10-Q 1 d10q.txt QUARTER ENDED SEPTEMBER 30, 2001 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 September 30, 2001 Commission File Number 0-20404 ENVIROGEN, INC. --------------- (Exact name of registrant as specified in its charter) Delaware 22-2899415 -------- ---------- (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 October 31, 2001 was 4,005,608. 1 ENVIROGEN, INC. TABLE OF CONTENTS

2 PART 1 - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS ENVIROGEN, INC. CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. 3 ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 4 ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Supplemental disclosures of non-cash investing and financing activities: ------------------------------------------------------------------------ The Company financed a capital expenditure through a note payable amounting to $20,809 in the first quarter of 2000. The accompanying notes are an integral part of these consolidated financial statements. 5 ENVIROGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 of normal recurring 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, 2000. Because the Company incurred net losses for the nine months ended September 30, 2001 and 2000, both basic and diluted per share calculations are the same. The inclusion of additional shares assuming the exercise of options, warrants and stock credits would be antidilutive. There were options, warrants and other rights to purchase 703,921 and 591,356 shares of common stock outstanding at September 30, 2001 and 2000, respectively. 2. LITIGATION ---------- The Company was involved in litigation relating to services previously provided at a customer site where remediation work was performed. This customer filed a claim against the Company for professional malpractice, breach of warranty of professional services contract and misrepresentation. The matter was resolved in the Company's favor in May 2001. The Company is subject to claims and lawsuits in the ordinary course of its business. In the opinion of management, such claims are either adequately covered by insurance or, if not insured, will not individually or in the aggregate result in a material adverse effect on the Company's results of operations, cash flows or financial position. 3. ADOPTION OF ACCOUNTING STANDARD ------------------------------- In 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities " ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of the derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The implementation of SFAS 133 did not have any impact on the Company's consolidated results of operations, financial position or cash flows. 6 4. INCOME TAXES ------------ In January 2001, under a program in place in the State of New Jersey, the Company sold a portion of its available New Jersey net operating loss tax benefits related to losses incurred in prior years. The net amount received by the Company was $210,790 and is presented as an income tax benefit on the statement of operations for the period ended September 30, 2001. 5. SEGMENT INFORMATION ------------------- Information about reported segments for the three and nine months ended September 30, 2001 and 2000 is as follows:

The following table presents the details of the "Other" segment for the three and nine months ended September 30, 2001 and 2000:

