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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-31499
EDEN BIOSCIENCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-164960411816
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11816 NORTH CREEK PARKWAY NORTH
BOTHELL, WASHINGTON 98011-8205
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(425) 806-7300
(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, PAR VALUE $0.0025 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant, based on the closing sale price on March 22, 2001 as reported on
The Nasdaq National Market, was $245,053,595.
The number of shares of the registrant's common stock outstanding as of
March 22, 2001 was 23,927,013.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of EDEN Bioscience Corporation's proxy statement for its 2001
Annual Meeting of Shareholders to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after December 31, 2000 is incorporated
by reference in Part III of this Form 10-K.
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EDEN BIOSCIENCE CORPORATION
INDEX TO FORM 10-K
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 30
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 45
PART III
Item 10. Directors and Executive Officers of Registrant.............. 45
Item 11. Executive Compensation...................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 45
Item 13. Certain Relationships and Related Transactions.............. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 45
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "intend," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of these terms or other terminology.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined in the "Factors That May Affect
Our Business, Future Operating Results and Financial Condition" section included
elsewhere in this report. These factors may cause our actual results to differ
materially from any forward-looking statement. Except as required by law, we
undertake no obligation to publicly release any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS.
OVERVIEW
We are a plant technology company focused on developing, manufacturing and
marketing innovative natural products for agriculture. We have a fundamentally
new, patented and proprietary technology that we believe will significantly
improve plant protection and crop production worldwide. We believe our
technology and our initial product, Messenger(R), allow us to offer superior
alternatives to existing plant protection and crop yield enhancement products in
terms of both performance and safety and, importantly, to avoid the substantial
public resistance to many chemical pesticides and genetically modified plants.
We are aware of no other product or technology currently being marketed, under
development or described in scientific literature that generates the
comprehensive set of beneficial results that Messenger produces on such a wide
array of crops.
Our proprietary technology is based on a new class of nontoxic, naturally
occurring proteins called harpins. Harpin proteins trigger a plant's natural
defense systems to protect against disease and pests, and simultaneously
activate certain plant growth systems, leading to increased biomass,
photosynthesis, nutrient uptake and root development and, ultimately, to greater
crop yield and quality.
Messenger received conditional EPA approval in April 2000, and we began
sales of the product in August 2000. Utilizing our harpin and harpin-related
technology, Messenger simultaneously activates the plant's natural defense and
growth systems, providing broad protection against disease, reduced damage
caused by pests and improved plant growth, crop yield and quality. Messenger is
a water-soluble, granular powder that is topically applied either independently
or in conjunction with traditional chemical pesticides. Once applied, Messenger
degrades rapidly and leaves no detectable residue. Unlike traditional chemical
pesticides, Messenger and other products we are developing have no direct
killing effect on pests and pathogens, reducing the likelihood of pest
resistance. In addition, unlike genetically modified plants, Messenger does not
alter the plant's DNA.
Our near-term focus is the commercialization of Messenger for use on a wide
variety of crops. We are currently concentrating our efforts in the United
States on high-value crops, such as citrus, tomatoes, peppers, cucumbers,
strawberries and other horticultural and specialty crops, from which we expect
growers will derive the greatest economic benefit from Messenger. We plan to
take advantage of the Messenger brand developed in the use on these high-value
crops to penetrate traditional field crop markets, including cotton, wheat,
rice, corn and soybean.
In conjunction with the commercialization of Messenger, we will continue to
focus significant resources on research and development activities to develop
and commercialize new products based on our harpin and harpin-related
technology. We believe that many of the additional products and technologies
currently under development will lead to significant business opportunities in
the future. We were incorporated in the state of Washington in 1994.
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INDUSTRY OVERVIEW
In order to meet growing food demand and remain competitive in the global
agricultural marketplace, growers are consistently challenged to increase
productivity by improving crop yield and quality. Over the last several decades,
growers have relied on the development of more effective farming practices and
improved plant protection and yield enhancement methods and products to limit
agricultural crop losses and to increase the yield and quality of their crops.
In recent years, however, the rate at which growers have been able to further
improve crop productivity has declined as improved farming practices have become
more fully implemented, as land suitable for conversion to farming has become
more scarce and as concerns about the environmental impact of farming have
increased. Moreover, growers today face increasing scarcity of available
resources, such as labor, water and land, and increasing restrictions on the use
of traditional chemical pesticides. At the same time, the global demand for food
and increased food quality continues to increase with population growth and
generally rising standards of living.
In today's competitive agricultural environment, growers must maximize crop
productivity by enhancing yield and minimizing crop losses. The Food and
Agriculture Organization of the United Nations estimates annual crop losses from
pests to be $300 billion worldwide. In addition to basic agronomic practices
such as crop rotation, cultivation or variety selection, growers generally have
two alternatives to limit these economic losses and increase yields. The first
approach is to use traditional chemical pesticides, and the second is to grow
genetically modified plants that are engineered to resist disease and
infestation or to tolerate applications of nonselective herbicides. Each of
these approaches has come under increasing criticism from a variety of sources
worldwide including environmental groups, government regulators, consumers and
labor advocacy groups.
Traditional Chemical Pesticides
Growers use traditional chemical pesticides to kill insects, microorganisms
and other pests. Although generally effective in killing targeted pests,
traditional pesticides often have serious adverse side effects. Many of these
chemicals are suspected carcinogens and many are acutely toxic. Pesticide
applicators and field workers face significant risks from direct exposure to
toxic chemical pesticides. In addition, use of chemical pesticides often
suppresses beneficial insects and microorganisms that otherwise provide a degree
of natural protection.
Over time, many pathogens and pests develop resistance to chemical
pesticides. As pest resistance increases, and beneficial predators and parasites
decline, growers often escalate the application of pesticides to maintain an
acceptable level of disease and pest control. As a result, chemical pesticides
or their byproducts may contaminate the soil, surface water and groundwater
resources. In addition, chemical pesticides can enter the food chain, adversely
affecting animal populations, and can be directly ingested by humans or by
livestock intended for human consumption.
Over the past 50 years, increased use of pesticides, with their potential
risks and problems, has heightened public awareness and concern over their
environmental and health hazards. As a result, the U.S. government and various
state and foreign governments have imposed increasingly stringent regulations on
the manufacture and use of chemical pesticides.
Regulatory and public pressure is forcing manufacturers to remove many
traditional chemical pesticides from the market. Over the last 15 years,
numerous pesticide products have been removed from the marketplace or have been
severely restricted in their allowable uses. Currently, many widely used
pesticides are subject to extensive and costly re-registration requirements
mandated by changes in federal pesticide laws. As a result of these regulatory
constraints as well as other economic pressures, growers have increasingly
sought new technologies to protect crops and maintain profit margins.
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Genetically Modified Plants
Scientific advances, coupled with the health and environmental problems
associated with conventional chemical pesticides, led to the introduction of
genetically modified plants in the early 1990s. These products can provide a
variety of pesticidal and other benefits. Genetically modified plants have been
developed to produce herbicide-tolerant, insect-resistant or virus-resistant
crops. In addition, improved output traits, including those designed to create
higher-quality animal feed, have been introduced into the market. For the 1999
growing season, 55% of all cotton fields, 57% of all soybean fields and 33% of
all cornfields in the United States were planted with genetically modified seed
varieties.
While genetically modified plants have been widely used, environmental
groups, some scientists and consumers, especially in Europe, are raising
questions regarding the potential adverse side effects, long-term risks and
uncertainties associated with genetically modified plants. Some countries,
primarily in the European Union, have established restrictions on the planting
of certain genetically modified seeds or on the importation of grain produced
from these seeds. Moreover, some countries, including Japan and certain members
of the European Union, have imposed labeling requirements on genetically
modified food products, and federal legislation requiring such labeling has been
proposed in the United States. Several food-related companies have indicated
that they will not use genetically modified crops in their products.
Market Opportunity for New Plant Protection and Yield Enhancement Products
Based on data collected by the Food and Agricultural Organization of the
United Nations, in 2000, over 118 million acres of horticultural and specialty
crops were harvested worldwide, including nearly 17 million acres of tomatoes,
peppers, cucumbers and strawberries and approximately 16 million acres of
citrus. In addition, in 2000, approximately 2.0 billion acres of row crops were
harvested worldwide, with corn, wheat, cotton and rice accounting for
approximately 1.3 billion acres. Based on data from Allan Woodburn Associates,
worldwide expenditures on agricultural chemicals to protect these and other
crops in 2000 were approximately $29 billion. We believe growers worldwide are
seeking new plant protection and yield enhancement products to replace or reduce
the need for traditional agricultural chemicals, and that allow them to manage
plant disease and improve crop yield and quality without modifying a plant's
DNA.
THE EDEN SOLUTION AND ADVANTAGES
Utilizing our harpin and harpin-related technology, we are developing
products that activate a plant's natural defense and growth systems without
altering the plant's DNA. We believe our harpin and harpin-related technology
provides the following advantages over current plant protection and yield
enhancement products:
- Simultaneous activation of natural plant systems to:
- Protect against a broad array of viral, fungal and bacterial
diseases. Our technology has demonstrated an ability to activate a
plant's natural defense systems against a broad spectrum of viral,
fungal and bacterial diseases, including some diseases for which there
is currently no effective treatment. We believe that our harpin-based
products will reduce or eliminate the need for certain traditional
chemical pesticides.
- Reduce damage caused by a variety of pests. Our technology has shown an
ability to reduce crop infestation and damage caused by certain harmful
insects and other pests. Unlike chemical pesticides, however, our
technology has no direct killing effect and, therefore, we believe that
beneficial insects and microorganisms will not be adversely affected by
our products.
- Improve plant growth, crop yield and quality. We have demonstrated an
ability to improve plant growth as evidenced by one or more of the
following: increased biomass, photosynthesis, nutrient uptake and root
development. The improved plant growth observed in our Messenger field
trials leads to increased plant quality and generally increased yields
of 10% to 20% over current agronomic practices using traditional
chemicals.
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- Effectiveness across a wide array of crops. Our technology has proven
effective in activating natural plant defense and growth systems in over
40 crops, including high-value crops such as citrus, tomatoes, peppers,
cucumbers and strawberries; traditional field crops such as cotton,
wheat, rice, corn and soybean; and ornamental crops such as rose.
- Improved food safety. Our technology allows us to use small amounts of
harpin protein, our active ingredient. Generally, only two to four grams
of harpin protein are required to treat one acre. Once applied, harpin
protein degrades rapidly and leaves no detectable residue. As a result,
we believe harpin-based products will improve food safety compared to
food harvested from crops treated with traditional chemical pesticides.
- Reduced risk of environmental damage and increased worker safety. Based
on independent toxicology studies, in-house laboratory tests and
extensive field testing, we believe harpin protein has little, if any,
impact on the environment. As a result, we believe harpin-based products
have significant advantages over traditional chemical pesticides in terms
of worker safety and environmental damage.
- Reduced likelihood of pest resistance. Over time, the direct killing
function associated with chemical pesticides sometimes results in pest
and pathogen resistance. Because the mode of action of our technology has
no direct killing effect, we believe it is less likely that pests and
pathogens will develop resistance to our products.
OUR BUSINESS STRATEGY
Our objective is to utilize our proprietary technology to develop and
market products that enhance plant protection and crop yield. We plan to achieve
this goal by implementing the following key strategies:
- Commercialize Messenger and future products based on our proprietary
technology worldwide. We have initiated marketing activities designed to
promote the distribution and sale of our first product, Messenger, and
made our first commercial sales of the product in August 2000. We plan to
commercialize Messenger and future products worldwide beginning in the
United States and expanding to foreign countries as we obtain regulatory
approvals. We intend to distribute these products through established
agri-chemical distributors and retailers in order to leverage their
existing sales forces and grower relations. We intend to continue to
expand our team of field development specialists to maintain close
relationships with growers and educate industry leaders and distributors.
- Promote the benefits of Messenger and our harpin and harpin-related
technology. We intend to use our existing and growing body of field trial
results to promote the use of Messenger and the benefits of our
proprietary technology. We plan to build market awareness through a wide
range of programs, materials and events, including conference and trade
show appearances and the dissemination of sales literature and
promotional materials.
- Continue to develop Messenger product extensions and new products that
utilize natural plant defense and growth systems. We will continue to
focus significant resources on research and development activities to
develop and commercialize new products based on our harpin and
harpin-related technology platform. These efforts will include Messenger
product line extensions, such as crop, disease and pest specific
products. In addition, we have identified and are currently performing
efficacy studies on new harpin proteins that may be significantly more
potent and may be effective against other classes of disease or induce
additional growth pathways.
- Control and protect our technology. We own or have obtained exclusive
worldwide rights to patents and patent applications that cover Messenger
and its use and other related technologies. We have not granted any
geographic, crop or technology rights, other than for experimental and
limited field trials, to these patents and patent applications. We plan
to aggressively protect our control of these technologies by enforcing
our current patents and filing additional patent applications in many
countries worldwide. Where appropriate, we will continue to file patent
applications jointly with Cornell University or other institutions.
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- Maintain control over product manufacturing. In order to control the
quality and supply of our products and help maintain our proprietary
position, we intend to retain control over the manufacturing of our
products. We expect to expand our manufacturing capabilities as necessary
to meet market demand. We have established comprehensive and detailed
quality control and assurance systems to ensure that we sell the highest
quality product. We will only use independent manufacturing arrangements
when we can assure ourselves that we can maintain our quality standards.
CORE TECHNOLOGY PLATFORM
The active ingredient in our initial product, Messenger, is one of a class
of environmentally safe, nontoxic proteins called harpins, which were discovered
by Dr. Zhongmin Wei, our Vice President of Research, and his colleagues while at
Cornell University. Science magazine recognized the importance of the harpin
discovery and published the related study as its cover story in July 1992. The
USDA also recognized the discovery, describing it as a "scientific breakthrough"
in understanding how plants respond to pathogens.
Plants have powerful natural defense mechanisms. Plants generally resist
pathogens, or restrict their proliferation, by causing localized necrosis, or
death of tissues, to a small zone surrounding the site of infection. This
resistance by the plant is called the hypersensitive response. In addition to
the localized hypersensitive response, plants respond to infection by activating
defenses in parts of the plant that were not infected by the original pathogen,
increasing resistance to further or secondary infections by the same and other
pathogens. The activation and maintenance of defense systems in the uninfected
regions of a plant are referred to as systemic acquired resistance. Systemic
acquired resistance confers long-lasting systemic disease resistance against a
broad spectrum of pathogens.
Researchers have studied these natural defense mechanisms for over 30 years
seeking to understand how plants recognize an infection and what activates their
defense systems. Dr. Wei and his colleagues were able to isolate and
characterize the harpin protein, a previously undescribed class of proteins
associated with activating these responses. They established that when certain
bacterial infections occur, the bacteria secrete a harpin protein, which, in
turn, signals the plant to generate a defense against the infection. Dr. Wei
later discovered that direct topical application of trace amounts of harpin to
the surface of the plant leaf or seed signals the plant to activate multiple
pest-resistant and growth-enhancing responses without visible hypersensitive
response.
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HOW HARPIN WORKS
[Description of "How Harpin Works" Chart (p.29)]
[GRAPHIC -- Depiction of how harpin works. Under the "Topical Application"
heading, a harpin protein is depicted bonding to a plant receptor, initiating an
ion-exchange. Under the "Simultaneous Plant Reactions heading, the ion-exchange
is depicted causing a signal amplification, resulting in the following responses
in the plant: (1) systemic acquired resistance pathway activation, (2)
jasmonic acid/ethylene pathway activation and (3) increased photosynthesis and
nutrient uptake. Under the "Benefits" heading, the effects of such plant
responses are disease resistance, pest resistance and improved plant growth.]
