<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934 For the quarterly period ended June 30, 2000
Transition report pursuant to 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 Registrant as Specified in its Charter)
NEBRASKA 47-0709577
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10740 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(Address, Including Zip Code, of Principal Executive Offices)
(858) 675-1660
(Registrant's Telephone Number, Including Area Code)
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 past 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 August 4, 2000, 18,704,535
shares of the Registrant's Common Stock, $.005 par value per share, were
outstanding.
<PAGE>
INDEX
ECO SOIL SYSTEMS, INC.
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 3. Defaults upon Senior Securities 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE>
ECO SOIL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------------- -----------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 447 $ 131
Accounts receivable, net of allowance for doubtful accounts of $938 and $1,546
at June 30, 2000 and December 31, 1999, respectively 4,651 5,131
Inventories 5,517 5,681
Prepaid expenses and other current assets 2,943 3,078
------------------- -----------------
Total current assets 13,558 14,021
Equipment under construction 4,908 5,042
Property and equipment, net 12,429 12,790
Intangible assets, net 13,668 14,374
Debt issuance costs 5,667 4,075
Other assets 606 537
Net non-current assets of discontinued operations 1,756 1,710
------------------- -----------------
Total assets $ 52,592 $ 52,549
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,165 $ 4,710
Accrued expenses 2,792 3,661
Current portion of long-term obligations 27,019 21,617
Net current liabilities of discontinued operations 9,099 4,704
------------------- -----------------
Total current liabilities 43,075 34,692
Long-term obligations, net of current portion 158 1,307
Deferred gain on sale/leaseback of building 494 523
Other 569 -
Shareholders' equity:
Preferred stock
$.005 par value; 5,000,000 shares authorized; none issued and outstanding - -
Common stock
$.005 par value; 50,000,000 shares authorized at June 30, 2000 and
December 31, 1999, 18,657,444 and 18,349,965 shares issued and
outstanding at June 30, 2000 and December 31, 1999, respectively 96 92
Additional paid-in capital 57,413 55,578
Warrants 3,966 2,733
Accumulated deficit (53,179) (42,376)
------------------- -----------------
Total shareholders' equity 8,296 16,027
------------------- -----------------
Total liabilities and shareholders' equity $ 52,592 $ 52,549
=================== =================
</TABLE>
See accompanying notes.
Note: The Balance Sheet at December 31, 1999 is derived from the audited
financial statements at that date, but does not include all of the disclosures
required by generally accepted accounting principles.
3
<PAGE>
ECO SOIL SYSTEMS, INC.
UNAUDITED CONSOILIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- ----------------------------
2000 1999 2000 1999
--------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Proprietary $ 2,138 $ 2,664 $ 3,429 $ 3,208
Distributed 5,656 5,872 10,580 11,266
------------------ --------------- --------------- ----------
Total revenues 7,794 8,536 14,009 14,474
Cost of revenues:
Proprietary 984 1,606 1,805 2,414
Distributed 4,125 3,854 7,903 7,691
------------------ --------------- --------------- ----------
Total cost of revenues 5,109 5,460 9,708 10,105
Gross profit 2,685 3,076 4,301 4,369
Operating expenses:
Selling, general and administrative 3,420 3,475 7,160 7,181
Research and development 155 159 269 252
Amortization of intangibles 149 132 291 289
Restructuring charges 1,119 - 1,119 -
Legal settlement - 198 - 198
------------------ --------------- --------------- ----------
Loss from operations (2,158) (888) (4,538) (3,551)
Interest expense 898 470 1,934 884
Interest income 58 - 86 139
Income taxes 92 - 92 -
------------------ --------------- --------------- ----------
Loss from continuing operations (3,090) (1,358) (6,478) (4,296)
Income (loss) from discontinued operations (1,495) 2,413 (4,325) 551
------------------ --------------- --------------- ----------
Net income (loss) $ (4,585) $ 1,055 $ (10,803) $ (3,745)
================== =============== =============== ==========
Loss per share of common stock, basic:
Income (loss) from continuing operations $ (0.17) $ (0.08) $ (0.35) $ (0.25)
Income (loss) from discontinued operations (0.08) 0.14 (0.23) 0.03
------------------ --------------- --------------- ----------
Net income (loss) $ (0.25) $ 0.06 $ (0.58) $ (0.22)
================== =============== =============== ==========
Loss per share of common stock, diluted:
Income (loss) from continuing operations $ (0.07)
Income (loss) from discontinued operations 0.13
------------------
Net income (loss) $ 0.06
==================
Shares used in calculating income (loss) per share, basic 18,623 17,341 18,579 17,262
================== =============== =============== ==========
Shares used in calculating income (loss) per share,
diluted 18,623 17,080 18,579 17,262
================== =============== =============== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
ECO SOIL SYSTEMS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ (6,478) $ (4,296)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization 2,231 1,349
Amortization of debt issuance costs and discount on long-term 1,843 185
Deferred rent (29) --
Provision for losses on accounts receivable 1,095 101
Loss/(gain) on sale of property and equipment (12) 97
Issuance of stock options/warrants for services 51 242
Gain on redemption of common stock (121) --
Write-off of debt issuance costs 64 --
Changes in operating assets and liabilities (1,582) 169
-------- --------
Net cash used in operating activities of continuing operations (2,938) (2,153)
Net cash (used) provided by operating activities of discontinued operations (3,512) 2,500
-------- --------
Net cash (used) provided by operating activities (6,450) 347
INVESTING ACTIVITIES:
Proceeds from the sale of property and equipment -- 111
Proceeds from sale of patent rights 100 --
Purchase of property and equipment (558) (2,023)
Purchase of patents and licenses (38) (16)
-------- --------
Net cash used in investing activities of continuing operations (496) (1,928)
Net cash used in investing activities of discontinued operations (43) (291)
-------- --------
Net cash used in investing activities (539) (2,219)
FINANCING ACTIVITIES:
Advances (to) from shareholders -- 11
Proceeds from short-term obligations 6,444 --
Repayments of short-term obligations (1,608) --
Proceeds from long-term obligations -- 2,643
Repayments of long-term obligations (523) (83)
Net proceeds from issuance of common stock 44 942
Debt issuance costs (607) --
-------- --------
Net cash provided by financing activities of continuing operations 3,750 3,513
Net cash provided by financing activities of discontinued operations 3,203 9
-------- --------
Net cash provided by financing activities 6,953 3,522
-------- --------
Net (decrease) increase in cash (36) 1,650
Cash and cash equivalents at beginning of period of continuing operations 131 761
-------- --------
(Increase) decrease in cash and cash equivalents of discontinued operations 352 2,218
Cash and cash equivalents at end of period of continuing operations $ 447 $ 193
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
ECO SOIL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Eco Soil Systems, Inc. (the "Company"), all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results for the three-month periods ended June 30, 2000
and 1999 have been made. The results of operations for the three-month and
six-month periods ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full fiscal year. For further information, refer
to the audited financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
2. NET LOSS PER SHARE
In accordance with Financial Accounting Standards Board Statement No.
