SEC Company Response from EDEN BIOSCIENCE CORP (CIK 0000930095) — Aug 5, 2005
EDEN BIOSCIENCE CORP (CIK 0000930095)
Date: Aug. 5, 2005 · CIK: 0000930095 · Accession: 0001145443-05-001733
AI Filing Summary & Sentiment
Referenced dates: July 26, 2005, June 10, 2005, June 23, 2005
Letter
United States Security and Exchange Commission Division of Corporate Finance Comment Letter dated June 10, 2005 Response Letter dated June 23, 2005 Second Comment Letter dated July 26, 2005 File No. 0-31499
RE:
Dear Ms. Davis:
This letter sets forth the responses of Eden Bioscience Corporation (the “Company”) to the comments of the Securities and Exchange Commission (“Commission”) staff relating to the filings referenced above contained in your letter dated July 26, 2005 (the “Second Comment Letter”). The Company’s responses are set forth below and are numbered to correspond to the numbers of the Second Comment Letter.
Form 10-K for the Fiscal Year Ended December 31, 2004
Financial Statements, page 40
Inventory, page 45
1.
We have reviewed your responses to our prior comments one and two, and note that you have provided additional support to your customers related to inventory that they continue to hold that you recorded as a sale. These include, but are not limited to the following:
•
January 2003 inventory exchange for the STS reprocess product at no cost
•
January 2003 inventory not meeting your quality standards voluntarily replaced to the distributor at no cost
•
February 2003 distributor settlement
•
September 2003 buy one get one free promotion for the customers of the distributors you sold to which resulted in you giving 470, 000 ounces of your product to distributors free of charge.
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
Please provide us an analysis that demonstrates how your revenue recognition policy complies with paragraphs 6-8 of SFAS 48. Additionally explain how you are able to conclude, if true, that future returns are reasonably estimable or how returns were adequately accrued in the appropriate period given the substantial volume of returns. Finally, confirm to us whether you have corresponded, amended, or agreed to additional terms other than those specified within your standard distribution agreement. If so please provide descriptions and the specific terms of these arrangements. Refer also to SAB Topic 13:B:2 and paragraph 3 of SFAS 48.
Company response:
Below are paragraphs 3 and 6-8 of SFAS 48 and an analysis of how our revenue recognition policy complies with those paragraphs:
SFAS 48 paragraph 3. This Statement specifies criteria for recognizing revenue on a sale in which a product may be returned, whether as a matter of contract or as a matter of existing practice, either by the ultimate customer or by a party who resells the product to others. The product may be returned for a refund of the purchase price, for a credit applied to amounts owed or to be owed for other purchases, or in exchange for other products. The purchase price or credit may include amounts related to incidental services, such as installation.
Company comment – We do not give the buyer the right to return the product as a matter of contract or existing practice. Our distributor agreements explicitly provide that distributors do not have price protection, inventory protection, or product return rights. The first three bullets of your comment 1 describe the only three transactions that involve the exchange or return of product since the Company began selling products over five years ago. The details of these transactions were described in our letter to you dated June 23, 2005. We do not believe these three transactions constitute the establishment of a practice of allowing products to be returned.
Although distributors have asked to return product, we have consistently declined to do so, which has resulted in the amount of product owned by distributors. We estimated that distributors owned the following amounts of Messenger:
At December 31,
Ounces of Messenger
1,016,000
867,000
503,000
511,000
In each of our Form 10-Ks and Form 10-Qs filed since December 31, 2001, we have disclosed our estimate of the amount of Messenger products in distributors’ inventory and that we do not expect distributors that have significant inventories of Messenger products to place additional orders for Messenger products until their current
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
inventories are reduced. We do not allow returns, which makes these disclosures necessary. Many distributors have asked to return product and we have consistently told them no.
SFAS 48 paragraph 6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
Company comment – We do not give the buyer the right to return the product by contract or as a matter of practice.
SFAS 48 paragraph 6. a. The seller's price to the buyer is substantially fixed or determinable at the date of sale.
Company comment – Our price to the buyer is substantially fixed and determinable at the date of sale. See further discussion of this item in our response to comment 4 below.
SFAS 48 paragraph 6. b. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
Company comment – The buyer is obligated to pay us and the obligation is not contingent upon resale of the product by the distributor.
SFAS 48 paragraph 6. c. The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.
Company comment – The buyer’s obligation to us does not change in the event of theft or physical destruction or damage of the product.
