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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended September 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ___________ to ___________
Commission File Number: 0-21975
ECO SOIL SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEBRASKA 47-0709577
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10890 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(619) 675-1660
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.005 PAR VALUE
(Title of Class)
Check 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 28, 1997, 11,910,075
shares of the Registrant's Common Stock, $.005 par value per share, were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
a) The line provides for advances equal to the sum of 75% of eligible accounts
receivable plus 50% of eligible inventory. Advances associated with the
Company's eligible inventory shall not exceed $2.5 million.
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ECO SOIL SYSTEMS, INC.
FORM 10-QSB INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended September 30, 1997
and September 30, 1996 4
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended September 30, 1997 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 3. Changes in Securities and Use of Proceeds 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Eco Soil Systems, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
-------- --------
(unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 212 $ 150
Accounts receivable, net 10,552 2,193
Inventories 4,161 2,047
Prepaid expenses and other current assets 622 289
-------- --------
Total current assets 15,547 4,679
Property and equipment, net 1,188 656
Equipment under operating leases, net 4,910 1,325
Intangible assets, net 6,272 5,663
Other assets 188 563
-------- --------
Total assets $ 28,105 $ 12,886
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 4,697 $ 2,743
Accrued expenses 1,978 734
Current portion of long-term debt 3,568 7,266
Current portion of advances from shareholders -- 348
Current portion of capital lease obligations -- 22
-------- --------
Total current liabilities 10,243 11,113
Long-term debt, net of current portion 712 1,826
Deferred gain on sale leaseback, net of current portion 210 --
Advances from shareholders, net of current portion -- 21
Total liabilities 11,165 12,960
Shareholders' equity (deficit):
Preferred stock
$.005 par value; 5,000,000 shares authorized; -- --
none issued and outstanding
Common stock
$.005 par value; 20,000,000 shares authorized; 59 33
11,868,575 and 6,606,590 issued and outstanding at
September 30, 1997 and December 31, 1996, respectively
Additional paid-in capital 28,889 12,730
Warrants 242 242
Note receivable from shareholder (192) (192)
Accumulated deficit (12,058) (12,887)
-------- --------
Total shareholders' equity (deficit) 16,940 (74)
-------- --------
Total liabilities and shareholders' equity (deficit) $ 28,105 $ 12,886
======== ========
</TABLE>
See accompanying notes.
Note: The Balance Sheet at December 31, 1996 is derived from the audited
financial statements at that date but does not include all of the disclosures
required by generally accepted accounting principles.
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Eco Soil Systems, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Proprietary products $ 4,945 $ 1,196 $ 8,876 $ 3,626
Distributed products 8,968 3,894 20,265 5,603
----------- ----------- ----------- -----------
Total revenues 13,913 5,090 29,141 9,229
Cost of revenues:
Proprietary products 3,073 484 3,830 1,625
Distributed products 6,730 2,892 15,229 4,080
----------- ----------- ----------- -----------
Total cost of revenues 9,803 3,376 19,059 5,705
Gross profit 4,110 1,714 10,082 3,524
Operating expenses:
Selling, general and administrative 2,772 1,870 7,857 4,541
Research and development 42 78 189 353
----------- ----------- ----------- -----------
Income (loss) before interest,
depreciation and amortization 1,296 (234) 2,036 (1,370)
Depreciation 234 183 376 365
Amortization of intangibles 56 65 401 173
----------- ----------- ----------- -----------
Income (loss) from operations 1,006 (482) 1,259 (1,908)
Interest expense 179 331 430 523
----------- ----------- ----------- -----------
Net income (loss) $ 827 $ (813) $ 829 $ (2,431)
=========== =========== =========== ===========
Net income (loss) per share $ .06 $ (.11) $ .06 $ (.40)
=========== =========== =========== ===========
Shares used in calculating net income
(loss) per share 15,016 7,459 14,341 6,050
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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Eco Soil Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months
ended September 30,
1997 1996
-------- ---------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 829 $(2,431)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 777 538
Deferred gain on sale leaseback 210 --
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable (8,359) 961
Inventories (1,630) 103
Prepaid expenses and other assets 42 (634)
Accounts payable 1,941 (2,340)
Accrued expenses 1,244 (511)
-------- -------
Net cash used in operating activities (4,946) (4,314)
