As described above, our future capital
requirements will depend on the success of our Home and Garden Business and whether or not the Plan of Dissolution is approved by our shareholders and
implemented. 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 March 31, 2009 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.
Capital Resources
At March 31, 2009, our cash and cash
equivalents totaled $4.8 million, a decrease of $0.3 million from the balance of $5.1 million at December 31, 2008. We plan to finance our operations
in 2009 using cash from operations and existing cash and cash equivalents. As discussed in detail above and in the section entitled “Results of
Operations — Income Taxes,“ due to the importance of avoiding a future ownership change under the tax laws, we are limited in our ability
to issue additional stock to provide capital for our business. As of March 31, 2009, there were no material commitments for capital
expenditures.
Net Cash Used in Operations
Net cash used in operations increased
by $41,814, or 19%, to $263,773 in the first quarter of 2009 from $221,959 in the same period of 2008. Net cash used in operations during the first
quarter of 2009 resulted primarily from a net loss of $226,721 and net fluctuations in various asset and liability balances totaling $37,052. Net cash
used in operations during the first quarter of 2008 resulted primarily from a net loss of $130,276 offset by net fluctuations in various asset and
liability balances totaling $93,358. We expect that net cash used in operations will continue to be significant.
Exchange Rate Risk
Historically, we conducted our
operations in three primary functional currencies: the U.S. dollar, the euro and, until December 31, 2004, the Mexican peso. We closed and dissolved
our European operation in December 2008. 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.
Critical Accounting Policies, Estimates and
Judgments
Our critical accounting policies are
more fully described in Note 1 to our condensed consolidated financial statements included in this Quarterly Report and in Note 1 to our audited
consolidated financial statements included in our most recent Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission
on March 27, 2009. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are
based on historical experience, terms of existing contracts, commonly accepted industry practices, information provided by our customers and other
assumptions that we believe are reasonable under the circumstances. Our estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the consolidated financial statements in the period in which they are determined to be necessary. Actual results may differ
from these estimates under different assumptions or conditions. Our critical accounting policies and estimates include:
Revenue Recognition
We recognize revenue from product
sales, 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: sales terms and
arrangements, including customer payment terms, historical experience and current incentive programs.
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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.
We also review our inventory to
determine inventory classification. Inventory expected to be utilized in the next 12-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.
Stock-Based Compensation
We account for stock-based compensation
in accordance with the fair value recognition provisions of Financial Accounting Standards Board, or “FASB,” Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment. 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 December 2007, the FASB issued
Statement of Financial Accounting Standards 141(R), Business Combinations, or “SFAS No. 141(R).” SFAS No. 141(R) improves the
relevance, representational faithfulness, and comparability of the information that a reporting entity provides in is financial reports about a
business combination and its effects. SFAS No. 141(R) is effective for us beginning with fiscal year 2009. The impact of adopting SFAS No. 141(R) was
not significant to the consolidated financial statements.
In December 2007, the FASB issued
Statement of Financial Standards 160, Noncontrolling Interests in Consolidated Financial Statements, or “SFAS No. 160.” SFAS
No. 160 improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated
financial statements. SFAS No. 160 is effective for us beginning with fiscal year 2009. The impact of adopting SFAS No. 160 was not significant to the
consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
We do not currently hold any derivative
instruments and we do not engage in hedging activities. Also, we do not have any outstanding variable 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. Further, cash deposits with banks may exceed the amount of insurance provided on such deposits.
However, these deposits may be redeemed upon demand. Our credit risk is managed by investing our excess cash in high-quality money market instruments
and securities of the U.S. government. However, our direct exposure to interest rate fluctuations is currently not material to our results of
operations.
Historically, we have conducted our
operations in three primary functional currencies: the U.S. dollar, the euro and, until December 31, 2004, the Mexican peso. We closed and dissolved
our European operations in December 2008. 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.
