William T. Weyerhaeuser, Ph.D. has served as
Chairman of the Board of Directors since November 2001 and 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 other public 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.
Gilberto H. Gonzalez has served as one of our
directors since February 2003. Mr. Gonzalez currently serves as Chairman of Evergreen Business Group, LLC, a company involved in real estate marketing,
investing and development, and as Chairman of Select Capital Group, a financial services company. Beginning in 1970, Mr. Gonzalez has worked in the
agricultural chemical business in various executive capacities in sales and marketing. Most recently, Mr. Gonzalez served as Executive Vice President
of Micro Flo Company, an agricultural chemical production company, from 1991 to 1999, and Regional Sales Manager from 1985 to 1989. From 1970 to 1985,
Mr. Gonzalez worked for Helena Chemical Company in a variety of managerial roles, most notably Division Manager of the Midwest and Northcentral
Divisions, and as Director of the Andean Block for Vertac International, an international division of Helena. Mr. Gonzalez received a B.S. degree in
Agricultural Business and Economics from Texas A&M University.
Jon E. M. Jacoby has served as one of our
directors since February 1999. Until his retirement in October 2003, Mr. Jacoby worked in various capacities since 1963, most recently as Vice-Chairman
and member of the Executive Committee, for Stephens Inc. and Stephens Group, Inc., collectively engaged in investment banking and other business
activities, and remains a director of Stephens Group, Inc. He is also a director of Delta & Pine Land Company, an agricultural products company;
Power-One, Inc., a power supplies manufacturer; Sangamo Biosciences, a biotechnology company; and Conn’s Inc., retail stores specializing in
electronics. 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. Mr. James has also served as a director of several privately held companies. 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 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 Chief Executive Officer, President of Roadable Aircraft International,
Inc., a start-up company involved in the research and development of new transportation technologies. Ms. Maza received a B.S. degree from Seattle
University and an M.B.A. degree from City University and has completed the Executive Marketing Management Program at Stanford
University.
Richard N. Pahre has served as one of our
directors since February 2003. Mr. Pahre is a certified public accountant and, effective December 31, 2002, retired as a partner of Moss Adams LLP, a
public accounting firm that provides services to a wide-range of public and private clients. From February 1977 to December
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2002, Mr. Pahre served as an audit partner of
Moss Adams LLP. Mr. Pahre joined Moss Adams LLP in August 1975 and served as a Senior Audit Manager through January 1977. Mr. Pahre joined the public
accounting firm of Price Waterhouse & Co. in June 1962, and from June 1967 to August 1975 served as a Senior Audit Manager. Since 1993, Mr. Pahre
has served on the Board of Directors and as Treasurer (non-executive) of Seattle Goodwill, a nonprofit organization. In February 2005, Mr. Pahre was
elected to the Board of Directors of CityBank, a commercial bank, headquartered in Lynnwood, Washington, and a NASDAQ listed public company. Mr. Pahre
received a B.A. degree in accounting 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.
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 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,
2005, we have accumulated a deficit of $105.9 million. For the years ended December 31, 2004, 2003, 2002, 2001 and 2000, we had net losses of $8.9
million, $11.2 million, $23.5 million, $23.7 million and $15.7 million, respectively. To date, our revenues have been limited. For example, there were
no sales in the fourth quarter of 2001 and annual net sales decreased from $3.5 million in 2001 to $1.9 million in 2002, $1.8 million in 2003 and $1
million in 2004. We expect our future revenues to come primarily from the sale of Messenger, Messenger STS, employ, MightyPlant, ProAct™,
N-Hibit™ and other products and these sales are highly uncertain.
We expect to continue to devote substantial
resources to funding sales and marketing activities in the United States and foreign countries, maintaining and operating our manufacturing facility
and funding our research and development activities. 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.
We currently anticipate that our operating expenses
will significantly exceed net product sales and that net losses and working capital requirements will consume a material amount of our cash resources.
If net product sales do not significantly increase in the near term, we will have to further reduce our operating expenses. We believe that the balance
of our cash and cash equivalents at December 31, 2004 will be sufficient to meet our anticipated cash needs for net losses, working capital and capital
expenditures for more than the next 12 months, although there can be no assurance in that regard.
We may have to reduce or cease operations if we are unable to meet our
funding requirements.
We will require substantial additional funding to
continue our sales and marketing and research and development activities in the United States and foreign countries and to maintain and operate our
manufacturing facilities. 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 or manufacturing programs or cease all operations.
For example, we
19
reduced our workforce by 34% in May 2003 and by
23% in May 2002, significantly curtailing certain research and development activities and our European and Mexican operations. 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 on acceptable
terms.
As of the date of this report, we do not meet the $1.00 minimum bid
requirement for continued listing on The Nasdaq National Market and, as a result, our common stock may be delisted from The Nasdaq National Market,
which could further depress our stock price and make it more difficult for us to raise capital.
The closing price of our common stock is currently
below $1.00 per share. Our stock price could decline or be subject to wide fluctuations. To maintain listing of our common stock on The Nasdaq National
Market, we must continue to satisfy ongoing listing requirements, including consistently maintaining a minimum bid price for the common stock of $1.00
per share or more. If our common stock were to trade below the $1.00 minimum bid requirement for a period of 30 consecutive business days or more, or
if we were to otherwise fail to meet Nasdaq’s ongoing listing criteria, Nasdaq could initiate delisting procedures at any time. If we were to lose
our Nasdaq National Market status, we would likely seek listing of our common stock in the over-the-counter market, which is viewed by many investors
as a less liquid marketplace. Among other things, our common stock may then constitute “penny stock,” which would place increased regulatory
burden upon brokers, making them less likely to make a market in our stock. Loss of our Nasdaq National Market status could also make it more difficult
for us to raise capital or complete acquisitions and would also complicate compliance with state “blue sky” laws.
We currently depend on products that are based on the same new technology,
and our development and commercialization of those products may not be successful.
For the immediately foreseeable future we will be
dependent on the successful development and commercialization of six products (Messenger, Messenger STS, ProAct, N-Hibit, employ and MightyPlant) which
are based on the same new technology. We have had only limited sales of Messenger since its introduction in August 2000 and we began marketing employ
in November 2003, Messenger STS in January 2004, MightyPlant in April 2004 and N-Hibit and ProAct in early 2005. These six products may not be
commercially successful. Our products may not prove effective or economically viable for all crops or markets. In addition, because our products have
not been put to widespread commercial use over significant periods of time, no assurance can be given that adverse consequences might not result from
their use, 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 our products and other harpin-based
products we may develop are unproven. Messenger, Messenger STS, employ and MightyPlant have not gained, and may not gain, commercial acceptance or
success. N-Hibit and ProAct may not gain commercial acceptance or success. If we are unable to successfully achieve broad market acceptance of our
products, 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 our products, including our ability to
implement and maintain an appropriate pricing policy and general economic conditions in agricultural markets, including commodity prices, climatic
conditions and the extent that growers, regulatory authorities and the public accept new agricultural practices and products developed through
biotechnology.
We have experienced limited grower usage of Messenger and Messenger STS, and
independent distributors hold significant inventories of Messenger STS.
Based on information received from distributors, we
estimate that distributors sold 66,000 ounces of Messenger in 2000, 596,000 ounces in 2001, 684,000 ounces in 2002, 734,000 ounces in 2003 and 800,000
ounces in 2004. We estimate that Messenger and Messenger STS inventory held by distributors at
20
December 31, 2004 was approximately 511,000 ounces. We sent distributors
approximately 470,000 ounces of additional Messenger STS for free in 2004 as part of an effort to lower the average cost of their year-end Messenger
inventories by approximately 50%. This free product significantly increased channel inventory and negatively affected our sales to distributors. We do
not expect distributors that hold significant inventories of Messenger or Messenger STS to place additional orders for our products until their current
inventories are reduced, which will adversely affect our sales and results of operations.
Inability to develop adequate sales and marketing capabilities could prevent
us from successfully commercializing our current products and other products we may develop.
We currently have limited sales and marketing
experience and capabilities. Our internal sales and marketing staff consist primarily of sales and marketing specialists who are trained to educate
growers and independent distributors on the uses and benefits of our products. We will need to further develop our sales and marketing 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 our products’ 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, retailers and growers. Failure to recruit, train and retain
important sales and marketing personnel, such as our sales and marketing specialists, or the inability of new sales and marketing personnel to
effectively market and sell our current products and other products we may develop, could impair our ability to gain market acceptance of our products
and cause our sales to suffer.
We may be unable to establish or maintain successful relationships with
independent distributors and retailers, which could adversely affect our sales.
We intend to rely on independent distributors and
retailers of agri-chemicals to distribute and assist with the marketing and sale of our current products and any other products we may develop. We have
engaged several independent distributors and retailers for the distribution and sale of our products. Our future revenue growth will depend in large
part on our success in establishing and maintaining these sales and distribution channels. We are continuing to develop our distribution network and we
may be unable to establish or maintain these relationships in a timely or cost-effective manner. Moreover, we cannot assure you that the distributors
and retailers on which we rely will focus adequate resources on selling these 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 our products as a threat to various product lines currently being manufactured or distributed by them. In
addition, the distributors and retailer 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 and retailers, we will need to further develop our own distribution and
sales and marketing capabilities, which would be expensive and time-consuming and the success of which would be uncertain.
Three distributors accounted for an aggregate of 46%
of net product sales revenue in 2004 and three distributors accounted for an aggregate of 40% of our net sales revenue in the same period of 2003. If
any distributor that purchases a significant amount of our products were to discontinue purchasing our products at any time, our sales would be
adversely affected. In addition, the failure of any of these distributors, or of any other distributor to which we extend a significant amount of
credit, to pay its account, now or in the future, may harm our operating results.
If our ongoing or future field trials are unsuccessful, we may be unable to
achieve market acceptance or obtain regulatory approval of our current products or any other products we may develop.
The successful completion of multiple field trials
in domestic and foreign locations on a wide variety of 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 adverse side effects, or if we are unable to
21
collect reliable data, regulatory approval of
our current products or any other products we may develop could be delayed or withheld or we may be unable to achieve market acceptance of these
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 droughts and floods, severe heat
and frost, hail, tornadoes and hurricanes. Generally, we pay third parties, such as growers, consultants and universities, to conduct our field trials
for us. Incompatible crop treatment practices or misapplication of the product by third parties could interfere with the success of our field
trials.
We are largely in the development stage and are subject to the risks of a new
enterprise and the commercialization of a new technology.
We began our operations in 1994 and began the
marketing and sale of our first product, Messenger, in the third quarter of 2000. Our stage of development, our novel 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 develop a company capable of supporting commercial activities,
including manufacturing, quality control and assurance, regulatory approval and compliance, marketing, sales, distribution and customer service. Our
inability to adequately address these risks could cause us to be unprofitable or to cease operations.
International expansion will subject us to risks associated with
international operations, which could adversely affect both our domestic and international operations.
Our success depends in part on our ability to expand
internationally as we obtain regulatory approvals to market and sell our current products, and any other products we may develop, in other countries.
We recently began selling our products in Spain. We have been conducting field trials in several international locations and we have personnel in
Europe to develop operations in that region. International expansion of our operations could impose substantial burdens on our resources, divert
management’s attention from domestic operations or otherwise adversely affect our business. Furthermore, international operations are subject to
several inherent risks, such as different regulatory requirements and reduced protection of intellectual property rights, which could adversely affect
our ability to compete in international markets and could have a negative effect on our operating results.
The high level of competition in our market may result in price reductions,
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 or future competitors, which may result in price reductions, reduced margins or the inability to achieve market acceptance of our current
products or any other products we may develop. For example, from September to December 2003 we offered growers a “buy one, get one free”
promotion and in January 2004 we introduced Messenger STS at a price that is approximately 50% of the 2003 price of Messenger.
Many companies 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,
distribution, sales, marketing, human and other resources than we do. As a result, they may be able to devote greater resources to the development,
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. Furthermore,
22
these large agri-chemical companies have a more
diversified product offering than we do, which may give them an advantage in meeting customer needs by enabling them to offer integrated solutions to
plant protection and yield enhancement.
Age and actual storage conditions of our products may cause them to degrade,
which could adversely affect market acceptance of our products or our results of operations.
Messenger is currently being stored in large
quantities under various conditions by us and by distributors. Most of this material was manufactured in 2000, 2001, 2002 and 2004. We have conducted
laboratory studies that indicate Messenger is stable for at least two years under our recommended storage conditions and the results of recently
completed re-testing of Messenger manufactured in 2000 indicate that it is stable for more than four years. No assurance can be given, however, that
actual storage conditions will not cause our products’ quality to degrade over a shorter time period.
The inventory of Messenger held by us and by distributors is aging and may
not meet our quality standards, which could adversely affect market acceptance of our products and our results of operations.
Our inventory at December 31, 2004 includes
approximately 2.9 million ounces of Messenger and Messenger STS that was manufactured in 2000, 2001, 2002 and 2004. In addition, we estimate that
distributors own approximately 511,000 ounces of Messenger and Messenger STS that was manufactured between 2000 and 2004. Due to the age of this
inventory, we conducted limited re-testing of Messenger samples produced in 2000 and 2001. In 2003, we voluntarily recalled and replaced approximately
10,000 ounces of Messenger owned by distributors that our limited re-testing indicated had degraded below our quality control
standards.
Although results of our limited re-testing indicate
that a portion of inventory manufactured in 2000, 2001 and 2002 continues to meet our quality standards, no assurance can be given that this material
will continue to meet our quality standards, nor can we predict if or when this material might fail to meet our quality standards. If our limited
re-testing program indicates that additional material has degraded below our quality standards, we may have to record additional inventory write-downs
and may choose to replace any such product owned by distributors or growers, which could adversely affect the market acceptance of our products or our
results of operations.
