Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and accompanying notes
thereto included in this report and with our 2003 audited financial statements
and notes thereto included in our Annual Report on Form 10-K, which was filed
with the Securities and Exchange Commission on March 26, 2004.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. We use words such as "anticipate," "believe,"
"expect," "future" and "intend," the negative of these terms and similar
expressions to identify forward-looking statements. However, these words are not
the exclusive means of identifying such statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the factors described below and under the caption
"Factors That May Affect Our Business, Future Operating Results and Financial
Condition" set forth at the end of this Item 2. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this report. The cautionary statements made in this report apply to all
forward-looking statements wherever they appear in this report. We undertake no
obligation to publicly release any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
We are a plant health technology company focused on developing,
manufacturing and marketing innovative products for agriculture using our
natural protein-based harpin technology. We have a fundamentally new, patented
and proprietary technology that we believe enhances plant health and improves
overall crop production and quality. We believe our technology provides growers
with valuable benefits by increasing crop yields, quality and shelf-life; by
improving the plant's ability to suppress certain diseases and other
environmental stresses; and by enhancing the uptake of nutrients.
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We have incurred significant operating losses since inception. At September
30, 2004, we had an accumulated deficit of $103.3 million. We incurred net
losses of $6.3 million and $8.7 million for the nine months ended September 30,
2004 and 2003, respectively, and annual losses of $11.2 million in 2003, $23.5
million in 2002 and $23.7 million in 2001. We expect to incur significant
additional net losses as we proceed with the commercialization of our current
products and the development of new products and technologies. These expected
net losses and working capital requirements will consume a material amount of
our cash resources. If net product sales do not significantly increase in the
near term, we will have to further reduce our operating expenses or cease
operations.
Results of Operations
Three months and nine months ended September 30, 2004 and 2003
Revenues
We generated our first product sales revenue in August 2000. Product sales
revenue to date has resulted primarily from sales of Messenger, our initial
product, and Messenger STS, an improved formulation of Messenger introduced in
January 2004, as well as employ™, MightyPlant™ and other related products
(hereafter referred to collectively as "Messenger Products") primarily to
distributors in the United States and, recently, in Europe. Revenues from
product sales are recognized when (a) the product is delivered to independent
distributors, (b) we have satisfied all of our significant obligations and (c)
any acceptance provisions or other contingencies or arrangements have been
satisfied. 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 sales incentive programs. Our distributor
contracts provide no price protection or product-return rights. Product sales
revenue is reported net of applicable sales allowances, as follows:
Three Months Ended September 30 , Nine Months Ended September 30 ,
2004 2003 2004 2003
Gross product sales $ 427,120 $ 105,409 $ 907,342 $ 1,435,295
Sales allowances (58,737 ) (2,876 ) (130,858 ) (63,539 )
Elimination of previously
recorded
sales allowance
liabilities - - 95,237 126,301
Product sales, net of
sales allowances $ 368,383 $ 102,533 $ 871,721 $ 1,498,057
Gross product sales revenue for the third quarter of 2004 was $427,000, an
increase of $322,000, (307%) from $105,000 in the same quarter of 2003. The
increase in the third quarter was primarily the result of recognizing $226,000
of product sales in Spain, as discussed in the next paragraph. Gross product
sales for the first nine months of 2004 totaled $907,000, a decrease of $528,000
(37%) from $1.4 million for the same period of 2003. Sales in the first nine
months of 2004 were made primarily to 41 distributors and customers, three of
which accounted for an aggregate of 44% of net product sales revenue. Sales in
the first nine months of 2003 were made primarily to 30 distributors, three of
which accounted for an aggregate of 48% of net product sales revenue. Sales in
the United States in the three and nine month periods ended September 30, 2004
and 2003 were significantly lower than expected and were negatively impacted by
high levels of inventory in the channel, free product provided under the price
reduction program and the continuing challenges of commercializing a
fundamentally new technology and products. We expect that high levels of
inventory in the channel, free product to be provided under the price reduction
program and the difficult economic conditions in certain sectors of agriculture
will continue to adversely impact our commercialization efforts and sales of
Messenger Products in the United States.
Net product sales revenue from sales to foreign customers totaled $226,000
in the three months ended September 30, 2004 and $316,000 and $28,000 in the
nine months ended September 30, 2004 and 2003, respectively. There were no sales
to foreign customers in the three months ended September 30, 2003. Foreign sales
were made primarily to distributors in Spain in 2004 and Central America in
2003. In February 2004, we received approval to sell Messenger in Spain. We
initiated marketing activities in March, 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 these product deliveries were deferred and are recognized when
payment is received. The Company recognized net revenue totaling $226,000 and
$316,000 in the three months and nine months ended September 30, 2004,
respectively, from these deliveries when payment was received. Gross revenue of
$159,000 and cost of goods sold of $73,000 have been deferred at September 30,
2004 and will be recognized when payment is received.
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Gross sales of Messenger to consumers in the home and garden market in the
United States totaled $28,000 and $13,000 in the three months ended September
30, 2004 and 2003, respectively, and $181,000 and $50,000 in the nine months
ended September 30, 2004 and 2003, respectively. While we expect sales of our
home and garden products to increase as we continue to pursue this market, we do
not expect revenues from this market to be significant in 2004.
In the first nine months of 2004, we recognized revenue on the shipment of
approximately 283,000 ounces of Messenger and Messenger STS to distributors,
compared to approximately 377,000 ounces in the first nine months of 2003, a
decrease of approximately 94,000 ounces (25%). Based on information received
from distributors, we estimate that distributors sold approximately 730,000
ounces to growers in the first nine months of 2004, an increase of approximately
47% from approximately 497,000 ounces in the first nine months of 2003. Based on
information received from distributors, we estimate that Messenger and Messenger
STS inventory held by distributors at September 30, 2004 was approximately
456,000 ounces in the aggregate.