As shown above, the harpin protein serves to initiate several key plant
reactions that generally result in improved disease and pest resistance and
plant growth. Once a harpin protein is applied to a plant and binds to a plant
receptor, production of hydrogen peroxide, an important mechanism of plant
defense, is induced in plant cells and a series of ion exchanges are stimulated
in the cell membrane. Then, a series of reactions occur that result in the
following benefits:
- Disease resistance and pest resistance. The systemic acquired resistance
pathway is broadly classified as encoding pathogenesis-related proteins,
which play an active role in disease resistance. In addition, our
researchers have demonstrated that harpin proteins induce the jasmonic
acid/ethylene dependent pathway that plays an important role in disease
and pest defense.
- Improved plant growth, crop yield and quality. Activation of a plant's
growth systems has been noted even in the absence of disease. Activation
of plant growth and related pathways results in increased photosynthesis
and nutrient uptake. Harpin-treated plants generally show increased
biomass, root development, earlier flowering and fruit maturation, as
well as increased crop yield and quality.
The first harpin was isolated from Erwinia amylovora, a pathogenic
bacterium that causes fire blight in apple, pear and other rosaceous plants.
Since then, EDEN and Cornell University, as well as other research institutions,
have isolated several harpin or harpin-like proteins from other major groups of
plant pathogenic bacteria.
MESSENGER -- OUR INITIAL PRODUCT
Utilizing our proprietary harpin and harpin-related technology, we have
developed our first product, Messenger, which activates natural plant defense
and growth systems without altering the plant's DNA or having a direct killing
effect on targeted pests or pathogens. Messenger received conditional approval
from the EPA in April 2000, and we have initiated marketing activities to
promote the distribution and sale of Messenger in the United States. We are
currently manufacturing Messenger for sale in commercial quantities and began
commercial sales of the product in August 2000. Messenger is a water-soluble,
granular powder that is topically applied either independently or in conjunction
with traditional chemical pesticides. Once
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applied, Messenger degrades rapidly and leaves no detectable residue. Messenger
provides all the advantages of our core technology, including:
- simultaneous activation of natural plant systems to:
- protect against a broad array of viral, fungal and bacterial diseases,
including some diseases for which no effective treatment is currently
available;
- reduce damage caused by a variety of pests; and
- improve plant growth, crop yield and quality;
- effectiveness across a wide array of crops;
- improved food safety;
- reduced risk of environmental damage;
- increased worker safety; and
- reduced likelihood of pest resistance.
In addition to these key advantages of our proprietary technology,
Messenger provides the following additional benefits:
- Low dosage and quick activation of plant systems. Generally, only two to
four grams of harpin protein, Messenger's active ingredient, are required
to treat one acre. Upon application, Messenger generally initiates the
activation of the plant's defense and growth systems within five to ten
minutes, with full activation occurring within three to five days. The
presence of Messenger initiates the plant response. The continued
presence of Messenger is not required for full activation, reducing the
need for re-application due to rain or other environmental conditions.
- Simple application. Messenger can be applied using standard equipment and
a variety of simple application methods, such as direct foliar sprays,
seed treatments and soil drenches. For foliar spray applications,
Messenger is mixed with water, either alone or in combination with other
plant treatments, and applied using conventional spray equipment. In
contrast to many traditional pesticides, which generally require that
each individual plant leaf be sprayed, it is not necessary to spray the
entire plant for Messenger to be effective.
- Extended effect. In certain crops, such as wheat and rice, we believe
only one application of Messenger per season is necessary. For other
crops, such as fresh vegetables and ornamentals, repeat applications at a
rate equal to or less than traditional chemical pesticides have been
shown to enhance the defense and growth benefits of Messenger.
- Reduced use restrictions and ease of disposal. Many chemical pesticides
have restrictions that prohibit farm workers from re-entering treated
fields or greenhouses for periods of 24 to 48 hours, which may cause
significant delays in grower activities. Messenger, on the other hand,
qualifies for the EPA's minimum restricted entry interval of four hours.
Similarly, many chemical pesticides are subject to restrictions that
impose minimum time periods, ranging from a few days to several weeks,
between the product's last application and the time of harvest. Because
Messenger is virtually nontoxic and leaves no detectable residues on
treated crops, there is no pre-harvest interval. In addition, in contrast
to most traditional chemical pesticides, personal protective equipment,
such as respirators, rubber gloves, boots and complete suits of
protective outerwear, is not required for workers applying Messenger.
Unlike products containing toxic chemicals, Messenger's packaging
materials can be easily disposed of in traditional municipal or county
waste collection systems.
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Messenger's Performance in Field Trials
We conduct both small scientifically oriented field trials and large
demonstration field trials to test the efficacy and performance of Messenger, to
educate growers and their advisors regarding the value and use of Messenger, and
to generate data to enable us to improve application rates and timing. In
addition, we conduct field trials in connection with our research and
development of new products. Field trials are conducted with major growers,
universities and consultants. Generally, we pay these independent third parties
to execute, evaluate and report on our trials pursuant to specific protocols
agreed to by such parties. Compliance with such protocols is monitored by our
field development specialists.
Since 1996, we have completed in excess of 700 field trials on over 40
crops in the United States, the People's Republic of China and other countries.
The majority of trials were conducted on citrus, cotton, cucumber, peppers,
strawberries, tobacco, tomatoes and wheat. Our field trials generally
demonstrated that there is an increase of 10% to 20% in the yields of crops
treated with Messenger over the yields of crops grown under current agronomic
practices. In addition, Messenger generally provided better or equal disease
control over traditional chemicals, even when compared to crops treated
simultaneously with a combination of two or more traditional pesticides. In
large-scale demonstration field trials on citrus, fresh tomatoes, strawberries
and other crops, traditional pesticide use could be reduced by 70% to 90%.
Field trials are subject to numerous environmental and human circumstances
beyond our control and results can vary significantly. Not all the trials we
have conducted have shown commercially significant results. We will continue to
research the crops that may prove to be unresponsive to Messenger as we learn
more about plant biochemistry through our research programs.
Messenger's Safety
Independent toxicology studies, in-house laboratory tests and our extensive
field testing experience demonstrate that Messenger is virtually nontoxic to
humans and the environment. The following is a summary of the human health and
environmental safety attributes of Messenger:
- Negligible human dietary and environmental exposure. There is virtually
no human dietary or environmental exposure to Messenger resulting from
application of the product. Residues of Messenger on treated crops are
rapidly degraded by sunlight, rain and microorganisms and are
undetectable within three to ten days following application, even when
applied at rates far above our recommended application rates.
- Safe for animals. The EPA requires that toxicology studies be conducted
to evaluate the impact of Messenger on selected animals. The EPA-required
mammalian toxicology testing placed Messenger in the EPA's "Toxicity
Category IV," a designation reserved for materials with the lowest hazard
potential. Further, only at dose levels hundreds of times higher than
would ever be present as a result of recommended field applications is
there any evidence of toxicity to fish or other aquatic organisms. Unlike
many plant protection and yield enhancement products, Messenger requires
no label warnings or special use restrictions to protect animals.
- Nontoxic to plants. Messenger has never been observed to cause toxicity
or any other adverse effects in plants during the course of hundreds of
field trials conducted on a diversity of crops under a wide variety of
environmental conditions. Also, we have not observed any adverse effects
attributable to Messenger in numerous controlled laboratory studies to
evaluate its effects on seedling germination and emergence.
- Safe for use in sensitive habitats. The EPA has expressed concern about
the use of crop protection products in or around highly sensitive
habitats such as estuaries and areas inhabited by threatened or
endangered plants and animals. Because Messenger exhibits such a high
degree of safety to plants and nontarget organisms, we believe it is an
ideal candidate for use within and adjacent to environmentally sensitive
areas and the Messenger label bears no restrictions or precautions
regarding such use.
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COMMERCIALIZATION STRATEGY
We have initiated marketing activities designed to promote the distribution
and sale of Messenger, made our first sales of the product in August 2000 and
will continue to commercialize Messenger by implementing the following
strategies:
- Initially focus on high-value crops and large commercial growers. Our
initial commercialization efforts are focused on high-value crops in the
United States, such as citrus, tomatoes, peppers, cucumbers, strawberries
and other horticultural and specialty crops, from which we expect growers
will derive the greatest benefit from Messenger, both in terms of its
relative cost compared to the value of the crops treated and the value of
the expected increases in yields. In addition, we are focusing on large
commercial growers in the United States who have significant purchasing
power and are generally considered early adopters of new technologies. We
have recruited leading growers and their consultants to participate in
field trials, enabling them to become familiar with Messenger and to
experience its benefits firsthand.
- Employ existing industry distribution channels and expand our sales and
field development team. We are employing established industry methods to
distribute Messenger. In addition, we intend to expand our team of sales
and field development specialists to educate growers and distributors and
maintain close relationships with commercial growers.
- Take advantage of the Messenger brand to promote the use of Messenger on
traditional field crops. We plan to take advantage of the Messenger brand
developed in the use on high-value crops and apply it in marketing
Messenger to traditional field crops, such as cotton, wheat, rice, corn
and soybean.
- Capitalize on international opportunities. We intend to expand
internationally by hiring personnel with experience in foreign markets,
conducting additional international field trials, pursuing regulatory
approval in international markets and establishing distribution
relationships with multinational agri-chemical companies in an effort to
capitalize on global opportunities and to establish Messenger as a
leading plant protection and yield enhancement product in the global
marketplace.
SALES, MARKETING AND DISTRIBUTION
We intend to market and sell our products worldwide as an attractive
alternative or complement to traditional chemical pesticides and genetically
modified plants. We plan to utilize traditional industry distribution channels
in our sales efforts, as well as to employ sales, marketing and field
development specialists, to market and sell our products to large commercial
growers.
Our distribution strategy is to focus on large, nationwide and regional
independent distributors. We will be highly selective in choosing distributors
and retailers to represent our products. They will be selected based on
commitment to our product, technical expertise, local market knowledge and
financial stability. We believe our distributors and retailers will have the
opportunity to achieve attractive profit margins selling our products and,
therefore, will have an incentive to promote Messenger and other products we may
develop. To ensure that they have adequate selling incentives, however, we may
also offer volume discounts, extended payment terms or establish other programs
designed to motivate our distributors and retailers. We have engaged several
independent distributors and retailers regarding the distribution and sale of
Messenger.
Our sales and marketing staff consists of sales and marketing specialists
and field development specialists who possess a high level of technical
expertise and knowledge regarding Messenger and our harpin and harpin-related
technology as well as competing plant protection and yield enhancement products
and techniques. Our specialists support our products and educate growers and
independent distributors on the uses and benefits of our technology. Our sales
and marketing and research staff is organized into separate business units that
focus on particular regions and crops. As of December 31, 2000, we had
established three business units. Our Florida business unit currently consists
of 10 sales and field development personnel and is focused on citrus and fresh
vegetable crops. Our Southeastern business unit currently consists of 10 sales
and field development personnel and is focused on cotton, tobacco and peanut
crops. Our Western and Mexico business unit consists
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of 11 sales and field development personnel and is focused on strawberries,
grapes, fresh and processed vegetables and small grain crops.
In order to enhance our commercialization efforts, we expect to continue to
expand our sales, marketing and field development capabilities and to continue
to establish separate business units in various regional and international
markets that will focus on the needs relating to that region or specific crops.
We have initiated the development of business units for the Mid western United
States and for the European-North African regions. We are also beginning to
leverage the sales and marketing efforts of independent distributors by actively
training their sales and marketing personnel in the uses and benefits of
Messenger.
We conduct a number of marketing and awareness programs to support the sale
and distribution of Messenger. We have initiated integrated marketing campaigns
in our targeted crops and regions aimed at increasing brand awareness among
large growers. These include print advertising in trade magazines, localized
radio commercials, targeted direct mail promotions, outdoor advertising,
publicity articles and trade show promotions. In addition, we have programs that
are designed to educate major commercial growers and their pest and disease
control advisors about the benefits of Messenger and we test Messenger in their
fields. Our field development specialists conduct field trials with these
influential groups to further evaluate product efficacy, timing of application,
combination treatments incorporating other pesticide products, and use in
integrated pest and disease management programs.
We also target crop specialists and university agricultural research
personnel in an effort to increase industry awareness of our harpin and
harpin-related technology and its potential benefits. We have sponsored field
trials for these groups, who independently test Messenger, report their results
to us and make recommendations to growers on inclusion of Messenger in
integrated pest and disease management programs.
MANUFACTURING
We believe that we have the manufacturing capacity to meet our currently
anticipated near-term commercial requirements. We intend to expand our
manufacturing capabilities. To ensure the quality and supply of our products and
to protect our proprietary technology, we intend to retain control over the
manufacturing process. We have established comprehensive and detailed quality
control and assurance systems to ensure that we sell the highest quality
product. We currently conduct numerous quality control tests on each Messenger
production lot. We will use independent manufacturing arrangements only when we
can assure ourselves that we can maintain our strict quality standards. We
currently depend on independent manufacturers to perform certain portions of our
production process. We intend to engage and we are in discussions with
additional third-party manufacturers to perform this process.
We have designed and developed a water-based fermentation process to
manufacture Messenger and other harpin-based products. First, we place the
harpin gene into a benign form of common laboratory bacteria, Escherichia coli,
which is frequently used in pharmaceutical production and is nonpathogenic and
nutritionally deficient and cannot survive in normal environmental conditions.
Once the harpin protein has been produced, the bacteria is destroyed and the
harpin protein is extracted and dried. We do not create harmful intermediates in
the production of Messenger or other harpin-based products we are developing.
Further, waste materials are biodegradable and are easily disposable. The raw
materials used in the manufacture of our products are readily available from
multiple sources. We do not currently depend on any single supplier for the raw
materials necessary for the manufacture of Messenger.
Approximately 20,000 square-feet of our Bothell, Washington facilities are
dedicated to the manufacture, packaging, warehousing and shipment of Messenger.
The manufacturing portion of our facility is monitored and regulated by a number
of different governmental agencies including local, state and federal
authorities. We believe that we are in compliance with all regulatory
requirements relating to our facilities.
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RESEARCH AND DEVELOPMENT PROGRAMS
Our research and development efforts utilize protein and organic chemistry,
analytical chemistry, recombinant technologies and traditional water-based
fermentation techniques, among others. As of December 31, 2000, we employed 36
researchers and support staff in Bothell, Washington and other locations, 10 of
whom hold doctoral degrees.
Through our extensive knowledge of harpin effects and harpin receptors and
intensive research program, we believe that we will continue to discover and
develop new products that will significantly improve plant protection and yield
enhancement in the future. We intend to continue to focus our research and
development efforts in the following areas:
- Additional Messenger products and product extensions. We are currently
developing additional Messenger products and product extensions that are
crop, disease or pest specific, or that can be applied to seeds before
planting.
- New harpin proteins. We have identified and are currently performing
efficacy studies on new harpin proteins that we have shown to be many
times more potent than our current product, and are also expected to have
effects on other classes of disease or induce additional growth pathways
in plants.
- Harpin protein fragments. We have discovered that small sections, or
fragments, of the harpin protein are responsible for separate and
distinct harpin-induced effects such as growth enhancement and disease
control. We are identifying which of these fragments correspond to each
separate harpin effect and, in some cases, we are now able to selectively
"switch on" individual characteristics in plants. Products incorporating
this technology may be useful in circumstances in which it is desirable
to control disease without activating plant growth systems.
- The plant receptor system. We believe that our scientists are leading the
effort in the international research community to understand how the
harpin protein message is received by the plant's receptors and carried
throughout the plant and which biochemical pathways are activated in that
process. We believe this research will allow us to better understand the
potential use of harpin and other harpin-related products.
In addition, we conduct in-house research and development activities with
respect to genetically modified plants, principally to increase our
understanding of harpin and harpin-related technology. While we currently do not
intend to manufacture and sell products that modify a plant's DNA in the
foreseeable future, no assurance can be given that we will not manufacture and
sell these products if market conditions become favorable.