Inability to obtain regulatory approvals, or to comply with ongoing and
changing regulatory requirements, could delay or prevent sales of our current products or any other products we may develop.
The field testing, manufacture, sale and use of
plant health products, including Messenger, Messenger STS, ProAct, N-Hibit, employ, MightyPlant and other products we may develop, are extensively
regulated by the EPA and/or state, local and foreign governmental authorities. These regulations substantially increase the cost and time associated
with bringing our current products and any other products we may develop to market. If we do not receive the necessary governmental approvals to test,
manufacture and market these products, or if the regulatory authorities revoke our approvals or grant them subject to restrictions on their use, we may
be unable to sell these products and our business may fail.
We are required to obtain regulatory approval from
certain state and foreign regulatory authorities before we market our products in those jurisdictions. Some of these jurisdictions may apply different
criteria than the EPA in connection with their approval processes. Although we are authorized to sell Messenger, Messenger STS and ProAct in 48 states
for use on virtually all crops for crop production and disease management, and to sell Messenger and Messenger STS in California for use on citrus for
yield enhancement and on strawberries, citrus, grapes and fruiting vegetables, such as tomatoes and peppers, for disease management, we have not
received approval of Messenger, Messenger STS, N-Hibit or ProAct for use on other crops in California. In Colorado, Messenger is approved for use on
virtually all crops for home and garden use. ProAct has not been approved for use in California or Colorado. We have also received authorization to
sell Messenger, or are
23
exempt from formal authorization requirements,
in at least 26 foreign countries, including Spain, Germany, Mexico, China and six Central American countries. Our registration in China is temporary
and limited to the sale of Messenger for use on tomatoes, peppers, tobacco, and rapeseed. Our registration in Spain is limited to the sale of Messenger
for use on tomatoes, peppers, cucumbers, melons, strawberries, lettuce, citrus and olives. The EPA has approved the use of Messenger STS and we are
currently in the process of obtaining foreign registrations for this product, but there can be no assurance that such registrations will be obtained on
acceptable terms.
Neither employ nor MightyPlant are pesticides and
they are not regulated by the EPA. However, several states and foreign governments regulate both products. Many states regulate employ as a plant
amendment or soil conditioner and some of these states and foreign regulatory authorities require the submission and review of performance data and
other information prior to granting their approval. We are authorized to sell employ in 33 states and no foreign countries. MightyPlant is classified
by most states as a fertilizer and we are now in the process of obtaining state approvals for its sale. We are authorized to sell MightyPlant in 46
states and no foreign countries. However, there can be no assurance that we will obtain approval to sell employ or MightyPlant in other states or
foreign countries.
If we significantly modify our current
products’ designs as a result of our ongoing research and development projects, additional EPA and other regulatory 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 the EPA will not impose additional requirements that could make the procedure more time-consuming and costly for any
future products we may develop.
Even if we obtain all necessary regulatory approvals
to market and sell our current products and any other products we may develop, these products 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 discovery of new information, including an inability to comply with regulatory requirements or the occurrence of unanticipated problems with the
product, or for other reasons. In addition, federal, state and foreign regulations relating to crop production and 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 our current products or any other
products we may develop and commercialize.
Inability to satisfy the conditions of our California registration for citrus
could limit or prevent sales of Messenger STS in that state.
Our California registration for use on citrus for
yield enhancement, granted in March 2003, is conditioned on the requirement that we submit data from several additional studies within various required
timeframes ending on December 31, 2005. We expect to submit the results of additional citrus field trials at various required timeframes through 2005,
in accordance with our registration. If we are unable to conduct the studies required by the California Department of Pesticide Regulation
(“CDPR”) in a timely manner, or if the results of the studies are unacceptable to the CDPR, they may not allow the continued use of Messenger
STS in California on citrus for yield enhancement, or they may impose limitations on this use of Messenger STS, which could have a negative impact on
our sales. Because EPA and state approvals are required for commercial sales of our current products, the loss of any of these approvals for any reason
would prevent further sales of our products in the affected state or nationwide.
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 and
commercially unproven. It may take years and significant capital investment to develop viable enhancements of our current products or any new products
we
24
may develop 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 uneconomical to
market or will be difficult to produce on a large scale; |
• |
|
proprietary rights of third parties will prevent us from
marketing products; and |
• |
|
third parties will market superior or equivalent products or
will market their products first. |
Our operating results are likely to fluctuate, resulting in an unpredictable
level of sales and earnings and 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 sales and earnings and possibly result in a decrease in our
stock price. For example, there were no sales of Messenger in the fourth quarter of 2001 and annual net product sales decreased 70% from 2001 to 2004.
Numerous other 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 depend on planting and growing seasons, climatic conditions and economic and other variables,
which we expect to result in substantial fluctuations in our quarterly sales and earnings. For example, weather-related events such as droughts and
floods, severe heat and frost, hail, tornadoes and hurricanes could decrease demand for our products and any future products we may develop, and have
an adverse impact on our operating results from quarter to quarter. 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 amount of our products carried in inventory by independent distributors
and retailers, the amount of free product to be given to retailers, 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 under a promotion such as “buy one, get one free” in a particular quarter to store and use over long periods of time, or time their
purchases to coincide with the availability of capital, either of which may cause significant fluctuations in our operating results for a particular
quarter or year.
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 patents or proprietary
rights.
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 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 or 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 incurred
significant costs in protecting their proprietary rights in these foreign countries.
Patent law is still evolving with respect to the
scope and enforceability of claims in the fields in which we operate. We are like many biotechnology companies in that our patent protection is highly
uncertain and
25
involves complex legal and technical questions
for which legal principles are not 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 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 current products or any other products we may
develop in the future.
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 products do 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 merit or 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; |
• |
|
enter into licensing or royalty agreements that may be
unavailable on acceptable terms. |
If we do not adequately distinguish our products from genetically modified
plants and products, public concerns over those products could negatively impact market acceptance of our products.
Claims that the output of genetically modified
plants is unsafe for consumption or that these plants pose a danger to the environment have led to public concerns and negative attitudes about
genetically modified crops, particularly in Europe. We intend to distinguish our products and other topically applied harpin technologies from
genetically modified plants and products. Our products are topically applied and do not modify the plant’s DNA. If the public or our customers
perceive our products as products that genetically modify plants, market acceptance and registration of our products could be delayed, impaired or
limited in countries with strong political resistance to genetically modified plants.
We may be exposed to product liability claims, which could adversely affect
our operations.
We may be held liable or incur costs to settle
product liability claims if our current products or any products we may 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 any 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
26
commercially reasonable terms or at all. A
product liability claim could result in liability to us greater than our assets and 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 that arise in the normal course of business.
Rapid changes in technology could render our current products or any other
products we may develop unmarketable or obsolete.
We are engaged in an industry characterized by
extensive research efforts and rapid technological development. Our competitors, many 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 current products and any other products we
may develop and to design, develop and market new products that keep pace with new technological and industry developments.
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 help ensure full technical
compliance. If the EPA or another regulator determines that we are not in compliance, regulatory approval of our current products or any other products
we may develop could be revoked, delayed or withheld 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 were required to limit or cease our manufacturing activities, our ability to produce our current products in commercial
quantities would be impaired or prohibited, which could have an adverse effect on our sales.
Inability to produce high quality products could impair our
business.
To be successful, we will have to manufacture our
current products 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 back-up
manufacturing systems and, as a result, the failure of any component required in the manufacturing process could delay or impair our ability to
manufacture our products in the quantities that we may require.
We intend to continue to make changes to our
manufacturing processes and facilities in order to improve the efficiency and quality of our manufacturing activities. We cannot guarantee that we will
be successful in this regard or that the changes we make will improve our manufacturing activities. We may encounter difficulties in the production of
our current products or any future products we may develop, including problems involving manufacturing processes or yields, packaging, distribution,
storage, quality control and assurance, shortages of qualified personnel or compliance with regulatory requirements. Even if we are successful in
developing our manufacturing capability and processes, there can be no assurance that we will satisfy the requirements of our distributors or
customers.
If third-party manufacturers fail to perform adequately, we could be unable
to meet demand and our revenues could be impaired.
When our manufacturing plant is operating, we depend
on independent manufacturers for large-scale fermentation services and to perform certain other portions of our production process. We intend to engage
additional third-party manufacturers as necessary to perform these processes. Any failure or delay in the
27
ability of our current or any future
manufacturers to provide us with material they produce could adversely affect our ability to produce our current products in the quantities necessary
to satisfy the requirements of our distributors or customers, or could increase our costs associated with obtaining such 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 terms acceptable to us.
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.
Inability to address strain on our resources caused by growth could result in
ineffective management of our business.
As we add manufacturing, marketing, sales, field
development or other personnel, both domestically and internationally, during the commercialization of our current products, 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.
Inability to retain our key employees or other skilled managerial or
technical personnel could impair our ability to maintain or expand our business.
We are highly dependent on the efforts and abilities
of our current key managerial and technical personnel, particularly Dr. Rhett R. Atkins, our President and Chief Executive Officer, and Dr. Zhongmin
Wei, our Chief Scientific Officer and Vice President of Research. Our success will depend in part on retaining the services of Drs. Atkins and 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 or
technical personnel or to attract additional qualified personnel could, among other things, delay our sales, marketing, manufacturing and research and
development efforts. Moreover, in our field, competition for qualified management and technical personnel is intense and many of the companies with
which we compete for experienced personnel have greater financial and other resources than we do. As a result, we may be unable to recruit, train and
retain sufficient qualified personnel.
As of December 31, 2004, our principal facilities in
and around Bothell, Washington, which house our manufacturing, research, administration and warehouse functions, total approximately 105,100 square
feet and are leased under the following arrangements:
• |
|
63,200 square feet of research and office space is leased
through January 2011, at which time we have the option to extend the lease for two five-year terms. Approximately 34,300 square feet of this space has
been subleased to another party through December 2007, with options to extend the sublease through January 2011 and beyond, at the sublessee’s
discretion, provided that we exercise our option to extend the lease beyond its initial ten-year term. |
• |
|
24,000 square feet of warehouse space is leased through January
2006; and |
• |
|
17,900 square feet of manufacturing space is leased through
December 2006, at which time we have an option to extend the lease for an additional 36 months. |
We also lease office space in Annapolis, Maryland
and Mulhouse, France on a short-term basis. We do not own any real estate.
28
| Item 3. |
|
Material Legal Proceedings. |
None.
| Item 4. |
|
Submission of Matters to a Vote of Security
Holders. |
None.
PART II
| Item 5. |
|
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities. |
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 trading prices for our common stock as quoted on The Nasdaq National Market.
|
|
|
|
High
|
|
Low
|
First Quarter
2003 |
|
|
|
|
1.71 |
|
|
|
0.80 |
|
Second Quarter
2003 |
|
|
|
|
2.25 |
|
|
|
1.09 |
|
Third Quarter
2003 |
|
|
|
|
2.01 |
|
|
|
1.20 |
|
Fourth Quarter
2003 |
|
|
|
|
2.00 |
|
|
|
0.91 |
|
|
First Quarter
2004 |
|
|
|
|
1.95 |
|
|
|
1.30 |
|
Second Quarter
2004 |
|
|
|
|
1.66 |
|
|
|
0.65 |
|
Third Quarter
2004 |
|
|
|
|
0.90 |
|
|
|
0.37 |
|
Fourth Quarter
2004 |
|
|
|
|
1.25 |
|
|
|
0.43 |
|
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 18, 2005, there were approximately 192
holders of record of our common stock.
On September 26, 2000, the SEC declared effective
our Registration Statement on Form S-1, as amended (Registration No. 333-41028), as filed with the SEC in connection with our initial public offering.
Our net proceeds, after accounting for $7.0 million in underwriting discounts and commissions and approximately $1.6 million in other expenses of the
offering, were $91.5 million. At December 31, 2004, we had used approximately $18.6 million of the net offering proceeds to expand and enhance our
manufacturing and research and development and administration facilities, and approximately $61.0 million for working capital and general corporate
purposes. The remaining portion of the net offering proceeds has been invested in cash equivalent instruments. Our use of the proceeds from the
offering does not represent a material change in the use of proceeds described in the prospectus included as part of the Registration
Statement.
