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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-31499
EDEN BIOSCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1649604
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11816 NORTH CREEK PARKWAY NORTH
BOTHELL, WASHINGTON 98011-8205
(Address of Principal Executive Offices, including Zip Code)
(425) 806-7300
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date:
CLASS OUTSTANDING AS OF MAY 1, 2001
Common Stock, $.0025 Par Value 23,960,375
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EDEN BIOSCIENCE CORPORATION
INDEX TO FORM 10-Q
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................. 2
Condensed Balance Sheets as of December 31, 2000 and March 31, 2001............... 2
Condensed Statements of Operations for the Three Months Ended
March 31, 2000 and 2001....................................................... 3
Condensed Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 2001........................................................ 4
Notes to Unaudited Condensed Financial Statements................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 7
Factors That May Affect Our Business, Future Operating Results and
Financial Condition............................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................. 18
SIGNATURES ............................................................................... 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDEN BIOSCIENCE CORPORATION
CONDENSED BALANCE SHEETS
December 31, March 31,
2000 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 86,556,865 $ 75,163,076
Accounts receivable 595,470 2,023,657
Inventory 1,321,241 2,463,429
Other current assets 236,458 690,991
------------- -------------
Total current assets 88,710,034 80,341,153
Property and equipment, net 9,479,872 14,607,183
Other assets 310,715 1,483,191
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Total assets $ 98,500,621 $ 96,431,527
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,415,730 $ 1,647,315
Accrued expenses 3,238,398 3,285,929
Current portion of capital lease obligations 275,316 269,716
------------- -------------
Total current liabilities 4,929,444 5,202,960
Capital lease obligations, net of current portion 330,394 264,614
Other long-term liabilities -- 169,905
------------- -------------
Total liabilities 5,259,838 5,637,479
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Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value,
10,000,000 shares authorized; no shares designated
at December 31, 2000 and March 31, 2001 -- --
Common stock, $.0025 par value, 100,000,000 shares
authorized; issued and oustanding shares -
23,894,680 at December 31, 2000; 23,927,346 at
March 31, 2001 59,737 59,818
Additional paid-in capital 131,844,183 131,863,268
Deferred stock option compensation expense (28,625) (24,005)
Accumulated deficit (38,634,512) (41,105,033)
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Total shareholders' equity 93,240,783 90,794,048
------------- -------------
Total liabilities and shareholders' equity $ 98,500,621 $ 96,431,527
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The accompanying notes are an integral part of these financial statements.
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EDEN BIOSCIENCE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-------------------------------
March 31, March 31,
2000 2001
------------ ------------
Revenues:
Product sales $ -- $ 3,840,952
Sales allowances -- 1,359,529
------------ ------------
Net revenues -- 2,481,423
------------ ------------
Operating expenses:
Cost of goods sold -- 974,603
Research and development 2,263,418 2,094,426
Selling, general and administrative 916,685 3,023,078
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Total operating expenses 3,180,103 6,092,107
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Loss from operations (3,180,103) (3,610,684)
------------ ------------
Other income (expense):
Interest income 160,461 1,165,138
Interest expense (38,482) (24,975)
------------ ------------
Total other income (expense) 121,979 1,140,163
------------ ------------
Net loss $ (3,058,124) $ (2,470,521)
============ ============
Historical basic and diluted net
loss per share $ (1.11) $ (0.10)
============ ============
Historical weighted average
shares outstanding used to
compute net loss per share 2,753,792 23,908,272
============ ============
Pro forma basic and diluted net
loss per share $ (0.18) $ (0.10)
============ ============
Weighted average shares
outstanding used to compute
pro forma net loss per share 16,547,896 23,908,272
============ ============
The accompanying notes are an integral part of these financial statements.
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EDEN BIOSCIENCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------------
2000 2001
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Cash flows from operating activities:
Net loss $ (3,058,124) $ (2,470,521)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 204,480 380,560
Amortization of stock option compensation expense 23,217 4,620
Interest income on subscriptions receivable (1,143) --
Loss (gain) on disposition of fixed assets 2,852 (3,528)
Increase in deferred rent payable -- 137,405
Changes in assets and liabilities:
Accounts receivable 7,652 (1,428,187)
Inventory -- (1,142,188)
Other assets (278,847) (1,627,009)
Accounts payable (363,350) 231,585
Accrued expenses 281,552 47,531
Other liabilities -- 32,500
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Net cash used in operating activities (3,181,711) (5,837,232)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (400,098) (5,509,163)
Proceeds from disposal of equipment -- 4,820
------------ ------------
Net cash used in investing activities (400,098) (5,504,343)
------------ ------------
Cash flows from financing activities:
Payments on capital equipment leases (84,658) (71,380)
Offering costs (8,709) --
Proceeds from exercise of stock options 39,200 19,166
Proceeds from exercise of common stock warrants 93,150 --
------------ ------------
Net cash provided by (used in) financing activities 38,983 (52,214)
------------ ------------
Net decrease in cash and cash equivalents (3,542,826) (11,393,789)
Cash and cash equivalents at beginning of period 13,107,250 86,556,865
------------ ------------
Cash and cash equivalents at end of period $ 9,564,424 $ 75,163,076
============ ============
Supplemental disclosures:
Cash paid for interest $ 38,482 $ 24,975
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The accompanying notes are an integral part of these financial statements.
