$3,405,443 in 2006. Gross product sales revenues were $4,128,926 in 2006, which decreased $88,251 from $4,217,177 in 2005. The decrease in 2006 is a result primarily of a significant decline in sales of Messenger STS in Spain offset by an increase in sales of ProAct in the United States. We believe the cause of lower sales in Spain is the higher than expected levels of product in the distribution channel. Sales of new products produced over 50% of total gross revenue in 2005. Sales in 2006 were made to 39 distributors, three of which accounted for an aggregate of 42% of net product sales. Sales in 2005 were made to 53 distributors, five of which accounted for an aggregate of 59% of net product sales.
We sell our Home and Garden Products to distributors, retailers and directly to consumers over the internet. Sales to consumers in the Home and Garden Market in the United States totaled $260,371 (74% of gross product sales) in 2007, $384,841 (9% of gross product sales) in 2006 and $390,766 (9% of gross product sales) in 2005. We believe the decrease in 2007 sales volume compared to 2006 was due to lower spending on personnel, marketing and advertising, higher levels of product inventory in the distribution channel and poor weather conditions in the first half of 2007. Our only two full-time employees in home and garden sales and marketing resigned effective on July 20, 2007 and August 14, 2007. Although we intend to continue to operate our home and garden business with our remaining one full-time and two part-time employees, we do not currently intend to fill these positions at this time and do not intend to significantly increase our investment toward the development of this business. We expect this to negatively impact our sales during 2008.
In February 2004, we received approval to sell Messenger in Spain. We initiated marketing activities in March 2004, but the approval was not received in time to meet initial sales activity. In order to ensure that an adequate supply of Messenger was quickly disbursed in the new distribution channel and to limit the amount of working capital required by our new distributors at this early stage of introduction, we granted flexible and/or extended payment terms to distributors in this new market. Because of this combination of factors, revenues from product deliveries to certain distributors were deferred and are recognized as payment is received. We recognized net revenue of $47,432 in 2007, $122,000 in 2006 and $794,000 in 2005 from product deliveries when payment was received. Gross revenues of approximately $54,000 was deferred at December 31, 2007 and will be recognized if payment is received.
Due to the growing seasons in the United States, we expect usage of our Home and Garden Products to be highly seasonal. Based on the recommended application timing, we expect the second quarter to be the most significant period of use. Our Home and Garden 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 amounts of our products in distributors’ inventories.
Product sales revenues are reported net of applicable sales allowances, as follows:
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. Distributor program agreements expire annually, generally on December 31.
Sales allowances for 2007 were zero due to the sale of our Harpin Protein Technology to PHC. Sales allowances related to 2006 sales totaled $507,932, a decrease of $37,001 (7%) from $544,933 in 2005. Sales allowances as a percentage of gross product sales revenue were 12% in 2006 and 13% in 2005. Sales allowances also included the reductions by $664 in 2007, $169,290 in 2006 and $91,371 in 2005 of sales allowance liabilities recognized in prior periods that were not paid because actual amounts earned by distributors were less than amounts previously estimated. As a result of the sale of our Harpin Protein Technology to PHC, we expect sales allowances to be less than 1% of sales in 2008.
Cost of goods sold includes the cost of products sold, idle capacity charges, royalty expense, shipping and handling and other costs necessary to deliver products to customers, and the cost of products used for promotional purposes. Cost of goods sold was $177,935 in 2007, a decrease of $2,017,042 (92%) from $2,194,977 in 2006, which decreased $284,988 (11%) from $2,479,965 in 2005. The decrease in 2007 compared to 2006 was primarily due to lower sales volumes in our Home and Garden Business and lower sales volumes, idle capacity charges, royalty expense, shipping and handling costs and products used for promotional purposes as a result of the sale of Harpin Protein Technology to PHC. Royalty expenses and idle capacity charges ceased as of February 28, 2007. The decrease in 2006 compared to 2005 is a result of less product waste from manufacturing activities, lower idle capacity charges and fewer products used for promotions.
Research and Development Expenses
Research and development expenses consist primarily of personnel, field trial, laboratory, regulatory, patent and facility expenses. Research and development expenses totaled $136,442 in 2007, a decrease of $1,181,895 (90%) from $1,318,337 in 2006, which decreased $1,902,701 (59%) from $3,221,038 in 2005. The decrease in 2007 compared to 2006 was primarily due to the sale of our Harpin Protein Technology to PHC. The decrease in 2006 compared to 2005 was primarily a result of lower personnel, facility, depreciation and field trial costs. As a result of the sale of our Harpin Protein Technology to PHC, we do not expect to incur any research and development expenses in 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel and related expenses for sales and marketing, executive and administrative personnel; advertising, marketing and professional fees; and other corporate expenses. Selling, general and administrative expenses totaled $1,468,400 in 2007, a decrease of $3,294,792 (69%) from $4,763,192 in 2006, which decreased $627,902 (12%) from $5,391,094 in 2005. The decrease in 2007 compared to 2006 resulted primarily from reductions in personnel, advertising and marketing expenses, facility costs and the sale of Harpin Protein Technology to PHC and was partially offset by supplemental payment compensation to Bradley S. Powell, our President and Chief Financial Officer, totaling $355,188 and a $100,000 payment made to Stephens Inc. to act as our exclusive financial advisor in connection with our efforts to effect one or more business combinations. The decrease in 2006 compared to 2005 resulted primarily from reductions in personnel, advertising and marketing expenses and facility costs, offset by an increase in legal fees associated with sale of our Harpin Protein Technology to PHC totaling approximately $320,000.
Our business strategy moving forward is to use any revenues generated by our Home and Garden Business to support our operations while we explore whether there may be opportunities to realize potential value from our remaining business assets, primarily our tax loss carryforwards. As described below, we engaged legal professionals to validate the underlying assumptions related to our tax loss carryforwards and analyze and provide advice on the options that may be available to preserve and maximize the potential use of our deferred tax assets, as well as on potential limitations and risks of such utilization strategy. We expect this to be an expensive and time consuming process, and we may not generate revenue from our Home and Garden Business or otherwise attract capital to support the process for its duration.
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Effective January 1, 2006, we adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“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 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 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 December 31, 2007, total unrecognized stock-based compensation expense related to nonvested stock options was $5,025 and we expected to recognize this amount in 2008. Total stock-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2007 and 2006 was $19,015 and $242,164, respectively. Prior to the January 1, 2006 adoption of SFAS 123R, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. Accordingly, because the stock option exercise price equaled the market price on the date of grant, no compensation expense was recognized 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 or earlier terminated, 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 our stock. For the year ended December 31, 2006, the expected term of each award granted was calculated using the “simplified method” in accordance with Staff Accounting Bulletin No. 107. No stock options were granted in 2007. 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 our 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 consisted 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 grouped all of these assets together in one asset group because our administration and research supported 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 our 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, we concluded on July 31, 2006, that a charge for impairment to our equipment and leasehold improvements was required and a $4,901,955 impairment loss was recognized at June 30, 2006. We estimated the fair value of equipment using an orderly liquidation
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method and leasehold improvements were estimated to have zero fair value. The impairment charge did not result in future cash expenditures.
In December 2005, we completed an efficiency analysis of our manufacturing processes, including an assessment of all manufacturing equipment and its usefulness in future manufacturing operations. As a result of this analysis, we recorded a loss of $1,649,902 on equipment that we determined would not be used in future manufacturing operations and would be sold or disposed. The lower of carrying value or estimated fair value less estimated costs to sell of the equipment to be sold totaled $64,000 at December 31, 2006, and is included in other current assets on the balance sheet.
Loss on write-down of inventory
In reviewing the impact of the sale of our Harpin Technology for potential asset impairments, we compared the carrying value at December 31, 2006 of assets sold to consideration received from PHC and recorded liabilities assumed by PHC on February 28, 2007. Based on this review, the carrying value of inventory sold to PHC exceeded the consideration received from PHC and recorded liabilities assumed by PHC and we recorded a $452,347 write-down of inventory as of December 31, 2006.
Lease Termination Loss
On September 9, 2005, we entered into an Amendment of Lease and Termination Agreement with the landlord to terminate the lease of 63,200 square feet of research and office space in Bothell, Washington. The lease originally expired January 11, 2011. Average annual rent and operating costs under the lease were approximately $1.9 million. The termination was effective as of August 31, 2005.
Approximately 34,300 square feet of the space subject to the lease was subleased. The sublease had an initial term that expired in December 2007. Average annual rent and operating costs under the sublease were approximately $1.1 million. In connection with the Amendment of Lease and Termination Agreement, the existing sublease was transferred to the landlord.
The lease termination resulted in a loss totaling $2,260,538. The lease termination loss is comprised of a termination fee totaling $1,500,000, consisting of $250,000 cash and the forfeiture of a $1,250,000 security deposit; other costs, and an asset impairment loss on leasehold improvements and equipment at the leased facility totaling approximately $3,480,883, offset by the write-off of liabilities recorded for accrued losses on facility subleases and rent expense in excess of rent payments totaling approximately $2,724,124.
Gain on Property and Equipment
Gain on sale of property and equipment represents the amount of sales proceeds over the recorded value of property and equipment at the time of sale.
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 $99,844.
Interest Income
Interest income consists primarily of earnings on our cash and cash equivalents and note receivable from PHC. Interest income totaled $316,895 in 2007, an increase of $65,613 (26%) from $251,282 in 2006, which decreased $43,470 (15%) from $294,752 in 2005. The increase in 2007 over 2006 was primarily due to higher average cash balances available for investment as a result of proceeds from the sale of our Harpin Protein Technology to PHC in 2007 and interest income on the promissory note from PHC. The decrease in
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2006 compared to 2005 was due to significantly lower average cash balances available for investment offset by slightly higher interest rates in 2006.
Income Taxes
We have generated a net loss from operations for each period since we began doing business. As of December 31, 2007, we had accumulated approximately $119.2 million of net operating loss carryforwards for U.S. Federal income tax purposes, which expire between 2009 and 2027, and net operating loss carryforwards in 18 U.S. States that range between $12.5 million to $2,000 per state and expire between 2008 and 2027. Our total U.S. general business credit carryforwards were approximately $1.4 million and expire between 2013 and 2026. We have also accumulated approximately $1.4 million of net operating loss carryforwards in Mexico that expire between 2011 and 2017 and approximately $3.7 million in France, of which $800,000 expires in 2008 and $2.9 million does not expire. We have provided a valuation allowance against our net deferred tax assets because of the significant uncertainty surrounding our ability to realize value on such assets.
Our business strategy is to use any revenue generated by our Home and Garden Business to support our continued operations while we explore whether there may be opportunities to realize potential value from our remaining business assets, primarily our tax loss carryforwards. The strategy is extremely speculative and subject to a large number of risks and uncertainties including those set forth under the heading “Risk Factors” and elsewhere in this Annual Report. We have conducted limited analysis of our ability to utilize our tax loss carryforwards and have drawn no final conclusions about the viability of this strategy. In order to confirm whether there are opportunities to realize potential value from our tax loss carryforwards, we engaged legal and investment banking professionals during 2007 to validate the underlying assumptions related to our tax loss carryforwards and analyze and provide advice on the options that may be available to preserve and maximize the potential use of our tax loss carryforwards, as well as on potential limitations and risks of such utilization strategy. During the third quarter of 2007, we completed an analysis of past changes in our ownership. We believe that Eden Bioscience has experienced ownership changes (as defined under Section 382 of the IRS Code) on March 20, 1996 and October 2, 2000 and, absent any other ownership changes in the future, there are no significant limitations on our future ability to use U.S. tax loss carryforwards generated prior to those dates. In September 2007, we engaged Stephens Inc. to act as our exclusive financial advisor in connection with our efforts to effect one or more business combinations. This will continue to be an expensive and time consuming process, and we may not generate sufficient revenue from our Home and Garden Business or otherwise attract sufficient capital to support the process for its duration.
If we were to undergo an ownership change as defined in Section 382 of the Code, our net tax loss and general business credit carryforwards generated prior to the ownership change would be subject to annual limitations, which could reduce, eliminate, or defer the utilization of these losses. Based upon an analysis completed during the third quarter of 2007 of past changes in our ownership, we believe we have experienced ownership changes (as defined under Section 382) on March 20, 1996 and October 2, 2000 and absent any other ownership changes in the future, there are no significant limitations on our future ability to use tax loss carryforwards generated prior to those dates. We do not believe that the sale to PHC resulted in another ownership change that would further limit our future ability to use tax loss carryforwards generated after October 2000 because it was a sale of assets. However, the IRS or some other taxing authority may disagree with our position and contend that we have already experienced other such ownership changes or that the sale of assets resulted in an ownership change. In such case, our ability to use our tax loss carryforwards to offset future taxable income would be severely limited. If the sale of assets to PHC results in an ownership change as defined in Section 382 of the Code, our tax loss carryforwards available to offset future taxable income could be severely limited and the tax loss carryforwards may expire as a result of the limitation. If an ownership change does not occur as a result of the sale to PHC, there is still the potential for an ownership change to occur under Section 382 as a result of future changes in stock ownership. Net operating loss carryforwards may expire if we do not generate sufficient income to utilize the losses before their normal expiration.