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Item 4T. Controls and Procedures
Our Chief Executive Officer 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 amended, or the “Exchange Act”) as of the end of the fiscal quarter covered by this Quarterly
Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal
quarter covered by this Quarterly Report on Form 10-Q, 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 Exchange Act 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 Chief Executive Officer and Chief Financial Officer to allow
timely decisions regarding required disclosure.
There were no changes to our internal
control over financial reporting that occurred during the quarter ended March 31, 2009, 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.
PART II — OTHER INFORMATION
Item 1A. Risk Factors
Our results of operations and
financial condition are subject to numerous risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, filed with the Securities and Exchange Commission on March 27, 2009. You should carefully consider those risk factors, together with
all of the other information included in this Quarterly Report on Form 10-Q. Additional considerations not presently known to us or that we currently
believe are immaterial may also impair our business operations. If any of such risks actually occur, our business, financial condition or operating
results could be materially and adversely affected, the value of our common stock could decline and you may lose all or part of your
investment.
Except as set forth below, there
have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
Risks Related to the Plan of Dissolution
If the amount of our liabilities and
expenses is higher than we currently anticipate, the amount we distribute to our shareholders pursuant to the Plan of Dissolution may be less than the
amount we have estimated, or may be depleted entirely.
The amount of cash ultimately
distributed to shareholders pursuant to the Plan of Dissolution depends on the amount of our liabilities and expenses during the liquidation process,
and the amount we generate from the sale of our remaining non-cash assets, consisting primarily of our Home and Garden Business. We have attempted to
estimate such liabilities and expenses in our definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission, or
“SEC,” on April 1, 2009. However, those estimates may be inaccurate. Factors that could impact our estimates include the
following:
• |
|
If any of the estimates regarding the Plan of Dissolution and
the expense of satisfying our outstanding obligations and liabilities during the liquidation process are inaccurate, the amount we distribute to our
shareholders may be reduced or may be entirely depleted. For instance, if claims are asserted against us and are successful, we will have to defend or
settle these claims before making distributions to our shareholders; |
• |
|
We have made certain estimates regarding the expense of
personnel required and other operating expenses (including legal, accounting and other professional fees) necessary to liquidate and dissolve our
company. Our actual expenses could vary significantly and are dependent on the timing of the effective date of dissolution, or the “Effective
Date,” and the timing and manner of the sale of our non-cash assets. If the timing for either event differs from our plans, we may incur
additional expenses above our current estimates, which could reduce or deplete entirely funds available for distribution to our shareholders;
and |
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• |
|
We have assumed that all material contract rights can be
effectively transferred. If we are unable to obtain any required consents with the counterparties to those contracts, our ability to transfer such
rights may be impaired. |
After the Effective Date, we have an
obligation to continue to comply with the applicable reporting requirements of the Exchange Act even though compliance with these reporting
requirements may be economically burdensome. In order to curtail expenses, we intend, after the Effective Date, to seek relief from the SEC from the
reporting requirements under the Exchange Act. We anticipate that, if such relief were granted, we would continue to file current reports on Form 8-K
to disclose material events relating to our dissolution and liquidation along with any other reports that the SEC might require. However, the SEC may
not grant any such relief, in which case we will be required to continue to incur the expenses associated with these reporting requirements, which will
reduce the cash available for distribution to our shareholders.
If the amount of our contingency
reserve is insufficient to satisfy the aggregate amount of our liabilities, each shareholder may be liable to our creditors for the amount of
liquidating distributions received by such shareholder under the Plan of Dissolution.
After the Effective Date, our corporate
existence will continue, but we will not be able to carry on any business except that appropriate to wind up and liquidate our business and affairs.
Following the Effective Date, we will pay all expenses and known liabilities and our board will establish a contingency reserve consisting of cash or
other assets that we believe to be adequate for the satisfaction of all current, contingent or conditional liabilities. We also may seek to acquire
insurance coverage or take other steps our board determines are advisable to provide reasonable provision for the satisfaction of the estimated amount
of such liabilities.