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EDEN BIOSCIENCE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2000 AND 2001 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
EDEN Bioscience Corporation ("EDEN" or the "Company") was incorporated on
July 18, 1994. EDEN is a plant technology company focused on developing,
manufacturing and marketing innovative natural products for agriculture. Prior
to August 2000, the Company was a development stage company. In August 2000, the
Company began sales of its initial product, Messenger.
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The balance sheet at December 31, 2000 has been derived from the audited
financial statement at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements and notes should be read in
conjunction with the financial statements and notes for the year ended December
31, 2000 included in the Company's Annual Report on Form 10-K, which was filed
with the Securities and Exchange Commission on March 29, 2001.
In the opinion of management, the unaudited condensed financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein. Results
of operations for the three-month period ended March 31, 2001 are not
necessarily indicative of the results expected for the full fiscal year or for
any future period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements are stated at historical cost.
Improvements and replacements are capitalized. Maintenance and repairs are
expensed when incurred. The provision for depreciation and amortization is
determined using straight-line and accelerated methods, which allocate costs
over their estimated useful lives of two to 20 years. 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 the equipment's estimated useful life
or lease term, which ranges between three and five years.
REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of sales
allowances, when the products are shipped and all significant obligations of the
Company have been satisfied. Product sales revenue in the quarter ended March
31, 2001 resulted from sales to six distributors, one of which accounted for
$2.8 million (73%) of product sales revenue and $1.5 million (74%) of trade
accounts receivable at March 31,
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2001. Sales to another distributor accounted for $603,000 (16%) of product
sales revenue and $422,000 (21%) of trade accounts receivable at March 31, 2001.
NET LOSS PER COMMON SHARE
Basic net loss per share is calculated as the net loss divided by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is calculated as the net loss divided by the sum of the
weighted average number of common shares outstanding during the period plus the
additional common 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 exercises (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 and consist of the following:
As of March 31,
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2000 2001
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Options to purchase common stock............................... 1,835,000 2,342,670
Warrants to purchase common stock.............................. 442,008 302,644
Pro forma basic and diluted net loss per share is calculated presuming the
conversion of all convertible preferred stock at the beginning of the periods
presented. The actual conversion of the preferred stock occurred on September
26, 2000, the effective date of the registration statement filed in connection
with the Company's initial public offering.
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31, March 31,
2000 2001
------------ ------------
Equipment.................................................. $ 4,246,033 $ 9,979,813
Equipment under capital leases............................. 1,174,262 1,118,083
Leasehold improvements..................................... 1,291,927 4,746,530
Construction in progress................................... 5,246,799 1,619,108
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11,959,021 17,463,534
Less accumulated depreciation and amortization............. (2,479,149) (2,856,351)
------------ ------------
Net property and equipment.............................. $ 9,479,872 $ 14,607,183
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3. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, March 31,
2000 2001
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Compensation and benefits.................................. $ 1,542,700 $ 1,364,753
Field trial expenses....................................... 550,013 397,444
Sales and marketing expense................................ 415,267 169,756
Other...................................................... 730,418 1,353,976
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Total accrued expenses.................................. $ 3,238,398 $ 3,285,929
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with our
unaudited condensed financial statements and accompanying notes included in this
document and the 2000 audited financial statements and notes thereto included in
our Annual Report on Form 10-K, which was filed with the Securities and Exchange
Commission on March 29, 2001.
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. 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 this Item 2.
You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this Form 10-Q.
OVERVIEW
We are a plant technology company focused on developing, manufacturing,
and marketing innovative natural products for agriculture. We have a
fundamentally new, patented and proprietary technology that we believe will
significantly improve plant protection and crop production worldwide. We believe
our technology and initial product offer innovative solutions versus traditional
plant protection and crop enhancement alternatives and, importantly, avoid the
substantial and growing public resistance to chemical pesticides and gene-based
biotechnology. Commercial sales of Messenger, our initial product, began in
August 2000.
We have incurred significant operating losses since inception. As of March
31, 2001, we had an accumulated deficit of $41.1 million. We incurred net losses
of $3.1 million and $2.5 million for the quarters ended March 31, 2000 and 2001,
respectively, and $15.7 million for the year ended December 31, 2000. Operating
expenses were $6.1 million for the quarter ended March 31, 2001, an increase of
$2.9 million (92%) from $3.2 million in the comparable quarter of 2000. We
expect to incur additional losses as we expand and enhance our research and
development activities and sales and marketing capabilities in the United States
and in foreign countries.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 2001
Revenues
We generated our first revenue from product sales in August 2000, when we
began selling our first commercial product, Messenger. Product sales to six
distributors in the quarter ended March 31, 2001 totaled $3.8 million. Sales to
United Agri Products, a subsidiary of ConAgra Foods, Inc., accounted for $2.8
million (73%) of product sales revenue and $1.5 million (74%) of trade accounts
receivable at March 31, 2001. Sales to Western Farm Service accounted for
$603,000 (16%) of product sales revenue and $422,000 (21%) of trade accounts
receivable at March 31, 2001.