128, "Earnings per share" ("SFAS 128"), basic earnings (loss) per share is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of the
Company such as common stock which may be issuable upon exercise of
outstanding stock options and warrants. These shares are excluded when their
effects are antidilutive.
3. DISCONTINUED OPERATIONS
On July 28, 2000, the Company completed the sale of substantially all of
the assets of its Turf Partners subsidiary (the "Asset Sale") to the J.R.
Simplot Company ("Simplot"). At the closing of the Asset Sale, Simplot made a
cash payment of $23 million and assumed Turf Partners' exiting long-term debt
and vendor payables totaling $38.5 million. Simplot also assumed Turf
Partners' outstanding contracts and leases. The Asset Sale was consummated
pursuant to an Amended and Restated Asset Purchase Agreement dated April 5,
2000, as amended by a First Amendment to Amended and Restated Asset Purchase
Agreement dated June 9, 2000.
6
<PAGE>
The results of the unaudited discontinued operations (in thousands) were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- ---------------------------------
1999 2000 1999 2000
-------------- --------------- -------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 24,197 $ 32,137 $ 36,372 $ 43,451
Cost of revenues 18,443 24,040 27,313 32,709
-------------- --------------- -------------- ---------------
Gross profit 5,754 8,097 9,059 10,742
Operating expenses:
Selling, general and administrative 5,604 5,206 10,425 9,269
Amortization of intangibles 152 152 304 304
-------------- --------------- -------------- ---------------
Income (loss) from operations (2) 2,739 (1,670) 1,169
Interest expense 1,429 326 2,591 618
Income taxes 64 - 64 -
-------------- --------------- -------------- ---------------
Net income (loss) $ (1,495) $ 2,413 $ (4,325) $ 551
============== =============== ============== ===============
</TABLE>
For the periods presented, the Company borrowed funds from institutional
lenders and accredited investors to provide working capital for the parent
company and its subsidiaries. The interest expense associated with this debt
was originally recorded by the parent company, but a portion of interest
expense associate with this debt has been allocated to the discontinued
operations noted above. Interest expense allocated to the discontinued
operations totaled $730,000 and $330,000 for the three months ended June 30,
2000 and 1999, respectively, and $1.5 million and $621,000 for the six months
ended June 30, 2000 and 1999, respectively. Also, selling, general and
administrative expenses that were recorded by the parent company but were
specifically an expense of the discontinued operations have been allocated to
the discontinued operations as shown above. The amount of selling, general
and administrative expenses allocated by the parent company to the
discontinued operations totaled $728,000 and $126,000 for the three months
ended June 30, 2000 and 1999, respectively, and $1.3 million and $622,000 for
the six months ended June 30, 2000 and 1999, respectively.
The historical consolidated balance sheets reflect the assets and
liabilities of discontinued operations as current or non-current assets based on
the original classification of the accounts, except that current liabilities are
netted against current assets and non-current liabilities are netted against
non-current assets.
The following pro forma financial statements reflect the Asset Sale as
if the sale to Simplot was completed on June 30, 2000. Also, 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 June 30, 2000.
The following pro forma adjustments have been recorded to the historical
financial statements: (i) an adjustment of $749,000 to reflect shipments to
Turf Partners from the parent company as if they were independent companies
as of June 30, 2000, (ii) the recognition of a gain on the sale of the
discontinued operations of $17.8 million, (iii) the application of $23
million of proceeds from the Asset Sale as follows: (a) retired $14 million
of the $15 million Senior Subordinated Notes, (b) repaid the Simplot Term
Loan of $3 million received in July 2000, and (c) paid $1.1 million in
closing fees, and (iv) a $3.9 million write-off of debt issuance costs
related to the Senior Subordinated Notes.
7
<PAGE>
UNAUDITED PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- ---------------------------------
1999 2000 1999 2000
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Proprietary $ 2,887 $ 2,664 $ 4,179 $ 3,208
Distributed 5,656 5,872 10,579 11,266
-------------- --------------- -------------- ---------------
Total revenues 8,543 8,536 14,758 14,474
Cost of revenues:
Proprietary 984 1,606 1,805 2,414
Distributed 4,125 3,854 7,903 7,691
-------------- --------------- -------------- ---------------
Total cost of revenues 5,109 5,460 9,708 10,105
Gross profit 3,434 3,076 5,050 4,369
Operating expenses:
Selling, general and administrative 3,420 3,475 7,160 7,181
Research and development 155 159 269 252
Amortization of intangibles 149 132 291 289
Restructuring charges 1,119 - 1,119 -
Legal settlement - 198 - 198
-------------- --------------- -------------- ---------------
Loss from operations (1,409) (888) (3,789) (3,551)
Interest expense 898 470 1,934 884
Interest income 58 - 86 139
Income taxes 92 - 92 -
-------------- --------------- -------------- ---------------
Loss from continuing operations (2,341) (1,358) (5,729) (4,296)
Income (loss) from discontinued operations (1,495) 2,413 (4,325) 551
Gain on sale of discontinued operations 17,803 - 17,803 -
-------------- --------------- -------------- ---------------
Net income (loss) $ 13,967 $ 1,055 $ 7,749 $ (3,745)
============== =============== ============== ===============
Loss per share of common stock, basic:
Income (loss) from continuing operations $ (0.13) $ (0.08) $ (0.31) $ (0.25)
Income (loss) from discontinued operations (0.08) 0.14 (0.23) 0.03
Gain on sale of discontinued operations 0.96 - 0.96 -
-------------- --------------- -------------- ---------------
Net income (loss) $ 0.75 $ 0.06 $ 0.42 $ (0.22)
============== =============== ============== ===============
Loss per share of common stock, diluted:
Income (loss) from continuing operations $ (0.07)
Income (loss) from discontinued operations 0.13
Gain on sale of discontinued operations -
--------------
Net income (loss) $ (0.06)
==============
Shares used in calculating income (loss)
per share, basic 18,623 17,341 18,579 17,262
============== =============== ============== ===============
Shares used in calculating income (loss)
per share, diluted 18,623 19,080 18,579 17,262
============== =============== ============== ===============
</TABLE>
8
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
2000
-----------------
(UNAUDITED)
<S> <C>
Current Assets:
Cash and cash equivalents $ 5,268
Accounts receivable, net of allowance for doubtful accounts of
$938 at June 30, 2000 4,651
Inventories 5,517
Prepaid expenses and other current assets 2,943
-----------------
Total current assets 18,379
Equipment under construction 4,908
Property and equipment, net 12,429
Intangible assets, net 6,324
Debt issuance costs 1,754
Other assets 368
-----------------
Total assets $ 44,162
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,165
Accrued expenses 2,590
Current portion of long-term obligations 12,848
Net current liabilities of discontinued operations -
-----------------
Total current liabilities 19,603
Long-term obligations, net of current portion 559
Deferred gain on sale/leaseback of building 494
Other 569
Shareholders' equity:
Preferred stock
Common stock 96
Additional paid-in capital 57,413
Warrants 3,966
Accumulated deficit (38,538)
-----------------
Total shareholders' equity 22,937
-----------------
Total liabilities and shareholders' equity $ 44,162
=================
</TABLE>
9
<PAGE>
4. RESTRUCTURING CHARGES
During the second quarter, the Company incurred a restructuring charge of
$1.1 million as a result of the closure of five operating locations of the
Agricultural Supply subsidiary located in the United States and Mexico.
