<PAGE> 1
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] 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)
<TABLE>
<S> <C>
WASHINGTON 91-1649604
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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) filed all reports required to
be filed by Section 13 or 15(d) of the 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 [ ] No [X]
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date:
<TABLE>
<S> <C>
CLASS OUTSTANDING AT OCTOBER 31, 2000
Common Stock, $.0025 Par Value 23,674,681
</TABLE>
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<PAGE> 2
EDEN BIOSCIENCE CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................... 2
Condensed Balance Sheets as of December 31, 1999 and September 30, 2000............ 2
Condensed Statements of Operations for the three and nine months ended
September 30, 1999 and 2000.................................................... 3
Condensed Statement of Shareholders' Equity for the nine months ended
September 30, 2000.............................................................. 4
Condensed Statements of Cash Flow for the nine months ended
September 30, 1999 and 2000..................................................... 5
Notes to Condensed Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........................................21
Item 4. Submission of Matters to a Vote of Security Holders................................22
Item 6. Exhibits and Reports on Form 8-K...................................................22
SIGNATURES ................................................................................23
INDEX TO EXHIBITS..........................................................................23
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDEN BIOSCIENCE CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma as of
December 31, September 30, September 30,
1999 2000 2000
------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,107,250 $ 944,178 $ 93,990,678
Accounts receivable -- 622,070 622,070
Inventory -- 414,824 414,824
Other current assets 61,367 234,511 234,511
------------- ------------- -------------
Total current assets 13,168,617 2,215,583 95,262,083
Property and equipment, net 2,949,720 6,334,878 6,334,878
Other assets 159,711 1,822,594 343,321
------------- ------------- -------------
Total assets $ 16,278,048 $ 10,373,055 $ 101,940,282
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 725,711 $ 3,000,508 $ 3,000,508
Accrued expenses 1,100,018 2,479,756 2,479,756
Current portion of capital lease obligations 329,085 263,409 263,409
------------- ------------- -------------
Total current liabilities 2,154,814 5,743,673 5,743,673
Capital lease obligations, net of current portion 522,966 331,066 331,066
------------- ------------- -------------
Total liabilities 2,677,780 6,074,739 6,074,739
------------- ------------- -------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value,
10,000,000 shares authorized; 9,964,185 shares
designated as Series A through F at December 31,
1999 and no designations at September 30, 2000;
Issued and outstanding shares - 9,746,396 shares
at December 31, 1999; no shares at
September 30, 2000 and pro forma
Aggregate liquidation preference - $30,554,080 at
December 31, 1999 and $0 at September 30, 2000 97,464 -- --
Common stock, $.0025 par value, 100,000,000 shares
authorized; issued and outstanding shares -
2,694,798 at December 31, 1999; 16,965,115 at
September 30, 2000; and 23,635,115 pro forma 6,737 42,413 59,088
Additional paid-in capital 36,675,834 40,044,271 131,594,823
Common stock subscriptions receivable (59,007) (26,393) (26,393)
Deferred stock option compensation expense (146,336) (76,685) (76,685)
Accumulated deficit (22,974,424) (35,685,290) (35,685,290)
------------- ------------- -------------
Total shareholders' equity 13,600,268 4,298,316 95,865,543
------------- ------------- -------------
Total liabilities and shareholders' equity $ 16,278,048 $ 10,373,055 $ 101,940,282
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
EDEN BIOSCIENCE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ -- $ 1,028,283 $ -- $ 1,028,283
Consulting services 34,186 -- 77,257 --
------------ ------------ ------------ ------------
Gross revenues 34,186 1,028,283 77,257 1,028,283
Sales allowances -- 411,314 -- 411,314
------------ ------------ ------------ ------------
Net revenues 34,186 616,969 77,257 616,969
------------ ------------ ------------ ------------
Operating expenses:
Cost of goods sold -- 352,683 -- 352,683
Research and development 1,743,022 2,128,210 5,455,470 7,244,368
Selling, general and administrative 557,779 1,774,241 1,568,282 3,685,167
------------ ------------ ------------ ------------
Total operating expenses 2,300,801 4,255,134 7,023,752 11,282,218
------------ ------------ ------------ ------------
Loss from operations (2,266,615) (3,638,165) (6,946,495) (10,665,249)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 84,273 61,402 332,203 339,852
Interest expense (46,147) (30,369) (138,746) (103,945)
Fee and fair value of warrants
granted for credit facilities -- (2,281,524) -- (2,281,524)
------------ ------------ ------------ ------------
Total other income (expense) 38,126 (2,250,491) 193,457 (2,045,617)
------------ ------------ ------------ ------------
Net loss $ (2,228,489) $ (5,888,656) $ (6,753,038) $(12,710,866)
============ ============ ============ ============
Historical basic and diluted net
loss per share $ (1.22) $ (1.57) $ (3.70) $ (4.07)
============ ============ ============ ============
Historical weighted average
shares outstanding used to
compute net loss per share 1,831,883 3,745,271 1,825,938 3,120,521
============ ============ ============ ============
Pro forma basic and diluted net
loss per share $ (0.15) $ (0.35) $ (0.46) $ (0.76)
============ ============ ============ ============
Weighted average shares
outstanding used to compute
pro forma net loss per share 14,677,003 16,933,040 14,660,627 16,713,251
============ ============ ============ ============