29
| Item 6. |
|
Selected Financial Data. |
The following selected financial data and other
operating information are derived from our consolidated financial statements. When you read this selected financial data, it is important that you also
read the historical consolidated 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,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
(in thousands, except per share data)
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales, net of sales allowances |
|
|
|
$ |
1,040 |
|
|
$ |
1,772 |
|
|
$ |
1,907 |
|
|
$ |
3,496 |
|
|
$ |
1,229 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold |
|
|
|
|
2,023 |
|
|
|
2,190 |
|
|
|
2,629 |
|
|
|
4,879 |
|
|
|
661 |
|
Research and
development |
|
|
|
|
3,505 |
|
|
|
4,883 |
|
|
|
10,301 |
|
|
|
12,537 |
|
|
|
9,575 |
|
Selling,
general and administrative |
|
|
|
|
4,418 |
|
|
|
5,759 |
|
|
|
8,920 |
|
|
|
12,608 |
|
|
|
6,043 |
|
Loss on
facility subleases |
|
|
|
|
202 |
|
|
|
366 |
|
|
|
4,242 |
|
|
|
— |
|
|
|
— |
|
Total
operating expenses |
|
|
|
|
10,148 |
|
|
|
13,198 |
|
|
|
26,092 |
|
|
|
30,024 |
|
|
|
16,279 |
|
Loss from
operations |
|
|
|
|
(9,108 |
) |
|
|
(11,426 |
) |
|
|
(24,185 |
) |
|
|
(26,528 |
) |
|
|
(15,050 |
) |
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
|
224 |
|
|
|
290 |
|
|
|
717 |
|
|
|
2,896 |
|
|
|
1,803 |
|
Interest
expense |
|
|
|
|
(2 |
) |
|
|
(9 |
) |
|
|
(38 |
) |
|
|
(83 |
) |
|
|
(132 |
) |
Fee and fair
value of warrants |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,281 |
) |
Total other
income (expense) |
|
|
|
|
222 |
|
|
|
281 |
|
|
|
679 |
|
|
|
2,813 |
|
|
|
(610 |
) |
Cumulative
effect of adoption of SFAS No. 143 |
|
|
|
|
— |
|
|
|
(64 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
loss |
|
|
|
$ |
(8,886 |
) |
|
$ |
(11,209 |
) |
|
$ |
(23,506 |
) |
|
$ |
(23,715 |
) |
|
$ |
(15,660 |
) |
Basic and
diluted net loss per share (1) |
|
|
|
$ |
(0.36 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.97 |
) |
|
$ |
(0.99 |
) |
|
$ |
(1.89 |
) |
Weighted
average shares outstanding used
in computation of basic and diluted net
loss per share (1) |
|
|
|
|
24,370 |
|
|
|
24,341 |
|
|
|
24,241 |
|
|
|
23,968 |
|
|
|
8,290 |
|
|
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
(in thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
11,860 |
|
|
$ |
19,823 |
|
|
$ |
30,730 |
|
|
$ |
48,327 |
|
|
$ |
86,557 |
|
Working
capital |
|
|
|
|
13,970 |
|
|
|
20,582 |
|
|
|
29,558 |
|
|
|
46,290 |
|
|
|
83,781 |
|
Total
assets |
|
|
|
|
31,336 |
|
|
|
40,703 |
|
|
|
53,993 |
|
|
|
75,539 |
|
|
|
98,501 |
|
Capital lease
obligations, net of current portion |
|
|
|
|
1 |
|
|
|
12 |
|
|
|
30 |
|
|
|
130 |
|
|
|
330 |
|
Accumulated
deficit |
|
|
|
|
(105,950 |
) |
|
|
(97,064 |
) |
|
|
(85,855 |
) |
|
|
(62,349 |
) |
|
|
(38,635 |
) |
Total
shareholders’ equity |
|
|
|
|
26,609 |
|
|
|
35,435 |
|
|
|
46,594 |
|
|
|
69,994 |
|
|
|
93,241 |
|
| (1) |
|
See Note 1 of Notes to Consolidated Financial Statements for
information concerning the calculation of basic and diluted net loss per share. |
30
| 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” and
“intend” and similar expressions to identify forward-looking statements. However, these words are not the exclusive means of identifying such
statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are
forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons,
including the factors described below and 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 health technology company focused on
developing, manufacturing and marketing innovative products for agriculture using our natural protein-based harpin technology. We have a fundamentally
new, patented and proprietary technology that we believe enhances plant health and improves overall crop production and quality. We believe our
technology provides growers with valuable benefits by increasing crop yields, quality and shelf-life; by improving the plant’s ability to suppress
certain diseases and other environmental stresses; and by enhancing the uptake of nutrients.
We have incurred significant operating losses since
inception. At December 31, 2004, we had an accumulated deficit of $105.9 million. We incurred net losses of $8.9 million in 2004, $11.2 million in 2003
and $23.5 million in 2002. We expect to incur significant additional net losses as we proceed with the commercialization of our current products and
the development of new products and technologies.
Results of Operations
Revenues
We generated our first product sales in August 2000.
Product sales revenue to date has resulted primarily from sales of Messenger, our initial product, and Messenger STS, an improved formulation of
Messenger introduced in January 2004, as well as employ™, MightyPlant™ and other related products (hereafter referred to collectively as
“Messenger Products”) primarily to distributors in the United States and, recently, in Europe. Revenues from product sales are recognized
when (a) the product is shipped to independent distributors, (b) we have satisfied all of our significant obligations and (c) any acceptance provisions
or other contingencies or arrangements have been satisfied. If acceptance provisions or contingencies exist, revenue is recognized after such
provisions or contingencies have been satisfied. As part of the analysis of whether all of our significant obligations have been satisfied or
situations where acceptance provisions or other contingencies or arrangements exist, we consider the following elements, among others: sales terms and
arrangements, historical experience and current incentive programs. Our distributor contracts provide no price protection or product-return rights.
Product sales revenues are reported net of applicable sales allowances, as follows:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Gross product
sales |
|
|
|
$ |
1,074,368 |
|
|
$ |
1,739,917 |
|
|
$ |
2,418,050 |
|
Sales
allowances |
|
|
|
|
(129,861 |
) |
|
|
(94,121 |
) |
|
|
(511,385 |
) |
Elimination
of previously recorded sales allowances |
|
|
|
|
95,237 |
|
|
|
126,301 |
|
|
|
— |
|
Product
sales, net of sales allowances |
|
|
|
$ |
1,039,744 |
|
|
$ |
1,772,097 |
|
|
$ |
1,906,665 |
|
31
Gross product sales revenues were $1.1 million in
2004, a decrease of $666,000 (38%) from $1.7 million in 2003, which decreased $678,000 (28%) from $2.4 million in 2002. Sales in 2004 were made to 27
distributors, three of which accounted for an aggregate of 46% of net product sales. Sales in 2003 were made to 30 distributors, three of which
accounted for an aggregate of 40% of net product sales. Sales in 2002 were made to 26 distributors, two of which accounted for an aggregate of 21% of
net product sales. In addition, we sell directly to consumers in the home and garden market over the Internet. Sales during this three-year period were
significantly lower than expected and were impacted by high levels of inventory in the channel and the continuing challenges of commercializing a new
technology and products.
Gross sales to foreign customers totaled $535,000 in
2004, $127,000 in 2003 and $128,000 in 2002. Sales in 2004 were made primarily to distributors in Spain. Sales in 2003 and 2002 were made primarily to
distributors in China, Europe, Mexico, Central and South America and Oman.
Sales to consumers in the home and garden market in
the United States totaled $200,000 (19% of net product sales) in 2004 and $60,000 (3% of net product sales) in 2003. No sales to consumers in the home
and garden market were recorded in 2002. We plan to increase our spending in this market in 2005 and we expect sales to increase in
2005.
In 2004, in addition to the 470,000 ounces of
Messenger STS product sent to our distributors for free, we shipped 339,000 ounces of Messenger or Messenger STS to distributors, a decrease of 263,000
ounces (44%) from 602,000 ounces shipped in 2003, which increased 67,000 ounces (13%) from 535,000 ounces shipped in 2002. Based on information
received from distributors, we estimate that distributors sold approximately 800,000 ounces of Messenger and Messenger STS to growers in 2004, an
increase of approximately 66,000 ounces (9%) from approximately 734,000 ounces sold in 2003, which increased approximately 50,000 ounces (7%) from
684,000 ounces sold in 2002. We estimate that Messenger and Messenger STS inventory held by distributors at December 31, 2004 was approximately 511,000
ounces.
In September 2003, with the cooperation of its
distributors, the Company instituted a “buy one, get one free” promotion at the grower level that ran through the end of 2003. Near the end
of 2003, the Company announced a reduction of approximately 50% in the price of Messenger and introduced Messenger STS, an improved formulation in
January 2004 at this lower price point. We also announced to distributors that we planned to send them Messenger Products at no charge in order to
reduce the average cost of their existing inventories of Messenger. In 2004, we delivered approximately 470,000 ounces of free Messenger STS to
distributors. This free product substantially increased channel inventory and negatively affected our sales to distributors in 2004. We do not expect
distributors that hold significant inventories of Messenger STS to place additional orders until their current inventories are
reduced.
Due to the growing seasons of our targeted crops, we
expect grower usage of our products to be highly seasonal. Based on the recommended application timing in our targeted crops and information received
from distributors, we expect the second quarter of each year to be the most significant period of use. Our product sales to distributors are also
expected to be seasonal. However, actual timing of orders received from distributors will depend on many factors, including the amount of our products
in distributors’ inventories.
Sales Allowances
Sales allowances represent allowances granted to
independent distributors for sales and marketing support, product warehousing and delivery and information exchange, and are based on a percentage of
sales. Sales allowances are accrued when the related product sales revenue is recognized and are paid in accordance with the terms of the then-current
distributor program agreements. Distributor program agreements expire annually, generally on December 31. Prior to 2003, sales allowances were paid
when the distributors sold the product and reported the sales data to us, generally on a quarterly basis. We expect that sales allowances related to
2003 sales will be paid upon submission by distributors of annual sales data. In January 2004, we changed our distributor program to provide for sales
allowances based on marketing support and the total amount of products purchased during the year. Marketing support and volume rebates are paid
throughout the year as distributors qualify to receive them.
32
Sales allowances related to 2004 sales totaled
$130,000, an increase of $36,000 (38%) from $94,000 in 2003, which decreased $417,000 (82%) from $511,000 in 2002. Sales allowances as a percentage of
gross product sales revenue were 12% in 2004, 5% in 2003 and 21% in 2002. The increase in sales allowances as a percentage of gross product sales
revenue in 2004 compared to 2003 is primarily the result of payments to distributors in Spain for marketing support programs. The decrease in sales
allowances as a percentage of gross product sales revenue in 2003 compared to 2002 reflects changes in our distributor programs. Sales allowances also
included the reduction by $95,000 in 2004 and $126,000 in 2003 of sales allowance liabilities recognized in prior years that will not be paid because
of the changes in distributor programs implemented in 2003 and actual amounts earned by distributors being less than amounts previously
estimated.
Beginning in 2003, we made several changes to our
distributor program. We reduced both the cost of Messenger to our distributors and the sales allowance they will receive, thereby lowering the
necessary working capital investment by distributors who maintain inventories of Messenger. As a result of these changes, previously accrued sales
allowances totaling approximately $546,000 related to Messenger inventory held by distributors at December 31, 2002 were paid in early
2003.
In February 2003, we negotiated with one of our
distributors a compromise settlement whereby we paid $250,000 to settle unpaid accrued sales allowances and an uncollected account receivable. As part
of the settlement agreement and mutual release, we accepted approximately 232,000 ounces of Messenger from that distributor.
Cost of Goods Sold
Cost of goods sold includes the cost of Messenger
sold to distributors, idle capacity charges, inventory cost reductions and write-offs and the cost of Messenger used for promotional purposes. Cost of
goods sold was $2.0 million in 2004, a decrease of $0.2 million (9%) from $2.2 million in 2003, which decreased $0.4 million (15%) from $2.6 million in
2002. Cost of goods sold as a percentage of net sales revenues was 195% in 2004, 124% in 2003 and 138% in 2002. Cost of goods sold includes
manufacturing overhead costs incurred while our manufacturing plant was not in production of approximately $1.3 million in 2004, $1.7 million in 2003
and $1.6 million in 2002. We expect to continue incurring idle capacity charges in the future and will continue to identify opportunities to lower
these charges during periods of non-production.
Included in cost of goods sold are inventory cost
reductions and write-offs totaling $10,000 in 2004, $47,000 in 2003 and $193,000 in 2002. These amounts relate to lower of cost or market adjustments
for inventory that failed to meet our quality control standards. In 2004, we also disposed of Messenger labels and boxes totaling $117,000 that were
not usable due to the introduction of Messenger STS and we recorded a $153,000 net reduction to cost of goods sold to adjust our warranty liability
based on our current expectations of future warranty claims.
The cost of Messenger used for promotional purposes
was $25,000 in 2004, $141,000 in 2003 and $374,000 in 2002. The majority of the 2003 expense related to the accrual of costs associated with
approximately 470,000 ounces that was delivered to distributors at no cost in 2004 as part of the price reduction program.
Research and Development Expenses
Research and development expenses consist primarily
of personnel, field trial, laboratory, regulatory, patent and facility expenses. Research and development expenses totaled $3.5 million in 2004, a
decrease of $1.4 million (29%) from $4.9 million in 2003, which decreased $5.4 million (52%) from $10.3 million in 2002. These decreases were due
primarily to lower spending on personnel costs, field trials, facility costs and travel. The decrease in 2004 was partially offset by an increase in
depreciation and amortization that resulted from reducing the estimated useful life of leasehold improvements and certain equipment at our research
facility. We are pursuing additional tenants to sublease lab and office space at our research and administrative building and we expect to complete
this by December 2005.
33
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist
of personnel and related expenses for sales and marketing, executive and administrative personnel; advertising, marketing and professional fees; and
other corporate expenses. Selling, general and administrative expenses totaled $4.4 million in 2004, a decrease of $1.4 million (24%) from $5.8 million
in 2003, which decreased $3.1 million (35%) from $8.9 million in 2002. These decreases resulted primarily from reductions in personnel, advertising and
marketing expenses and facility costs. Included in selling, general and administrative expenses were severance costs of $160,000 in 2003 and $535,000
in 2002 in connection with workforce reductions.
Loss on Facility Subleases
In January 2001, we entered into a ten-year lease
agreement, with two five-year extension options to be exercised at our discretion, for 63,200 square feet of office space located near our
manufacturing facility in Bothell, Washington. In the first half of 2001, we converted approximately 22,600 square feet of this building into
laboratory facilities and made other improvements at a cost of approximately $9.1 million. In order to offset our future facility costs, in December
2002, we entered into an agreement to sublease to another company 34,302 square feet of laboratory and office space. The sublease agreement has an
initial non-cancelable term of five years, with one three-year and two five-year extension options to be exercised at the subtenant’s discretion,
provided that we exercise our option to extend the lease beyond its initial ten-year term. The rent to be collected under the sublease exceeds the rent
we will pay for the subleased space. However, the excess does not cover the unamortized cost of leasehold improvements and equipment in the subleased
space. As a result, a $4.2 million loss on the sublease was recorded in December 2002. The loss includes a write-off of net leasehold improvements and
equipment directly related to the subleased space totaling $1.0 million; an accrued loss of $4.0 million for the subtenant’s estimated portion of
depreciation and amortization of shared assets, offset by excess rents of approximately $1.1 million; and sublease transaction costs of approximately
$300,000.