SFAS 48 paragraph 6. d. The buyer acquiring the product for resale has economic substance apart from that provided by the seller.
Company comment – The buyers of our products for resale have economic substance apart from the Company. The only exception to this is our distributor in Mexico and revenue from these sales are recognized when cash has been collected by the Company. With respect to the Mexico distributor, no revenues were recorded prior to 2004 and total revenue recognized in 2004 was $6,063.
SFAS 48 paragraph 6. e. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
Company comment – We do not have significant obligations for the future performance to directly bring about resale of the product by the buyer. See further discussion of this item in our response to comment 4 below.
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
SFAS 48 paragraph 6. f. The amount of future returns can be reasonably estimated (paragraph 8).
Company comment – We do not give the buyer the right to return the product as a matter of contract or practice.
SFAS 48 paragraph 6. Sales revenue and cost of sales that are not recognized at time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions subsequently are met, whichever occurs first.
Company comment – Sales revenue and cost of sales are recognized at time of sale because we do not give the buyer the right to return the product as a matter of contract or practice. The exception to recognition of revenue at the time of sales are sales to our distributor in Mexico and the delayed recognition is not a result of an return privileges as described above.
SFAS 48 paragraph 7. If sales revenue is recognized because the conditions of paragraph 6 are met, any costs or losses that may be expected in connection with any returns shall be accrued in accordance with FASB Statement No. 5, Accounting for Contingencies. Sales revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns.
Company comment – We do not give the buyer the right to return the product as a matter of contract or practice and therefore no reduction for estimated returns is necessary.
SFAS 48 paragraph 8. The ability to make a reasonable estimate of the amount of future returns depends on many factors and circumstances that will vary from one case to the next. However, the following factors may impair the ability to make a reasonable estimate:
a. The susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand
b. Relatively long periods in which a particular product may be returned
c. Absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling enterprise's marketing policies or relationships with its customers
d. Absence of a large volume of relatively homogeneous transactions
The existence of one or more of the above factors, in light of the significance of other factors, may not be sufficient to prevent making a reasonable estimate; likewise, other factors may preclude a reasonable estimate.
Company comment – We are able to conclude that future returns will be zero because we do not give the buyer the right to return the product as a matter of contract or
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
practice. As previously stated, many of our distributors have asked to return products and we have consistently declined to do so.
In response to the staff specific question regarding modification of the standard distribution agreement, the Company does allow some minor amendments, but none of these amendments grant product return rights or inventory or price protection. Attached are three typical examples of amendments to the standard distribution agreements.
2.
We note your response to our prior comment 3. Please provide us with a revised analysis to support your conclusion that your inventory is fully recoverable and addresses the following, without limitation:
Company response:
The tables below show inventory costs as of December 31, 2004 and 2003 and the lowest net price to customers in 2005 and 2004. All inventory amounts are recoverable. Messenger is still being sold in foreign countries such as Spain or can be easily processed at a minimal cost with STS to produce Messenger STS.
Unit Units December 31, Dollars Cost/unit Net Price/unit
Raw materials:
Yeast
$ 395,321
Packaging film, labels, boxes
133,186
Other raw materials
50,878
Total raw materials
579,385
Bulk inventory and work in progress:
Bulk Messenger & Messenger STS oz. 2,230,028
1,468,705
.66 .85
Bulk N-Hibit Hopper Box oz. 160,318
152,758
.95 .00
Bulk N-Hibit CST oz. 258,960
170,396
.66 .00
Bulk ProAct oz. 117,213
114,822
.98 .00
Total bulk inventory and work in progress
2,766,519
1,906,681
Finished Goods:
Agriculture:
Messenger STS 32 oz bags oz. 225,728
138,833
.62 .85
Messenger 100/300 gram bags oz. 26,447
21,154
.80 .85
Messenger 500 gram bags oz. 682,665
612,023
.90 .00
Employ oz. 32,796
4,671
.14 .00
25 lb Mighty Plant bags lb. 35,550
29,113
.82 .25
Home & garden:
9 gal H&G Clamshells and bags bag 91,234
57,447
.63 .67
3 gal H&G Clamshells and bags bag 314,688
113,901
.36 .30
H&G Mighty Plant Clamshells and bags bag 75,775
21,909
.29 .45
8 oz Messenger STS oz. 3,320
2,469
.74 .85
Total finished goods
1,488,203
1,001,520
Total Inventory
$3,487,586
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
Unit Units December 31, Dollars Cost/unit Net Price/unit
Raw materials:
Yeast
$ 525,699
Packaging film, labels, boxes
251,346
Other raw materials
78,838
Total raw materials
855,883
Bulk inventory and work in progress:
Bulk Messenger & Messenger STS oz. 479,326
282,122
.59 .85
Bulk ProAct oz. 85,894
66,843
.78 .00
Total bulk inventory and work in progress
565,220
348,965
Finished Goods:
Agriculture:
Messenger 9 oz bags oz. 117,711
5,173
.04 .85
Messenger 22.5 oz bags oz. 890,550
699,460
.79 .85
Messenger STS 32 oz bags oz. 53,408
28,720
.54 .85
Messenger 100/300 gram bags oz. 16,398
9,141
.56 .85
Messenger 500 gram bags oz. 144,429
83,419
.58 .00
Employ oz. 47,580
7,652
.16 .00
Home & garden:
9 gal H&G Clamshells and bags bag 28,260
19,405
.69 .67
Total finished goods
1,298,336
852,970
Total Inventory
$2,057,818
•
Explain the impact the age and the development of the STS additive had on the value and salability of your Messenger inventory.