Pro forma as adjusted basic and
diluted net loss per share $ (0.25) $ (0.54)
============ ============
Weighted average shares outstanding
used to compute pro forma as
adjusted net loss per share 23,603,040 23,383,251
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
EDEN BIOSCIENCE CORPORATION
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Outstanding Shares
------------------------------- Additional
Preferred Common Preferred Common Paid-in
Stock Stock Stock Stock Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 9,746,396 2,694,798 $ 97,464 $ 6,737 $ 36,675,834
Exercise of warrants -- 189,880 -- 475 911,574
Fair value of warrants granted -- -- -- -- 1,981,524
Offering costs -- -- -- -- (14,657)
Interest on subscriptions
receivable -- -- -- -- --
Exercise of stock options -- 286,333 -- 716 427,017
Repayment of note receiv-
able from shareholder -- -- -- -- --
Conversion of preferred stock
upon effectiveness of
initial public offering (9,746,396) 13,794,104 (97,464) 34,485 62,979
Amortization of stock
option compensation
expense -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2000
(unaudited) -- 16,965,115 $ -- $ 42,413 $ 40,044,271
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Deferred
Stock Stock Total
Subscrip- Option Accum- Share-
tions Compen- ulated holders'
Receivable sation Deficit Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ (59,007) $ (146,336) $(22,974,424) $ 13,600,268
Exercise of warrants -- -- -- 912,049
Fair value of warrants granted -- -- -- 1,981,524
Offering costs -- -- -- (14,657)
Interest on subscriptions
receivable (2,818) -- -- (2,818)
Exercise of stock options -- -- -- 427,733
Repayment of note receiv-
able from shareholder 35,432 -- -- 35,432
Conversion of preferred stock
upon effectiveness of
initial public offering -- -- -- --
Amortization of stock
option compensation
expense -- 69,651 -- 69,651
Net loss -- -- (12,710,866) (12,710,866)
------------ ------------ ------------ ------------
Balance at September 30, 2000
(unaudited) $ (26,393) $ (76,685) $(35,685,290) $ 4,298,316
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
EDEN BIOSCIENCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,753,038) $(12,710,866)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 786,601 640,959
Amortization of stock option compensation expense 73,688 69,651
Interest income on subscriptions receivable (3,239) (2,818)
Loss on disposition of fixed assets -- 13,159
Fair value of warrants granted for credit facilities -- 1,981,524
Changes in assets and liabilities:
Accounts receivable (11,857) (622,070)
Inventory -- (414,824)
Other assets (133,281) (1,836,027)
Accounts payable (657,402) 2,274,797
Accrued expenses 445,362 1,379,738
------------ ------------
Net cash used in operating activities (6,253,166) (9,226,777)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (1,704,601) (4,039,276)
Repayment of note receivable from shareholder -- 35,432
------------ ------------
Net cash used in investing activities (1,704,601) (4,003,844)
------------ ------------
Cash flows from financing activities:
Proceeds from sale-leaseback of equipment 162,999 --
Payments on capital equipment leases (210,131) (257,576)
Sales of preferred stock 1,547,880 --
Offering costs (5,871) (14,657)
Proceeds from exercise of stock options 15,000 427,733
Proceeds from exercise of common stock warrants -- 912,049
------------ ------------
Net cash provided by financing activities 1,509,877 1,067,549
------------ ------------
Net decrease in cash and cash equivalents (6,447,890) (12,163,072)
Cash and cash equivalents at beginning of period 11,723,450 13,107,250
------------ ------------
Cash and cash equivalents at end of period $ 5,275,560 $ 944,178
============ ============
Supplemental disclosures:
Cash paid for interest $ 138,746 $ 103,945
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 7
EDEN BIOSCIENCE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 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 by the Company 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, 1999 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, 1999 included in the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-41028), which was declared effective by
the Securities and Exchange Commission on September 26, 2000.
In the opinion of management, the 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 and nine-month periods ended September 30, 2000 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.
REVENUE RECOGNITION
The Company sells its products primarily through distributors. Revenues
from product sales are recognized at the time of shipment to the distributors.
Sales allowances are granted to the distributors based on the specific terms
included in the distribution agreement. Revenues from consulting arrangements
are recognized as the Company performs activities under the terms of each
agreement. The Company does not expect to generate any significant future
revenues from consulting services.
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 exercise (Treasury Stock
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<PAGE> 8
EDEN BIOSCIENCE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
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:
<TABLE>
<CAPTION>
As of September 30,
-------------------------
1999 2000
--------- ---------
<S> <C> <C>
Options to purchase common stock............................... 1,365,200 2,455,667
Warrants to purchase common stock.............................. 1,334,040 511,878
</TABLE>
Pro forma basic and diluted net loss per share is calculated presuming
the conversion of all convertible preferred stock. The actual conversion of the
preferred stock occurred on September 26, 2000, the effective date of the
Company's initial public offering.
Pro forma as adjusted basic and diluted net loss per share is calculated
presuming the conversion of all convertible preferred stock and issuance at the
beginning of the periods presented of 6,670,000 shares of common stock issued in
the Company's initial public offering.
