required a $.5 million principal
payment in June 2000 (which was recently extended to October 2000) with
the balance due in June 2001. The loan bears interest at prime plus 2%
and is payable monthly. The Company's assets collateralize the loan. A
corporation controlled by one of the Company's principal stockholders
guarantees the loan. In connection with the guarantee, such corporation
was issued a five-year warrant to purchase 200,000 shares of the
Company's common stock at $1.25 per share. The value of such warrants,
approximately $ .2 million has been recorded as deferred debt expense and
is being amortized as interest expense over the life of the loan.
(6) Stockholders' Equity
--------------------
On September 11, 2000, the Company's common stock was delisted from the
Nasdaq National Market ("NNM") as a result of the Company's failure to
meet the NNM's net tangible assets listing requirement. As a result,
dividends on the Company's Series 2000-A and Series 1998-C Convertible
Preferred Stock are payable in cash, effective with the quarterly
dividend payment date of September 30, 2000 and the semiannual dividend
8
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements, Continued
(6) Stockholders' Equity, con't
---------------------------
payment date of December 31, 2000, respectively. The Company no longer
has the option to pay such dividends in stock.
During the first six months of fiscal 2000, the Company issued 984,732
shares of its common stock in exchange for 15,000 shares of the Company's
Series 1999-A 7% convertible preferred stock issued in May 1999. The
Company also issued 52,356 shares of its common stock in payment of
cumulative dividends at the time of conversion.
Series 2000-A Convertible Preferred Stock:
On February 14, 2000, the Company sold 15,000 shares of Series 2000-A 7%
convertible preferred stock, stated value $100 per share, to
institutional investors for net proceeds of $1.4 million. The liquidation
value of the preferred stock is $1.5 million. The holders of the
preferred stock were issued five-year warrants to purchase up to 200,000
shares of common stock at $2.66 per share. Dividends were payable
quarterly in cash or stock at the option of the Company. As a result of
the Company's common stock being delisted from the Nasdaq National
Market, effective with the September 30, 2000 dividend payment date, such
dividends will be payable in cash. The preferred stock has no voting
rights except with respect to certain matters affecting the Company's
preferred stock. At the election of the holders, the preferred stock may
be converted at various dates to shares of the Company's common stock at
the lesser of $2.73 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, except in certain circumstances, including when
the Company's shares are not listed on an national exchange. 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. 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
2000-A preferred stock the Company is required to recognize an assumed
incremental yield of $.6 million (calculated at the date of issuance
based on the conversion formula in the agreement). Such amount is being
amortized as preferred stock dividends over a seven-month period
beginning with the date of issuance through the date the preferred stock
is first convertible. Through July 31, 2000, the Company issued 217,329
shares of its common stock in exchange for 2,000 shares of the preferred
stock. At the time of the conversion, the Company also issued 6,127
shares of common stock in payment of cumulative dividends. Subsequent to
July 31, 2000, 4,000 shares of the preferred stock were converted to
561,154 shares of the Company's common stock, including shares issued in
payment of cumulative dividends on the preferred stock.
9
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements, Continued
(7) Acquisition
-----------
On February 15, 2000, the Company completed its acquisition of certain
assets of the sprayable Bt bioinsecticide business of Mycogen
Corporation, an affiliate of Dow AgroSciences LLC. The Company issued
1,351,351 shares of the Company's common stock valued at approximately
$3.0 million upon the closing of the transaction. Prior to the closing,
the Company acquired approximately $.4 million of Mycogen's inventory of
sprayable Bt products, under a distribution agreement effective January
1, 2000. Under the terms of the agreement, Mycogen has agreed to hold the
shares for a three-year period, except in the event of certain change in
control transactions. Mycogen was granted certain demand and piggyback
registration rights with respect to the shares. In addition, Mycogen has
the right of first refusal to purchase securities of the Company so as to
maintain its ownership percentage in the Company. Mycogen also has been
granted certain market price protection rights at the time that Mycogen
sells the shares, which may result in the issuance of additional shares,
which may not exceed 20% of the Company's outstanding shares, without
stockholder approval. The Company and Dow AgroSciences LLC also entered
into a five-year supply agreement and the companies have agreed to enter
into distribution agreements granting exclusive rights to Dow
AgroSciences to sell the acquired products in Mexico, New Zealand and
Australia.
The transaction was accounted for as a purchase and, accordingly, the
total purchase price for the assets of approximately $3.4 million,
including out of pocket expenses, was allocated based upon their fair
value at the date of acquisition. The assets acquired include inventory
of $.9 million and certain identifiable intangible assets of $1.8 million
including a license to certain genes and strains and product registration
and data citation rights. Included in the purchase price is inventory
acquired by the Company prior to the final closing under a distribution
agreement. The agreement also provides that the Company has no obligation
for past or future royalties under a 1998 settlement agreement with
Mycogen on a patent infringement dispute. Under purchase accounting, part
of the purchase price ($.6 million) has been allocated to other assets
for the fully, paid-up royalty and any amounts previously accrued under
the settlement agreement have been eliminated in purchase accounting.
