10-Q 1 d10q.txt FORM 10-Q DATED JULY 31, 2002 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, 2002 ------------- Commission File Number 1-9579 ------ Ecogen Inc. ----------- (Exact name of registrant as specified in its charter) Delaware 22-2487948 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P.O. Box K, Belmar, New Jersey 07719 ------------------------------- ----- Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (800) 589-3434 -------------- Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5 (d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No__. --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at September 26, 2002 ----- --------------------------------- Common Stock, $.01 par value 24,178,000 ECOGEN INC. INDEX

Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements: Unaudited Consolidated Condensed Balance Sheets-~~Pro~~ ~~Forma~~ as of ~~April~~July 3031,~~2002~~ ~~and Actual as of April 30,~~ 2002 and October 31, 2001 .................................................. 1 Unaudited Consolidated Condensed Statements of Operations for the ~~six~~nine months and three months ended ~~April~~July 3031, 2002 and 2001 .....~~........~~ 2 Unaudited Consolidated Condensed Statement of Stockholders' Deficit for the ~~six~~nine months ended ~~April~~July 3031, 2002 .......................~~........~~ 3 Unaudited Consolidated Condensed Statements of Cash Flows for the ~~six~~nine months ended ~~April~~July 3031, 2002 and 2001 ......................~~....................~~ 4 Notes to Unaudited Consolidated Condensed Financial Statements ............................................................~~........~~ 6 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition ......................... 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk ...... 16 Item 4 - Controls and Procedures ......................................... 1116 PART II - OTHER INFORMATION Item 6(a) - Exhibits ........................................................~~.........~~ 1617

ECOGEN INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

--------------------------------------------------------------------------------------------------------~~---------------------~~ ~~Unaudited~~ Assets ~~Pro Forma~~ Actual ~~April~~July 3031, ~~April 30,~~ October 31, 2002 ~~2002~~ 2001 --------------------------------------------------------------------------------------------------------~~---------------------~~ Current assets: Cash and cash equivalents $ ~~818,181~~- $ ~~2,525 $~~ 8,054 Trade receivables, net ~~152~~81,~~575~~969 ~~152,575~~ 311,024 Inventory, net ~~21,309~~- ~~21,309~~ 300,322 Prepaid expenses and other current assets ~~331,643~~- ~~331,643~~ 373,962 ~~Assets held for sale~~ - ~~128,954~~ - ------------------------------------------------------------------------------------------------------~~-----------------------~~ Total current assets 181,~~323,708~~969 ~~637,006~~ 993,362 --------------------------------------------------------------------------------------------------------~~---------------------~~ Plant and equipment, net ~~3,244~~- ~~3,244~~ 29,554 Intangible and other assets, net 273,~~232~~207 ~~27,232~~ 778,093 ~~Assets held for sale~~ - ~~746,280~~ - ------------------------------------------------------------------------------------------------------~~-----------------------~~ $ 185,~~354,184.00~~176 $ 1,~~413,762.00 $ 1,~~801,009 ========================================================================================================~~=====================~~ Liabilities and Stockholders' Deficit --------------------------------------------------------------------------------------------------------~~---------------------~~ Current liabilities: Debt due within one year ~~- 2~~200,~~755,500~~280 2,500,500 Accounts payable and accrued expenses 54,~~107~~711,~~745~~464 5,~~551,588 5,~~005,810 --------------------------------------------------------------------------------------------------------~~---------------------~~ Total current liabilities 54,~~107~~911,~~745~~744 ~~8,307,088~~ 7,506,310 --------------------------------------------------------------------------------------------------------~~---------------------~~ Long-term accrued expenses ~~153~~114,~~253~~126 ~~153,253~~ 231,505 --------------------------------------------------------------------------------------------------------~~---------------------~~ Long-term deferred revenue 1,~~864~~906,928 1,~~864,928 1,~~780,928 --------------------------------------------------------------------------------------------------------~~---------------------~~ Minority interest 1,533,854 1,533,854 ~~1,533,854~~ --------------------------------------------------------------------------------------------------------~~---------------------~~ Stockholders' deficit: Preferred stock, par value $.01 per share; authorized 7,500,000 shares: Series 2000 A convertible preferred stock; 30,000 shares authorized; 5,873 and 6,598 shares outstanding in 2002 and 2001, respectively (liquidation value $~~596~~587,~~000~~300) 59 59 66 Series 1998 C convertible preferred stock ; 50,000 shares authorized; 20,854 and 32,354 shares outstanding in 2002 and 2001, respectively (liquidation value $2,085,~~000~~400) 209 ~~209~~ 324 Common stock, par value $.01 per share; authorized 42,000,000 shares:issued and outstanding 414,~~780~~178,~~095~~010 ~~shares in pro forma~~ and ~~actual 2002 and 14~~1,~~432~~443,~~807~~281 shares in ~~2001~~2002 ~~417~~and 2001,~~799~~ ~~417~~respectively 41,~~799~~780 ~~144~~14,~~327~~433 Additional paid-in capital 129,~~049~~425,~~166~~187 129,~~049~~447,~~166~~006 ~~129,317,112~~ Accumulated deficit (~~136~~137,~~772~~848,~~829~~711) (~~139,912,594) (~~138,713,417) --------------------------------------------------------------------------------------------------------~~---------------------~~ Total stockholders' deficit (78,~~305~~381,~~596~~476) (~~10,445,361) (~~9,251,588) --------------------------------------------------------------------------------------------------------~~---------------------~~ $ 185,~~354,184~~176 $ 1,~~413,762 $ 1,~~801,009 ========================================================================================================~~=====================~~

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements. 1 ECOGEN INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