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Generally, an ownership change occurs if one or more shareholders, each of whom owns 5% or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50% over the lowest percentage of stock owned by such shareholders at any time during the preceding three-year period. For example, if a single shareholder owning 10% of our stock acquired an additional 50.1% of our stock in a three-year period, a change of ownership would occur. Similarly, if ten persons, none of whom owned our stock, each acquired slightly over 5% of our stock within a three-year period (so that such persons own, in the aggregate, more than 50%) an ownership change would occur. Ownership of stock is determined by certain constructive ownership rules which can attribute ownership of stock owned by entities (such as estates, trusts, corporations, and partnerships) to the ultimate indirect owner.
For purposes of this rule, all holders who each own less than 5% of a corporation’s stock are generally treated together as one (or, in certain cases, more than one) 5% shareholder. Transactions in the public markets among shareholders owning less than 5% of the equity securities generally are not included in the calculation. Special rules can result in the treatment of options (including warrants) or other similar interests as having been exercised if such treatment would result in an ownership change.
As we explore whether there may be opportunities to utilize our tax loss carryforwards, due to the importance of avoiding a future ownership change under the tax laws, we will be limited in our ability to issue additional stock in the future to provide capital for our business. We would only be able to issue such additional stock in a manner that would not cause an ownership change, for purposes of these rules, and thus our ability to access the equity markets could be restricted.
Finally, in addition to Section 382, certain other statutory provisions and common law doctrine could limit our opportunities to realize potential value from, or otherwise adversely affect our ability to preserve and utilize, our tax loss carryforwards.
The use of our tax loss carryforwards is subject to uncertainty because it is dependent upon the amount of taxable income we generate. We have no assurance that we will have sufficient taxable income in future years to use the tax loss carryforwards before they expire. We believe that our ability to achieve profitability may depend in substantial part on our ability to identify and acquire suitable acquisitions on favorable terms, so that we can increase our revenues and generate new income. We may seek additional capital from time to time, including through the sale of stock or other securities, which may result in dilution to existing shareholders. In addition, as noted above, the provisions of the Code and certain applicable IRS regulations will limit the number of shares of stock we can sell from time to time without causing a limitation on our ability to use our tax loss carryforwards to reduce our future tax obligations.
Liquidity and Capital Resources
Our operating expenditures have been significant since our inception. We currently anticipate that our operating expenses in 2008, although less than our operating expenses in 2007, will significantly exceed net Home and Garden Product sales and that net losses and working capital requirements will consume a material amount of our cash resources in 2008. As described above, our future capital requirements will depend on the success of our Home and Garden Business and our ability to successfully implement our strategy of realizing potential value from our remaining business assets, primarily our tax loss carryforwards. We have no current intention to make substantial investments to grow our Home and Garden Business. We believe that the balance of our cash and cash equivalents at December 31, 2007 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 this regard.
At December 31, 2007, our cash and cash equivalents totaled $5,668,239, an increase of $1,483,014 from the balance of $4,185,225 at December 31, 2006. In the first quarter of 2007, we received $1,396,824 in net proceeds (after transaction costs incurred after January 1, 2007) from the sale of the Harpin Protein Technology to PHC and on June 6, 2007 we collected $506,250 from PHC as a partial payment of the promissory note. We collected the remaining principal balance of $194,501 on December 31, 2007. Prior to
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October 2000, we financed our operations primarily through the private sale of our equity securities, resulting in net proceeds of $36.5 million through September 30, 2000. In October 2000, we received approximately $91.5 million in net proceeds from the initial public offering of 741,111 shares of our common stock. To a lesser extent, we have financed our equipment acquisitions through lease financings. We plan to finance our operations in 2008 using existing cash and cash equivalents. As discussed in detail above and in the section entitled “Risk Factors — Risks Related to Our Business Plan to Utilize Tax Loss Carryforwards,” our business strategy of exploring whether there may be opportunities to utilize our remaining business assets, including our tax loss carryforwards, will, due to the importance of avoiding a future ownership change under the tax laws, limit us in our ability to issue additional stock to provide capital for our business.
The sale of our Harpin Protein Technology had the following effects on our cash used in operations and cash resources in 2007:
| • | | Cash and cash equivalents increased by $1,500,000 on February 28, 2007. This increase was offset by the payment of transaction costs totaling $103,176 incurred and recorded in the first three months of 2007 (approximately $320,000 was incurred and recorded in selling, general and administrative expense in 2006). Cash and cash equivalents also increased and other long-term assets decreased by $287,879 for the release of restricted cash and return of deposit by the facility lease landlord. On June 6, 2007, cash and cash equivalents increased and note receivable decreased by $506,250 as a result of collecting a portion of the note receivable from PHC. The remaining principal balance of $194,501 was collected on December 31, 2007. |
| • | | Current inventory decreased by $1,895,978 for inventory sold to PHC. We also sold $261,820 of finished goods to PHC under our Independent Distribution Agreement with PHC. The remaining inventory consists primarily of raw materials and finished goods used for our Home and Garden Business. |
| • | | Other current assets decreased by $63,750 for equipment classified as held for sale and sold to PHC. |
| • | | Property and equipment decreased by $647,962 for assets sold to PHC. |
| • | | Current accrued liabilities decreased by $59,625 due to PHC’s assumption of these liabilities. |
| • | | Other long-term liabilities decreased to zero at February 28, 2007 due to PHC’s assumption of our office and manufacturing facility lease liabilities recorded for rent expense in excess of rent payments totaling $73,131 and asset retirement obligation of $287,857 and our $100,000 liability to CRF. |
| • | | Product sales, cost of goods sold, research and development and selling, general and administrative expenses decreased significantly in 2007 compared to 2006. |
Additionally, future minimum lease payments under the non-cancelable office and manufacturing facility lease totaling $184,970 in 2007, $229,424 in 2008 and $238,366 in 2009 were assumed by PHC as of February 28, 2007. We currently have no contractual obligations associated with capital and operating lease obligations.
Net cash used in operations totaled $638,158 in 2007, a decrease of $2,639,904 (81%) from $3,278,062 in 2006, which decreased $1,910,496 (37%) from $5,188,558 in 2005. Net cash used in operations of $3,278,062 in 2006 resulted primarily from net loss of $9,445,185, which includes loss on impairment of equipment, leasehold improvements and inventory, depreciation and amortization, deferred rent payable, gain on property and equipment, gain on sale of investment and stock compensation expense totaling $5,909,407, and fluctuations in various asset and liability balances totaling $257,716. Net cash used in operations of $5,188,558 in 2005 resulted primarily from net loss of $10,857,865, which includes depreciation and amortization, loss on termination of lease and loss on property and equipment totaling $5,584,274, and fluctuations in various asset and liability balances totaling $85,033. We expect that cash used in operations in 2008 will continue to be significant.
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Net cash provided by investing activities totaled $2,147,575 in 2007 as a result of proceeds from the sale of our Harpin Protein Technology and equipment. Net cash provided by investing activities totaled $414,989 in 2006 and $207,761 in 2005 and resulted primarily from proceeds from the sale of equipment, and in 2006, the sale of an investment.
Net cash provided by financing activities in 2006 totaled $21,000 and represents proceeds from the exercise of stock options. Net cash used in financing activities totaled $1,572 in 2005 as a result of paying down the principal on capital leases, offset by proceeds from the issuance of common stock under our employee stock purchase plan.
Historically, we conducted our operations in three primary functional currencies: the U.S. dollar, the euro and, until December 31, 2004, the Mexican peso. Historically, neither fluctuations in foreign exchange rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not hedge our foreign currency exposures and are, therefore, subject to the risk of exchange rates. We may invoice our international customers in U.S. dollars or 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. As of February 28, 2007, the cumulative translation adjustment related to our European subsidiary totaling $103,470 was reclassified from accumulated other comprehensive income and reported as part of the gain on sale of Harpin Protein Technology as this subsidiary was substantially liquidated as a result of the sale to PHC. Foreign exchange rate fluctuations did not have a material impact on our financial results in 2007, 2006 or 2005.
Employment Agreement
On July 25, 2007, we entered into an employment agreement with Bradley S. Powell, our President and Chief Financial Officer to help ensure the retention of his services during the critical period following the sale of our Harpin Protein Technology. Under the terms of the employment agreement, we agreed to pay Mr. Powell an annual base salary initially set at $205,000, and a lump sum amount payable upon execution of the employment agreement equal to the retroactive application of his annual base salary to December 15, 2006, the date on which he became our President. Mr. Powell will be paid a cash bonus equal to one times his annual base salary upon completion of an acquisition, merger or consolidation to which the Company is a party. Mr. Powell is also entitled to participate, subject to and in accordance with applicable eligibility requirements, in fringe benefit programs provided to our other employees. The employment agreement includes noncompetition and nonsolicitation provisions that apply to Mr. Powell during his employment and for a period of 18 months thereafter, and includes customary nondisclosure and inventions assignment provisions.
The employment agreement extinguished Mr. Powell’s change-in-control agreement, dated August 16, 2000, and severance agreement, dated January 28, 2002, in exchange for supplemental payments totaling $356,145. The supplemental payments were paid in installments as follows: one-half on July 25, 2007; one-quarter on September 30, 2007; and one-quarter on January 15, 2008. The Compensation Committee approved the employment agreement, including the supplemental payments, for purposes of retention and in order to resolve any uncertainty as to the timing and amount of payments to which Mr. Powell was or could be entitled under the change-in-control agreement.
Critical Accounting Policies, Estimates and Judgments
Our critical accounting policies are more fully described in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices, information provided by our customers and other assumptions that we believe are reasonable under the circumstances. Our estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period in which they are determined to
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be necessary. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates include:
Revenue Recognition
Prior to the sale of our Harpin Protein Technology assets on February 28, 2007, we sold the majority of our products to independent, third-party distributors in the agricultural and horticultural markets. 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.
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, the age of our inventory and recent quality control data. Changes in the factors above or other factors could result in significant inventory cost reductions and write-offs.
In reviewing for asset impairment in connection with the sale of our Harpin Protein Technology to PHC, we compared the carrying value at February 28, 2007 of assets sold to consideration received from PHC and recorded liabilities assumed by PHC. Based on this review, the carrying value of inventory sold to PHC exceeded the consideration received from PHC and recorded liabilities assumed by PHC. Accordingly, we recorded a $452,347 charge for impairment to inventory as of December 31, 2006.
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, we consider 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.
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 undiscounted net cash flows expected 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. Prior to the sale of our Harpin Protein Technology assets on February 28, 2007, our property and equipment consisted primarily of assets used to manufacture and sell our products and assets used in our research and
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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.
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 for impairment in connection with the preparation of our 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 the 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, we concluded on July 31, 2006 that a charge for impairment to our equipment and leasehold improvements was required and a $4,901,955 impairment loss was recognized at June 30, 2006. We estimated the fair value of equipment using an orderly liquidation method and leasehold improvements were estimated to have zero fair value.
In December 2005, we completed an efficiency analysis of our manufacturing processes, including an assessment of all manufacturing equipment and its usefulness in future manufacturing operations. As a result of this analysis, we recorded a loss of $1,649,902 on equipment that we determined would not be used in future manufacturing operations and would be sold or disposed. The lower of carrying value or estimated fair value less estimated costs to sell equipment to be sold totaled $64,000 at December 31, 2006 and was included in other current assets on the balance sheet.
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 our 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.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning with fiscal year 2008. The impact of adopting SFAS No. 157 is not expected to be significant to the consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The impact of adopting SFAS No. 159 is not expected to be significant to the consolidated financial statements.
Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk. |
We do not currently hold any derivative instruments and we do not engage in hedging activities. Also, we do not have any outstanding variable interest rate debt and currently do not enter into any material transactions denominated in foreign currency. Because of the relatively short-term average maturity of our investment funds, such investments are sensitive to interest rate movements. Therefore, our future interest income may be adversely impacted by changes in interest rates. We believe that the market risk arising from our cash equivalents is not material.
41
Item 8. | | Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Eden Bioscience Corporation
Bothell, Washington
We have audited the accompanying consolidated balance sheet of Eden Bioscience Corporation and Subsidiaries as of December 31, 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eden Bioscience Corporation and Subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
/S/ PETERSON SULLIVAN PLLC
March 15, 2008
Seattle, Washington
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Eden Bioscience Corporation:
We have audited the accompanying consolidated balance sheets of Eden Bioscience Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for each of the years in the two-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eden Bioscience Corporation and subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, Eden Bioscience Corporation and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, effective January 1, 2006.