2. INITIAL PUBLIC OFFERING
On October 2, 2000, the Company closed its initial public offering of
6,670,000 shares of common stock, including the underwriters' over-allotment
option, at a purchase price of $15.00 per share for proceeds of $91.6 million,
net of underwriters' fees, commissions and offering costs.
3. CREDIT FACILITIES
In August 2000, the Company established unsecured, multiple-advance,
committed credit facilities with Stephens Group, Inc. and the WBW Trust Number
One (the "Credit Facilities"). Under the terms of the Credit Facilities, the
Company had the ability to borrow up to a total of $15 million. The Credit
Facilities contained a requirement that any borrowings be repaid at the date
that the Company received any cash proceeds from the issuance of equity
securities after the date of the Credit Facilities. The Company did not borrow
any amounts pursuant to the Credit Facilities and, with the completion of the
initial public offering, the Company no longer has the ability to borrow any
amounts under the Credit Facilities.
One of the Company's directors, William T. Weyerhaeuser, is trustee for
the WBW Trust Number One. Stephens Group, Inc. beneficially owns approximately
10% the Company's common stock and Jon E.M. Jacoby, a director of the Company,
is also a director and an executive vice president of Stephens Group, Inc.
In connection with the Credit Facilities, the Company paid a loan
commitment fee of $300,000 and issued warrants to purchase 200,000 shares of the
Company's common stock at an exercise price of $15.00 per share. These warrants
may be exercised after March 26, 2001 and expire in August 2005. The Company
recorded an expense of $2.3 million in the three month period ended September
30, 2000 for the loan commitment fee and fair value of the warrants related to
the Credit Facilities.
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<PAGE> 9
EDEN BIOSCIENCE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- -------------
<S> <C> <C>
Equipment .............................. $ 3,575,395 $ 7,539,357
Leasehold improvements ................. 974,461 1,016,409
----------- -----------
4,549,856 8,555,766
Less accumulated depreciation .......... (1,600,136) (2,220,888)
----------- -----------
Net property and equipment ............. $ 2,949,720 $ 6,334,878
=========== ===========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- -------------
<S> <C> <C>
Compensation ........................... $ 759,039 $1,243,822
Field trial expenses ................... --
458,213
Accrued offering costs ................. --
249,828
Other .................................. 340,979 527,893
---------- ----------
Total accrued expenses ................. $1,100,018 $2,479,756
========== ==========
</TABLE>
-8-
<PAGE> 10
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
financial statements and accompanying notes included in this document and the
1999 audited financial statements and notes thereto included in our Registration
Statement on Form S-1, as amended (No. 333-41028), declared effective on
September 26, 2000.
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 products 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.
Prior to August 2000, we derived all of our revenue from providing consulting
services to growers in the analysis and diagnosis of plant and soil diseases and
from research grants. We terminated all consulting services in January 2000 in
order to focus on commercialization of Messenger. Since 1997, we have not
sought, and do not intend to seek in the future, additional research grants.
We have incurred significant operating losses since inception. As of
September 30, 2000, we had an accumulated deficit of $35.7 million. For the year
ended December 31, 1999, we had a net loss of $9.4 million and for the nine
months ended September 30, 2000, we had a net loss of $12.7 million. Operating
expenses were $4.3 million for the quarter ended September 30, 2000, an increase
of $2.0 million (85%) from $2.3 million in the comparable quarter of 1999.
Operating expenses were $11.3 million for the nine months ended September 30,
2000, an increase of $4.3 million (61%) from $7.0 million in the comparable nine
months of 1999. We expect to incur additional losses while we expand and enhance
our manufacturing and research and development activities, as well as our sales
and marketing capabilities.
RESULTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1999 and 2000
Revenues
We generated our first revenue from product sales in August 2000, when we
began selling Messenger, our first commercial product. Revenues from product
sales were $1.0 million for the quarter and nine months ended September 30,
2000. In January 2000, we terminated all consulting services in order to
increase our focus on commercialization of Messenger. Accordingly, revenues from
consulting services decreased $34,000 (100%) from the quarter ended September
30, 1999 to the quarter ended
-9-
<PAGE> 11
September 30, 2000, and $77,000 (100%) from the nine months ended September 30,
1999 to the comparable period in 2000.
Sales Allowances
Sales allowances represent costs incurred to an independent distributor
for sales and marketing support, product warehousing and delivery and
information exchange. For the quarter and nine months ended September 30, 2000,
these costs were $411,000, or 40% of product sales. No such costs were incurred
in 1999.
Cost of Goods Sold
Cost of goods sold includes the cost of raw materials, labor and overhead
required to manufacture Messenger. For the quarter and nine months ended
September 30, 2000, cost of goods sold was $353,000, or 34% of product sales. No
such costs were incurred in 1999. We believe that our cost to manufacture
Messenger will decrease as we increase our capacity and continue to enhance the
manufacturing process.
Research and Development Expenses
Our research and development expenses consist primarily of personnel and
related expenses, field trial expenses, laboratory expenses and facility and
equipment expenses. Research and development expenses were $2.1 million for the
quarter ended September 30, 2000, an increase of $400,000 (22%) from $1.7
million in the comparable quarter of 1999. Research and development expenses
increased $1.8 million (33%) from $5.4 million for the nine months ended
September 30, 1999 to $7.2 million for the comparable period in 2000. Research
and development expenses have increased primarily because we have increased
staffing, conducted more field trials, conducted extensive toxicology tests,
developed and enhanced our manufacturing processes and prepared and filed
additional patent applications. We expect substantial increases in research and
development expenses as we develop new products and attempt to maintain and
enhance our harpin-related technology platform.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of payroll and
expenses for sales and marketing, executive and administrative personnel;
marketing, recruiting and professional fees; and other corporate expenses.