-----------------------------------------------------------------------------------------------------------~~-----~~ Three Months Ended ~~Six~~Nine Months Ended ~~April~~July 3031, ~~April~~July 3031, 2002 2001 2002 2001 -----------------------------------------------------------------------------------------------------------~~-----~~ Revenues: Product sales, net $ ~~156~~45,~~656~~897 $ ~~805~~792,~~357~~844 ($ ~~420~~466,~~871~~768 $ 12,~~597~~390,~~850~~694 Contract research - ~~172~~50,~~813~~000 - ~~172~~222,813 -----------------------------------------------------------------------------------------------------------~~-----~~ Total revenues ~~156~~45,~~656~~897 ~~978~~842,~~170~~844 ~~420~~466,~~871~~768 12,~~770~~613,~~663~~507 -----------------------------------------------------------------------------------------------------------~~-----~~ Costs and expenses: Cost of products sold ~~8,210~~- ~~801~~723,~~166~~408 219,633 12,~~487~~210,~~439~~847 Research and development: - ~~189~~62,~~915~~626 - ~~482~~544,~~097~~723 Selling, general and administrative ~~489~~371,~~529~~937 546,012 1,~~091~~350,~~506~~972 ~~979~~2,~~035 1~~465,~~919,437~~449 -----------------------------------------------------------------------------------------------------------~~-----~~ Total costs and expenses ~~497~~371,~~739~~937 21,~~082~~332,~~587~~046 1,~~198~~570,~~668~~605 35,~~888~~221,~~973~~019 -----------------------------------------------------------------------------------------------------------~~-----~~ Operating loss (~~341~~326,~~083~~040) (1489,~~104,417~~202) (~~777~~1,~~797~~103,837) (2,~~118~~607,~~310~~512) -----------------------------------------------------------------------------------------------------------~~-----~~ Other income (expense): Interest expense, net (~~133~~159,~~505~~201) (~~199~~139,~~135~~509) (~~249~~408,~~397~~598) (~~321~~461,~~775~~284) Other income 2,~~308~~637,605 ~~124~~10,~~095~~264 142,~~381~~651,986 ~~155~~165,~~567~~831 -----------------------------------------------------------------------------------------------------------~~-----~~ Total other income (expense), net ~~(131~~2,~~197)~~478,404 (75129,~~040~~245) ~~(235~~2,~~016)~~243,388 (~~166~~295,~~208~~453) -----------------------------------------------------------------------------------------------------------~~-----~~ Net ~~loss~~income (~~472,280~~loss) (12,~~179~~152,~~457)~~364 (618,447) 1,~~012~~139,~~813)~~551 (2,~~284~~902,~~518~~965) Dividends on preferred stock 8789,~~232~~874 ~~127~~134,~~544~~785 ~~184~~274,~~971~~845 ~~262~~396,~~205~~990 ----------------------------------------- -----------------------------------------------------------------~~------~~ Net income available (loss allocable) to common stockholders ($ ~~559~~2,~~512)~~062,490 ($ 1753,~~307,001~~232) ($ 1864,~~197,784)~~706 ($ 23,~~546~~299,~~723~~955) =========================================================================================================== Basic net income (loss) per common share $ 0.49 ($0.53) $ 0.22 ($2.37) =========================================================================================================== ~~Basic~~Weighted ~~and~~average ~~diluted~~number of common shares outstanding 4,178,000 1,428,000 3,985,000 1,390,000 =========================================================================================================== Diluted net income (loss) per common share ($ 0.~~01)~~03 ($ 0.0953) ($ 0.~~03)~~02 ($ 02.1837) ===========================================================================================================~~=====~~ Weighted average number of common shares outstanding 4167,~~447~~333,000 141,~~198~~428,~~900~~000 3867,~~878~~140,000 131,~~839~~390,~~800~~000 ===========================================================================================================~~=====~~

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements. 2 ECOGEN INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' (DEFICIT) Nine months ended July 31, 2002

------------------------------------------------------------------------------------------------------------------------------- Convertible Additional Preferred Common Paid-in Accumulated Stock Stock Capital Deficit Total ------------------------------------------------------------------------------------------------------------------------------- Balance November 1, 2001 $390 $144,327 $129,317,112 ($138,713,417) ($9,251,588) Dividends on preferred stock, including ~~163~~16,~~935~~394 shares ~~of common stock issued in payment of dividends~~ - 1,639 3,~~765~~767 (~~186~~274,~~364~~845) (~~180~~269,~~960~~439) of common stock issued in payment of dividends Conversion of 11,500 shares of Series 1998 C convertible preferred stock to 252,~~000~~500,000 shares of common stock (115) 250,000 (249,885) - - Conversion of 725 shares of Series 2000 A convertible preferred stock to 2218,~~183,313~~331 shares of common stock (7) 21,833 (21,826) - - One-for-ten reverse stock split - (376,019) 376,019 - - Net income (loss) - - - (1,~~012~~139,~~813)~~551 (1,~~012~~139,~~813)~~551 ------------------------------------------------------------------------------------------------------------------------------- Balance ~~April~~July 3031, 2002 $268 $~~417~~ 41,~~799~~780 $129,~~049~~425,~~166~~187 ($~~139~~137,~~912~~848,~~594~~711) ($108,~~445~~381,~~361~~476) ===============================================================================================================================

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements. 3 ECOGEN INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