In April 2003, the Company subleased approximately
7,300 square feet of office space to another company under a five year sublease agreement. Due to declines in the real estate market, the rent we pay
on the subleased space exceeded the initial rent to be collected under the sublease and we recorded a loss of $213,000. Due to the subtenants financial
difficulties, the subtenant later reduced the rental payment and an additional loss of $153,000 was recorded in 2003. The subtenant vacated the space
in October 2004. As a result, the Company recorded an additional loss of $202,000 in 2004 based upon an estimate of the time needed to re-sublease the
space and expected future rents to be collected.
Interest Income
Interest income consists of earnings on our cash and
cash equivalents. Interest income totaled $224,000 in 2004, a decrease of $66,000 (23%) from $290,000 in 2003, which decreased $427,000 (60%) from
$717,000 in 2002. The decreases were due to significantly lower average cash balances available for investment in each year offset by higher interest
rates in 2004.
Interest Expense
Interest expense consists of interest we pay on
capital leases used to finance certain equipment acquisitions. Interest expense totaled $3,000 in 2004, a decrease of $6,000 (67%) from $9,000 in 2003,
which decreased $29,000 (76%) from $38,000 in 2002. These decreases were due to lower average principal balances as we paid down the capital lease
obligations.
Income Taxes
We have generated a net loss from operations for
each period since we began doing business. As of December 31, 2004, we had accumulated approximately $101.5 million of net operating loss carryforwards
for federal income tax purposes, which expire between 2009 and 2024, and approximately $9.1 million in foreign
34
tax net operating loss carryforwards, which expire between 2006
and 2009. We have provided a valuation allowance against our net deferred tax assets because of the significant uncertainty surrounding our ability to
realize them. 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
Our operating expenditures have been significant
since our inception. We currently anticipate that our operating expenses will significantly exceed net product sales and that net losses and working
capital requirements will consume a material amount of our cash resources. If net product sales do not significantly increase in the near term, we will
have to further reduce our operating expenses. Our future capital requirements will depend on the success of our operations. We believe that the
balance of our cash and cash equivalents at December 31, 2004 will be sufficient to meet our anticipated cash needs for net losses, working capital and
capital expenditures for more than the next 12 months, although there can be no assurance in that regard. After the next 12 months, if net product
sales do not significantly increase, we will have to further reduce operating expenses or secure additional financing. We may be unable to obtain
adequate or favorable financing at that time or at all and may cease operations. In this regard, the closing price per share for our common stock is
currently below the $1.00 minimum bid price required to meet Nasdaq’s continued listing criteria. If the minimum bid price remains below the $1.00
minimum bid price requirement, Nasdaq may send us a delisting warning letter, in which case we would have 180 calendar days from the date of the letter
to regain compliance. To regain compliance with the minimum bid price requirement, the closing bid price of our common stock must remain above $1.00
for a minimum of ten consecutive trading days. If we do not regain compliance within the 180 day period and are not eligible for an additional
compliance period, our common stock will be delisted from The Nasdaq National Market. Nasdaq delisting could make it more difficult for us to raise
capital. The sale of additional equity securities could result in dilution to the Company’s shareholders.
At December 31, 2004, our cash and cash equivalents
totaled $11.9 million, a decrease of $7.9 million from the balance of $19.8 million at December 31, 2003. 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 acquisitions through lease financings.
Net cash used in operations totaled $8 million in
2004, a decrease of $2.8 million (26%) from $10.8 million in 2003, which decreased $6.5 million (38%) from $17.3 million in 2002. Net cash used in
operations of $8 million in 2004 resulted primarily from net loss of $8.9 million, which includes depreciation and amortization and loss on subleases
of $2.2 million, and fluctuations in various asset and liability balances totaling $1.4 million. Net cash used in operations of $10.8 million in 2003
resulted primarily from net loss of $11.2 million, which includes depreciation and amortization and loss on subleases of $2.5 million, and fluctuations
in various asset and liability balances totaling $2.5 million. Net cash used in operations of $17.3 million in 2002 resulted primarily from net loss of
$23.5 million, which includes depreciation and amortization and loss on subleases of $6.9 million, and fluctuations in various asset and liability
balances totaling $1.1 million. We expect that cash used in operations will continue to be significant.
Net cash provided by investing activities totaled
$10,000 in 2004 and resulted primarily from proceeds from the sale of equipment. Net cash used in investing activities totaled $50,000 in 2003, a
decrease of $134,000 (73%) from $184,000 in 2002. The reduction from 2002 to 2003 was due primarily to increased proceeds from the disposal of
equipment in 2003.
Net cash used in financing activities totaled $5,000
in 2004, a reduction of $34,000 (87%) from $39,000 in 2003, which decreased $42,000 (52%) from net cash provided by financing activities of $81,000 in
2002. The primary use of funds during these years was to pay down principal on our outstanding capital leases,
35
offset by proceeds from the issuance of our
common stock in connection with our stock option and employee stock purchase plans.
We conduct our operations in three primary
functional currencies: the U.S. dollar, the euro and, until December 31, 2004, the Mexican peso. Historically, neither fluctuations in foreign exchange
rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not
hedge our foreign currency exposures and are, therefore, subject to the risk of exchange rates. We may invoice our international customers in U.S.
dollars, euros and Mexican pesos, as the case may be. We are exposed to foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. Foreign exchange rate fluctuations did not have a material impact on our financial
results in 2004, 2003 or 2002. As of December 31, 2004, we changed the functional currency of our Mexican subsidiary from the Mexican peso to the U. S.
dollar due to lower activity in Mexico and the majority of transactions being denominated in U.S. dollars.
The following are our contractual obligations as of
December 31, 2004 associated with our capital and operating lease obligations:
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Total
|
|
Less Than
1 Year
|
|
1–3
Years
|
|
3–5
Years
|
|
More Than
5 Years
|
Capital lease
obligations, including interest |
|
|
|
$ |
13 |
|
|
$ |
12 |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
— |
|
Operating
lease obligations |
|
|
|
|
9,815 |
|
|
|
1,868 |
|
|
|
3,241 |
|
|
|
3,029 |
|
|
|
1,677 |
|
Total |
|
|
|
$ |
9,828 |
|
|
$ |
1,880 |
|
|
$ |
3,242 |
|
|
$ |
3,029 |
|
|
$ |
1,677 |
|
Critical Accounting Policies, Estimates and Judgments
Our critical accounting policies are more fully
described in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K. Certain of our accounting policies require
the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, terms of existing contracts,
commonly accepted industry practices, information provided by our customers and other assumptions that we believe are reasonable under the
circumstances. Our estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial
statements in the period in which they are determined to be necessary. Actual results may differ from these estimates under different assumptions or
conditions. Our critical accounting policies and estimates include:
Revenue Recognition
We sell the majority of our products to independent,
third-party distributors. Our contracts with those distributors provide no price protection or product-return rights. We recognize revenue from product
sales, net of sales allowances, when product is delivered to our distributors and all of our significant obligations have been satisfied, unless
acceptance provisions or other contingencies or arrangements exist. If acceptance provisions or contingencies exist, revenue is recognized after such
provisions or contingencies have been satisfied. As part of the analysis of whether all of our significant obligations have been satisfied or
situations where acceptance provisions or other contingencies or arrangements exist, we consider the following elements, among others: sales terms and
arrangements, including customer payment terms, historical experience and current incentive programs.
Sales allowances represent allowances granted to
independent distributors for sales and marketing support, product warehousing and delivery and information exchange and are based on the terms of the
distribution agreements or other arrangements. Sales allowances are estimated and accrued when the related product sales are recognized or when
services are provided and are paid in accordance with the terms of the
36
then-current distributor program agreements or
other arrangements. Distributor program agreements expire annually, generally on December 31. Prior to 2003, sales allowances were paid when the
distributors sold the product and reported the sales data to us, generally on a quarterly basis. We expect that sales allowances related to 2003 sales
will be paid upon submission by distributors of annual sales data. In January 2004, we changed our distributor program to provide for sales allowances
based on marketing support and the total amount of products purchased during the year. Marketing support and volume rebates are paid throughout the
year as distributors qualify to receive them.
We also record, at the time revenue is recognized, a
liability for warranty claims based on a percentage of sales. The warranty accrual percentage, which has ranged between zero and five percent, and
warranty liability are reviewed periodically and adjusted as necessary, based on historical experience, the results of product quality testing and
future expectations. Changes in our estimate of the warranty liability are recorded in cost of goods sold.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable balances are reported net of
customer-specific related sales allowances. In determining the adequacy of the allowance for doubtful accounts, we consider a number of factors,
including the age of outstanding invoices, customer payment trends, the financial condition of our customers, historical bad debts and current economic
trends. Based upon our analysis of outstanding net accounts receivable at December 31, 2004, no allowance for doubtful accounts was recorded. Changes
in the factors above or other factors could result in a significant charge.
Inventory
Our inventory is valued at the lower of cost or
market on an average cost basis. We regularly review inventory balances to determine whether a write-down is necessary. We consider various factors in
making this determination, including recent sales history and predicted trends, industry market conditions, general economic conditions, the age of our
inventory and recent quality control data. Changes in the factors above or other factors could result in significant additional inventory cost
reductions and write-offs.
Valuation of Property and Equipment
We periodically review the carrying values of our
property and equipment to determine whether such assets have been impaired. An impairment loss must be recorded pursuant to SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” when the undiscounted net cash flows to be realized from the use of such
assets are less than their carrying value. The determination of undiscounted net cash flows requires us to make many estimates, projections and
assumptions, including the lives of the assets, future sales and expense levels, additional capital investments or expenditures necessary to maintain
the assets, industry market trends and general and industry economic conditions. During 2002, we wrote off approximately $1.0 million of leasehold
improvements and equipment directly related to approximately 34,300 square feet of laboratory and office space subleased to another
company.
Based upon our most recently completed analysis of
net cash flows expected to be realized from our remaining investments in property and equipment, no additional impairment loss was recorded. The
critical estimates in the analysis are our ability to significantly increase sales over the next five years while controlling operating expenses at
about current levels over the next four years. If net product sales do not significantly increase in the near term or if expenses significantly
increase over the current level, a significant impairment loss may need to be recorded. Another critical assumption is that we will continue our
current facility leases. If we do not continue our leases, we may incur a significant impairment loss on leasehold improvements and equipment at these
facilities and other significant losses. Changes in the factors above or other factors could result in significantly different cash flow estimates and
a significant impairment charge.
Loss on Facility Subleases
As of December 31, 2004, we subleased approximately
34,300 square feet of laboratory and office space to other companies. One subtenant vacated approximately 7,300 square feet of office space in October
2004. As a result, the Company recorded an additional loss of $202,000 in 2004. In determining the loss on these
37
facility subleases, we considered a number of
factors, including the financial condition of the subtenants, subtenants’ investments in improvements, amounts of security deposits, estimated
time needed to sublease space and estimated rents to be collected. Based on our analysis, we estimate that rents will be collected and that one
subtenant will exercise a three-year extension option. Changes in the factors above or other factors could result in a significant increase in the
loss.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R). Statement 123R will provide users of financial
statements with more complete financial information by requiring that the compensation cost relating to share-based payment transactions be recognized
in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123R covers a wide
range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. Statement 123R replaces FASB 123, Accounting for Stock Issued to Employees, and supercedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123R will be effective for the Company for its third fiscal
quarter ending September 30, 2005. The Company is in the process of evaluating the impact of adopting Statement 123R and of determining the impact on
its results of operations or financial position.
The FASB issued Statement of Financial Accounting
Standards No. 151, Inventory Costs — An Amendment of ARB No. 43, Chapter 4 (Statement 151) in November 2004. Statement 151 amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal” as stated in ARB No. 43. Additionally, Statement 151 requires the allocation of fixed production overheads to the
costs of conversion be based on normal capacity of the production facilities. Statement 151 is effective for fiscal years beginning after June 15,
2005, and is required to be adopted by the Company in the first quarter of fiscal 2006. The Company is currently evaluating the effect that the
adoption of Statement 151 will have on its financial position and results of operation, but does not expect it to be material.
The FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (Statement
153) in December 2004. Statement 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in
Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with a general exception for
exchanges that do not have commercial substance. Statement 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows
of the entity are expected to change significantly as a result of the exchange. Statement 153 is effective for fiscal periods beginning after June 15,
2005, and is required to be adopted by the Company in the third quarter of fiscal 2005. The Company is currently evaluating the effect that the
adoption of Statement 153 will have on its financial position and results of operation, but does not expect it to be material.
| 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. Because of the relatively short-term average maturity of our investment funds, such investments
are sensitive to interest rate movements. Therefore, our future interest income may be adversely impacted by changes in interest rates. We believe that
the market risk arising from cash equivalents is not material.
38
| Item 8. |
|
Financial Statements and Supplementary
Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Eden Bioscience Corporation:
We have audited the accompanying consolidated
balance sheets of Eden Bioscience Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations,
shareholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (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 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Eden Bioscience Corporation and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 12 to the consolidated
financial statements, the Company changed its method of accounting for asset retirement obligations effective January 1, 2003.