As discussed in note 14 to the consolidated financial statements, the Company disclosed that on February 22, 2008, the Company amended its Restated Articles of Incorporation to reduce the number of authorized shares of Company common stock from 33,333,333 to 11,111,111 and to affect a 1-3 reverse stock split of the Company’s common stock. To reflect this reverse stock split, the Company has retroactively adjusted share information previously reported in the consolidated financial statements and notes thereto. We have not audited the amendment to the Company’s Restated Articles of Incorporation nor the 1-3 reverse stock split. The auditing procedures we performed relate only to the pre-split amounts presented in note 14 to the consolidated financial statements.
/s/ KPMG LLP
Seattle, Washington
March 28, 2007
43
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | December 31,
| |
|---|
| | | | 2007
| | 2006
|
|---|
ASSETS
|
Current assets:
| | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 5,668,239 | | | $ | 4,185,225 | |
| Accounts receivable | | | | | — | | | | 186,175 | |
| Inventory, current | | | | | 41,749 | | | | 2,284,300 | |
| Prepaid expenses and other current assets | | | | | 68,537 | | | | 289,892 | |
| Total current assets | | | | | 5,778,525 | | | | 6,945,592 | |
| Inventory, non-current | | | | | 60,035 | | | | 41,758 | |
| Property and equipment | | | | | 99 | | | | 698,061 | |
| Other assets | | | | | 59,027 | | | | 287,879 | |
| Total assets | | | | $ | 5,897,686 | | | $ | 7,973,290 | |
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Current liabilities:
| | | | | | | | | | |
| Accounts payable | | | | $ | 29,979 | | | $ | 279,224 | |
| Accrued liabilities | | | | | 232,631 | | | | 528,284 | |
| Total current liabilities | | | | | 262,610 | | | | 807,508 | |
| Other long-term liabilities | | | | | — | | | | 456,722 | |
| Total liabilities | | | | | 262,610 | | | | 1,264,230 | |
| | | | | | | | | | | |
Commitments and contingencies
| | | | | | | | | | |
| | | | | | | | | | | |
Shareholders’ equity:
| | | | | | | | | | |
Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares
issued and outstanding at December 31, 2007 and 2006 | | | | | — | | | | — | |
Common stock, $.0025 par value, 11,111,111 shares authorized; issued
and outstanding shares — 2,716,518 shares at December 31, 2007 and 2006 | | | | | 6,791 | | | | 6,791 | |
| Additional paid-in capital | | | | | 132,882,325 | | | | 132,863,310 | |
| Accumulated other comprehensive income | | | | | — | | | | 91,896 | |
| Accumulated deficit | | | | | (127,254,040 | ) | | | (126,252,937 | ) |
| Total shareholders’ equity | | | | | 5,635,076 | | | | 6,709,060 | |
| Total liabilities and shareholders’ equity | | | | $ | 5,897,686 | | | $ | 7,973,290 | |
The accompanying notes are an integral part of these consolidated financial statements.
44
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
| Product sales, net of sales allowances | | | | $ | 350,811 | | | $ | 3,790,284 | | | $ | 3,763,615 | |
| Operating expenses: | | | | | | | | | | | | | | |
| Cost of goods sold | | | | | 177,935 | | | | 2,194,977 | | | | 2,479,965 | |
| Research and development | | | | | 136,442 | | | | 1,318,337 | | | | 3,221,038 | |
| Selling, general and administrative | | | | | 1,468,400 | | | | 4,763,192 | | | | 5,391,094 | |
Loss on impairment of equipment and
leasehold improvements | | | | | — | | | | 4,901,955 | | | | 1,649,902 | |
| Loss on write-down of inventory | | | | | — | | | | 452,347 | | | | — | |
| Lease termination loss | | | | | — | | | | — | | | | 2,260,538 | |
| Gain on sale of property and equipment | | | | | — | | | | (44,213 | ) | | | (86,305 | ) |
| Total operating expenses | | | | | 1,782,777 | | | | 13,586,595 | | | | 14,916,232 | |
| Loss from operations | | | | | (1,431,966 | ) | | | (9,796,311 | ) | | | (11,152,617 | ) |
| | | | | | | | | | | | | | | |
Other income:
| | | | | | | | | | | | | | |
| Gain on sale of Harpin Protein Technology | | | | | 113,968 | | | | — | | | | — | |
| Gain on sale of investment | | | | | — | | | | 99,844 | | | | — | |
| Interest income | | | | | 316,895 | | | | 251,282 | | | | 294,752 | |
| Total other income | | | | | 430,863 | | | | 351,126 | | | | 294,752 | |
| Loss before income taxes | | | | | (1,001,103 | ) | | | (9,445,185 | ) | | | (10,857,865 | ) |
| Income taxes | | | | | — | | | | — | | | | — | |
| Net loss | | | | $ | (1,001,103 | ) | | $ | (9,445,185 | ) | | $ | (10,857,865 | ) |
| |
| Basic and diluted net loss per share | | | | $ | (0.37 | ) | | $ | (3.48 | ) | | $ | (4.01 | ) |
Weighted average shares outstanding used to compute
net loss per share — basic and diluted | | | | | 2,716,518 | | | | 2,714,893 | | | | 2,710,342 | |
The accompanying notes are an integral part of these consolidated financial statements.
45
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
| | | | Outstanding
Shares
Common
Stock
| | Common
Stock
| | Additional
Paid-in
Capital
| | Accumulated
Other
Comprehensive
Income (Loss)
| | Accumulated
Deficit
| | Total
Shareholders’
Equity
|
|---|
| Balance at December 31, 2004 | | | | | 2,709,075 | | | $ | 6,773 | | | $ | 132,590,164 | | | $ | (37,675 | ) | | $ | (105,949,887 | ) | | $ | 26,609,375 | |
Comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | — | | | | — | | | | — | | | | — | | | | (10,857,865 | ) | | | (10,857,865 | ) |
| Cumulative translation adjustment | | | | | — | | | | — | | | | — | | | | (4,827 | ) | | | — | | | | (4,827 | ) |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | (10,862,692 | ) |
| Sale of common stock | | | | | 2,777 | | | | 7 | | | | 9,993 | | | | — | | | | — | | | | 10,000 | |
| Balance at December 31, 2005 | | | | | 2,711,852 | | | | 6,780 | | | | 132,600,157 | | | | (42,502 | ) | | | (116,807,752 | ) | | | 15,756,683 | |
Comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | — | | | | — | | | | — | | | | — | | | | (9,445,185 | ) | | | (9,445,185 | ) |
| Cumulative translation adjustment | | | | | — | | | | — | | | | — | | | | 134,398 | | | | — | | | | 134,398 | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | (9,310,787 | ) |
| Stock option compensation expense | | | | | — | | | | — | | | | 242,164 | | | | — | | | | — | | | | 242,164 | |
| Exercise of stock options | | | | | 4,666 | | | | 11 | | | | 20,989 | | | | — | | | | — | | | | 21,000 | |
| Balance at December 31, 2006 | | | | | 2,716,518 | | | | 6,791 | | | | 132,863,310 | | | | 91,896 | | | | (126,252,937 | ) | | | 6,709,060 | |
Comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | — | | | | — | | | | — | | | | — | | | | (1,001,103 | ) | | | (1,001,103 | ) |
| Cumulative translation adjustment | | | | | — | | | | — | | | | — | | | | (91,896 | ) | | | — | | | | (91,896 | ) |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | (1,092,999 | ) |
| Stock option compensation expense | | | | | — | | | | — | | | | 19,015 | | | | — | | | | — | | | | 19,015 | |
| Balance at December 31, 2007 | | | | | 2,716,518 | | | $ | 6,791 | | | $ | 132,882,325 | | | | — | | | $ | (127,254,040 | ) | | $ | 5,635,076 | |
The accompanying notes are an integral part of these consolidated financial statements.
46
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
Cash flows from operating activities:
| | | | | | | | | | | | | | |
| Net loss | | | | $ | (1,001,103 | ) | | $ | (9,445,185 | ) | | $ | (10,857,865 | ) |
Adjustments to reconcile net loss to cash used in operating activities net of effects of sale of Harpin Protein Technology:
| | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | — | | | | 350,744 | | | | 1,952,027 | |
| Deferred rent payable | | | | | (1,406 | ) | | | 74,537 | | | | 33,704 | |
| Accretion expense | | | | | 5,672 | | | | 31,757 | | | | 28,187 | |
| Gain on sale of Harpin Protein Technology | | | | | (113,968 | ) | | | — | | | | — | |
| Stock compensation expense | | | | | 19,015 | | | | 242,164 | | | | — | |
| Gain on sale of investment | | | | | — | | | | (99,884 | ) | | | — | |
| Loss on write-down of inventory | | | | | — | | | | 452,347 | | | | — | |
| Loss on impairment of equipment and leasehold improvements | | | | | — | | | | 4,901,955 | | | | 1,649,902 | |
| Gain on sale of property and equipment | | | | | — | | | | (44,213 | ) | | | (86,305 | ) |
| Loss on property and equipment on lease termination | | | | | — | | | | — | | | | 3,480,883 | |
| Termination of lease obligations | | | | | — | | | | — | | | | (2,724,124 | ) |
| Forfeiture of security deposit on lease termination | | | | | — | | | | — | | | | 1,250,000 | |
Changes in assets and liabilities:
| | | | | | | | | | | | | | |
| Accounts receivable | | | | | 186,778 | | | | 38,979 | | | | (179,777 | ) |
| Inventory | | | | | 370,250 | | | | 779,299 | | | | 295,307 | |
| Prepaid expenses and other assets | | | | | 386,457 | | | | 36,341 | | | | 259,329 | |
| Accounts payable | | | | | (249,274 | ) | | | 49,558 | | | | 38,336 | |
| Accrued liabilities | | | | | (240,579 | ) | | | (646,461 | ) | | | 8,753 | |
| Accrued loss on facility subleases | | | | | — | | | | — | | | | (336,915 | ) |
| Net cash used in operating activities | | | | | (638,158 | ) | | | (3,278,062 | ) | | | (5,188,558 | ) |
Cash flows from investing activities:
| | | | | | | | | | | | | | |
| Purchases of property and equipment | | | | | — | | | | (16,377 | ) | | | (19,147 | ) |
| Proceeds from sale of Harpin Protein Technology, net of expenses | | | | | 2,097,575 | | | | — | | | | — | |
| Proceeds from sale of investment | | | | | — | | | | 100,000 | | | | — | |
| Proceeds from disposal of property and equipment | | | | | 50,000 | | | | 331,366 | | | | 226,908 | |
| Net cash from investing activities | | | | | 2,147,575 | | | | 414,989 | | | | 207,761 | |
Cash flows from financing activities:
| | | | | | | | | | | | | | |
| Reduction in capital lease obligations | | | | | — | | | | — | | | | (11,572 | ) |
| Proceeds from issuance of stock | | | | | — | | | | 21,000 | | | | 10,000 | |
| Net cash from financing activities | | | | | — | | | | 21,000 | | | | (1,572 | ) |
| Effect of foreign currency exchange rates on cash and cash equivalents | | | | | (26,403 | ) | | | 201,646 | | | | (52,364 | ) |
| Net increase (decrease) in cash and cash equivalents | | | | | 1,483,014 | | | | (2,640,427 | ) | | | (5,034,733 | ) |
| Cash and cash equivalents at beginning of period | | | | | 4,185,225 | | | | 6,825,652 | | | | 11,860,385 | |
| Cash and cash equivalents at end of period | | | | $ | 5,668,239 | | | $ | 4,185,225 | | | $ | 6,825,652 | |
The accompanying notes are an integral part of these consolidated financial statements.
47
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | | Organization and Summary of Significant Accounting Policies |
Organization and Business
Eden Bioscience Corporation (“Eden Bioscience” or the “Company”) was incorporated in the State of Washington on July 18, 1994. On February 28, 2007, the Company sold its proprietary harpin protein-based technology and substantially all of its assets used in the manufacturing and distribution of harpin-based products used in the worldwide agricultural and horticultural markets (“Harpin Protein Technology”) to Plant Health Care, Inc. (“PHC”). From December 1, 2006 through February 28, 2007, the Company operated under an Independent Distribution Agreement whereby PHC served as the exclusive distributor of the Company’s products for all channels of trade, other than to retail distributors and consumers (the “Home and Garden Market”), in substantially all worldwide territories. The Company’s business strategy after the sale is to sell harpin protein-based products to the Home and Garden Market (the “Home and Garden Business”) and use its available cash and any revenue generated from its Home and Garden Business to explore whether there may be opportunities to realize potential value from its remaining business assets, primarily its tax loss carryforwards.