-------- -------
INVESTING ACTIVITIES
Cash received in acquisitions -- 1,656
Payments related to acquired businesses (1,424) (1,810)
Proceeds from disposition of equipment under
operating leases 1,325 --
Purchase of equipment under operating leases (5,063) --
Purchase of property and equipment (715) (741)
Proceeds from note receivable -- 595
-------- -------
Net cash used in investing activities (5,877) (300)
-------- -------
FINANCING ACTIVITIES
Advances from (repayments to) shareholders (356) 74
Proceeds from long-term debt 4,489 5,416
Repayments of long-term debt (7,297) (948)
Repayments on capital lease obligations (22) (76)
Net proceeds from sale of common stock 14,071 585
-------- -------
Net cash provided by financing activities 10,885 5,051
-------- -------
Net increase in cash and cash equivalents 62 437
Cash and cash equivalents at beginning of period 150 --
-------- -------
Cash and cash equivalents at end of period $ 212 $ 437
======== =======
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
ORGANIZATION
Eco Soil Systems, Inc. (the "Company") develops, markets, sells and
supports a proprietary line of biologically-produced, environmentally safe
products designed to address a variety of problems in the turf maintenance,
agricultural crop, soil redemption and water quality management industries. The
Company has developed two patented delivery systems that enable the Company to
ferment microorganisms at the customer's site and then dispense the appropriate
amount of cultured product directly into the customer's irrigation system, pond
or lake. Additionally, the Company has developed a comprehensive soil amendment
system. The Company sells, through its Turf Partners sales group, various
products produced by third parties to the turf and ornamental industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
In the opinion of the Company, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results
for the three-month and nine-month periods ended September 30, 1997 and 1996
have been made. The results of operations for the three-month and nine-month
periods ended September 30, 1997 are not necessarily indicative of the results
to be expected for the full fiscal year.
The accompanying consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996.
2. NET INCOME (LOSS) PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during those periods. Net income per share is
computed using the weighted average of common shares outstanding for the period
after giving effect to stock options and warrants considered to be dilutive
common stock equivalents using the treasury stock method. Fully diluted income
per share is not materially different from primary income per share. Common
stock equivalents were not included in computing net loss per share since the
effect would have been antidilutive, except that, pursuant to the requirements
of the Securities and Exchange Commission, shares of common stock issued during
the twelve months immediately preceding the initial public offering, plus the
number of common equivalent shares under stock options granted or warrants
issued during such period, have been included in the calculation of the shares
used in computing net loss per share as if they were outstanding through the
date of the initial public offering (using the treasury stock method).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS
128). FAS 128 is effective for financial statements issued for periods ending
after December 15, 1997. FAS 128 replaces Accounting Principles Board Opinion
15, Earnings Per Share (APB 15) and requires dual presentation of basic and
diluted earnings per share by entities with complex capital structures. Basic
earnings per share includes no dilution and is computed by dividing net earnings
(loss) by the weighted average number of common shares
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outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of the entity. The
impact of adopting FAS 128 on the calculation of net earnings (loss) per share
on the periods presented herein, using the basic earnings per share calculation
method, may be material as the company has a large number of common stock
equivalents which are currently included in the calculation of primary earnings
per share. Under FAS 128, such shares will not be included in the calculation of
basic earnings per share, and therefore basic earnings (loss) per share will be
higher under the new standard. Diluted earnings per share and loss per share
under the new standard is not anticipated to be materially different than as
presented herein.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Management's Discussion and Analysis that
are not related to historical results are forward looking statements. Actual
results may differ materially from those projected or implied in the forward
statements. Further, certain forward looking statements are based upon
assumptions of future events which may not prove to be accurate. These forward
looking statements involve risks and uncertainties including but not limited to
those referred to below. See "Item 5. Other Items. Factors That Could Affect
Future Performance."