/s/ KPMG LLP
Seattle, Washington
February 14, 2005
39
EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
11,860,385 |
|
|
$ |
19,823,339 |
|
Accounts
receivable, net of sales allowances |
|
|
|
|
39,946 |
|
|
|
166,111 |
|
Inventory |
|
|
|
|
3,487,586 |
|
|
|
2,057,818 |
|
Prepaid
expenses and other current assets |
|
|
|
|
498,670 |
|
|
|
719,939 |
|
Total current
assets |
|
|
|
|
15,886,587 |
|
|
|
22,767,207 |
|
Property and
equipment, net |
|
|
|
|
13,887,573 |
|
|
|
16,305,604 |
|
Other
assets |
|
|
|
|
1,561,902 |
|
|
|
1,629,769 |
|
Total
assets |
|
|
|
$ |
31,336,062 |
|
|
$ |
40,702,580 |
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
|
$ |
190,648 |
|
|
$ |
105,076 |
|
Accrued
liabilities |
|
|
|
|
1,206,411 |
|
|
|
1,568,952 |
|
Current
portion of accrued loss on facility subleases |
|
|
|
|
507,748 |
|
|
|
494,373 |
|
Current
portion of capital lease obligations |
|
|
|
|
11,572 |
|
|
|
17,257 |
|
Total current
liabilities |
|
|
|
|
1,916,379 |
|
|
|
2,185,658 |
|
Accrued loss on
facility subleases, net of current portion |
|
|
|
|
2,037,613 |
|
|
|
2,373,342 |
|
Capital lease
obligations, net of current portion |
|
|
|
|
761 |
|
|
|
12,333 |
|
Other long-term
liabilities |
|
|
|
|
771,934 |
|
|
|
695,996 |
|
Total
liabilities |
|
|
|
|
4,726,687 |
|
|
|
5,267,329 |
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 10,000,000 shares authorized; no shares
issued and outstanding at December 31, 2004 and 2003 |
|
|
|
|
— |
|
|
|
— |
|
Common stock,
$.0025 par value, 100,000,000 shares authorized; issued
and outstanding shares — 24,381,870 shares at December 31, 2004;
24,361,990 shares
at December 31, 2003 |
|
|
|
|
60,955 |
|
|
|
60,905 |
|
Additional
paid-in capital |
|
|
|
|
132,535,982 |
|
|
|
132,523,362 |
|
Accumulated
other comprehensive loss |
|
|
|
|
(37,675 |
) |
|
|
(85,381 |
) |
Accumulated
deficit |
|
|
|
|
(105,949,887 |
) |
|
|
(97,063,635 |
) |
Total
shareholders’ equity |
|
|
|
|
26,609,375 |
|
|
|
35,435,251 |
|
Total
liabilities and shareholders’ equity |
|
|
|
$ |
31,336,062 |
|
|
$ |
40,702,580 |
|
The accompanying notes are an integral part of these consolidated financial
statements.
40
EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Product
sales, net of sales allowances |
|
|
|
$ |
1,039,742 |
|
|
$ |
1,772,097 |
|
|
$ |
1,906,665 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold |
|
|
|
|
2,023,338 |
|
|
|
2,190,034 |
|
|
|
2,628,608 |
|
Research and
development |
|
|
|
|
3,504,699 |
|
|
|
4,883,120 |
|
|
|
10,301,587 |
|
Selling,
general and administrative |
|
|
|
|
4,417,704 |
|
|
|
5,759,163 |
|
|
|
8,919,734 |
|
Loss on
facility subleases |
|
|
|
|
202,007 |
|
|
|
366,019 |
|
|
|
4,241,643 |
|
Total
operating expenses |
|
|
|
|
10,147,748 |
|
|
|
13,198,336 |
|
|
|
26,091,572 |
|
Loss from
operations |
|
|
|
|
(9,108,006 |
) |
|
|
(11,426,239 |
) |
|
|
(24,184,907 |
) |
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
|
224,405 |
|
|
|
290,206 |
|
|
|
717,020 |
|
Interest
expense |
|
|
|
|
(2,651 |
) |
|
|
(9,048 |
) |
|
|
(37,680 |
) |
Total other
income |
|
|
|
|
221,754 |
|
|
|
281,158 |
|
|
|
679,340 |
|
Loss before
income taxes and cumulative effect of adoption of SFAS No. 143 |
|
|
|
|
(8,886,252 |
) |
|
|
(11,145,081 |
) |
|
|
(23,505,567 |
) |
Income
taxes |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss before
cumulative effect of adoption of
SFAS No. 143 |
|
|
|
|
(8,886,252 |
) |
|
|
(11,145,081 |
) |
|
|
(23,505,567 |
) |
Cumulative
effect of adoption of SFAS No. 143 |
|
|
|
|
— |
|
|
|
(63,508 |
) |
|
|
— |
|
Net
loss |
|
|
|
$ |
(8,886,252 |
) |
|
$ |
(11,208,589 |
) |
|
$ |
(23,505,567 |
) |
Basic and
diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
cumulative effect of adoption of
SFAS No. 143 |
|
|
|
$ |
(0.36 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.97 |
) |
Cumulative
effect of adoption of SFAS No. 143 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
loss |
|
|
|
$ |
(0.36 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.97 |
) |
Weighted
average shares outstanding used to compute
net loss per share — basic and diluted |
|
|
|
|
24,370,467 |
|
|
|
24,340,980 |
|
|
|
24,240,516 |
|
The accompanying notes are an integral part of these consolidated financial
statements.
41
EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
|
|
|
|
Outstanding
Shares
Common
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Deferred
Stock
Option
Compen-
sation
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Total
Shareholders’
Equity
|
Balance at
December 31, 2001 |
|
|
|
|
24,099,944 |
|
|
$ |
60,250 |
|
|
$ |
132,326,759 |
|
|
$ |
(10,145 |
) |
|
$ |
(33,577 |
) |
|
$ |
(62,349,479 |
) |
|
$ |
69,993,808 |
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,505,567 |
) |
|
|
(23,505,567 |
) |
Cumulative
translation
adjustment |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45,265 |
) |
|
|
— |
|
|
|
(45,265 |
) |
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,550,832 |
) |
Sale of common
stock |
|
|
|
|
47,189 |
|
|
|
118 |
|
|
|
97,881 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
97,999 |
|
Exercise of
stock options, net |
|
|
|
|
160,362 |
|
|
|
401 |
|
|
|
42,266 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,667 |
|
Stock option
compensation
expense |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,145 |
|
|
|
— |
|
|
|
— |
|
|
|
10,145 |
|
Balance at
December 31, 2002 |
|
|
|
|
24,307,495 |
|
|
|
60,769 |
|
|
|
132,466,906 |
|
|
|
— |
|
|
|
(78,842 |
) |
|
|
(85,855,046 |
) |
|
|
46,593,787 |
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,208,589 |
) |
|
|
(11,208,589 |
) |
Cumulative
translation
adjustment |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,539 |
) |
|
|
— |
|
|
|
(6,539 |
) |
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,215,128 |
) |
Sale of common
stock |
|
|
|
|
22,295 |
|
|
|
56 |
|
|
|
29,137 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,193 |
|
Exercise of
stock options |
|
|
|
|
32,200 |
|
|
|
80 |
|
|
|
27,319 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,399 |
|
Balance at
December 31, 2003 |
|
|
|
|
24,361,990 |
|
|
|
60,905 |
|
|
|
132,523,362 |
|
|
|
— |
|
|
|
(85,381 |
) |
|
|
(97,063,635 |
) |
|
|
35,435,251 |
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,886,252 |
) |
|
|
(8,886,252 |
) |
Cumulative
translation
adjustment |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47,706 |
|
|
|
— |
|
|
|
47,706 |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,838,546 |
) |
Sale of common
stock |
|
|
|
|
19,880 |
|
|
|
50 |
|
|
|
12,620 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,670 |
|
Balance at
December 31, 2004 |
|
|
|
|
24,381,870 |
|
|
$ |
60,955 |
|
|
$ |
132,535,982 |
|
|
$ |
— |
|
|
$ |
(37,675 |
) |
|
$ |
(105,949,887 |
) |
|
$ |
26,609,375 |
|
The accompanying notes are an integral part of these consolidated financial
statements.
42
EDEN
BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
$ |
(8,886,252 |
) |
|
$ |
(11,208,589 |
) |
|
$ |
(23,505,567 |
) |
Adjustments
to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
|
|
1,976,015 |
|
|
|
2,149,267 |
|
|
|
2,660,792 |
|
Amortization
of stock option compensation expense |
|
|
|
|
— |
|
|
|
— |
|
|
|
10,145 |
|
Loss on
disposition of fixed assets |
|
|
|
|
— |
|
|
|
105,890 |
|
|
|
230,652 |
|
Loss on
facility subleases |
|
|
|
|
202,007 |
|
|
|
366,019 |
|
|
|
4,213,192 |
|
Deferred rent
payable |
|
|
|
|
50,556 |
|
|
|
120,321 |
|
|
|
138,442 |
|
Accretion
expense |
|
|
|
|
25,015 |
|
|
|
21,156 |
|
|
|
— |
|
Cumulative
effect of adoption of SFAS No. 143 |
|
|
|
|
— |
|
|
|
63,508 |
|
|
|
— |
|
Changes in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
|
|
127,431 |
|
|
|
56,118 |
|
|
|
(128,944 |
) |
Inventory |
|
|
|
|
(999,103 |
) |
|
|
172,101 |
|
|
|
183,778 |
|
Prepaid
expenses and other assets |
|
|
|
|
307,568 |
|
|
|
64,900 |
|
|
|
201,369 |
|
Accounts
payable |
|
|
|
|
87,605 |
|
|
|
(260,069 |
) |
|
|
(563,293 |
) |
Accrued
liabilities |
|
|
|
|
(379,489 |
) |
|
|
(2,085,753 |
) |
|
|
(748,404 |
) |
Accrued loss
on facility subleases |
|
|
|
|
(524,361 |
) |
|
|
(404,437 |
) |
|
|
— |
|
Other
long-term liabilities |
|
|
|
|
— |
|
|
|
— |
|
|
|
(32,500 |
) |
Net cash used
in operating activities |
|
|
|
|
(8,013,008 |
) |
|
|
(10,839,568 |
) |
|
|
(17,340,338 |
) |
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
property and equipment |
|
|
|
|
(2,586 |
) |
|
|
(261,934 |
) |
|
|
(208,045 |
) |
Proceeds from
disposal of fixed assets |
|
|
|
|
13,040 |
|
|
|
212,030 |
|
|
|
23,956 |
|
Net cash
provided by (used in) investing activities |
|
|
|
|
10,454 |
|
|
|
(49,904 |
) |
|
|
(184,089 |
) |
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in
capital lease obligations |
|
|
|
|
(17,257 |
) |
|
|
(95,428 |
) |
|
|
(221,350 |
) |
Proceeds from
issuance of stock |
|
|
|
|
12,670 |
|
|
|
56,592 |
|
|
|
140,666 |
|
Net cash used
in financing activities |
|
|
|
|
(4,587 |
) |
|
|
(38,836 |
) |
|
|
(80,684 |
) |
Effect of
foreign currency exchange rates on cash and cash equivalents |
|
|
|
|
44,187 |
|
|
|
21,819 |
|
|
|
7,917 |
|
Net decrease
in cash and cash equivalents |
|
|
|
|
(7,962,954 |
) |
|
|
(10,906,489 |
) |
|
|
(17,597,194 |
) |
Cash and cash
equivalents at beginning of period |
|
|
|
|
19,823,339 |
|
|
|
30,729,828 |
|
|
|
48,327,022 |
|
Cash and cash
equivalents at end of period |
|
|
|
$ |
11,860,385 |
|
|
$ |
19,823,339 |
|
|
$ |
30,729,828 |
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest |
|
|
|
$ |
2,651 |
|
|
$ |
9,048 |
|
|
$ |
37,680 |
|
The accompanying notes are an integral part of these consolidated financial
statements.
43
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
| 1. |
|
Organization and Summary of Significant Accounting
Policies |
Organization and Business
Eden Bioscience Corporation (“Eden
Bioscience” or the “Company”) was incorporated in the State of Washington on July 18, 1994. Eden Bioscience is a plant health technology
company focused on developing, manufacturing and marketing innovative natural protein-based products for agriculture.
The Company is subject to a number of risks
including, among others: dependence on a limited number of products and the development and commercialization of those products, which may not be
successful; the need to develop adequate sales and marketing capabilities to commercialize the Company’s products; reliance on independent
distributors and retailers to sell the Company’s products; competition from other companies with greater financial, technical and marketing
resources; and other risks associated with commercializing a new technology.
Liquidity
The Company’s operating expenditures have been
significant since its inception. The Company currently anticipates that its operating expenses will significantly exceed net product sales and that net
losses and working capital requirements will consume a material amount of its cash resources. If net product sales do not significantly increase in the
near term, the Company will have to further reduce its operating expenses. The Company’s future capital requirements will depend on the success of
its operations. Management of the Company believes that the balance of its cash and cash equivalents at December 31, 2004 will be sufficient to meet
its anticipated cash needs for net losses, working capital and capital expenditures for more than the next 12 months, although there can be no
assurance in that regard. After the next 12 months, if net product sales do not significantly increase, the Company will have to further reduce
operating expenses or secure additional financing. The Company may be unable to obtain adequate or favorable financing at that time or at all and may
cease operations. The sale of additional equity securities could result in dilution to the Company’s shareholders.
Principles of Consolidation
The consolidated financial statements include the
accounts of Eden Bioscience and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated.
Segments
The Company has one operating segment — the
development and commercialization of natural protein-based products for agriculture.
Estimates Used in Financial Statement Preparation
The preparation of financial statements in
conformity with generally accepted accounting principles in the United States 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 revenues and expenses during the reporting period. Examples include depreciable lives of property and equipment; expense accruals;
and provisions for sales allowances, warranty claims, inventory valuation, cash flow projections used in evaluating whether asset impairment loss is
recorded, losses on facility subleases and bad debts. Such estimates and assumptions are based on historical experience, where applicable,
management’s plans and other assumptions. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements prospectively when they are determined to be necessary. Actual results could differ from these
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.