Sales Allowances
Sales allowances represent allowances granted to independent distributors
for sales and marketing support, product warehousing and delivery and
information exchange. Sales allowances for the first quarter of 2001 were $1.4
million, or 35% of product sales. No such allowances were granted in the
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first quarter of 2000. We believe the sales allowance percentage will range
between 35% and 40% as we proceed with the commercialization of Messenger.
Cost of Goods Sold
Cost of goods sold includes the cost of raw materials, labor and overhead
required to manufacture Messenger. For the quarter ended March 31, 2001, cost of
goods sold was $975,000, or 25% of product sales revenue. No such costs were
incurred in the first quarter of 2000. We believe that our cost to manufacture
Messenger will decrease as a percentage of product sales revenue as we utilize
our expanded plant capacity and continue to enhance the manufacturing process.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs, field trials and laboratory, regulatory, patents and facility and
equipment expenses. Research and development expenses were $2.1 million for the
first quarter of 2001, a reduction of $169,000 (7%) from $2.3 million in the
comparable quarter of 2000. This decrease was primarily due to lower patent
expenses in the first quarter of 2001 and expenses incurred in 2000 in
connection with the initial registration of Messenger that were not repeated in
the first quarter of 2001. We expect to incur substantial increases in research
and development expenses as we expand our domestic and international field trial
programs, pursue international regulatory approvals, develop new products and
enhance our harpin-related technology platform.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of payroll
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 were $3.0 million for the
first quarter of 2001, an increase of $2.1 million (230%) from $917,000 in the
comparable quarter of 2000. Over half of the increase is due to increased
payroll and employee benefit expenses related primarily to the expansion of our
sales and marketing efforts. Other non-personnel advertising and marketing
expenses increased significantly in connection with the commercialization and
promotion of Messenger. We expect selling, general and administrative expenses
to increase further as we continue hiring additional personnel to support
anticipated growth and the commercialization of Messenger, enhance information
systems, expand our sales and marketing capability and incur costs associated
with being a public company.
Interest Income
Interest income consists of earnings on our cash and cash equivalents.
Interest income was $1.2 million for the first quarter of 2001, an increase of
$1.0 million (626%) from $160,000 in the comparable quarter of 2000. The
increased interest income resulted from the investment of $91.5 million of net
proceeds received in our initial public offering, which closed on October 2,
2000.
Interest Expense
Interest expense consists of interest we pay on capital leases used to
finance our equipment purchases. Interest expense was $25,000 for the quarter
ended March 31, 2001, a decrease of $13,000 (35%) from $38,000 in the comparable
quarter of 2000. This decrease resulted from lower average principal balances as
we paid down our capital lease obligations. We expect interest expense to
continue to decrease as we pay off additional capital leases.
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Income Taxes
We have realized a net loss from operations in each period since we began
doing business. As of December 31, 2000, we had accumulated approximately $36.0
million of net operating loss carryforwards for federal income tax purposes.
These carryforwards expire between 2009 and 2015. The annual use of these net
operating loss carryforwards may be limited in the event of a cumulative change
in ownership of more than 50%.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
sale of equity securities. Prior to October 2000, most of our capital was raised
through private sales of our preferred stock, which resulted in net proceeds of
approximately $36.5 million. In October 2000, we received $91.5 million of net
proceeds from the initial public offering of 6.67 million shares of our common
stock. To a lesser extent, we have financed our equipment purchases through
lease financings. As of March 31, 2001, we had cash and cash equivalents of
$75.2 million.
Our operating activities resulted in net cash outflows of $5.8 million for
the three months ended March 31, 2001, an increase of $2.6 million (83%) over
net cash outflows of $3.2 million in the comparable quarter of 2000. These
operating cash outflows resulted primarily from an increase in working capital
and other assets and significant expenditures on research and development and
selling, general and administrative expenses.
Investing activities used cash of $5.5 million for the first quarter of
2001, an increase of $5.1 million over $400,000 in the comparable quarter of
2000. This increase is due primarily to property and equipment purchased and
leasehold improvements made in connection with a major expansion of our
manufacturing facilities, which was substantially completed during the first
quarter of this year. In addition to this project, we expect to spend
approximately $7 to $9 million dollars during the next nine months to build out
our new research and administration facility and further improve our
manufacturing facility.
Financing activities used cash of $52,000 during the three months ended
March 31, 2001, a decrease of $91,000 (234%) from cash provided by financing
activities of $39,000 during the comparable quarter of 2000. This decrease
resulted primarily from a reduction of $113,000 in proceeds from the exercise of
common stock options and warrants. As of March 31, 2001, our future minimum
payments under capital lease obligations totaled $534,000 and are payable over
the next five years.
