<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
For Quarter Ended March 31, 1998 Commission File Number 0-20404
ENVIROGEN, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 22-2899415
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4100 Quakerbridge Road
Princeton Research Center
Lawrenceville, NJ 08648
-----------------------
(Address of principal executive offices)
(609) 936-9300
--------------
(Registrant's telephone number, including area code)
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 [ ]
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of March 31, 1998 was 23,294,835.
- --------------------------------------------------------------------------------
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ENVIROGEN, INC.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 (Unaudited) 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General 8
Results of Operations 9
Liquidity and Capital Resources 10
Other Matters 10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE PAGE 12
</TABLE>
2
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,691,587 $4,863,658
Accounts receivable-trade, net 6,089,646 6,977,161
Unbilled revenue 4,580,722 4,213,653
Inventory 235,714 248,712
Prepaid expenses and other current assets 516,465 517,960
------------ ------------
Total current assets 15,114,134 16,821,144
Property and equipment, net 1,645,061 1,757,577
Restricted cash 309,300 309,300
Investment in and advances to joint venture 85,445 87,648
Intangible assets, net 23,139,072 23,488,607
Other assets 255,594 262,736
------------ ------------
Total assets $40,548,606 $42,727,012
============ ============
LIABILITIES
Current liabilities:
Accounts payable $2,264,370 $3,449,512
Accrued expenses and other liabilities 1,447,233 1,948,215
Reserve for claim adjustments and warranties 2,383,488 2,577,218
Deferred revenue 991,849 730,365
Current portion of capital lease obligations 14,814 16,777
------------ ------------
Total current liabilities 7,101,754 8,722,087
Capital lease obligations, net of current portion 10,422 12,671
------------ ------------
Total liabilities 7,112,176 8,734,758
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock 233,543 233,543
Additional paid-in capital 58,856,844 58,856,844
Accumulated deficit (25,648,007) (25,092,183)
Less: Treasury stock (5,950) (5,950)
------------ ------------
Total stockholders' equity 33,436,430 33,992,254
------------ ------------
Total liabilities and stockholders' equity $40,548,606 $42,727,012
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1998 1997
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Revenues:
Commercial operations $5,809,926 $1,764,972
Research and development services 714,520 689,738
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Total revenues 6,524,446 2,454,710
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Cost of commercial operations 4,416,238 1,569,621
Research and development costs 720,500 641,817
Marketing, general and administrative expenses 1,985,833 858,948
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Total costs and expenses 7,122,571 3,070,386
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Other income (expense):
Interest income 51,447 56,389
Interest expense (6,943) (3,317)
Equity in loss of joint venture (2,203) (64,963)
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Other income (expense), net 42,301 (11,891)
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Net loss applicable to Common Stock ($555,824) ($627,567)
=========== ===========
Basic and diluted net loss per share applicable
to Common Stock ($0.02) ($0.05)
=========== ===========
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 23,294,835 12,873,035
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
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Cash flows from operating activities:
Net loss ($555,824) ($627,567)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 508,454 192,695
Provision for doubtful accounts 150,400 24,849
Equity in loss of joint venture 2,203 64,963
Changes in operating assets and liabilities:
Accounts receivable 846,444 663,635
Unbilled revenue (367,069) 157,549
Prepaid expenses and other current assets 1,495 (52,408)
Inventory 12,998
Other assets 7,142 (118,103)
Accounts payable (1,185,142) (707,397)
Accrued expenses and other liabilities (500,982) (43,566)
Reserve for claim adjustments and warranties (303,059) (19,473)
Deferred revenue 261,484 12,472
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Net cash used in operating activities (1,121,456) (452,351)
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Cash flows from investing activities:
Capital expenditures (46,403) (51,517)
Investment in and advances to joint venture (68,773)
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Net cash used in investing activities (46,403) (120,290)
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Cash flows from financing activities:
Capital lease principal repayments (4,212) (4,091)
Debt repayment (1,138)
Net proceeds from exercise of stock options 1,169
Deferred acquisition costs (297,161)
Deferred financing costs (49,875)
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Net cash used in financing activities (4,212) (351,096)
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Net decrease in cash and cash equivalents (1,172,071) (923,737)
Cash and cash equivalents at beginning of period 4,863,658 4,614,062
----------- -----------
Cash and cash equivalents at end of period $3,691,587 $3,690,325
=========== ===========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid for interest $19,567 $3,008
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Cash paid for income taxes $0 $7,954
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</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The financial information presented reflects all adjustments consisting only of
normal occurring accruals which are, in the opinion of management, necessary for
a fair statement of the results for the interim periods. The results for the
interim periods are not necessarily indicative of the results to be expected for
the entire year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the fiscal year ended December 31, 1997. Certain
reclassifications have been made to conform prior year's presentation with the
1998 financial statement presentation.