In December 2003, we announced a reduction of approximately 50% in the
price of Messenger and determined that Messenger STS would sell for
approximately the same price as Messenger. We also announced to distributors
that we planned to send them Messenger Products at no charge in order to reduce
the average cost of their existing inventories of Messenger. In the first nine
months of 2004, we delivered approximately 400,000 ounces of free Messenger STS
and we estimate that approximately 74,000 ounces of Messenger Products remain to
be given to distributors. This free product will substantially increase channel
inventory and negatively affect our sales to distributors in the immediate term
but will, we believe, improve our growth rate and sales to distributors over the
medium term. We do not expect distributors that hold significant inventories of
Messenger STS to place additional orders until their current inventories are
reduced.
Due to the growing seasons of our targeted crops, we expect grower usage of
Messenger Products to be highly seasonal. Based on the recommended application
timing in our targeted crops and information received from our distributors, we
expect the second quarter of each year to be the most significant period of use
in the United States. The growing seasons of targeted crops in other regions are
different than in the United States. For example, in Spain, we expect grower
usage to be most significant in the first and fourth quarters. Our product sales
to distributors are also expected to be seasonal. However, actual timing of
orders received from distributors will depend on many factors, including the
amount of Messenger Products in distributors' inventories.
Sales Allowances
Sales allowances represent allowances granted to independent distributors
for sales and marketing support, product warehousing and delivery and
information exchange and are estimated based on the terms of the distribution
agreements or other arrangements. Sales allowances are estimated and accrued
when the related product sales revenue is recognized or services are provided
and are paid in accordance with the terms of the then-current distributor
program agreement or other arrangements. Distributor program agreements expire
annually, generally on December 31. Prior to 2003, sales allowances were
generally based on a percentage of sales and were required to be paid when the
distributors sold the product and reported the sales data to us. We expect that
sales allowances related to 2003 sales will be paid upon submission by
distributors of annual sales data. In January 2004, we changed our distributor
program to provide for sales allowances based on marketing support and the total
amount of products purchased during the year. Marketing support and volume
rebates are paid throughout the year as distributors qualify to receive them.
Sales allowances during the three months ended September 30, 2004 totaled
$59,000 (14% of gross product sales) compared to $3,000 (3% of gross product
sales) in the comparable period of 2003. Sales allowances for the nine months
ended September 30, 2004 and 2003 include the reduction by $95,237 and $126,301,
respectively, of sales allowance liabilities recognized in prior quarters that
will not be paid because of changes in distribution programs implemented in 2003
and actual amounts earned by distributors being less than amounts previously
estimated. Excluding these sales allowance reductions, sales allowances during
the nine months ended September 30, 2004 totaled $131,000 (14% of gross product
sales) compared to $64,000 (4% of gross product sales) in the comparable period
of 2003. The increase in sales allowances is the result of marketing support
programs in Spain.
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Cost of Goods Sold
Cost of goods sold consists primarily of the cost of Messenger Products
sold to distributors, shipping and handling costs, idle capacity charges and the
cost of Messenger used for promotional purposes. Cost of goods sold was $331,000
in the third quarter of 2004, compared to $308,000 in the third quarter of 2003.
Cost of goods sold for the first nine months of 2004 and 2003 was $1.5 million.
The increase in the third quarter was due primarily to higher sales in the
period offset by lower idle capacity charges due to the resumption of limited
manufacturing operations early in 2004 and by a reduction in the estimated
warranty liability recorded in the third quarter of 2003. We expect to continue
limited manufacturing operations into 2005 and to incur idle capacity charges.
Research and Development Expenses
Research and development expenses consist primarily of personnel,
facilities, field trials, regulatory compliance and patents. Research and
development expenses decreased $120,000 (12%) from $983,000 in the third quarter
of 2003 to $863,000 in the same quarter of this year. For the first nine months
of 2004, research and development costs were $2.3 million, a decrease of $1.7
million (43%) from $4.0 million in the same period last year. These decreases
were primarily due to staff reductions announced in May 2003 and lower spending
on patents and facilities in 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of payroll and related
expenses for sales and marketing, executive and administrative personnel;
advertising, marketing and professional fees; and other corporate expenses.
Selling, general and administrative expenses decreased $200,000 (14%) from $1.4
million in the third quarter of 2003 to $1.2 million in the same quarter of
2004. For the first nine months of 2004, selling, general and administrative
costs were $3.6 million, a decrease of $1.3 million (27%) from $4.9 million in
the same period last year. The majority of these decreases occurred in the
United States and resulted primarily from reductions in personnel and facilities
costs.
In April 2003, the Company subleased approximately 7,300 square feet of
office space to another company under a five year sublease agreement. Due to
declines in the real estate market, the rent we pay on the subleased space
exceeded the initial rent to be collected under the sublease and we recorded a
loss of $213,000. Due to the subtenants financial difficulties, the subtenant
later reduced the rental payment and an additional loss of $159,000 was recorded
in the quarter ended September 30, 2003. The subtenant vacated the space in
October 2004. As a result, the Company recorded an additional loss of $202,000
at September 30, 2004 based upon an estimate of the time needed to re-sublease
the space and expected future rents to be collected.
Interest Income
Interest income consists of earnings on our cash and cash equivalents.
Interest income decreased $75,000 (32%) from $234,000 in the first nine months
of 2003 to $159,000 in the same period of this year. This decrease was due
primarily to significantly lower average cash balances available for investment
in the current year.
Income Taxes
We have generated a net loss from operations in each period since we began
doing business. As of December 31, 2003, we had accumulated approximately $91.6
million of U.S. net operating loss carryforwards for federal income tax
purposes. These carryforwards expire between 2009 and 2023. Our foreign tax net
operating loss carryforwards totaled $7.9 million at December 31, 2003 and
expire between 2006 and 2008. We have provided a valuation allowance against our
net deferred tax assets because of the significant uncertainty surrounding our
ability to realize them. The annual use of these net operating loss
carryforwards may be limited in the event of a cumulative change in ownership of
more than 50%.
Liquidity and Capital Resources
Our operating expenditures have been significant since our inception. We
currently anticipate that our operating expenses will significantly exceed net
product sales and that net losses and working capital requirements will consume
a material amount of our cash resources. If net product sales do not
significantly increase in the near term, we will have to further reduce our
operating expenses and/or raise additional funds to support operations. Our
future capital requirements will depend on the success of our operations. We
believe that the balance of our cash and cash equivalents at September 30, 2004
will be sufficient to meet our anticipated cash needs for net losses, working
capital and capital expenditures for more than the next 12 months, although
there can be no assurance in that regard.