We expect to substantially increase our operating expenditures as we
expand our sales and marketing capabilities and research and development
activities. In addition, we expect to make capital expenditures during the
remainder of this year of up to approximately $10 million to expand our
manufacturing, research and development and administration facilities. These
additional operating and capital expenditures will use a material amount of our
cash resources. We believe that our existing cash and cash equivalents at March
31, 2001 will be sufficient to meet our anticipated cash needs for operating
activities, working capital and capital expenditures for at least the next 12
months. Our future capital requirements will depend on the success of our
operations.
In the future, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financings or from other sources. We may
be unable to obtain adequate or favorable financing at that time.
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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 quarterly report on Form 10-Q. The
risks and uncertainties described below are not the only ones facing our
company. If any of the following risks actually occurs, our business, financial
condition or operating results could be harmed.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND ARE SUBJECT TO THE RISKS OF A NEW
ENTERPRISE AND THE COMMERCIALIZATION OF A NEW TECHNOLOGY.
We began our operations in 1994 and have recently initiated marketing
activities designed to promote the distribution and sale of our first product,
Messenger, in the United States. We have not proven our ability to commercialize
any products. Our early stage of development, the newness of our technology and
the uncertain nature of the market in which we compete make it difficult to
assess our prospects or predict our future operating results. We are subject to
risks and uncertainties frequently encountered in the establishment of a new
business enterprise, particularly in the rapidly changing market for plant
protection and yield enhancement products. These risks include our inability to
transition from a company with a research focus to a company capable of
supporting commercial activities, including manufacturing, regulatory approval
and compliance, marketing, sales, distribution and quality control and
assurance. Our inability to adequately address these risks could cause us to be
unprofitable or to cease operations.
WE CURRENTLY DEPEND ON A SINGLE PRODUCT AND OUR DEVELOPMENT AND
COMMERCIALIZATION OF THAT PRODUCT MAY NOT BE SUCCESSFUL.
For the immediately foreseeable future we will be dependent on the
successful development and commercialization of one product, Messenger, which is
based on a new technology. While Messenger has been subject to numerous field
tests on a wide variety of crops with favorable results, we have only recently
begun sales of Messenger, and Messenger could prove to be commercially
unsuccessful. Messenger may not prove effective or economically viable for all
crops or markets. In addition, because Messenger has not been put to widespread
commercial use over significant periods of time, no assurance can be given that
adverse consequences might not result from the use of Messenger, such as soil or
other environmental degradation, the development of negative effects on animals
or plants or reduced benefits in terms of crop yield or protection.
The markets for Messenger and other harpin-based products we may develop
are unproven. Messenger may not gain commercial acceptance or success. If we are
unable to successfully achieve broad market acceptance of Messenger, we may not
be able to generate enough product revenues in the future to achieve
profitability. A variety of factors will determine the success of our market
development and commercialization efforts and the rate and extent of market
acceptance of Messenger, including our ability to implement and maintain an
appropriate pricing policy for Messenger, general economic conditions in
agricultural markets, including commodity prices, climatic conditions and the
extent that growers, regulatory authorities and the public accept new pest
control practices and products developed through biotechnology.
OUR PRODUCT DEVELOPMENT EFFORTS, WHICH ARE BASED ON AN INNOVATIVE TECHNOLOGY
THAT IS COMMERCIALLY UNPROVEN, MAY NOT BE SUCCESSFUL.
Our harpin and harpin-related technology is new, in an early stage of
development and commercially unproven. It may take years and significant capital
investment to develop viable enhancements of Messenger or new products based on
our harpin and harpin-related technology. Risks inherent in the development of
products based on innovative technologies include the possibility that:
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- new products or product enhancements will be difficult to produce on
a large scale or will be uneconomical to market;
- proprietary rights of third parties will prevent us from marketing
products; and
- third parties will market superior or equivalent products or will
market their products first.
INABILITY TO PRODUCE A HIGH QUALITY PRODUCT AS WE INCREASE OUR MANUFACTURING
CAPACITY COULD IMPAIR OUR BUSINESS.
To be successful, we will have to manufacture Messenger in large
quantities at acceptable costs while also preserving high product quality. If we
cannot maintain high product quality on a large scale, we may be unable to
achieve market acceptance of our products and our sales would likely suffer.
Moreover, we do not have back-up manufacturing systems and, as a result, any
failure of any component required in the manufacturing process could delay or
impair our ability to manufacture Messenger in the quantities that we may
require.
We intend to significantly expand our manufacturing facilities. We cannot
guarantee that we will be successful in expanding our manufacturing activities.
We may encounter difficulties in scaling up production of our products,
including problems involving manufacturing yields, quality control and
assurance, shortages of qualified personnel and compliance with regulatory
requirements. Even if we are successful in developing our manufacturing
capability and processes, we do not know whether we will do so in time to meet
our product commercialization schedule or to satisfy the requirements of our
distributors or customers.
WE HAVE A HISTORY OF LOSSES SINCE INCEPTION, WE EXPECT TO CONTINUE TO INCUR
LOSSES AND WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.