-------------------------------------------------------------------------------------------~~-----~~ ~~Six~~Nine months ended ~~April~~July 3031, 2002 2001 -------------------------------------------------------------------------------------------~~-----~~ Cash flows from operating activities: Net ~~loss~~income (loss) $ 1,~~012~~139,~~813)~~551 ($2,284,518) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 37,~~865~~943 341,146 ~~Loss~~Gain on ~~disposition~~sale of ~~fixed~~ assets 3(2,~~564~~626,436) (139,740) Noncash interest and other expense ~~222~~297,~~087~~773 267,054 Changes in assets and liabilities ~~506~~(49,~~137~~946) 1,010,620 -------------------------------------------------------------------------------------------~~-----~~ Net cash (used in) ~~provided by~~ operating activities (~~277~~1,~~160~~231,115) (805,438) -------------------------------------------------------------------------------------------~~-----~~ Cash flows from investing activities: Proceeds ~~form~~from sale of assets 183,~~047~~523,281 169,365 -------------------------------------------------------------------------------------------~~-----~~ Net cash provided by investing activities 183,~~047~~523,281 169,365 -------------------------------------------------------------------------------------------~~-----~~ Cash flows from financing activities: Proceeds from promissory notes ~~255~~565,000 1,000,500 ~~Payments~~Repayments ~~on line~~ of ~~credit~~debts (2,865,220) ~~net -~~ (436,370) ~~Repayment~~Repayments of capital lease obligations ~~(1,416)~~- (135,631) -------------------------------------------------------------------------------------------~~-----~~ Net cash ~~provided by~~ (used in) provided by financing activities ~~253~~(2,~~584~~300,220) 428,499 -------------------------------------------------------------------------------------------~~-----~~ Net decrease in cash (58,~~529~~054) (207,574) Cash and cash equivalents, beginning of period 8,054 215,777 -------------------------------------------------------------------------------------------~~-----~~ Cash and cash equivalents, end of period $ ~~2,525~~- $ 8,203 ===========================================================================================~~=====~~

(Continued) 4 ECOGEN INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED

---------------------------------------------------------------------------------------------------- ~~Six~~Nine months ended ~~April~~July 3031, 2002 2001 ---------------------------------------------------------------------------------------------------- Changes in assets and liabilities, net of ~~acquisition~~disposition: Decrease (increase) in receivables $~~158~~ 229,~~449~~055 ($61,620) Decrease in inventory ~~215~~236,~~059~~368 977,647 ~~Increase~~Decrease in prepaid expenses and other current assets ~~(22~~58,~~681)~~962 99,791 Decrease in other assets -24,414 46,828 ~~(Increase)~~Decrease ~~decrease~~ in accounts payable and accrued expenses ~~155~~(598,~~310~~745) (52,026) ---------------------------------------------------------------------------------------------------- Changes in assets and liabilities, net $~~506~~ (49,~~137~~946) $ 1,010,620 ==================================================================================================== ---------------------------------------------------------------------------------------------------- Noncash investing and financing activities: ----------------------------------------------------------------------------------------------------

During the first half of fiscal 2001, the Company transferred ownership of certain fixed assets to a contract manufacturer in exchanged for $250,000 in credits to be applied toward future costs of production at that facility. During the third quarter of fiscal 2002, a agreement was reached the contract manufacturer to offset the $250,000 owed to the Company against the Company's payable to the contract manufacturer. During the first nine months of fiscal 2002 and 2001, the Company issued 218,331 and 73,499 shares of common stock, respectively, upon conversion of the Company's preferred stock. In connection with the conversion, the Company issued 16,394 and 51,289 shares of its common stock, respectively in payment of dividends. See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements. 5 ECOGEN INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Condensed Financial Statements July 31, 2002 and 2001 (1) Basis of Presentation and Summary of Significant Accounting Policies Organization and Basis of Presentation: The consolidated condensed financial statements include the accounts of Ecogen Inc. ("Ecogen" or the "Company") and its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated condensed financial statements include all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. The consolidated condensed financial statements have been prepared in accordance with the requirements for Form 10-Q and, therefore, do not include all disclosures of financial information required by generally accepted accounting principles. These consolidated condensed financial statements should be read in conjunction with the Company's October 31, 2001 consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2001. The results of operations for the interim period ended July 31, 2002 are not necessarily indicative of the operating results for the full fiscal year. Net Income (Loss) Per Common Share: The computation of net income available (loss allocable) to common stockholders for the relevant period, is based upon the weighted average number of common shares outstanding during the period plus, in periods in which they have a dilutive effect, the effect of common equivalent shares. No effect has been given to the outstanding stock options, as the effect would be anti-dilutive. Diluted net income per share in fiscal 2002 is based on net income available to common stockholders divided by common shares outstanding plus common equivalent shares arising from the effect of convertible preferred stock using the if converted method and including the shares contingently issuable in connection with an acquisition. In accordance with the acquisition agreement, market price protection was granted. Because the Company reported a net loss per share in fiscal 2001, there was no difference between the Company's basic and diluted net loss per share calculations, since all potential common shares were anti-dilutive. (2) Operations and Liquidity 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 sold certain of its technologies and substantially all of its inventories to Certis U.S.A. L.L.C. (see note 5.) The Company's remaining technologies include biofungicides and Bt CellCap technologies. The Company has discontinued all sales, manufacturing and research and development efforts related to all of its technologies. Subsequent to July 31, 2002, the Company vacated its facilities in Langhorne, PA. The Company is in discussion with the landlord regarding the facility and will continue to evaluate the amount of the accrual for lease costs associated with the vacant facility. (Continued) 6 ECOGEN INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Condensed Financial Statements, Continued (2) Operations and Liquidity, (cont.) The Company has reported a loss from inception in 