CONTINUING CORNELL UNIVERSITY RELATIONSHIP
In May 1995, we entered into a license agreement with the Cornell Research
Foundation, whereby we acquired worldwide exclusive rights to Cornell
University's technology relating to harpin proteins and related genes. Since
then, our researchers and researchers at Cornell University have worked together
to continue the development of harpin protein technologies, designing research
programs and regularly exchanging and discussing information relating to the
technology.
The license agreement grants us exclusive rights to make, have made, use
and sell any product or use claimed in the licensed patents and patent
applications, or that incorporates the licensed biological materials. In
consideration of these exclusive rights, we agreed to fund research and
development activities at Cornell University, and we issued the Cornell Research
Foundation 400,000 shares of our common stock. We further agreed to pay a
royalty on net sales of licensed products and to make certain minimum annual
royalty payments.
Currently, we have exclusive rights under the license agreement to 10 U.S.
patents and 15 U.S. patent applications. The patents and patent applications
include claims that protect Messenger and, accordingly, our ability to market
and sell Messenger depends on the license agreement. Future inventions may be
added to the license agreement based on inventorship, our funding of the
research at Cornell that produced the invention
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and the relationship of potential patent claims of the invention to the claims
of the licensed patents or licensed patent applications.
The license agreement terminates on the expiration date of the
last-to-expire licensed patent. Currently, the last-to-expire licensed patent
will expire in February 2018. However, if additional patents are added to the
license agreement in connection with the development of future products, the
term of the license agreement would be extended to the date of the
last-to-expire of the additional patents. The Cornell Research Foundation may
terminate the license agreement prior to the expiration of the term, but only if
we are in substantial noncompliance with any of the material terms and
conditions of the license agreement and we fail to remedy the noncompliance
within six months after being notified in writing of the noncompliance.
We are currently responsible for the management of patent prosecution and
maintenance activities relating to the licensed patent applications and any
patents issuing therefrom. We are obligated to pay all expenses of this
prosecution and maintenance, both in the United States and in the foreign
jurisdictions that we designate for filing counterpart applications. In
addition, we continue to fund research and development activities at Cornell
University.
PATENTS AND PROPRIETARY RIGHTS
We own or have exclusive rights to 160 U.S. and foreign patents and patent
applications, consisting of 12 U.S. and foreign issued patents and 148 patent
applications pending in the U.S. and abroad. Protection of our proprietary
rights is vital to our business. In addition to our policy of seeking patents on
our inventions, we rely on trade secrets, know-how that is not patented, and
continuing technological innovation to develop and maintain our competitive
position. In addition, we maintain a policy of acquiring licenses under selected
patents or patent applications from third parties, and entering into
confidential information and invention assignment agreements with our employees,
consultants and other third parties.
Through our license agreement with the Cornell Research Foundation, we have
exclusive rights to 10 U.S. patents and 15 pending U.S. patent applications
either owned solely by the Cornell Research Foundation or jointly with us. Three
of the pending U.S. patent applications have received Notices of Allowance from
the U.S. Patent & Trademark Office. We also own or have exclusive rights to two
foreign patents and 123 foreign patent applications corresponding to the issued
patents or pending U.S. filings. We have filed ten additional U.S. patent
applications covering products which have been invented solely by our
researchers.
Our Messenger product is covered by the U.S. patents to which we have
exclusive rights. These patents, which include claims for the harpin family of
proteins generally, and for various specific harpins, and the use of harpin
proteins to impart disease resistance and to control insects in plants, will
expire between 2013 and 2018. We believe these patents preclude our competitors
and other entities from making, using or selling harpin proteins and using
harpin proteins to impart disease resistance and to control insects in plants.
Our pending patent applications include claims to several specific harpin
proteins, the use of harpin proteins to enhance plant growth and improve yields,
and methods to apply harpin proteins to seeds or insert harpin genes into plants
to impart disease resistance. In addition, we have filed for patent protection
on imparting tolerance to environmental or chemical stress, segments of harpin
proteins and receptor technologies.
Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. Like many biotechnology companies, our
patent protection is highly uncertain and involves complex legal and technical
questions for which legal principles are not yet firmly established. Therefore,
our patent applications may be rejected. Even if we are issued patents, they may
be insufficient to protect the technology underlying our products.
EDEN Bioscience(R) and Messenger(R) are registered trademarks in the United
States, the People's Republic of China, Mexico, the European Union and other key
foreign countries. EDEN(R) is also a registered trademark in the United States
and certain foreign countries. Applications to register those trademarks are
pending in other key foreign jurisdictions.
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GOVERNMENT REGULATION AND REGISTRATION
Messenger is regulated under the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA) and under the Federal Food, Drug, and Cosmetic Act
(FFDCA) by the U.S. Environmental Protection Agency. The EPA has determined that
Messenger is a biochemical pesticide, a subset of biopesticides. Compared to
traditional chemical pesticides, biopesticides are generally subjected to
significantly fewer data requirements to support registration under FIFRA.
On April 19, 2000, the EPA granted conditional registration for the full
commercial use of Messenger. Our Messenger registration will automatically
expire two years after the date on which it was granted. Before the expiration
date, the EPA will reevaluate the registration and determine whether to convert
the product to a non-expiring registration. We will not be permitted to continue
sales of Messenger if we do not receive a non-expiring registration.
The EPA also granted EDEN an exemption from tolerance under the FFDCA,
meaning that it was not necessary to establish a maximum level of harpin residue
that may be present on food or animal feed. Now that Messenger is registered by
the EPA, the Food and Drug Administration is responsible for monitoring and
enforcing Messenger's exemption from tolerance.
Our registration is conditioned on the requirement that by April 19, 2001,
we submit:
- the results of one additional laboratory study on a highly sensitive
aquatic species to confirm that Messenger poses no foreseeable hazard to
nontarget organisms;
- the results of two additional assays to assess product purity; and
- the results from assays of five Messenger production batches to verify
our quality standards to protect against potential microbial
contamination.
We have completed all of the studies listed above and believe the results
of the studies and the assays will meet the EPA's requirements. We expect to
submit the final report of the studies prior to April 19, 2001. Upon review and
acceptance of this information, we expect the EPA to convert our Messenger
registration to unconditional. However, if we are unable to meet the conditions
specified by the EPA within the time frames specified in the EPA's notice of
pesticide registration, the agency could revoke our registration or impose use
restrictions that are not currently applicable. The conditional status of our
registration does not currently impact our ability to market and sell Messenger.
Even upon satisfying the conditions imposed by the EPA and the conversion
of our registration to a non-expiring registration, Messenger will be subject to
continuing review by the EPA and extensive regulatory requirements. The EPA
could at any time revoke our registration or impose limitations on the use of
Messenger upon receipt of newly discovered information, including an inability
to comply with regulatory requirements or the occurrence of unanticipated
problems with the product.
Although pesticides themselves are exempt from the Toxic Substances Control
Act (TSCA), TSCA does regulate pesticide raw materials such as the bacteria we
use to produce harpin protein. However, the EPA has established an exemption
from TSCA regulation for the category of bacteria we use to produce harpin if it
is used in a contained environment in a limited access facility. The bacteria we
use and our facilities comply with these requirements and, therefore, we are
exempt from the requirements of this law.
We are required to obtain regulatory approval from certain state and
foreign regulatory authorities before we market Messenger in those
jurisdictions. We are authorized to sell Messenger in 47 states on virtually all
crops and in California for use on strawberry for disease management. The
California approval is conditioned on the requirement that we submit data from
several additional studies, some of which will be submitted in April 2001. The
remaining data will be collected and submitted within various required time
frames over the next two years. Upon review and acceptance of the data and
information, we expect California to convert the registration to unconditional.
We have not yet received approval for Messenger in Colorado and New York or for
use on other crops in California. We have not yet obtained authorization to sell
Messenger in any foreign
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countries. Certain of these jurisdictions may apply different criteria than the
EPA in connection with their approval processes.
Our manufacturing operations are subject to regulation and periodic
inspection by the EPA and other federal and state regulatory agencies.
COMPETITION
The crop protection and treatment industry is highly competitive and is
dominated by multinational chemical and pharmaceutical companies, including
Syngenta AG, Aventis S.A., Monsanto Company, BASF AG, Bayer AG, E.I. DuPont de
Nemours and Company and The Dow Chemical Company. Many of these companies have
substantially greater financial, technical, distribution and marketing resources
than we do. Competition is based primarily on price and efficacy, which is
generally measured by crop yield and overall cost of use to the grower. In
addition, attracting and retaining qualified personnel, developing production
and marketing expertise, developing proprietary products or processes and
obtaining regulatory approvals on a timely basis are essential to establishing a
competitive market position.
Many of the large chemical pesticide companies are also developing products
that they believe are less environmentally harmful than traditional chemical
pesticides and that may directly compete with Messenger and other products we
may develop. Syngenta AG, a large multinational company, manufactures a product
that is designed to induce disease-resistant systems in wheat and, potentially,
in other plants. Other small companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and
established companies. Furthermore, academic institutions, government agencies
and other public and private research organizations may also conduct research,
seek patent protection and establish collaborative arrangements for discovery,
research, development and marketing of products similar to ours.
We expect competition within the plant protection and yield enhancement
industry to intensify as regulatory pressures on traditional chemical solutions
increase. We believe this will occur as advances in biological crop protection
and yield enhancement technologies, such as that incorporated in Messenger,
become more widely known. We may be unable to compete successfully against our
current competitors or new market entrants may develop products that compete
directly with our products and are more effective, less expensive or more widely
accepted than our products.
EMPLOYEES
As of December 31, 2000, we employed 95 persons, 61 located at our
corporate headquarters in Bothell, Washington, and 34 located elsewhere. Of
those employees, approximately 36 are engaged primarily in research and
development, 18 in manufacturing, 22 in sales and marketing and 19 in management
and administration. None of our employees is covered by collective bargaining
agreements. We believe relations with our employees are good.
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EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of March 22, 2001:
NAME AGE POSITION
---- --- --------
Jerry L. Butler........................ 52 Chief Executive Officer, President and Director
Bradley S. Powell...................... 40 Chief Financial Officer, Vice President of Finance
and Secretary
Zhongmin Wei, Ph.D. ................... 43 Vice President of Research
Jon E.M. Jacoby........................ 62 Director
Albert A. James........................ 68 Director
Agatha L. Maza......................... 60 Director
Oscar C. Sandberg...................... 70 Director
John W. Titcomb, Jr.................... 50 Director
William T. Weyerhaeuser, Ph.D.......... 56 Director
JERRY L. BUTLER has served as our Chief Executive Officer, President and a
director since our incorporation in July 1994. From January 1991 to December
1993, Mr. Butler served as Vice President of Finance, Chief Financial Officer
and Treasurer of Bainbridge Sciences Corporation, a biotechnology diagnostics
company. In 1985, Mr. Butler co-founded MicroProbe Corporation, also a
biotechnology diagnostics company, and served as its Executive Vice President
and a director until November 1990. From 1981 to 1984, Mr. Butler served as
Treasurer of Genetic Systems Corporation, a biotechnology diagnostics company.
Mr. Butler received B.S. and M.A. degrees from Brigham Young University.
BRADLEY S. POWELL has served as our Chief Financial Officer and Vice
President of Finance since July 1998 and as our Secretary since June 2000. From
March 1994 to July 1998, he served as Vice President and Corporate Controller of
Omega Environmental, Inc., a provider of products and services to owners of
underground storage tanks. In 1983, Mr. Powell joined KPMG Peat Marwick, an
international public accounting firm, as a certified public accountant and, from
1990 to March 1994, served as a Senior Audit Manager. Mr. Powell received a B.S.
degree from Central Washington University.
ZHONGMIN WEI, PH.D. has served as our Vice President of Research since May
1998, as Director of Research from April 1997 to May 1998 and as Senior
Scientist from June 1996 to April 1997. From November 1995 to April 1996, Dr.
Wei served as Principal Investigator at the Institute of Molecular Agrobiology
in Singapore, an agricultural biotechnology research organization. From July
1992 to June 1996, Dr. Wei served as a Research Scientist and, from September
1989 to September 1992, as a Post-Doctoral Associate at the Cornell University
School of Agricultural and Life Sciences. Dr. Wei received a B.S. degree from
Zhejiang University and M.S. and Ph.D. degrees from Nanjing Agricultural
University, both in the People's Republic of China.
JON E.M. JACOBY has served as one of our directors since February 1999. Mr.
Jacoby has been employed by Stephens, Inc. and Stephens Group, Inc., both of
which engage in investment banking activities, since 1963 and is presently a
director and officer of each of those companies. He is also a director of Delta
& Pine Land Company, an agricultural products company; Beverly Enterprises,
Inc., an operator of nursing facilities; Power One, Inc., a power supplies
manufacturer; Sangamo Biosciences, a biotechnology company; and Energy
Exploration Technologies Inc., an oil and gas exploration company. Mr. Jacoby
received a B.S. degree from the University of Notre Dame and an M.B.A. degree
from Harvard Business School.
ALBERT A. JAMES has served as one of our directors since May 1995 and as
our Secretary from May 1995 to June 2000. Mr. James is a private investor and
currently serves as a general partner in several real estate projects in the
Western United States. From 1982 to November 1997, Mr. James served as Managing
Partner of Bellevue Associates, a commercial real estate management company. He
served as Secretary and Treasurer of Anthony's Restaurants, a regional chain of
restaurants, from 1976 to June 1995 and, from 1981 to March 1994, Mr. James
served as Vice President of Alpine Industries, a window and laminated
glass-manufacturing company. In 1957, Mr. James founded a discount drug and
cosmetic business that merged with a chain of
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discount retail drug stores, which was ultimately sold to Payless Drug Stores
Northwest in 1969. Mr. James received a B.S. degree in Pharmacy from the
University of Washington.
AGATHA L. MAZA has served as one of our directors since May 1995. From
February 1994 to October 1995, Ms. Maza served as Chief Executive Officer of the
National Testing Laboratory in Portland, a division of the American Red Cross
involved in biological testing of blood. From July 1991 to January 1994, she
served as Chief Executive Officer of Medical Arts Laboratory and, from January
1988 to December 1990, as Chief Executive Officer of Eastside Medical
Laboratory, both of which are medical diagnostics services laboratories. Ms.
Maza currently serves as CEO, President of Roadable Aircraft International,
Inc., an autoflight growth and development company. Ms. Maza received a B.S.
degree from Seattle University, an M.B.A. degree from City University and has
completed the Executive Marketing Management Program at Stanford University.
OSCAR C. SANDBERG has served as one of our directors since May 1995, and is
presently Secretary, Treasurer and a director of three retail automobile
dealerships. Mr. Sandberg has served as an officer or director of several
businesses, including First Western Bank, a financial institution, and Drug
Emporium, a chain of retail drug stores. He has also served as a general partner
in various real estate ventures. In 1954, Mr. Sandberg co-founded House of
Values, a chain of discount stores, which was sold to Payless Drug Stores in
1969. Mr. Sandberg received a B.A. degree in business administration from the
University of Washington.
JOHN W. TITCOMB, JR. has served as one of our directors since May 1995 and
as Assistant Secretary from December 1997 to June 2000. Mr. Titcomb is a private
investor and currently serves as a director of several privately held companies
involved in various technology and manufacturing businesses. Mr. Titcomb
received an A.B. degree from Harvard College and a J.D. degree from Harvard Law
School.
WILLIAM T. WEYERHAEUSER, PH.D. has served as one of our directors since May
1998. Dr. Weyerhaeuser was in private practice as a clinical psychologist from
1975 to 1999. From May 1993 to June 1994, he served as President of Rock Island
Company, a private investment company and from July 1994 to June 1998, as its
Chairman of the Board and Chief Executive Officer. Dr. Weyerhaeuser currently
serves as a director of several privately held companies and foundations, and of
two publicly listed companies, Potlatch Corporation, a timber and paper products
company, and Columbia Banking System, Inc., a financial institution. Dr.