A total of 25 employees were terminated from these locations, with almost
all of them having left the Company as of June 30, 2000. The remaining accrued
liabilities associated with these operations are expected to be recognized
during the second half of fiscal 2000.
Details of the restructuring charge (in thousands) are as follows:
<TABLE>
<CAPTION>
CASH EXPENDED
CASH/ AMOUNT OF THROUGH JUNE 30, ACCRUED LIABILITIES
DESCRIPTION OF CHARGE: NON-CASH CHARGE 2000 AT JUNE 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REORGANIZATION OF AGRICULTURAL
SUPPLY OPERATING STRUCTURE:
Severance of employees............ Cash $ 247 $ 91 $ 156
Vacated lease facilities.......... Cash 63 -- 63
Write-downs of assets removed
from operations................. Non-cash 780 38 742
Professional fees................. Cash 23 -- 23
Other............................. Cash 6 2 4
-------------------------------------------------------
$ 1,119 $ 153 $ 988
=======================================================
</TABLE>
The following is a summary of revenue and net operating losses (in thousands)
for the locations that were closed:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $ 212 $ 610
=============== =============== ============== =================
INCOME (LOSS) FROM
OPERATIONS $ (131) $ (272)
=============== =============== ============== =================
</TABLE>
10
<PAGE>
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-looking 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 in "Item 5. Other Information. 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 June 30, 2000. Additionally, the financial statements and notes thereto
and Management's Discussion and Analysis in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 will provide additional information.
OVERVIEW
In addition to other endeavors, the Company develops, markets and sells
proprietary biological products, and their delivery systems, for the golf and
agricultural industries. The Company's most unique delivery system is the
BioJect, a patented and EPA-approved device that stimulates and dispenses
biological products through irrigation systems. All proprietary products are
sold both direct and through traditional distribution channels into the turf
market and through direct sales along with irrigation products into the
agricultural market.
On July 28, 2000, the Company completed the sale of substantially all of
the assets of its Turf Partners subsidiary (the "Asset Sale") to the J.R.
Simplot Company ("Simplot"). At the closing of the Asset Sale, Simplot made a
cash payment of $23 million and assumed Turf Partners' exiting long-term debt
and vendor payables totaling $38.5 million. Simplot also assumed Turf
Partners' outstanding contracts and leases. The Asset Sale was consummated
pursuant to an Amended and Restated Asset Purchase Agreement dated April 5,
2000, as amended by a First Amendment to Amended and Restated Asset Purchase
Agreement dated June 9, 2000.
In connection with the sale of Turf Partners' assets, the Company
entered into two distribution agreements with Simplot. In the first
agreement, a Distribution and License Agreement, Simplot agreed to purchase
and distribute a minimum of $5 million of the Company's proprietary products
during the first two years of the five-year agreement. In the second
agreement, Simplot agreed to perform a market test of the Company's
proprietary products in ten of Simplot's Soilbuilders stores.
SECOND QUARTER ENDED JUNE 30, 2000 COMPARED TO SECOND QUARTER ENDED JUNE 30,
1999
RESULTS OF OPERATIONS
REVENUES
For the second quarter of 2000, our revenues were $7.8 million, a decrease
of 8.7% versus $8.6 million for the second quarter of 1999.
For the second quarter of 2000, our proprietary revenues were $2.1
million, a decrease of 19.8% versus $2.7 million for the second quarter of
1999. The decrease in proprietary revenues is due to inclement weather in
most of our markets and decreased sales of FRESHPACK products compared to the
second quarter of 1999. Distributed revenues were $5.7 million, a decrease of
3.7% versus $5.9 million for the second quarter of 1999. The decrease in
distributed revenues resulted primarily from shortages of working capital for
the agricultural distributed products business, which restricted the
Company's ability to purchase adequate levels of inventories needed to
support distributed product sales and to store closings.
11
<PAGE>
GROSS PROFIT
For the second quarter of 2000, our gross profit was $2.7 million, a
decrease of 12.7% versus $3.1 million for the second quarter of 1999. The
decrease in gross profit was due to the decrease in both proprietary and
distributed revenues. For the second quarter of 2000, our gross margin was 34%
versus 36% for the second quarter of 1999. The decrease in gross margin is
attributed to a greater mix of distributed sales with a lower margin than
proprietary sales. Also, the liquidity problems prevented the Company from
purchasing at a volume in which the Company would have received cash discounts
from the vendors. The absence of these discounts directly affects the gross
margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the second quarter 2000, selling, general and administrative ("SG&A")
expense was $3.4 million, a decrease of 1.6% versus $3.5 million for the second
quarter of 1999. SG&A expense as a percentage of revenues was 44% for the second
quarter 2000 compared to 41% for the second quarter 1999. Due to cost control
efforts employed by the Company, the SG&A expenses remained constant.
RESEARCH AND DEVELOPMENT
For the second quarter of 2000, research and development ("R&D") expense
was $155,000 compared to $159,000 for the second quarter of 1999.
AMORTIZATION EXPENSE
For the second quarter of 2000, amortization expense was $149,000 compared
to $132,000 for the second quarter of 1999.
INTEREST EXPENSE
For the second quarter of 2000, interest expense was $898,000, an
increase of 92.8% versus $466,000 for the second quarter 1999. The increase
in interest expense reflects the increase in the amount of debt outstanding
and amortization of debt additional issuance costs recorded in the latter
half of 1999 and the first half of 2000.
NET LOSS
For the second quarter of 2000, net loss was $3.1 million or $.17 per share
compared to a net loss of $1.4 million or $ .08 per share for the second quarter
of 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
For the first six months of 2000, revenues were $14 million, a decrease of
3.2% versus $14.5 million for the first six months of 1999.
For the first six months of 2000, proprietary revenues were $3.4
million, an increase of 6.9% versus $3.2 million for the first six months of
1999. The increase in proprietary revenues is due to our initial deliveries
of our new RHIZUP product, which were offset by the effects of inclement
weather in most of our markets and decreased sales of FRESHPACK products
compared to the second quarter of 1999. Distributed revenues were $10.6
million, a decrease of 6.1% versus $11.3 million for the first six months of
1999. The decrease in distributed revenues resulted primarily from shortages
of working capital for the agricultural distributed products business, which
restricted the Company's ability to purchase adequate levels of inventories
needed to support distributed product sales and to store closings.