1983 to July 31, 2002 in the cumulative amount of $137,751,000. Further, the Company has a working capital deficit, a stockholders' deficit and no liquid financial resources. These factors raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount or classification of liabilities, which might result from the outcome of this uncertainty. The Company's continued operations will depend on its ability to raise additional funds. To date, the Company has not generated positive cash flow from operations. Since its inception, the Company has financed its working capital needs primarily through private and public offerings of equity and debt securities, revenues from research and development alliances and product sales. The Company had secured a $1,500,000 term loan from a bank that is controlled by a principal of the Company's majority stockholder ("Term Loan") and notes from a corporation affiliated with the majority stockholder ("Notes"). In connection with the sale of assets as described in note 5, the Term Loan and all accrued interest and penalties which were past due were repaid from the net proceeds. In addition, $1,365,220 of principal due under the Notes was paid with the net proceeds from the sale, leaving a balance of $220,280 plus accrued interest of $179,182 outstanding at July 31, 2002, which are payable on demand. Subsequent to July 31, 2002, the Company borrowed an additional $200,000 under the Notes. After the payments of the Company's liabilities as described above, the net proceeds from the asset sale of approximately $365,000 were not sufficient for the Company to pay its existing liabilities. The Company will need to continue to pursue the raising of additional funds and other strategic initiatives including the sale of all or certain of its remaining assets to improve its working capital position. The Company also has taken a number of steps to conserve cash, including significant personnel reductions and related costs and the cessation of all sales, manufacturing and research and development until it is able to sell assets. The Company needs to sell other assets or obtain financing to provide the necessary cash resources to repay the outstanding balances under it's accounts payable and fund operations. At the present time, the Company is not pursuing any long-term financing. Further the Company needs to continue to obtain short-term funding while it negotiates potential asset sales. At this time the Company is unable to predict whether it will be successful in its efforts to obtain additional financing or sell additional assets. If the Company is not successful in obtaining additional funding or selling assets, the Company will not be able to continue as a going concern. Over the long-term, the Company's liquidity is dependent on market acceptance of its products and technology, including products, if any, commercialized by Monsanto Company utilizing the Company's technology. (3) Loan Agreements The Company had a secured term loan ("Term Loan") with a principal balance of $1,500,000 with a financial institution that is controlled by a principal of the Company's majority stockholder. A corporation affiliated with the majority stockholder had guaranteed the loan. In connection with the guarantee, the 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 of $183,556 was recorded as deferred debt expense and was amortized as interest expense over the life of the loan. The loan and all penalties and interest were repaid with the proceeds from the sale of assets as described in note 5. Continued 7 ECOGEN INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Condensed Financial Statements, Continued (3) Loan Agreements, (cont.) A corporation affiliated with the Company's majority stockholder loaned the Company an aggregate of $1,565,500 pursuant to promissory notes ("Notes"). The Notes bear interest at 12%, and are secured by all of the Company's assets. In connection with the sale of assets described in note 5, $1,365,220 due under the Notes was paid, leaving a balance of $200,280 plus accrued interest of $178,000 at July 31, 2002, which are payable on demand. Subsequent to July 31, 2002, such corporation loaned the Company an additional $200,000 pursuant to the Notes under the same terms as indicated previously. (4) Stockholders' Equity Subsequent to July 31,2001, 10,000 shares of Series 1998 C Preferred Stock were converted into 20,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. As a result of the conversion, the holder of the preferred stock owns 93.3% of the Company's outstanding shares. After the conversion, 10,854 shares of the Series 1998 C Convertible Preferred Stock remain outstanding During the first quarter of fiscal 2002, 11,500 shares of the Series 1998 C Preferred Stock were converted into 2,500,000 shares of the Company's common stock in accordance with the terms of the preferred stock. During the nine month period ended July 31, 2002, the Company issued 218,331 shares of its common stock in exchange for 725 shares of the Company's Series 2000-A 7% Convertible Preferred Stock. The Company also issued 16,394 shares of its common stock in payment of cumulative dividends at the time of conversion. The Company's stockholders approved an amendment to its Restated Certificate of Incorporation for a one-for-ten reverse stock split ("Reverse Split") of the Company's outstanding shares of common stock. The Reverse Stock Split was effected on July 29, 2002. A total of $376,019 was reclassified from common stock to additional paid in capital to reflect the reverse stock split. The number of authorized shares and the per share amounts were not changed. All share and per share amounts have been retroactively adjusted to reflect the reverse stock split (5) Sale of Assets On July 10, 2002, Ecogen Inc. (the "Company") completed the sale pursuant to the Asset Purchase Agreement dated as of May 6, 2002 (the "Agreement") of certain assets relating to the Company's sprayable Bt bio-pesticide business and the Company's insecticidal nematode business to Certis U.S.A. L.L.C. "Certis"), an indirect subsidiary of Mitsui & Co., The assets sold include, but are not limited to, the Company's CryMax , Lepinox, Condor, Condor G, Raven, Bti technicals ("Traditional Bt") and HB nematode product lines. The transaction excludes the Bt CellCap products acquired from Mycogen Corporation and the Company's agreements with the Monsanto Company relating to