2. PER SHARE DATA
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Since the Company incurred net losses for all periods presented, both basic and
diluted per share calculations are the same. Accordingly, options and warrants
to purchase 3,874,379 and 3,407,829 shares of common stock that were outstanding
at March 31, 1998 and 1997, respectively, were not included in diluted per share
calculations, as their effect would be antidilutive.
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
----------------------------------------------
The Company adopted Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130") in the first quarter of 1998. Comprehensive
income represents the change in net assets of a business enterprise as a result
of nonowner transactions. The adoption of SFAS 130 did not have any effect on
the Company's consolidated financial statements.
4. LITIGATION
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The Company is currently involved in litigation relating to services previously
provided at a customer site. This customer, against whom the Company filed suit
to recover amounts due for work performed, filed a counter-claim against the
Company for breach of contract, declaratory relief and interpleader. No
specific damages have been claimed by this customer and, at the present time,
management of the Company is unable to predict the outcome of this matter or to
determine whether the outcome of this matter will materially affect the
Company's results of operations, cash flows or financial position.
6
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On April 22, 1998, the Company and its subsidiary were served with a complaint
filed by a customer of the subsidiary. According to the complaint, the customer
seeks to recover amounts paid to the Company's subsidiary for work performed to
investigate and remediate contamination on the customer's property. The
complaint seeks recovery of fees and costs allegedly paid by the customer to the
Company's subsidiary, plus an additional unspecified sum. At the present time,
management of the Company is unable to predict the outcome of this matter or to
determine whether the outcome of this matter will materially affect the
Company's results of operations, cash flows or financial position.
5. SUBSEQUENT EVENTS
-----------------
The Company's Board of Directors appointed Robert S. Hillas as Chairman,
President and Chief Executive Officer, effective April 16, 1998. Mr. Hillas has
been a member of the Company's Board of Directors since April 1997. He
succeeded William C. Smith, who served as Chairman since April 1997 and interim
Chief Executive Officer since October 1997. Mr. Smith now serves as Vice
Chairman of the Board and Executive Vice President of the Company, and will
continue to serve as President and Chief Executive Officer of the Company's FMI
Operations Group, a position he has held since April 1997.
In connection with his employment by the Company, Mr. Hillas purchased 500,000
shares of the Company's common stock directly from the Company at $1.25 per
share.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included in this
Quarterly Report and the consolidated financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Form 10-K for the fiscal year ended December 31,
1997.
Certain statements made herein are forward-looking and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties which may cause results to differ
materially from those set forth in these statements. In particular,
unanticipated changes in the economic, competitive, governmental, technological,
marketing and other factors identified herein and in the Company's other filings
with the Securities and Exchange Commission could affect such results.
General
- -------
The source of the Company's revenues to date includes (i) remediation services,
including both in situ and ex situ bioremediation, (ii) commercial sales of the
Company's biological degradation systems, and (iii) funds received from third
parties and government agencies to conduct specific research and development
programs. While the Company has realized significant commercial revenues for
several years from remediation services, it has only recently seen the first
substantial revenues from sales of full-scale biological degradation systems for
the treatment of contaminated air and water streams. Although great strides
have been made in the commercialization of these systems, significant
expenditures will be required for continued research and development, additional
marketing activities and ultimately the development of manufacturing
capabilities for the further commercialization of the Company's biodegradation
systems. The amount and timing of such expenditures will vary depending on
several factors, including the progress of development and testing, funding
from third parties, the level of enforcement of environmental regulations by
federal and state agencies, technological advances, changing competitive
conditions and determinations with respect to the commercial potential of the
Company's systems. The amount and timing of such expenditures cannot be
predicted.