GROSS PROFIT
For the first six months of 2000, the Company's gross profit was $4.3
million, a decrease of 1.5 % versus $4.4 million for the first six months of
1999. For the first six months of 2000, the Company's gross margin was 31%
12
<PAGE>
versus 30% for the first six months of 1999. The increase in gross margin was
due to a better mix of proprietary and distributed sales during the first six
months of 2000 compared to 1999. However, the effect of this increase was not
fully realized due to the loss of cash discounts typically obtained from our
vendors from higher volumes of purchases, which we were unable to reach as a
result of our liquidity problems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the first six months of 2000 and 1999, SG&A expense was consistent
at $7.2 million. SG&A expense as a percentage of revenues was 51% for the six
months ended June 30, 2000 compared to 50% for the comparable period in 1999.
Due to cost control efforts employed by the Company, the SG&A expenses
remained constant despite the increased revenues noted above.
RESEARCH AND DEVELOPMENT
For the first six months of 2000, R&D expense was $269,000, an increase of
6.8% versus $252,000 during the first six months of 1999. The increase in R&D
expense is due to ongoing analysis and testing of proprietary technology by the
Company, particularly the microbes obtained from Agrium in September 1999.
AMORTIZATION EXPENSE
For the first six months of 2000, amortization expense was $291,000, an
increase of less than 1% versus $289,000 during the first six months of 1999.
INTEREST EXPENSE
For the first six months of 2000 interest expense was $1.9 million, an
increase of 119% versus $884,000 during the first six months of 1999. The
increase in interest expense reflects an increase in the amount of debt
outstanding and amortization of additional debt issuance cost.
NET LOSS
For the six months ended June 30, 2000 net loss was $6.5 million or $.35
per share versus net loss of $4.3 million or $.25 per share for the six months
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception from revenues from sales
of our products, sales of our common stock, borrowings from our principal
shareholders and debt financing. For the second quarter of 2000, our
operating and investing activities of the continuing operations used cash of
$3.4 million.
On August 25, 1998, we completed a financing transaction providing us with
$15 million in gross proceeds. We issued an aggregate of $15 million principal
amount of our Senior Subordinated Notes due 2003 pursuant to Note and Warrant
Purchase Agreements dated as of August 25, 1998 between Albion Alliance
Mezzanine Fund and us and between Paribas Capital Funding LLC (the "Lenders")
and us. We have entered into a series of amendments of the Note and Warrant
Purchase Agreements, which have, among other things, changed the rate of
interest payable on the notes, eliminated prepayment penalties on the notes and
revised financial covenants.
On June 30, 1999, our Turf Partners subsidiary entered into a credit
agreement with Coast Business Credit (the "Coast Working Capital Facility").
The Coast Working Capital Facility is a $25 million three-year credit
facility based upon Turf Partners' eligible inventory and receivables and has
an interest rate of prime rate plus 1.00%. On July 2, 1999, the Company drew
down on the facility and paid all amounts due under and terminated a line of
credit with Imperial Bank. Simplot assumed the Coast Working Capital Facility
in connection with the Asset Sale completed on July 28, 2000.
On June 30, 1999 The Company's wholly owned subsidiary Agricultural Supply,
Inc. entered into a credit agreement with First National Bank (the "FNB Working
Capital Facility"). The FNB Working Capital Facility is a
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$10 million three-year credit facility based upon Agricultural Supply's eligible
inventory and receivables and has an interest rate of prime plus .25%. As of
June 30, 2000, Agricultural Supply had $735,000 of availability under the FNB
Working Capital Facility based on its eligible inventory and receivables.
On July 31, 1999, the Company obtained a $2.5 million, two-year term loan
from Coast Business Credit (the "Coast Term Loan"). The Coast Term Loan bears
interest at Coast's prime rate plus 2.25%, payable monthly. One third of the
principal must be repaid in level monthly payments during the first year of the
term, with the remainder due in level monthly payments during the second year of
the term. The Coast Term Loan is secured by substantially all of the assets of
the parent company, and has been guaranteed by Turf Partners.
On January 24, 2000, the Company issued $4.5 million of Senior Secured
Convertible Debentures (the "Debentures") and warrants to purchase 356,436
shares of common stock. The Debentures are due January 24, 2001 and bear
interest at a rate of 7% per annum, which is due quarterly beginning March 31,
2000, and is payable in cash or common stock at our option. The Company reduced
the exercise price of the warrants to purchase 356,436 shares of common stock to
$1.00 and issued additional warrants to purchase an aggregate of 75,000 shares
of common stock with an exercise price of $2.50 per share to the Debenture
holders in connection with obtaining the Debenture holders' consent to the Term
Loan from Simplot described below.
The Company's Senior Subordinated Notes (the "Notes"), the Debentures, the
Coast Term Loan and the FNB Working Capital Facility contain certain
restrictions and limitations on the Company's operations, including restrictions
on capital expenditures, sale of assets, lease liabilities, mergers or other
forms of business combinations, as well as the prohibition on the payments of
cash dividends. The Coast Term Loan and the FNB Working Capital Facility also
contain certain covenants which require the company to maintain minimum levels
of net worth, working capital and other financial ratios, as defined. As of June
30, 2000, the Company was not in compliance with certain of these covenants.
First National Bank provided a waiver of such covenants through June 30, 2000.
Also, Coast Business Credit and the lenders for the Notes have provided waivers
of such covenants through July 31, 2000. Management expects to be in compliance
with covenants on the Coast Term Loan and respective working capital facilities
after the waivers expire and to remain in compliance through December 31, 2000.
However, there can be no assurance that the Company will remain in compliance,
and therefore, the Company has classified the debt associated with the Notes as
current in the accompanying balance sheet.
We entered into a Term Loan Agreement dated as of April 12, 2000 with
Simplot. The $3 million Term Loan was obtained in July 2000 and used for
working capital purposes. It was agreed upon between Simplot and the Company
that the term loan would be repaid upon the closing of the asset sale.
On July 28, 2000, the Company closed the Asset Sale and received proceeds
of $23 million from Simplot. The proceeds were used to: (1) retire $14 million
in principal amount of the Notes, (2) pay off the $3 million Term Loan from
Simplot, and (3) pay $1.1 million of closing fees. The remaining proceeds of
approximately $5 million will be used for working capital purposes.
On July 28, 2000, the Company amended the Note and Warrant Purchase
Agreements with the Lenders to eliminate financial covenants. The Company
replaced the Notes with amended Senior Subordinated Notes (the "Amended Notes")
with an aggregate principal amount of $1.4 million covering the principal and
accrued interest of the Notes not paid on July 28, 2000. The Amended Notes bear
interest at an annual rate of 14% and are due on January 28, 2002.