Selling, general and administrative expenses were $1.8 million for the quarter
ended September 30, 2000, an increase of $1.2 million (218%) from $600,000 for
the comparable quarter in 1999. Selling, general and administrative expenses
increased $2.1 million (135%) from $1.6 million for the nine months ended
September 30, 1999 to $3.7 million for the comparable period in 2000. Our
selling, general and administrative expenses rose primarily due to increased
salary expense, marketing costs for the introduction of Messenger and our harpin
and harpin-related technology, the expense of hiring additional personnel and
increases in professional fees. We expect selling, general and administrative
expenses to increase further as we hire additional personnel to support
anticipated growth and the commercialization of Messenger, enhance information
systems, expand our sales and marketing capability and incur costs associated
with being a public company.
Interest Income
Interest income consists of earnings on our cash and cash equivalents.
Interest income was $61,000 for the quarter ended September 30, 2000, a decrease
of $23,000 (27%) from $84,000 for the comparable quarter in 1999 as a result of
a lower average balance of cash and cash equivalents in 2000.
-10-
<PAGE> 12
Interest income increased $8,000 (2%) from $332,000 for the nine months ended
September 30, 1999 to $340,000 for the comparable period in 2000, primarily due
to funds received late in 1999 from the sale of preferred stock.
Interest Expense
Interest expense consists of interest we pay on capital leases used to
finance our equipment purchases. Interest expense was $30,000 for the quarter
ended September 30, 2000, a decrease of $16,000 (34%) from $46,000 for the
comparable quarter in 1999. Interest expense decreased $35,000 (25%) from
$139,000 for the nine months ended September 30, 1999 to $104,000 for the
comparable period in 2000. The decreases in 2000 over comparable periods in 1999
were due to lower average principal balances as we pay down our capital lease
obligations.
In August 2000, we established unsecured, multiple-advance, committed
credit facilities with Stephens Group, Inc. and the WBW Trust Number One to
borrow up to a total of $15 million. Under the terms of the facilities, we paid
commitment fees totaling $300,000 and issued warrants to purchase 200,000 shares
of our common stock at an exercise price of $15.00 per share. The commitment fee
and fair value of these warrants totaled $2.3 million and is included in other
income (expense) for the three months and nine months ended September 30, 2000.
We did not borrow any amounts pursuant to these credit facilities and, with the
completion of our initial public offering, we no longer have the ability to
borrow any amounts under these credit facilities.
Income Taxes
We have realized a net loss from operations for each period since we
began doing business. As of December 31, 1999, we had accumulated approximately
$21.3 million of net operating loss carryforwards for federal income tax
purposes. These carryforwards expire between 2009 and 2014. 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 private sale of our equity securities, resulting in net proceeds of $36.5
million through September 30, 2000. To a lesser extent, we have financed our
equipment purchases through lease financings. As of September 30, 2000, we had
cash and cash equivalents of $900,000. On October 2, 2000, we closed the initial
public offering of approximately 6.7 million shares of our common stock,
resulting in net proceeds of $91.6 million after deducting offering costs of
$8.5 million.
Our operating activities resulted in net cash outflows of $9.2 million
for the nine months ended September 30, 2000, an increase of $2.9 million (48%)
over net cash outflows of $6.3 million for the comparable period in 1999. These
operating cash outflows resulted primarily from significant expenditures on
research and development and selling, general and administrative expenses, all
of which led to operating losses.
Investing activities used cash of $4.0 million for the nine months ended
September 30, 2000, an increase of $2.3 million (135%) over $1.7 million for the
comparable period in 1999. This increase is due primarily to property and
equipment purchased in connection with expansion of our manufacturing and
research and development facilities.
Financing activities provided cash of $1.1 million during the nine months
ended September 30, 2000, a decrease of $400,000 (29%) from cash of $1.5 million
provided from financing activities during
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the comparable period in 1999. These funds resulted primarily from proceeds from
the exercise of common stock warrants and stock options in 2000 and the private
sale of our preferred stock in 1999. As of September 30, 2000, our future
minimum payments under capital and operating leases totaled approximately $1.2
million and are payable over the next five years.
We currently expect to substantially increase our operating expenses to
enhance and expand our sales and manufacturing capabilities and to continue to
enhance our manufacturing and research and development activities. In the next
fiscal year, we currently expect to spend approximately $8 million for sales and
marketing activities, including personnel, promotional and advertising expenses.
We also expect to make capital expenditures of up to approximately $20 million
to expand and enhance our manufacturing and research and development facilities.
These additional operating expenses and capital expenditures will consume a
material amount of our cash resources, including a portion of the net proceeds
of our initial public offering. We believe that the net proceeds from the
initial public offering, together with our existing cash and cash equivalents at
September 30, 2000, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next year. 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 financing or from other sources. We may
be unable to obtain adequate or favorable financing at that time.
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 new
enterprises and the commercialization of a new technology.