- 13 -
In the future, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or through other sources, such
as credit facilities. We may be unable to obtain adequate or favorable financing
at that time or at all. In this regard, we received in August 2004 a delisting
warning letter from the Nasdaq Stock Market notifying us that the closing price
per share for our common stock was below the $1.00 minimum bid price for 30
consecutive trading days and that, as a result, we no longer meet Nasdaq's
continued listing criteria. Nasdaq provided us with 180 calendar days, or until
January 26, 2005, to regain compliance. To regain compliance with the minimum
bid price requirement, the closing bid price of our common stock must remain
above $1.00 for a minimum of ten consecutive trading days. If we do not regain
compliance by January 26, 2005, which, as of the date of this report, we have
been unable to do, and are not eligible for an additional compliance period, our
common stock will be delisted from The Nasdaq National Market. Nasdaq delisting
could make it more difficult for us to raise capital. The sale of additional
equity securities could result in dilution to our shareholders.
At September 30, 2004, our cash and cash equivalents totaled $14.0 million,
a decrease of $5.8 million from the balance of $19.8 million at December 31,
2003. Prior to October 2000, we financed our operations primarily through the
private sale of our equity securities, resulting in net proceeds of
approximately $36.5 million through September 30, 2000. In October 2000, we
received approximately $91.5 million in net proceeds from the initial public
offering of 6,670,000 shares of our common stock. To a lesser extent, we have
financed our equipment purchases through lease financings.
Net cash used in operations decreased $3.0 million (34%) from $8.8 million
in the first nine months of 2003 to $5.8 million in the same period of 2004. Net
cash used in operations in the first nine months of 2004 resulted primarily from
a net loss of $6.3 million, which includes depreciation and amortization expense
of $1.2 million, and fluctuations in various asset and liability balances
totaling $943,000. We expect that net cash used in operations will continue to
be significant.
We conduct our operations in three primary functional currencies: the U.S.
dollar, the European Union euro and 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 rate fluctuations. We may invoice our
international customers in U.S. dollars, euros and Mexican pesos, as the case
may be. We are exposed to foreign exchange rate fluctuations as the financial
results of foreign subsidiaries are translated into U.S. dollars in
consolidation. Foreign exchange rate fluctuations did not have a material impact
on our financial results in the three-month or nine-month periods ended
September 30, 2004 or 2003.
The following are our contractual obligations as of September 30, 2004:
Payments Due by Period
(in thousands)
Less Than 1-3 4-5 More Than
Total 1 Year Years Years 5 Years
Capital leases, including interest $ 17 $ 15 $ 2 $ - $ -
Operating leases 10,282 1,870 3,349 2,999 2,064
Total contractual cash obligations $ 10,299 $ 1,885 $ 3,351 $ 2,999 $ 2,064
Critical Accounting Policies, Estimates and Judgments
Our critical accounting policies are more fully described in Note 1 to our
consolidated financial statements included in our most recent Annual Report on
Form 10-K, which was filed with the Securities and Exchange Commission on March
26, 2004. 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:
- 14 -
Revenue Recognition
We sell the majority of our products to independent, third-party
distributors. Our contracts 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. 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, product warehousing and delivery and
information exchange 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. Prior to 2003, sales allowances were paid when the distributors
sold the product and reported the sales data to us, generally on a quarterly
basis. We expect that sales allowances related to 2003 sales will be paid upon
submission by distributors of annual sales data. In January 2004, we changed our
distributor program to provide for sales allowances based on marketing support
and the total amount of products purchased during the year. Marketing support
and volume rebates are paid throughout the year as distributors qualify to
receive them.
We also record, at the time revenue is recognized, a liability for warranty
claims based on a percentage of sales. The warranty accrual percentage, which
has ranged between zero and five percent, and warranty liability are reviewed
periodically and adjusted as necessary, based on historical experience, the
results of product quality testing and future expectations. Changes in the
factors above or other factors could results in a significant charge.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable balances are reported net of customer-specific related
sales allowances. In determining the adequacy of the allowance for doubtful
accounts, we consider a number of factors, including the age of outstanding
invoices, customer payment trends, the financial condition of our customers,
historical bad debts and current economic trends. Based upon our analysis of
outstanding net accounts receivable at September 30, 2004, no allowance for
doubtful accounts was recorded. Changes in the factors above or other factors
could result in a significant charge.
Inventory
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
additional inventory cost reductions and write-offs.
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 to be realized from the
use of such assets are less than their carrying value. The determination of
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. During
2002, we wrote off approximately $1.0 million of leasehold improvements and
equipment directly related to approximately 34,300 square feet of laboratory and
office space subleased to another company. Based upon our analysis of net cash
flows expected to be realized from our remaining investments in property and
equipment, no additional impairment loss was recorded. The critical estimates in
the analysis are our ability to significantly increase sales over the next five
years while controlling operating expenses at current levels over the next four
years. If net product sales do not significantly increase in the near term or if
expenses significantly increase over the current level, a significant impairment
loss may need to be recorded. Another critical assumption is that we will
continue our current facility leases. If we do not continue our leases, we may
incur a significant impairment loss on leasehold improvements and equipment at
these facilities and other significant losses. Changes in the factors above or
other factors could result in significantly different cash flow estimates and a
significant impairment charge.
- 15 -
Loss on Facility Subleases
As of September 30, 2004, we subleased approximately 41,600 square feet of
laboratory and office space to other companies. One subtenant vacated
approximately 7,300 square feet of office space in October 2004. As a result,
the Company recorded an additional loss of $202,000 at September 30, 2004. In
determining the loss on these facility subleases, we considered a number of
factors, including the financial condition of the subtenants, subtenants'
investments in improvements, amounts of security deposits, estimated time needed
to sublease space and estimated rents to be collected. Based on our analysis, we
estimate that rents will be collected and that one subtenant will exercise a
three-year extension option. Changes in the factors above or other factors could
result in a significant increase in the loss.
