10-Q 1 d10q.txt FORM 10-Q ENVIROGEN, INC. 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, 2002 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 25, 2002 was 4,032,985. 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 capital expenditures through a note payable amounting to $27,435 and a capital lease amounting to $50,930 in the first quarter of 2002. 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, 2001. Because the Company incurred net losses for the nine months ended September 30, 2002 and 2001, both basic and diluted per share calculations are the same. The inclusion of additional shares assuming the exercise of options and stock credits would be antidilutive. There were options and other rights to purchase 863,688 and 703,921 shares of common stock outstanding at September 30, 2002 and 2001, respectively. 2. LITIGATION 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. 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. 6 4. SEGMENT INFORMATION Information about reported segments for the three and nine months ended September 30, 2002 and 2001 is as follows:

The following table presents the details of the "Other" segment for the three and nine months ended September 30, 2002 and 2001:

7 5. IMPACT OF ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD On January 1, 2002, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the cost of certain of the Company's indefinite-lived intangible assets are no longer subject to amortization, but instead are periodically reviewed for impairment. Upon adoption, the Company's earnings and financial position were not impacted by the required impairment tests. The 2002 annual amortization of goodwill that would have approximated $138,695, is no longer required. The following pro forma financial information assumes the adoption of SFAS 142 occurred at the beginning of the periods presented.