Weyerhaeuser received a B.A. degree from Stanford University, an M.A. degree
from Fuller Theological Seminary and a Ph.D. degree from the Fuller Graduate
School of Psychology.
FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION
You should carefully consider the risks described below together with all
of the other information included in this annual report on Form 10-K. The risks
and uncertainties described below are not the only ones facing our company. If
any of the following risks actually occurs, our business, financial condition or
operating results could be harmed.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND ARE SUBJECT TO THE RISKS OF NEW
ENTERPRISES AND THE COMMERCIALIZATION OF A NEW TECHNOLOGY.
We began our operations in 1994 and have recently initiated marketing
activities designed to promote the distribution and sale of our first product,
Messenger, in the United States. We have not proven our ability to commercialize
any products. Our early stage of development, the newness of our technology and
the uncertain nature of the market in which we compete make it difficult to
assess our prospects or predict our future operating results. We are subject to
risks and uncertainties frequently encountered in the establishment of a new
business enterprise, particularly in the rapidly changing market for plant
protection and yield enhancement products. These risks include our inability to
transition from a company with a research focus to a company capable of
supporting commercial activities, including manufacturing, regulatory approval
and compliance, marketing, sales, distribution and quality control and
assurance. Our inability to adequately address these risks could cause us to be
unprofitable or to cease operations.
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WE CURRENTLY DEPEND ON A SINGLE PRODUCT AND OUR DEVELOPMENT AND
COMMERCIALIZATION OF THAT PRODUCT MAY NOT BE SUCCESSFUL.
For the immediately foreseeable future we will be dependent on the
successful development and commercialization of one product, which is based on a
new technology. While Messenger has been subject to numerous field tests on a
wide variety of crops with favorable results, we have only recently begun sales
of Messenger, and Messenger could prove to be commercially unsuccessful.
Messenger may not prove effective or economically viable for all crops or
markets. In addition, because Messenger has not been put to widespread
commercial use over significant periods of time, no assurance can be given that
adverse consequences might not result from the use of Messenger, such as soil or
other environmental degradation, the development of negative effects on animals
or plants or reduced benefits in terms of crop yield or protection.
The markets for Messenger, and other harpin-based products we may develop,
are unproven. Messenger may not gain commercial acceptance or success. If we are
unable to successfully achieve broad market acceptance of Messenger, we may not
be able to generate enough product revenues in the future to achieve
profitability. A variety of factors will determine the success of our market
development and commercialization efforts and the rate and extent of market
acceptance of Messenger, including our ability to implement and maintain an
appropriate pricing policy for Messenger, and the rate and extent that growers,
regulatory authorities and the public accept new pest control practices and
products developed through biotechnology.
OUR PRODUCT DEVELOPMENT EFFORTS, WHICH ARE BASED ON AN INNOVATIVE TECHNOLOGY
THAT IS COMMERCIALLY UNPROVEN, MAY NOT BE SUCCESSFUL.
Our harpin and harpin-related technology is new, in an early stage of
development and commercially unproven. It may take years and significant capital
investment to develop viable enhancements to our Messenger product or new
products based on our harpin and harpin-related technology. Risks inherent in
the development of products based on innovative technologies include the
possibility that:
- new products or product enhancements will be difficult to produce on a
large scale or will be uneconomical to market;
- proprietary rights of third parties will prevent us from marketing
products; and
- third parties will market superior or equivalent products or will reach
the market with their products first.
INABILITY TO PRODUCE A HIGH QUALITY PRODUCT AS WE INCREASE OUR MANUFACTURING
CAPACITY COULD IMPAIR OUR BUSINESS.
To be successful, we will have to manufacture Messenger in large quantities
at acceptable costs while also preserving high product quality. If we cannot
maintain high product quality on a large scale, we may be unable to achieve
market acceptance of our products and our sales would likely suffer. Moreover,
we do not have backup manufacturing systems and, as a result, a failure of any
component required in the manufacturing process could delay or impair our
ability to manufacture Messenger in the quantities that we may require.
We intend to significantly expand our manufacturing facilities. We cannot
guarantee that we will be successful in expanding our manufacturing activities.
We may encounter difficulties in scaling up production of our products,
including problems involving manufacturing yields, quality control and
assurance, shortages of qualified personnel and compliance with regulatory
requirements. Even if we are successful in developing our manufacturing
capability and processes, we do not know whether we will do so in time to meet
our product commercialization schedule or to satisfy the requirements of our
distributors or customers.
WE HAVE A HISTORY OF LOSSES SINCE INCEPTION, WE EXPECT TO CONTINUE TO INCUR
LOSSES AND WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.
We have incurred operating losses in each quarter since inception and we
expect to continue to incur further operating losses for the foreseeable future.
From our inception in July 1994 to December 31, 2000, we
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have accumulated a deficit of $38.6 million. For the years ended December 31,
1999 and 2000, we had net losses of $9.4 million and $15.7 million,
respectively. To date, our revenues have been limited. We expect our future
revenues to be primarily from the sale of Messenger and other products and these
sales are highly uncertain. We expect to continue to devote substantial
resources to expand our research and development activities, further increase
manufacturing capacity and expand our sales and marketing activities for the
commercialization of Messenger. As a result, we will need to generate
significant revenues to achieve and maintain profitability. We may never
generate profits, and if we do become profitable, we may be unable to sustain or
increase profitability on a quarterly or annual basis.
IF OUR ONGOING OR FUTURE FIELD TRIALS ARE UNSUCCESSFUL, WE MAY BE UNABLE TO
ACHIEVE MARKET ACCEPTANCE OR OBTAIN REGULATORY APPROVAL OF OUR PRODUCTS.
The successful completion of multiple field trials in domestic and foreign
locations on many crops is critical to the success of our product development
and marketing efforts. If our ongoing or future field trials are unsuccessful or
produce inconsistent results or unanticipated adverse side effects or if we are
unable to collect reliable data, regulatory approval of our products could be
delayed or we may be unable to achieve market acceptance of our products.
Although we have conducted successful field trials on a broad range of crops, we
cannot be certain that additional field trials conducted on a greater number of
acres, or on crops for which we have not yet conducted field trials, will be
successful. Moreover, the results of our ongoing and future field trials are
subject to a number of conditions beyond our control, including weather-related
events such as drought or floods, severe heat or frost, hail, tornadoes and
hurricanes. Generally, we pay third parties, such as growers, consultants and
universities, to conduct our field tests for us. In addition, incompatible crop
treatment practices or misapplication of the product by the growers that
participate in our field trials could interfere with the success of our field
trials.
RAPID CHANGES IN TECHNOLOGY COULD RENDER OUR PRODUCTS UNMARKETABLE OR OBSOLETE.
We are engaged in an industry characterized by extensive research efforts
and rapid technological development. Our competitors, some of which have
substantially greater technological and financial resources than we do, may
develop plant protection and yield enhancement technologies and products that
are more effective than ours or that render our technology and products obsolete
or uncompetitive. To be successful, we will need to continually enhance our
products and to design, develop and market new products that keep pace with new
technological and industry developments.
INABILITY TO DEVELOP ADEQUATE SALES AND MARKETING CAPABILITIES COULD PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING MESSENGER AND OTHER PRODUCTS WE MAY DEVELOP.
We currently have limited sales and marketing experience and capabilities.
Our internal sales and marketing staff consists primarily of sales and marketing
specialists and field development specialists who are trained to educate growers
and independent distributors on the uses and benefits of Messenger. We will need
to further develop our sales, marketing and field development capabilities in
order to enhance our commercialization efforts, which will involve substantial
costs. These specialists require a high level of technical expertise and
knowledge regarding Messenger's capabilities and other plant protection and
yield enhancement products and techniques. We cannot assure you that our
specialists and other members of our sales and marketing team will successfully
compete against the sales and marketing operations of our current and future
competitors that may have more established relationships with distributors and
growers. Failure to recruit, train and retain important sales and marketing
personnel, such as our sales and marketing specialists and field development
specialists, or the inability of new sales and marketing personnel to
effectively market and sell Messenger and other products we may develop, could
impair our ability to gain market acceptance of our products and cause our sales
to suffer.
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WE MAY BE UNABLE TO ESTABLISH AND MAINTAIN SUCCESSFUL RELATIONSHIPS WITH
INDEPENDENT DISTRIBUTORS, WHICH COULD ADVERSELY AFFECT OUR SALES.
We intend to rely on independent distributors of agri-chemicals to
distribute and assist with the marketing and sale of Messenger and other
products we may develop. We have engaged several independent distributors and
retailers for the distribution and sale of Messenger. Our future revenue growth
will depend in large part on our success in establishing and maintaining these
sales and distribution channels. We are in the early stages of developing our
distribution network and we may be unable to establish these relationships in a
timely or cost-effective manner. Moreover, we cannot assure you that the
distributors and retailers with which we partner will focus adequate resources
on selling our products or will be successful in selling them. Many of our
potential distributors and retailers are in the business of distributing and
sometimes manufacturing other, possibly competing, plant protection and yield
enhancement products and may perceive Messenger as a threat to various product
lines currently being manufactured or distributed by them. In addition, the
distributors may earn higher margins by selling competing products or
combinations of competing products. If we are unable to establish or maintain
successful relationships with independent distributors, we will need to further
develop our own distribution capabilities, which would be expensive and
time-consuming and the success of which would be uncertain.
INABILITY TO OBTAIN REGULATORY APPROVALS, OR TO COMPLY WITH ONGOING AND CHANGING
REGULATORY REQUIREMENTS, COULD DELAY OR PREVENT SALES OF MESSENGER AND OTHER
POTENTIAL PRODUCTS.
The field testing, manufacture, sale and use of plant protection and yield
enhancement products, including Messenger and other products we may develop, are
extensively regulated by the EPA and state, local and foreign governmental
authorities. These regulations substantially increase the cost and time
associated with bringing our products to market. If we do not receive the
necessary governmental approvals to test, manufacture and market our products,
or if the regulatory authorities revoke our approvals or grant them subject to
restrictions on their use, we may be unable to sell our products and our
business may fail.
In April 2000, we received conditional approval from the EPA to market and
sell our first product, Messenger, in the United States. We are required,
however, to obtain regulatory approval from certain state and foreign regulatory
authorities before we market Messenger in those jurisdictions. Although we are
authorized to sell Messenger in 47 states on virtually all crops and in
California on strawberry, we have not yet received approval for Messenger in
Colorado and New York or for use on other crops in California. We have not yet
obtained authorization to sell Messenger in any foreign countries. Certain of
these jurisdictions may apply different criteria than the EPA in connection with
their approval processes.
If we make significant enhancements in Messenger's design as a result of
our ongoing research and development projects, additional EPA approvals may be
required. Moreover, we cannot assure you that we will be able to obtain approval
for marketing additional harpin-based products or product extensions that we may
develop. For example, while the EPA has in place a registration procedure for
products such as Messenger that is streamlined in comparison to the registration
procedure for chemical pesticides, there can be no assurance that all of our
products or product extensions will be eligible for the streamlined procedure or
that additional requirements will not be added by the EPA that could make the
procedure more time-consuming and costly for our future products.
Even after we obtain all necessary regulatory approvals to market and sell
Messenger and other products we develop, Messenger will be subject to continuing
review and extensive regulatory requirements. The EPA, as well as state and
foreign governmental authorities, could withdraw a previously approved product
from the market upon receipt of newly discovered information, including an
inability to comply with regulatory requirements, the occurrence of
unanticipated problems with the product or other reasons. In addition, federal,
state and foreign regulations relating to crop protection products developed
through biotechnology are subject to public concerns and political
circumstances, and, as a result, regulations have changed and may change
substantially in the future. These changes may result in limitations on the
manufacturing, marketing or use of Messenger or other products that we may
develop and commercialize.
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INABILITY TO SATISFY THE CONDITIONS OF OUR EPA AND CALIFORNIA REGISTRATIONS
COULD LIMIT OR PREVENT SALES OF MESSENGER.
The EPA has conditioned its approval of our Messenger registration on the
requirement that we conduct four additional studies by April 19, 2001 that are
designed to further demonstrate the safety of our product. In addition, our
registration to sell Messenger in California, which is limited to sales for use
on strawberry for disease management, is conditioned on the requirement that we
submit data from several additional studies within various required timeframes
over the next two years. If we are unable to conduct the studies required by the
EPA or the California Department of Pesticide Regulation in a timely manner, or
if the results of the studies are unacceptable to the EPA or CDPR, as
applicable, the EPA or the CDPR may revoke their approvals or impose limitations
on the use of Messenger that could have a negative impact on our sales. Because
EPA and state approvals are required for commercial sales of Messenger, the loss
of such approvals for any reason, including our inability to satisfy the
conditions of our EPA registration, would prevent further sales of Messenger.
INABILITY TO COMPLY WITH REGULATIONS APPLICABLE TO OUR FACILITIES AND PROCEDURES
COULD DELAY, LIMIT OR PREVENT OUR RESEARCH AND DEVELOPMENT OR MANUFACTURING
ACTIVITIES.
Our research and development and manufacturing facilities and procedures
are subject to continual review and periodic inspection. To comply with the
regulations applicable to these facilities and procedures, we must spend funds,
time and effort in the areas of production, safety and quality control and
assurance to ensure full technical compliance. If the EPA or another regulator
determines that we are not in compliance, regulatory approval of our products
could be delayed or we may be required to limit or cease our research and
development or manufacturing activities or pay a monetary fine. If we were
required to limit or cease our research and development activities, our ability
to develop new products would be impaired. In addition, if we are required to
limit or cease our manufacturing activities, our ability to produce Messenger in
commercial quantities would be impaired or prohibited, which would have an
adverse effect on our sales.
IF THIRD-PARTY MANUFACTURERS FAIL TO CORRECTLY PERFORM, WE COULD BE UNABLE TO
MEET DEMAND AND OUR REVENUES COULD BE IMPAIRED.
We currently depend on independent manufacturers to perform certain
portions of our production process. We intend to engage and we are in
discussions with additional third-party manufacturers to perform this process.
Any failure or delay in the ability of our current or any future manufacturers
to provide us with material could adversely affect our ability to produce
Messenger in the quantities necessary to satisfy the requirements of our
distributors or customers, or could increase our costs associated with obtaining
fermented materials. In addition, the time and resources that our current or
future third-party manufacturers devote to our business are not within our
control. We cannot ensure that our current or future third-party manufacturers
will perform their obligations to meet our quality standards, that we will
derive cost savings or other benefits from our relationships with them or that
we will be able to maintain a satisfactory relationship with them on
commercially acceptable terms. Moreover, these manufacturers may support
products that compete directly or indirectly with ours, or offer similar or
greater support to our competitors. If any of these events were to occur, our
business and operations could be adversely affected.
INTERNATIONAL EXPANSION WILL SUBJECT US TO RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS, WHICH COULD ADVERSELY AFFECT BOTH OUR DOMESTIC AND OUR INTERNATIONAL
OPERATIONS.
Our success depends in part on our ability to expand internationally as we
obtain regulatory approvals to market and sell our products in other countries.
We have been conducting field trials in the People's Republic of China and
elsewhere, and we hired personnel in Mexico and Europe to develop operations in
those regions. International expansion of our operations could impose
substantial burdens on our resources, divert management's attention from
domestic operations and otherwise adversely affect our business. Furthermore,
international operations are subject to several inherent risks, especially
different regulatory requirements and reduced protection of intellectual
property rights that could adversely affect our ability to compete in
international markets and have a negative effect on our operating results.
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INABILITY TO ADDRESS STRAIN ON OUR RESOURCES CAUSED BY GROWTH COULD RESULT IN
OUR INABILITY TO EFFECTIVELY MANAGE OUR BUSINESS.