Factors That May Affect Our Business, Future Operating Results and Financial
Condition
You should carefully consider the risks described below, together with all
of the other information included in this Quarterly Report on Form 10-Q. The
risks and uncertainties described below are not the only ones facing our
company. If any of the following risks actually occurs, our business, financial
condition or operating results could be harmed.
We have a history of losses since inception, we expect to continue to incur
losses and we may not achieve or sustain profitability.
We have incurred operating losses in each quarter since inception and we
expect to continue to incur further operating losses for the foreseeable future.
From our inception in July 1994 to September 30, 2004, we have accumulated a
deficit of $103.3 million. For the years ended December 31, 2003, 2002, 2001 and
2000, we had net losses of $11.2 million, $23.5 million, $23.7 million and $15.7
million, respectively. To date, our revenues have been limited. For example,
there were no sales of Messenger in the fourth quarter of 2001 and annual net
sales decreased from $3.5 million in 2001 to $1.9 million in 2002 and $1.8
million in 2003. Further, we expect domestic sales in 2004 to be minor. We
expect our future revenues to come primarily from the sale of Messenger,
Messenger STS, employ, MightyPlant, ProAct™, N-Hibit™ and other products and
these sales are highly uncertain.
We expect to continue to devote substantial resources to funding sales and
marketing activities in the United States and foreign countries, maintaining and
operating our manufacturing facility and funding our research and development
activities. As a result, we will need to generate significant revenues to
achieve and maintain profitability. We may never generate profits, and if we do
become profitable, we may be unable to sustain or increase profitability on a
quarterly or annual basis.
If net product sales do not significantly increase in the near term, we
will have to reduce our operating expenses or cease operations. Our future
capital requirements will depend on the success of our operations. We believe
that the balance of our cash and cash equivalents at September 30, 2004 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.
We may have to reduce or cease operations if we are unable to meet our funding
requirements.
We will require substantial additional funding to continue our sales and
marketing and research and development activities in the United States and
foreign countries and to maintain and operate our manufacturing facilities. If
we are unable to generate sufficient cash flow from operations, or obtain funds
through additional financing, we may have to delay, curtail or eliminate some or
all of our research and development, field-testing, marketing or manufacturing
programs or cease all operations. For example, we reduced our workforce by 34%
in May 2003 and by 23% in May 2002, significantly curtailing certain research
and development activities and our European and Mexican operations. Our future
capital requirements will depend on the success of our operations.
If our capital requirements vary from our current plans, we may require
additional financing sooner than we anticipate. Financing may be unavailable to
us when needed or on acceptable terms.
- 16 -
As of the date of this report, we do not meet the $1.00 minimum bid requirement
for continued listing on The Nasdaq National Market and, as a result, our common
stock may be delisted from The Nasdaq National Market, which could further
depress our stock price and make it more difficult for us to raise capital.
Our common stock is currently listed on The Nasdaq National Market. To
maintain this listing, we must satisfy ongoing listing requirements, including
consistently maintaining a minimum bid price for our common stock of $1.00 per
share or more. In August 2004, we received a delisting warning letter from the
Nasdaq Stock Market notifying us that the closing price per share for our common
stock was below the $1.00 minimum bid price for 30 consecutive trading days and
that, as a result, we no longer meet Nasdaq's continued listing criteria. Nasdaq
provided us with 180 calendar days, or until January 26, 2005, to regain
compliance. To regain compliance with the minimum bid price requirement, the
closing bid price of our common stock must remain above $1.00 for a minimum of
ten consecutive trading days. If we do not regain compliance by January 26,
2005, which, as of the date of this report, we have been unable to do, and are
not eligible for an additional compliance period, our common stock will be
delisted from The Nasdaq National Market. Nasdaq also notes in the delisting
warning letter that the 180-day period relates exclusively to the bid price
deficiency and that we may be delisted during the 180-day period for failure to
maintain compliance during this period with any other listing requirements. If
we were to lose our Nasdaq National Market status, we would likely seek listing
of our common stock in the over-the-counter market, which is viewed by many
investors as a less liquid marketplace. Among other things, our common stock may
then constitute "penny stock," which would place increased regulatory burden
upon brokers, making them less likely to make a market in our stock. Loss of
our Nasdaq National Market status could also make it more difficult for us to
raise capital or complete acquisitions and would also complicate compliance with
state "blue sky" laws.
We currently depend on five products that are based on the same new technology,
and our development and commercialization of those products may not be
successful.
For the immediately foreseeable future we will be dependent on the
successful development and commercialization of five products (Messenger,
Messenger STS, ProAct, employ and MightyPlant) which are based on the same new
technology. We have had only limited sales of Messenger since its introduction
in August 2000 and we began marketing employ in November 2003, Messenger STS in
January 2004, MightyPlant in April 2004 and we plan to begin marketing ProAct in
early 2005. These five products could prove to be commercially unsuccessful. Our
products may not prove effective or economically viable for all crops or
markets. In addition, because our products have not been put to widespread
commercial use over significant periods of time, no assurance can be given that
adverse consequences might not result from their use, such as soil or other
environmental degradation, the development of negative effects on animals or
plants or reduced benefits in terms of crop yield or protection.
The markets for our products and other harpin-based products we may develop
are unproven. Messenger has not gained, and may not gain, commercial acceptance
or success. Messenger STS, employ and MightyPlant may not gain commercial
acceptance or success. If we are unable to successfully achieve broad market
acceptance of our products, we may not be able to generate enough product
revenues in the future to achieve profitability. A variety of factors will
determine the success of our market development and commercialization efforts
and the rate and extent of market acceptance of our products, including our
ability to implement and maintain an appropriate pricing policy and general
economic conditions in agricultural markets, including commodity prices,
climatic conditions and the extent that growers, regulatory authorities and the
public accept new agricultural practices and products developed through
biotechnology.
We have experienced limited grower usage of Messenger and Messenger STS, and
independent distributors hold significant inventories of Messenger STS and will
be given significantly more inventory for free in 2004.