44
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable balances are reported net of
customer-specific related sales allowances payable of $11,000 and $55,000 at December 31, 2004 and 2003, respectively. In determining the adequacy of
the allowance for doubtful accounts, the Company considers a number of factors, including the aging of the accounts receivable portfolio, customer
payment trends, the financial condition of its customers, historical bad debts and current economic trends. Based upon an analysis of outstanding net
accounts receivable, no allowance for doubtful accounts was recorded at December 31, 2004 or 2003.
In February 2003, the Company negotiated with one of
its distributors a compromise settlement whereby the Company paid $250,000 to settle unpaid accrued sales allowances net of an uncollected account
receivable. As part of the settlement agreement and mutual release, the Company accepted approximately 232,000 ounces of Messenger from that
distributor, which was recorded at replacement cost. The effect on the consolidated statement of operations as a result of this settlement was
immaterial.
Inventory
Inventory is valued at the lower of average cost or
market. Costs include material, labor and overhead. The Company estimates inventory cost reductions based on the results of quality control testing and
the amount and age of product in the Company’s inventory. The Company recorded cost reductions and write-offs totaling approximately $10,000 in
2004, $47,000 in 2003, and $193,000 in 2002.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the
Company to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. Financial
instruments, including those listed above, that are short-term and/or that have little or no market risk are estimated to have a fair value equal to
book value. Deposits with banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon
demand and, therefore, bear minimal risk. 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 twenty years.
On January 1, 2001, the Company adopted the units-of-production method of depreciation for manufacturing equipment placed into service after that date.
Equipment leased under capital leases is depreciated over the shorter of its estimated useful life or lease term, which ranges between three to five
years. Leasehold improvements are amortized over the shorter of their estimated useful lives or lease terms, which range between two to ten years.
Substantially all of the Company’s assets are in the United States.
Long-lived assets are reviewed for impairment
whenever events or circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the Company compares the
carrying value of such assets to the undiscounted cash flows expected from the use of the assets and their eventual disposition. When necessary, an
impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value. During 2002, the Company wrote off
$1.0 million of leasehold improvements and equipment directly related to approximately 34,300 square feet of laboratory and office space subleased to
another company. Based upon an analysis of estimated net cash flows to be realized from the Company’s investments in property and equipment at
December 31, 2004, no additional impairment loss was recorded.
In October 2004, the Company began marketing lab and
office space it currently occupies and estimates it will sublease substantially all of this space by the end of 2005. Based on the current sublease
market, the
45
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Company believes that a portion of the leasehold
improvements and certain equipment related to the lab space will not be recovered from the receipt of future sublease payments. Therefore, the
estimated useful life of a portion of leasehold improvements and certain equipment related to this lab space has been reduced from January 2011, the
end of the lease term, to December 31, 2005. In the fourth quarter of 2004, additional amortization and depreciation of $355,000 was included in
research and development expense in the consolidated statements of operations and additional amortization and deprecation of $1.4 million is expected
to be recorded in 2005.
Other Assets
Other assets consist principally of restricted
investments held as deposits in connection with the Company’s operating leases of its headquarters/research and development and manufacturing
facilities.
Exit and Disposal Activities
Costs associated with one-time termination benefits
are estimated at the time the liability is incurred and are recognized over the future service period, if applicable, or immediately, if there is no
future service period. The cumulative effect of subsequent changes in the timing or amount of estimated cash flows over the future service period is
recognized as an adjustment to the liability in the period of the change.
Revenues
The Company recognizes revenue from product sales,
net of sales allowances, when product is shipped to its distributors and all significant obligations of the Company have been satisfied, unless
acceptance provisions or other contingencies or arrangements exist. If acceptance provisions or contingencies exist, revenue is deferred and recognized
later if such provisions or contingencies are satisfied. As part of the analysis of whether all significant obligations of the Company have been
satisfied or situations where acceptance provisions or other contingencies or arrangements exist, the Company considers the following elements, among
others: sales terms and arrangements, historical experience and current incentive programs. Distributors do not have price protection or product-return
rights. The Company provides an allowance for warranty claims based on historical experience and expectations. Shipping and handling costs related to
product sales that are paid by the Company are included in cost of goods sold.
Sales allowances represent allowances granted to
independent distributors for sales and marketing support, product warehousing and delivery and information exchange and are estimated based on the
terms of the distribution agreements currently in place. Sales allowances are accrued when the related product sales are recognized and are paid in
accordance with the terms of the then-current distributor program agreements. Distributor program agreements expire annually, generally on December 31.
Prior to 2003, sales allowances were paid when the distributors sold the product and reported the sales data to the Company, generally on a quarterly
basis. Sales allowances related to 2003 sales will be paid upon submission by distributors of sales data for the related growing season. Sales
allowances related to 2004 are paid when services are performed or when volume levels are achieved.
Gross product sales and sales allowances are as
follows:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Gross product
sales |
|
|
|
$ |
1,074,368 |
|
|
$ |
1,739,917 |
|
|
$ |
2,418,050 |
|
Sales
allowances |
|
|
|
|
(129,861 |
) |
|
|
(94,121 |
) |
|
|
(511,385 |
) |
Elimination
of previously recorded sales
allowance liabilities |
|
|
|
|
95,237 |
|
|
|
126,301 |
|
|
|
— |
|
Product
sales, net of sales allowances |
|
|
|
$ |
1,039,744 |
|
|
$ |
1,772,097 |
|
|
$ |
1,906,665 |
|
46
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company paid sales allowances totaling $125,768
in 2004, $1,826,811 in 2003, and $518,872 in 2002.
Gross product sales by geographical region
were:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
United
States |
|
|
|
$ |
539,479 |
|
|
$ |
1,631,496 |
|
|
$ |
2,290,091 |
|
Spain |
|
|
|
|
528,826 |
|
|
|
— |
|
|
|
— |
|
Other
regions |
|
|
|
|
6,063 |
|
|
|
108,421 |
|
|
|
127,959 |
|
Product
sales, net of sales allowances |
|
|
|
$ |
1,074,368 |
|
|
$ |
1,739,917 |
|
|
$ |
2,418,050 |
|
Incentives
The Company sometimes offers sales incentives, often
in the form of free product, to distributors and other customers. Costs associated with such incentives are recognized as costs of sales in the later
of the period in which (a) the associated revenue is recognized by the Company or (b) the sales incentive is offered to the customer.
In September 2003, with the cooperation of its
distributors, the Company instituted a “buy one, get one free” promotion at the grower level that ran through the end of 2003. Near the end
of 2003, the Company announced a reduction of approximately 50% in the price of Messenger and introduced Messenger STS, an improved formulation in
January 2004 at this lower price point. At the same time, the Company announced to distributors that it planned to send them additional products at no
charge in order to reduce the average cost of their existing inventories of Messenger. In 2004, the Company delivered approximately 470,000 ounces of
Messenger products at no charge to distributors. The total cost of these promotions was approximately $191,000, which the Company recorded as a cost of
sales in 2003.
Cost of Goods Sold
Cost of goods sold includes all direct and indirect
costs incurred in the manufacturing process; shipping and handling and other costs necessary to deliver product to distributors; inventory cost
reductions; product used for promotional purposes; and idle capacity charges during periods of non-production.
Advertising Costs
Advertising costs are expensed as incurred. The
Company incurred advertising expenses of $296,849 in 2004, $398,555 in 2003, and $756,890 in 2002.
Research and Development Expenses
Research and development costs are expensed as
incurred.
47
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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,” as amended
by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of SFAS No. 123.” 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. The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Net loss, as
reported |
|
|
|
$ |
(8,886,252 |
) |
|
$ |
(11,208,589 |
) |
|
$ |
(23,505,567 |
) |
Add: Stock
option compensation expense, as reported |
|
|
|
|
— |
|
|
|
— |
|
|
|
10,145 |
|
Deduct: Total
stock-based employee compensation expense under fair value based method |
|
|
|
|
(779,031 |
) |
|
|
(1,516,909 |
) |
|
|
(1,182,088 |
) |
Pro forma net
loss |
|
|
|
$ |
(9,665,283 |
) |
|
$ |
(12,725,498 |
) |
|
$ |
(24,677,510 |
) |
Loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted — as reported |
|
|
|
$ |
(0.36 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.97 |
) |
Basic and
diluted — pro forma |
|
|
|
$ |
(0.40 |
) |
|
$ |
(0.52 |
) |
|
$ |
(1.02 |
) |
The per-share weighted average grant date fair value
of options granted was $0.81 in 2004, $1.26 in 2003, and $1.03 in 2002. 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. The fair value of stock options granted subsequent to the Company’s initial public
offering was determined using the Black-Scholes model. The following weighted average assumptions were used to perform the
calculations:
|
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Expected
dividend yield |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Risk-free
interest rate |
|
|
|
|
3.34 |
% |
|
|
2.94 |
% |
|
|
4.23 |
% |
Expected life
(years) |
|
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
3.0 |
|
Volatility |
|
|
|
|
98 |
% |
|
|
102 |
% |
|
|
103 |
% |
Income Taxes
The Company accounts for income taxes under the
provisions of SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and operating loss and
tax credit carryforwards using enacted tax rates in effect for the year in which the differences and carryforwards are expected to
reverse.
Foreign Currency Translation
The Company conducts its operations in three primary
functional currencies: the U.S. dollar, the euro and, until December 31, 2004, the Mexican peso. Balance sheet accounts of the Company’s foreign
operations are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are translated at average
exchange rates during the period. Cumulative translation gains or losses related to net assets located outside the U.S. are shown as a component of
shareholders’ equity. Gains and losses resulting from foreign currency transactions, which are denominated in a currency other than
the
48
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
entity’s functional currency, are included
in the consolidated statements of operations. There were no significant gains or losses on foreign currency transactions in 2004, 2003 or 2002. As of
December 31, 2004, the Company changed the functional currency of its Mexican subsidiary from the Mexican peso to the U.S. dollar due to lower activity
in Mexico and the majority of transactions being denominated in U.S. dollars. The impact of this change was not material.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R). Statement 123R will provide users of financial
statements with more complete financial information by requiring that the compensation cost relating to share-based payment transactions be recognized
in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123R covers a wide
range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. Statement 123R replaces FASB 123, Accounting for Stock Issued to Employees, and supercedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123R will be effective for the Company for its third fiscal
quarter ending September 30, 2005. This Company is in the process of evaluating the impact of adopting Statement 123R and of determining the impact on
its results of operations or financial position.
The FASB issued Statement of Financial Accounting
Standards No. 151, Inventory Costs — An Amendment of ARB No. 43, Chapter 4 (Statement 151) in November 2004. Statement 151 amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal” as stated in ARB No. 43. Additionally, Statement 151 requires the allocation of fixed production overheads to the
costs of conversion be based on normal capacity of the production facilities. Statement 151 is effective for fiscal years beginning after June 15,
2005, and is required to be adopted by the Company in the first quarter of fiscal 2006. The Company is currently evaluating the effect that the
adoption of Statement 151 will have on its financial position and results of operation, but does not expect it to be material.
The FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (Statement
153) in December 2004. Statement 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in
Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with a general exception for
exchanges that do not have commercial substance. Statement 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows
of the entity are expected to change significantly as a result of the exchange. Statement 153 is effective for fiscal periods beginning after June 15,
2005, and is required to be adopted by the Company in the third quarter of fiscal 2005. The Company is currently evaluating the effect that the
adoption of Statement 153 will have on its financial position and results of operation, but does not expect it to be material.
Net Loss per Share
Basic net loss per share is the net loss divided by
the average number of shares outstanding during the period. Diluted net loss per share is the 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 using the 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. Shares issuable pursuant to stock options and warrants that have not been included in the above calculations because they are antidilutive
totaled 2,820,578 in 2004, 2,748,941 in 2003, and 2,100,669 in 2002.
49
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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” and, together with the 2000 Plan, the “Stock
Option Plans”) 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 Stock Option Plans, including designation as incentive or nonqualified stock options,
the selection of individuals to be granted options, the number of shares 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 at the earlier of the date on which the plan expires or ten 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 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. No additional shares were added to the 2000 Plan on
January 1, 2005, 2004 or 2003.
At December 31, 2004, the Company had reserved
640,834 shares of common stock for issuance under the 1995 Plan, all of which had been granted, and 3,189,338 shares for issuance under the 2000 Plan,
including 1,689,338 shares transferred from the 1995 Plan. Options totaling 1,979,744 under the 2000 Plan had been granted at December 31, 2004,
leaving 1,209,594 options available for future grant. The following table summarizes stock option activity:
|
|
|
|
Number of
Shares
|
|
Weighted
Average Exercise
Price Per Share
|
Balance at
December 31, 2001 |
|
|
|
|
2,740,603 |
|
|
$ |
7.57 |
|
Options
granted |
|
|
|
|
676,000 |
|
|
|
1.60 |
|
Options
forfeited |
|
|
|
|
(1,305,485 |
) |
|
|
8.70 |
|
Options
exercised |
|
|
|
|
(242,666 |
) |
|
|
1.00 |
|
Balance at
December 31, 2002 |
|
|
|
|
1,868,452 |
|
|
|
5.47 |
|
Options
granted |
|
|
|
|
1,281,000 |
|
|
|
1.65 |
|
Options
forfeited |
|
|
|
|
(568,311 |
) |
|
|
7.98 |
|
Options
exercised |
|
|
|
|
(32,200 |
) |
|
|
0.85 |
|
Balance at
December 31, 2003 |
|
|
|
|
2,548,941 |
|
|
|
3.05 |
|
Options
granted |
|
|
|
|
347,000 |
|
|
|
1.08 |
|
Options
forfeited |
|
|
|
|
(275,363 |
) |
|
|
1.88 |
|
Balance at
December 31, 2004 |
|
|
|
|
2,620,578 |
|
|
|
2.91 |
|
50
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The following table summarizes stock option
information at December 31, 2004:
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
|
|
Number
Outstanding
|
|
Weighted-Average
Remaining
Contractual
Life (in years)
|
|
Weighted-
Average
Exercise Price
|
|
Number
Outstanding
|
|
Weighted-
Average
Exercise Price
|
$0.40–1.00 |
|
|
|
|
480,001 |
|
|
|
6.93 |
|
|
$ |
0.90 |
|
|
|
205,501 |
|
|
$ |
0.94 |
|
1.40–1.85 |
|
|
|
|
1,618,084 |
|
|
|
7.83 |
|
|
|
1.63 |
|
|
|
921,526 |
|
|
|
1.63 |
|
2.00–6.50 |
|
|
|
|
227,333 |
|
|
|
4.47 |
|
|
|
4.20 |
|
|
|
214,466 |
|
|
|
4.20 |
|
7.00–14.00 |
|
|
|
|
295,160 |
|
|
|
5.97 |
|
|
|
12.17 |
|
|
|
232,013 |
|
|
|
13.22 |
|
|
|
|
|
|
2,620,578 |
|
|
|
7.16 |
|
|
|
2.91 |
|
|
|
1,573,506 |
|
|
|
3.60 |
|
Stock options exercisable were 1,169,173 and 748,114
at December 31, 2003 and 2002, respectively. The weighted-average exercise prices of options exercisable were $4.08 and $6.45 at December 31, 2003 and
2002, respectively.