As we add manufacturing, marketing, sales, field development and other
personnel, both domestically and internationally, during the commercialization
of Messenger, and expand our manufacturing and research and development
capabilities, we expect that our operating expenses and capital requirements
will increase. Our ability to manage growth effectively requires us to continue
to expend funds to improve our operational, financial and management controls,
reporting systems and procedures. In addition, we must effectively expand, train
and manage our employee base. We will be unable to effectively manage our
business if we are unable to timely and successfully alleviate the strain on our
resources caused by growth in our business, which could adversely affect our
operating results.
THE HIGH LEVEL OF COMPETITION IN OUR MARKET MAY RESULT IN PRICING PRESSURES,
REDUCED MARGINS OR THE INABILITY OF OUR PRODUCTS TO ACHIEVE MARKET ACCEPTANCE.
The market for plant protection and yield enhancement products is intensely
competitive, rapidly changing and undergoing consolidation. We may be unable to
compete successfully against our current and future competitors, which may
result in price reductions, reduced margins and the inability to achieve market
acceptance for our products.
Many entities are engaged in developing plant protection and yield
enhancement products. Our competitors include major international agri-chemical
companies, specialized biotechnology companies, and research and academic
institutions. Many of these organizations have significantly more capital,
research and development, regulatory, manufacturing, marketing, human and other
resources than we do. As a result, they may be able to devote greater resources
to the manufacture, promotion or sale of their products, receive greater
resources and support from independent distributors, initiate or withstand
substantial price competition, or take advantage of acquisition or other
opportunities more readily. Further, many of the large agri-chemical companies
have a more diversified product offering than we do, which may give these
companies an advantage in meeting customer needs by enabling them to offer
integrated solutions to plant protection and yield enhancement.
INABILITY TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS IN THE UNITED STATES AND
FOREIGN COUNTRIES COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY SINCE OUR
COMPETITORS MAY TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our success depends on our ability to obtain and maintain patent and other
proprietary-right protection for our technology and products in the United
States and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. We also rely on trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees, consultants and advisors. It is
possible that these agreements may be breached and that any remedies for a
breach will not make us whole. We generally control and limit access to, and the
distribution of, our product documentation and other proprietary information.
Despite our efforts to protect these proprietary rights, unauthorized parties
may copy aspects of our products and obtain and use information that we regard
as proprietary. We also cannot guarantee that other parties will not
independently develop our know-how or otherwise obtain access to our technology.
The laws of some foreign countries do not protect proprietary rights to the
same extent as the laws of the United States, and many companies have
encountered significant problems and costs in protecting their proprietary
rights in these foreign countries.
Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. We are like most biotechnology
companies in that our patent protection is highly uncertain and involves complex
legal and technical questions for which legal principles are not yet firmly
established. Our patents and those patents for which we have license rights may
be challenged, narrowed, invalidated or circumvented. In addition, our issued
patents may not contain claims sufficiently broad to protect us against
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third parties with similar technologies or products, or provide us with any
competitive advantage. We are not certain that our pending patent applications
will be issued. Moreover, our competitors could challenge or circumvent our
patents or pending patent applications.
The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights.
OTHER COMPANIES MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR BE
PREVENTED FROM SELLING OUR PRODUCTS.
Our success depends on our ability to operate without infringing the
patents and proprietary rights of third parties. Product development is
inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Future patents
issued to third parties may contain claims that conflict with our patents.
Although we believe that our current product does not infringe the proprietary
rights of any third parties, third parties could assert infringement claims
against us in the future. Any litigation or interference proceedings, regardless
of their outcome, would probably be costly and require significant time and
attention of our key management and technical personnel. Litigation or
interference proceedings could also force us to:
- stop or delay selling, manufacturing or using products that incorporate
the challenged intellectual property;
- pay damages; or
- enter into licensing or royalty agreements that may be unavailable on
acceptable terms.
IF WE DO NOT ADEQUATELY DISTINGUISH MESSENGER FROM GENETICALLY MODIFIED PLANTS
AND CERTAIN OTHER PRODUCTS, PUBLIC CONCERNS OVER THOSE PRODUCTS COULD NEGATIVELY
IMPACT MARKET ACCEPTANCE OF MESSENGER.
Claims that genetically engineered products are unsafe for consumption or
pose a danger to the environment have led to public concerns and negative public
attitudes, particularly in Europe. We intend to distinguish Messenger and
harpin-related technologies from products that genetically modify plants. While
our technology does involve genetic modification in the process of manufacturing
Messenger, Messenger and harpin-related technologies are topically applied and
do not genetically modify the plant's DNA. If the public or potential customers
perceive Messenger as a genetically modified product, Messenger may not gain
market acceptance. Similarly, countries that have imposed more restrictive
regulations on genetically modified plants, including Japan and certain members
of the European Union, may perceive Messenger as a genetically modified product.
If so, regulators in those countries may impose more restrictive regulations on
Messenger, which could delay, limit or impair our ability to market and sell
Messenger in those countries.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS, WHICH COULD ADVERSELY AFFECT OUR
OPERATIONS.
We may be held liable or incur costs to settle liability claims if any
products we develop, or any products that use or incorporate any of our
technologies, cause injury or are found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks exist even with respect to
products that have received, or may in the future receive, regulatory approval,
registration or clearance for commercial use. We cannot guarantee that we will
be able to avoid product liability exposure.
We currently maintain product liability insurance at levels we believe are
sufficient and consistent with industry standards for companies at our stage of
development. We cannot guarantee that our product liability insurance is
adequate, and, at any time, it is possible that such insurance coverage may not
be available on commercially reasonable terms or at all. A product liability
claim could result in liability to us greater than our assets and/or insurance
coverage. Moreover, even if we have adequate insurance coverage, product
liability claims or recalls could result in negative publicity or force us to
devote significant time and attention to matters other than those in the normal
course of business.
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INABILITY TO RETAIN OUR KEY EMPLOYEES AND OTHER SKILLED MANAGERIAL AND TECHNICAL
PERSONNEL COULD IMPAIR OUR ABILITY TO MAINTAIN AND EXPAND OUR BUSINESS.
We are highly dependent on the efforts and abilities of our current key
managerial and technical personnel, particularly Jerry L. Butler, our Chief
Executive Officer and President, and Dr. Zhongmin Wei, our Vice President of
Research. Our success will depend in part on retaining the services of Mr.
Butler and Dr. Wei and our other existing key management and technical personnel
and on attracting and retaining new highly qualified personnel. Inability to
retain our existing key management and technical personnel or to attract
additional qualified personnel could, among other things, delay our product
development, marketing and sales efforts. Although Mr. Butler and Dr. Wei have
signed agreements with us that limit their ability to compete directly with us
in the future, nothing prevents either of them from leaving EDEN. Moreover, in
our field, competition for qualified management and technical personnel is
intense. In addition, many of the companies with which we compete for
experienced personnel have greater financial and other resources than we do. As
a result of these factors, we may be unable to recruit, train and retain
sufficient qualified personnel.
WE MAY HAVE TO REDUCE OPERATIONS IF WE ARE UNABLE TO MEET OUR FUNDING
REQUIREMENTS.
We will require substantial additional funding to continue our research and
development activities, increase manufacturing capabilities and commercialize
products. If we are unable to generate sufficient cash flow from operations or
obtain funds through additional financing, we may have to delay, curtail or
eliminate some or all of our research and development, field testing, marketing
and manufacturing programs. We believe that our existing capital resources will
be sufficient to support our operations for at least the next year. Our future
capital requirements will depend on the success of our operations.
If our capital requirements vary from our current plans, we may require
additional financing sooner than we anticipate. Financing may be unavailable to
us when needed or may not be available to us on acceptable terms.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE, RESULTING IN AN UNPREDICTABLE
LEVEL OF EARNINGS AND POSSIBLY IN A DECREASE IN OUR STOCK PRICE.
Our operating results for a particular quarter or year are likely to
fluctuate, which could result in uncertainty surrounding our level of earnings
and possibly in a decrease in our stock price. Numerous factors will contribute
to the unpredictability of our operating results. In particular, our sales are
expected to be highly seasonal. Sales of plant protection and yield enhancement
products are dependent on planting and growing seasons, climatic conditions and
other variables, which we expect to result in substantial fluctuations in our
quarterly sales and earnings. In addition, most of our expenses, such as
employee compensation and lease payments for facilities and equipment, are
relatively fixed. Our expense levels are based, in part, on our expectations
regarding future sales. As a result, any shortfall in sales relative to our
expectations could cause significant changes in our operating results from
quarter to quarter. Other factors may also contribute to the unpredictability of
our operating results, including the size and timing of significant customer
transactions, the delay or deferral of customer use of our products and the
fiscal or quarterly budget cycles of our customers. For example, customers may
purchase large quantities of our products in a particular quarter to store and
use over long periods of time, or time their purchases to coincide with their
receipt of revenue or loan proceeds, which may cause significant fluctuations in
our operating results for a particular quarter or year.
ITEM 2. PROPERTIES.
As of December 31, 2000, our principal facilities in Bothell and
Woodinville, Washington, which house our manufacturing, research and
administration functions, totaled approximately 32,250 square feet and are
leased under the following arrangements:
- 17,900 square feet of manufacturing, research and office space is leased
through December 31, 2001, at which time we have an option to extend the
lease for an additional 18 months;
- 5,500 square feet of additional warehouse and office space is leased
through July 31, 2001;
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- 4,000 square feet for research and office space is leased through June
2003; and
- 4,850 square feet of warehouse space is leased through October 31, 2003.
In January 2001, we leased approximately 63,200 square feet of office space
in Bothell, Washington, to house our research and development and administration
functions. The lease has an initial term of ten years with two five-year
extension options to be exercised at our sole discretion. Approximately 15,000
square-feet of this space has been subleased to another party for a period of
three years.
We operate a field research station on approximately 30 acres of leased
property in LaBelle, Florida. The lease expires April 30, 2005 with two 30-month
renewal options to be exercised at our discretion. We also lease office space in
Melbourne, Florida, Annapolis, Maryland and Mexico City on a short-term basis.
We anticipate that we will require additional manufacturing space within the
next 24 months, but that suitable additional space will be available on
commercially reasonable terms, although there can be no assurance in this
regard. We do not own any real estate.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during the fourth
quarter of the fiscal year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our common stock has been quoted on The Nasdaq National Market under the
symbol "EDEN" since our initial public offering on September 27, 2000. Prior to
that time, there was no public market for our common stock.
The following table sets forth for the periods indicated the high and low
closing sale prices for our common stock as quoted on The Nasdaq National
Market.
HIGH LOW
------- -------
Third Quarter 2000 (from September 27, 2000)............. $34.250 $15.000
Fourth Quarter 2000...................................... 43.250 25.375
We have never paid any cash dividends on our common stock. We currently
intend to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future.
As of March 22, 2001, there were approximately 397 holders of record of our
common stock.
During the fiscal year ended December 31, 2000, we issued and sold
unregistered securities as follows:
1. In August 2000, in connection with the establishment of two credit
facilities with Stephens Group, Inc. and the WBW Trust Number One, EDEN
issued a warrant to Stephens Group to purchase 133,333 shares of our common
stock, and a warrant to the WBW Trust to purchase 66,667 shares of our
common stock at an exercise price of $15.00 per share. The foregoing
issuances were exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transactions did not involve
a public offering.
2. From January 1, 2000 to September 27, 2000, EDEN granted options to
purchase 1,303,950 shares of its common stock, with exercise prices ranging
from $6.00 to $14.00 per share, to employees and directors pursuant to its
1995 Combined Incentive and Nonqualified Stock Option Plan. Of these
options, options to purchase 27,200 shares have been canceled without being
exercised and options to purchase 1,276,750 shares remain outstanding. The
sale and issuance of these securities were exempt from registration under
the Securities Act pursuant to Rule 701 promulgated thereunder on the basis
that these options were offered and sold pursuant to a written compensatory
benefit plan.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data and other operating information are
derived from our financial statements. When you read this selected financial
data, it is important that you also read the historical financial statements and
related notes included in this report, as well as Item 7 of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales......................... $ -- $ -- $ -- $ -- $ 2,017
Consulting services................... 178 176 121 115 --
Research grants....................... 42 7 -- -- --
------- ------- ------- ------- --------
Gross revenues..................... 220 183 121 115 2,017
Sales allowances........................ -- -- -- -- 788
------- ------- ------- ------- --------
Net revenues....................... 220 183 121 115 1,229
------- ------- ------- ------- --------
Operating expenses:
Cost of goods sold.................... -- -- -- -- 662
Research and development.............. 1,643 2,865 5,322 7,555 9,575
Selling, general and administrative... 396 577 1,708 2,209 6,042
------- ------- ------- ------- --------
Total operating expenses...... 2,039 3,442 7,030 9,764 16,279
------- ------- ------- ------- --------
Loss from operations............... (1,819) (3,259) (6,909) (9,649) (15,050)
------- ------- ------- ------- --------
Other income (expense):
Interest and dividend income.......... 99 172 135 435 1,803
Interest expense...................... (27) (116) (162) (181) (132)
Fee and fair value of warrants........ -- -- -- -- (2,281)
------- ------- ------- ------- --------
Total other income
(expense)................... 72 56 (27) 254 (610)
------- ------- ------- ------- --------
Net loss................................ $(1,747) $(3,203) $(6,936) $(9,395) $(15,660)
======= ======= ======= ======= ========
Historical basic and diluted net loss
per share(1).......................... $ (1.04) $ (1.90) $ (3.93) $ (5.23) $ (1.89)
======= ======= ======= ======= ========
Weighted average shares outstanding used
in computation of historical basic and
diluted net loss per share(1)......... 1,681 1,681 1,765 1,902 8,290
======= ======= ======= ======= ========
Pro forma basic and diluted net loss per
share(1).............................. $ (0.59) $ (0.67) $ (0.85)
======= ======= ========
Weighted average shares outstanding used
in computation of pro forma basic and
diluted net loss per share(1)......... 11,752 14,820 18,456
======= ======= ========
DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 332 $ 1,633 $ 11,723 $ 13,107 $ 86,557
Working capital....................... 1,369 2,505 10,174 11,014 83,781
Total assets.......................... 2,087 4,136 13,631 16,278 98,501
Capital lease obligations, net of
current portion..................... 261 280 712 523 330
Accumulated deficit................... (2,887) (6,089) (13,025) (22,974) (38,635)
Total shareholders' equity............ 1,473 3,241 11,345 13,600 93,241
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of historical basic and diluted net loss per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. We use words such as "anticipate," "believe," "expect," "future,"
"intend" and similar expressions to identify forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the factors described
under the caption "Factors That May Affect Our Business, Future Operating
Results and Financial Condition" set forth at the end of Part I of this report.
You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this Form 10-K. You should read the following
discussion and analysis in conjunction with our financial statements and related
footnotes included in Item 8 of this report.
OVERVIEW
We are a plant technology company focused on developing, manufacturing, and
marketing innovative natural products for agriculture. We have a fundamentally
new, patented and proprietary technology that we believe will significantly
improve plant protection and crop production worldwide. We believe our
technology and our initial product, Messenger, allow us to offer innovative
solutions compared to traditional plant protection and crop yield enhancement
alternatives and, importantly, avoid the substantial and growing public
resistance to chemical pesticides and gene-based biotechnology.
Commercial sales of our initial product, Messenger, began in August 2000.
Prior to then, we derived all of our revenue from providing consulting services
to growers in the analysis and diagnosis of plant and soil diseases and from
research grants. We terminated all consulting services in January 2000 in order
to focus on the commercialization of Messenger. Since 1997, we have not sought,
and do not intend to seek in the future, additional research grants.