In the event the amount of our
contingency reserve and other measures reasonably calculated to provide for satisfaction of liabilities are insufficient, each of our shareholders
could be held liable for amounts due to our creditors to the extent of the amount of liquidating distributions received by such shareholder. In such
event, a shareholder could be required to return all amounts received as distributions pursuant to the Plan of Dissolution and ultimately could receive
nothing under the Plan of Dissolution. Moreover, for U.S. federal income tax purposes, payments made by a shareholder in satisfaction of our
liabilities not covered by the assets in our contingency reserve or otherwise satisfied through insurance or other reasonable means generally would
produce a capital loss for such shareholder in the year the liabilities are paid. The deductibility of any such capital loss generally would be subject
to certain limitations under the Internal Revenue Code of 1986, as amended. We cannot assure you that the contingency reserve or any insurance or other
arrangements that we establish will be adequate to satisfy the amount of all of our expenses and liabilities.
Distributions to our shareholders could be
delayed.
All or a portion of any distributions
to our shareholders could be delayed, depending on many factors, including:
• |
|
if a creditor seeks an injunction against the making of
distributions to our shareholders on the ground that the amounts to be distributed are needed to provide for the satisfaction of our
liabilities; |
• |
|
if we became a party to unanticipated lawsuits or other claims
asserted by or against us; |
• |
|
if we were unable to sell our remaining non-cash assets or if
such sales took longer than expected; |
• |
|
if we were unable to settle claims with creditors or if such
settlements took longer than expected; or |
• |
|
if the Department of Revenue of the State of Washington audits
us and thereby delays the issuance of the revenue clearance certificate required to file our articles of dissolution with the Secretary of State of the
State of Washington. |
Any of the foregoing could delay or
substantially diminish, or reduce to zero, the amount available for distribution to our shareholders. In addition, pursuant to the Washington Business
Corporation Act, or ”WBCA,“ claims and demands may be asserted against us at any time during the three years following the Effective
Date. Accordingly, our board of directors plans to establish a contingency reserve and may seek insurance coverage reasonably calculated to provide for
satisfaction of the reasonably estimated amount of any claims, suits or liabilities reasonably
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likely to arise during the three-year period following the
Effective Date. As a result of these factors, we may retain for distribution at a later date some or all of the amounts, if any, that we expect to
distribute to shareholders.
Shareholders will lose the opportunity to capitalize on
potential growth opportunities from the continuation of our business.
Our board of directors believes that
the Plan of Dissolution is more likely to result in greater returns to shareholders than if we continued the status quo or pursued other alternatives.
However, if the Plan of Dissolution is approved, shareholders will lose the opportunity to capitalize on potential business and possible future growth
opportunities that may have arisen if we had continued the NOL Strategy or pursued other alternatives. It is possible that these opportunities could
prove to be more valuable than the liquidating distributions our shareholders would receive pursuant to the Plan of Dissolution.
Shareholders may not be able to
recognize a loss for U.S. federal income tax purposes until they receive a final distribution from us.
As a result of our dissolution and
liquidation, for U.S. federal income tax purposes, our shareholders generally will recognize gain or loss equal to the difference between (i) the sum
of the amount of cash and the fair market value (at the time of distribution) of property, if any, distributed to them, and (ii) their tax basis for
their shares of our common stock. Liquidating distributions pursuant to the Plan of Dissolution may occur at various times and in more than one tax
year. A shareholder generally will recognize any loss only when the shareholder receives our final liquidating distribution to shareholders, and then
only if the aggregate value of all liquidating distributions with respect to a share is less than the shareholder’s tax basis for that share.
Shareholders are urged to consult their own tax advisors as to the specific tax consequences to them of our dissolution and liquidation pursuant to
the Plan of Dissolution.
Recordation of transfers of our common stock on our stock
transfer books will be restricted after the Effective Date, and thereafter it generally will not be possible for shareholders to change record
ownership of our stock.