The following unaudited pro forma information has been prepared as if the
February 2000 acquisition of the products had occurred on November 1,
1998. The unaudited pro forma information does not purport to represent
our consolidated results of operations that would have been achieved had
the transaction to which pro forma effect is given been consummated as of
the date or period indicated.
10
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements, Continued
(7) Acquisition, cont.:
Nine Months Ended July 31,
2000 1999
---- ----
($ in thousands except per share data)
Total revenues $ 6,109 $ 8,953
Net loss (5,511) (5,477)
Net loss allocable to
common stockholders (6,402) (6,143)
Basic and diluted net
loss per share (0.54) (0.59)
11
<PAGE>
ECOGEN INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months and Nine Months Ended July 31, 2000 and 1999
Overview
--------
For the first nine months of fiscal 2000, total revenues decreased $.9 million
or 15% from $6.3 million in fiscal 1999 to $5.3 million in fiscal 2000. Contract
research revenue decreased $.6 million as a result of the expiration in January
1999 of the research and development agreement with Monsanto Company. Product
sales decreased $.3 million or 6% from $5.6 million in fiscal 1999 to $5.3
million for the nine months ended July 31, 2000.
During the first nine months of fiscal 2000, the Company realized a reduction in
operating expenses of $1.4 million or 20% from $7.0 million in the year-ago
period to $5.6 million in fiscal 2000. The lower operating expenses more than
offset the lower revenues resulting in an improvement in the operating loss of
$.5 million. Net loss allocable to common stockholders was ($6.3) million or
($0.55) per basic and diluted share in the first nine months of fiscal 2000
compared to a net loss allocable to common stockholders of ($6.3) million or
($0.70) per share in the comparable period in fiscal 1999. Weighted average
shares outstanding were 11.5 million and 9.0 million in the first nine months of
fiscal 2000 and 1999, respectively.
During the second quarter of fiscal 2000, the Company acquired certain assets of
the sprayable Bt bioinsecticide business of Mycogen Corporation for
approximately $3.4 million including cash and $3.0 million of the Company's
common stock.
NINE MONTHS ENDED JULY 31, 2000 AND 1999
----------------------------------------
Revenues
--------
Net product sales decreased 6% during the nine months ended July 31, 2000,
principally due to volume. Sales of the Company's Bt product line, representing
87% of total sales, decreased 9% due principally to lower volume of sales.
Included in the Company's Bt sales for the nine months ended July 31,2000 are
$1.9 million of acquired Mycogen products principally Mattch and MVP for
caterpillar control. Sales of Ecogen's Bt products exclusive of the acquired
Mycogen products decreased $2.4 million for the nine months ended July 31, 2000.
The decrease was primarily due to lower sales of Lepinox and Condor, two of the
Company's Bt bioinsecticides for control of caterpillars. Biofungicide sales,
representing 9% of total sales, increased 76% due to initial sales of AQ10 in
Europe. Other product sales represented 5% of total sales in the first nine
months of both fiscal 2000 and 1999.
Contract research revenues decreased $.6 million in the current nine-month
period, due to the expiration in January 1999 of the Monsanto research and
development contract that had contributed more than $10 million in contract
research revenue over its three-year term.
Costs and Expenses
------------------
Cost of products sold was $4.5 million in both the first nine months of fiscal
2000 and 1999. Gross margins on product sales decreased to 14% in the first nine
months of fiscal 2000 compared to 19% in fiscal 1999. The decrease in gross
margins on product sales was due to lower margins on biofungicide sales in
fiscal 2000
12
<PAGE>
resulting from initial sales of AQ10 to the Company's distributor at reduced
prices to support the commercialization of this product in Europe.
Total operating expenses were $5.6 million in the first nine months of fiscal
2000 compared to $7.0 million in 1999, a decrease of $1.4 million or 20%.
Research and development costs decreased $.7 million or 33% due principally to
lower personnel costs. The Company's commitment to provide research services to
Monsanto expired in January 1999 and the Company's technology continues to
approach commercialization, therefore requiring less activity in basic research
and development. Selling, general and administrative expenses were $4.2 million
in the first nine months of fiscal 2000 compared to $5.1 million in 1999,
representing a decrease of $.9 million or 17%. The decrease was the result of
lower general and administrative expenses and other costs containment efforts
implemented in fiscal 2000. Amortization expense of $.1 million was recorded in
fiscal 2000 related to the amortization of intangible assets associated with the
acquired Mycogen products. The Company did not incur any other significant
incremental costs to integrate the acquired Mycogen products into the Company's
portfolio.