This information should be read in conjunction with the financial statements and
notes thereto included in Item 1 of this report for the quarter ended September
30, 1997. Additionally, the financial statements and notes thereto and
Management's Discussion and Analysis in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996 will provide additional information.
THIRD QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THIRD QUARTER ENDED SEPTEMBER
30, 1996
REVENUES For the third quarter of 1997 revenues were $13.9 million, an increase
of 173% versus $5.1 million for the third quarter of 1996. The increase in
revenues reflects an increase in both distributed and proprietary revenues.
For the third quarter of 1997 distributed revenues were $9.0 million, an
increase of 130% versus $3.9 million for the third quarter of 1996. The increase
in distributed revenues reflects the Company's acquisitions and the opening of
new branches. On May 31, 1996 the Company acquired both Turf Products and Turf
Specialty. In February 1997, the Company acquired substantially all the assets
of Turfmakers, Inc. In addition, the Company hired a number of sales people
during 1997 and opened distribution units in Pennsylvania and California.
For the third quarter of 1997 proprietary revenues were $4.9 million, an
increase of 313% versus $1.2 million for the third quarter of 1996. BioJect
lease revenues were $222,000, an increase of 131% versus $96,000 for the third
quarter of 1996. BioJect menu items, primarily microbes, were $1.0 million, an
increase of 116% versus $475,000 during the third quarter of 1996. The increase
in BioJect lease and menu items revenues were due to an increase in the
installed base of BioJect systems from 238 to 345. Included in proprietary
revenues are $2.4 million of revenues from the sale leaseback transaction,
which took place during the third quarter of 1997. In September 1997, the
Company sold 261 BioJect units and 11 CalJect units under operating leases to
Eco Lease Partners, LLC, an unaffiliated investor group, for aggregate proceeds
of $4.0 million. The Company then leased the BioJect units back from Eco Lease
Partners under a 40-month lease agreement.
For the third quarter of 1997 revenues from CleanRack and ClearLake systems were
$308,000, an increase of 542% versus $48,000 during the third quarter of 1996.
For the third quarter of 1997 revenues from Aspen Consulting Inc. were $486,000,
an increase of 98% versus $245,000 during the third quarter of 1996. The
increase in Aspen's revenues was due to a higher volume of consulting
contracts.
For the third quarter of 1997 sales of other proprietary products, which
consisted primarily of fertilizer and nutrient sales were $388,000, an increase
of 1,113% versus $32,000 during the third quarter of 1996.
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GROSS PROFIT
For the third quarter of 1997 the Company's gross profit was $4.1 million, an
increase of 140% versus $1.7 million for the third quarter of 1996. The increase
in gross profit was due to the increase in both distributed and proprietary
revenues. For the third quarter of 1997 the Company's gross margin was 30%
versus 34% for the third quarter of 1996. The decline in the gross margin was
due to the addition of the sales of distributed products which carry a lower
margin as well as the sale leaseback transaction for which the gain has been
deferred. For the third quarter of 1997 the Company's gross profit on
distributed products was $2.2 million, an increase of 123% versus $1.0 million
for the third quarter of 1996. The increase in the gross profit is due to higher
distributed sales. For the third quarter of 1997 the gross margin on distributed
products was 25% as compared to 26% during the third quarter of 1996. The
decline in the gross profit on distributed sales during the third quarter of
1996 was due to a change in the distributed product mix.
For the third quarter of 1997 the gross profit on proprietary sales was $1.9
million, an increase of 163% versus $712,000 during the third quarter of 1996.
The increase in the gross profit on proprietary sales was due to an increase in
the number of installed BioJect systems. For the third quarter of 1997 the gross
margin on proprietary sales was 38% as compared to 60% during the third quarter
of 1996. The decline of the proprietary gross margin reflects the effect of the
sale leaseback transaction. The gross margin for BioJect related revenues was
88% during the third quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the third quarter of 1997 selling, general and administrative expenses
("SG&A expenses") were $2.8 million an increase of 48% versus $1.9 million
during the third quarter of 1996. The increase in SG&A expenses was due to
additional overhead costs associated with the previously discussed acquisitions.