We have incurred significant operating losses since inception. At December
31, 2000, we had an accumulated deficit of $38.6 million. We incurred net losses
of $6.9 million in 1998, $9.4 million in 1999 and $15.7 million in 2000. Total
operating expenses increased $2.8 million (39%) from $7.0 million in 1998 to
$9.8 million in 1999 and increased $6.5 million (67%) to $16.3 million in 2000.
We expect to incur additional net losses as we expand and enhance our
manufacturing and research and development activities and sales and marketing
capabilities.
RESULTS OF OPERATIONS
Revenues
We generated our first revenue from product sales in August 2000 when we
began selling Messenger. Revenues from product sales are recognized when the
product is shipped to independent distributors and all significant obligations
of EDEN have been satisfied. Revenues from product sales in 2000 totaled $2.0
million. Approximately $1.8 million (90%) of product sales revenue in 2000
resulted from sales to one major distributor. We expect sales to this
distributor to continue to be significant in 2001. In January 2000, we
terminated all consulting services in order to increase our focus on the
commercialization of Messenger. Accordingly, revenues from consulting services
decreased $6,000 (5%) from $121,000 in 1998 to $115,000 in 1999 and decreased
$115,000 (100%) to $0 in 2000.
Sales Allowances
Sales allowances represent allowances granted to independent distributors
and retailers for sales and marketing support, product warehousing and delivery
and information exchange. Sales allowances are based on a percentage of sales
and are accrued when the related product sales revenue is recognized. Sales
allowances for 2000 totaled $787,000, or 39% of product sales revenue. No such
allowances were granted in 1999 or 1998.
27
30
Cost of Goods Sold
Cost of goods sold includes the cost of raw materials, labor and overhead
required to manufacture, package and ship Messenger. Cost of goods sold for 2000
was $662,000, or 33% of gross product sales revenue. No such costs were incurred
in 1999 or 1998. We believe that our cost to manufacture Messenger will decrease
as we increase our capacity and continue to improve our manufacturing process.
Research and Development Expenses
Our research and development expenses consist primarily of personnel and
related expenses, field trial expenses, laboratory expenses, patent expenses and
facility and equipment expenses. Research and development expenses increased
$2.3 million (42%) from $5.3 million in 1998 to $7.6 million in 1999 and
increased $2.0 million (27%) to $9.6 million in 2000. Research and development
expenses have increased primarily because we have increased staffing, conducted
more field trials, conducted extensive toxicology tests, developed and enhanced
our manufacturing processes and prepared and filed additional patent
applications. We expect substantial increases in research and development
expenses as we develop new products and attempt to maintain and enhance our
harpin-related technology platform.
In 1995, we issued 400,000 shares of our common stock to the Cornell
Research Foundation as partial consideration for the exclusive right to use
Cornell University's patents, patent applications and biological materials
relating to harpin proteins and related genes. The agreement allowed for the
cancellation of some shares by us if we did not reach prescribed milestones in
product development. We recognized license expense equal to the value of the
shares at the time they vested. When we achieved milestones in 1998, we recorded
license expense of $240,000. On September 30, 1998, we amended the license
agreement to fully vest the remaining 120,000 shares and recorded license
expense of $420,000.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of personnel and
related expenses for sales and marketing, executive and administrative
personnel, marketing expenses, professional fees and other corporate expenses.
Selling, general and administrative expenses increased $501,000 (29%) from $1.7
million in 1998 to $2.2 million in 1999 and increased $3.8 million (174%) to
$6.0 million in 2000. Our selling, general and administrative expenses increased
primarily due to increased staffing, marketing costs for the introduction of
Messenger and our harpin and harpin-related technology, and increases in
professional fees. We expect selling, general and administrative expenses to
increase further as we hire additional personnel to support anticipated growth
and the commercialization of Messenger, enhance information systems, expand our
sales and marketing capability and incur costs associated with being a public
company.
Interest Income
Interest income consists of earnings on our cash and cash equivalents.
Interest income increased $301,000 (223%) from $135,000 in 1998 to $436,000 in
1999 and increased $1.4 million (314%) to $1.8 million in 2000. These increases
were due to higher average cash balances that resulted primarily from the sale
of preferred stock in 1998 and 1999 and common stock in 2000. In October 2000,
we received approximately $91.5 million in net proceeds from our initial public
offering of 6,670,000 shares of common stock.
Interest Expense
Interest expense consists of interest we pay on capital leases used to
finance certain equipment purchases. Interest expense increased $19,000 (12%)
from $162,000 in 1998 to $181,000 in 1999 and decreased $49,000 (27%) to
$132,000 in 2000. The increase in 1999 resulted from additional capital leases
entered into in 1998 and 1999. The decrease in 2000 was due to reduced leasing
activity and lower average principal balances as we paid down our existing
capital lease obligations.
In August 2000, we established unsecured, multiple-advance, committed
credit facilities with Stephens Group, Inc. and the WBW Trust Number One to
borrow up to a total of $15 million. Under the terms of the
28
31
facilities, we paid commitment fees totaling $300,000 and issued warrants to
purchase 200,000 shares of our common stock at an exercise price of $15.00 per
share. The commitment fee and fair value of these warrants totaled $2.3 million
and is included in other income (expense). We did not borrow any amounts
pursuant to these credit facilities and, with the completion of our initial
public offering, we no longer have the ability to borrow any amounts under these
credit facilities.
Income Taxes
We have realized a net loss from operations for each period since we began
doing business. As of December 31, 2000, we had accumulated approximately $36
million of net operating loss carryforwards for federal income tax purposes.
These carryforwards expire between 2009 and 2015. The annual use of these net
operating loss carryforwards may be limited in the event of a cumulative change
in ownership of more than 50%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, our cash and cash equivalents totaled $86.6 million.
Prior to October 2000, we financed our operations primarily through the private
sale of our equity securities, resulting in net proceeds of $36.5 million
through September 30, 2000. In October 2000, we received approximately $91.5
million in net proceeds from the initial public offering of 6,670,000 shares of
our common stock. To a lesser extent, we have financed our equipment purchases
through lease financings.
Net cash used in operations increased $3.2 million (69%) from $4.6 million
in 1998 to $7.8 million in 1999 and increased $4.3 million (54%) to $12.1
million in 2000. Net cash used in operations resulted primarily from net losses
less depreciation and amortization and fair value of warrants granted for credit
facilities of $5.7 million, $8.3 million and $12.7 million in 1998, 1999 and
2000, respectively. We expect net cash used in operations to increase for
expansion and enhancement of our manufacturing and research and development
activities and sales and marketing capabilities and increases in trade accounts
receivable and inventory.
Net cash used in investing activities increased from $7,900 in 1998 to $2.2
million in 1999 and increased $5.2 million (237%) to $7.4 million in 2000.
Investing activities in 1998 consisted of purchases of property and equipment of
$1.4 million, offset by a nearly equal amount of proceeds from the sale of
short-term investments. Investing activities in 1999 and 2000 consisted
primarily of property and equipment purchases in connection with expansion of
our manufacturing and research and development facilities, which we expect to
complete by September 30, 2001. We expect to spend approximately $4 million to
$5 million in 2001 to complete the expansion of our manufacturing facilities and
approximately $7 million to $9 million in 2001 to improve and equip our new
leased facility which will house our research and development and administration
functions.
Net cash provided by financing activities decreased $3.3 million (22%) from
$14.7 million in 1998 to $11.4 million in 1999 and increased $81.6 million
(713%) to $93.0 million in 2000. Funds provided in 1998 and 1999 resulted
primarily from private offerings of our preferred stock and from the exercise of
common stock warrants and options. Funds provided in 2000 resulted primarily
from the initial public offering of 6,670,000 shares of our common stock,
resulting in net proceeds of approximately $91.5 million. At December 31, 2000,
our future minimum payments under capital and operating leases totaled
approximately $1.3 million and are payable over the next five years. In January
2001, we entered into a new facility lease with annual future minimum payments
of $1.2 million to $1.5 million over the next 10 years.
We currently expect to substantially increase our operating expenses as we
enhance and expand our sales and manufacturing capabilities and continue to
enhance our manufacturing and research and development activities. These
additional operating expenses and capital expenditures and increases in working
capital requirements will consume a material amount of our cash resources. We
believe that the balance of cash and cash equivalents at December 31, 2000 will
be sufficient to meet our anticipated cash needs for net losses, working capital
and capital expenditures for at least the next year. Our future capital
requirements will depend on the success of our operations.
29
32
In the future, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. We may
be unable to obtain adequate or favorable financing at that time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not currently hold any derivative instruments and we do not engage in
hedging activities. Also, we do not have any outstanding variable interest rate
debt and currently do not enter into any material transactions denominated in
foreign currency. Therefore, our direct exposure to interest rate and foreign
exchange fluctuation is currently minimal. We believe that the market risk
arising from holdings of our financial instruments is not material.
30
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
EDEN Bioscience Corporation:
We have audited the accompanying balance sheets of EDEN Bioscience
Corporation as of December 31, 1999 and 2000, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EDEN Bioscience Corporation
as of December 31, 1999 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Seattle, Washington
February 9, 2001
31
34
EDEN BIOSCIENCE CORPORATION
BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1999 2000
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 13,107,250 $ 86,556,865
Trade accounts receivable................................. 7,698 595,470
Inventory................................................. -- 1,321,241
Other current assets...................................... 53,669 236,458
------------ ------------
Total current assets.............................. 13,168,617 88,710,034
Property and equipment, net................................. 2,949,720 9,479,872
Other assets................................................ 159,711 310,715
------------ ------------
Total assets...................................... $ 16,278,048 $ 98,500,621
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 725,711 $ 1,415,730
Accrued expenses.......................................... 1,100,018 3,238,398
Current portion of capital lease obligations.............. 329,085 275,316
------------ ------------
Total current liabilities......................... 2,154,814 4,929,444
Capital lease obligations, net of current portion........... 522,966 330,394
------------ ------------
Total liabilities................................. 2,677,780 5,259,838
------------ ------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value, 10,000,000
shares authorized; 9,964,185 shares designated as
Series A through F at December 31, 1999 and no
designations at December 31, 2000:
Issued and outstanding shares -- 9,746,396 shares at
December 31, 1999; no shares at December 31,
2000..............................................
Aggregate liquidation preference -- $30,554,080 at
December 31, 1999 and $0 at December 31, 2000..... 97,464 --
Common stock, $.0025 par value, 100,000,000 shares
authorized; issued and outstanding shares -- 2,694,798
shares at December 31, 1999; 23,894,680 shares at
December 31, 2000...................................... 6,737 59,737
Additional paid-in capital................................ 36,675,834 131,844,183
Common stock subscriptions receivable..................... (59,007) --
Deferred stock option compensation expense................ (146,336) (28,625)
Accumulated deficit....................................... (22,974,424) (38,634,512)
------------ ------------
Total shareholders' equity........................ 13,600,268 93,240,783
------------ ------------
Total liabilities and shareholders' equity........ $ 16,278,048 $ 98,500,621
============ ============
The accompanying notes are an integral part of these statements.
32
35
EDEN BIOSCIENCE CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
Revenues:
Product sales.................................... $ -- $ -- $ 2,016,517
Consulting services.............................. 120,686 114,620 --
----------- ----------- ------------
Gross revenues................................ 120,686 114,620 2,016,517
Sales allowances................................. -- -- 787,450
----------- ----------- ------------
Net revenues.................................. 120,686 114,620 1,229,067
----------- ----------- ------------
Operating expenses:
Cost of goods sold............................... -- -- 661,590
Research and development......................... 5,321,563 7,555,295 9,574,929
Selling, general and administrative.............. 1,707,775 2,208,486 6,042,080
----------- ----------- ------------
Total operating expenses................. 7,029,338 9,763,781 16,278,599
----------- ----------- ------------
Loss from operations..................... (6,908,652) (9,649,161) (15,049,532)
----------- ----------- ------------
Other income (expense):
Interest income.................................. 135,009 435,742 1,802,946
Interest expense................................. (162,206) (181,159) (131,978)
Fee and fair value of warrants................... -- -- (2,281,524)
----------- ----------- ------------
Total other income (expense)............. (27,197) 254,583 (610,556)
----------- ----------- ------------
Loss before income taxes........................... (6,935,849) (9,394,578) (15,660,088)
Provision for income taxes......................... -- -- --
----------- ----------- ------------
Net loss........................................... $(6,935,849) $(9,394,578) $(15,660,088)
=========== =========== ============
Basic and diluted net loss per share............... $ (3.93) $ (5.23) $ (1.89)
=========== =========== ============
Weighted average shares outstanding used to compute
net loss per share............................... 1,765,126 1,902,281 8,289,947
=========== =========== ============
Pro forma basic and diluted net loss per share..... $ (0.59) $ (0.67) $ (0.85)
=========== =========== ============
Weighted average shares outstanding used to compute
pro forma net loss per share..................... 11,751,905 14,820,198 18,456,013
=========== =========== ============
The accompanying notes are an integral part of these statements.
33
36
EDEN BIOSCIENCE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON DEFERRED
OUTSTANDING SHARES STOCK STOCK
----------------------- ADDITIONAL SUBSCRIP- DEFERRED OPTION
PREFERRED COMMON PREFERRED COMMON PAID-IN TIONS LICENSE COMPEN-
STOCK STOCK STOCK STOCK CAPITAL RECEIVABLE EXPENSE SATION
---------- ---------- --------- ------- ------------ ---------- --------- ---------
Balance at December 31,
1997................... 9,497,285 1,681,250 $ 94,973 $4,203 $ 9,522,130 $(50,628) $(240,000) $ --
Sale of preferred
stock................ 196,671 -- 1,967 -- 14,464,393 -- -- --
Offering costs......... -- -- -- -- (212,541) -- -- --
Interest on
subscriptions
receivable........... -- -- -- -- -- (4,019) -- --
Exercise of stock
options.............. -- 141,666 -- 354 69,812 -- -- --
Increase in fair market
value of cancelable
stock issued for
license.............. -- -- -- -- 420,000 -- (420,000) --
Amortization of license
expense.............. -- -- -- -- -- -- 660,000 --
Unearned stock option
compensation......... -- -- -- -- 298,883 -- -- (298,883)
Amortization of stock
option compensation
expense.............. -- -- -- -- -- -- -- 59,679
Net loss............... -- -- -- -- -- -- -- --
---------- ---------- -------- ------- ------------ -------- --------- ---------
Balance at December 31,
1998................... 9,693,956 1,822,916 96,940 4,557 24,562,677 (54,647) -- (239,204)
Sale of preferred
stock................ 52,440 -- 524 -- 6,292,276 -- -- --
Exercise of warrants... -- 831,882 -- 2,080 5,821,094 -- -- --
Offering costs......... -- -- -- -- (25,113) -- -- --
Interest on
subscriptions
receivable........... -- -- -- -- -- (4,360) -- --
Exercise of stock
options.............. -- 40,000 -- 100 24,900 -- -- --
Amortization of stock
option compensation
expense.............. -- -- -- -- -- -- -- 92,868
Net loss............... -- -- -- -- -- -- -- --
---------- ---------- -------- ------- ------------ -------- --------- ---------
Balance at December 31,
1999................... 9,746,396 2,694,798 97,464 6,737 36,675,834 (59,007) -- (146,336)
Sale of common stock... -- 6,670,000 -- 16,675 100,033,325 -- -- --
Offering costs......... -- -- -- -- (8,588,716) -- -- --
Fair value of warrants
granted.............. -- -- -- -- 1,981,524 -- -- --
Conversion of preferred
stock upon
effectiveness of
initial public
offering............. (9,746,396) 13,794,104 (97,464) 34,485 62,979 -- -- --
Exercise of warrants... -- 399,114 -- 998 1,120,285 -- -- --
Interest on
subscriptions
receivable........... -- -- -- -- -- (3,149) -- --
Exercise of stock
options.............. -- 336,664 -- 842 558,952 -- -- --
Amortization of stock
option compensation
expense.............. -- -- -- -- -- -- -- 117,711
Repayment of note
receivable from
shareholder.......... -- -- -- -- -- 62,156 -- --
Net loss............... -- -- -- -- -- -- -- --
---------- ---------- -------- ------- ------------ -------- --------- ---------
Balance at December 31,
2000................... -- 23,894,680 $ -- $59,737 $131,844,183 $ -- $ -- $ (28,625)
========== ========== ======== ======= ============ ======== ========= =========
TOTAL
SHARE-
ACCUMULATED HOLDERS'
DEFICIT EQUITY
------------ ------------
Balance at December 31,
1997................... $ (6,089,409) $ 3,241,269
Sale of preferred
stock................ -- 14,466,360
Offering costs......... -- (212,541)
Interest on
subscriptions
receivable........... -- (4,019)
Exercise of stock
options.............. -- 70,166
Increase in fair market
value of cancelable
stock issued for
license.............. -- --
Amortization of license
expense.............. -- 660,000
Unearned stock option
compensation......... -- --
Amortization of stock
option compensation
expense.............. -- 59,679
Net loss............... (6,935,849) (6,935,849)
------------ ------------
Balance at December 31,
1998................... (13,025,258) 11,345,065
Sale of preferred
stock................ -- 6,292,800
Exercise of warrants... (554,588) 5,268,586
Offering costs......... -- (25,113)
Interest on
subscriptions
receivable........... -- (4,360)
Exercise of stock
options.............. -- 25,000
Amortization of stock
option compensation
expense.............. -- 92,868
Net loss............... (9,394,578) (9,394,578)
------------ ------------
Balance at December 31,
1999................... (22,974,424) 13,600,268
Sale of common stock... -- 100,050,000
Offering costs......... -- (8,588,716)
Fair value of warrants
granted.............. -- 1,981,524
Conversion of preferred
stock upon
effectiveness of
initial public
offering............. -- --
Exercise of warrants... -- 1,121,283
Interest on
subscriptions
receivable........... -- (3,149)
Exercise of stock
options.............. -- 559,794
Amortization of stock
option compensation
expense.............. -- 117,711
Repayment of note
receivable from
shareholder.......... -- 62,156
Net loss............... (15,660,088) (15,660,088)
------------ ------------
Balance at December 31,
2000................... $(38,634,512) $ 93,240,783
============ ============
The accompanying notes are an integral part of these statements.