On June 17, 2002, the Company offered to exchange
certain outstanding options to purchase shares of its common stock granted to its current U.S. employees and officers (other than its Chief Financial
Officer and then-Interim President) under the Stock Option Plans for new options to be granted under the 2000 Plan on a date that was at least six
months and one day after the date that the Company cancelled the tendered options. The offer expired on July 17, 2002, at which time the Company
cancelled options to purchase 788,900 shares of its common stock with a weighted average exercise price of $9.05 that were tendered for exchange or
cancellation without replacement. On January 21, 2003, the Company granted new options to purchase 558,700 shares of its common stock, subject to new
option agreements executed by the Company and its employees who participated in the offer. Each new option has an exercise price of $1.64 per share
(the fair market value of the Company’s common stock on the new grant date) and vests over four years at a rate of 25% on each anniversary of the
vesting start date of the tendered option that it replaced.
The Company records compensation expense over the
vesting period for the difference between the exercise price of stock options granted and the fair market value of the underlying stock for financial
reporting purposes. In conjunction with grants made in 1998, the Company recognized compensation expense for these stock options of $10,145 in 2002.
The compensation expense was fully amortized at December 31, 2002. The weighted average grant date fair value of these options was
$2.81.
Common Stock Warrants
In August 2000, the Company issued warrants to
purchase 133,333 shares of its common stock at $15.00 per share to Stephens Group, Inc. (“Stephens”) and warrants to purchase 66,667 shares
of its common stock at $15.00 per share to WBW Trust Number One (“WBW”), in connection with credit facilities it established with these
entities. The Company also paid loan commitment fees of $200,000 to Stephens and $100,000 to WBW. Under the terms of the credit facilities, the Company
had the ability to borrow up to $10 million from Stephens and $5 million from WBW. 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. One of
the Company’s directors, William T. Weyerhaeuser, is trustee of WBW. At the time, Stephens beneficially owned approximately 10% of the
Company’s common stock (approximately 17% at December 31, 2004) and Jon E. M. Jacoby, a director of the Company, is also a director and was an
executive vice president of Stephens. The warrants are currently exercisable and expire in August 2005.
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.
51
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 consists of four six-month purchase periods, with purchases being made on the last day of each such
period. Offering periods begin on each May 1 and November 1. The price of the common stock purchased under the 2000 Stock Purchase Plan is 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.
The 2000 Stock Purchase Plan authorizes the issuance
of a total of 500,000 shares of common stock, plus an automatic annual increase 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. No additional shares were added to the 2000 Stock Purchase Plan on January 1, 2005, 2004 or 2003. A total of 19,880 shares of stock were
purchased under the plan in 2004, for total proceeds of $12,670; 22,295 shares were purchased in 2003, for total proceeds of $29,193; and 47,189 shares
were purchased in 2002, for total proceeds of $97,999.
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, which is currently February 2018. 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 a royalty on net sales of products that
incorporate the licensed technology, subject to certain minimum annual royalty payments.
Inventory, at average cost, consists of the
following:
|
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
Raw
materials |
|
|
|
$ |
579,385 |
|
|
$ |
855,883 |
|
Bulk inventory
and work in progress |
|
|
|
|
1,906,681 |
|
|
|
348,965 |
|
Finished
goods |
|
|
|
|
1,001,520 |
|
|
|
852,970 |
|
Total
inventory |
|
|
|
$ |
3,487,586 |
|
|
$ |
2,057,818 |
|
| 5. |
|
Property and Equipment |
Property and equipment, at cost, consists of the
following:
|
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
Equipment |
|
|
|
$ |
12,460,206 |
|
|
$ |
12,790,658 |
|
Equipment under
capital leases |
|
|
|
|
66,646 |
|
|
|
102,374 |
|
Leasehold
improvements |
|
|
|
|
10,817,391 |
|
|
|
11,578,034 |
|
Total
property and equipment |
|
|
|
|
23,344,243 |
|
|
|
24,471,066 |
|
Less accumulated
depreciation and amortization |
|
|
|
|
(9,456,670 |
) |
|
|
(8,165,462 |
) |
Net property
and equipment |
|
|
|
$ |
13,887,573 |
|
|
$ |
16,305,604 |
|
52
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company recorded depreciation and amortization
expense of $1,976,015 in 2004, $2,149,267 in 2003, and $2,660,792 in 2002. In December 2002, the Company recorded a $1.0 million loss on the write-off
of net leasehold improvements and equipment directly related to 34,302 square feet of laboratory and office space subleased to another
company.
Accrued liabilities consist of the
following:
|
|
|
|
December 31,
|
|
|
|
|
|
2004
|
|
2003
|
Compensation and
benefits |
|
|
|
$ |
307,313 |
|
|
$ |
311,246 |
|
Research and
development field trial expenses |
|
|
|
|
256,873 |
|
|
|
303,586 |
|
Facility
costs |
|
|
|
|
232,097 |
|
|
|
283,630 |
|
Promotions |
|
|
|
|
95,415 |
|
|
|
180,692 |
|
Sales
allowances |
|
|
|
|
84,769 |
|
|
|
160,217 |
|
Warranty |
|
|
|
|
75,000 |
|
|
|
228,021 |
|
Other |
|
|
|
|
154,944 |
|
|
|
101,560 |
|
Total accrued
liabilities |
|
|
|
$ |
1,206,411 |
|
|
$ |
1,568,952 |
|
The Company records, at the time revenues are
recognized, a liability for warranty claims based on a percentage of sales. The warranty accrual percentage, which has ranged between zero and five
percent, and warranty liability are reviewed periodically and adjusted as necessary, based on historical experience, the results of product quality
testing and future expectations.
The following table summarizes changes to the
Company’s warranty liability during the years ended December 31, 2004 and 2003:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Beginning
balance |
|
|
|
$ |
228,021 |
|
|
$ |
331,059 |
|
|
$ |
324,249 |
|
Payments and
other settlements |
|
|
|
|
— |
|
|
|
(41,071 |
) |
|
|
(198,174 |
) |
Accruals, net
of changes in estimate of liability |
|
|
|
|
(153,021 |
) |
|
|
(61,967 |
) |
|
|
204,984 |
|
Ending
balance |
|
|
|
$ |
75,000 |
|
|
$ |
228,021 |
|
|
$ |
331,059 |
|
53
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
| 8. |
|
Commitments and Contingencies |
Leases
The Company has entered into non-cancelable lease
agreements involving equipment and facilities through the year 2011. Future minimum rental payments under capital lease obligations and operating
leases, as well as sublease rental receipts to be received under the non-cancelable subleases described below, as of December 31, 2004 are as
follows:
|
|
|
|
Capital
|
|
Operating
|
|
Sublease
Rental Receipts
|
2005 |
|
|
|
$ |
12,145 |
|
|
$ |
1,867,758 |
|
|
$ |
873,960 |
|
2006 |
|
|
|
|
769 |
|
|
|
1,809,464 |
|
|
|
873,960 |
|
2007 |
|
|
|
|
— |
|
|
|
1,431,480 |
|
|
|
922,032 |
|
2008 |
|
|
|
|
— |
|
|
|
1,480,195 |
|
|
|
— |
|
2009 |
|
|
|
|
— |
|
|
|
1,548,396 |
|
|
|
— |
|
2010 and
later |
|
|
|
|
— |
|
|
|
1,677,429 |
|
|
|
— |
|
Total minimum
lease payments |
|
|
|
|
12,914 |
|
|
$ |
9,814,722 |
|
|
$ |
2,669,952 |
|
Less amount
representing interest |
|
|
|
|
(581 |
) |
|
|
|
|
|
|
|
|
Present value
of net minimum lease payments |
|
|
|
|
12,333 |
|
|
|
|
|
|
|
|
|
Less current
portion |
|
|
|
|
(11,572 |
) |
|
|
|
|
|
|
|
|
Capital lease
obligation, net of current portion |
|
|
|
$ |
761 |
|
|
|
|
|
|
|
|
|
Rental expense was as follows:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Minimum
rentals |
|
|
|
$ |
1,921,310 |
|
|
$ |
1,912,104 |
|
|
$ |
2,237,223 |
|
Payment of
accrued loss on facility subleases |
|
|
|
|
(525,120 |
) |
|
|
(376,144 |
) |
|
|
— |
|
Less sublease
rental income |
|
|
|
|
(448,820 |
) |
|
|
(358,117 |
) |
|
|
(259,702 |
) |
Net rental
expense |
|
|
|
$ |
947,370 |
|
|
$ |
1,177,843 |
|
|
$ |
1,977,521 |
|
In January 2001, the Company entered into a ten-year
lease agreement, with two five-year extension options to be exercised at the Company’s discretion, for 63,200 square feet of office space located
near its manufacturing facility in Bothell, Washington. Rent payments increase by approximately eight percent every 30 months over the term of the
lease. Total rent is expensed on a straight-line basis over the lease term. A liability for rent expense in excess of rent payments is included in
other long-term liabilities and totaled approximately $550,000 at December 31, 2004 and $499,000 at December 31, 2003. In the first half of 2001, the
Company converted approximately 22,600 square feet of this building into laboratory facilities and made other improvements at a cost of approximately
$9.1 million.
In order to offset its future facility costs, the
Company, in December 2002, entered into an agreement to sublease to another company 34,302 square feet of laboratory and office space. The sublease
agreement has an initial non-cancelable term of five years, with one three-year extension option to be exercised at the subtenant’s discretion and
two five-year extension options to be exercised at the subtenant’s discretion, provided that the Company exercises its options to extend the lease
beyond the initial ten-year term. The rent to be collected under the sublease exceeds the rent the Company will pay for the subleased space. However,
the excess does not cover the unamortized cost of leasehold improvements and equipment in the subleased space. As a result, a $4.2 million loss on the
sublease was recorded in December 2002. The loss includes a write-off of net leasehold improvements and equipment directly related to the subleased
space totaling $1.0 million; an accrued loss of $4.0 million for the subtenant’s estimated portion of depreciation and amortization of shared
assets, offset by excess rents of approximately $1.1 million; and sublease transaction costs of approximately $300,000.
54
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In April 2003, the Company subleased to another
company approximately 7,300 square feet of office space. The sublease agreement has a term of five years. Due to declines in the real estate market,
the rent the Company will pay on the subleased space exceeds the rent to be collected under the sublease. As a result, the Company recorded a loss on
the sublease in 2003 of approximately $366,000. This subtenant was not in compliance with the sublease agreement at September 30, 2004 and the
agreement was terminated in October 2004. As a result, the Company recorded an additional loss of approximately $202,000 in 2004 based upon an estimate
of the time needed to re-sublease the space and expected future rents to be collected.
Legal Proceedings
The Company is subject to various claims and legal
actions that arise in the ordinary course of business and believes that the ultimate liability, if any, with respect to these claims and legal actions
will not have a material effect on its consolidated financial statements.
Net product sales to the following distributors
accounted for more than ten percent of net revenues for the periods indicated:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
Customer
A |
|
|
|
$ |
175,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Customer
B |
|
|
|
|
159,000 |
|
|
|
363,000 |
|
|
|
— |
|
Customer
C |
|
|
|
|
146,000 |
|
|
|
— |
|
|
|
— |
|
Customer
D |
|
|
|
|
— |
|
|
|
182,000 |
|
|
|
** |
|
Customer
E |
|
|
|
|
** |
|
|
|
168,000 |
|
|
|
** |
|
Customer
F |
|
|
|
|
— |
|
|
|
— |
|
|
|
193,000 |
|
Customer
G |
|
|
|
|
** |
|
|
|
** |
|
|
|
214,000 |
|
__________
** Less than
ten percent.
| 10. |
|
Restructuring Charges and Other Costs |
The Company recorded restructuring costs for
severance and other costs associated with separate workforce reductions that occurred during 2003 and 2002. These costs are recorded in the
consolidated statements of operations as components of research and development expense or selling, general and administrative expense, depending upon
the classification of the affected employees. The following table summarizes changes to the Company’s restructuring liability during the years
ended December 31, 2003 and 2002:
|
|
|
|
Total
Charges
|
|
Non-Cash
Charges
|
|
Cash
Payments
|
|
Liability at
End of Year
|
2003 |
|
|
|
$ |
160,082 |
|
|
$ |
— |
|
|
$ |
216,616 |
|
|
$ |
— |
|
2002 |
|
|
|
|
534,769 |
|
|
|
— |
|
|
|
478,235 |
|
|
|
56,534 |
|
Of the 18 employees included in the 2003 workforce
reductions, nine worked in research and development and the remainder worked in a variety of other areas, principally administration and sales and
marketing. Of the 37 employees included in the 2002 workforce reductions, 20 worked in research and development and the remainder worked in a variety
of other areas, principally manufacturing and facilities, sales and marketing and administration.
| 11. |
|
Defined Contribution Plan |
The Eden Bioscience Corporation 401(k) Plan and
Trust (the “Plan”) was established in 1997 and revised in 2001. The current Plan covers all employees of the Company who are at least 21
years old. The Plan includes a provision for deferral of up to 100% of participant compensation, subject to IRS limitations, and a
55
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
discretionary employer match at an amount to be
determined by the Company’s Board of Directors. To date, the Company has made no contributions to the Plan.
| 12. |
|
Asset Retirement Obligation |
As of January 1, 2003, the Company adopted SFAS No.