Company response:
The addition of STS to Messenger had no impact on the value and salability of Messenger. Further, the age of Messenger was unrelated to the development of Messenger STS.
•
Explain how the increase in your inventory, in relation to sales and in conjunction with the volume already held by distributors, was factored into your obsolescence analysis.
Company response:
The increase in inventory in 2004 compared to 2003 was primarily related to the production of Messenger and Messenger STS, N-Hibit Hopper Box and CST, ProAct and packages for home & garden. The decision to produce products in 2004 was made based on expected future sales of these products. At the time of our assessments we consider items such as expected future sales of new product introductions, new
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
geographic markets, new targeted crops, expansion of existing markets, including amount of inven
Show Raw Text
CORRESP
1
filename1.htm
August 5, 2005
Ms. Jill S. Davis
Branch Chief
United States Security and Exchange Commission
Division of Corporate Finance
Mail Stop 04-05
Washington, D.C. 20549-0405
RE:
Eden Bioscience Corporation
Form 10-K for Fiscal Year Ended December 31, 2004, Filed March 25, 2005
Form 10-Q for Fiscal Quarter Ended March 31, 2005, Filed May 11, 2005
Comment Letter dated June 10, 2005
Response Letter dated June 23, 2005
Second Comment Letter dated July 26, 2005
File No. 0-31499
Dear Ms. Davis:
This letter sets forth the responses of Eden Bioscience Corporation (the “Company”) to the comments of the Securities and Exchange Commission (“Commission”) staff relating to the filings referenced above contained in your letter dated July 26, 2005 (the “Second Comment Letter”). The Company’s responses are set forth below and are numbered to correspond to the numbers of the Second Comment Letter.
Form 10-K for the Fiscal Year Ended December 31, 2004
Financial Statements, page 40
Inventory, page 45
1.
We have reviewed your responses to our prior comments one and two, and note that you have provided additional support to your customers related to inventory that they continue to hold that you recorded as a sale. These include, but are not limited to the following:
•
January 2003 inventory exchange for the STS reprocess product at no cost
•
January 2003 inventory not meeting your quality standards voluntarily replaced to the distributor at no cost
•
February 2003 distributor settlement
•
September 2003 buy one get one free promotion for the customers of the distributors you sold to which resulted in you giving 470, 000 ounces of your product to distributors free of charge.
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
Please provide us an analysis that demonstrates how your revenue recognition policy complies with paragraphs 6-8 of SFAS 48. Additionally explain how you are able to conclude, if true, that future returns are reasonably estimable or how returns were adequately accrued in the appropriate period given the substantial volume of returns. Finally, confirm to us whether you have corresponded, amended, or agreed to additional terms other than those specified within your standard distribution agreement. If so please provide descriptions and the specific terms of these arrangements. Refer also to SAB Topic 13:B:2 and paragraph 3 of SFAS 48.
Company response:
Below are paragraphs 3 and 6-8 of SFAS 48 and an analysis of how our revenue recognition policy complies with those paragraphs:
SFAS 48 paragraph 3. This Statement specifies criteria for recognizing revenue on a sale in which a product may be returned, whether as a matter of contract or as a matter of existing practice, either by the ultimate customer or by a party who resells the product to others. The product may be returned for a refund of the purchase price, for a credit applied to amounts owed or to be owed for other purchases, or in exchange for other products. The purchase price or credit may include amounts related to incidental services, such as installation.