We began our operations in 1994 and have recently initiated marketing
activities designed to promote the distribution and sale of our first product,
Messenger, in the United States. We have not proven our ability to commercialize
any products. Our early stage of development, the newness of our technology and
the uncertain nature of the market in which we compete make it difficult to
assess our prospects or predict our future operating results. We are subject to
risks and uncertainties frequently encountered in the establishment of a new
business enterprise, particularly in the rapidly changing market for plant
protection and yield enhancement products. These risks include our inability to
transition from a company with a research focus to a company capable of
supporting commercial activities, including manufacturing, regulatory approval
and compliance, marketing, sales, distribution and quality control and
assurance. Our inability to adequately address these risks could cause us to be
unprofitable or to cease operations.
We currently depend on a single product and our development and
commercialization of that product may not be successful.
For the immediately foreseeable future we will be dependent on the
successful development and commercialization of one product, which is based on a
new technology. While Messenger has been subject to numerous field tests on a
wide variety of crops with favorable results, we have only recently begun sales
of Messenger, and Messenger could prove to be commercially unsuccessful.
Messenger may not prove effective or economically viable for all crops or
markets. For example, our potato field trials to date have shown inconsistent
results and, therefore, we have determined that the benefits of Messenger to
potato growers have not yet proven sufficient for marketing purposes. In
addition, because Messenger
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has not been put to widespread commercial use over significant periods of time,
no assurance can be given that adverse consequences might not result from the
use of Messenger, such as soil or other environmental degradation, the
development of negative effects on animals or plants or reduced benefits in
terms of crop yield or protection.
The markets for Messenger, and other harpin-based products we may
develop, are unproven. Messenger may not gain commercial acceptance or success.
If we are unable to successfully achieve broad market acceptance of Messenger,
we may not be able to generate enough product revenues in the future to achieve
profitability. A variety of factors will determine the success of our market
development and commercialization efforts and the rate and extent of market
acceptance of Messenger, including our ability to implement and maintain an
appropriate pricing policy for Messenger, and the rate and extent that growers,
regulatory authorities and the public accept new pest control practices and
products developed through biotechnology.
Our product development efforts, which are based on an innovative technology
that is commercially unproven, may not be successful.
Our harpin and harpin-related technology is new, in an early stage of
development and commercially unproven. It may take years and significant capital
investment to develop viable enhancements to our Messenger product or new
products based on our harpin and harpin-related technology. Risks inherent in
the development of products based on innovative technologies include the
possibility that:
- new products or product enhancements will be difficult to produce
on a large scale or will be uneconomical to market;
- proprietary rights of third parties will prevent us from marketing
products; and
- third parties will market superior or equivalent products or will
reach the market with their products first.
Inability to produce a high quality product as we increase our manufacturing
capacity could impair our business.
To be successful, we will have to manufacture Messenger in large
quantities at acceptable costs while also preserving high product quality. If we
cannot maintain high product quality on a large scale, we may be unable to
achieve market acceptance of our products and our sales would likely suffer.
Moreover, we do not have backup manufacturing systems and, as a result, a
failure of any component required in the manufacturing process could delay or
impair our ability to manufacture Messenger in the quantities that we may
require.
We intend to significantly expand our manufacturing facilities, a process
that we expect will take approximately 12 to 24 months to complete. 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.
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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 September 30, 2000, we have accrued an
accumulated deficit of $35.7 million. For the year ended December 31, 1999, we
had a net loss of $9.4 million and for the nine months ended September 30, 2000,
we had a net loss of $12.7 million. To date, our revenues have been limited. We
expect our future revenues to be primarily from the sale of Messenger and other
products and these sales are highly uncertain. We expect to continue to devote
substantial resources to expand our research and development activities, further
increase manufacturing capacity and expand our sales and marketing activities
for the commercialization of Messenger. As a result, we will need to generate
significant revenues to achieve and maintain profitability. We may never
generate profits, and if we do become profitable, we may be unable to sustain or
increase profitability on a quarterly or annual basis.
If our ongoing or future field trials are unsuccessful, we may be unable to
achieve market acceptance or obtain regulatory approval of our products.
The successful completion of multiple field trials in domestic and
foreign locations on many crops is critical to the success of our product
development and marketing efforts. If our ongoing or future field trials are
unsuccessful or produce inconsistent results or unanticipated adverse side
effects or if we are unable to collect reliable data, regulatory approval of our
products could be delayed or we may be unable to achieve market acceptance of
our products. Although we have conducted successful field trials on a broad
range of crops, we cannot be certain that additional field trials conducted on a
greater number of acres, or on crops for which we have not yet conducted field
trials, will be successful. Moreover, the results of our ongoing and future
field trials are subject to a number of conditions beyond our control, including
weather-related events such as drought or floods, severe heat or frost, hail,
tornadoes and hurricanes. Generally, we pay third parties, such as growers,
consultants and universities, to conduct our field tests for us. In addition,
incompatible crop treatment practices or misapplication of the product by the
growers that participate in our field trials could interfere with the success of
our field trials.
Rapid changes in technology could render our products unmarketable or obsolete.
We are engaged in an industry characterized by extensive research efforts
and rapid technological development. Our competitors, some of which have
substantially greater technological and financial resources than we do, may
develop plant protection and yield enhancement technologies and products that
are more effective than ours or that render our technology and products obsolete
or uncompetitive. To be successful, we will need to continually enhance our
products and to design, develop and market new products that keep pace with new
technological and industry developments.