The Company is subject to a number of risks including, among others: realizing potential value from tax loss carryforwards is highly speculative and subject to numerous material uncertainties; dependence on one manufacturer for the supply of harpin protein-based products; dependence on a limited number of products and the commercialization of those products, which may not be successful; reliance on independent distributors and retailers to sell the Company’s products; ability to retain existing employees; and competition from other companies with greater financial, technical and marketing resources.
On April 17, 2006, the Company amended its Restated Articles of Incorporation to reduce the Company’s number of authorized shares of common stock from 100,000,000 to 33,333,333 and to effect a 1-for-3 reverse stock split of the Company’s outstanding common stock. The reverse stock split was effective at 5:00p.m., Pacific time, on April 18, 2006 and the Company’s common stock began trading as adjusted for the reverse stock split on April 19, 2006. As a result of this reverse stock split, each three shares of common stock were exchanged for one share of common stock, with cash being issued for any fractional shares, and the total number of shares outstanding was reduced from 24.4 million shares to 8.1 million shares. Further, on February 22, 2008, the Company amended its Restated Articles of Incorporation, as amended, to reduce the Company’s number of authorized shares of common stock from 33,333,333 to 11,111,111 and to effect a 1-for-3 reverse stock split of the Company’s outstanding common stock. The reverse stock split was effective at 5:00 p.m., Pacific time, on February 22, 2008 and the Company’s common stock began trading as adjusted for the reverse stock split on February 25, 2008. As a result of this reverse stock split, each three shares of common stock were exchanged for one share of common stock, with cash being issued for any fractional shares, and the total number of shares outstanding was reduced from 8.1 million shares to approximately 2.7 million shares. The Company has retroactively adjusted all the share information to reflect both of these reverse stock splits in the accompanying consolidated financial statements and notes.
Liquidity
The Company’s operating expenditures have been significant since its inception. The Company currently anticipates that its operating expenses in 2008, although substantially less than its operating expenses in 2007, will exceed net sales of its harpin protein-based products (“Home and Garden Products”) to the Home and Garden Market and that net losses and working capital requirements will consume a portion of its cash resources in 2008. The Company’s future capital requirements will depend on the success of its Home and Garden Business and its ability to successfully implement its strategy of realizing
48
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
potential value from its remaining business assets, primarily its tax loss carryforwards. The Company does not plan to make a substantial investment toward the development of its Home and Garden Business. Management of the Company believes that the balance of its cash and cash equivalents at December 31, 2007 will be sufficient to meet its anticipated cash needs for net losses, working capital and capital expenditures for more than the next 12 months, although there can be no assurance in that regard.
Principles of Consolidation
The consolidated financial statements include the accounts of Eden Bioscience and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated.
Segments
The Company had one operating segment historically — the development and commercialization of natural protein-based products.
Estimates Used in Financial Statement Preparation
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples include fair value and depreciable lives of property and equipment; expense accruals; provisions for sales allowances, warranty claims, inventory valuation and classification; cash flow projections used in evaluating whether asset impairment loss is recorded; fair value of stock compensation arrangements and bad debts. Such estimates and assumptions are based on historical experience, where applicable, management’s plans, use of third-party valuation specialist and other assumptions. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements prospectively when they are determined to be necessary. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market.
Accounts Receivable
In determining the adequacy of the allowance for doubtful accounts, the Company considers a number of factors, including the aging of the accounts receivable portfolio, customer payment trends, the financial condition of its customers, historical bad debts and current economic trends. Based upon an analysis of outstanding net accounts receivable, no allowance for doubtful accounts was recorded at December 31, 2006 and there were no write-offs in 2007 or 2006.
Inventory
Inventory is valued at the lower of average cost or market. Costs include material, labor and overhead. The Company estimates inventory cost reductions based on expected sales value, including expected bulk sale, the results of quality control testing and the amount and age of product in the Company’s inventory.
49
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, accounts payable and accrued liabilities. Financial instruments, including those listed above, that are short-term and/or that have little or no market risk are estimated to have a fair value equal to book value. Deposits with banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company’s credit risk is managed by investing its excess cash in high-quality money market instruments and securities of the U. S. government.
Property and Equipment
Equipment and leasehold improvements are stated at estimated fair value as a result of asset impairment charges recorded as of June 30, 2006 in the amount of $4,901,955. Prior to June 30, 2006, equipment and leasehold improvements were stated at historical cost. Improvements and replacements are capitalized. Maintenance and repairs are expensed when incurred. The provision for depreciation and amortization is determined using straight-line and units-of-production methods, which allocate costs less salvage value over their estimated useful lives of two to twenty years. Leasehold improvements are amortized over the shorter of their estimated useful lives or lease term, which range between two to ten years. Substantially all of the Company’s property and equipment are in the United States.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the Company compares the carrying value of such assets to the undiscounted cash flows expected from the use of the assets and their eventual disposition. When necessary, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value.
Other Assets
As of December 31, 2007, other non-current assets consist principally of prepaid insurance. As of December 31, 2006, other non-current assets consist principally of restricted investments held as deposits in connection with the Company’s operating lease. In the first quarter of 2006, the Company sold a minority stock investment for $100,000 that resulted in a gain of $99,884.
Exit and Disposal Activities
Costs associated with one-time termination benefits are estimated at the time the liability is incurred and are recognized over the future service period, if applicable, or immediately, if there is no future service period. The cumulative effect of subsequent changes in the timing or amount of estimated cash flows over the future service period is recognized as an adjustment to the liability in the period of the change.
Revenues
The Company recognizes revenue from product sales, net of sales allowances, when product is delivered to its distributors and all significant obligations of the Company have been satisfied, unless acceptance provisions or other contingencies or arrangements exist. If acceptance provisions or contingencies exist, revenue is deferred and recognized later if such provisions or contingencies are satisfied. As part of the analysis of whether all significant obligations of the Company have been satisfied or situations where acceptance provisions or other contingencies or arrangements exist, the Company considers the following elements, among others: sales terms and arrangements, historical experience and current incentive programs. Distributors do not have price protection or product-return rights. The Company provides an allowance for warranty claims based on historical experience and expectations. Shipping and handling costs related to product sales that are paid by the Company are included in cost of goods sold.
50
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales allowances represent allowances granted to independent distributors for sales and marketing support and are estimated based on the terms of the distribution arrangements 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 arrangements or other arrangements. Distributor program arrangements expire annually, generally on December 31.
Gross product sales and sales allowances are as follows:
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
| Gross product sales | | | | $ | 350,147 | | | $ | 4,128,926 | | | $ | 4,217,177 | |
| Sales allowances | | | | | — | | | | (507,932 | ) | | | (544,933 | ) |
Elimination of previously recorded sales
allowance liabilities | | | | | 664 | | | | 169,290 | | | | 91,371 | |
| Product sales, net of sales allowances | | | | $ | 350,811 | | | $ | 3,790,284 | | | $ | 3,763,615 | |
Gross product sales by geographical region were:
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
| United States | | | | $ | 302,715 | | | $ | 3,789,664 | | | $ | 3,134,058 | |
| Spain | | | | | 47,432 | | | | 140,224 | | | | 888,178 | |
| Other regions | | | | | — | | | | 199,038 | | | | 194,941 | |
| Product sales | | | | $ | 350,147 | | | $ | 4,128,926 | | | $ | 4,217,177 | |
Incentives
The Company sometimes offers sales incentives, often in the form of free product, to distributors and other customers. Costs associated with such incentives are recognized as costs of sales in the later of the period in which (a) the associated revenue is recognized by the Company or (b) the sales incentive is offered to the customer.
Cost of Goods Sold
Cost of goods sold includes all direct and indirect costs incurred in the manufacturing process; shipping and handling and other costs necessary to deliver product to distributors; inventory cost reductions; product used for promotional purposes; and idle capacity charges during periods of non-production.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred advertising expenses of $60,210 in 2007, $499,674 in 2006 and $768,926 in 2005.
Research and Development Expenses
Research and development costs are expensed as incurred.
51
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Stock Compensation
The Company maintains a stock equity incentive plan under which it may grant non-qualified stock options, incentive stock options or restricted stock to employees, non-employee directors and consultants. Prior to the January 1, 2006 adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“SFAS 123R”), the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, 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. As permitted by FASB Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (“SFAS 123”), stock-based compensation was included as a pro forma disclosure in the notes to the consolidated financial statements.
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. Results for prior periods have not been restated, as provided for under the modified-prospective transition method. Total stock-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2007 and 2006 was $19,015 and $242,164, respectively.
The following table shows the effect on net loss and loss per share had compensation cost been recognized based upon the estimated fair value on the grant date of stock options in accordance with SFAS 123, as amended by FASB Statement of Financial Accounting Standards No. 148Accounting for Stock-Based Compensation — Transition and Disclosure:
| | | | Year Ended
December 31, 2005
|
|---|
| Net loss, as reported | | | | $ | (10,857,865 | ) |
Deduct total stock-based employee compensation expense under
fair value based method | | | | | (646,672 | ) |
| Pro forma net loss | | | | $ | (11,504,537 | ) |
| Loss per share: | | | | | | |
| Basic and diluted — as reported | | | | $ | (4.01 | ) |
| Basic and diluted — pro forma | | | | $ | (4.24 | ) |
Disclosures for the year ended December 31, 2007 and 2006 are not presented because the amounts are recognized in the consolidated financial statements.
The fair value for stock awards was estimated at the date of grant using the Black-Scholes-Merton (“BSM”) option valuation model with the following weighted average assumptions:
| | | | December 31,
| |
|---|
| | | | 2006
| | 2005
|
|---|
| Expected term (in years) | | | | | 6.25 | | | | 5.0 | |
| Expected stock price volatility | | | | | 95 | % | | | 96 | % |
| Risk-free interest rate | | | | | 4.29 | % | | | 4.35 | % |
| Expected dividend yield | | | | | — | | | | — | |
| Estimated fair value per option granted | | | | $ | 1.71 | | | $ | 1.38 | |
52
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2006, the expected life 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. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future.
The BSM option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Because Company stock options do not trade on a secondary exchange, employees do not derive a benefit from holding stock options unless there is an increase, above the grant price, in the market price of the Company’s stock.
Income Taxes
The Company accounts for income taxes under the provisions of FASB Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards using enacted tax rates in effect for the year in which the differences and carryforwards are expected to reverse.
Foreign Currency Translation
The Company conducts its operations in two primary functional currencies: the U.S. dollar and the euro. Balance sheet accounts of the Company’s foreign operations are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are translated at average exchange rates during the period. Cumulative translation gains or losses related to net assets located outside the U.S. are shown as a component of shareholders’ equity. Gains and losses resulting from foreign currency transactions, which are denominated in a currency other than the entity’s functional currency, are included in the consolidated statements of operations. As of February 28, 2007, the cumulative translation adjustment related to the Company’s European subsidiary totaling $103,470 was reclassified from accumulated other comprehensive income and reported as part of the gain on sale of Harpin Protein Technology as this subsidiary was substantially liquidated as a result of the sale to PHC. There were no significant gains or losses on foreign currency transactions in 2007, 2006 or 2005.
Prospective Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning with fiscal year 2008. The impact of adopting SFAS No. 157 is not expected to be significant to the consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The impact of adopting SFAS No. 159 is not expected to be significant to the consolidated financial statements.
53
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Pronouncements Implemented
In July 2006, the FASB issued Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified in the balance sheet; and provides transition and interim-period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and, as a result, is effective for the Company beginning January 1, 2007. The impact of adopting FIN 48 was not significant to the consolidated financial statements, principally because of the full valuation against the Company’s net deferred assets.
Net Loss per Share
Basic net loss per share is the net loss divided by the average number of shares outstanding during the period. Diluted net loss per share is the net loss divided by the sum of the average number of shares outstanding during the period plus the additional shares that would have been issued had all dilutive options been exercised, less shares that would be repurchased with the proceeds from such exercise using the treasury stock method. The effect of including outstanding options is antidilutive for all periods presented. Therefore, options have been excluded from the calculation of diluted net loss per share. Shares issuable pursuant to stock options that have not been included in the above calculations because they are antidilutive totaled 146,776 in 2007, 247,127 in 2006 and 294,177 in 2005.