On April 10, 1997 the Company acquired Fluid Management, Inc. ("FMI"), a full-
service environmental consulting and engineering firm that is now operated as
the Company's FMI Operations Group. Remediation services are FMI's core
business and generate the greatest portion of FMI's revenues. The majority of
FMI's work is eligible for reimbursement to its clients (or their lending banks)
under the Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"). Review
of the PECFA claims by the Wisconsin Department of Commerce ("DCOM") and
determination of any ineligible costs typically is not completed until one to
three years after the expense has been incurred and paid by FMI's client (or its
bank). This exposes the client to the risk that remediation expenses it
incurred and paid ultimately may be disallowed for PECFA reimbursement by DCOM.
While not contractually obligated to do so, FMI has historically reimbursed its
clients (or their lending banks) for the remediation costs for services provided
by FMI which ultimately were determined by DCOM to be ineligible for
reimbursement under PECFA.
The 1997 Wisconsin state budget bill, which was passed in October 1997, extended
through December 2001 the $1 million maximum per site reimbursement under the
PECFA program (which, under previous legislation, was to be reduced to $190,000
for sites entering the program after June 1, 1998). However, revised
administrative policies and procedures recently implemented by DCOM in
connection with the
8
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legislative process have limited, and are expected to continue to limit, the
types and costs of services reimbursable by DCOM. DCOM has recently limited
approval, absent special circumstances, for implementation of active remediation
procedures, instead favoring natural attenuation as the presumed remedy and
generally allowing reimbursement primarily for site investigation and monitoring
costs. The implementation of such revised policies has resulted, and is
expected to continue to result, in a decrease in revenues per site generated by
FMI. An aggressive marketing strategy has been implemented with the goal of
bringing a greater number of sites under contract.
As a result of the acquisition of FMI in April 1997, the results of operations
of the Company during the 1997 and 1998 periods presented are not directly
comparable.
Results of Operations
- ---------------------
Three Months Ended March 31, 1998 Compared to
- ---------------------------------------------
Three Months Ended March 31, 1997
- ---------------------------------
For the three months ended March 31, 1998, revenues increased 166% to $6,524,446
from $2,454,710 from the same period in 1997. The net loss in the period
decreased 11% to $555,824 from $627,567, while the basic and diluted net loss
per share was $0.02 compared to $0.05 in the same period in 1997. The decrease
in basic and diluted net loss per share is due primarily to an increase in the
number of shares outstanding primarily from the issuance of common stock in
connection with the FMI acquisition and a related private placement.
Commercial revenues increased 229% to $5,809,926 from $1,764,972 in the same
period in 1997, while revenues from corporate research and development contracts
increased 4% to $714,520 from $689,738 in the same period in 1997. The
increased commercial revenues are due primarily to the inclusion of sales of the
Company's FMI Operations Group, which was acquired in April 1997. An increase
in the Company's systems sales also contributed to the increase in the Company's
commercial revenues. Revenues from the sale of the Company's air and water
treatment systems and systems-related products accounted for 10% of the
Company's commercial revenues in the three-month period ended March 31, 1998.
Revenues from corporate and government research and development contracts
increased primarily due to the greater volume of Phase II government projects
that the Company is actively working on. In the three-month period ended March
31, 1998, the Company also recorded initial revenues under a Phase I grant from
the National Science Foundation.
Total costs and expenses increased 132% to $7,122,571 in the first quarter of
1998 from $3,070,386 in the same period in 1997. The cost of commercial
operations increased 181% to $4,416,238 from $1,569,621 due to the increased
revenue levels. Research and development expenses increased 12% to $720,500
from $641,817 due primarily to an increase in work under corporate and
government research and development contracts. Marketing, general and
administrative expenses increased 131% to $1,985,833 from $858,948 due primarily
to inclusion of expenses of the FMI Operations Group and the amortization of
goodwill associated with the FMI acquisition.