Monthly payments of $87,000 in the aggregate will begin on August 28, 2000.
In addition, the Company intends to finance its future operations and
growth through a combination of cash flows from operations, borrowings available
under lines of credit and public or private debt or equity financing.
We believe that the net proceeds from the sale of Turf Partners' assets,
together with our existing cash balances, current performance and present plans,
will be sufficient to finance our operations, make planned capital expenditures
and fund future growth for the next 12 months.
YEAR 2000
During the fourth quarter of 1999, we upgraded our existing computer
software and information technology ("IT") systems and tested our utility
systems (heat, light, telephones, etc.) and other non-IT systems to ensure their
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Year 2000 readiness. Through July 2000, we have experienced no significant
disruptions in critical IT and non-IT systems and believe those systems
responded to the Year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems or the products and services of third parties. The Company will continue
to monitor our IT and non-IT systems and those of our suppliers and vendors
throughout Year 2000.
If significant yet to be identified Year 2000 issues arise, we may
experience significant problems that could have a material adverse affect on our
financial condition and results of operations. Litigation regarding Year 2000
issues is possible. It is uncertain whether, or to what extent, we may be
affected by such litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign sales are principally to Mexico. All foreign
transactions are denominated in U.S. dollars; therefore, the Company's exposure
to foreign currency fluctuations is minimal.
The Company is exposed to changes in interest rates from the Notes and
Debentures, which are due in full in 2003 and 2001, respectively. A hypothetical
100 basis point adverse move (decrease) in interest rates along the entire
interest rate yield curve would adversely affect the net fair value of these
debt instruments by approximately $501,250 as of June 30, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 24, 1999, a purported class action securities complaint was
filed against the Company and three of its officers and/or directors, William B.
Adams, Douglas M. Gloff and Mark. D. Buckner, by Edward Wissinger. The suit was
allegedly brought by Mr. Wissinger on behalf of all purchasers of Eco Soil
common stock during the period from April 13, 1999 (the date Eco Soil filed its
Annual Report on Form 10-K for the year ended December 31, 1998 with the
Securities and Exchange Commission) and November 3, 1999 (the date on which Eco
Soil issued its quarterly earnings release for the three months ended September
30, 1999). The complaint alleged that defendants failed to sufficiently identify
certain risks associated with the Company's agricultural business in Mexico,
thereby artificially inflating the Company's stock price. On July 11, 2000, the
Court dismissed without prejudice the class action complaint. The Court found
that the plaintiff had failed to allege sufficient facts to state a claim in
light of the heightened pleading standards applicable to the allegations made in
the complaint. Under the Court's order, the plaintiff may amend his complaint at
any time within 30 days of the Court's order to attempt to state a cognizable
claim. The parties have by stipulation extended the deadline for filing the
amended complaint to September 1, 2000.
From time to time, the Company is involved in legal proceedings, claims and
litigation arising in the ordinary course of business, the outcome of which, in
the opinion of management, would not have a material, adverse effect on the
Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Agricultural Supply subsidiary's FNB Working Capital Facility contains
certain restrictions and limitations on the Agricultural Supply subsidiary's
operations including restrictions on capital expenditures, sale of assets, lease
liabilities, mergers or other forms of business combinations, as well as the
prohibition on the payments of cash dividends. The Agricultural Supply
subsidiary's FNB Working Capital Facility also contains certain covenants which
require the Agricultural Supply subsidiary to maintain minimum levels of net
worth, working capital and other financial ratios, as defined. As of June 30,
2000, the Company was not in compliance with certain of these covenants. FNB
provided a waiver of such covenants through June 30, 2000. Management expects to
be in compliance with covenants on the FNB working capital facility after the
waiver expires and continuing through December 31, 2000.
ITEM 5. OTHER INFORMATION
SALE OF TURF PARTNERS ASSETS
On July 28, 2000, the Company completed the sale of substantially all of
the assets of its Turf Partners subsidiary to the J.R. Simplot Company for total
consideration of $61.5 million, including a cash payment of $23 million and the
assumption of Turf Partners' exiting long-term debt and vendor payables totaling
$38.5 million. Simplot also assumed Turf Partners' outstanding contracts and
leases. The sale of Turf Partners' assets was consummated pursuant to an Amended
and Restated Asset Purchase Agreement dated April 5, 2000, as amended by a First
Amendment to Amended and Restated Asset Purchase Agreement dated June 9, 2000.
The terms of the sale of Turf Partner's assets were determined on the basis of
arms length negotiations.
In connection with the sale of Turf Partners' assets, the Company
entered into two distribution agreements with Simplot. In the first
agreement, a Distribution and License Agreement, Simplot agreed to purchase
and distribute a minimum of $5 million of the Company's proprietary products
during the first two years of the five-year agreement. In the second
agreement, Simplot agreed to perform a market test of the Company's
proprietary products in ten of Simplot's Soilbuilders stores.
The foregoing summary of the terms of the Amended and Restated Asset
Purchase Agreement, as amended, the asset sale and the Distribution and License
Agreement does not purport to be complete and is qualified in its entirety
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by reference to the full text of the Amended and Restated Asset Purchase
Agreement, the First Amendment to Amended and Restated Asset Purchase Agreement
and the Distribution and License Agreement, copies of which are included as
Exhibits 10.1, 10.5 and 10.13 and incorporated herein by reference.
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 of Financial Condition and Results of
Operations." 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 "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 and its Proxy Statement dated June 26, 2000 for its 2000 Annual Meeting
of Shareholders.
At June 30, 2000, we had an accumulated deficit of $53.2 million. We have
historically experienced losses due to significant expenditures for product
development, sales, marketing and administrative costs, as well as amortization
costs associated with our previous acquisitions of turf and agricultural
products dealers.
On April 5, 2000, we, and our subsidiary Turf Partners, entered into an
Amended and Restated Asset Purchase Agreement, as amended by a First
Amendment to Asset Purchase Agreement dated June 9, 2000, with the J.R.
Simplot Company pursuant to which Simplot acquired substantially all of Turf
Partners' assets (the "Asset Sale"). We completed the Asset Sale on July 28,
2000. Due to the Asset Sale, our business is substantially smaller. It is
expected that a large portion of our sales will now be generated through the
sale and distribution of our proprietary products to turf and agricultural
markets, as well as irrigation products through our Agricultural Supply
distribution network. The agricultural products and supply business does not
historically represent a large portion of our business or revenues. The
growth of our proprietary and other products sales in agricultural markets
depends heavily upon the strength of the domestic and international
agricultural economies. If these economies weaken, demand for our proprietary
and other products may decline and our business or future financial results
could suffer. We also intend to sell proprietary products into turf markets
through Simplot's distribution channels, including those acquired in the
asset sale, pursuant to the distribution agreements between Eco Soil and
Simplot entered into in connection with closing the asset sale. Sales of our
products through Simplot's distribution channels may not result in sales
equal to those historically recorded by Turf Partners.
