We have incurred significant operating losses since inception. At June 30, 2006, we had an accumulated deficit of $123.5 million. We incurred net losses of $6.7 million and $3.1 million for the six months ended June 30, 2006 and 2005, respectively, and annual losses of $10.9 million in 2005, $8.9 million in 2004 and $11.2 million in 2003.
We expect to incur significant additional net losses as we proceed with the commercialization of our current products and the development of new products and technologies. As a result of continuing operating losses and lower sales and growth rates in the first half of 2006 compared to forecasts, the carrying value of our assets exceeded undiscounted cash flows expected from the use of these assets and a $4.9 million loss on impairment of equipment and leasehold improvements was recognized at June 30, 2006.
Our net product sales in the first six months of 2006 have not increased enough to meet our operating plans. We have taken steps to reduce our operating expenses and our Board of Directors and management are reviewing strategic alternatives for the future, including plans to further reduce operating expenses. There can be no assurance, however, that any actions we take will improve our operating results or liquidity enough to support our operations.
Results of Operations
Three Months and Six Months Ended June 30, 2006 and 2005
We generated our first product sales revenue in August 2000. Product sales revenue to date has resulted primarily from sales of Messenger, our initial product, and Messenger STS, an improved formulation of Messenger introduced in January 2004, as well as N-HibitTM, ProActTM, MightyPlantTM and other related products (hereafter referred to collectively as “Harp-N-TekTM products”) primarily to distributors in the United States and Spain. Revenues from product sales are recognized when (a) the product is delivered to independent distributors, (b) we have satisfied all of our significant obligations and (c) any acceptance provisions or other contingencies or arrangements have been satisfied, including whether collection is reasonably assured. As part of the analysis of whether all of our significant obligations have been satisfied or situations where acceptance provisions or other contingencies or arrangements exist, we consider the following elements, among others: sales terms and arrangements, historical experience and current incentive programs. Our distributor arrangements provide no price protection or product-return rights. Product sales revenue is reported net of applicable sales allowances, as follows:
| | | | Three Months Ended June 30,
| | Six Months Ended June 30,
| |
|---|
| | | | 2006
| | 2005
| | 2006
| | 2005
|
|---|
| Gross product sales | | | | $ | 1,829,118 | | | $ | 2,021,580 | | | $ | 3,782,654 | | | $ | 3,386,797 | |
| Sales allowances | | | | | (160,754 | ) | | | (429,334 | ) | | | (507,932 | ) | | | (731,436 | ) |
| Elimination of previously recorded sales allowance liabilities | | | | | 91,676 | | | | 85,217 | | | | 133,705 | | | | 176,588 | |
| Product sales, net of sales allowances | | | | $ | 1,760,040 | | | $ | 1,677,463 | | | $ | 3,408,427 | | | $ | 2,831,949 | |
Gross product sales revenue for the second quarter of 2006 was $1,829,000, a decrease of $193,000 (9.5%) from $2,022,000 in the same quarter of 2005. This decrease was primarily due to lower sales of N-Hibit in the United States and lower sales in foreign and home and garden markets. Gross product sales for the first six months of 2006 totaled $3,783,000, an increase of $396,000 (11.7%) from $3,387,000 for the same period of 2005. This is a result of increased sales of ProAct in the United States, offset by sales declines in foreign markets. Sales in the first six months of 2006 were made primarily to 37 distributors, three of which accounted for an aggregate of 45% of net product sales revenue. Sales in the first six months of 2005 were made primarily to 37 distributors, two of which accounted for an aggregate of 27% of net product sales revenue. Based on our experience and seasonality, we expect sales in the second half of 2006 to be significantly lower than in the first half of 2006.
Net product sales revenue from sales to foreign customers totaled $204,000 and $270,000 in the three months ended June 30, 2006 and 2005, respectively, and $258,000 and $534,000 in the six months ended June 30, 2006 and 2005, respectively. These sales were made primarily to distributors in Europe.
Net sales of Messenger to consumers in the home and garden market in the United States totaled $112,000 and $152,000 in the three months ended June 30, 2006 and 2005, respectively, and $343,000 and $335,000 in the six months ended June 30, 2006 and 2005, respectively. Based on our experience and seasonality, we expect first half sales of our home and garden products to represent the substantial portion of full year 2006 sales.