We have incurred operating losses in each quarter since inception and we
expect to continue to incur further operating losses for the foreseeable future.
From our inception in July 1994 to March 31, 2001, we have accumulated a deficit
of $41.1 million. For the quarter ended March 31, 2001, we had a net loss of
$2.5 million and for the years ended December 31, 2000 and 1999, we had net
losses of $15.7 million and $9.4 million, respectively. To date, our revenues
have been limited. We expect our future revenues to come primarily from the sale
of Messenger and other products, and these sales are highly uncertain. We expect
to continue to devote substantial resources to expand our research and
development activities, further increase manufacturing capacity and expand our
sales and marketing activities for the commercialization of Messenger worldwide.
As a result, we will need to generate significant revenues to achieve and
maintain profitability. We may never generate profits, and if we do become
profitable, we may be unable to sustain or increase profitability on a quarterly
or annual basis.
IF OUR ONGOING OR FUTURE FIELD TRIALS ARE UNSUCCESSFUL, WE MAY BE UNABLE TO
ACHIEVE MARKET ACCEPTANCE OR OBTAIN REGULATORY APPROVAL OF OUR PRODUCTS.
The successful completion of multiple field trials in domestic and foreign
locations on many crops is critical to the success of our product development
and marketing efforts. If our ongoing or future field trials are unsuccessful or
produce inconsistent results or unanticipated adverse side effects, or if we are
unable to collect reliable data, regulatory approval of our products could be
delayed or we may be unable to achieve market acceptance of our products.
Although we have conducted successful field trials on a broad range of crops, we
cannot be certain that additional field trials conducted on a greater number of
acres, or on crops for which we have not yet conducted field trials, will be
successful. Moreover, the results of our ongoing and future field trials are
subject to a number of conditions beyond our control,
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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 tests for us. In
addition, incompatible crop treatment practices or misapplication of the product
by the growers that participate in our field trials could interfere with the
success of our field trials.
RAPID CHANGES IN TECHNOLOGY COULD RENDER OUR PRODUCTS UNMARKETABLE OR OBSOLETE.
We are engaged in an industry characterized by extensive research efforts
and rapid technological development. Our competitors, 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
products and to design, develop and market new products that keep pace with new
technological and industry developments.
INABILITY TO DEVELOP ADEQUATE SALES AND MARKETING CAPABILITIES COULD PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING MESSENGER AND OTHER PRODUCTS WE MAY DEVELOP.
We currently have limited sales and marketing experience and capabilities.
Our internal sales and marketing staff consists primarily of sales and marketing
specialists and field development specialists who are trained to educate growers
and independent distributors on the uses and benefits of Messenger. We will need
to further develop our sales, marketing and field development capabilities in
order to enhance our commercialization efforts, which will involve substantial
costs. These specialists require a high level of technical expertise and
knowledge regarding Messenger's capabilities and other plant protection and
yield enhancement products and techniques. We cannot assure you that our
specialists and other members of our sales and marketing team will successfully
compete against the sales and marketing operations of our current and future
competitors that may have more established relationships with distributors and
growers. Failure to recruit, train and retain important sales and marketing
personnel, such as our sales and marketing specialists and field development
specialists, or the inability of new sales and marketing personnel to
effectively market and sell Messenger and other products we may develop, could
impair our ability to gain market acceptance of our products and cause our sales
to suffer.
WE MAY BE UNABLE TO ESTABLISH AND MAINTAIN SUCCESSFUL RELATIONSHIPS WITH
INDEPENDENT DISTRIBUTORS, WHICH COULD ADVERSELY AFFECT OUR SALES.
We intend to rely on independent distributors of agri-chemicals to
distribute and assist with the marketing and sale of Messenger and other
products we may develop. We have engaged several independent distributors and
retailers for the distribution and sale of Messenger. Our future revenue growth
will depend in large part on our success in establishing and maintaining these
sales and distribution channels. We are in the early stages of developing our
distribution network and we may be unable to establish these relationships in a
timely or cost-effective manner. Moreover, we cannot assure you that the
distributors and retailers with which we partner will focus adequate resources
on selling our products or will be successful in selling them. Many of our
potential distributors and retailers are in the business of distributing and
sometimes manufacturing other, possibly competing, plant protection and yield
enhancement products and may perceive Messenger as a threat to various product
lines currently being manufactured or distributed by them. In addition, the
distributors may earn higher margins by selling competing products or
combinations of competing products. If we are unable to establish or maintain
successful relationships with independent distributors, we will need to further
develop our own distribution capabilities, which would be expensive and
time-consuming and the success of which would be uncertain.
Two of our distributors accounted for an aggregate of approximately 89% of
our product sales and 95% of our accounts receivable balance as of March 31,
2001. One distributor, United Agri
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Products, a subsidiary of ConAgra Foods, Inc., accounted for approximately 73%
of our product sales revenue and 74% of our accounts receivable balance, and
Western Farm Service accounted for approximately 16% of our product sales
revenue and 21% of our accounts receivable balance as of March 31, 2001. We
anticipate that we will continue to extend credit to these distributors. If
either of these distributors, or any other distributor which 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
either 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.