2. | | Sale of Harpin Protein Technology to Plant Health Care, Inc. |
On February 28, 2007, under the terms of an asset purchase agreement, the Company sold the Harpin Protein Technology to PHC for $1,396,824 in cash, net of transaction costs incurred after January 1, 2007 totaling $103,176, a promissory note in the principal amount of $700,751 payable on December 31, 2007 and the assumption by PHC of certain of the liabilities relating to or arising out of the Company’s Harpin Protein Technology. The promissory note had an interest rate of 5% per annum and was secured by equipment, certain intellectual property and other assets acquired by PHC and unconditionally guaranteed by PHC’s indirect parent, Plant Health Care plc. On June 6, 2007, PHC sold substantially all of the equipment that secured the promissory note and, in accordance with the terms of the promissory note, paid the Company 75% of the proceeds from the sale which amounted to $506,250. The remaining principal and interest was paid on December 31, 2007. The Company also sold $281,044 of finished goods to PHC under the Independent Distribution Agreement. Harpin Protein Technology includes substantially all of the Company’s assets used in the creation of plant health technology incorporating harpin proteins and the manufacture of biopesticide, plant health and nutrient products utilizing the Harpin Protein Technology. These assets include all intellectual property, contracts (including the Company’s license agreement with the Cornell Research Foundation (“CRF”) and manufacturing and office facility lease), equipment and inventory related to the Company’s worldwide agricultural and horticultural markets.
The sale of Harpin Protein Technology to PHC resulted in a gain calculated as follows:
| Cash portion of purchase price | | | | $ | 2,200,751 | |
| Less transaction costs incurred after January 1, 2007 | | | | | (103,176 | ) |
Assets sold to PHC:
| | | | | | |
| Inventory | | | | | (1,895,978 | ) |
| Equipment held for sale | | | | | (63,750 | ) |
| Property and equipment held and used | | | | | (647,962 | ) |
Liabilities assumed by PHC:
| | | | | | |
| Accrued liabilities | | | | | 59,625 | |
| Other long-term liabilities | | | | | 460,988 | |
| Recognition of cumulative translation adjustment | | | | | 103,470 | |
| Gain on sale of assets to PHC | | | | $ | 113,968 | |
54
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2006, the Company reviewed the impact of the sale of the Company’s Harpin Protein Technology to PHC for potential asset impairments by comparing the carrying value at December 31, 2006 of assets sold to consideration received from PHC and recorded liabilities assumed by PHC on February 28, 2007. Based on this review, the carrying value of inventory sold to PHC exceeded the consideration received from PHC and recorded liabilities assumed by PHC, as follows:
| Purchase price | | | | $ | 2,200,751 | |
| Inventory sold to PHC subsequent to December 31, 2006 | | | | | 281,044 | |
Assets sold to PHC:
| | | | | | |
| Inventory sold to PHC (including $281,044 sold between January 1, 2007 and February 27, 2007) | | | | | (2,624,405 | ) |
| Estimated fair value of equipment held for sale | | | | | (75,000 | ) |
| Estimated fair value of property and equipment held and used | | | | | (755,350 | ) |
Liabilities assumed by PHC:
| | | | | | |
| Accrued liabilities | | | | | 59,625 | |
| Other long-term liabilities | | | | | 460,988 | |
| Impairment on sale of assets to PHC | | | | $ | (452,347 | ) |
Since the estimated fair values of equipment held for sale and property and equipment held and used exceeds recorded values, the Company recorded a $452,347 write-down of inventory as of December 31, 2006.
Under the asset purchase agreement, all liabilities and obligations under the Company’s non-cancelable office and manufacturing facility lease were assigned to PHC as of February 28, 2007, including future minimum lease payments totaling $184,970 in 2007, $229,424 in 2008 and $238,366 in 2009. PHC provided all of the deposits required by the lease to the landlord and the Company’s restricted cash and deposit totaling $287,000 were released by the landlord and returned to the Company in March 2007. In conjunction with the assignment of this lease, PHC also assumed the Company’s liabilities recorded for rent expense in excess of rent payments of $73,131 at February 28, 2007 and the Company’s asset retirement obligation associated with this facility lease of $287,857 at February 28, 2007.
Under the asset purchase agreement, all rights, liabilities and obligations under the Company’s exclusive worldwide licensing agreement with CRF for certain patents, patent applications and biological material relating to harpin proteins and related technology have been assigned to PHC. As consideration for the license, the Company originally issued 44,444 shares of common stock to CRF in May 1995, funded certain research and development activities at Cornell University and agreed to pay a 2% royalty on net sales of current Harp-N-Tek Products that incorporate the licensed technology, subject to a $200,000 minimum annual royalty payment. Effective July 1, 2006, the license agreement was amended to establish a development fund at CRF to advance harpin technology and reduced the minimum obligation required to maintain the rights under the license agreement to contributions to the development fund of $100,000 in each of the 2006, 2007 and 2008 license years. The amendment also required a payment to CFR of $100,000 by May 30, 2008, which is recorded in other long-term liabilities on the balance sheet at December 31, 2006.
All of the Company’s obligations under the change-in-control agreement with Dr. Zhongmin Wei, the Company’s former Chief Science Officer, were assigned to PHC and Dr. Wei resigned from the Company on February 28, 2007. The agreement provides that, upon a change in control, as defined in the agreement,
55
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company or the acquiring company, would continue to employ Dr. Wei for a period of two years following such change in control. During that time, the agreement provides that the position, authority, duties and responsibilities of Dr. Wei would be substantially the same as they were during the 90-day period prior to the change in control, and that his annual base salary would be at least equal to his annual base salary established by the Company’s Board of Directors prior to the change in control. If, during this two-year period, the employment of Dr. Wei is terminated by the acquiring company other than for cause, as defined in the agreements, or by the executive for good reason, as defined in the agreement, the terminated executive would be entitled to receive (i) his annual base salary, and pro rata annual bonus, through the date of termination, and any deferred compensation; and (ii) a severance payment equal to twice the sum of his annual base salary and the average of his past three annual bonuses.
The Company retained its cash, accounts receivable, tax attributes and assets relating to its Home and Garden Business, consisting primarily of inventory designated for the Home and Garden Market. In conjunction with the sale of its Harpin Protein Technology, the Company entered into a license and supply agreement with PHC, pursuant to which PHC granted the Company an exclusive worldwide right and license to sell harpin protein-based products for the protection of plants and seeds and the promotion of plant health in the Home and Garden Market and a royalty free, exclusive worldwide license to use the Messenger, MightyPlant and Harp-N-Tek trademarks in connection with the sale of its Home and Garden Products. Under the license and supply agreement, PHC will supply the Company harpin proteins and harpin-protein based products for its Home and Garden Business. The license and supply agreement will continue until the expiration of the last U.S. or foreign patent relating to the products held or acquired by PHC in connection with the asset purchase agreement and, thereafter, for automatic additional consecutive five year periods. The Company retained all liabilities associated with the Home and Garden Business and all liabilities associated with its Harpin Protein Technology that occurred or existed prior to February 28, 2007 that were not specifically assumed by PHC.
Common Stock Options
During 2000, the shareholders and Board of Directors approved the 2000 Stock Incentive Plan (the “2000 Plan”). Upon completion of the Company’s initial public offering, the 2000 Plan replaced the 1995 Combined Incentive and Nonqualified Stock Option Plan (the “1995 Plan” and, together with the 2000 Plan, the “Stock Option Plans”) for the purpose of all future stock incentive awards. All reserved but ungranted shares under the 1995 Plan and any shares subject to outstanding options under the 1995 Plan that expire or are otherwise cancelled without being exercised will be added to the shares available under the 2000 Plan.
The Board of Directors has the authority to determine all matters relating to options to be granted under the Stock Option Plans, including designation as incentive or nonqualified stock options, the selection of individuals to be granted options, the number of shares subject to each grant, the exercise price, the term and vesting period, if any. Generally, options vest over periods ranging from three to five years and expire ten years from date of grant. The Board of Directors reserved an initial total of 166,666 shares of common stock under the 2000 Plan, plus an automatic annual increase equal to the lesser of (a) 166,666 shares; (b) 5% of the outstanding shares of common stock on a fully diluted basis as of the end of the immediately preceding year; and (c) a lesser amount as may be determined by the Board of Directors. No additional shares were added to the 2000 Plan on January 1, 2008, 2007 or 2006.
At December 31, 2007, the Company had reserved 37,777 shares of common stock for issuance under the 1995 Plan, all of which had been granted, and 383,130 shares for issuance under the 2000 Plan, including 216,464 shares transferred from the 1995 Plan. Options totaling 108,999 under the 2000 Plan had been granted at December 31, 2007, leaving 274,131 options available for future grant.
56
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each stock option granted is estimated on the date of grant using the BSM option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience. Options granted are valued using the single option valuation approach, and the resulting expense is recognized over the entire requisite service period on a straight-line basis. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant and at each balance sheet date based on the Company’s historical experience and future expectations. Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized as the forfeitures occurred.
The following table summarizes stock option activity:
| | | | Number of
Options
| | Weighted
Average Exercise
Price Per Option
| | Weighted Average
Remaining
Contractual Life
| | Aggregate
Intrinsic
Value
|
|---|
| Balance at December 31, 2004 | | | | | 291,158 | | | $ | 26.19 | | | | | | | | | |
| Granted | | | | | 23,333 | | | | 5.58 | | | | | | | | | |
| Forfeited | | | | | (20,314 | ) | | | 32.58 | | | | | | | | | |
| Balance at December 31, 2005 | | | | | 294,177 | | | | 24.12 | | | | | | | | | |
| Granted | | | | | 3,333 | | | | 6.48 | | | | | | | | | |
| Exercised | | | | | (4,666 | ) | | | 4.50 | | | | | | | | | |
| Forfeited | | | | | (45,717 | ) | | | 20.16 | | | | | | | | | |
| Balance at December 31, 2006 | | | | | 247,127 | | | | 24.93 | | | | | | | | | |
| Forfeited | | | | | (100,351 | ) | | | 17.49 | | | | | | | | | |
| Balance at December 31, 2007 | | | | | 146,776 | | | | 30.06 | | | | 4.1 | | | $ | 0 | |
| Exercisable at December 31, 2007 | | | | | 145,665 | | | $ | 30.24 | | | | 4.1 | | | $ | 0 | |
The aggregate intrinsic value in the table above is based on the Company’s closing stock price of $1.77 as of December 31, 2007, which would have been received by the optionees had all in-the-money options been exercised on that date. As of December 31, 2007, total unrecognized stock-based compensation expense related to nonvested stock options was $5,025 and the Company expects to recognize this amount in 2008.
The following table summarizes stock option information at December 31, 2007:
| | | | Options Outstanding
| | Options Exercisable
| |
|---|
Range of Exercise Prices
| | | | Number
Outstanding
| | Weighted-Average
Remaining
Contractual
Life (in years)
| | Weighted-
Average
Exercise Price
| | Number
Outstanding
| | Weighted-
Average
Exercise Price
|
|---|
| $6.75 – 16.65 | | | | 113,999 | | 4.7 | | $ | 13.23 | | | | 112,888 | | | $ | 13.29 | |
| 27.00 – 54.00 | | | | 13,889 | | 1.2 | | | 37.80 | | | | 13,889 | | | | 37.80 | |
| 126.00 | | | | 18,888 | | 2.6 | | | 126.00 | | | | 18,888 | | | | 126.00 | |
| | | | | 146,776 | | 4.1 | | | 30.06 | | | | 145,665 | | | | 30.24 | |
Stock options exercisable were 239,788 and 209,989 at December 31, 2006 and 2005, respectively. The weighted-average exercise prices of options exercisable were $27.12 and $28.44 at December 31, 2006 and 2005, respectively.
57
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
The 2000 Employee Stock Purchase Plan (the “2000 Stock Purchase Plan”) was implemented in October 2000 at the completion of the Company’s initial public offering. The 2000 Stock Purchase Plan allowed employees to purchase common stock through payroll deductions of up to 15% of their annual compensation. No employee could purchase common stock worth more than $25,000 in any calendar year, valued as of the first day of each offering period. In addition, no more than an aggregate of 13,888 shares could be purchased in any six-month purchase period and no employee could purchase more than 111 shares in any six-month purchase period.
The 2000 Stock Purchase Plan utilized twenty-four-month offering periods, each of which consists of four six-month purchase periods, with purchases made on the last day of each such period. Offering periods began on each May 1 and November 1. The price of the common stock purchased under the 2000 Stock Purchase Plan was the lesser of 85% of the fair market value on the first day of an offering period and 85% of the fair market value on the last day of a purchase period.
The 2000 Stock Purchase Plan authorized the issuance of a total of 55,555 shares of common stock, plus an automatic annual increase equal to the lesser of (a) 27,777 shares; (b) 1% of the outstanding shares of common stock as of the end of the immediately preceding fiscal year on a fully diluted basis; and (c) a lesser amount determined by the Board of Directors. No additional shares were added to the 2000 Stock Purchase Plan. A total of 2,777 shares were purchased under the plan in 2005, for total proceeds of $10,000. The 2000 Stock Purchase Plan was terminated by the Board of Directors in November 2005.