Company comment – We do not give the buyer the right to return the product as a matter of contract or existing practice. Our distributor agreements explicitly provide that distributors do not have price protection, inventory protection, or product return rights. The first three bullets of your comment 1 describe the only three transactions that involve the exchange or return of product since the Company began selling products over five years ago. The details of these transactions were described in our letter to you dated June 23, 2005. We do not believe these three transactions constitute the establishment of a practice of allowing products to be returned.
Although distributors have asked to return product, we have consistently declined to do so, which has resulted in the amount of product owned by distributors. We estimated that distributors owned the following amounts of Messenger:
At December 31,
Ounces of Messenger
2001
1,016,000
2002
867,000
2003
503,000
2004
511,000
In each of our Form 10-Ks and Form 10-Qs filed since December 31, 2001, we have disclosed our estimate of the amount of Messenger products in distributors’ inventory and that we do not expect distributors that have significant inventories of Messenger products to place additional orders for Messenger products until their current
2
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
inventories are reduced. We do not allow returns, which makes these disclosures necessary. Many distributors have asked to return product and we have consistently told them no.
SFAS 48 paragraph 6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:
Company comment – We do not give the buyer the right to return the product by contract or as a matter of practice.
SFAS 48 paragraph 6. a. The seller's price to the buyer is substantially fixed or determinable at the date of sale.
Company comment – Our price to the buyer is substantially fixed and determinable at the date of sale. See further discussion of this item in our response to comment 4 below.
SFAS 48 paragraph 6. b. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
Company comment – The buyer is obligated to pay us and the obligation is not contingent upon resale of the product by the distributor.
SFAS 48 paragraph 6. c. The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.
Company comment – The buyer’s obligation to us does not change in the event of theft or physical destruction or damage of the product.
SFAS 48 paragraph 6. d. The buyer acquiring the product for resale has economic substance apart from that provided by the seller.
Company comment – The buyers of our products for resale have economic substance apart from the Company. The only exception to this is our distributor in Mexico and revenue from these sales are recognized when cash has been collected by the Company. With respect to the Mexico distributor, no revenues were recorded prior to 2004 and total revenue recognized in 2004 was $6,063.
SFAS 48 paragraph 6. e. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
Company comment – We do not have significant obligations for the future performance to directly bring about resale of the product by the buyer. See further discussion of this item in our response to comment 4 below.
3
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
SFAS 48 paragraph 6. f. The amount of future returns can be reasonably estimated (paragraph 8).
Company comment – We do not give the buyer the right to return the product as a matter of contract or practice.
SFAS 48 paragraph 6. Sales revenue and cost of sales that are not recognized at time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions subsequently are met, whichever occurs first.
Company comment – Sales revenue and cost of sales are recognized at time of sale because we do not give the buyer the right to return the product as a matter of contract or practice. The exception to recognition of revenue at the time of sales are sales to our distributor in Mexico and the delayed recognition is not a result of an return privileges as described above.
SFAS 48 paragraph 7. If sales revenue is recognized because the conditions of paragraph 6 are met, any costs or losses that may be expected in connection with any returns shall be accrued in accordance with FASB Statement No. 5, Accounting for Contingencies. Sales revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns.
Company comment – We do not give the buyer the right to return the product as a matter of contract or practice and therefore no reduction for estimated returns is necessary.
SFAS 48 paragraph 8. The ability to make a reasonable estimate of the amount of future returns depends on many factors and circumstances that will vary from one case to the next. However, the following factors may impair the ability to make a reasonable estimate:
a. The susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand
b. Relatively long periods in which a particular product may be returned
c. Absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling enterprise's marketing policies or relationships with its customers
d. Absence of a large volume of relatively homogeneous transactions
The existence of one or more of the above factors, in light of the significance of other factors, may not be sufficient to prevent making a reasonable estimate; likewise, other factors may preclude a reasonable estimate.
Company comment – We are able to conclude that future returns will be zero because we do not give the buyer the right to return the product as a matter of contract or
4
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
practice. As previously stated, many of our distributors have asked to return products and we have consistently declined to do so.