commercialization success fees, if any, for transgenic plants. The assets sold include all technology and know-how related to the business, including strain libraries for bio-pesticide uses, product registration, trademarks, patents or licenses and certain inventory and fixed assets. Upon the closing of the transaction, the Company received cash proceeds of $3,640,000 from Certis, (Continued) 8 ECOGEN INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Condensed Financial Statements, Continued (5) Sale of Assets (cont.) after giving effect to (i) certain purchase price adjustment provided for in the Agreement ($85,000, representing the amount by which the value of the inventory sold to Certis was less than the value at December 31, 2001), and $250,000 due to the Company's inability to obtain a letter from a licensor of the Company clarifying certain matters regarding the license, and (ii) certain additional purchase price adjustments ($175,000) by virtue of the fact that certain patents and contract rights provided for in the Agreement were unavailable for sale upon closing, as reflected in the amendment of certain Schedules to the Agreement. The cash proceeds do not include the approximately $50,000 paid for by Certis for purchase of inventory pursuant to the Pre-Closing Technologies Arrangement Agreement entered into concurrently with the Agreement. Out of pocket expenses associated with the transaction were approximately $135,000. A summary of assets sold and the gain is as follows: Inventory $ 64,000 Other current assets 65,000 Intangibles and other assets 746,000 ---------- 875,000 Net Proceeds 3,505,000 ---------- Gain on sale of assets $2,630,000 ========== As a result of the gain on sale, the Company has net income for the nine months ended July 31, 2002. No provision for income taxes has been recorded due to the utilization of net operating loss carryforwards. As a condition of closing, the Company was required to repay its Term Loan with Berkshire Bank and a substantial portion of its Notes to Momar Corporation, both of which are affiliated with the Company's majority stockholder. The aggregate amount paid from the proceeds of the sale including accrued interest were $1,775,000 and $1,365,000 under the Term Loan and the Notes, respectively. After such payments, approximately $318,000 remains outstanding under the Notes, including accrued interest of $178,000, which are secured by the Company's remaining assets and payable on demand. The holder of the Notes deferred payment of the remaining balance and the accrued interest under the demand Notes. The net cash proceeds to the Company after the payments of the Company's outstanding obligations referred to above were approximately $365,000. Unaudited pro forma consolidated results of operations as if the assets had been sold on November 1, 2000 and the Term Loan and Notes been repaid are as follows:

(Continued) 9 ECOGEN INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Condensed Financial Statements, Continued (5) Sale of Assets, (cont.) The unaudited pro forma information is not necessarily indicative of the results that would have been obtained had the sale of assets actually occurred on the date indicated, nor is it indicative of the Company's future consolidated results of operations. (6) Prepaid Expenses During fiscal 2001, the Company transferred ownership in certain fixed assets, with a net book value of $279,000, to a contract manufacturer of the Company in exchange for $250,000 in credits to be used for future costs of production at that facility. Such amount was recorded as prepaid expense. During the third quarter of fiscal 2002, the vendor agreed to apply the credits against $250,000 in amounts owed by the company to the vendor. As a result an entry was made to reduce accounts payable and prepaid expenses by $250,000 as of July 31, 2002. 10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Three Months and Nine Months Ended July 31, 2002 and 2001 INTRODUCTION In July 2002, the Company sold certain of its technologies and substantially all of its inventories to Certis U.S.A. L.L.C. (see note 5.) The Company has discontinued all sales, manufacturing and research and development efforts related to all of its technologies. Subsequent to July 31, 2002, the Company vacated its facilities in Langhorne, PA. The Company is in discussion with the landlord regarding the facility and will continue to evaluate the amount of the accrual for lease costs associated with the vacant facility. The Company's continued operations will depend on its ability to raise additional funds. To date, the Company has not generated positive cash flow from operations. Since its inception, the Company financed its working capital needs primarily through private and public offerings of equity and debt securities, revenues from research and development alliances and product sales. NINE MONTHS ENDED JULY 31, 2002 AND 2001 Revenues Net product sales were $467,000 and $2,391,000 for the first nine months of fiscal 2002 and 2001, respectively, representing a decrease of 80%. Sales of the Company's Bt product line, representing 94% of Company's product sales in the first nine months of fiscal 2002, decreased 80%. The decrease in sales was due principally to the Company's lack of financial resources including its inability to fund production and secure additional finished goods from Dow Agrosciences LLC. In January 2002, Dow terminated the Supply Agreement as a result of Ecogen's alleged failure to remedy its breaches under the agreement. As a result of the termination of the Supply Agreement, the Company currently is unable to sell any products acquired from Mycogen. Since Dow owns the manufacturing process, the Company is unable to contract with a third party for the manufacture of these products. Although the Company is in discussions with Dow to resolve the situation, there is no assurance that the Company will be successful. Due to the termination of the Dow supply agreement, the sale of assets to Certis and the Company's lack of liquidity, the Company does not expect to have any product sales over the near term. To resume product sales the Company would need to obtain substantial funding to restart manufacturing for any of its remaining products. Biofungicide product sales, which represented 6% of product sales in fiscal 2002, decreased from 8% of product sales in the year-ago period. The Company discontinued marketing its biofungicide products in fiscal 2001. The limited product sales in fiscal 2002 represented the sale of available finished products. Contract research revenues decreased to zero in fiscal 2002 from $.2 million due in fiscal 2001. The Company discontinued all research and development efforts in fiscal 2002. Costs and Expenses Cost of products sold decreased 90% in the first nine months of fiscal 2002 compared to the same period in fiscal 2001 principally due to lower sales volume. Gross margins on product sales were 53% for fiscal 2002 and 7% in the same nine-month period in fiscal 2001. The higher gross margins in fiscal 2002 were principally due to sales of certain products that had been fully reserved and therefore had no costs associated with such sales. 