4.Inventory
Inventory, at the lower of average cost or market as described in Notes 1 and 2, consisted of the following:
| | | | December 31,
| |
|---|
| | | | 2007
| | 2006
|
|---|
| Raw materials | | | | $ | 18,941 | | | $ | 418,597 | |
| Bulk manufactured goods | | | | | — | | | | 340,313 | |
| Finished goods | | | | | 82,843 | | | | 1,567,148 | |
| Total inventory | | | | | 101,784 | | | | 2,326,058 | |
| Less non-current portion of inventory | | | | | (60,035 | ) | | | (41,758 | ) |
| Current portion of inventory | | | | $ | 41,749 | | | $ | 2,284,300 | |
The non-current portion of inventory consists primarily of raw materials and finished goods that the Company does not expect to utilize in the twelve months following the balance sheet date.
5. | | Property and Equipment |
Property and equipment consisted primarily of equipment used to manufacture and sell our products and assets used in our research and administration. For the purpose of assessing asset impairment, the Company has grouped all of these assets together in one asset group because administration and research activities support manufacturing and sales activities and do not have a separate identifiable cash flow. The Company periodically reviews the carrying values of property and equipment to determine whether such assets have been impaired. An impairment loss must be recorded pursuant to FASB Statement of Financial Accounting Standards 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 the Company 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.
58
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company 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 for impairment in connection with the preparation of the Company’s financial statements for the quarter ended June 30, 2006, the Company compared the carrying value of such assets to updated undiscounted cash flows expected from the use of the 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 was required and a $4,901,955 impairment loss was recognized in the consolidated financial statements as of June 30, 2006. The Company estimated the fair value of equipment using an orderly liquidation method and leasehold improvements were estimated to have zero fair value.
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 recorded a loss of $1,649,902 on equipment that it determined would not be used in future manufacturing operations and would be sold or disposed. The lower of carrying value or estimated fair value less estimated costs to sell equipment to be sold totaled $64,000 at December 31, 2006 and was included in other current assets on the balance sheet.
The Company recorded depreciation and amortization expense of $350,744 in 2006 and $1,952,027 in 2005. No depreciation was recorded after June 30, 2006 for equipment depreciated under the units-of-production method due to no production during this period or for equipment depreciated under the straight-line method as estimated fair value approximated salvage value.
Accrued liabilities consisted of the following:
| | | | December 31,
| |
|---|
| | | | 2007
| | 2006
|
|---|
| Compensation and benefits | | | | $ | 142,878 | | | $ | 136,697 | |
| Legal fees and expenses | | | | | — | | | | 107,809 | |
| Facility costs | | | | | — | | | | 70,352 | |
| Research and development field trial expenses | | | | | — | | | | 59,725 | |
| Royalty | | | | | — | | | | 39,794 | |
| Promotions | | | | | 37,416 | | | | 38,683 | |
| Warranty | | | | | 25,000 | | | | 25,000 | |
| Other | | | | | 27,337 | | | | 50,224 | |
| Total accrued liabilities | | | | $ | 232,631 | | | $ | 528,284 | |
The Company provides a limited warranty to customers that its products, at the time of the first sale, conform to the chemical description on the label and under normal conditions are reasonably fit for the purposes referred to in the directions for use, subject to certain inherent risks. The Company records, at the time revenues are recognized, a liability for warranty claims based on a percentage of sales. The warranty liability is reviewed periodically and adjusted as necessary, based on historical experience, the results of product quality testing and future expectations. The following table summarizes changes to the Company’s warranty liability:
59
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
| Beginning balance | | | | $ | 25,000 | | | $ | 74,871 | | | $ | 75,000 | |
| Payments and other settlements | | | | | — | | | | — | | | | (129 | ) |
| Revisions in estimate of liability | | | | | — | | | | (49,871 | ) | | | — | |
| Ending balance | | | | $ | 25,000 | | | $ | 25,000 | | | $ | 74,871 | |
8. | | Commitments and Contingencies |
Leases
Beginning March 1, 2007, the Company leases office and warehouse space on a month-to-month basis. Rental expense for facility leases in each of the last three fiscal years was as follows:
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
| Minimum rentals | | | | $ | 71,911 | | | $ | 458,126 | | | $ | 1,452,481 | |
| Payment of accrued loss on facility subleases | | | | | — | | | | — | | | | (350,080 | ) |
| Less sublease rental income | | | | | — | | | | — | | | | (269,416 | ) |
| Net rental expense | | | | $ | 71,911 | | | $ | 458,126 | | | $ | 832,985 | |
Loss on Lease Termination
In January 2001, the Company entered into a ten-year lease agreement, with two five-year extension options to be exercised at the Company’s discretion, for 63,200 square feet of office space located near its manufacturing facility in Bothell, Washington. Rent payments were scheduled to increase by approximately eight percent every 30 months over the term of the lease. In the first half of 2001, the Company converted approximately 22,600 square feet of this building into laboratory facilities and made other improvements at a cost of approximately $9.1 million.
On September 9, 2005, the Company entered into an Amendment of Lease and Termination Agreement with the landlord to terminate the ten-year lease. The termination was effective as of August 31, 2005. In connection with the termination, the existing sublease was transferred to the landlord. The lease termination resulted in a loss totaling $2,260,538. The lease termination loss is comprised of a termination fee totaling $1,500,000, consisting of $250,000 cash and the forfeiture of a $1,250,000 security deposit, a loss on leasehold improvements and equipment at the leased facility totaling $3,480,883, and other costs, offset by the write-off of liabilities recorded for accrued losses on facility subleases and rent expense in excess of rent payments totaling $2,724,124.
Employment Agreement
On July 25, 2007, the Company entered into an employment agreement with Bradley S. Powell, its President and Chief Financial Officer. Under the terms of the employment agreement, the Company has agreed to pay Mr. Powell an annual base salary initially set at $205,000, and a lump sum amount payable upon execution of the employment agreement equal to the retroactive application of his annual base salary to December 15, 2006, the date on which he became the Company’s President. Mr. Powell will be paid a cash bonus equal to one times his annual base salary upon completion of an acquisition, merger or consolidation to which the Company is a party. Mr. Powell is also entitled to participate, subject to and in accordance with applicable eligibility requirements, in fringe benefit programs provided to other employees of the Company. The employment agreement includes noncompetition and nonsolicitation provisions that
60
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
apply to Mr. Powell during his employment and for a period of 18 months thereafter, and includes customary nondisclosure and inventions assignment provisions.
The employment agreement extinguished Mr. Powell’s change-in-control agreement, dated August 16, 2000, and severance agreement, dated January 28, 2002, in exchange for supplemental payments totaling $356,145. The supplemental payments were paid in installments as follows: one-half on July 25, 2007; one-quarter on September 30, 2007; and one-quarter on January 15, 2008.
Legal Proceedings
The Company is subject to various claims and legal actions that arise in the ordinary course of business and believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on its consolidated financial statements.
Net product sales to the following distributors accounted for more than ten percent of net revenues for the periods indicated:
| | | | Year Ended December 31,
| |
|---|
| | | | 2007
| | 2006
| | 2005
|
|---|
| Customer A | | | | $ | 47,000 | | | $ | ** | | | $ | 449,000 | |
| Customer B | | | | | 42,000 | | | | ** | | | | ** | |
| Customer C | | | | | — | | | | 720,000 | | | | 517,000 | |
| Customer D | | | | | — | | | | 478,000 | | | | ** | |
| Customer E | | | | | — | | | | 402,000 | | | | ** | |
| Customer F | | | | | — | | | | ** | | | | 509,000 | |
| Customer G | | | | | — | | | | — | | | | 384,000 | |
| Customer H | | | | | — | | | | ** | | | | 375,000 | |
| ** | | Less than ten percent. |
10. | | Defined Contribution Plan |
The Eden Bioscience Corporation 401(k) Plan and Trust (the “Plan”) was established in 1997 and revised in 2001. The Plan covers all employees of the Company who are at least 21 years old. The Plan includes a provision for deferral of up to 100% of participant compensation, subject to IRS limitations, and a discretionary employer match at an amount to be determined by the Company’s Board of Directors. To date, the Company has made no contributions to the Plan.
The Company files a U.S. Federal and certain foreign and state tax returns and did not record an income tax benefit for any of the periods presented because it has experienced operating losses since inception. The Company’s total U.S. Federal tax net operating loss carryforwards were approximately $119.2 million at December 31, 2007 and expire between 2009 and 2027. The Company’s total foreign tax net operating loss carryforwards were approximately $5.2 million at December 31, 2007 of which $2.3 million expires between 2008 and 2017 and $2.9 million does not expire. The Company has total net operating loss carryforwards in 18 states that range between $12.5 million to $2,000 per state and expire between 2008 and 2027. The Company’s total general business credit carryforwards were approximately $1.4 million at December 31, 2007 and expire between 2013 and 2026.
61
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company were to undergo an ownership change as defined in Section 382 of the U.S. Internal Revenue Code (the “Code”), its net tax loss and general business credit carryforwards generated prior to the ownership change would be subject to annual limitations, which could reduce, eliminate, or defer the utilization of these losses. Based upon an analysis completed during the third quarter of 2007 of past changes in the Company’s ownership, the Company believes that it has experienced ownership changes (as defined under Section 382) on March 20, 1996 and October 2, 2000 and absent any other ownership changes in the future, there are no significant limitations on the Company’s future ability to use tax loss carryforwards generated prior to those dates. The Company does not believe that the sale to PHC resulted in another ownership change that would further limit its future ability to use tax loss carryforwards generated after October 2000 because it was a sale of assets. However, the IRS or some other taxing authority may disagree with the Company’s position and contend that the Company has already experienced other such ownership changes or that the sale of assets resulted in an ownership change. In such case, the Company’s ability to use its tax loss carryforwards to offset future taxable income would be severely limited. If the sale of assets to PHC results in an ownership change as defined in Section 382 of the Code, the Company’s tax loss carryforwards available to offset future taxable income could be severely limited and the tax loss carryforwards may expire as a result of the limitation. If an ownership change does not occur as a result of the sale to PHC, there is still the potential for an ownership change to occur under Section 382 as a result of future changes in stock ownership. Net operating loss carryforwards may expire if the Company does not generate sufficient income to utilize the losses before their normal expiration. In addition to Section 382, certain other statutory provisions and common law doctrine could limit the Company’s opportunities to realize potential value from, or otherwise adversely affect the Company’s ability to preserve and utilize, the Company’s tax loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and income tax reporting. The Company recognized a valuation allowance equal to net deferred tax assets due to the uncertainty of realizing the benefits of the assets. The valuation allowance decreased by $0.2 million during 2007 and increased by $2.6 million during 2006 and $1.1 million in 2005. The significant components of deferred tax assets and liabilities as of December 31 are as follows:
| | | | 2007
| | 2006
| | 2005
|
|---|
Deferred tax assets:
| | | | | | | | | | | | | | |
| Net operating loss carryforwards | | | | $ | 44,743,000 | | | $ | 44,649,000 | | | $ | 44,080,000 | |
| General business credit carryforwards | | | | | 1,415,000 | | | | 1,404,000 | | | | 1,399,000 | |
| Inventory write-down | | | | | — | | | | 177,000 | | | | — | |
| Trademarks | | | | | — | | | | 155,000 | | | | 146,000 | |
| Accrued benefits | | | | | 21,000 | | | | 19,000 | | | | 94,000 | |
| Asset retirement obligation | | | | | — | | | | 55,000 | | | | 43,000 | |
| Other | | | | | 10,000 | | | | 39,000 | | | | 129,000 | |
| Gross deferred tax assets | | | | | 46,189,000 | | | | 46,498,000 | | | | 45,891,000 | |
| Less valuation allowance | | | | | (46,189,000 | ) | | | (46,428,000 | ) | | | (43,867,000 | ) |
| Net deferred tax assets | | | | | — | | | | 70,000 | | | | 2,024,000 | |
Deferred tax liabilities:
| | | | | | | | | | | | | | |
| Net property and equipment | | | | | — | | | | (70,000 | ) | | | (2,024,000 | ) |
| Net deferred tax asset | | | | $ | — | | | $ | — | | | $ | — | |
The difference between the statutory tax rate of 35% and the effective tax rate of zero recorded by the Company is primarily due to the following:
62
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | 2007
|
|---|
| Expected tax benefit at statutory tax rate | | | | $ | (350,000 | ) |
| Deduction of intercompany advances to foreign subsidiaries for income tax reporting | | | | | (501,000 | ) |
| Expiration of foreign net operating loss carryforwards | | | | | 1,148,000 | |
| Other | | | | | (58,000 | ) |
| Change in valuation allowance against net deferred tax assets | | | | | (239,000 | ) |
| Recorded net tax benefit | | | | $ | — | |
The difference between the statutory tax rate of 35% and the tax benefit of zero recorded by the Company in 2006 and 2005 is due to the Company’s full valuation allowance against net deferred tax assets.