Inability to develop adequate sales and marketing capabilities could prevent us
from successfully commercializing Messenger and other products we may develop.
We currently have limited sales and marketing experience and
capabilities. Our internal sales and marketing staff consists primarily of sales
and marketing specialists and field development specialists who are trained to
educate growers and independent distributors on the uses and benefits of
Messenger. We will need to further develop our sales, marketing and field
development capabilities in order to enhance our commercialization efforts,
which will involve substantial costs. These specialists require a high level of
technical expertise and knowledge regarding Messenger's capabilities and other
plant protection and yield enhancement products and techniques. We cannot assure
you that our specialists and other members of our sales and marketing team will
successfully compete against the sales and marketing operations of our current
and future competitors that may have more established relationships with
distributors and growers. Failure to recruit, train and retain important sales
and marketing personnel,
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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 are currently engaged in discussions with several
independent distributors and have signed our first agreement for the
distribution 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 with which we
partner will focus adequate resources on selling our products or will be
successful in selling them. Many of our potential distributors are in the
business of distributing and sometimes manufacturing other, possibly competing,
plant protection and yield enhancement products and may perceive Messenger as a
threat to various product lines currently being manufactured or distributed by
them. In addition, the distributors may earn higher margins by selling competing
products or combinations of competing products. If we are unable to establish or
maintain successful relationships with independent distributors, we will need to
further develop our own distribution capabilities, which would be expensive and
time-consuming and the success of which would be uncertain.
Inability to obtain regulatory approvals, or to comply with ongoing and changing
regulatory requirements, could delay or prevent sales of Messenger and other
potential products.
The field testing, manufacture, sale and use of plant protection and
yield enhancement products, including Messenger and other products we may
develop, are extensively regulated by the EPA and state, local and foreign
governmental authorities. These regulations substantially increase the cost and
time associated with bringing our products to market. If we do not receive the
necessary governmental approvals to test, manufacture and market our products,
or if the regulatory authorities revoke our approvals or grant them subject to
restrictions on their use, we may be unable to sell our products and our
business may fail.
We recently received conditional approval from the EPA to market and sell
our first product, Messenger, in the United States. We are required, however, to
obtain regulatory approval from certain state and foreign regulatory authorities
before we market Messenger in those jurisdictions. Although we are authorized to
sell Messenger in 47 states, we have not yet received approval for Messenger in
the remaining states, including California, and 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.
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Even after we obtain all necessary regulatory approvals to market and
sell Messenger and other products we develop, Messenger will be subject to
continuing review and extensive regulatory requirements. The EPA, as well as
state and foreign governmental authorities, could withdraw a previously approved
product from the market upon receipt of newly discovered information, including
an inability to comply with regulatory requirements, the occurrence of
unanticipated problems with the product or other reasons. In addition, federal,
state and foreign regulations relating to crop protection products developed
through biotechnology are subject to public concerns and political
circumstances, and, as a result, regulations have changed and may change
substantially in the future. These changes may result in limitations on the
manufacturing, marketing or use of Messenger or other products that we may
develop and commercialize.
Inability to satisfy the conditions of our EPA registration 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 2001 that are
designed to further demonstrate the safety of our product. If we are unable to
conduct the studies in a timely manner, or if the results of the studies are
unacceptable to the EPA, the EPA may revoke its approval or impose limitations
on the use of Messenger that could have a negative impact on our sales. Because
EPA approval is required for commercial sales of Messenger, the loss of EPA
approval for any reason, including our inability to satisfy the conditions of
our EPA registration, would prevent further sales of Messenger.
Inability to comply with regulations applicable to our facilities and procedures
could delay, limit or prevent our research and development or manufacturing
activities.
Our research and development and manufacturing facilities and procedures
are subject to continual review and periodic inspection. To comply with the
regulations applicable to these facilities and procedures, we must spend funds,
time and effort in the areas of production, safety and quality control and
assurance to ensure full technical compliance. If the EPA or another regulator
determines that we are not in compliance, regulatory approval of our products
could be delayed or we may be required to limit or cease our research and
development or manufacturing activities or pay a monetary fine. If we were
required to limit or cease our research and development activities, our ability
to develop new products would be impaired. In addition, if we are required to
limit or cease our manufacturing activities, our ability to produce Messenger in
commercial quantities would be impaired or prohibited, which would have an
adverse effect on our sales.
International expansion will subject us to risks associated with international
operations, which could adversely affect both our domestic and our international
operations.
Our success depends in part on our ability to expand internationally as
we obtain regulatory approvals to market and sell our products in other
countries. We have been conducting field trials in the People's Republic of
China and elsewhere, and we have recently established an office in Mexico City
to facilitate our Mexican operations. 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
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manufacturing and research and development capabilities, we expect that our
operating expenses and capital requirements will increase. Our ability to manage
growth effectively requires us to continue to expend funds to improve our
operational, financial and management controls, reporting systems and
procedures. In addition, we must effectively expand, train and manage our
employee base. We will be unable to effectively manage our business if we are
unable to timely and successfully alleviate the strain on our resources caused
by growth in our business, which could adversely affect our operating results.