We intend to close our stock transfer
books at the close of business on the Effective Date. Thereafter, certificates representing our common stock will not be assignable or transferable on
the books of our transfer agent except by will, intestate succession or operation of law, and will no longer be traded on The Nasdaq Capital Market.
From and after the Effective Date, and subject to applicable law, our common stock will be deemed cancelled and each shareholder will cease to have any
rights in respect thereof, except the right to receive distributions in accordance with the Plan of Dissolution. The proportionate interests of all of
our shareholders will be fixed in our books on the basis of their respective stock holdings at the close of business on the Effective Date. Further,
after the Effective Date, any distributions that we make will be made solely to the shareholders of record at the close of business on the Effective
Date (except as may be necessary to reflect subsequent transfers recorded on our books as a result of any assignments by will, intestate succession or
operation of law).
Further shareholder approval will not be required in
connection with the implementation of the Plan of Dissolution.
Approval of the Plan of Dissolution by
our shareholders at the special meeting will constitute full and complete authority for our board of directors and officers, without further
shareholder approval, to proceed with the dissolution and liquidation of our company in accordance with the applicable provisions of the WBCA.
Accordingly, we will be authorized to dispose of our Home and Garden Business and other non-cash assets without further shareholder approval. As a
result, our board of directors may authorize actions in implementing the Plan of Dissolution, including the sale of our Home and Garden Business, with
which our shareholders may not agree.
Our board of directors may revoke or delay implementation of
the Plan of Dissolution even if our shareholders approve it.
Even if our shareholders approve the
Plan of Dissolution at the special meeting, our board of directors has reserved the right, if such action would be in the best interest of our company
and our shareholders and without further shareholder approval, to revoke the Plan of Dissolution to the extent and in the manner permitted by the WBCA
at any time (i) prior to the Effective Date or (ii) at any time within 120 days after the Effective Date. In addition, our board of directors may delay
the implementation of the Plan of Dissolution if it determines such delay is in the best interests of our company and our
shareholders.
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If prior to the Effective Date, we were
to become an acquisition target or receive a proposal for implementing our NOL Strategy or other alternative transaction, our board may elect to delay
or revoke the Plan of Dissolution if it believes that such acquisition or alternative transaction could or would be more favorable to and better serve
the interests of our company and our shareholders. A revocation of the Plan of Dissolution would result in our shareholders not receiving any
liquidating distributions. Any delay in the implementation of the Plan of Dissolution could result in increased expenses, which would reduce the amount
available for distribution to our shareholders.
If our shareholders do not approve the Plan of Dissolution,
our resources may diminish completely.
If our shareholders do not approve the
Plan of Dissolution or if the Plan of Dissolution is not otherwise implemented pursuant to our board’s ability to abandon the Plan of Dissolution
as discussed above, our board of directors will explore what, if any, strategic alternatives are available for the future of our company, which may
include the continued exploration of our NOL Strategy. Other possible alternatives include seeking to raise capital from the sale of securities, which
could result in substantial dilution to our existing shareholders and the granting of superior rights to the new shareholders, selling all of our stock
or assets, changing our business focus, expanding the scope of our business through relationships with third parties, seeking voluntary dissolution at
a later time and with potentially diminished assets or seeking bankruptcy protection. There can be no assurance that any of these alternatives would
result in greater shareholder value than the proposed Plan of Dissolution. Moreover, any alternative we select may have unanticipated negative
consequences, and we will face a number of risks, including:
• |
|
We are likely to continue to incur net losses from the operation
of our Home and Garden Business. Moreover, our Home and Garden Business may be negatively impacted by our announced intent to dissolve our company,
which may cause our customers to transition to other products. Our net losses may increase in the future as we continue to operate our Home and Garden
Business and could consume a material amount of our limited cash resources. We discuss the risks of the continued operation of our Home and Garden