11 Total operating expenses were $1,351,000 in the first nine months of fiscal 2002, compared to $3,010,000 in the same period in fiscal 2001, a decrease of 55% due to cost reduction measures implemented by the Company in fiscal 2002 and 2001 to conserve cash, including significant personnel reductions and related costs. There were no research and development expenses in fiscal 2002 due to the Company's decision to curtail all research and development due to its limited resources. Research and development expenses in the first nine months of fiscal 2001 were $545,000. The remaining decrease in costs is related to selling general and administrative expenses, which decreased 45%. The Company expects such costs to continue to decrease. Operating Loss Operating loss was ($1,104,000) in the first nine months of fiscal 2002 compared to ($2,608,000) in 2001. The decrease was due principally to lower operating expenses in fiscal 2002. Other Income Other income, increased in the first nine months of fiscal 2002 compared to the same period in fiscal 2001 due primarily to $2,630,000 gain on the sales of assets to Certis in fiscal 2002. Net Income (Loss) Net income available to common stockholders for the nine months ended July 31, 2002 was $864,000, compared to a net loss allocable to common stockholders of ($3,299,000) for the same period in fiscal 2001 substantially as a result of the gain on sale of assets and lower operating expenses. Basic net income per common share for the nine months ended July 31, 2002 was $0.50, compared to net loss per share of ($.18) in fiscal 2001 on weighted average shares outstanding of 3,985,000 and 1,340,000 in the first nine months of fiscal 2002 and 2001, respectively. Preferred stock dividends were $275,000 and $397,000 in fiscal 2002 and 2001 respectively. Diluted net income per share was $0.03 for the nine months ended July 31, 2002. The Company effected a one-for-ten reverse stock split in July 2002. All share and per share amounts have been retroactively adjusted to reflect the reverse stock split. THREE MONTHS ENDED July 31, 2002 AND 2001 Revenues Net product sales decreased $421,000 or 90% in the three-month period ended July 31, 2002 when compared to the same period in fiscal 2001 principally due to lower volume of the Company's Bt products. The decrease in Bt product sales was due principally to the Company's lack of financial resources including its inability to fund production and secure additional finished goods from Dow Agrosciences LLC. In January 2002, Dow terminated the Supply Agreement as a result of Ecogen's alleged failure to remedy its breaches under the agreement. As a result of the termination of the Supply Agreement, the Company currently is unable to sell any products acquired from Mycogen. Since Dow owns the manufacturing process, the Company is unable to contract with a third party for the manufacture of these products. Although the Company is in discussions with Dow to resolve the situation, there is no assurance that the Company will be successful. Due to the termination of the Dow supply agreement, the sale of assets to Certis and the Company's lack of liquidity, the Company does not expect to have any product sales over the near term. To resume product sales the Company would need to obtain substantial funding to restart manufacturing for any of its remaining products. 12 Costs and Expenses There was no cost of products sold in the third quarter of fiscal 2002, representing a gross margin on product sales of 100%. The higher margins in the third quarter of fiscal 2002 were due principally to sales of certain finished products that had no costs as a result of a previously recorded reserve against the carrying amount of such inventory. Total operating expenses consisting of research and development and selling, general and administrative expenses were $372,000 in the third quarter of fiscal 2002, compared to $609,000 in the same period in fiscal 2001, a decrease of 39%. The decrease was due to cost reduction measures implemented by the Company to conserve cash, including significant personnel reductions and related costs and a reduction in outside services. Further cost reductions have been implemented in operating expenses subsequent to the end of the third quarter of fiscal 2002. There was no research and development activity in fiscal 2002. Operating Loss The operating loss improved from ($489,000) in the third quarter of fiscal 2001 to ($326,000) in the third quarter of fiscal 2002. The improvement was primarily due to the decrease in operating expenses. Net Income (Loss) Net income available to common stockholders for the three months ended July 31, 2002 was $2,062,000, compared to a net loss allocable to common stockholders of ($753,000) for the same period in fiscal 2001. Basic net income per share for the three months ended July 31, 2002 was $0.49, compared to net loss per share of ($0.53) in the third quarter of fiscal 2001 on weighted average shares outstanding of 4,178,010 and 1,427,980 in the third quarter of fiscal 2002 and 2001, respectively. Preferred stock dividends were $89,000 and $135,000 in the third quarter of fiscal 2002 and 2001, respectively. Diluted net income per share was $0.02 for the third quarter of fiscal 2002. Seasonality of Business Currently the Company has discontinued all sales, manufacturing and research and development due to its lack of liquidity. To resume operations the Company would need substantial resources. (See liquidity discussion below.) Although the Company does not anticipate operating in the near term, should the Company resume operations its business would be seasonal. The bulk of the Company's products would be 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 may 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 any new products is contingent on, among other factors, completion of field testing and receipt of required regulatory approvals. Unusual weather conditions during field tests or failure to receive regulatory approvals prior to the growing season may require additional field tests in subsequent growing seasons, with resulting delays in product development and commercialization. Liquidity and Capital Resources At July 31,2002, the Company had no cash or cash equivalents. The Company funded its operating loss in the first nine months of fiscal 2002 primarily through the sale of assets and decreases in inventory and accounts receivable. 