The high level of competition in our market may result in pricing pressures,
reduced margins or the inability of our products to achieve market acceptance.
The market for plant protection and yield enhancement products is
intensely competitive, rapidly changing and undergoing consolidation. We may be
unable to compete successfully against our current and future competitors, which
may result in price reductions, reduced margins and the inability to achieve
market acceptance for our products.
Many entities are engaged in developing plant protection and yield
enhancement products. Our competitors include major international agri-chemical
companies, specialized biotechnology companies, and research and academic
institutions. Many of these organizations have significantly more capital,
research and development, regulatory, manufacturing, marketing, human and other
resources than we do. As a result, they may be able to devote greater resources
to the manufacture, promotion or sale of their products, receive greater
resources and support from independent distributors, initiate or withstand
substantial price competition, or take advantage of acquisition or other
opportunities more readily. Further, many of the large agri-chemical companies
have a more diversified product offering than we do, which may give these
companies an advantage in meeting customer needs by enabling them to offer
integrated solutions to plant protection and yield enhancement.
Inability to protect our patents and proprietary rights in the United States and
foreign countries could limit our ability to compete effectively since our
competitors may take advantage of our research and development efforts.
Our success depends on our ability to obtain and maintain patent and
other proprietary-right protection for our technology and products in the United
States and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. We also rely on trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees, consultants and advisors. It is
possible that these agreements may be breached and that any remedies for a
breach will not make us whole. We generally control and limit access to, and the
distribution of, our product documentation and other proprietary information.
Despite our efforts to protect these proprietary rights, unauthorized parties
may copy aspects of our products and obtain and use information that we regard
as proprietary. We also cannot guarantee that other parties will not
independently develop our know-how or otherwise obtain access to our technology.
The laws of some foreign countries do not protect proprietary rights to
the same extent as the laws of the United States, and many companies have
encountered significant problems and costs in protecting their proprietary
rights in these foreign countries.
Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. We are like most biotechnology
companies in that our patent protection is highly uncertain and involves complex
legal and technical questions for which legal principles are not yet firmly
established. Our patents and those patents for which we have license rights may
be challenged, narrowed, invalidated or circumvented. In addition, our issued
patents may not contain claims sufficiently broad to
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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
regulations on genetically modified plants, including Japan and certain members
of the European Union, may perceive Messenger as a genetically modified product.
If so, regulators in those countries may impose more restrictive regulations on
Messenger, which could delay, limit or impair our ability to market and sell
Messenger in those countries.
We may be exposed to product liability claims, which could adversely affect our
operations.
We may be held liable or incur costs to settle liability claims if any
products we develop, or any products that use or incorporate any of our
technologies, cause injury or are found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks exist even with respect to
products that have received, or may in the future receive, regulatory approval,
registration or clearance for commercial use. We cannot guarantee that we will
be able to avoid product liability exposure. We currently maintain product
liability insurance at levels we believe are sufficient and consistent with
industry standards for companies at our stage of development. We cannot
guarantee that our product liability insurance is adequate, and, at any time, it
is possible that such insurance coverage may not be available on commercially
reasonable terms or at all. A product liability claim could result in liability
to
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us greater than our assets and/or insurance coverage. Moreover, even if we have
adequate insurance coverage, product liability claims or recalls could result in
negative publicity or force us to devote significant time and attention to
matters other than those in the normal course of business.
Inability to retain our key employees and other skilled managerial and technical
personnel could impair our ability to maintain and expand our business.
We are highly dependent on the efforts and abilities of our current key
managerial and technical personnel, particularly Jerry L. Butler, our Chief
Executive Officer and President, and Dr. Zhongmin Wei, our Vice President of
Research. Our success will depend in part on retaining the services of Mr.
Butler and Dr. Wei and our other existing key management and technical personnel
and on attracting and retaining new highly qualified personnel. Inability to
retain our existing key management and technical personnel or to attract
additional qualified personnel could, among other things, delay our product
development, marketing and sales efforts. Although Mr. Butler and Dr. Wei have
signed agreements with us that limit their ability to compete directly with us
in the future, nothing prevents either of them from leaving EDEN. Moreover, in
our field, competition for qualified management and technical personnel is
intense. In addition, many of the companies with which we compete for
experienced personnel have greater financial and other resources than we do. As
a result of these factors, we may be unable to recruit, train and retain
sufficient qualified personnel.
We may have to reduce operations if we are unable to meet our funding
requirements.
We will require substantial additional funding to continue our research
and development activities, increase manufacturing capabilities and
commercialize products. If we are unable to generate sufficient cash flow from
operations or obtain funds through additional financing, we may have to delay,
curtail or eliminate some or all of our research and development, field testing,
marketing and manufacturing programs. We believe that our existing capital
resources will be sufficient to support our operations for at least the next
year. Our future capital requirements will depend on the success of our
operations. If our capital requirements vary from our current plans, we may
require additional financing sooner than we anticipate. Financing may be
unavailable to us when needed or may not be available to us on acceptable terms.
Our operating results are likely to fluctuate, resulting in an unpredictable
level of earnings and possibly in a decrease in our stock price.