RESEARCH AND DEVELOPMENT EXPENSES
For the third quarter of 1997 research and development expense ("R&D expense")
was $42,000, a decrease of 46% versus $78,000 during the third quarter of 1996.
The decline in R&D expense during the third quarter of 1997 reflects the
Company's emphasis on the engineering and manufacture of the BioJect system
rather than more traditional research and development efforts.
INTEREST EXPENSES
For the third quarter of 1997 interest expenses were $179,000, a decrease of 46%
versus $331,000 for the third quarter of 1996. The decrease in interest expense
reflects a decrease in the amount of debt outstanding.
AMORTIZATION EXPENSES
For the third quarter of 1997 amortization expenses were $56,000, a decrease of
14% versus $65,000 for the third quarter of 1996.
NET INCOME
For the third quarter of 1997 net income was $827,000 or $.06 per share
versus a loss of $813,000 or $.11 per share during the third quarter of 1996.
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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Revenues
For the first nine months of 1997 revenues were $29.1 million, an increase of
216% versus $9.2 million during the first nine months of 1996. The increase in
revenues reflects an increase in both distributed and proprietary revenues.
For the first nine months of 1997 distributed revenues were $20.3 million, an
increase of 262% versus $5.6 million during the first nine months of 1996. The
increase in distributed revenues reflects the Company's acquisitions and the
opening of new branches. On May 31, 1996, the Company acquired both Turf
Products and Turf Specialty. In February 1997, the Company acquired
substantially all the assets of Turfmakers, Inc. In addition, the Company hired
a number of sales people during 1997 and opened distribution units in
Pennsylvania and California.
For the first nine months of 1997 proprietary revenues were $8.9 million, an
increase of 145% versus $3.6 million during the first nine months of 1996.
BioJect lease revenues were $1.0 million, an increase of 62% versus $625,000 for
the first nine months of 1996. BioJect menu items revenues, primarily microbes,
were $2.1 million an increase of 106% versus $1.0 million during the first nine
months of 1996. The increase in BioJect lease and menu items revenues were due
to an increase in the installed base of BioJect systems from 238 to 345.
Included in proprietary revenues are $2.4 million of revenues from the sale
leaseback transaction, which took place during the third quarter of 1997.
For the first nine months of 1997 revenues from Cleanrack and ClearLake systems
were $565,000, an increase of 52% versus $371,000 during the first nine months
of 1996.
For the first nine months of 1997 revenues from Aspen Consulting Inc. were $1.2
million, an increase of 48% versus $807,000 during the first nine months of
1996. The increase in Aspen's revenues were due to a higher volume of consulting
contracts.
For the first nine months of 1997 sales of other proprietary products, which
consisted primarily of fertilizer and nutrient sales were $1.0 million, an
increase of 110% versus $477,000 during the first nine months of 1996.
Gross Profit
For the first nine months of 1997 the Company's gross profit was $10.1 million,
an increase of 186% versus $3.5 million during the first nine months of 1996.
The increase in gross profit was due to the increase in both distributed and
proprietary revenues. For the first nine months of 1997 the Company's gross
margin was 35% versus 38% for the first nine months of 1996. The decline in the
gross margin for the first nine months was due to the additional sales of
distributed products which carry a lower margin as well as the sale leaseback
transaction for which the gain has been deferred. For the first nine months of
1997 the Company's gross profit on distributed products was $5.0 million, an
increase of 231% versus $1.5 million during the first nine months of 1996. The
increase in the gross profit is due to higher distributed sales. For the first
nine months of 1997 the gross margin on distributed products was 25% as compared
to 27% during the first nine months of 1996. The decline in the gross profit on
distributed sales during the first nine months of 1997 was due to a change in
the distributed product mix.