Business in further detail under the heading ”Risk Factors— Risks Related to Our Continuing Business Operations“ in our Annual
Report on Form 10-K for the year ended December 31, 2008; |
• |
|
If we were to continue to explore our NOL Strategy, we cannot
assure you that we would ever realize the value of our deferred tax assets. For example, if shareholders do not approve the Plan of Dissolution, there
can be no assurance that the holders of our common stock, including one or more of the holders of 5% or more of our common stock, will not sell their
shares and thereby potentially impair our ability to utilize our net operating loss carryforwards by causing an ”ownership change“ (as
defined in Section 382 of the Code). In such case, pursuit of the NOL Strategy may not be among the alternatives available to us. The NOL Strategy is
extremely speculative and subject to a number of risks that we describe in further detail under the heading ”Risk Factors— Risks Related
to Our Business Plan to Utilize Net Operating Loss Carryforwards“ in our Annual Report on Form 10-K for the year ended December 31, 2008, and
the continued pursuit of the NOL Strategy may consume substantially all of our remaining cash resources; |
• |
|
Any financing we may require to continue our operations or to
acquire another business as part of the NOL Strategy may not be available on acceptable terms, if at all, particularly in light of the current economic
crisis, which we believe will significantly impair our ability to attract capital through the sale of securities or otherwise obtain financing. Any
financing we are able to obtain may substantially dilute the interests of our current shareholders; |
• |
|
We would continue to incur expenses associated with being a
public reporting company, including ongoing SEC reporting obligations. These expenses would accelerate the depletion of our existing cash resources;
and |
• |
|
Prior to the public announcement of our board’s approval of
the Plan of Dissolution, our common stock had generally been trading below $1.00 per share for the prior two months. If our shareholders do not approve
the Plan of Dissolution, we believe it is likely that the price of our common stock will fall below The Nasdaq Capital Market’s $1.00 minimum bid
price requirement and that our common stock will eventually be delisted from The Nasdaq Capital Market, which could significantly impair our ability to
fund operations through the sale of our securities. |
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If our shareholders do not approve the Plan of Dissolution,
our stock price may be adversely affected.
On December 4, 2008, the day
immediately prior to our announcement that our board of directors had approved the Plan of Dissolution, the closing sales price of our common stock on
The Nasdaq Capital Market was $0.79. From December 5, 2008 to May 4, 2009, the sales price of our common stock on The Nasdaq Capital Market has ranged
from a high of $1.70 and a low of $0.85. If our shareholders do not approve the Plan of Dissolution, our stock price may be adversely affected due to
the market’s doubt as to our ability to successfully operate our Home and Garden Business or to successfully pursue other strategic alternatives,
and we may not be able to retain our listing on The Nasdaq Capital Market.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
On September 26, 2000, the SEC declared
effective our Registration Statement on Form S-1, as amended (Registration No. 333-41028), as filed with the SEC in connection with our initial public
offering. Our net proceeds, after accounting for $7.0 million in underwriting discounts and commissions and approximately $1.6 million in other
expenses of the offering, were $91.5 million. At March 31, 2009, we had used approximately $18.6 million of the net offering proceeds to expand and
enhance our former manufacturing and research and development and administration facilities, and approximately $68.1 million for working capital and
general corporate purposes. The remaining portion of the net offering proceeds has been invested in cash equivalent instruments. Our use of the
proceeds from the offering does not represent a material change in the use of proceeds described in the prospectus included as part of the Registration
Statement.
Item 6. Exhibits
Exhibit 31.1 is being filed as part of
this quarterly report on Form 10-Q. Exhibit 32.1 is being furnished with this quarterly report on Form 10-Q.
Exhibit
Number
|
|
|
|
Description
|
| 31.1 |
|
|
|
Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer and Chief Financial Officer). |
| 32.1 |
|
|
|
Section 1350
Certification (Chief Executive Officer and Chief Financial Officer). |
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SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
EDEN BIOSCIENCE
CORPORATION
Date: May 5, 2009
By: |
|
/s/ Nathaniel T. Brown
Nathaniel T. Brown
Chief Executive Officer, Chief Financial Officer and Secretary
(Signing on behalf of the registrant and as
Principal Financial and Accounting Officer) |
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