34
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EDEN BIOSCIENCE CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
Cash flows from operating activities:
Net loss......................................... $(6,935,849) $(9,394,578) $(15,660,088)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization................. 550,206 1,019,464 909,425
Amortization of deferred license expense...... 660,000 -- --
Amortization of stock option compensation
expense..................................... 59,679 92,868 117,711
Interest income on subscriptions receivable... (4,019) (4,360) (3,149)
Loss on disposition of fixed assets........... 13,339 11,859 9,591
Fair value of warrants granted................ -- -- 1,981,524
Changes in assets and liabilities:
Trade accounts receivable..................... 5,088 (5,063) (587,772)
Inventory..................................... -- -- (1,321,241)
Other assets.................................. 35,157 (81,298) (333,793)
Accounts payable.............................. 676,944 (72,022) 690,019
Accrued expense............................... 299,563 591,983 2,138,380
----------- ----------- ------------
Net cash used in operating activities.... (4,639,892) (7,841,147) (12,059,393)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.............. (1,378,161) (2,208,468) (7,449,168)
Sale of short-term investments, net.............. 1,370,269 -- --
----------- ----------- ------------
Net cash used in investing activities.... (7,892) (2,208,468) (7,449,168)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from sale-leaseback of equipment........ 627,481 168,297 90,641
Payments on capital equipment leases............. (213,197) (296,155) (336,982)
Sale of common and preferred stock............... 14,466,360 6,292,800 100,050,000
Offering costs................................... (212,541) (25,113) (8,588,716)
Proceeds from exercise of stock options.......... 70,166 25,000 559,794
Proceeds from exercise of common stock
warrants...................................... -- 5,268,586 1,121,283
Repayment of notes receivable from
shareholders.................................. -- -- 62,156
----------- ----------- ------------
Net cash provided by financing
activities............................. 14,738,269 11,433,415 92,958,176
----------- ----------- ------------
Net increase in cash and cash equivalents.......... 10,090,485 1,383,800 73,449,615
Cash and cash equivalents at beginning of period... 1,632,965 11,723,450 13,107,250
----------- ----------- ------------
Cash and cash equivalents at end of period......... $11,723,450 $13,107,250 $ 86,556,865
=========== =========== ============
Supplemental disclosures:
Cash paid for interest........................... $ 162,206 $ 181,159 $ 131,978
=========== =========== ============
The accompanying notes are an integral part of these statements.
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EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
EDEN Bioscience Corporation ("EDEN" or the "Company") was incorporated on
July 18, 1994. EDEN is a plant technology company focused on developing,
manufacturing and marketing innovative natural products for agriculture. Prior
to August 2000, the Company was a development stage corporation. In August 2000,
the Company began selling its initial product, Messenger.
ESTIMATES USED IN FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market.
INVENTORY
Inventory consists of raw materials, work in process and finished goods and
is valued at the lower of average cost or market.
CONCENTRATIONS OF CREDIT RISK
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed by investing its excess cash
in high-quality money market instruments and securities of the U.S. government.
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements are stated at historical cost.
Improvements and replacements are capitalized. Maintenance and repairs are
expensed when incurred. The provision for depreciation and amortization is
determined using straight-line and accelerated methods, which allocate costs
over their estimated useful lives of two to 20 years. Equipment leased under
capital leases is depreciated over the shorter of the equipment's estimated
useful life or lease term, which ranges between three and five years.
REVENUES
Revenues from consulting arrangements are recognized as the Company
performs activities under the terms of each agreement. The Company recognizes
revenue from product sales, net of sales allowances, when the products are
shipped and all significant obligations of the Company have been satisfied. All
product sales revenue in 2000 resulted from sales to two distributors, one of
which accounted for $1.8 million (90%) of product sales revenue and $453,000
(76%) of trade accounts receivable at December 31, 2000. Sales to the other
distributor resulted in $200,000 (10%) of product sales revenue and $138,000
(23%) of trade accounts receivable at December 31, 2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
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39
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCK COMPENSATION
The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
under SFAS No. 109, "Accounting for Income Taxes."
NET LOSS PER COMMON SHARE
Basic net loss per share is the adjusted net loss divided by the average
number of shares outstanding during the period. Diluted net loss per share is
the adjusted net loss divided by the sum of the average number of shares
outstanding during the period plus the additional shares that would have been
issued had all dilutive warrants and options been exercised, less shares that
would be repurchased with the proceeds from such exercise (Treasury Stock
Method). The effect of including outstanding options and warrants is
antidilutive for all periods presented. Therefore, options and warrants have
been excluded from the calculation of diluted net loss per share. The adjusted
net loss is the net loss adjusted for the amount of the inducement (discount
from the original exercise price) that was provided to certain holders of
warrants in exchange for their common stock warrants (see Note 2).
The pro forma basic and diluted net loss per share is calculated presuming
the conversion of all convertible preferred stock at the beginning of the
periods presented. The computation of historical and pro forma basic and diluted
net loss per share is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
HISTORICAL
Net loss as reported....................... $(6,935,849) $(9,394,578) $(15,660,088)
Inducement to exercise warrants............ -- (554,588) --
----------- ----------- ------------
Adjusted net loss.......................... $(6,935,849) $(9,949,166) $ 15,660,088)
=========== =========== ============
Weighted average common shares
outstanding.............................. 1,765,126 1,902,281 8,289,947
=========== =========== ============
Historical basic and diluted net loss per
share.................................... $ (3.93) $ (5.23) $ (1.89)
=========== =========== ============
PRO FORMA
Adjusted net loss.......................... $(6,935,849) $(9,949,166) $(15,660,088)
=========== =========== ============
Weighted average common shares
outstanding.............................. 1,765,126 1,902,281 8,289,947
Pro forma conversion of convertible
preferred stock.......................... 9,986,779 12,917,917 10,166,066
----------- ----------- ------------
Pro forma weighted average shares
outstanding.............................. 11,751,905 14,820,198 18,456,013
=========== =========== ============
Pro forma basic and diluted net loss per
share.................................... $ (0.59) $ (0.67) $ (0.85)
=========== =========== ============
Shares issuable pursuant to stock options and warrants that have not been
included in the above calculations because they are antidilutive totaled
2,425,252, 1,982,358, and 2,678,980 for the years ended December 31, 1998, 1999
and 2000, respectively.
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EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock with a par
value of $.01 per share. All outstanding shares of convertible preferred stock
were converted into 13,794,104 shares of common stock on September 26, 2000, the
effective date of the Company's registration statement in connection with its
initial public offering. There were no shares of convertible preferred stock
outstanding at December 31, 2000.
COMMON STOCK
The Company has authorized 100,000,000 shares of common stock. Upon
inception, the Company issued to the founders 1,500,000 shares of common stock
in receipt for notes totaling $45,000 and bearing interest at 7.75% per annum,
due in July 2004. During 1995, one of the founders terminated employment and
sold 218,750 shares to the Company at $.05 per share plus forgiveness of the
associated note receivable. The remaining notes receivable were repaid during
2000.
During 1995, the Company issued 400,000 shares of common stock to Cornell
Research Foundation ("CRF") as partial consideration for an exclusive license
agreement for Cornell University's rights to certain patents, patent
applications and biological materials relating to harpin proteins and related
technology. These shares were subject to cancellation by the Company if the
agreement was terminated prior to the sale of products under the license and if
certain milestones as set forth in the license agreement were not achieved. The
Company recorded expense of $16,000, $60,000 and $240,000 as the fair market
value of the shares for which the cancellation provision had lapsed in 1995,
1996 and April 1998, respectively. These shares were valued at $0.40 per share,
$0.50 per share and $2.00 per share in 1995, 1996 and 1998, respectively.
In September 1998, the Company and CRF amended the exclusive license
agreement to reduce royalty arrangements in exchange for fully vesting CRF's
remaining shares of common stock subject to cancellation. The Company recorded
additional expense in 1998 of $420,000, or $3.50 per share, as the fair value of
vested shares.
On October 2, 2000, the Company closed its initial public offering of
6,670,000 shares of common stock, including the underwriters' over-allotment
option, at a price of $15.00 per share for proceeds of approximately $91.5
million, net of underwriters' fees, commissions and offering costs.
COMMON STOCK OPTIONS
During 2000, the shareholders and Board of Directors approved the 2000
Stock Incentive Plan (the "2000 Plan"). Upon completion of the Company's initial
public offering, the 2000 Plan replaced the 1995 Combined Incentive and
Nonqualified Stock Option Plan (the "1995 Plan") for the purpose of all future
stock incentive awards. All reserved but ungranted shares under the 1995 Plan
and any shares subject to outstanding options under the 1995 Plan that expire or
are otherwise cancelled without being exercised will be added to the shares
available under the 2000 Plan.
The Board of Directors has the authority to determine all matters relating
to options to be granted under the 1995 Plan and 2000 Plan, including
designation as incentive or nonqualified stock options, the selection of
individuals to be granted options, number of shares to be subject to each grant,
the exercise price, the term and vesting period, if any. Generally, options vest
over periods ranging from three to five years and expire 10 years from date of
grant. The Board of Directors reserved an initial total of 1,500,000 shares of
common stock under the 2000 Plan, plus an automatic annual increase, to be added
on the first day of the Company's fiscal year beginning in 2002, equal to the
lesser of (a) 1,500,000 shares; (b) 5% of the outstanding shares of common stock
on a fully diluted basis as of the end of the immediately preceding year; and
(c) a lesser amount as may be determined by the Board of Directors.
38
41
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2000, the Company had granted options to purchase 2,376,336
shares of common stock under the 1995 Plan and 1,838,668 shares are available
for future grant under the 2000 Plan. As of December 31, 2000, no options had
been granted under the 2000 Plan. The following table summarizes the 1995 Plan
stock option activity:
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
Balance at December 31, 1997...................... 887,000 $ 0.79
Options granted................................. 573,000 2.33
Options cancelled............................... (72,334) 0.90
Options exercised............................... (141,666) 0.50
---------
Balance at December 31 1998....................... 1,246,000 1.53
Options granted................................. 321,700 4.88
Options cancelled............................... (47,500) 2.78
Options exercised............................... (40,000) 0.63
---------
Balance at December 31, 1999...................... 1,480,200 2.24
Options granted................................. 1,303,950 11.03
Options cancelled............................... (71,150) 4.52
Options exercised............................... (336,664) 1.66
---------
Balance at December 31, 2000...................... 2,376,336 7.08
=========
The following table summarizes stock option information at December 31,
2000:
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ----------------------------
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$ 0.40 - 1.00 594,168 6.42 $ 0.92 433,163 $0.91
1.01 - 3.50 253,918 7.74 3.05 33,334 3.50
4.00 - 6.50 690,500 8.99 5.69 -- --
10.00 - 14.00 837,750 9.60 13.81 -- --
--------- -------
2,376,336 8.43 7.08 466,497 1.09
========= =======
The number of shares for which stock options were exercisable was 242,997
and 431,831 at December 31, 1998 and 1999, respectively. The weighted-average
exercise prices of options exercisable were $0.76 and $1.06 at December 31, 1998
and 1999, respectively.
The Company records compensation expense over the vesting period for the
difference between the exercise price and the deemed fair market value for
financial reporting purposes of stock options granted. In conjunction with
grants made in 1998, the Company recognized compensation expense of $59,679,
$92,868 and $117,711 in 1998, 1999 and 2000, respectively. At December 31, 2000,
the unearned compensation expense was $28,625. The weighted average grant date
fair value of these options was $2.81.
39
42
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation expense been recognized on stock options issued based on the fair
value of the options at the date of grant and recognized over the vesting
period, the Company's net loss would have been increased to the pro forma
amounts indicated below:
DECEMBER 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
Net Loss:
As reported.............................. $(6,935,849) $(9,394,578) $(15,660,088)
Pro forma................................ (6,972,423) (9,487,569) (16,120,791)
Basic and diluted net loss per share:
As reported.............................. $ (3.93) $ (5.23) $ (1.89)
Pro forma................................ (3.95) (5.28) (1.94)
The weighted average grant date fair value of options granted in 1998, 1999
and 2000 was $0.38, $0.92 and $2.38, respectively. Prior to completion of the
Company's initial public offering in October 2000, the fair value of each option
grant was estimated on the date of grant using the fair value based method
prescribed by SFAS No. 123 for private companies, which considers only the time
value of money. Assumptions used for the grants were: expected life of 3 to 5
years, risk free interest rate of 4.5% to 6.6% and no dividend yield. No options
were granted in 2000 after completion of the initial public offering.
COMMON STOCK WARRANTS
Purchasers of Series F convertible preferred stock ("Series F") received
warrants to purchase 948,984 common shares at $5.00, $7.00 and $9.00 per share.
The $7.00 and $9.00 purchase price increased to $7.50 and $10.00, respectively,
in April 2000 when the Company received notice from the Environmental Protection
Agency of its approval of the Company's product registration application and
request for exemption from tolerance. In 1999, the Company offered holders of
$5.00, $7.00 and $9.00 warrants the opportunity to exchange one of each warrant
plus $19.00 for three shares of common stock. A total of 831,882 warrants were
exchanged under this offer for proceeds of $5,268,586 in 1999. A total of
$554,588 has been charged to accumulated deficit and credited to additional
paid-in capital for the effect of the inducement offered to warrant holders. A
total of 116,702 warrants were exercised in 2000 for proceeds of $860,163. The
remaining 400 warrants expired unexercised on June 30, 2000.