In response to the staff specific question regarding modification of the standard distribution agreement, the Company does allow some minor amendments, but none of these amendments grant product return rights or inventory or price protection. Attached are three typical examples of amendments to the standard distribution agreements.
2.
We note your response to our prior comment 3. Please provide us with a revised analysis to support your conclusion that your inventory is fully recoverable and addresses the following, without limitation:
Company response:
The tables below show inventory costs as of December 31, 2004 and 2003 and the lowest net price to customers in 2005 and 2004. All inventory amounts are recoverable. Messenger is still being sold in foreign countries such as Spain or can be easily processed at a minimal cost with STS to produce Messenger STS.
Unit
2004
Units
December 31,
2004
Dollars
2004
Cost/unit
2005
Net Price/unit
Raw materials:
Yeast
$ 395,321
Packaging film, labels, boxes
133,186
Other raw materials
50,878
Total raw materials
579,385
Bulk inventory and work in progress:
Bulk Messenger & Messenger STS
oz.
2,230,028
1,468,705
0
.66
1
.85
Bulk N-Hibit Hopper Box
oz.
160,318
152,758
0
.95
7
.00
Bulk N-Hibit CST
oz.
258,960
170,396
0
.66
7
.00
Bulk ProAct
oz.
117,213
114,822
0
.98
3
.00
Total bulk inventory and work in progress
2,766,519
1,906,681
Finished Goods:
Agriculture:
Messenger STS 32 oz bags
oz.
225,728
138,833
0
.62
1
.85
Messenger 100/300 gram bags
oz.
26,447
21,154
0
.80
1
.85
Messenger 500 gram bags
oz.
682,665
612,023
0
.90
2
.00
Employ
oz.
32,796
4,671
0
.14
2
.00
25 lb Mighty Plant bags
lb.
35,550
29,113
0
.82
1
.25
Home & garden:
9 gal H&G Clamshells and bags
bag
91,234
57,447
0
.63
2
.67
3 gal H&G Clamshells and bags
bag
314,688
113,901
0
.36
1
.30
H&G Mighty Plant Clamshells and bags
bag
75,775
21,909
0
.29
0
.45
8 oz Messenger STS
oz.
3,320
2,469
0
.74
4
.85
Total finished goods
1,488,203
1,001,520
Total Inventory
$3,487,586
5
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
Unit
2003
Units
December 31,
2003
Dollars
2003
Cost/unit
2004
Net Price/unit
Raw materials:
Yeast
$ 525,699
Packaging film, labels, boxes
251,346
Other raw materials
78,838
Total raw materials
855,883
Bulk inventory and work in progress:
Bulk Messenger & Messenger STS
oz.
479,326
282,122
0
.59
1
.85
Bulk ProAct
oz.
85,894
66,843
0
.78
3
.00
Total bulk inventory and work in progress
565,220
348,965
Finished Goods:
Agriculture:
Messenger 9 oz bags
oz.
117,711
5,173
0
.04
1
.85
Messenger 22.5 oz bags
oz.
890,550
699,460
0
.79
1
.85
Messenger STS 32 oz bags
oz.
53,408
28,720
0
.54
1
.85
Messenger 100/300 gram bags
oz.
16,398
9,141
0
.56
1
.85
Messenger 500 gram bags
oz.
144,429
83,419
0
.58
2
.00
Employ
oz.
47,580
7,652
0
.16
2
.00
Home & garden:
9 gal H&G Clamshells and bags
bag
28,260
19,405
0
.69
2
.67
Total finished goods
1,298,336
852,970
Total Inventory
$2,057,818
•
Explain the impact the age and the development of the STS additive had on the value and salability of your Messenger inventory.
Company response:
The addition of STS to Messenger had no impact on the value and salability of Messenger. Further, the age of Messenger was unrelated to the development of Messenger STS.
•
Explain how the increase in your inventory, in relation to sales and in conjunction with the volume already held by distributors, was factored into your obsolescence analysis.
Company response:
The increase in inventory in 2004 compared to 2003 was primarily related to the production of Messenger and Messenger STS, N-Hibit Hopper Box and CST, ProAct and packages for home & garden. The decision to produce products in 2004 was made based on expected future sales of these products. At the time of our assessments we consider items such as expected future sales of new product introductions, new
6
Ms. Jill S. Davis
United States Securities and Exchange Commission
Division of Corporation Finance
August 5, 2005
geographic markets, new targeted crops, expansion of existing markets, including amount of inven