Due to the growing seasons of our targeted crops and our current portfolio of Harp-N-Tek products, we expect grower usage of Harp-N-Tek products to be highly seasonal. Based on the recommended application timing in our targeted crops and information received from our distributors, we expect the second quarter to be the most significant period of use. Our product sales to distributors are also expected to be seasonal. However, actual timing of orders received from distributors will depend on many factors, including the amount of Harp-N-Tek products in distributors’ inventories.
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Sales Allowances
Sales allowances represent allowances granted to independent distributors for sales and marketing support and are estimated based on the terms of the distribution arrangements. Sales allowances are estimated and accrued when the related product sales revenue is recognized or when services are provided and are paid in accordance with the terms of the then-current distributor program arrangements. Distributor program arrangements expire annually, generally on December 31.
Sales allowances during the three months ended June 30, 2006 totaled $161,000 (9% of gross product sales) compared to $429,000 (21% of gross product sales) in the comparable period of 2005. Sales allowances during the six months ended June 30, 2006 totaled $508,000 (13% of gross product sales) compared to $731,000 (22% of gross product sales) in the comparable period of 2005. The decrease was primarily due to a reduction in the estimated amounts to be paid to distributors based on the changes in programs and distributors’ participation incurrent programs. Net revenue for the three months ended June 30, 2006 and 2005 included $92,000 and $85,000, respectively, and net revenue for the six months ended June 30, 2006 and 2005 included $134,000 and $177,000, respectively, of sales allowance recognized in prior quarters that will not paid because actual amounts earned by distributors were less than amounts previously estimated.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of products sold to distributors, idle capacity charges and the cost of products used for promotional purposes. Cost of goods sold was $840,000 in the second quarter of 2006, compared to $646,000 in the second quarter of 2005. Cost of goods sold was $1.9 million for the first six months of 2006, compared to $1.2 million in the first six months of 2005. The increase in cost of goods sold was due to higher sales volumes in 2006 and an increase in idle capacity charges resulting from no manufacturing activities in the first half of 2006 compared to 107 days of production in the same period of 2005.
Research and Development Expenses
Research and development expenses consist primarily of personnel, field trial, laboratory, regulatory, patent and facility expenses. Research and development expenses decreased $613,000 (62%) from $986,000 in the second quarter of 2005 to $373,000 in the same quarter of this year. For the first six months of 2006, research and development costs were $689,000, a decrease of $1,240,000 (64%) from $1,929,000 in the same period last year. This decrease was primarily due to terminating a facility lease in September 2005 that significantly reduced rent and depreciation and amortization expense related to leasehold improvements and certain equipment at the facility. Stock compensation expense included in research and development totaled $7,000 in the second quarter of 2006 and $13,000 in the first half of 2006.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist 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 decreased $135,000 (9%) from $1,515,000 in the second quarter of 2005 to $1,380,000 in the same quarter of 2006. For the first six months of 2006, selling, general and administrative costs were $2,938,000 a decrease of $31,000 (1%) from $2,969,000 in the same period last year. These decreases resulted primarily from less spending on advertising and marketing costs for the home and garden market and the Spanish market offset by recording stock compensation expense of $72,000 in the second quarter of 2006 and $191,000 in the first half of 2006.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options. Compensation expense recognized included the estimated expense for stock options granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. As of June 30, 2006, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $179,000 and expected to recognize $66,000 in the remainder of 2006, $81,000 in 2007, $28,000 in 2008 and $4,000 in 2009. Total stock-based compensation expense recognized in the consolidated statement of operations for the quarter and six months ended June 30, 2006 was $79,000 and $204,000, respectively. Prior to the January 1, 2006 adoption of the SFAS
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123R, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations. Accordingly, because the stock option grant price equaled the market price on the date of grant, no compensation expense was recognized by the Company for stock-based compensation. Results for prior periods have not been restated, as provided for under the modified-prospective method.
We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Options generally become exercisable over a three or four-year period and, if not exercised, expire ten years after the grant date. The majority of our employees participate in our stock option program. This option-pricing model requires the input of highly subjective assumptions, including the option’s expected term and the price volatility of the Company’s stock. For the three and six months ended June 30, 2006, the expected term of each award granted was calculated using the “simplified method” in accordance with Staff Accounting Bulletin No. 107. Prior to January 1, 2006, the expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Company’s stock.