In the purchase agreement that governed the Asset Sale, we agreed to
indemnify Simplot for the breach of our representations and warranties contained
in the purchase agreement and for other matters. For example, an indemnification
claim by Simplot might result if representations we or Turf Partners made in the
purchase agreement are later proved to be materially incorrect. Significant
indemnification claims by Simplot could materially and adversely affect our
financial condition and results of operations.
Sales of our proprietary products recently have declined. Our proprietary
products remain in the early stages of market introduction and are subject to
the risks inherent in the commercialization of new product concepts,
particularly with respect to agricultural applications. There can be no
assurance that our efforts to increase sales of proprietary products to turf and
agricultural crop and ornamental markets will prove successful, that marketing
partnerships will be established and will become successful, or that our
intended customers will purchase our systems and products instead of competing
products. In addition, there can be no assurance that we will be able to obtain
significant customer satisfaction or market share with our proprietary products.
Failure to reverse the decline in sale of proprietary products would have a
material adverse effect on our business.
Primarily because of our history of operating losses and because we may not
be able to satisfy financial covenants contained in our long-term debt
instruments, the report of independent accountants in our financial statements
for the period ended December 31, 1999, filed on Form 10-K with the Commission,
includes an explanatory paragraph regarding our ability to continue as a going
concern unless we are able to obtain additional equity financing. We believe
that the net proceeds from the sale of Turf Partners' assets, together with our
existing cash balances, current performance and present plans, will be
sufficient to finance our operations, make planned capital expenditures and fund
future growth for the next 12 months.
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We have received a term loan and our Agricultural Supply subsidiary has
received a line of credit from financial institutions, and we have received debt
financing from institutional investors through the issuance of convertible
debentures and senior subordinated notes. Some of the loan documents to which we
and Agricultural Supply are parties, contain restrictions on our activities and
financial covenants with which Agricultural Supply and we must comply. Among
other things, the financial covenants require us and Agricultural Supply to
satisfy net worth requirements, debt service coverage ratios and other financial
tests. In the past, we have obtained waivers to remain in compliance with the
financial covenants and avoid default. There can be no assurance that we or
Agricultural Supply will satisfy all of the applicable financial covenants in
future quarters. To the extent we or Agricultural Supply do not satisfy these
requirements, we would be in default and our obligations could be declared
immediately due and payable. To avoid a default, we may be required to obtain
waivers from third parties, which might not be granted. A default on
indebtedness from one lender could result in the acceleration of indebtedness
from other lenders. In addition, our cash flow and capital resources might not
be sufficient to repay our indebtedness or that we will be successful in
obtaining alternate financing. In the event we or Agricultural Supply are unable
to repay debts, we may be forced to delay the expansion of our business, sell
some of our assets, obtain additional equity capital or refinance or restructure
our debt, any of which could have a material adverse effect on our business,
prospects and financial condition.
Our agreement with the holders of our 7% Senior Convertible Debentures
prohibits us from selling any shares of our capital stock or securities
convertible into shares of our capital stock prior to 12 months after January
24, 2000 without giving such holders (i) a right of first refusal to purchase
shares of our capital stock or capital stock equivalents on the same terms on
which we are prepared to sell them to other investors and (ii) if such holders
do not exercise their right of first refusal, the further right to exchange
their convertible debentures and warrants for an equivalent dollar amount of the
new securities we offer. These restrictions may impair our ability to raise
equity capital on terms satisfactory to us, if at all. Our inability to raise
needed funds would have a material adverse effect on our business, financial
condition and results of operations.
We have received a notice from the Nasdaq Stock Market that based on a
review of our Annual Report on Form 10-K, Nasdaq calculated our net tangible
assets at December 31, 1999 to be below Nasdaq's $4,000,000 minimum. At the time
the notice was provided, Nasdaq asked us to submit a specific plan to achieve
and sustain compliance with all Nasdaq National Market listing requirements. On
May 23, 2000, we submitted such a plan, in which we outlined, among other
things, how completion of the asset sale would bring us back into compliance
with the net tangible assets requirement. In a letter received on June 15, 2000,
Nasdaq granted us an extension of the deadline to comply with Nasdaq's listing
requirements, subject to (i) the sale of Turf Partners' assets closing no later
than July 31, 2000, (ii) our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 being filed no later than August 15, 2000 and (iii) such Form 10-Q
demonstrating compliance with Nasdaq's listing requirements. Although we have
completed the asset sale and we believe that this Quarterly Report on Form 10-Q
will satisfy the requirements of the extension, Nasdaq may determine that one or
more of the requirements were not met and we may not maintain compliance with
all of Nasdaq's listing requirements. In such a case, Nasdaq could send a formal
notice of deficiency and commence the delisting process. If Nasdaq were to begin
delisting proceedings, it could reduce the level of liquidity currently
available to our shareholders. If our common stock were delisted, the price of
the common stock would, in all likelihood, decline. In addition, it would be an
event of default under its Convertible Subordinated Debentures if our shares
were delisted from Nasdaq.
We distribute and sell our products through agricultural products
distributors and dealers we have acquired and through independent dealers and
distributors. We sold our turf products distribution business to Simplot in the
Asset Sale. Pursuant to distribution agreements with Simplot, we will continue
to sell some of its products through the distribution network that was sold, but
we may not achieve the same level of sales through the distribution network now
owned by Simplot. Any failure to identify future distributors or acquisition
candidates properly, any large expenditures on acquisitions that prove to be
unprofitable or any difficulties encountered in selling our proprietary products
through the existing distribution system could have a material adverse effect on
its business, financial condition and results of operations.
Our ability to manage future growth, should it occur, will require us to
implement and continually expand operational and financial systems, recruit
additional employees and train and manage both current and new employees. In
particular, our success depends in large part on our ability to attract and
retain qualified technical,
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sales, financial and management personnel. We face competition for these persons
from other companies, academic institutions, government entities and other
organizations. No assurance can be given that we will be successful in
recruiting or retaining personnel of the requisite caliber or in adequate
numbers to enable it to conduct its business as it proposes to be conducted.
Our success will depend in large measure upon our ability to obtain and
enforce patent protection for our proprietary products, maintain
confidentiality of our trade secrets and know-how and operate without
infringing upon the proprietary rights of third parties. We have been granted
three U.S. patents for the technology relating to the BioJect-Registered
Trademark- system. We do not have foreign patent protection with respect to
the claims covered by the two U.S. patents issued in 1993, and we are
precluded from obtaining these foreign rights due to the expiration of the
period for filing such claims. However, in connection with a U.S. patent
granted in 1995, we applied for foreign patent protection with respect to the
BioJect-Registered Trademark- system in selected countries. To date,
technology relating to the BioJect-Registered Trademark- system has been
successfully patented in several of these foreign countries. In addition, we
have registered a number of trademarks used in our business, including
"BioJect-Registered Trademark-" and "FreshPack-TM-" and we have applied for
registration of a number of additional trademarks. We also rely on trade
secrets and proprietary know-how. We generally enter into confidentiality and
nondisclosure agreements with our employees and consultants and attempts to
control access to and distribution of our confidential documentation and
other proprietary information.