7 6. IMPACT OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS --------------------------------------------------------------------- In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141, "Business Combinations" ("SFAS 141"), and 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. Under the provisions of SFAS 142, which will be effective for fiscal years beginning after December 15, 2001, the cost of certain of the Company's intangible assets will no longer be subject to amortization. Management has not made a final determination as to the impact of this new pronouncement on its consolidated results of operations or financial position. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement will be effective for fiscal years beginning after December 15, 2001. SFAS 144 establishes a single accounting model, based upon the framework established in SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", for long-lived assets to be disposed of by sale and to address significant implementation issues. The Company is in the process of assessing the impact of the adoption of this statement on its consolidated results of operations, financial position and cash flows. 8 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, 2000. 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 or other factors identified herein or in the Company's other filings with the Securities and Exchange Commission could affect such results. General ------- The Company has received most of its revenue from commercial remediation services and systems, which includes, primarily, revenue attributable to traditional remediation services such as soil vapor extraction and air sparging. In addition, a portion of the Company's revenue to date has been derived from research funded largely by corporate and governmental sponsors to develop cost effective advanced biological treatment systems. Revenues from these advanced treatment technologies are still in the early stages of commercial development, and additional expenditures by the Company will be required for continued research and development and expanded marketing activities. The amount and timing of such expenditures cannot be predicted and 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. Results of Operations --------------------- Nine Months Ended September 30, 2001 Compared to ------------------------------------------------ Nine Months Ended September 30, 2000 ------------------------------------ For the nine months ended September 30, 2001, the Company's total revenues increased 4% to $15,255,067 from $14,674,051 in the same period in 2000. The net loss for the current nine month period decreased 75% to $436,120 in 2001 from $1,776,273 in the same period in 2000. The basic and diluted net loss per share was $0.11 for the first nine months of 2001 compared to $0.45 in the same period in 2000. The Company's net loss in the first nine months of 2001 declined from the same period in 2000 primarily due to increased revenues and improved margins in its commercial operations segment and the sale of a portion of the Company's State of New Jersey net operating loss carryforwards under a state tax benefit program, which resulted in a net tax benefit recognized by the Company of $210,790. Commercial revenues in the nine months ended September 30, 2001 increased 7% to $14,247,979 from $13,335,902 in the same period in 2000. The increased commercial revenues are due primarily to more rapid growth of revenues from commercial systems offset by a reduction in revenue on work passed through to subcontractors and continued reduction of revenue under the PECFA program, which is funded by the State of Wisconsin for cleaning up underground storage tanks. Revenues from corporate research and development contracts decreased in the nine-month period ended September 30, 2001 by 25% to $1,007,088 from $1,338,149 in the same period in 2000. Revenues decreased primarily due to a reduced number of government projects in process in 2001. 9 Total costs and expenses decreased 4% to $15,978,563 in the nine-month period ended September 30, 2001 from $16,595,915 in the same period in 2000. The cost of commercial operations decreased 2% to $11,111,416 during the first nine months of 2001 from $11,302,409 in the same period in 2000 despite a 7% increase in revenue levels. As a result, the Company's gross profit margin for its commercial operations segment increased from 15% for the nine month period ended September 30, 2000 to 22% for the same period in 2001, which was primarily due to product mix, better absorption of fixed costs and a reduction in work passed through to subcontractors. Research and development expenses decreased 20% to $1,259,157 during the first nine months of 2001 from $1,569,385 in the same period in 2000 due primarily to a decrease in the corporate and government research and development projects in progress. Marketing, general and administrative expenses decreased 3% to $3,607,990 from $3,724,121 due primarily to a reduction in business development and administrative costs due to ongoing cost reduction programs. Interest income decreased 45% to $84,636 in the nine-month period ended September 30, 2001 from $153,051 in 2000, due primarily to the combination of decreased average cash available for investment and lower interest rates. Three Months Ended September 30, 2001 Compared to ------------------------------------------------- Three Months Ended September 30, 2000 ------------------------------------- For the three months ended September 30, 2001, the Company's total revenues increased 11% to $5,381,047 from $4,857,528 in the same period in 2000. The net loss for the current period decreased 80% to $152,334 from $769,830 in the third quarter of 2000. The basic and diluted net loss per share was $0.04 in the third quarter of 2001 as compared to $0.19 in the same period in 2000. The Company's net loss in the third quarter of 2001 declined from the same period in 2000 primarily due to increased revenue and improved margins in its commercial operations segment. Commercial revenues in the third quarter of 2001 increased 10% to $4,978,616 from $4,539,493 in the same period in 2000. The increase in commercial revenues was due to increased revenue from commercial systems. Revenues from corporate research and development contracts increased in the three-month period ended September 30, 2001 by 27% to $402,431 from $318,035 in 2000. Revenues increased primarily due to an increased number of government projects awarded in mid 2001 and in process during the third quarter of 2001. Total costs and expenses decreased 2% to $5,549,192 in the three-month period ended September 30, 2001 from $5,680,208 in the same period in 2000. The cost of commercial operations decreased 2% to $3,909,955 during the third quarter of 2001 from $3,991,329 in the same period in 2000 due primarily to improved margins. The Company's gross profit margin for its commercial operations segment increased to 21% for the three month period ended September 30, 2001 from 12% for the same period in 2000, which was primarily due to product mix, better absorption of fixed costs and a reduction in work passed through to subcontractors. Research and development expenses decreased 13% to $395,275 during the third quarter of 2001 from $455,575 in the same period in 2000 due primarily to a decrease in labor costs. Marketing, general and administrative expenses increased 1% to $1,243,962 from $1,233,304 due primarily to an increase in business development costs. Interest income decreased 64% to $19,653 in the three-month period ended September 30, 2001 from $53,976 in 2000, due primarily to the combination of decreased average cash available for investment and lower interest rates. 10 Liquidity and Capital Resources ------------------------------- The Company has funded its operations to date primarily through revenues from commercial services and biodegradation systems, public offerings and private placements of equity securities, research and development agreements with major industrial companies and research grants from government agencies. At September 30, 2001, the Company had cash and cash equivalents of $2,278,253 and working capital of $3,095,513. Cash and cash equivalents decreased $1,547,753 from December 31, 2000 to September 30, 2001 due primarily to cash used in operations of $1,344,799 and capital expenditures of $198,785. From December 31, 2000 to September 30, 2001, accounts receivable increased by $1,437,056 primarily due to clients paying at a slightly slower pace in 2001 than at the end of 2000. In the same period, accounts payable decreased by $94,770 due to reduced expense levels as well as shifts in the timing of project expenses. At September 30, 2001, the Company had $3,002,267 in reserve for claim adjustments and warranties, $2,825,403 of which is available with respect to potential PECFA claim adjustments related to approximately $36 million in unsettled PECFA submittals and $176,864 of which is available with respect to potential 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 at least the next 18 to 24 months. The Company may seek additional funds through equity or debt financing. However, there can be no assurance that such additional funds will be available on terms favorable to the Company, if at all. Other Matters ------------- As of December 31, 2000, the Company had a net operating loss carryforward of approximately $27.5 million for federal income tax reporting purposes available to offset future taxable income, if any, through 2020. 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. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 11 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: November 6, 2001 By: /s/ Robert S. Hillas -------------------- Robert S. Hillas President and Chief Executive Officer By: /s/ Mark J. Maten ----------------- Mark J. Maten Vice President, Finance and Chief Financial Officer 12

ENVIROGEN INC 10-Q