Other Income (Expense)
----------------------
Other expense, net, increased $.3 million in the first nine months of fiscal
2000 compared to the same period in fiscal 1999 principally as a result of
higher interest expense.
Net Loss
--------
Net loss allocable to common stockholders for the nine months ended July 31,
2000 was $6.3 million, which was approximately the same for the comparable
period in fiscal 1999. Basic and diluted net loss per share for the nine months
ended July 31, 2000 was ($0.55), compared to a net loss per share of ($0.70) on
weighted average shares outstanding of 11.5 million and 9.0 million in the first
nine months of 2000 and 1999, respectively. Dividends on preferred stock
including an assumed incremental yield were $.9 million and $.7 million in the
nine-month period ended July 31, 2000 and 1999, respectively.
THREE MONTHS ENDED JULY 31, 2000 AND 1999
-----------------------------------------
Revenues
--------
Net product sales decreased 15% during the three months ended July 31, 2000 to
$1.8 million compared with $2.1 million in the third quarter of 1999 principally
due to decreased volume. Sales of the Company's Bt product line, representing
95% of total sales, decreased $.3 million. Included in the Company's reported Bt
sales for the three months ended July 31, 2000 are $.7 million of the acquired
Mycogen products. Sales of Ecogen's Bt products, excluding the acquired Mycogen
products, decreased $.9 million during the three months ended July 31, 2000
primarily due to lower sales of CRYMAX and Lepinox, two of the Company's Bt
bioinsecticides for the control of caterpillars. Biofungicide sales, represented
3% and 1% of total sales in the third quarter of fiscal 2000 and 1999,
respectively. The increase in the third quarter of fiscal 2000 was due to
marginally higher sales of AQ10. Other product sales represented 1% of total
sales in the third quarter of fiscal 2000, a decrease from 5% in fiscal 1999 due
to lower sales of soil amendments.
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Costs and Expenses
------------------
Cost of products sold decreased from $1.8 million in the third quarter of fiscal
1999 to $1.6 million in the current period due to lower sales in fiscal 2000.
Gross margins on product sales decreased to 10% in the third quarter of fiscal
2000 compared to 17% in the same period in fiscal 1999. This decrease was due to
unabsorbed overhead as a result of no production in the current period and fixed
charges as a higher percentage of sales. Gross margins on product sales
exclusive of these charges were 23% in the third quarter of both fiscal 2000 and
1999.
Total operating expenses were $1.9 million in the third quarter of fiscal 2000
compared to $2.5 million in the same period in fiscal 1999 representing a
decrease of 24%. Research and development costs decreased $.2 million or 33% as
a result of lower personnel and related costs. Selling, general and
administrative expenses decreased $.5 million or 26%, principally as a result of
personnel reductions and lower outside services.
Other Income (Expense)
----------------------
Other expense, net increased $.1 million during the three months ended July 31,
2000 when compared to the third quarter of fiscal 1999 due primarily to an
increase interest expense.
Net Loss
--------
Net loss allocable to common stockholders for the three months ended July 31,
2000 was ($2.3) million, compared to a net loss of ($2.7) million for the same
period in fiscal 1999. The decrease in the net loss is primarily due to an
improvement in the operating loss in fiscal 2000 as a result of lower operating
expenses. Basic and diluted net loss per common share for the three months ended
July 31, 2000 was ($0.18), compared to net loss per common share of ($0.29) on
weighted average shares outstanding of 12.5 million and 9.5 million in the third
quarter of fiscal 2000 and 1999, respectively. Dividends on preferred stock
including an assumed incremental yield were $.4 million and $.5 million in the
nine month period ended July 31, 2000 and 1999, respectively.
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 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
-------------------------------
During the first nine months of fiscal 2000, the Company used $1.5 million of
cash for operations, $.3 million to fund the acquired Mycogen product line and
$1.0 million in repayment of debt, including capital lease obligations. The
Company funded these cash outlays through financings. In December 1999, the
Company obtained a $1.5 million variable rate secured loan. Principal on this
loan is payable in 2000 and 2001. The principal payment of $.5 million,
originally due in June
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2000, has been extended until October 2000. In February 2000, the Company raised
net proceeds of $1.4 million pursuant to a private placement of 7% convertible
preferred stock to institutional investors. In accordance with the terms of the
preferred stock, the Company is required to recognize a non-cash, assumed
incremental yield of approximately $.6 million, calculated at the date of
issuance based on 95% of the average conversion feature, as defined in the
agreement. The terms of the preferred stock are disclosed in Note 6 of the Notes
to the Unaudited Consolidated Condensed Financial Statements.