9
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Equity in loss of joint venture decreased to $2,203 in the first quarter of 1998
from $64,963 in the same period in 1997 due to the acquisition by the Company of
the remaining 50% interest in the CVT America joint venture in August 1997.
After the acquisition, the Company dissolved the venture and thereafter
continued its operations as part of the Company's air group.
Liquidity and Capital Resources
- -------------------------------
The Company has funded its operations to date primarily through revenues from
commercial services, sales of biological degradation systems, public offerings
and private placements of equity securities, research and development agreements
with major industrial companies and research grants from government agencies.
At March 31, 1998 the Company had cash and cash equivalents of $3,691,587 and
working capital of $8,012,380. Additionally, the Company had restricted cash of
$309,300 that was being used to collateralize a bond for a large commercial
project. Cash and cash equivalents decreased $1,172,071 from December 31, 1997
to March 31, 1998 due primarily to cash used by operations of $1,121,456 and
capital expenditures of $46,403. The Company expects to incur additional
expenditures in connection with the continued development and commercialization
of its technologies. The timing and amount of such expenditures will fluctuate
depending on the timing of field tests, systems development activity, the
rapidity with which the Company's biodegradation systems can be further
commercialized and the availability of capital. Furthermore, future projects
may require the Company to set aside additional capital to collateralize
performance bonds.
Accounts receivable decreased by $887,515 primarily as a result of reduced
revenues, and accounts payable decreased by $1,185,142 due primarily to the
timing of project expenses from December 31, 1997 to March 31, 1998. Accrued
expenses and other liabilities decreased by $500,982 from December 31, 1997 to
March 31, 1998 primarily due to the payment in the first quarter of 1998 of
bonuses related to prior years. On March 31, 1998 the Company had $2,383,488 in
reserve for claim adjustments and warranties, $1,925,800 of which is available
with respect to potential PECFA claim adjustments related to approximately $53
million in unsettled PECFA submittals and $457,688 of which is available with
respect to potential systems warranty claims and other contract issues.
It is anticipated that the Company's currently available cash, cash equivalents
and cash expected to be generated from operations will provide sufficient
operating capital for the foreseeable future.
Other Matters
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As of December 31, 1997, the Company had a net operating loss carryforward of
approximately $21,000,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2012. The timing and manner in
which these losses may be utilized are limited under Section 382 of the Internal
Revenue Code of 1986 to approximately $1,700,000 per year based on preliminary
calculations of certain ownership changes to date and may be further limited in
the event of additional ownership changes.
10
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
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27 Financial Data Schedule
(b) Reports on Form 8-K
None
11
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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.
ENVIROGEN, INC.
(Registrant)
Date: May 13, 1998 By: /s/ Robert S. Hillas
------------------------
Robert S. Hillas
President and Chief Executive Officer
By: /s/ Mark J. Maten
----------------------
Mark J. Maten
Vice President of Finance
and Chief Financial Officer
12
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM: FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,691,587
<SECURITIES> 0
<RECEIVABLES> 6,720,864
<ALLOWANCES> (631,218)
<INVENTORY> 235,714
<CURRENT-ASSETS> 15,114,134
<PP&E> 5,166,067
<DEPRECIATION> (3,521,006)
<TOTAL-ASSETS> 40,548,606
<CURRENT-LIABILITIES> 7,101,754
<BONDS> 0
0
0
<COMMON> 233,543
<OTHER-SE> 33,202,887
<TOTAL-LIABILITY-AND-EQUITY> 40,548,606
<SALES> 0
<TOTAL-REVENUES> 6,524,446
<CGS> 0
<TOTAL-COSTS> 7,122,571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,943
<INCOME-PRETAX> (555,824)
<INCOME-TAX> 0
<INCOME-CONTINUING> (555,824)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (555,824)
<EPS-PRIMARY> ($0.02)
<EPS-DILUTED> ($0.02)
</TABLE>