Loss on impairment of equipment and leasehold improvements
We periodically review the carrying values of our property and equipment to determine whether such assets have been impaired. An impairment loss must be recorded pursuant to SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, when the undiscounted net cash flows expected to be realized from the use of such assets are less than their carrying value. The determination of expected undiscounted net cash flows requires us to make many estimates, projections and assumptions, including the lives of the assets, future sales and expense levels, additional capital investments or expenditures necessary to maintain the assets, industry market trends and general and industry economic conditions. Our property and equipment consists primarily of assets used to manufacture and sell our products and assets used in our research and administration. For the purpose of assessing asset impairment, we have grouped all of these assets together in one asset group because our administration and research support our manufacturing and sales activities and do not have a separate identifiable cash flow.
In the first half of 2006, we continued to incur losses from operations and actual sales and growth rates for the first half of 2006 were significantly lower than expected. In reviewing our assets for impairment in connection with the preparation of the Company’s financial statements for the quarter ended June 30, 2006, we compared the carrying value of such assets to updated undiscounted cash flows expected from the use of this asset group. As a result of continuing operating losses and lower sales and growth rates in the first half of 2006 compared to forecasts, the carrying value of the group of assets exceeded undiscounted cash flows expected from the use of this asset group. Consequently, the Company concluded on July 31, 2006 that a charge for impairment to its equipment and leasehold improvements is required and a $4.9 million impairment loss was recognized at June 30, 2006. We estimated the fair value of equipment using an orderly liquidation method and no fair value was attributed to leasehold improvements. Our estimates of fair value may change as we obtain additional information about the fair value of our equipment and finalize our valuation. The impairment charge will not result in future cash expenditures.
Gain on sale of investment
In the first quarter of 2006, we sold a minority stock investment for $100,000 that resulted in a gain of $99,884.
Interest Income
Interest income consists of earnings on our cash and cash equivalents. Interest income decreased $23,000 from $140,000 in the first half of 2005 to $117,000 in the same period of this year. The change was due to higher interest rates in 2006 offset by significantly lower average cash balances available for investment in the six months ended June 30, 2006 compared to the same period in 2005.
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Income Taxes
We have generated a net loss from operations for each period since we began doing business. As of December 31, 2005, we had accumulated approximately $112.1 million of net operating loss carryforwards for federal income tax purposes, which expire between 2009 and 2025, and approximately $10.4 million in foreign tax net operating loss carryforwards, which expire between 2006 and 2015. We have provided a valuation allowance against our net deferred tax assets because of the significant uncertainty surrounding our ability to realize them. The annual use of these net operating loss carryforwards may be limited in the event of a cumulative change in ownership of more than 50%.
Liquidity and Capital Resources
Our operating expenditures have been significant since our inception. We currently anticipate that our operating expenses will significantly exceed net product sales and that net losses and working capital requirements will consume a material amount of our cash resources. Net product sales have not increased enough to meet our operating plans and we have taken steps to reduce our operating expenses, primarily in the European and home and garden markets, and we are currently examining strategic alternatives for the future and developing plans to further reduce operating expenses. Our future capital requirements will depend on the success of our operations. We believe that the balance of our cash and cash equivalents at June 30, 2006 will be sufficient to meet our anticipated cash needs for net losses, working capital and capital expenditures for more than the next 12 months, although there can be no assurance in that regard. After the next 12 months, if net product sales do not significantly increase, we will have to further reduce operating expenses or secure additional financing. We may be unable to obtain adequate or favorable financing at that time or at all and may be forced to cease operations. The sale of additional equity securities could result in dilution of our shareholders.
At June 30, 2006, our cash and cash equivalents totaled $5.4 million, a decrease of $1.4 million from the balance of $6.8 million at December 31, 2005. Prior to October 2000, we financed our operations primarily through the private sale of our equity securities, resulting in net proceeds of approximately $36.5 million through September 30, 2000. In October 2000, we received approximately $91.5 million in net proceeds from the initial public offering of 2,223,333 shares of our common stock. To a lesser extent, we have financed our equipment purchases through lease financings.
Net cash used in operations decreased $0.9 million (34%) from $2.6 million in the first six months of 2005 to $1.7 million in the same period of 2006. Net cash used in operations in the first six months of 2006 resulted primarily from a net loss of $6.7 million, which includes loss on impairment of equipment and leasehold improvements of $4.9 million, depreciation and amortization expense of $351,000 and stock compensation expense of $204,000, and fluctuations in various asset and liability balances totaling $398,000. We expect that net cash used in operations will continue to be significant.