For the first nine months of 1997 the gross profit on proprietary sales was $5.0
million, an increase of 152% versus $2.0 million during the first nine months of
1996. The increase in the gross profit on proprietary sales was due to an
increase in the number of installed BioJect systems. For the first nine months
of 1997 the gross margin on proprietary sales was 57% as compared to 55% during
the first nine months of 1996. The proprietary products gross margin for first
nine months of 1997 was favorably impacted by the product mix during the first
nine months as the Company has chosen to focus on its BioJect product line,
while being
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negatively impacted by the sale leaseback transaction. The gross margin
for BioJect related revenues was 88% during the first nine months of 1997.
Selling, General and Administrative Expenses
For the first nine months of 1997 selling, general and administrative expenses
("SG&A expenses") were $7.9 million, an increase of 73% versus $4.5 million
during the first nine months of 1996. The increase in SG&A expenses was due to
additional overhead costs associated with the previously discussed acquisitions.
Research and Development Expenses
For the first nine months of 1997 research and development expenses ("R&D
expenses") were $189,000, a decrease of 46% versus $353,000 during the first
nine months of 1996. The decline in R&D expenses during the first nine months of
1997 reflects the Company's emphasis on the engineering and manufacture of the
BioJect system rather than more traditional research and development efforts.
Interest Expenses
For the first nine months of 1997 interest expenses were $430,000, a decrease of
18% versus $523,000 during the first nine months of 1996. The decrease in
interest expense reflects a decrease in the amount of debt outstanding.
Amortization Expenses
For the first nine months of 1997 amortization expenses were $401,000, an
increase of 132% versus $173,000 during the first nine months of 1996. The
increase in amortization expense is due to an increase in the Company's goodwill
associated with the previously discussed acquisitions.
Net Income
For the first nine months of 1997 net income was $829,000 or $.06 per share
versus a loss of $2.4 million or $.40 per share during the first nine months of
1996.
Liquidity and Capital Resources
The Company has financed its operations from revenues from sales of its
products, sales of its Common Stock, borrowing from its principal shareholders
and bank financing. The Company's operating and investing activities used cash
of $10.8 million during the first nine months of 1997 and $4.6 million during
the first nine months of 1996.
On September 30, 1997 the Company received proceeds of $4.0 from the sale
leaseback transaction. In addition, the Company expanded its line of credit with
Imperial Bank to $5.0 million. The Company believes that it has sufficient
resources to finance its operations and future growth for at least the next
twelve months.
The Company intends to fund its future operations and growth through a
combination of product revenues, borrowings available under the line of credit,
and public or private debt or equity financing. However, there can be no
assurance that such financing alternatives will be available under favorable
terms, if at all.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1997, the Company entered into a $5,000,000 line of credit
agreement with Imperial Bank which provides for direct advances up to
$5,000,000. The line provides for advances equal to the sum of 75% of eligible
accounts receivable plus 50% of eligible inventory. Advances associated with the
Company's eligible inventory may not exceed $2.5 million. In connection with the
establishment of the line of credit, the Company issued a warrant to Imperial
Bank to purchase 40,000 shares of Common Stock at an exercise price of $5.25 per
share. The warrant expires on June 30, 2002. The issuance of the warrant was
made in reliance upon Section 4(2) of the Securities Act of 1933. Imperial Bank
represented to the Company that it is an accredited investor and that it
acquired the warrant for its own account and not with a view to any distribution
thereof to the public.
ITEM 5. OTHER INFORMATION
RECENT DEVELOPMENTS
On July 6, 1997, the Company restructured its relationship with Encore
Technologies, Inc. ("Encore"). The Company and Encore entered into a Settlement
Agreement providing for the suspension of existing license and consulting
agreements between the parties. Encore also agreed to assign intellectual
property rights in media and in Pseudomonas aureofaciens TX-1 to the Company.