143, “Accounting for Asset Retirement Obligations,” by recording an asset and liability in the amount of $129,093 related to asset retirement
obligations the Company has at the expiration or earlier termination of its manufacturing facility lease. The lease expires on December 31, 2006, at
which time the Company may extend the lease for three additional years. The Company has not restricted any assets for purposes of settling this asset
retirement obligation. As of January 1, 2003, the Company also recorded a $63,508 charge for the cumulative effect of adopting SFAS No. 143, which
consists of cumulative accretion of $34,821 and depreciation of $28,687 related to periods prior to January 1, 2003. Following is a reconciliation of
the beginning and ending aggregate carrying value of the asset retirement obligation liability, which is included in other long-term
liabilities:
Initial
measurement of obligation |
|
|
|
$ |
129,093 |
|
Accretion
expense for periods prior to January 1, 2003 |
|
|
|
|
34,821 |
|
Accretion
expense in 2003 |
|
|
|
|
21,156 |
|
Accretion
expense in 2004 |
|
|
|
|
25,015 |
|
Balance at
December 31, 2004 |
|
|
|
$ |
210,085 |
|
Pro forma net loss for the year ended December 31,
2002, assuming retroactive application of SFAS No. 143, would be as follows:
|
|
|
|
Year Ended
December 31,
2002
|
Net loss, as
reported |
|
|
|
$ |
(23,505,567 |
) |
Accretion and
depreciation expense |
|
|
|
|
(32,792 |
) |
Pro forma net
loss, assuming retroactive application of SFAS No. 143 |
|
|
|
$ |
(23,538,359 |
) |
The pro forma balance of the asset retirement
obligation liability, assuming that SFAS No. 143 had been adopted prior to the year ended December 31, 2002 (the earliest period presented), would be
$163,913 at December 31, 2002.
56
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 U.S. tax net operating loss
carryforwards were approximately $101.5 million at December 31, 2004 and expire between 2009 and 2024. The Company’s total foreign tax net
operating loss carryforwards were approximately $9.1 million at December 31, 2004 and expire between 2006 and 2009. The Company’s total general
business credit carryforwards were approximately $1.3 million at December 31, 2004 and expire between 2013 and 2024. The significant components of the
deferred tax asset were as follows:
|
|
|
|
2004
|
|
2003
|
Net operating
loss carryforwards |
|
|
|
$ |
40,095,000 |
|
|
$ |
35,772,000 |
|
Depreciation and
amortization |
|
|
|
|
(2,467,000 |
) |
|
|
(1,829,000 |
) |
General business
credit carryforwards |
|
|
|
|
1,345,000 |
|
|
|
1,277,000 |
|
Accrued loss on
facility subleases |
|
|
|
|
963,000 |
|
|
|
1,077,000 |
|
Other |
|
|
|
|
317,000 |
|
|
|
554,000 |
|
Deferred tax
asset |
|
|
|
|
40,253,000 |
|
|
|
36,851,000 |
|
Deferred tax
asset valuation allowance |
|
|
|
|
(40,253,000 |
) |
|
|
(36,851,000 |
) |
Net deferred
tax asset |
|
|
|
$ |
— |
|
|
$ |
— |
|
The valuation allowance on deferred tax assets
increased by $3.4 million during 2004 and $4.1 million during 2003. Pursuant to Section 382 of the Internal Revenue Code, annual use of the
Company’s net operating loss and credit carryforwards may be limited in the event of a cumulative change in ownership of more than 50%. These
Section 382 limitations and other limitations under state and foreign tax laws could result in a portion of the Company’s net operating losses
never being utilized. The difference between the statutory tax rate of 35% and the tax benefit of zero recorded by the Company is due to the
Company’s full valuation allowance against net deferred tax assets.
| 14. |
|
Quarterly Financial Data (Unaudited) |
The following table summarizes selected unaudited
quarterly financial data for each quarter of the years ended December 31, 2004 and 2003.
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Fiscal
year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
|
|
$ |
213,401 |
|
|
$ |
289,937 |
|
|
$ |
368,383 |
|
|
$ |
168,021 |
|
Loss from
operations |
|
|
|
|
(2,397,603 |
) |
|
|
(2,041,706 |
) |
|
|
(1,996,600 |
) |
|
|
(2,672,097 |
) |
Net
loss |
|
|
|
|
(2,346,399 |
) |
|
|
(1,995,581 |
) |
|
|
(1,937,799 |
) |
|
|
(2,606,473 |
) |
Basic and
diluted net loss per share |
|
|
|
|
(0.10 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
|
|
(0.11 |
) |
Common stock
trading range: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
|
$ |
1.95 |
|
|
$ |
1.66 |
|
|
$ |
0.90 |
|
|
$ |
1.25 |
|
Low |
|
|
|
|
1.30 |
|
|
|
0.65 |
|
|
|
0.37 |
|
|
|
0.43 |
|
Fiscal
year 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
|
|
$ |
846,860 |
|
|
$ |
548,664 |
|
|
$ |
102,533 |
|
|
$ |
274,040 |
|
Loss from
operations |
|
|
|
|
(2,913,986 |
) |
|
|
(3,372,594 |
) |
|
|
(2,594,537 |
) |
|
|
(2,545,122 |
) |
Net
loss |
|
|
|
|
(2,887,804 |
) |
|
|
(3,297,556 |
) |
|
|
(2,533,519 |
) |
|
|
(2,489,710 |
) |
Basic and
diluted net loss per share |
|
|
|
|
(0.12 |
) |
|
|
(0.14 |
) |
|
|
(0.10 |
) |
|
|
(0.10 |
) |
Common stock
trading range: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
|
$ |
1.71 |
|
|
$ |
2.25 |
|
|
$ |
2.01 |
|
|
$ |
2.00 |
|
Low |
|
|
|
|
0.80 |
|
|
|
1.09 |
|
|
|
1.20 |
|
|
|
0.91 |
|
57
| Item 9. |
|
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. |
None.
| Item 9A. |
|
Controls and Procedures. |
Under the supervision and with the participation of
management, including our President and Chief Executive Officer and our Chief Financial Officer, we have carried out an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal year
covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of the end of such year. There have been no changes in our internal control over financial
reporting during the fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
| Item 9B. |
|
Other Information. |
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 “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial
Ownership Reporting Compliance” contained in our proxy statement for the 2005 annual meeting of shareholders, to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after December 31, 2004.
| Item 11. |
|
Executive Compensation. |
The information required by this item is
incorporated by reference from the sections captioned “Executive Compensation” and “Board of Directors and Corporate Governance —
Board of Director Compensation” contained in our proxy statement for the 2005 annual meeting of shareholders, to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after December 31, 2004.
| Item 12. |
|
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The information required by this item is
incorporated by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters — Equity Compensation Plan Information” contained in our proxy statement for the 2005 annual meeting of shareholders, to be filed
with the Commission pursuant to Regulation 14A not later than 120 days after December 31, 2004.
| Item 13. |
|
Certain Relationships and Related
Transactions. |
None.
| Item 14. |
|
Principal Accountant Fees and Services. |
The information required by this item is
incorporated by reference from the section captioned “Independent Auditors” contained in our proxy statement for the 2005 annual meeting of
shareholders, to be filed with the Commission pursuant to Regulation 14A not later than 120 days after December 31, 2004.
58
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following documents are being filed as part of
this annual report on Form 10-K.
(a) |
|
Financial Statements. |
|
|
|
|
Page
|
Report of
Independent Registered Public Accounting Firm |
|
|
|
|
39 |
|
Consolidated
Balance Sheets |
|
|
|
|
40 |
|
Consolidated
Statements of Operations |
|
|
|
|
41 |
|
Consolidated
Statements of Shareholders’ Equity and
Comprehensive Loss |
|
|
|
|
42 |
|
Consolidated
Statements of Cash Flows |
|
|
|
|
43 |
|
Notes to
Consolidated Financial Statements |
|
|
|
|
44 |
|
Exhibits 31.1 and 31.2 are being filed as part of
this annual report on Form 10-K. Exhibits 32.1 and 32.2 are being furnished with this annual report on Form 10-K.
Exhibit
Number
|
|
|
|
Description
|
| 3.1 |
|
|
|
Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Eden Bioscience’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 Bioscience’s Registration Statement
on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 4.1 |
|
|
|
Form
of Common Stock Purchase Warrant, dated August 16, 2000, issued to Stephens Group, Inc. (incorporated by reference to Exhibit D to Exhibit 10.12 to
Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7,
2000). |
| 4.2 |
|
|
|
Form
of Common Stock Purchase Warrant, dated August 16, 2000, issued to WBW Trust Number One (incorporated by reference to Exhibit D to Exhibit 10.13 to
Eden Bioscience’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 Bioscience’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 Bioscience’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 Koll North Creek Business Park and the Registrant (incorporated by reference
to Exhibit 10.2 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No.
333-41028), initially filed with the
SEC on July 7, 2000). |
59
Exhibit
Number
|
|
|
|
Description
|
| 10.3** |
|
|
|
1995
Combined Incentive and Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.3 to Eden Bioscience’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 Bioscience’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 Bioscience’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 Bioscience’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 Zhongmin Wei (incorporated by reference to Exhibit 10.8 to Eden
Bioscience’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** |
|
|
|
Change of Control Agreement, dated August 16, 2000, between the Registrant and Bradley S. Powell (incorporated by reference to Exhibit 10.10
to Eden Bioscience’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 Zhongmin Wei (incorporated by reference to Exhibit 10.11 to
Eden Bioscience’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 |
|
|
|
Lease, dated January 12, 2001, between Eden Bioscience Corporation and Ditty Properties Limited Partnership (incorporated by reference to
Exhibit 10.14 to Eden Bioscience’s Annual Report on Form 10-K (Commission File No. 0-31499), filed with the SEC on March 29,
2001). |
| 10.11** |
|
|
|
Letter agreement, dated January 28, 2002, between the Registrant and Bradley S. Powell (incorporated by reference to Exhibit 10.15 to Eden
Bioscience’s Annual Report on Form 10-K (Commission File No. 0-31499), filed with the SEC on March 29, 2002). |
| 10.12 |
|
|
|
Sublease, dated December 31, 2002, between the Registrant and CEPTYR, Inc., a Delaware corporation. |
| 10.13** |
|
|
|
Amendments to Zhongmin Wei’s Employment Agreement Dated August 16, 2000 (incorporated by reference to Exhibit 10.1 to Eden
Bioscience’s Quarterly Report on Form 10-Q (Commission File No. 0-31499), filed with the SEC on August 6, 2003). |
| 21.1 |
|
|
|
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to Eden Bioscience’s Annual Report on Form 10-K (Commission
File No. 0-31499), filed with the SEC on March 29, 2002). |
| 23.1* |
|
|
|
Consent of Independent Registered Public Accounting Firm. |
| 31.1* |
|
|
|
Rule
13a-14(a) Certification (Chief Executive Officer). |
| 31.2* |
|
|
|
Rule
13a-14(a) Certification (Chief Financial Officer). |
| 32.1* |
|
|
|
Section 1350 Certification (Chief Executive Officer). |
| 32.2* |
|
|
|
Section 1350 Certification (Chief Financial Officer). |
| ** |
|
Management contract or compensatory plan. |
| † |
|
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. |
60
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 25, 2005.
EDEN BIOSCIENCE CORPORATION
By: |
|
/s/ Rhett R. Atkins
Rhett R. Atkins,
President, Chief Executive Officer and Director |
By: |
|
/s/ Bradley S. Powell
Bradley S. Powell,
Vice President of Finance, Chief Financial Officer and Secretary |
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
25, 2005.
Signature
|
|
|
|
Title
|
|
/s/ Rhett R.
Atkins
Rhett R. Atkins |
|
|
|
President,
Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
/s/ Bradley S.
Powell
Bradley S. Powell |
|
|
|
Vice President
of Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
|
/s/ William T.
Weyerhaeuser
William T. Weyerhaeuser |
|
|
|
Chairman of the
Board of Directors |
|
|
|
|
|
|
|
|
/s/ Gilberto
H. Gonzalez
Gilberto H. Gonzalez |
|
|
|
Director |
|
|
|
|
|
|
|
|
/s/ Jon E. M.
Jacoby
Jon E. M. Jacoby |
|
|
|
Director |
|
|
|
|
|
|
|
|
/s/ Albert A.
James
Albert A. James |
|
|
|
Director |
|
|
|
|
|
|
|
|
/s/ Agatha L.
Maza
Agatha L. Maza |
|
|
|
Director |
|
|
|
|
|
|
|
|
/s/ Richard N.
Pahre
Richard N. Pahre |
|
|
|
Director |
|
|
|
|
|
|
|
|
/s/ John W.
Titcomb, Jr.
John W. Titcomb, Jr. |
|
|
|
Director |
|
|
|
|
61