Based on information received from distributors, we estimate that
distributors sold 66,000 ounces of Messenger in 2000, 596,000 ounces in 2001,
684,000 ounces in 2002 and 734,000 ounces in 2003. During the first nine months
of 2004, we estimate that distributors sold 730,000 ounces to growers, compared
to 497,000 ounces in the same period of 2003, an increase of 47%. We estimate
that Messenger and Messenger STS inventory held by distributors at September 30,
2004 was approximately 456,000 ounces. We sent distributors approximately
400,000 ounces of additional Messenger STS for free in the nine months ended
September 30, 2004 as part of an effort to lower the average cost of their
year-end Messenger inventories by approximately 50%. We estimate that
approximately 74,000 ounces of Messenger Products remain to be given to
distributors, which will significantly increase channel inventory and negatively
affect our sales to distributors. We do not expect distributors that hold
significant inventories of Messenger Products to place additional orders for our
products until their current inventories are reduced, which will adversely
affect our sales and results of operations.
- 17 -
Inability to develop adequate sales and marketing capabilities could prevent us
from successfully commercializing our current products and other products we may
develop.
We currently have limited sales and marketing experience and capabilities.
Our internal sales and marketing staff consists primarily of sales and marketing
specialists who are trained to educate growers and independent distributors on
the uses and benefits of our products. We will need to further develop our sales
and marketing capabilities in order to enhance our commercialization efforts,
which will involve substantial costs. These specialists require a high level of
technical expertise and knowledge regarding our products' capabilities and other
plant protection and yield enhancement products and techniques. We cannot assure
you that our specialists and other members of our sales and marketing team will
successfully compete against the sales and marketing operations of our current
and future competitors that may have more established relationships with
distributors, retailers and growers. Failure to recruit, train and retain
important sales and marketing personnel, such as our sales and marketing
specialists, or the inability of new sales and marketing personnel to
effectively market and sell our current products and other products we may
develop, could impair our ability to gain market acceptance of our products and
cause our sales to suffer.
We may be unable to establish or maintain successful relationships with
independent distributors and retailers, which could adversely affect our sales.
We intend to rely on independent distributors and retailers of
agri-chemicals to distribute and assist with the marketing and sale of our
current products and any other products we may develop. We have engaged several
independent distributors and retailers for the distribution and sale of our
products. Our future revenue growth will depend in large part on our success in
establishing and maintaining these sales and distribution channels. We are
continuing to develop our distribution network and we may be unable to establish
or maintain these relationships in a timely or cost-effective manner. Moreover,
we cannot assure you that the distributors and retailers on which we rely will
focus adequate resources on selling these products or will be successful in
selling them. Many of our potential distributors and retailers are in the
business of distributing and sometimes manufacturing other, possibly competing,
plant protection and yield enhancement products and may perceive our products as
a threat to various product lines currently being manufactured or distributed by
them. In addition, the distributors may earn higher margins by selling competing
products or combinations of competing products. If we are unable to establish or
maintain successful relationships with independent distributors and retailers,
we will need to further develop our own distribution and sales and marketing
capabilities, which would be expensive and time-consuming and the success of
which would be uncertain.
Three distributors accounted for an aggregate of 44% of net product sales
revenue in the nine months ended September 30, 2004 and three distributors
accounted for an aggregate of 48% of our net sales revenue in the same period of
2003. If any distributor that purchases a significant amount of our products
were to discontinue purchasing our products at any time, our sales would be
adversely affected. In addition, the failure of any of these distributors, or of
any other distributor to which we extend a significant amount of credit, to pay
its account, now or in the future, may harm our operating results.
If our ongoing or future field trials are unsuccessful, we may be unable to
achieve market acceptance or obtain regulatory approval of our current products
or any other products we may develop.
The successful completion of multiple field trials in domestic and foreign
locations on a wide variety of crops is critical to the success of our product
development and marketing efforts. If our ongoing or future field trials are
unsuccessful or produce inconsistent results or adverse side effects, or if we
are unable to collect reliable data, regulatory approval of our current products
or any other products we may develop could be delayed or withheld or we may be
unable to achieve market acceptance of these products. Although we have
conducted successful field trials on a broad range of crops, we cannot be
certain that additional field trials conducted on a greater number of acres, or
on crops for which we have not yet conducted field trials, will be successful.
Moreover, the results of our ongoing and future field trials are subject to a
number of conditions beyond our control, including weather-related events such
as droughts and floods, severe heat and frost, hail, tornadoes and hurricanes.
Generally, we pay third parties, such as growers, consultants and universities,
to conduct our field trials for us. Incompatible crop treatment practices or
misapplication of the product by third parties could interfere with the success
of our field trials.
- 18 -
We are at an early stage of development and are subject to the risks of a new
enterprise and the commercialization of a new technology.
We began our operations in 1994 and began the marketing and sale of our
first product, Messenger, in the third quarter of 2000. Our early stage of
development, the newness of our technology and the uncertain nature of the
market in which we compete make it difficult to assess our prospects or predict
our future operating results. We are subject to risks and uncertainties
frequently encountered in the establishment of a new business enterprise,
particularly in the rapidly changing market for plant protection and yield
enhancement products. These risks include our inability to develop a company
capable of supporting commercial activities, including manufacturing, quality
control and assurance, regulatory approval and compliance, marketing, sales,
distribution and customer service. Our inability to adequately address these
risks could cause us to be unprofitable or to cease operations.
International expansion will subject us to risks associated with international
operations, which could adversely affect both our domestic and international
operations.
Our success depends in part on our ability to expand internationally as we
obtain regulatory approvals to market and sell our current products, and any
other products we may develop, in other countries. We recently began selling our
products in Spain and China. We have been conducting field trials in several
international locations and we have personnel in Europe to develop operations in
that region. International expansion of our operations could impose substantial
burdens on our resources, divert management's attention from domestic operations
or otherwise adversely affect our business. Furthermore, international
operations are subject to several inherent risks, especially different
regulatory requirements and reduced protection of intellectual property rights,
that could adversely affect our ability to compete in international markets and
could have a negative effect on our operating results.
The high level of competition in our market may result in price reductions,
reduced margins or the inability of our products to achieve market acceptance.