INABILITY TO OBTAIN REGULATORY APPROVALS, OR TO COMPLY WITH ONGOING AND CHANGING
REGULATORY REQUIREMENTS, COULD DELAY OR PREVENT SALES OF MESSENGER AND OTHER
POTENTIAL PRODUCTS.
The field testing, manufacture, sale and use of plant protection and yield
enhancement products, including Messenger and other products we may develop, are
extensively regulated by the EPA and state, local and foreign governmental
authorities. These regulations substantially increase the cost and time
associated with bringing our products to market. If we do not receive the
necessary governmental approvals to test, manufacture and market our products,
or if the regulatory authorities revoke our approvals or grant them subject to
restrictions on their use, we may be unable to sell our products and our
business may fail.
In April 2000, we received conditional approval from the EPA to market and
sell our first product, Messenger, in the United States. We are required,
however, to obtain regulatory approval from certain state and foreign regulatory
authorities before we market Messenger in those jurisdictions. Although we are
authorized to sell Messenger in 48 states on virtually all crops and in
California on strawberry, we have not yet received approval for Messenger in
Colorado or for use on other crops in California. We have not yet obtained
authorization to sell Messenger in any foreign countries. Certain of these
jurisdictions may apply different criteria than the EPA in connection with their
approval processes.
If we make significant enhancements in Messenger's design as a result of
our ongoing research and development projects, additional EPA approvals may be
required. Moreover, we cannot assure you that we will be able to obtain approval
for marketing additional harpin-based products or product extensions that we may
develop. For example, while the EPA has in place a registration procedure for
products such as Messenger that is streamlined in comparison to the registration
procedure for chemical pesticides, there can be no assurance that all of our
products or product extensions will be eligible for the streamlined procedure or
that additional requirements will not be added by the EPA that could make the
procedure more time-consuming and costly for our future products.
Even after we obtain all necessary regulatory approvals to market and sell
Messenger and other products we may develop, Messenger and other such 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 receipt of newly discovered
information, including an inability to comply with regulatory requirements, the
occurrence of unanticipated problems with the product or other reasons. In
addition, federal, state and foreign regulations relating to crop protection
products developed through biotechnology are subject to public concerns and
political circumstances, and, as a result, regulations have changed and may
change substantially in the future. These changes may result in limitations on
the manufacturing, marketing or use of Messenger or other products that we may
develop and commercialize.
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INABILITY TO SATISFY THE CONDITIONS OF OUR EPA AND CALIFORNIA REGISTRATIONS
COULD LIMIT OR PREVENT SALES OF MESSENGER.
The EPA has conditioned its approval of our Messenger registration on the
requirement that we conduct four additional studies by April 19, 2001 that are
designed to further demonstrate the safety of our product. These studies were
completed and submitted to the EPA on April 16, 2001. In addition, our
registration to sell Messenger in California, which is limited to sales for use
on strawberry for disease management, is conditioned on the requirement that we
submit data from several additional studies within various required timeframes
over the next two years. If we are unable to conduct the studies required by the
California Department of Pesticide Regulation in a timely manner, or if the
results of the studies are unacceptable to the EPA or CDPR, as applicable, the
EPA or the CDPR may revoke its approvals or impose limitations on the use of
Messenger that could have a negative impact on our sales. Because EPA and state
approvals are required for commercial sales of Messenger, the loss of such
approvals for any reason, including our inability to satisfy the conditions of
our EPA registration, would prevent further sales of Messenger.
INABILITY TO COMPLY WITH REGULATIONS APPLICABLE TO OUR FACILITIES AND PROCEDURES
COULD DELAY, LIMIT OR PREVENT OUR RESEARCH AND DEVELOPMENT OR MANUFACTURING
ACTIVITIES.
Our research and development and manufacturing facilities and procedures
are subject to continual review and periodic inspection. To comply with the
regulations applicable to these facilities and procedures, we must spend funds,
time and effort in the areas of production, safety and quality control and
assurance to help ensure full technical compliance. If the EPA or another
regulator determines that we are not in compliance, regulatory approval of our
products could be delayed or we may be required to limit or cease our research
and development or manufacturing activities or pay a monetary fine. If we were
required to limit or cease our research and development activities, our ability
to develop new products would be impaired. In addition, if we were required to
limit or cease our manufacturing activities, our ability to produce Messenger in
commercial quantities would be impaired or prohibited, which would have an
adverse effect on our sales.
IF THIRD-PARTY MANUFACTURERS FAIL TO ADEQUATELY PERFORM, WE COULD BE UNABLE TO
MEET DEMAND AND OUR REVENUES COULD BE IMPAIRED.
We currently depend on independent manufacturers to perform certain
portions of our production process. We intend to engage, and we are in
discussions with, additional third-party manufacturers to perform this process.