As consideration for Encore's entering into the Settlement Agreement, the
Company made certain cash payments to Encore, agreed to make certain payments
to Encore for the Company's use of media and entered into a License and Supply
Agreement providing for additional payments of at least $910,000 over the next
three years to Encore for the production of microbial products. Under the
restructured relationship between Encore and the Company, the Company makes
regular cash payments to Encore rather than the percentage royalty payments
required under the superseded consulting and license agreements.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the
business and financial condition of the Company, including various statements
contained in "Management's Discussion and Analysis or Plan of Operation." The
actual results of the Company could differ materially from any forward looking
statements contained herein. The following information sets forth certain
factors that could cause the actual results to differ materially from those
contained in the forward looking statements. For a more detailed discussion of
the factors that could cause actual results to differ, see "Item 1: Business --
Factors That Could Affect Future Performance" in the Company's Form 10-KSB for
the fiscal year ended December 31, 1996.
At September 30, 1997 the Company had an accumulated deficit of $12.1
million. This is the second quarter that the Company has generated net income.
The Company has been principally engaged in organizational activities, research
and development, licensing activities, product introductions and the
establishment of a sales and marketing organization. The Company's recent losses
have resulted in part from expenditures for product development, U.S. patent
protection and sales and marketing expenses, including the costs of the
Company's recent dealer acquisitions.
In order to expand its business and achieve significant growth in sales,
the Company must continue to broaden its sales and marketing capability and
increase the size of its customer base, in part through the acquisition of
independent dealers and distributors. Although sales of certain of the Company's
products are growing, the Company's products and operations remain in the early
stages of market introduction and are subject to the risks inherent in the
commercialization of new product concepts. These risks include unforeseen
problems, delays, expenses and complications frequently encountered in the early
phases of research, development and commercialization of products, and expenses
associated with hiring and training additional sales, marketing and customer
service personnel.
Distribution and sales of the Company's products have historically
occurred through direct sales efforts and independent dealers and distributors.
The Company has initiated a strategy of attempting to establish a nationwide
distribution system for its products through the acquisition of various
independent dealers and distributors. Any failure to identify acquisition
candidates properly, any large expenditures on acquisitions that prove to be
unprofitable, or any inability to sell the Company's proprietary products
through the acquired distribution system could have a material adverse effect on
the Company's business, financial position and results of operations.
The Company's success will be dependent in large measure upon its
ability to obtain and enforce patent protection for its products, maintain
confidentiality of its trade secrets and know-how and operate without infringing
upon the proprietary rights of third parties. Despite precautions taken by the
Company, it may be possible for a third party to copy or otherwise obtain or use
the Company's products or technology without authorization, or to develop
similar products or technology independently.
The Company plans to acquire the rights to additional microbial
products. The Company does not engage in its own research and development with
respect to microbial products. Although the Company is actively seeking to
obtain licenses for additional microbial products, there can be no assurance
that the Company will be successful in obtaining any such licenses on terms
acceptable to the Company, if at all.
The Company may be exposed to liability resulting from the commercial
use of its products. Such liability might result from claims made directly by
customers or others manufacturing such products on behalf of the Company. The
Company currently carries a product liability insurance policy with an aggregate
limit of $7,000,000. There can be no assurance, however, that such product
liability insurance will adequately protect the Company against any product
liability claim. A product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the business and prospects of the Company.
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Some states have laws imposing liability on certain parties for the
release of fertilizers and other agents into the environment in certain manners
or concentrations. Such liability could include, among other things,
responsibility for cleaning up the damage resulting from such a release. In
addition, the federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), commonly known as the "Superfund" law, and other
applicable laws impose liability on certain parties for the release into the
environment of hazardous substances, which might include fertilizers and water
treatment chemicals. The Company is also subject to certain other environmental
laws, including the Environmental Protection Act, the Toxic Substance Control
Act, the Resource Conservation and Recovery Act, the Clean Air Act and the Clean
Water Act and may be subject to other present and potential future federal,
state or local regulations. The Company does not currently maintain insurance
for any environmental claims which might result from the release of its products
into the environment in a manner or in concentrations not permitted by law.