13 On July 10, 2002, Ecogen Inc. (the "Company") completed the sale pursuant to the Asset Purchase Agreement dated as of May 6, 2002 (the "Agreement") of certain assets relating to the Company's sprayable Bt bio-pesticide business and the Company's insecticidal nematode business to Certis U.S.A. L.L.C. "Certis"), an indirect subsidiary of Mitsui & Co., The assets sold include, but are not limited to, the Company's CryMax , Lepinox, Condor, Condor G, Raven, Bti technicals ("Traditional Bt") and HB nematode product lines. The transaction excludes the Bt CellCap products acquired from Mycogen Corporation and the Company's agreements with the Monsanto Company relating to commercialization success fees, if any, for transgenic plants. The assets sold include all technology and know-how related to the business, including strain libraries for bio-pesticide uses, product registration, trademarks, patents or licenses and certain inventory and fixed assets. Upon the closing of the transaction, the Company received cash proceeds of $3,640,000 from Certis, after giving effect to certain purchase price adjustments. At July 31,2002, current liabilities were $4,912,000 and current assets were $82,000, resulting in a working capital deficit of $4,830,000. Current liabilities decreased $2,264,000 from October 31, 2001 due primarily to repayment of the Term Loan and payments against the Notes with the net proceeds form the sale of assets to Certis. At July 31, 2002, the Company had $2,391,000 in accounts payable representing a decrease of $613,000 from October 31, 2002. Certain of these creditors have initiated legal and other action for collection of amounts overdue. Included in current liabilities at July 31, 2002 are net borrowings under debt facilities of $200,000 representing a decrease of $2,300,000 as a result of the payment of debt with the proceeds form the sale of assets to Certis. During fiscal 2000, the Company obtained a $1.500,000 variable rate secured term loan with the Berkshire Bank, a financial institution controlled by a principal of United Equities (Commodities) Corporation, the Company's current majority stockholder. The maturity date of the Term Loan was June 2002 for all principal, interest and penalty payments. Further, a corporation affiliated with the majority stockholder loaned the Company an aggregate of $1,565,500 through July 31, 2002 pursuant to promissory notes ("the Notes") that bear interest at 12%. On July 10, 2002, in connection with the closing of the sale of assets to Certis, the Company repaid the amounts past due under the Term Loan and all accrued interest and penalties and $1,365,000 due under the Notes. At July 31, 2002, the outstanding balance under the notes was $220,280 and accrued interest was $179,182, which are payable on demand. Subsequent to July 31, 2002, the Company borrowed an additional $200,000 pursuant to the Notes. Subsequent to July 31, 2002, 10,000 shares of Series 1998 C Preferred Stock with an aggregate liquidation amount of $1,000,000 were converted into 20,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. As a result of the conversion, the holder of the preferred stock owns 93.3% of the Company's outstanding shares. After the conversion, 10,854 shares of the Series 1998 C Convertible Preferred Stock remain outstanding, In the first quarter of fiscal 2002, 11,500 shares of the Series 1998 C preferred stock were converted into 25,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. During the nine month period ended July 31, 2002, the Company issued 218,331 shares of its common stock in exchange for 725 shares of the Company's Series 2000-A 7% Convertible Preferred Stock. The Company also issued 16,394 shares of its common stock in payment of cumulative dividends at the time of conversion. 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, beginning 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. Under Delaware Law, the Company is precluded from paying cash dividends due to its deficit in stockholders' equity and therefore is in default of its preferred stock. 14 In July 2002, the Company sold certain of its technologies and substantially all of its inventories to Certis U.S.A. L.L.C. (see note 5.) The Company has discontinued all sales, manufacturing and research and development efforts related to all of its technologies. Subsequent to July 31, 2002, the Company vacated its facilities in Langhorne, PA. The Company is in discussion with the landlord regarding the facility and will continue to evaluate the amount of the accrual for lease costs associated with the vacant facility. The Company's continued operations will depend on its ability to raise additional funds. To date, the Company has not generated positive cash flow from operations. Since its inception, the Company financed its working capital needs primarily through private and public offerings of equity and debt securities, revenues from research and development alliances and product sales. After the payments of the Company's liabilities as described above, the net proceeds from the sale of assets of approximately $365,000 are not sufficient for the Company to pay its existing liabilities. The Company will need to continue to pursue the raising of additional funds and other strategic initiatives including the sale of all or certain other assets to improve its working capital position. The Company also has taken a number of steps to conserve cash, including significant personnel reductions and related costs and the curtailment of all sales, manufacturing and research and development until it is able to sell assets. The Company needs to sell other assets or obtain financing to provide the necessary cash resources to repay the outstanding balances under it's accounts payable and fund operations. At the present time, the Company is not pursuing any long-term financing. Further the Company needs to continue to obtain short-term funding while it negotiates potential sales. 