Any failure or delay in the ability of our current or any future manufacturers
to provide us with material they produce could adversely affect our ability to
produce Messenger in the quantities necessary to satisfy the requirements of our
distributors or customers, or could increase our costs associated with obtaining
fermented materials. In addition, the time and resources that our current or
future third-party manufacturers devote to our business are not within our
control. We cannot ensure that our current or future third-party manufacturers
will perform their obligations to meet our quality standards, that we will
derive cost savings or other benefits from our relationships with them or that
we will be able to maintain a satisfactory relationship with them on
commercially acceptable terms. Moreover, these manufacturers may support
products that compete directly or indirectly with ours, or offer similar or
greater support to our competitors. If any of these events were to occur, our
business and operations could be adversely affected.
INTERNATIONAL EXPANSION WILL SUBJECT US TO RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS, WHICH COULD ADVERSELY AFFECT BOTH OUR DOMESTIC AND OUR INTERNATIONAL
OPERATIONS.
Our success depends in part on our ability to expand internationally as we
obtain regulatory approvals to market and sell our products in other countries.
We have been conducting field trials in
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several international locations, and we hired personnel in Mexico and Europe to
develop operations in those regions. International expansion of our operations
could impose substantial burdens on our resources, divert management's attention
from domestic operations and otherwise adversely affect our business.
Furthermore, international operations are subject to several inherent risks,
especially different regulatory requirements and reduced protection of
intellectual property rights, that could adversely affect our ability to compete
in international markets and have a negative effect on our operating results.
INABILITY TO ADDRESS STRAIN ON OUR RESOURCES CAUSED BY GROWTH COULD RESULT IN
OUR INABILITY TO EFFECTIVELY MANAGE OUR BUSINESS.
As we add manufacturing, marketing, sales, field development and other
personnel, both domestically and internationally, during the commercialization
of Messenger, and expand our manufacturing and research and development
capabilities, we expect that our operating expenses and capital requirements
will increase. Our ability to manage growth effectively requires us to continue
to expend funds to improve our operational, financial and management controls,
reporting systems and procedures. In addition, we must effectively expand, train
and manage our employee base. We will be unable to effectively manage our
business if we are unable to timely and successfully alleviate the strain on our
resources caused by growth in our business, which could adversely affect our
operating results.
THE HIGH LEVEL OF COMPETITION IN OUR MARKET MAY RESULT IN PRICING PRESSURES,
REDUCED MARGINS OR THE INABILITY OF OUR PRODUCTS TO ACHIEVE MARKET ACCEPTANCE.
The market for plant protection and yield enhancement products is
intensely competitive, rapidly changing and undergoing consolidation. We may be
unable to compete successfully against our current and future competitors, which
may result in price reductions, reduced margins and the inability to achieve
market acceptance of our products.
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, marketing, human and other
resources than we do. As a result, they may be able to devote greater resources
to the manufacture, promotion or sale of their products, receive greater
resources and support from independent distributors, initiate or withstand
substantial price competition or take advantage of acquisition or other
opportunities more readily. Further, many of the large agri-chemical companies
have a more diversified product offering than we do, which may give these
companies an advantage in meeting customer needs by enabling them to offer
integrated solutions to plant protection and yield enhancement.
INABILITY TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS IN THE UNITED STATES AND
FOREIGN COUNTRIES COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY SINCE OUR
COMPETITORS MAY TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our success depends on our ability to obtain and maintain patent and other
proprietary-right protection for our technology and products in the United
States and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. We also rely on trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees, consultants and advisors. It is
possible that these agreements may be breached and that any remedies for a
breach will not make us whole. We generally control and limit access to, and the
distribution of, our product documentation and other proprietary information.
Despite our efforts to protect these proprietary rights, unauthorized parties
may copy aspects of our products and obtain and use information that we regard
as proprietary. We also
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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 relative to the scope and enforceability of
claims in the fields in which we operate. We are like most biotechnology
companies in that our patent protection is highly uncertain and involves complex
legal and technical questions for which legal principles are not 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 PRODUCTS.
Our success depends on our ability to operate without infringing the
patents and proprietary rights of third parties. Product development is
inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Future patents
issued to third parties may contain claims that conflict with our patents.
Although we believe that our current product does not infringe the proprietary
rights of any third parties, third parties could assert infringement claims
against us in the future. Any litigation or interference proceedings, regardless
of their outcome, would probably be costly and require significant time and
attention of our key management and technical personnel. Litigation or
interference proceedings could also force us to:
- stop or delay selling, manufacturing or using products that
incorporate the challenged intellectual property;
- pay damages; or
- enter into licensing or royalty agreements that may be unavailable
on acceptable terms.
IF WE DO NOT ADEQUATELY DISTINGUISH MESSENGER FROM GENETICALLY MODIFIED PLANTS
AND CERTAIN OTHER PRODUCTS, PUBLIC CONCERNS OVER THOSE PRODUCTS COULD NEGATIVELY
IMPACT MARKET ACCEPTANCE OF MESSENGER.