Despite the precautions described above, it may be possible for a third
party to copy or otherwise use our products or technology without authorization,
or to develop similar products or technology independently. No assurance can be
given that our patent or trademark applications will be granted, that the way we
protect our proprietary rights will be adequate or that our competitors will not
independently develop similar or competing products. Furthermore, there can be
no assurance that we are not infringing other parties' rights. If any of our
patents are infringed upon or if a third party alleges that we are violating
their proprietary rights, we may not have sufficient resources to prosecute a
lawsuit to defend our rights. In addition, an adverse determination in any
litigation could subject us to significant liabilities to third parties, require
us to seek licenses from or pay royalties to third parties or prevent us from
manufacturing, selling or using our products, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Even if we prevailed in litigation to protect its intellectual property rights,
this litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, financial condition and
results of operations.
We currently do not have any manufacturing capability and we rely on third
parties to manufacture our products and components. We have more than one
supplier for the manufacture of most of our products and components; however, we
obtain some products or components from only one source. Although we believe
that we will be able to contract production with alternate suppliers, no
assurance can be given that this will be the case or that the need to contract
with additional suppliers will not delay our ability to have our products and
components manufactured. No assurance can be given that existing or future
manufacturers will meet our requirements for quality, quantity and timeliness,
and any such failure could have a material adverse effect on our business.
We do not engage in our own research and development with respect to the
discovery of new microbial products. Therefore, we plan to acquire the rights to
additional microbial products from third parties. Although we are actively
seeking to obtain licenses for additional microbial products, there can be no
assurance that we will be successful in obtaining any such licenses on terms
acceptable to us, if at all.
In September of 1999, we acquired the Agricultural Biological Division
(AgBio) of Canadian-based Agrium, Inc. Among other things, the acquisition
included a microbiological collection in excess of 2,500 unique biocontrol
and growth-promoting microorganisms. We have increased its research and
development efforts to determine which microbes will be suitable for
distribution through the BioJect-Registered Trademark- system or as a new
FreshPack-TM- product. We may not be successful, however, in identifying
microbes that will be suitable for commercial deployment or in creating
products comprised of these microbes. Even if new product candidates are
identified, EPA approvals of the products will be required to market them as
pesticides. In order to market a microbial product as a pesticide, we must
obtain EPA approval of a particular product containing that microbe,
including EPA approval of the claims made in the product label and the method
of application. In addition, if a microbe is sold as a pesticide for use on
crops, a tolerance level must be set by the EPA which would define the
acceptable limit on the amount of microbes that could be present on a given
raw agricultural commodity at the time of harvest. Registration of microbial
products as pesticides is a lengthy and expensive process that may or may not
result in EPA approval. Also, third parties may
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develop superior products or have proprietary rights that preclude us from
marketing our products. If research and testing is not successful or if we fail
to obtain regulatory approval, we may be unable to sell products based on the
microbes obtained from Agrium or any other microbes.
We 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 our behalf. We currently carry product
liability insurance. There can be no assurance, however, that such product
liability insurance will adequately protect us 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 our
business and prospects.
The federal government and 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. We are 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. We do 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 our business.
We are subject to laws and regulations administered by federal, state
and foreign governments, including those requiring registration or approval
of fertilizers, pesticides, water treatment products and product labeling.
Some of our current products are subject to regulation by the EPA, the USDA
and by certain state environmental and agricultural departments. Prior to
1998, we had only one registered pesticide with the EPA, BACILLUS
THURINGIENSIS, and we marketed it as well as other microbial products only as
soil inoculants. In 1998, we received two EPA approvals. First, we registered
PSEUDOMONAS AUREOFACIENS TX-1 (Spot-less-TM-) with the EPA as a biofungicide
for use in turf across the United States and received EPA approval of the
BioJect-Registered Trademark- as a means of application of the microbe.
Second, we received EPA approval to use XANTHOMONAS CAMPESTRIS pv poaannua
(Xpo) as a bioherbicide in experimental use permit trials for use in turf
across the United States. We are in the final process of receiving EPA
approval on PSEUDOMONAS HORORAPHIS, STRAIN 63-28 (AtEze-TM-) for use as a
biofungicide on greenhouse and agricultural plants. No assurance can be given
that EPA approval will be received for sales of additional microbial products
as biopesticides. In order to market a microbe as a pesticide, we must obtain
EPA approval of a particular product containing that microbe, including EPA
approval of the claims made in the product label and the method of
application. Registration of our microbial products as pesticides likely will
be a lengthy and expensive process that may or may not result in EPA
approval. Without the desired EPA approvals, we will not be able to market
such unregistered microbes as pesticides, and our sales efforts will be
limited to discussions of the soil inoculant features of the microbe. If the
EPA determines that a microbial product has no significant commercially
valuable use other than use as a pesticide, however, we will be precluded
from selling the product entirely unless it is approved by the EPA. In
addition, we may be subject to regulation in foreign countries. Compliance
with such requirements likely would result in additional cost and delays in
introducing our products in such foreign countries.
The BioJect-Registered Trademark- system and our FreshPack-TM- products
compete against traditional chemical insecticides and fungicides, chemical soil
penetrants, acid injection systems and the direct, manual application of
cultured microbial products. Many of our competitors have substantially greater
financial, technical and personnel resources than we do. Our competitors include
such well-established companies as Novartis Corporation, Rhone-Poulenc AG
Company, the Dow Chemical Company, O.M. Scotts & Sons, Inc., Lesco, Inc., and
The Toro Company, as well as a number of smaller local and regional competitors.
We compete against traditional technologies on the basis of our delivery
mechanism and bioaugmentation expertise. We believe that the long-term
competitiveness of the BioJect-Registered Trademark- system may be affected by
the timing and extent of our penetration into golf and agricultural markets
compared to the market penetration achieved by companies offering competing
products for microbial distribution. This timing, in turn, will be based on the
effectiveness with which we or the competition can complete product testing and
approval processes and supply products to the marketplace. Competition among
microbial distribution products is expected to be based on, among other things,
product effectiveness, safety, reliability, cost, market capability and patent
protection.
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A decrease in the number of golfers, reduced participation rates or reduced
consumer spending on golf could have a material adverse effect on our golf
course customers and, in turn, on our business. Specifically, the success of
efforts to attract and retain members at private country clubs and the number of
rounds played at public golf courses historically have been dependent upon
discretionary spending by consumers, which may be adversely affected by general
and regional economic conditions. In addition, the construction of additional
golf courses is dependent upon growth in the number of golfers. If customer
tastes or economic conditions cause golf courses to reduce their budgets or slow
the development of additional golf courses, we may see a correlative decrease in
sales of the BioJect-Registered Trademark- system and its other products.