On February 15, 2000, the Company completed its acquisition of certain sprayable
Bt biopesticides from Mycogen Corporation, an affiliate of Dow AgroSciences LLC.
(the "Mycogen Transaction") for aggregate consideration of $3.4 million
including shares of common stock with a market value of $3.0 million. (See Note
7 of Notes to the Unaudited Consolidated Condensed Financial Statements.)
On September 11, 2000, the Company's common stock was delisted from the Nasdaq
National Market ("NNM") as a result of the Company's failure to meet the NNM's
net tangible assets listing requirement. As a result, dividends on the Company's
Series 2000-A and Series 1998-C Convertible Preferred Stock are payable in cash,
effective with the quarterly dividend payment date of September 30, 2000 and the
semiannual dividend payment date of December 31, 2000, respectively. The Company
no longer has the option to pay such dividends in stock.
To date, the Company has not generated positive cash flow from operations. The
Company believes that amounts available under its working capital line of credit
should be sufficient to meet its capital and liquidity requirements through
fiscal year 2000 based on reduced spending levels. 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 factors 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. The Company's access to capital markets may be limited as a result
of the Company's delisting from NNM.
The Company's two-year working capital line of credit for up to $5.0 million,
originally due in August 2000, has been extended to November 2000. At July 31,
2000, the Company was not in compliance with the covenants under the
agreement. At August 31, 2000, $.9 million was outstanding under this credit
facility. As a result of the Company's non-compliance with the covenants in its
loan agreement, the lender, at its option, may discontinue making loans and
liquidate the collateral. The Company continues to pursue the raising of
additional funds and other strategic initiatives to improve its working capital
position and its capital structure. Also, the Company will need to refinance its
working capital line of credit. There is no assurance that access to financings
will be available on terms acceptable to the Company or at all. If the Company
is not successful in refinancing its working capital line of credit, the Company
would take a number of steps to conserve cash until the Company is able to sell
assets to provide the necessary resources to repay the outstanding balances
under its line of credit and fund operations. Janney Montgomery Scott has been
engaged to assist the Company with its strategic initiatives including the sale
of certain assets. The Company is also implementing cost saving measure to
conserve cash until the closing of any transaction for the sale of assets. At
this time the Company is unable to predict whether it will be successful in its
efforts. If the Company is not successful in obtaining additional funding, the
Company may not be able to continue in existence. Over the long-term, the
Company's liquidity is dependent on market acceptance of its products and
technology.
15
<PAGE>
Other Assets and Liabilities
----------------------------
Net of the effects of an acquisition, inventory decreased $2.6 million in the
first nine months of fiscal 2000 as a result of a curtailment in production to
conserve cash and due to carryover inventory from fiscal 1999. Accounts
receivables increased $.3 million compared to the balance at October 31, 1999
due principally to the seasonality of the Company's sales. Accounts payable
increased $.6 million due to the timing of payments.
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities which becomes effective for our financial
statements beginning November 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments as assets or liabilities in its balance
sheet and measure them at fair value. We do not expect adoption of this standard
to have a material impact on our financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 requires the Company to follow its guidance no later than its fiscal
year beginning November 1, 2000 through a cumulative effect of a change in
accounting principle. We do not expect adoption of this standard to have a
material impact on our financial statements.
Forward-Looking Statements
--------------------------
The discussion set forth by the Company in this report 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
16
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strategic priorities through operations or access to capital which may be
dependant on maintaining its NASDAQ listing. On September 11, 2000, the Company
was delisted from the Nasdaq National Market. See additional discussion under
"Factors That May Affect Future Results" in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1999, and other factors detailed from
time to time in the Company's other 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.
17
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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 Certificate of Designations, Preferences and Rights of Series 1999-A
Convertible Preferred Stock (Form 10-Q, for fiscal quarter ended April 30,
1999)*
3.6 Certificate of Designations, Preferences and Rights of Series 2000-A
Convertible Preferred Stock (Form 10-K, for fiscal year ended October 31, 1999)*
27 Financial Data Schedule
(b) Current Reports on Form 8-K
The Company filed a Current Report on Form 8-K/A on May 1, 2000, to file the
financial statements and pro forma financial information required by Item 7 of
Form 8-K in connection with the purchase of assets from Mycogen Corporation.
The Company filed a Current Report on Form 8-K on August 11, 2000 describing the
status of its listing on The Nasdaq Stock Market, Inc.'s National Market System.
The Company filed a Current Report on Form 8-K on September 12, 2000 announcing
its delisting on The Nasdaq Stock Market, Inc.'s National Market System.
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated and are made part of this report.
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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 19, 2000
ECOGEN INC.
By: /s/ JAMES P. REILLY, JR.
--------------------------------
James P. Reilly, Jr.
Chairman and Chief Executive
Officer
19