The market for plant protection and yield enhancement products is intensely
competitive, rapidly changing and undergoing consolidation. We may be unable to
compete successfully against our current or future competitors, which may result
in price reductions, reduced margins or the inability to achieve market
acceptance of our current products or any other products we may develop. For
example, from September to December 2003 we offered growers a "buy one, get one
free" promotion and in January 2004 we introduced Messenger STS at a price that
is approximately 50% of the 2003 price of Messenger.
Many companies are engaged in developing plant protection and yield
enhancement products. Our competitors include major international agri-chemical
companies, specialized biotechnology companies and research and academic
institutions. Many of these organizations have significantly more capital,
research and development, regulatory, manufacturing, distribution, sales,
marketing, human and other resources than we do. As a result, they may be able
to devote greater resources to the development, manufacture, promotion or sale
of their products, receive greater resources and support from independent
distributors, initiate or withstand substantial price competition or take
advantage of acquisition or other opportunities more readily. Furthermore, these
large agri-chemical companies have a more diversified product offering than we
do, which may give them an advantage in meeting customer needs by enabling them
to offer integrated solutions to plant protection and yield enhancement.
Age and actual storage conditions of our products may cause them to degrade,
which could adversely affect market acceptance of our products or our results of
operations.
Messenger is currently being stored in large quantities under various
conditions by us and by distributors. Most of this material was manufactured in
2000, 2001, 2002 and 2004. We have conducted laboratory studies that indicate
Messenger is stable for at least two years under our recommended storage
conditions and the results of recently completed re-testing of Messenger
manufactured in 2000 indicate that it is stable for more than four years. No
assurance can be given, however, that actual storage conditions will not cause
our products' quality to degrade over a shorter time period.
The inventory of Messenger held by us and by distributors is aging and may not
meet our quality standards, which could adversely affect market acceptance of
our products or our results of operations.
Our inventory at September 30, 2004 includes approximately 2.9 million
ounces of Messenger and Messenger STS that was manufactured in 2000, 2001, 2002
and 2004. In addition, we estimate that distributors own approximately 456,000
ounces of Messenger and Messenger STS that was manufactured between 2000 and
2004. Due to the age of this inventory, we conducted limited re-testing of
Messenger samples produced in 2000 and 2001. In 2003, we voluntarily recalled
and replaced approximately 10,000 ounces of Messenger owned by distributors that
our limited re-testing indicated had degraded below our quality control
standards.
- 19 -
Although results of our limited re-testing indicate that a portion of
inventory manufactured in 2000, 2001 and 2002 continues to meet our quality
standards, no assurance can be given that this material will continue to meet
our quality standards, nor can we predict if or when this material might fail to
meet our quality standards. If our limited re-testing program indicates that
additional material has degraded below our quality standards, we may have to
record additional inventory write-downs and may choose to replace any such
product owned by distributors or growers, which could adversely affect the
market acceptance of our products or our results of operations.
Inability to obtain regulatory approvals, or to comply with ongoing and changing
regulatory requirements, could delay or prevent sales of our current products or
any other products we may develop.
The field testing, manufacture, sale and use of plant health products,
including Messenger, Messenger STS, ProAct, N-Hibit, employ, MightyPlant and
other products we may develop, are extensively regulated by the EPA and/or
state, local and foreign governmental authorities. These regulations
substantially increase the cost and time associated with bringing our current
products and any other products we may develop to market. If we do not receive
the necessary governmental approvals to test, manufacture and market these
products, or if the regulatory authorities revoke our approvals or grant them
subject to restrictions on their use, we may be unable to sell these products
and our business may fail.
We are required to obtain regulatory approval from certain state and
foreign regulatory authorities before we market our products in those
jurisdictions. Some of these jurisdictions may apply different criteria than the
EPA in connection with their approval processes. Although we are authorized to
sell Messenger and Messenger STS in 48 states for use on virtually all crops for
crop production and disease management, and in California for use on citrus for
yield enhancement and on strawberries, citrus, grapes and fruiting vegetables,
such as tomatoes and peppers, for disease management, we have not received
approval for use on other crops in California. In Colorado, Messenger is
approved for use on virtually all crops for home and garden use. We have also
received authorization to sell Messenger, or are exempt from formal
authorization requirements, in at least 26 foreign countries, including China,
Spain, Germany, Mexico and six Central American countries. Our registration in
China is temporary and limited to the sale of Messenger for use on tomatoes,
peppers, tobacco, and rapeseed. Our registration in Spain is limited to the sale
of Messenger for use on tomatoes, peppers, cucumbers, melons, strawberries,
lettuce, citrus and olives. The EPA has approved the use of Messenger STS and we
are currently in the process of obtaining foreign registrations for this
product, but there can be no assurance that such registrations will be obtained
on acceptable terms.
Neither employ nor MightyPlant are pesticides and they are not regulated by
the EPA. However, several states and foreign governments regulate both products.
Many states regulate employ as a plant amendment or soil conditioner and some of
these states and foreign regulatory authorities require the submission and
review of performance data and other information prior to granting their
approval. We are authorized to sell employ in 33 states and no foreign
countries. MightyPlant is classified by most states as a fertilizer and we are
now in the process of obtaining state approvals for its sale. We are authorized
to sell MightyPlant in 46 states and no foreign countries. However, there can be
no assurance that we will obtain approval to sell employ or MightyPlant in other
states or foreign countries.
If we significantly modify our current products' designs as a result of our
ongoing research and development projects, additional EPA and other regulatory
approvals may be required. Moreover, we cannot assure you that we will be able
to obtain approval for marketing additional harpin-based products or product
extensions that we may develop. For example, while the EPA has in place a
registration procedure for products such as Messenger that is streamlined in
comparison to the registration procedure for chemical pesticides, there can be
no assurance that all of our products or product extensions will be eligible for
the streamlined procedure or that the EPA will not impose additional
requirements that could make the procedure more time-consuming and costly for
any future products we may develop.
Even if we obtain all necessary regulatory approvals to market and sell our
current products and any other products we may develop, these products will be
subject to continuing review and extensive regulatory requirements. The EPA, as
well as state and foreign governmental authorities, could withdraw a previously
approved product from the market upon discovery of new information, including an
inability to comply with regulatory requirements or the occurrence of
unanticipated problems with the product, or for other reasons. In addition,
federal, state and foreign regulations relating to crop production and
protection products developed through biotechnology are subject to public
concerns and political circumstances and, as a result, regulations have changed
and may change substantially in the future. These changes may result in
limitations on the manufacturing, marketing or use of our current products or
any other products we may develop and commercialize.