We conduct our operations in two primary functional currencies: the U.S. dollar and the euro. Historically, neither fluctuations in foreign exchange rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not hedge our foreign currency exposures and are, therefore, subject to the risk of exchange rate fluctuations. We may invoice our international customers in U.S. dollars and euros, as the case may be. We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Foreign exchange rate fluctuations did not have a material impact on our financial statements in the six months ended June 30, 2006 or 2005.
Critical Accounting Policies, Estimates and Judgments
Our critical accounting policies are more fully described in Note 1 to our consolidated financial statements included in our most recent Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2006. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices, information provided by our customers and other assumptions that we believe are reasonable under the circumstances. Our estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period in which they are determined to be necessary. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates include:
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Revenue Recognition
We sell the majority of our products to independent, third-party distributors. Our arrangements with those distributors provide no price protection or product-return rights. We recognize revenue from product sales, net of sales allowances, when product is delivered to our distributors and all of our significant obligations have been satisfied, unless acceptance provisions or other contingencies or arrangements exist, including whether collection is reasonably assured. If acceptance provisions or contingencies exist, revenue is recognized after such provisions or contingencies have been satisfied. As part of the analysis of whether all of our significant obligations have been satisfied or situations where acceptance provisions or other contingencies or arrangements exist, we consider the following elements, among others: sales terms and arrangements, including customer payment terms, historical experience and current incentive programs.
Sales allowances represent allowances granted to independent distributors for sales and marketing support and are based on the terms of the distribution agreements or other arrangements. Sales allowances are estimated and accrued when the related product sales are recognized or when services are provided and are paid in accordance with the terms of the then-current distributor program agreements or other arrangements.
We also record, at the time revenue is recognized, a liability for warranty claims based on a percentage of sales. The warranty accrual percentage, which has ranged between zero and five percent, and warranty liability are reviewed periodically and adjusted as necessary, based on historical experience, the results of product quality testing and future expectations. Changes in our estimate of the warranty liability are recorded in cost of goods sold.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable balances are reported net of customer-specific related sales allowances. In determining the adequacy of the allowance for doubtful accounts, we consider a number of factors, including the age of outstanding invoices, customer payment trends, the financial condition of our customers, historical bad debts and current economic trends. Based upon our analysis of outstanding net accounts receivable at June 30, 2006, no allowance for doubtful accounts was recorded. Changes in the factors above or other factors could result in a significant charge.
Inventory Valuation and Classification
Our inventory is valued at the lower of cost or market on an average cost basis. We regularly review inventory balances to determine whether a write-down is necessary. We consider various factors in making this determination, including recent sales history and predicted trends, industry market conditions, general economic conditions, introduction of new products that may obsolete existing products, the age of our inventory and recent quality control data. Changes in the factors above or other factors could result in significant additional inventory cost reductions and write-offs.
We also review our inventory to determine inventory classification. Inventory expected to be utilized in the next twelve-month period is classified as current and inventory expected to be utilized beyond that period is classified as non-current. In determining the classification of inventory, the Company considers a number of factors, including historical sales experience and trends, existing distributor inventory, expansion into new markets, introduction of new products and estimates of future sales growth. Changes in the factors above or other factors could result in significant changes in classification of inventory.
Valuation of Property and Equipment
We periodically review the carrying values of our property and equipment to determine whether such assets have been impaired. An impairment loss must be recorded pursuant to SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, when the undiscounted net cash flows expected to be realized from the use of such assets are less than their carrying value. The determination of expected undiscounted net cash flows requires us to make many estimates, projections and assumptions, including the lives of the assets, future sales and expense levels, additional capital investments or expenditures necessary to maintain the assets, industry market trends and general and industry economic conditions. Our property and equipment consists primarily of assets used to manufacture and sell our products and assets used in our research and administration. For the purpose of assessing asset impairment, we have grouped all of these assets together in one asset group because our administration and research support our manufacturing and sales activities and do not have a separate identifiable cash flow.
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In December 2005, the Company completed an efficiency analysis of its manufacturing processes, including an assessment of all manufacturing equipment and its usefulness in future manufacturing operations. As a result of this analysis, the Company identified equipment that will not be used in future manufacturing operations and will be sold or disposed. The lower of carrying value or estimated fair value less estimated costs to sell of equipment to be sold totals $191,000 at June 30, 2006 and is included in other current assets on the balance sheet. We expect to complete the sale or disposal of this equipment by the end of 2006.