12. | | Shareholder Rights Plan |
The Board of Directors of the Company declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock pursuant to a rights agreement dated as of June 1, 2007, between Eden Bioscience and Mellon Investor Services LLC as Rights Agent (the “Rights Agreement”). The dividend was paid on June 4, 2007 to the Company’s shareholders of record on that date. In addition, the Board of Directors authorized the issuance of one preferred share purchase right for each additional share of common stock that becomes outstanding between June 1, 2007 and the earliest of:
| • | | the distribution date, which is the earliest of: (1) the close of business on the tenth business day after a public announcement that a person has acquired beneficial ownership of 5% or in the case of any person or group that owned beneficially 5% or more of the outstanding shares of common stock on June 1, 2007, 13% (or 18% in the case of SF Holding Corp., an existing investor that owns in excess of 16% of the outstanding shares) or more of the outstanding shares of common stock (such 5% or 13% being hereafter referred to as the “Requisite Percentage”); and (2) a date that the Board of Directors designates following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer for outstanding shares of common stock that could result in the offeror becoming the beneficial owner of the Requisite Percentage or more of the outstanding shares of common stock; |
| • | | the date on which the rights expire, June 1, 2017; and |
| • | | the date, if any, on which the Board of Directors redeems the preferred share purchase rights. |
Each preferred share purchase right entitles its registered holder to purchase from the Company one one-hundredth of a share of the Series R Participating Cumulative Preferred Stock, at a price of $36.00 per one-thirty-third and one-third (1/33-1/3) of a share of Preferred Stock, subject to adjustment as described below.
To preserve the economic value of the preferred share purchase rights, the number of preferred shares or other securities issuable upon exercise of a preferred share purchase right, the purchase price, the redemption price and the number of preferred share purchase rights associated with each outstanding common share are all subject to adjustment by the Board of Directors. The Board of Directors may make adjustments in the event of any change in the common or preferred shares, including, for example, changes associated with stock dividends or stock splits, recapitalizations, mergers or consolidations, split-ups, split-offs or spin-offs, or distributions of cash, assets, options, warrants, indebtedness or subscription rights to holders of common or preferred shares.
If a person acquires beneficial ownership of the Requisite Percentage or more of the Company’s outstanding shares of common stock after June 1, 2007, the preferred share purchase rights will entitle each right holder, other than such person or any affiliate or associate of that person, to purchase, for the purchase price, the number of shares of common stock which at the time of the transaction would have a market value of twice the purchase price.
63
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After a person becomes the beneficial owner of the Requisite Percentage or more of the outstanding shares of common stock, but before a person becomes the beneficial owner of more than 50% of these shares, the Board of Directors may elect to exchange each preferred share purchase right, other than those that have become null and void and nontransferable as described above, for shares of common stock, without payment of the purchase price. The exchange rate in this situation would be one-half of the number of shares of common stock that would otherwise be issuable at that time upon the exercise of one preferred share purchase right.
At any time prior to any person acquiring beneficial ownership of the Requisite Percentage or more of the outstanding shares of common stock, the Board of Directors may redeem the preferred share purchase rights in whole, but not in part. The redemption price of $0.0075 per preferred share purchase right, subject to adjustment as provided in the Rights Agreement, may be paid in cash, shares of common stock or other Eden Bioscience securities deemed by the Board of Directors to be at least equivalent in value.
At any time prior to any person’s or group’s acquiring beneficial ownership of the Requisite Percentage or more of the outstanding shares of common stock, the Board of Directors may, without the approval of any holder of the preferred share purchase rights, supplement or amend any provision of the Rights Agreement, including the date on which the distribution date or expiration date would occur, the time during which the preferred share purchase rights may be redeemed and the terms of the preferred shares.
The principal purpose of the preferred share purchase rights is to protect the utilization of the Company’s net operating tax loss carryforwards, which could be jeopardized in the event that any investor accumulates a large position in the Company’s stock. The preferred share purchase rights have certain antitakeover effects and will cause substantial dilution to a person that attempts to acquire Eden Bioscience on terms not approved by the Board of Directors. The preferred share purchase rights should not affect any prospective offeror willing to make an all cash offer at a full and fair price, or willing to negotiate with the Board of Directors. Similarly, the preferred share purchase rights will not interfere with any merger or other business combination approved by the Board of Directors since the board of directors may, at its option, redeem all, but not less than all, of the then outstanding preferred share purchase rights at the redemption price.
13. | | Quarterly Financial Data (Unaudited) |
The following table summarizes selected unaudited quarterly financial data for each quarter of the years ended December 31, 2007 and 2006.
| | | | Three Months Ended
| |
|---|
| | | | March 31
| | June 30
| | September 30
| | December 31
|
|---|
Fiscal year 2007:
| | | | | | | | | | | | | | | | | | |
| Net revenues | | | | $ | 188,772 | | | $ | 83,127 | | | $ | 55,845 | | | $ | 23,067 | |
| Loss from operations | | | | | (470,694 | ) | | | (165,684 | ) | | | (594,091 | ) | | | (201,497 | ) |
| Net loss | | | | | (292,675 | ) | | | (81,581 | ) | | | (514,622 | ) | | | (112,135 | ) |
| Basic and diluted net loss per share | | | | | (0.12 | ) | | | (0.03 | ) | | | (0.18 | ) | | | (0.03 | ) |
Common stock trading range(1):
| | | | | | | | | | | | | | | | | | |
| High | | | | $ | 3.45 | | | $ | 4.05 | | | $ | 3.90 | | | $ | 2.76 | |
| Low | | | | | 1.50 | | | | 2.43 | | | | 2.25 | | | | 1.65 | |
Fiscal year 2006:
| | | | | | | | | | | | | | | | | | |
| Net revenues | | | | $ | 1,648,387 | | | $ | 1,760,040 | | | $ | 258,284 | | | $ | 123,573 | |
| Loss from operations | | | | | (1,224,839 | ) | | | (5,685,508 | ) | | | (1,153,705 | ) | | | (1,732,259 | ) |
| Net loss | | | | | (1,063,841 | ) | | | (5,629,950 | ) | | | (1,082,784 | ) | | | (1,668,610 | ) |
| Basic and diluted net loss per share | | | | | (0.39 | ) | | | (2.07 | ) | | | (0.39 | ) | | | (0.60 | ) |
Common stock trading range(1):
| | | | | | | | | | | | | | | | | | |
| High | | | | $ | 8.19 | | | $ | 11.25 | | | $ | 5.64 | | | $ | 7.20 | |
| Low | | | | | 4.50 | | | | 6.39 | | | | 1.59 | | | | 1.47 | |
| (1) | | Adjusted to give effect to the Company’s one-for-three reverse stock split effective April 18, 2006 and an additional one-for-three reverse stock split effective February 22, 2008. |
64
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the three months ended September, 30, 2007, the Company made supplemental payments to Bradley S. Powell, our President and Chief Financial Officer, totaling $267,109 and a $100,000 payment to Stephens Inc. to act as our exclusive financial advisor in connection with our efforts to effect one or more business combinations. On February 28, 2007, the Company recorded a $113,968 gain on sale of Harpin Protein Technology to PHC; see Note 2. In December 2006, the Company recorded a $452,347 write-down of inventory based on the estimated fair value of the inventory derived from the sale to PHC on February 28, 2007; see Note 2. In June 2006, the Company recorded a loss on impairment of equipment and leasehold improvements totaling $4,901,955; see Note 5.
14. | | 1-for-3 Reverse Stock Split |
On February 22, 2008, the Company amended its Restated Articles of Incorporation to reduce the Company’s number of authorized shares of common stock from 33,333,333 to 11,111,111 and to effect a 1-for-3 reverse stock split of the Company’s outstanding common stock. The reverse stock split was effective at 5:00 p.m., Pacific time, on February 22, 2008 and the Company’s common stock began trading as adjusted for the reverse stock split on February 25, 2008. As a result of this reverse stock split, each three shares of common stock were exchanged for one share of common stock, with cash being issued for any fractional shares, and the total number of shares outstanding was reduced from 8,149,554 shares to 2,716,518 shares. To reflect this reverse stock split, the Company has retroactively adjusted share information previously reported in the consolidated financial statements and notes as follows:
| | | | As
Originally
Reported
| | As
Currently
Reported
|
|---|
Consolidated Balance Sheets:
| | | | | | | | | | |
| Shares of common stock authorized at December 31, 2006 | | | | | 33,333,333 | | | | 11,111,111 | |
| Issued and outstanding shares of common stock at December 31, 2006 | | | | | 8,149,554 | | | | 2,716,518 | |
| $.0025 par value of outstanding shares of common stock at December 31, 2006 | | | | $ | 20,374 | | | $ | 6,791 | |
| Additional paid-in capital at December 31, 2006 | | | | $ | 132,849,727 | | | $ | 132,863,310 | |
| |
Consolidated Statements of Operations:
| | | | | | | | | | |
| Basic and diluted net loss per share for the year ended December 31, 2006 | | | | $ | (1.16 | ) | | $ | (3.48 | ) |
| Weighted average shares outstanding used to compute net loss per share — basic and diluted for the year ended December 31, 2006 | | | | | 8,144,680 | | | | 2,714,893 | |
| Basic and diluted net loss per share for the year ended December 31, 2005 | | | | $ | (1.34 | ) | | $ | (4.01 | ) |
| Weighted average shares outstanding used to compute net loss per share — basic and diluted for the year ended December 31, 2005 | | | | | 8,131,025 | | | | 2,710,342 | |
| |
Consolidated Statements of Shareholders’ Equity and Comprehensive Loss: | | | | | | | | | | |
| Outstanding shares of common stock at December 31, 2004 | | | | | 8,127,221 | | | | 2,709,075 | |
| $.0025 par value of outstanding shares of common stock at December 31, 2004 | | | | $ | 20,318 | | | $ | 6,773 | |
| Additional paid-in capital at December 31, 2004 | | | | $ | 132,576,619 | | | $ | 132,590,164 | |
| Sale of common stock in 2005 — number of shares of common stock sold | | | | | 8,333 | | | | 2,777 | |
| Sale of common stock in 2005 — par value of common stock sold | | | | $ | 21 | | | $ | 7 | |
| Sale of common stock in 2005 — additional paid-in capital of common stock sold | | | | $ | 9,979 | | | $ | 9,993 | |
| Outstanding shares of common stock at December 31, 2005 | | | | | 8,135,554 | | | | 2,711,852 | |
| $.0025 par value of outstanding shares of common stock at December 31, 2005 | | | | $ | 20,339 | | | $ | 6,780 | |
| Additional paid-in capital at December 31, 2005 | | | | $ | 132,586,598 | | | $ | 132,600,157 | |
| Exercise of stock options in 2006 — number of shares of common stock sold | | | | | 14,000 | | | | 4,666 | |
| Exercise of stock options in 2006 — par value of common stock sold | | | | $ | 35 | | | $ | 11 | |
| Exercise of stock options in 2006 — additional paid-in capital sold | | | | $ | 20,965 | | | $ | 20,989 | |
| Outstanding shares of common stock at December 31, 2006 | | | | | 8,149,554 | | | | 2,716,518 | |
| $.0025 par value of outstanding shares of common stock at December 31, 2006 | | | | $ | 20,374 | | | $ | 6,791 | |
| Additional paid-in capital at December 31, 2006 | | | | $ | 132,849,727 | | | $ | 132,863,310 | |
65
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | As Originally
Reported
| | As Currently
Reported
|
Note 1. Organization and Summary of Significant Accounting Policies: | | | | | | | | | | |
Notes to Consolidated Financial Statements: | | | | | | | | | | |
Accounting for Stock Compensation: | | | | | | | | | | |
| Basic and diluted net loss per share for the year ended December 31, 2005 — as reported | | | | $ | (1.34 | ) | | $ | (4.01 | ) |
The effect on loss per share had compensation cost been recognized based upon the estimated fair value on the grant date of stock options in accordance with SFAS 123, as amended by FASB Statement of Financial Accounting Standards No. 148Accounting for Stock-Based Compensation — Transition and Disclosure: Basic and diluted net loss per share for the year ended December 31, 2005 — pro forma | | | | $ | (1.41 | ) | | $ | (4.24 | ) |
| Estimated fair value per option granted during the year ended December 31, 2006 | | | | $ | 0.57 | | | $ | 1.71 | |
| Estimated fair value per option granted during the year ended December 31, 2005 | | | | $ | 0.46 | | | $ | 1.38 | |
| |
Net Loss per Share: | | | | | | | | | | |
| Shares issuable pursuant to stock options that have not been included in the basic and diluted net loss per share for the year ended December 31, 2006 because they are antidilutive totaled | | | | | 741,384 | | | | 247,127 | |