Between 1996 and 1998, the Company issued warrants to purchase 175,822
shares of common stock at prices from $0.50 to $5.00 per share to placement
agents for the sale of convertible preferred stock. In connection with the sale
of Series C Preferred shares in 1996, a purchaser of Series C Preferred shares
received a warrant to purchase 200,000 shares of our common stock at a price of
$1.00 per share. In October 1996, the Company issued warrants to purchase 9,234
shares of common stock at a price of $1.00 per share to an equipment lessor. A
total of 282,412 of these warrants were exercised in 2000 for proceeds of
$261,120. The remaining 102,644 warrants are exercisable immediately and expire
from 2001 to 2003. The weighted average exercise price of the remaining warrants
outstanding at December 31, 2000 was $3.07.
In August 2000, the Company issued warrants to purchase 200,000 shares of
the Company's common stock at an exercise price of $15.00 per share in
connection with the establishment of credit facilities with Stephens Group, Inc.
and the WBW Trust Number One. The warrants may be exercised after March 26, 2001
and expire in August 2005. The Company recorded an expense of approximately $2.0
million in 2000 for the fair value of the warrants issued in connection with the
credit facilities.
40
43
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan (the "2000 Stock Purchase Plan") was
implemented in October 2000 at the completion of the Company's initial public
offering. The 2000 Stock Purchase Plan allows employees to purchase common stock
through payroll deductions of up to 15% of their annual compensation. No
employee may purchase common stock worth more than $25,000 in any calendar year,
valued as of the first day of each offering period. In addition, no more than an
aggregate of 125,000 shares can be purchased in any six-month purchase period
and no employee may purchase more than 1,000 shares in any six-month purchase
period.
The 2000 Stock Purchase Plan utilizes twenty-four month offering periods,
each of which will consist of four six-month purchase periods, with purchases
being made on the last day of each such period, except that the first offering
period began on the effective date of the initial public offering and will end
on October 31, 2002. Subsequent offering periods will begin on each May 1 and
November 1. The price of the common stock purchased under the 2000 Stock
Purchase Plan will be the lesser of 85% of the fair market value on the first
day of an offering period and 85% of the fair market value on the last day of a
purchase period, except that the purchase price for the first offering period
will be equal to the lesser of 100% of the initial public offering price of the
common stock and 85% of the fair market value on the last day of the purchase
period.
The 2000 Stock Purchase Plan authorizes the issuance of a total of 500,000
shares of common stock, plus an automatic annual increase, to be added on the
first day of the Company's fiscal year beginning in 2002, equal to the lesser of
(a) 250,000 shares; (b) 1% of the outstanding shares of common stock as of the
end of the immediately preceding fiscal year on a fully diluted basis, and (c) a
lesser amount determined by the Board of Directors.
3. LICENSING AGREEMENT
In May 1995, the Company entered into an exclusive worldwide licensing
agreement with Cornell Research Foundation for certain patents, patent
applications and biological material relating to harpin proteins and related
technology. The license agreement terminates on the expiration date of the
last-to-expire licensed patent covered by the agreement. As consideration for
the license, the Company issued 400,000 shares of common stock to Cornell
Research Foundation, has funded certain research and development activities at
Cornell University and has agreed to pay certain minimum annual royalty
payments. The Company also agreed to pay a royalty on net sales of products that
incorporate the licensed technology. In 1998, the Company and Cornell Research
Foundation amended the exclusive license agreement to reduce royalty fee
arrangements in exchange for fully vesting Cornell Research Foundation's
remaining shares of common stock subject to cancellation, for which the Company
recorded amortization expense of $660,000 as a research and development expense.
41
44
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Equipment......................................... $ 1,749,262 $ 4,246,033
Equipment under capital leases.................... 1,392,383 1,174,262
Leasehold improvements............................ 974,461 1,291,927
Construction in progress.......................... 433,750 5,246,799
----------- -----------
4,549,856 11,959,021
Less accumulated depreciation and amortization.... (1,600,136) (2,479,149)
----------- -----------
Net property and equipment...................... $ 2,949,720 $ 9,479,872
=========== ===========
5. LEASES
The Company has entered into non-cancelable lease agreements involving
equipment and facilities through the year 2005. Rent expense totaled $307,049,
$313,659 and $419,421 for 1998, 1999 and 2000, respectively. Future minimum
payments under these leases, as of December 31, 2000, are as follows:
CAPITAL OPERATING
--------- ---------
2001.................................................. $ 357,181 $363,615
2002.................................................. 249,192 128,684
2003.................................................. 104,797 79,322
2004.................................................. 14,787 18,000
2005.................................................. 7,521 7,500
--------- --------
Total minimum lease payments.......................... 733,478 $597,121
========
Less amount representing interest................... (127,768)
---------
Present value of net minimum lease payments........... 605,710
Less current portion................................ (275,316)
---------
Capital lease obligation, net of current portion...... $ 330,394
=========
In January 2001, the Company entered into a lease for approximately 63,200
square feet of office space in Bothell, Washington, to house the Company's
research and development and administration functions. The lease has an initial
term of 10 years with two 5-year extension options to be exercised at the
Company's sole discretion. Approximately 15,000 square feet of space has been
subleased to another party for a period of three years. Future minimum payments
and receipts under the lease and sublease, respectively, are as follows:
RENTAL SUBLEASE
PAYMENTS INCOME
----------- --------
2001................................................ $ 1,038,004 $263,424
2002................................................ 1,232,400 310,275
2003................................................ 1,264,000 320,822
2004................................................ 1,327,200 40,268
2005 and thereafter................................. 8,998,100 --
----------- --------
Total minimum lease payments...................... $13,859,704 $934,789
=========== ========
The Company provided a security deposit in the form of a $1.25 million
irrevocable, fully assignable and unconditional standby letter of credit. The
standby letter of credit is secured by a $1.25 million interest-bearing
certificate of deposit.
42
45
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CREDIT FACILITIES
In August 2000, the Company established unsecured, multiple-advance,
committed credit facilities with Stephens Group, Inc. and the WBW Trust Number
One (the "Credit Facilities"). One of the Company's directors, William T.
Weyerhaeuser, is trustee for the WBW Trust Number One. Stephens Group, Inc.
beneficially owns approximately 10% of the Company's common stock and Jon E.M.
Jacoby, a director of the Company, is also a director and an executive vice
president of Stephens Group, Inc. Under the terms of the Credit Facilities, the
Company had the ability to borrow up to $10 million from Stephens Group and $5
million from WBW Trust. The Company did not borrow any amounts pursuant to the
Credit Facilities and, with the completion of the initial public offering, no
longer has the ability to borrow any amounts under the Credit Facilities.
In connection with the Credit Facilities, the Company paid loan commitment
fees of $200,000 to Stephens Group and $100,000 to WBW Trust. The Company also
issued warrants to purchase 133,333 shares of its common stock at $15 per share
to Stephens Group and warrants to purchase 66,667 shares of its common stock at
$15 per share to WBW Trust. The warrants may be exercised after March 26, 2001
and expire in August 2005. The Company recorded an expense of approximately $2.3
million in 2000 for the loan commitment fee and fair value of the warrants
related to the Credit Facilities.
7. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
------------------------
1999 2000
---------- ----------
Compensation and benefits........................... $ 843,251 $1,542,700
Field trial expense................................. -- 550,013
Sales and marketing expense......................... -- 415,267
Other............................................... 256,767 730,418
---------- ----------
Total accrued expenses............................ $1,100,018 $3,238,398
========== ==========
8. DEFINED CONTRIBUTION PLAN
The EDEN Bioscience Corporation 401(k) Plan and Trust (the "Plan") was
established in 1997. The Plan covers all employees of the Company who have
completed at least three months of service and who are at least 21 years old.
The Plan includes a provision for a 401(k) deferral of up to 20% of participant
compensation, subject to IRS limitations, and a discretionary employer match at
an amount to be determined by the Company's board of directors. The Company has
made no contributions to the Plan.
43
46
EDEN BIOSCIENCE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The Company did not record an income tax benefit for any of the periods
presented because it has experienced operating losses since inception. The
Company's total tax net operating loss carry forwards were approximately $36
million at December 31, 2000 and expire between 2009 and 2015. The significant
components of the deferred tax asset were as follows:
1999 2000
----------- ------------
Net operating loss carry forward......................... $ 7,256,000 $ 12,260,000
Other.................................................... 207,000 271,000
----------- ------------
Deferred tax asset....................................... 7,463,000 12,531,000
Deferred tax asset valuation allowance................... (7,463,000) (12,531,000)
----------- ------------
Net deferred tax asset................................. $ -- $ --
=========== ============
The valuation allowance on the deferred tax asset increased by $3.1 million
and $5.1 million during 1999 and 2000, respectively. Pursuant to Sections 382
and 383 of the Internal Revenue Code, annual use of the Company's net operating
loss and credit carry forwards may be limited in the event of a cumulative
change in ownership of more than 50%.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes selected unaudited quarterly financial data
for each quarter of the years ended December 31, 1999 and 2000.
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
FISCAL YEAR 1999:
Total revenues........................ $ 15,405 $ 27,666 $ 34,186 $ 37,363
Loss from operations.................. (2,112,762) (2,567,118) (2,266,615) (2,702,666)
Net loss.............................. (2,016,807) (2,507,742) (2,228,489) (2,641,540)
Basic and diluted net loss per
share............................... (1.11) (1.68) (1.22) (1.24)
FISCAL YEAR 2000:
Total revenues........................ $ -- $ -- $ 1,028,283 $ 988,234
Loss from operations.................. (3,180,103) (3,846,981) (3,638,165) (4,384,283)
Net loss.............................. (3,058,124) (3,681,189) (5,971,553) (2,949,222)
Basic and diluted net loss per
share............................... (1.11) (1.48) (1.59) (0.12)
Common stock trading range:
High................................ -- -- $ 34.25 $ 43.25
Low................................. -- -- 27.75 25.38
44
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from the
sections captioned "Election of Directors" and "Section 16 (a) Beneficial
Ownership Reporting Compliance" contained in our proxy statement for the 2001
annual meeting of shareholders, to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
sections captioned "Executive Compensation" and "Election of
Directors -- Compensation of Directors" contained in our proxy statement for the
2001 annual meeting of shareholders, to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in our proxy statement for the 2001 annual meeting of
shareholders, to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
section captioned "Related Transaction with Executive Officers, Directors and 5%
Shareholders" contained in our proxy statement for the 2001 annual meeting of
shareholders, to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after December 31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are being filed as part of this report on Form
10-K.
(a) Financial Statements.
PAGE
----
Report of Independent Accountants........................... 31
Balance Sheets.............................................. 32
Statements of Operations.................................... 33
Statements of Shareholders' Equity.......................... 34
Statements of Cash Flows.................................... 35
Notes to Financial Statements............................... 36
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
45
48
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to EDEN's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 (Commission File No. 0-31499)).
3.2 Third Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.2 to EDEN's
Registration Statement on Form S-1, as amended (Commission
File No. 333-41028), initially filed with the SEC on July 7,
2000).
9.1 Form of Voting Trust Agreement between Stephens-EBC, LLC and
James Sommers, as Trustee (incorporated by reference to
Exhibit 9.1 to EDEN's Registration Statement on Form S-1, as
amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.1+ Exclusive License Agreement, dated May 1, 1995, between
Cornell Research Foundation, Inc. and the Registrant, as
amended as of June 2, 2000 (incorporated by reference to
Exhibit 10.1 to EDEN's Registration Statement on Form S-1,
as amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.2 Lease, dated November 4, 1996, between Koll Real Estate
Group for Knoll North Creek Business Park and the Registrant
(incorporated by reference to Exhibit 10.2 to EDEN's
Registration Statement on Form S-1, as amended (Commission
File No. 333-41028), initially filed with the SEC on July 7,
2000).
10.3 1995 Combined Incentive and Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.3 to EDEN's
Registration Statement on Form S-1, as amended (Commission
File No. 333-41028), initially filed with the SEC on July 7,
2000).
10.4 2000 Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 to EDEN's Registration Statement on Form S-1,
as amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.5 2000 Employee Stock Purchase Plan, as amended (incorporated
by reference to Exhibit 10.5 to EDEN's Registration
Statement on Form S-1, as amended (Commission File No.
333-41028), initially filed with the SEC on July 7, 2000).
10.6 Form of Indemnification Agreement (incorporated by reference
to Exhibit 10.6 to EDEN's Registration Statement on Form
S-1, as amended (Commission File No. 333-41028), initially
filed with the SEC on July 7, 2000).
10.7 Employment Agreement, dated August 16, 2000, between the
Registrant and Jerry L. Butler (incorporated by reference to
Exhibit 10.7 to EDEN's Registration Statement on Form S-1,
as amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.8 Employment Agreement, dated August 16, 2000, between the
Registrant and Zhongmin Wei (incorporated by reference to
Exhibit 10.8 to EDEN's Registration Statement on Form S-1,
as amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.9 Change of Control Agreement, dated August 16, 2000, between
the Registrant and Jerry L. Butler (incorporated by
reference to Exhibit 10.9 to EDEN's Registration Statement
on Form S-1, as amended (Commission File No. 333-41028),
initially filed with the SEC on July 7, 2000).
10.10 Change of Control Agreement, dated August 16, 2000, between
the Registrant and Bradley S. Powell (incorporated by
reference to Exhibit 10.10 to EDEN's Registration Statement
on Form S-1, as amended (Commission File No. 333-41028),
initially filed with the SEC on July 7, 2000).
10.11 Change of Control Agreement, dated August 16, 2000, between
the Registrant and Zhongmin Wei (incorporated by reference
to Exhibit 10.11 to EDEN's Registration Statement on Form
S-1, as amended (Commission File No. 333-41028), initially
filed with the SEC on July 7, 2000).
46
49
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.12 Credit Agreement, dated August 16, 2000, between Stephens
Group, Inc. and the Registrant (incorporated by reference to
Exhibit 10.12 to EDEN's Registration Statement on Form S-1,
as amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.13 Credit Agreement, dated August 16, 2000, between WBW Trust
Number One, and the Registrant (incorporated by reference to
Exhibit 10.13 to EDEN's Registration Statement on Form S-1,
as amended (Commission File No. 333-41028), initially filed
with the SEC on July 7, 2000).
10.14* Lease, dated January 12, 2001, between EDEN Bioscience
Corporation and Ditty Properties Limited Partnership.
11.1* Statement re computation of per share loss.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Arthur Andersen LLP.
23.3* Consent of Allan Woodburn Associates.
- ---------------
* Filed herewith.
+ In accordance with Rule 202 of Regulation S-T; portions of the exhibit have
been filed in paper pursuant to a continuing hardship exemption. Confidential
treatment has been granted with respect to portions of this exhibit.
47
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Bothell,
State of Washington, on March 28, 2001.
EDEN BIOSCIENCE CORPORATION
/s/ JERRY L. BUTLER
--------------------------------------
Jerry L. Butler,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated below on March 28, 2001.
SIGNATURE TITLE
--------- -----
/s/ JERRY L. BUTLER President, Chief Executive Officer and
- -------------------------------------------------------- Director (Principal Executive Officer)
Jerry L. Butler
/s/ BRADLEY S. POWELL Vice President of Finance and
- -------------------------------------------------------- Chief Financial Officer
Bradley S. Powell (Principal Financial and Accounting Officer)
/s/ JON E.M. JACOBY Director
- --------------------------------------------------------
Jon E.M. Jacoby
/s/ ALBERT A. JAMES Director
- --------------------------------------------------------
Albert A. James
/s/ AGATHA L. MAZA Director
- --------------------------------------------------------
Agatha L. Maza
/s/ OSCAR C. SANDBERG Director
- --------------------------------------------------------
Oscar C. Sandberg
/s/ JOHN W. TITCOMB, JR. Director
- --------------------------------------------------------
John W. Titcomb, Jr.
/s/ WILLIAM T. WEYERHAEUSER Director
- --------------------------------------------------------
William T. Weyerhaeuser
48