Based upon our most recently completed analysis of net cash flows expected to be realized from our remaining investments in property and equipment in connection with the preparation of the Company’s financial statements for the quarter ended June 30, 2006, a $4.9 million impairment loss was recorded at June 30, 2006. The critical estimates in the analysis are our forecast sales and expenses over the next seven years, our ability to sell certain equipment for our estimated fair value in 2006 and our estimated fair value of equipment held for use. Our estimate of equipment fair value may change as we obtain additional information on the fair value of our equipment and finalize our valuation. An additional significant impairment loss may need to be recorded.
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123R. We use the Black-Scholes-Merton option-pricing model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on the consolidated statements of operations.
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 foreign currency. Because of the relatively short-term average maturity of our investment funds, such investments are sensitive to interest rate movements and we do not expect interest rate fluctuations to significantly affect our results of operations. Our direct exposure to interest rate and foreign exchange rate fluctuation is currently not material to our results of operations. We believe that the market risk arising from the financial instruments we hold is not material.
Item 4. | | Controls and Procedures |
Under the supervision and with the participation of management, including our President and Chief Executive Officer and our Chief Financial Officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal quarter covered by this report. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of such quarter. There have been no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Except as described below and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 filed with the SEC on May 5, 2006, there have not been any material changes during the quarter ended June 30, 2006 to the risk factors set forth in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 15, 2006 (“Annual Report”). “). In addition to those risk factors, we note the following additional risk factor:
We currently are not in compliance with The Nasdaq Capital Market $1.00 minimum bid price requirement and failure to regain and maintain compliance with this and other continued listing standards could result in delisting and adversely affect the market price and liquidity of our common stock.
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On April 18, 2006, we implemented a 1-for-3 reverse stock split to help us regain compliance with the Nasdaq Capital Market’s minimum bid price continued listing requirement of $1.00 per share (the “Bid Price Requirement”). As a result of the reverse split, we regained compliance with this continued listing requirement on May 3, 2006. Since that time, however, the closing bid price of our common stock has fallen below $1.00 per share and we have not been in compliance with the Bid Price Requirement since of July 24, 2006. If the deficiency continues for a period of 30 consecutive business days from July 24, 2006, Nasdaq will provide us written notification that we have 180 calendar days to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid price of our common stock has to remain at $1.00 per share or more for a minimum of ten consecutive trading days. If we do not regain compliance within this requisite period, we may be provided an additional 180 days to achieve compliance, if at such time we satisfy all of the initial listing standards for listing on the Nasdaq Capital Market, with the exception of the Bid Price Requirement. If we do not meet the [initial listing standards] or are not able to achieve compliance with the Bid Price Requirement after the subsequent 180 calendar day period, Nasdaq will provide us written notification that our common stock will be delisted. In such case, we have the right to appeal Nasdaq’s delisting determination to a Listing Qualifications Panel.
If our common stock were to be delisted from The Nasdaq Capital Market, we may seek quotation on a regional stock exchange, if available. Such listing could reduce the market liquidity for our common stock. If our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock.
If our common stock is delisted from The Nasdaq Capital Market, and if we fail to obtain quotation on another market or exchange, then trading in our common stock might also become subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on Nasdaq that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of shareholders to borrow against or “margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual shareholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock. As a result, the ability of our shareholders to resell their shares of common stock, and the price at which they could sell their shares, could be adversely affected. The delisting of our stock from the Nasdaq Capital Market would also make it more difficult for us to raise additional capital. Further, if we are delisted we could also incur additional costs under state blue sky laws in connection with any sales of our securities.
Item 2. | | Unregistered Sales of Equity Securities and 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. Proceeds to Eden Bioscience, after accounting for $7.0 million in underwriting discounts and commissions and approximately $1.6 million in other expenses of the offering, were approximately $91.5 million.
To date, of the net offering proceeds, we have used approximately $18.6 million to expand and enhance our manufacturing, research and development and administration facilities, and approximately $67.5 million for working capital and general corporate purposes. The remaining portion of the net offering proceeds has been invested in cash equivalent investments. Our use of the proceeds from the offering does not represent a material change in the use of proceeds described in the prospectus included as part of the Registration Statement.