We began selling our proprietary products to growers who will apply them to
crops using micro irrigation methods. In addition, we have formed a strategic
relationship with Cebeco Seeds Group to sell our proprietary products in
European greenhouse markets. Our proprietary products have not been widely
applied using micro irrigation methods or in greenhouses and we may not achieve
significant market share in these markets. Revenues from sales of our
proprietary products for application using micro irrigation methods or in
greenhouses may not exceed the sales, marketing and development costs we have
incurred in an effort to penetrate these markets.
We have devoted substantial resources to developing markets for our
products outside the United States, particularly in Mexico. In addition, our
strategic relationship with Cebeco Seeds Group calls for us to sell its
proprietary products to the European greenhouse markets. To date, our operations
outside the United States have generated limited revenues, which have not been
sufficient to cover our costs in seeking to penetrate foreign markets. While we
are continuing to explore opportunities to sell its products outside the United
States, no assurance can be given that these efforts will be successful. Our
international sales efforts are subject to risks associated with operations in
foreign countries that may increase its costs, lengthen its sales cycle and
require significant management attention. These risks include:
- fluctuations in currency exchange rates, which may make our products
more expensive;
- general economic conditions in international markets;
- political risks;
- additional costs of compliance with local regulations, including costs
associated with unexpected changes in regulatory requirements
resulting in unanticipated costs and delays;
- tariffs, export controls and other trade barriers; and
- longer accounts receivable payment cycles and difficulties in
collecting accounts receivable.
The costs related to out international operations could adversely affect
its operations and financial results in the future.
Our common stock currently is quoted on the Nasdaq National Market. The
market price of our common stock could be subject to significant fluctuations in
response to operating results and other factors. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of our common stock. In
addition, in the event the listing of the common stock were discontinued for any
reason, the liquidity and price of our common stock would be adversely affected.
Our operating results vary from quarter to quarter as a result of
seasonality and various factors. Virtually all of our customers are located in
the Northern Hemisphere and purchase greater quantities of microbes and
distributed products during the spring, summer and fall months. As a result of
low customer activity during the winter, we typically market the
BioJect-Registered Trademark- system during the fourth and first quarters. As a
result of these marketing efforts, we typically receive orders during the first
and second quarters and install BioJect-Registered Trademark- systems during the
second and third quarters. BioJect-Registered Trademark- revenues generally
occur in the second and third quarters of the year. Because of this sales cycle,
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we expect to recognize a significant portion of our revenues during the second
and third quarters. Operating expenses have tended to be independent of the
quarterly sales cycle. As a result, operating expenses generally represent a
higher percentage of sales in the first and fourth quarters as compared to the
second or third quarters, and we may experience losses in the first and fourth
quarters. Accordingly, results for any quarter are not necessarily indicative of
results for any future period. The sales cycle for the BioJect-Registered
Trademark- system also makes it difficult to predict the number of
BioJect-Registered Trademark- systems that will be employed and the quantity of
microbial products that will be sold until we receive orders during the first
half of the year. Sales of our products also depend to some extent on the
severity of weather patterns in the geographic areas we serves. Given these
factors, it is difficult to accurately predict the level of demand for our
products. It is likely that in one or more future quarters our financial results
will fall below the expectations of analysts and investors. If this happens, the
trading price of our common stock would likely decrease. Many of the factors
that cause our quarter to quarter financial results to be unpredictable are
largely beyond our control.
We are dependent upon the active participation of William B. Adams, its
Chairman of the Board and Chief Executive Officer. The loss of the services of
Mr. Adams could have a material adverse effect upon our future operations. Our
success depends in large part on its ability to attract and retain qualified
scientific, financial and management personnel. We face competition for such
persons from other companies, academic institutions, government entities and
other organizations. There can be no assurance that we 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
10.1 (2) Amended and Restated Asset Purchase Agreement dated April 5,
2000 by and among the Company, Turf Partners, Inc. and J.R.
Simplot Company.
10.2 (3) Term Loan Agreement dated as of April 12, 2000 among Turf
Partners, Inc. and Eco Soil Systems, Inc. and J.R. Simplot
Company.
10.3 (1) Amendment No. 3 to Loan and Security Agreement, dated as of
April 14, 2000 among Turf Partners, Inc. and Coast Business
Credit.
10.4 (3) Amendment No. 4 to Loan and Security Agreement, dated as of May
4, 2000 among Turf Partners, Inc. and Coast Business Credit.
10.5 (4) First Amendment to Amended and Restated Asset Purchase Agreement
dated June 9, 2000 by and among the Company, Turf Partners, Inc.
and J.R. Simplot Company.
10.6 (1) Amendment No. 6 to Note and Warrant Purchase Agreement, dated as
of July 28, 2000 among the Company, Albion Alliance Mezzanine
Fund, L.P. and Paribas Capital Funding LLC.
10.7 (1) Amended Senior Subordinated Note due January 28, 2002, dated as
of July 28, 2000 among the Company and Paribas Capital Funding
LLC.
10.8 (1) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Paribas Capital Funding LLC.
10.9 (1) Amended Senior Subordinated Note due January 28, 2002, dated as
of July 28, 2000 among the Company and Albion Alliance Mezzanine
Fund, L.P.
10.10(1) Amended and Restated Common Stock Purchase Warrant expiring
August 25, 2005 in favor of Albion Alliance Mezzanine Fund, L.P.
10.11(1) Stock Purchase Warrant, dated as of June 23, 2000, issued to the
investors listed in Schedule 1 attached thereto.
10.12(1) Stock Purchase Warrant, dated as of June 23, 2000, issued to the
investors listed in Schedule 1 attached thereto.
10.13(1) Distribution and License Agreement dated July 28, 2000 between
J.R. Simplot Company and the Company.
27.1(1) Financial Data Schedule
--------------------------------------------------------------------------------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K (File
No. 001-12653) filed with the Commission on April 14, 2000.
(3) Incorporated by reference to the Company's Periodic Report on Form 10-Q
(File No. 001-21975) filed with the Commission on May 15, 2000.
(4) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 001-12653) filed with the Commission on June 19, 2000.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K (File No. 001-21975)
under Item 5 thereof on June 19, 2000, relating to the First Amendment to
Amended and Restated Asset Purchase Agreement dated as of April 5, 2000, by
and among the Company and the J.R. Simplot Company.
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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: August 14, 2000 By: /s/ WILLIAM B. ADAMS
--------------------
William B. Adams
Chairman and Chief Executive
Officer
Date: August 14, 2000 By: /s/ DENNIS N. SENTZ
-------------------
Dennis N. Sentz
Chief Financial Officer
(Principal financial officer and
Principal accounting officer)
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