- 20 -
Inability to satisfy the conditions of our California registration for citrus
could limit or prevent sales of Messenger STS in that state.
Our California registration for use on citrus for yield enhancement,
granted in March 2003, is conditioned on the requirement that we submit data
from several additional studies within various required timeframes ending on
December 31, 2005. There are no conditions on our registration to sell Messenger
STS in California for use on citrus, strawberries, fruiting vegetables and
grapes for disease management. We expect to submit the results of additional
citrus field trials at various required timeframes through 2005, in accordance
with our registration. If we are unable to conduct the studies required by the
California Department of Pesticide Regulation ("CDPR") in a timely manner, or if
the results of the studies are unacceptable to the CDPR, they may not allow the
continued use of Messenger STS in California on citrus for yield enhancement, or
they may impose limitations on this use of Messenger STS, which could have a
negative impact on our sales. Because EPA and state approvals are required for
commercial sales of our current products, the loss of any of these approvals for
any reason would prevent further sales of our products in the affected state or
nationwide.
Our product development efforts, which are based on an innovative technology
that is commercially unproven, may not be successful.
Our harpin and harpin-related technology is new and commercially unproven.
It may take years and significant capital investment to develop viable
enhancements of our current products or any new products we may develop based on
our harpin and harpin-related technology. Risks inherent in the development of
products based on innovative technologies include the possibility that:
• new products or product enhancements will be uneconomical to market or
will be difficult to produce on a large scale;
• proprietary rights of third parties will prevent us from marketing
products; and
• third parties will market superior or equivalent products or will market
their products first.
Our operating results are likely to fluctuate, resulting in an unpredictable
level of sales and earnings and possibly in a decrease in our stock price.
Our operating results for a particular quarter or year are likely to
fluctuate, which could result in uncertainty surrounding our level of sales and
earnings and possibly result in a decrease in our stock price. For example,
there were no sales of Messenger in the fourth quarter of 2001 and annual net
product sales decreased 49% from 2001 to 2003. Numerous other factors will
contribute to the unpredictability of our operating results. In particular, our
sales are expected to be highly seasonal. Sales of plant protection and yield
enhancement products depend on planting and growing seasons, climatic conditions
and economic and other variables, which we expect to result in substantial
fluctuations in our quarterly sales and earnings. For example, weather-related
events such as droughts and floods, severe heat and frost, hail, tornadoes and
hurricanes could decrease demand for our products and any future products we may
develop, and have an adverse impact on our operating results from quarter to
quarter. In addition, most of our expenses, such as employee compensation and
lease payments for facilities and equipment, are relatively fixed. Our expense
levels are based, in part, on our expectations regarding future sales. As a
result, any shortfall in sales relative to our expectations could cause
significant changes in our operating results from quarter to quarter. Other
factors may also contribute to the unpredictability of our operating results,
including the amount of our products carried in inventory by independent
distributors and retailers, the amount of free product to be given to retailers,
the size and timing of significant customer transactions, the delay or deferral
of customer use of our products and the fiscal or quarterly budget cycles of our
customers. For example, customers may purchase large quantities of our products
under a promotion such as "buy one, get one free" in a particular quarter to
store and use over long periods of time, or time their purchases to coincide
with the availability of capital, either of which may cause significant
fluctuations in our operating results for a particular quarter or year.
- 21 -
Inability to protect our patents and proprietary rights in the United States and
foreign countries could limit our ability to compete effectively since our
competitors may take advantage of our patents or proprietary rights.
Our success depends on our ability to obtain and maintain patent and other
proprietary-right protection for our technology and products in the United
States and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights. We also rely on trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. We have taken
measures to protect our trade secrets and know-how, including the use of
confidentiality agreements with our employees, consultants and advisors. It is
possible that these agreements may be breached and that any remedies for breach
will not make us whole. We generally control and limit access to, and the
distribution of, our product documentation and other proprietary information.
Despite our efforts to protect these proprietary rights, unauthorized parties
may copy aspects of our products or obtain and use information that we regard as
proprietary. We also cannot guarantee that other parties will not independently
develop our know-how or otherwise obtain access to our technology.
The laws of some foreign countries do not protect proprietary rights to the
same extent as the laws of the United States, and many companies have
encountered significant problems and incurred significant costs in protecting
their proprietary rights in these foreign countries.
Patent law is still evolving with respect to the scope and enforceability
of claims in the fields in which we operate. We are like many biotechnology
companies in that our patent protection is highly uncertain and involves complex
legal and technical questions for which legal principles are not firmly
established. Our patents and those patents for which we have license rights may
be challenged, narrowed, invalidated or circumvented. In addition, our issued
patents may not contain claims sufficiently broad to protect us against third
parties with similar technologies or products, or provide us with any
competitive advantage. We are not certain that our pending patent applications
will be issued. Moreover, our competitors could challenge or circumvent our
patents or pending patent applications.
The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights.
Other companies may claim that we infringe their intellectual property or
proprietary rights, which could cause us to incur significant expenses or be
prevented from selling our current products or any other products we may develop
in the future.
Our success depends on our ability to operate without infringing the
patents and proprietary rights of third parties. Product development is
inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. Future patents
issued to third parties may contain claims that conflict with our patents.
Although we believe that our current products do not infringe the proprietary
rights of any third parties, third parties could assert infringement claims
against us in the future. Any litigation or interference proceedings, regardless
of their merit or outcome, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation or
interference proceedings could also force us to:
• stop or delay selling, manufacturing or using products that incorporate
the challenged intellectual property;
• pay damages; or
• enter into licensing or royalty agreements that may be unavailable on
acceptable terms.
If we do not adequately distinguish our products from genetically modified
plants and products, public concerns over those products could negatively impact
market acceptance of our products.