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 or selling assets, the Company will not be able to continue as a going concern. Over the long-term, the Company's liquidity is dependent on market acceptance of its products and technology including products, if any, commercialized by the Monsanto Company utilizing the Company's technology. The report of our independent auditors on the Company's consolidated financial statements for the years ended October 31, 2002 and 2001 included an explanatory paragraph which stated that the recurring losses from operations, working capital deficiency, net capital deficiency and limited liquid resources raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Accounting for Business Combinations (FAS 141) and Statement No. 142, Accounting for Goodwill and Intangible Assets (FAS 142). FAS 141 and 142 change the method of accounting for mergers and acquisitions. Under FAS 141 pooling-of-interest accounting may no longer be used. Under FAS 142 purchased goodwill will be subject to impairment reviews rather then amortizing goodwill over a specific period. The effective date for FAS 141 is for transactions entered into after June 30, 2001. FAS 142 will be effective for fiscal years beginning after December 31, 2001. Earlier application is permitted, however FAS 142 must be adopted at the beginning of a fiscal year. Adoption of FAS 142 is not expected to have a material impact on the Company's consolidated financial statements. Forward-Looking Statements All statements contained in this management's discussion and analysis of financial condition and results of operations other than statements of historical information, are forward-looking statements. Forward-looking statements include statements containing 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 significant risks and uncertainties which may cause actual results to vary from such forward-looking statements and to vary significantly from reporting period to reporting period. These risks include among others, those listed in "Factors That May Affect Future Results", in the Company's Annual Report on Form 10K for the year ended October 31, 2001, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to update the results discussed herein as a result of changes in risks or operating results. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 4. Controls and Procedures Not applicable. 16 PART II - OTHER INFORMATION Item 6 Exhibits and reports in 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)* 10.153 Asset Purchase and License Agreement between Ecogen Inc. and Mycogen Corporation dated as of February 15, 2000 (Current Report on Form 8-K dated March 1, 2000)* 10.154 Stockholders Agreement between Ecogen Inc. and Mycogen Corporation dated February 15, 2000 (Current Report on Form 8-K dated March 1, 2000)* 10.155 Purchase and Sale Agreement between Ecogen Inc. and Dow AgroSciences LLC dated as of February 15, 2000 (Current Report on Form 8-K dated March 1, 2000)* 10.156 Convertible Preferred Stock Purchase Agreement between Ecogen Inc. and Amro International, S.A., Aspen International, Ltd. and Markham Holdings Limited dated as of February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.157 Registration Rights Agreement between Ecogen Inc. and Amro International, S.A., Aspen International, Ltd. and Markham Holdings Limited dated as of February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* _____________________________ * These items are hereby incorporated by reference from the exhibits of the filing or report indicated and are made part of this Report. 17 10.158 Warrant Agreement between Ecogen Inc. and Amro International, S.A. dated February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.159 Warrant Agreement between Ecogen Inc. and Aspen International, Ltd. dated February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.160 Warrant Agreement between Ecogen Inc. and Markham Holdings Limited dated as of February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.161 Form of Demand Promissory Note to Momar Corporation (Form 10-K for the fiscal year ended October 31, 2000) * 10.162 Letter Agreement between Ecogen Inc. and Momar Corporation dated May 16, 2002 (Form 10-K for the fiscal year ended October 31, 2001)* 10.163 Asset Purchase Agreement by and among Certis USA L.L.C., Ecogen Inc., Ecogen-Bio Inc. and Ecogen Technologies Incorporated dated May 6, 2002. (Current Report on Form 8-K filed on July 25, 2002)* 10.164 Pre-closing Business Arrangement Agreement by and among Certis USA L.L.C., Ecogen Inc., Ecogen-Bio Inc. and Ecogen Technologies Incorporated dated May 6, 2002. (Current Report on Form 8-K filed on July 25, 2002)* 10.165 List of omitted schedules/exhibits to Asset Purchase Agreement by and among Certis USA L.L.C., Ecogen Inc., Ecogen-Bio Inc. and Ecogen Technologies Incorporated dated May 6, 2002. (Current Report on Form 8-K filed on July 25, 2002)* 11 Statement re: Computation of Per Share Earnings 99.1 Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Current Reports on Form 8-K On July 25, 2002, a Current Report on Form 8-K was filed for event dated July 10, 2002 with respect to the sale of certain assets to Certis USA, LLC. and a 1 for 10 reverse stock split effected on July 29, 2002. ________________________ * These items are hereby incorporated by reference from the exhibits of the filing or report indicated and are made part of this Report. 18 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 26, 2002 ECOGEN INC. By: /s/ James P. Reilly, Jr. --------------------------- James P. Reilly, Jr. Chairman, Chief Executive Officer and Acting Chief Financial and Accounting Officer 19 Certifications I, James P. Reilly, Jr., Chief Executive Officer and Acting Chief Financial Officer of Ecogen, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Ecogen, Inc. (the "registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 26, 2002 /s/ James P. Reilly, Jr. ------------------------------ James P. Reilly, Jr. Chief Executive Officer and Acting Chief Financial Officer 20

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