Claims that genetically engineered products are unsafe for consumption or
pose a danger to the environment have led to public concerns and negative public
attitudes, particularly in Europe. We intend to distinguish Messenger and
harpin-related technologies from products that genetically modify plants. While
our technology does involve genetic modification in the process of manufacturing
Messenger, Messenger and harpin-related technologies are topically applied and
do not genetically modify the plant's DNA. If the public or potential customers
perceive Messenger as a genetically modified product, Messenger may not gain
market acceptance. Similarly, countries that have imposed more restrictive
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regulations on genetically modified plants, including Japan and certain members
of the European Union, may perceive Messenger as a genetically modified product.
If so, regulators in those countries may impose more restrictive regulations on
Messenger, which could delay, limit or impair our ability to market and sell
Messenger in those countries.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS, WHICH COULD ADVERSELY AFFECT OUR
OPERATIONS.
We may be held liable or incur costs to settle product liability claims if
any products we develop, or any products that use or incorporate any of our
technologies, cause injury or are found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks exist even with respect to
products that have received, or may in the future receive, regulatory approval,
registration or clearance for commercial use. We cannot guarantee that we will
be able to avoid product liability exposure.
We currently maintain product liability insurance at levels we believe are
sufficient and consistent with industry standards for companies at our stage of
development. We cannot guarantee that our product liability insurance is
adequate, and, at any time, it is possible that such insurance coverage may not
be available on commercially reasonable terms or at all. A product liability
claim could result in liability to us greater than our assets and insurance
coverage. Moreover, even if we have adequate insurance coverage, product
liability claims or recalls could result in negative publicity or force us to
devote significant time and attention to matters other than those in the normal
course of business.
INABILITY TO RETAIN OUR KEY EMPLOYEES AND OTHER SKILLED MANAGERIAL AND TECHNICAL
PERSONNEL COULD IMPAIR OUR ABILITY TO MAINTAIN AND EXPAND OUR BUSINESS.
We are highly dependent on the efforts and abilities of our current key
managerial and technical personnel, particularly Jerry L. Butler, our Chief
Executive Officer and President, and Dr. Zhongmin Wei, our Vice President of
Research. Our success will depend in part on retaining the services of Mr.
Butler and Dr. Wei and our other existing key management and technical personnel
and on attracting and retaining new, highly qualified personnel. Inability to
retain our existing key management and technical personnel or to attract
additional qualified personnel could, among other things, delay our product
development and marketing and sales efforts. Although Mr. Butler and Dr. Wei
have signed agreements with us that limit their ability to compete directly with
us in the future, nothing prevents either of them from leaving EDEN. Moreover,
in our field, competition for qualified management and technical personnel is
intense. In addition, many of the companies with which we compete for
experienced personnel have greater financial and other resources than we do. As
a result of these factors, we may be unable to recruit, train and retain
sufficient qualified personnel.
WE MAY HAVE TO REDUCE OPERATIONS IF WE ARE UNABLE TO MEET OUR FUNDING
REQUIREMENTS.
We will require substantial additional funding to continue our research
and development activities, increase manufacturing capabilities and
commercialize products. If we are unable to generate sufficient cash flow from
operations, or obtain funds through additional financing, we may have to delay,
curtail or eliminate some or all of our research and development, field testing,
marketing and manufacturing programs. We believe that our existing capital
resources will be sufficient to support our operations for at least the next
year. Our future capital requirements will depend on the success of our
operations.
If our capital requirements vary from our current plans, we may require
additional financing sooner than we anticipate. Financing may be unavailable to
us when needed or may not be available to us on acceptable terms.
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OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE, RESULTING IN AN UNPREDICTABLE
LEVEL OF EARNINGS AND POSSIBLY IN A DECREASE IN OUR STOCK PRICE.
Our operating results for a particular quarter or year are likely to
fluctuate, which could result in uncertainty surrounding our level of earnings
and possibly in a decrease in our stock price. Numerous factors will contribute
to the unpredictability of our operating results. In particular, our sales are
expected to be highly seasonal. Sales of plant protection and yield enhancement
products are dependent on planting and growing seasons, climatic conditions and
other variables, which we expect to result in substantial fluctuations in our
quarterly sales and earnings. For example, weather-related events such as
droughts and floods, severe heat and frost, hail, tornadoes and hurricanes could
decrease demand for our product 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 size and timing of significant customer
transactions, the delay or deferral of customer use of our products and the
fiscal or quarterly budget cycles of our customers. For example, customers may
purchase large quantities of our products in a particular quarter to store and
use over long periods of time, or time their purchases to coincide with the
availability of capital, which may cause significant fluctuations in our
operating results for a particular quarter or year.
ITEM 3. 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 rate debt
and currently do not enter into any material transactions denominated in a
foreign currency. Therefore, our direct exposure to interest rate and foreign
exchange fluctuation is currently minimal. We believe that the market risk
arising from holdings of our financial instruments is not material.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit is being filed as part of this quarterly report on
Form 10-Q.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11.1 Statement re computation of per share loss.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three months ended
March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDEN BIOSCIENCE CORPORATION
Date: May 14, 2001
By: /S/ Bradley S. Powell
------------------------------------
Bradley S. Powell
Vice President of Finance, Secretary
and Chief Financial Officer
(principal financial and accounting
officer)
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