Item 4. | | Submission of Matters to a Vote of Security Holders |
The 2006 annual meeting of shareholders of Eden Bioscience Corporation was held on May 16, 2006. At the annual meeting, our shareholders were asked to elect four directors to our Board of Directors. The following directors were elected to serve for terms expiring at the Annual Meetings shown below, or until the directors’ earlier retirement, resignation or removal:
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| | | | Votes For
| | Votes Withheld
|
|---|
Class I Director (term expiring at the 2008 Annual Meeting): | | | | | | | | | | |
| Roger M. Ivesdal | | | | | 6,727,650 | | | | 26,241 | |
Class II Directors (term expiring at the 2009 Annual Meeting): | | | | | | | | | | |
| Gilberto H. Gonzalez | | | | | 6,725,983 | | | | 27,908 | |
| Albert A. James | | | | | 6,721,181 | | | | 32,710 | |
| Agatha L. Maza | | | | | 6,718,030 | | | | 35,861 | |
There were no broker nonvotes in the election of directors since brokers who hold shares for the accounts of their clients have discretionary authority to vote such shares with respect to election of directors.
Item 5. | | Other Information |
Effective July 1, 2006, Eden Bioscience and Cornell Research Foundation, Inc. (“Cornell”) amended Article VIII of the Exclusive License Agreement, dated May 1, 1995, by and between the parties (the “License Agreement”), whereby the Company and Cornell agreed to modify the amounts of minimum annual royalty obligations due under the License Agreement for license years 11 through 13. Pursuant to such amended License Agreement, we will be deemed to have satisfied our minimum annual royalty obligations for license years 11-13 if we deposit a total of $100,000 (in two $50,000 payments) into a development fund for research and field trials by certain specified dates during each of the lease years. If we fail to deposit the required sums by the specified dates, our minimum royalty payments under the Agreement due will revert to $200,000 annually for each of the aforementioned license years.
The License Agreement, as amended, was filed as Exhibit 10.1 to Eden Bioscience’s quarterly report on Form 10-Q for the period ended June 30, 2005 (Commission File No. 0-31499), filed with the SEC on July 26, 2005. The amendment to the License Agreement is being filed as Exhibit 10.1 to this Form 10-Q.
On August 1, 2006, we entered into a agreement with Dr. Zhongmin Wei, our Vice President of Research and Chief Scientific Officer, which provides Dr. Wei severance if he is terminated by us under certain circumstances (the “Wei Agreement”). Under the Wei Agreement, which was approved by the Compensation Committee of our Board of Directors and by the Board of Directors, we agreed that if Dr. Wei’s employment is terminated by the Company. Dr. Wei’s base salary will be continue for a period of six months following the termination, unless the termination was based upon fraud, criminal activity or breach of fiduciary duties. The six months severance will be paid in the regular course of our payroll and will be subject to normal deductions. The Wei Agreement will terminate on July 31, 2007. A copy of the Wei Agreement is filed as Exhibit 10.2 to this Form 10-Q.
Exhibits 31.1 and 31.2 are being filed as part of this quarterly report on Form 10-Q. Exhibits 32.1 and 32.2 are being furnished with this quarterly report on Form 10-Q.
Exhibit
Number
| | | | Description
|
|---|
| 10.1 | | | | Amendment to Exclusive License Agreement, as amended, dated, July 1, 2006, between Cornell Research Foundation, Inc. and Eden Bioscience Corporation. |
| 10.2* | | | | Agreement related to severance, dated August 1, 2006, between Dr. Zhongmin Wei and Eden Bioscience Corporation. |
| 31.1 | | | | Rule 13a-14(a) Certification (Chief Executive Officer). |
| 31.2 | | | | Rule 13a-14(a) Certification (Chief Financial Officer). |
| 32.1 | | | | Section 1350 Certification (Chief Executive Officer). |
| 32.2 | | | | Section 1350 Certification (Chief Financial Officer). |
* Management contract or compensatory plan or arrangement.
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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: August 4, 2006
| By: | /s/ Rhett R. Atkins
Rhett R. Atkins
President and Chief Executive Officer |
| By: | /s/ Bradley S. Powell
Bradley S. Powell
Vice President of Finance, Chief Financial
Officer and Secretary
(principal financial and accounting officer) |
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