Claims that the output of genetically modified plants is unsafe for
consumption or that these plants pose a danger to the environment have led to
public concerns and negative attitudes about genetically modified crops,
particularly in Europe. We intend to distinguish our products and other
topically applied harpin technologies from genetically modified plants and
products. Our products are topically applied and do not modify the plant's DNA.
If the public or our customers perceive our products as products that
genetically modify plants, market acceptance and registration of our products
could be delayed, impaired or limited in countries with strong political
resistance to genetically modified plants.
- 22 -
We may be exposed to product liability claims, which could adversely affect our
operations.
We may be held liable or incur costs to settle product liability claims if
our current products or any products we may develop, or any products that use or
incorporate any of our technologies, cause injury or are found unsuitable during
product testing, manufacturing, marketing, sale or use. These risks exist even
with respect to any products that have received, or may in the future receive,
regulatory approval, registration or clearance for commercial use. We cannot
guarantee that we will be able to avoid product liability exposure.
We currently maintain product liability insurance at levels we believe are
sufficient and consistent with industry standards for companies at our stage of
development. We cannot guarantee that our product liability insurance is
adequate, and, at any time, it is possible that such insurance coverage may not
be available on commercially reasonable terms or at all. A product liability
claim could result in liability to us greater than our assets and insurance
coverage. Moreover, even if we have adequate insurance coverage, product
liability claims or recalls could result in negative publicity or force us to
devote significant time and attention to matters other than those that arise in
the normal course of business.
Rapid changes in technology could render our current products or any other
products we may develop unmarketable or obsolete.
We are engaged in an industry characterized by extensive research efforts
and rapid technological development. Our competitors, many of which have
substantially greater technological and financial resources than we do, may
develop plant protection and yield enhancement technologies and products that
are more effective than ours or that render our technology and products obsolete
or uncompetitive. To be successful, we will need to continually enhance our
current products and any other products we may develop and to design, develop
and market new products that keep pace with new technological and industry
developments.
Inability to comply with regulations applicable to our facilities and procedures
could delay, limit or prevent our research and development or manufacturing
activities.
Our research and development and manufacturing facilities and procedures
are subject to continual review and periodic inspection. To comply with the
regulations applicable to these facilities and procedures, we must spend funds,
time and effort in the areas of production, safety and quality control and
assurance to help ensure full technical compliance. If the EPA or another
regulator determines that we are not in compliance, regulatory approval of our
current products or any other products we may develop could be revoked, delayed
or withheld or we may be required to limit or cease our research and development
or manufacturing activities or pay a monetary fine. If we were required to limit
or cease our research and development activities, our ability to develop new
products would be impaired. In addition, if we were required to limit or cease
our manufacturing activities, our ability to produce our current products in
commercial quantities would be impaired or prohibited, which could have an
adverse effect on our sales.
Inability to produce high quality products could impair our business.
To be successful, we will have to manufacture our current products in large
quantities at acceptable costs while also preserving high product quality. If we
cannot maintain high product quality on a large scale, we may be unable to
achieve market acceptance of our products and our sales would likely suffer.
Moreover, we do not have back-up manufacturing systems and, as a result, the
failure of any component required in the manufacturing process could delay or
impair our ability to manufacture our products in the quantities that we may
require.
We intend to continue to make changes to our manufacturing processes and
facilities in order to improve the efficiency and quality of our manufacturing
activities. We cannot guarantee that we will be successful in this regard or
that the changes we make will improve our manufacturing activities. We may
encounter difficulties in the production of our current products or any future
products we may develop, including problems involving manufacturing processes or
yields, packaging, distribution, storage, quality control and assurance,
shortages of qualified personnel or compliance with regulatory requirements.
Even if we are successful in developing our manufacturing capability and
processes, there can be no assurance that we will satisfy the requirements of
our distributors or customers.
- 23 -
If third-party manufacturers fail to perform adequately, we could be unable to
meet demand and our revenues could be impaired.
When our manufacturing plant is operating, we depend on independent
manufacturers for large-scale fermentation services and to perform certain other
portions of our production process. We intend to engage additional third-party
manufacturers as necessary to perform these processes. Any failure or delay in
the ability of our current or any future manufacturers to provide us with
material they produce could adversely affect our ability to produce our current
products in the quantities necessary to satisfy the requirements of our
distributors or customers, or could increase our costs associated with obtaining
such materials. In addition, the time and resources that our current or future
third-party manufacturers devote to our business are not within our control. We
cannot ensure that our current or future third-party manufacturers will perform
their obligations to meet our quality standards, that we will derive cost
savings or other benefits from our relationships with them or that we will be
able to maintain a satisfactory relationship with them on terms acceptable to
us. Moreover, these manufacturers may support products that compete directly or
indirectly with ours, or offer similar or greater support to our competitors. If
any of these events were to occur, our business and operations could be
adversely affected.
Inability to address strain on our resources caused by growth could result in
ineffective management of our business.
As we add manufacturing, marketing, sales, field development or other
personnel, both domestically and internationally, during the commercialization
of our current products, we expect that our operating expenses and capital
requirements will increase. Our ability to manage growth effectively requires us
to continue to expend funds to improve our operational, financial and management
controls, reporting systems and procedures. In addition, we must effectively
expand, train and manage our employee base. We will be unable to effectively
manage our business if we are unable to timely and successfully alleviate the
strain on our resources caused by growth in our business, which could adversely
affect our operating results.
Inability to retain our key employees or other skilled managerial or technical
personnel could impair our ability to maintain or expand our business.
We are highly dependent on the efforts and abilities of our current key
managerial and technical personnel, particularly Dr. Rhett R. Atkins, our
President and Chief Executive Officer, and Dr. Zhongmin Wei, our Chief
Scientific Officer and Vice President of Research. Our success will depend in
part on retaining the services of Drs. Atkins and Wei and our other existing key
management and technical personnel and on attracting and retaining new, highly
qualified personnel.
Inability to retain our existing key management or technical personnel or
to attract additional qualified personnel could, among other things, delay our
sales, marketing, manufacturing and research and development efforts. Moreover,
in our field, competition for qualified management and technical personnel is
intense and many of the companies with which we compete for experienced
personnel have greater financial and other resources than we do. As a result, we
may be unable to recruit, train and retain sufficient qualified personnel.
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