| Shares issuable pursuant to stock options that have not been included in the basic and diluted net loss per share for the year ended December 31, 2005 because they are antidilutive totaled | | | | | 882,583 | | | | 294,177 | |
Note 2. Sale of Harpin Protein Technology to Plant Health Care, Inc.: | | | | | | | | | | |
| As consideration for the exclusive worldwide licensing agreement with CRF for certain patents, patent applications and biological material relating to harpin proteins and related technology, the Company originally issued shares of common stock to CRF in May 1995 totaling | | | | | 133,333 | | | | 44,444 | |
| |
Note 3. Shareholders’ Equity: | | | | | | | | | | |
Common Stock Options: | | | | | | | | | | |
| The initial total of shares of common stock reserved by the Board of Directors under the 2000 Plan | | | | | 500,000 | | | | 166,666 | |
| Shares of common stock reserved under the 2000 Plan may automatically increase annually by | | | | | 500,000 | | | | 166,666 | |
| Number of stock options outstanding at December 31, 2004 | | | | | 873,480 | | | | 291,158 | |
| Weighted average exercise price of stock options outstanding at December 31, 2004 | | | | $ | 8.73 | | | $ | 26.19 | |
| Number of stock options granted in 2005 | | | | | 70,000 | | | | 23,333 | |
| Weighted average exercise price of stock options granted in 2005 | | | | $ | 1.86 | | | $ | 5.58 | |
| Number of stock options forfeited in 2005 | | | | | (60,942 | ) | | | (20,314 | ) |
| Weighted average exercise price of stock options forfeited in 2005 | | | | $ | 10.86 | | | $ | 32.58 | |
| Number of stock options outstanding at December 31, 2005 | | | | | 882,538 | | | | 294,177 | |
| Weighted average exercise price of stock options outstanding at December 31, 2005 | | | | $ | 8.04 | | | $ | 24.12 | |
| Number of stock options granted in 2006 | | | | | 9,999 | | | | 3,333 | |
| Weighted average exercise price of stock options granted in 2006 | | | | $ | 2.16 | | | $ | 6.48 | |
| Number of stock options exercised in 2006 | | | | | (14,000 | ) | | | 4,666 | |
| Weighted average exercise price of stock options exercised in 2006 | | | | $ | 1.50 | | | $ | 4.50 | |
| Number of stock options forfeited in 2006 | | | | | (137,153 | ) | | | (45,717 | ) |
| Weighted average exercise price of stock options forfeited in 2006 | | | | $ | 6.72 | | | $ | 20.16 | |
| Number of stock options outstanding at December 31, 2006 | | | | | 741,384 | | | | 247,127 | |
| Weighted average exercise price of stock options outstanding at December 31, 2006 | | | | $ | 8.31 | | | $ | 24.93 | |
| Number of stock options exercisable at December 31, 2006 | | | | | 719,366 | | | | 239,788 | |
| Weighted average exercise price of stock options exercisable at December 31, 2006 | | | | $ | 9.04 | | | $ | 27.12 | |
| Number of stock options exercisable at December 31, 2005 | | | | | 629,969 | | | | 209,989 | |
66
EDEN BIOSCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | As Originally
Reported
| | As Currently
Reported
|
| Weighted average exercise price of stock options exercisable at December 31, 2005 | | | | $ | 9.48 | | | $ | 28.44 | |
Employee Stock Purchase Plan: | | | | | | | | | | |
| Under the 2000 Stock Purchase Plan, the maximum aggregate number of shares that could be purchased in any six-month purchase period | | | | | 41,666 | | | | 13,888 | |
| Under the 2000 Stock Purchase Plan, the maximum number of shares an employee could purchase in any six-month purchase period | | | | | 333 | | | | 111 | |
| Total shares of common stock authorized for issuance under the 2000 Stock Purchase Plan | | | | | 166,666 | | | | 55,555 | |
| Shares of common stock reserved under the 2000 Stock Purchase Plan may automatically increase annually by | | | | | 83,333 | | | | 27,777 | |
| Common shares purchased under the plan in 2005 | | | | | 8,333 | | | | 2,777 | |
67
Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
See our definitive proxy statement on Schedule 14A filed on April 23, 2007 under the heading “Independent Registered Public Accounting Firm—Change of Independent Registered Public Accounting Firms” for information regarding the change in our independent registered public accounting firm in 2007. During the fiscal years ended December 31, 2005 and 2006 and through March 30, 2007, there were no disagreements with our former independent registered public accounting firm of the type described in Item 304(a)(1)(iv) of Regulation S-K or reportable events as described in Item 304(a)(1)(v) of Regulation S-K.
Item 9A(T). Controls and Procedures.
Disclosure Controls and Procedures
Our President and Chief Financial Officer has evaluated the effectiveness and design 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 period covered by this annual report. Based on that evaluation, our President and Chief Executive Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our President and Chief Executive Officer to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
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Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2007, which were identified in connection with our management’s evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. | | Other Information. |
Not Applicable.
PART III
Item 10. | | Directors, Executive Officers and Corporate Governance. |
The information required by this item is incorporated herein by reference to the sections entitled “Proposal—Election of Directors,” “Board of Directors and Corporate Governance—Number, Term and Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Board of Directors and Corporate Governance—Committees of the Board of Directors—Audit Committee” in our proxy statement for the 2008 annual meeting of shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2007. Information regarding our executive officer is set forth in Item 4 of Part 1 of this annual report under the caption “Executive Officers and Directors of the Registrant.”
See Item 1 “Business—Available Information” for information on the Code of Ethics applicable to our President and Chief Executive Officer, which information is incorporated herein by reference.
Item 11. | | Executive Compensation. |
The information required by this item is incorporated herein by reference to the sections entitled “Compensation Discussion and Analysis,” “Executive Compensation,” “Board of Directors and Corporate Governance—Board of Directors Compensation,” “Board of Directors and Corporate Governance—Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our proxy statement for the 2008 annual meeting of shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2007.
Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item is incorporated herein by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” in our proxy statement for the 2008 annual meeting of shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2007.
Item 13. | | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item is incorporated herein by reference to the sections entitled “Board of Directors and Corporate Governance—Related Person Transactions,” “Proposal—Election of Directors,” “Board of Directors and Corporate Governance—Number, Term and Election of Directors,” “Board of Directors and Corporate Governance—Independence of the Board of Directors” and “Board of Directors and Corporate Governance—Committees of the Board of Directors” in our proxy statement for the 2008 annual meeting of shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2007.
Item 14. | | Principal Accountant Fees and Services. |
The information required by this item is incorporated herein by reference to the section entitled “Independent Registered Public Accounting Firm” in our proxy statement for the 2008 annual meeting of shareholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2007.
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PART IV
Item 15. | | Exhibits and Financial Statement Schedules. |
The following documents are being filed as part of this Annual Report on Form 10-K.
| (a) | | Financial Statements. |
| | | | Page
|
|---|
| Report of Independent Registered Public Accounting Firms | | | | | 42 | |
| Consolidated Balance Sheets | | | | | 44 | |
| Consolidated Statements of Operations | | | | | 45 | |
| Consolidated Statements of Shareholders’ Equity and Comprehensive Loss | | | | | 46 | |
| Consolidated Statements of Cash Flows | | | | | 47 | |
| Notes to Consolidated Financial Statements | | | | | 48 | |
Exhibit 32.1 is being furnished with this Annual Report on Form 10-K and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act or otherwise subject to the liability of that section.
Exhibit
Number
| | | | Description
|
|---|
| 3.1* | | | | Restated Articles of Incorporation of the Registrant, as amended by Articles of Amendment dated April 17, 2006, June 1, 2007 (including designation of Series R Participating Cumulative Preferred Stock) and February 21, 2008. |
| 3.2* | | | | Third Amended and Restated Bylaws of the Registrant, as amended. |
| 4.1 | | | | Rights Agreement, dated as of June 1, 2007, between Eden Bioscience and Mellon Investor Services LLC (including form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares) (incorporated by reference to Exhibit 4.1 to Eden Bioscience’s Registration Statement on Form 8-A (File No. 001-33510), filed with the SEC on June 4, 2007). |
| 9.1 | | | | Form of Voting Trust Agreement between Stephens-EBC, LLC and James Sommers, as Trustee (incorporated by reference to Exhibit 9.1 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 10.1 | | | | Asset Purchase Agreement by and among Plant Health Care, Inc., Plant Health Care plc and Eden Bioscience Corporation dated as of December 1, 2006 (incorporated by reference to Exhibit 10.1 to Eden Bioscience’s Current Report on Form 8-K (Commission File No. 0-31499), filed with the SEC on December 7, 2006). |
| 10.3 | | | | License and Supply Agreement between PHC and the Company, dated as of February 28, 2007 (incorporated by reference to Exhibit 10.3 to Eden Bioscience’s Current Report on Form 8-K (Commission File No. 0-31499), filed with the SEC on March 2, 2007). |
| 10.6** | | | | 1995 Combined Incentive and Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.3 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 10.7** | | | | 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 10.8** | | | | Form of Option Letter Agreement for Directors and Officers (incorporated by reference to Exhibit 10.1 to Eden Bioscience’s Quarterly Report on Form 10-Q (Commission File No. 0-31499), filed with the SEC on October 28, 2005). |
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Exhibit
Number
| | | | Description
|
|---|
| 10.9 | | | | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 10.10** | | | | Employment Agreement, dated July 25, 2007, between the Registrant and Bradley S. Powell (incorporated by reference to Exhibit 10.1 to Eden Bioscience’s Current Report on Form 8-K (Commission File No. 001-33510), filed with the SEC on July 30, 2007). |
| 10.11** | | | | Change of Control Agreement, dated August 16, 2000, between the Registrant and Bradley S. Powell (incorporated by reference to Exhibit 10.10 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 10.12** | | | | Letter agreement, dated January 28, 2002, between the Registrant and Bradley S. Powell (incorporated by reference to Exhibit 10.15 to Eden Bioscience’s Annual Report on Form 10-K (Commission File No. 0-31499), filed with the SEC on March 29, 2002). |
| 10.13** | | | | Change of Control Agreement, dated August 16, 2000, between the Registrant and Zhongmin Wei (incorporated by reference to Exhibit 10.11 to Eden Bioscience’s Registration Statement on Form S-1, as amended (Commission File No. 333-41028), initially filed with the SEC on July 7, 2000). |
| 10.14** | | | | Agreement related to severance, dated August 1, 2006, between Dr. Zhongmin Wei and Eden Bioscience Corporation (incorporated by reference to Exhibit 10.2 to Eden Bioscience’s Quarterly Report on Form 10-Q (Commission File No. 0-31499), filed with the SEC on August 4, 2006). |
| 21.1 | | | | Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to Eden Bioscience’s Annual Report on Form 10-K (Commission File No. 0-31499), filed with the SEC on March 29, 2002). |
| 23.1* | | | | Consent of Peterson Sullivan PLLC. |
| 23.2* | | | | Consent of KPMG LLP. |
| 31.1* | | | | Rule 13a-14(a) Certification (President and Chief Financial Officer). |
| 32.1* | | | | Section 1350 Certification (President and Chief Financial Officer). |
| ** | | Management contract or compensatory plan, contract or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Bothell, State of Washington, on March 27, 2008.
EDEN BIOSCIENCE CORPORATION
| By: | | /s/ Bradley S. Powell
Bradley S. Powell,
President, Chief Financial Officer and Secretary |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated below on March 27, 2008.
Signature
| | | | | | Title
|
|---|
/s/ Bradley S. Powell
Bradley S. Powell | | | | | | President, Chief Financial Officer and Secretary
(Principal Executive, Financial
and Accounting Officer) |
| |
/s/ William T. Weyerhaeuser
William T. Weyerhaeuser | | | | | | Chairman of the Board of Directors |
| |
/s/ Rhett R. Atkins
Rhett R. Atkins | | | | | | Director |
| |
/s/ Gilberto H. Gonzalez
Gilberto H. Gonzalez | | | | | | Director |
| |
/s/ Roger Ivesdal
Roger Ivesdal | | | | | | Director |
| |
/s/ Jon E. M. Jacoby
Jon E. M. Jacoby | | | | | | Director |
| |
/s/ Albert A. James
Albert A. James | | | | | | Director |
| |
/s/ Agatha L. Maza
Agatha L. Maza | | | | | | Director |
| |
/s/ Richard N. Pahre
Richard N. Pahre | | | | | | Director |
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