Our operating results for a particular quarter or year are likely to
fluctuate, which could result in uncertainty surrounding our level of earnings
and possibly in a decrease in our stock price. Numerous factors will contribute
to the unpredictability of our operating results. In particular, our sales are
expected to be highly seasonal. Sales of plant protection and yield enhancement
products are dependent on planting and growing seasons, climatic conditions and
other variables, which we expect to result in substantial fluctuations in our
quarterly sales and earnings. In addition, most of our expenses, such as
employee compensation and lease payments for facilities and equipment, are
relatively fixed. Our expense levels are based, in part, on our expectations
regarding future sales. As a result, any shortfall in sales relative to our
expectations could cause significant changes in our operating results from
quarter to quarter. Other factors may also contribute to the unpredictability of
our operating results, including the size and timing of significant customer
transactions, the delay or deferral of customer use of our products and the
fiscal or quarterly budget cycles of our customers. For example, customers may
purchase large quantities of our products in a particular quarter to store and
use over long periods of time, or time their purchases to coincide with their
receipt of revenue or loan proceeds, which may cause significant fluctuations in
our operating results for a particular quarter or year.
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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.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
During the period covered by this report on Form 10-Q, we issued and sold
unregistered securities as follows:
- 42,833 shares of our common stock to employees pursuant to the
exercise of stock options under our 1995 combined incentive and
nonqualified stock option plan for a total consideration of
$28,533.
- 22,178 shares of our common stock to warrant holders pursuant to
the exercise of their warrants for total consideration of $26,386.
- options to purchase 797,500 shares of our common stock at an
exercise price of $14.00 per share, as consideration for the
recipients' services to EDEN.
- warrants to purchase 200,000 shares of our common stock at an
exercise price of $15.00 per share, in connection with the
establishment of credit facilities.
The sales and issuances of these shares were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these options and warrants were offered and sold either pursuant to a
written compensatory benefit plan or pursuant to written contracts relating to
consideration or pursuant to Section 4(2) of the Securities Act on the basis
that the transactions did not involve a public offering.
(d) Use of Proceeds
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. The offering has
terminated as a result of the sale of all of the shares. The co-managing
underwriters were Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Stephens Inc. The offering consisted of 6,670,000 shares of our common stock,
including 870,000 shares of common stock offered pursuant to the exercise of the
underwriters' over-allotment option. The aggregate price of the shares offered
and sold by EDEN was approximately $100.1 million. Proceeds to EDEN, after
accounting for $7.0 million in underwriting discounts and commissions and
approximately $1.5 million in other expenses, were $91.6 million.
None of the net offering proceeds were paid, directly or indirectly, to
any of our directors or officers, to persons owning ten percent or more of our
securities, or to affiliates of EDEN. A portion of the expenses incurred by EDEN
in connection with the issuance and distribution of these securities were paid
to Stephens Inc., a co-managing underwriter of the offering, for underwriting
discounts and commissions. Stephens-EBC, LLC, an affiliate of Stephens Inc.,
beneficially owns 2.4 million shares, or approximately 10% of the issued and
outstanding shares of our common stock. In addition, Stephens Group, Inc.
controls Stephens Inc. and is the sole manager of Stephens-EBC, LLC. Mr. John
E.M. Jacoby, one of our directors, is also a director and executive vice
president of Stephens Inc. and Stephens Group, Inc. Other than the underwriting
discounts and commissions paid to Stephens Inc., none of the underwriting
discounts and commission, finders' fees, expenses paid to or for underwriters,
or other expenses incurred by EDEN in connection with the issuance and
distribution of these securities were paid to any of our directors or officers
or to any person owning ten percent or more of our common stock.
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We intend to use up to approximately $20 million of the net proceeds
raised in the initial public offering to expand and enhance our manufacturing
and research and development facilities. We intend to use the remaining portion
of the net proceeds for working capital and general corporate purposes,
including the expansion of our sales and marketing capabilities for the
commercialization of Messenger and the expansion of our research and development
activities. Pending such uses, we will invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2000 annual meeting of shareholders of EDEN Bioscience Corporation
was held on August 9, 2000.
(b) The following directors were elected to serve a term expiring on his/her
death, resignation of removal, or upon election of any such director's
successor:
<TABLE>
<S> <C>
Jerry L. Butler Agatha L. Maza
Jon E. M. Jacoby Albert A. James
Oscar C. Sandberg John W. Titcomb
William T. Weyerhaeuser
</TABLE>
(c) The following additional matters were approved at the annual meeting:
1. Amendments to our articles of incorporation and subsequent
restatement of the articles of incorporation:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
15,746,338 74,474 62,627
</TABLE>
2. Amendments to our 1995 combined incentive and nonqualified stock
option plan, including the reservation of an additional 1,000,000
shares of our common stock for issuance under the plan:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
15,470,881 254,775 157,783
</TABLE>
3. Adoption of our 2000 stock incentive plan:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
15,470,340 231,705 181,394
</TABLE>
4. Adoption of our 2000 employee stock purchase plan:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
15,601,426 124,230 157,783
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Restated Articles of Incorporation
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
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<PAGE> 24
We filed no reports on Form 8-K during the quarter covered by this Form
10-Q.
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: November 14, 2000
By: /s/ BRADLEY S. POWELL
----------------------------------------
Bradley S. Powell
Vice President of Finance, Secretary and
Chief Financial Officer (Principal
financial and accounting officer)
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Articles of Incorporation
27.1 Financial Data Schedule
</TABLE>
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