Thus, a claim for environmental liability could have a material adverse effect
on the Company.
The Company competes for market share with a number of companies that
manufacture and market chemical compounds. In addition, a number of companies
are developing biological and organic products for turf maintenance. Many of
these competitors have substantially greater capital resources, research and
development staffs and facilities than the Company, and many of these
competitors have extensive experience in turf maintenance. The fields of
biotechnology and related technologies in which the Company is engaged have
undergone rapid and significant technological changes. The Company expects that
the technologies associated with its research and development will continue to
develop rapidly. There can be no assurance that the Company will be able to
establish itself in such fields or, if established, that it will be able to
maintain a competitive position. Further, there can be no assurance that the
development by others of new or improved processes or products will not make the
Company's products and processes less competitive or obsolete.
The Company is dependent upon the active participation of William B.
Adams, its Chairman of the Board and Chief Executive Officer, and Douglas M.
Gloff, its President and Chief Operating Officer. The loss of the services of
either of these individuals could have a material adverse effect upon the
Company's future operations. The Company's success depends in large part on its
ability to attract and retain qualified scientific, financial and management
personnel. The Company faces competition for such persons from other companies,
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in recruiting or retaining
personnel of the requisite caliber or in adequate numbers to enable it to
conduct its business as proposed.
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
10.1 Settlement Agreement dated as of July 6, 1997 by and between
the Company and Encore Technologies, Inc. (incorporated by
reference to Exhibit 10.15 to the Company's Registration
Statement on Form SB-2 filed November 4, 1997).
10.2 Assignment of TX-1 Intellectual Property made as of July 6,
1997 by Encore Technologies, Inc. to the Company
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 filed November 4, 1997).
10.3 Assignment of Media Intellectual Property made as of July 6,
1997 by Encore Technologies, Inc. to the Company
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form SB-2 filed November 4, 1997).
10.4 License and Supply Agreement dated as of July 6, 1997 by and
between the Company and Encore Technologies, Inc.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form SB-2 filed November 4, 1997).
11.1 Computation of net income (loss) per share
27.1 Financial Data Schedule
No reports on Form 8-K were filed with the SEC during the period ended June 30,
1997.
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Eco Soil Systems, Inc.
Date: November 3, 1997 By: /s/ William B. Adams
--------------------
William B. Adams
Chairman and Chief Executive
Officer
Date: November 3, 1997 By: /s/ L. Jean Dunn, Jr.
----------------------
L. Jean Dunn, Jr.
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 11.1.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
ECO SOIL SYSTEMS, INC
Computation of Net Income (Loss) Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------- --------------------------
1997 1996 1997 1996
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss) 827 (813) 829 (2,431)
========== ========= ========= ==========
Weighted average common shares outstanding 11,840 6,465 11,266 5,056
Adjustment to reflect requirements of
the Securities and Exchange Commission
(Effect of SAB 83) -- 994 -- 994
Net effect of dilutive common share
equivalents
based on the treasury stock method 3,176 -- 3,075 --
---------- ---------- ---------- ----------
Shares used in computing net income
(loss) per share 15,016 7,459 14,341 6,050
========== ========== ========== ==========
Net income (loss) per share .06 (0.11) .06 (0.40)
========== ========== ========== ==========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 212
<SECURITIES> 0
<RECEIVABLES> 10,670
<ALLOWANCES> 118
<INVENTORY> 4,161
<CURRENT-ASSETS> 15,547
<PP&E> 6,098
<DEPRECIATION> 234
<TOTAL-ASSETS> 28,105
<CURRENT-LIABILITIES> 10,243
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 16,881
<TOTAL-LIABILITY-AND-EQUITY> 28,105
<SALES> 13,913
<TOTAL-REVENUES> 13,913
<CGS> 9,803
<TOTAL-COSTS> 3,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 179
<INCOME-PRETAX> 827
<INCOME-TAX> 0
<INCOME-CONTINUING> 827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 827
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