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, 2001. 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 that 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 revenue attributable to traditional remediation services such as soil vapor extraction and air sparging as well as revenue attributable to advanced biological water treatment systems and biofilters. 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. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Management believes the following represents its critical accounting policies. Revenue Recognition Revenue from certain contracts is recognized as services are provided and costs are incurred. For fixed-price contracts, revenue is recognized on the percentage-of-completion method, measured by the percentage of costs incurred over the estimated total costs for each contract. This method is used because management considers expended costs to be the best available measure of progress on these contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. 9 Reserves for Claim Adjustments and Warranties The Company reserves for potential amounts that it could repay to customers related to remediation performed by the Company under the State of Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"). On each PECFA-related revenue dollar a reserve is established, which reduces the revenue recorded, to cover amounts that may be declared ineligible. The Wisconsin Department of Commerce ("DCOM") reviews claims for reimbursement under PECFA to determine the extent to which submitted claims will be reimbursed. The DCOM review process may not be completed until one to three years after the expense has been incurred and paid by the Company'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. The Company has in a number of cases reimbursed its clients (or their lending banks) for the remediation costs for services provided by the Company which ultimately were determined by DCOM to be ineligible for reimbursement under PECFA. There can be no assurance that the amount of such reserve, which was determined by management based on historic reimbursement disallowance rates under the PECFA program, will be adequate. The Company also provides for potential systems warranty claims and other contract issues. Estimated warranty reserves are related to specific projects and are established by charges to operations in the period in which the related revenue is recognized or at such time as a potential claim arises. If actual failure rates differ from the Company's estimates, revisions to the estimated warranty liability may be required. Results of Operations Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 For the nine months ended September 30, 2002, the Company's total revenues decreased 19% to $12,349,840 from $15,255,067 in the same period in 2001. The net loss for the nine-month period ended September 30, 2002 increased to $1,881,039 from $436,120 in the same period in 2001. The basic and diluted net loss per share was $0.47 for the first nine months of 2002 compared to $0.11 in the same period in 2001. The Company's net loss in the first nine months of 2002 increased from the same period in 2001 due primarily to decreased revenues in its commercial operations segment. Also, in the first nine months of 2001, the Company recognized a benefit of $210,790 from the sale of a portion of its State of New Jersey net operating loss carryforwards under a state tax benefit program. Commercial revenues in the nine months ended September 30, 2002 decreased 22% to $11,089,225 from $14,247,979 in the same period in 2001. The decreased commercial revenues are due primarily to a decline in revenues from commercial systems. A decline in revenues from remediation services was offset in part by favorable PECFA claims activity during the period, which resulted in a $655,000 improvement in reported revenue. Revenues from corporate research and development contracts increased in the nine-month period ended September 30, 2002 by 25% to $1,260,615 from $1,007,088 in the same period in 2001. Revenues increased due to an increased number of government projects in process in 2002. Total costs and expenses decreased 11% to $14,244,416 in the nine-month period ended September 30, 2002 from $15,978,563 in the same period in 2001. The cost of commercial operations decreased 16% to $9,343,858 during the first nine months of 2002 from $11,111,416 in the same period in 2001 due primarily to a 22% decrease in corresponding revenue. As a result, the Company's gross profit margin for its commercial operations segment decreased from 22% for the nine month period ended September 30, 2001 to 16% for the same period in 2002, which was due primarily to product mix and lower absorption of fixed costs. Research and development expenses increased 12% to $1,411,832 during the first nine months of 2002 from $1,259,157 in the same period in 2001 due 10 primarily to an increase in the corporate and government research and development projects in progress. Marketing, general and administrative expenses decreased 3% to $3,488,726 from $3,607,990 due primarily to a reduction in the amortization of goodwill. On January 1, 2002, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the cost of certain of the Company's indefinite-lived intangible assets are no longer subject to amortization, but instead are periodically reviewed for impairment. Upon adoption, the Company's earnings and financial position were not impacted by the required impairment tests. The 2002 annual amortization of goodwill that would have approximated $138,695, is no longer required. Interest income decreased 74% to $21,890 in the nine-month period ended September 30, 2002 from $84,636 in 2001, due to the combination of decreased average cash available for investment and lower interest rates. Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 For the three months ended September 30, 2002, the Company's total revenues decreased 30% to $3,783,960 from $5,381,047 in the same period in 2001. The net loss for the current period increased to $789,658 from $152,334 in the third quarter of 2001. The basic and diluted net loss per share was $0.20 in the third quarter of 2002 as compared to $0.04 in the same period in 2001. The Company's net loss in the third quarter of 2002 increased from the same period in 2001 due primarily to decreased revenue in its commercial operations segment. Commercial revenues in the third quarter of 2002 decreased 31% to $3,446,910 from $4,978,616 in the same period in 2001. The decrease in commercial revenues was due primarily to decreased revenue from commercial systems. A decline in revenue from remediation services was offset in part by favorable PECFA claims activity during the period, which resulted in a $255,000 improvement in reported revenue. Revenues from corporate research and development contracts decreased in the three-month period ended September 30, 2002 by 16% to $337,050 from $402,431 in 2001. Revenues decreased due primarily to a variation in timing of activities being performed on a number of government projects in process in 2002. Total costs and expenses decreased 18% to $4,575,988 in the three-month period ended September 30, 2002 from $5,549,192 in the same period in 2001. The cost of commercial operations decreased 24% to $2,959,076 during the second quarter of 2002 from $3,909,955 in the same period in 2001 due primarily to lower revenues. The Company's gross profit margin for its commercial operations segment decreased to 14% for the three month period ended September 30, 2002 from 21% for the same period in 2001, which was due primarily to product mix and lower absorption of fixed costs. Research and development expenses increased 32% to $521,664 during the second quarter of 2002 from $395,275 in the same period in 2001 due primarily to an increase in project related costs. Marketing, general and administrative expenses decreased 12% to $1,095,248 from $1,243,962 principally due to cost reduction efforts. Interest income decreased 76% to $4,640 in the three-month period ended September 30, 2002 from $19,653 in 2001, due to the combination of decreased average cash available for investment and lower interest rates. Liquidity and Capital Resources The Company has funded its operations to date primarily through revenues from commercial services, sales of 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, 2002, the Company had cash and cash equivalents of $1,373,748 and working capital of $1,392,550. Cash and cash equivalents decreased $1,445,280 from December 31, 2001 to September 30, 2002 due primarily to cash used in operations of $1,240,569 and capital expenditures of $185,029. 11 From December 31, 2001 to September 30, 2002, net accounts receivable decreased by $2,287,915 due primarily to lower revenues and the timing of billing as explained by the increase in unbilled revenue of $107,865. In the same period, accounts payable decreased by $534,435 due to reduced expense levels on lower revenues. At September 30, 2002, the Company had $2,129,842 in reserve for claim adjustments and warranties, $2,043,929 of which is available with respect to potential PECFA claim adjustments related to approximately $24 million in unsettled PECFA submittals and $85,913 of which is available with respect to potential warranty claims and other contract issues. The Company routinely evaluates these reserves based upon historical trends and ongoing activity. The amount of unsettled PECFA submittals declined from approximately $35 million at December 31, 2001 to approximately $24 million at September 30, 2002. The corresponding reserve has been reduced from $2,772,737 at December 31, 2001 to $2,043,929 at September 30, 2002. The Company's currently available cash, cash equivalents and cash expected to be generated from operations may not provide sufficient operating capital for the next twelve months. The Company is currently engaged in reviewing strategic alternatives and may seek additional funds through equity or debt financing. However, there can be no assurance that the current initiatives will be successful or that such additional funds will be available on terms favorable to the Company, if at all. Other Matters As of December 31, 2001, the Company had a net operating loss carryforward of approximately $28 million for federal income tax reporting purposes available to offset future taxable income, if any, through 2021. 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. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this report, and have concluded that the Company's disclosure controls and procedures are effective because of the following: [_] The Company's disclosure controls and procedures are designed to ensure that the information that the Company is required to disclose in its Exchange Act reports is recorded, processed, summarized and reported accurately and on a timely basis. [_] Information that the Company is required to disclose in its Exchange Act reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. (b) Changes in internal controls There have not been any significant changes in the Company's internal controls or in other factors, including any corrective actions with regard to significant deficiencies and material weaknesses, that could significantly affect these controls after the date of the evaluation described above. 12 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION In addition to the Chief Executive Officer and Chief Financial Officer certifications required by Section 302 of the Sarbanes-Oxley Act, which are attached to this report following the signature page, the Company has submitted to the Securities and Exchange Commission as correspondence accompanying this report the Chief Executive Officer and Chief Financial Officer certifications required by Section 906 of that Act. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K On August 13, 2002, the Company filed a Current Report on Form 8-K reporting it had submitted as correspondence to the Securities and Exchange Commission unqualified certifications of Robert S. Hillas, President and Chief Executive Officer of the Company, and Mark J. Maten, Vice-President, Finance and Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each in connection with the filing of the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. 13 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 12, 2002 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 14 CERTIFICATION I, Robert S. Hillas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Envirogen, Inc.; 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; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Robert S. Hillas -------------------------------------------- Name: Robert S. Hillas Title: President and Chief Executive Officer 15 CERTIFICATION I, Mark J. Maten, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Envirogen, Inc.; 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; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Mark J. Maten ------------------------------------------- Name: Mark J. Maten Title: Vice President, Finance and Chief Financial Officer 16

ENVIROGEN INC 10-Q