LIFECORE BIOMEDICAL, INC. \DE\
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the Fiscal Quarter Ended November
29, 2009
, or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Transition period from _____ to _________.
Commission
file number:
0-27446
LANDEC
CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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94-3025618
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(State
or other jurisdiction of
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(IRS
Employer
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incorporation
or organization)
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Identification
Number)
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3603
Haven Avenue
Menlo
Park, California 94025
(Address
of principal executive offices)
Registrant's
telephone number, including area code:
(650)
306-1650
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer” and “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated Filer
¨
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Accelerated
Filer
x
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Non
Accelerated Filer
¨
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Smaller
Reporting Company
¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
x
As of
December 21, 2009, there were 26,362,064 shares of Common Stock
outstanding.
LANDEC
CORPORATION
FORM 10-Q
For the Fiscal Quarter Ended November 29, 2009
INDEX
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Page
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Facing
sheet
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1
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Index
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2
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Part
I.
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Financial
Information
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Item
1.
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a)
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Consolidated
Balance Sheets as of November 29, 2009 and May 31, 2009
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3
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b)
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Consolidated
Statements of Income for the Three Months and Six Months Ended November
29, 2009 and November 30, 2008
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4
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c)
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Consolidated
Statements of Cash Flows for the Six Months Ended November 29, 2009 and
November 30, 2008
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5
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d)
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Notes
to Consolidated Financial Statements
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6
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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25
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Item
4
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Controls
and Procedures
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26
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Part
II.
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Other
Information
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27
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Item
1.
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Legal
Proceedings
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27
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Item
1A.
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Risk
Factors
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27
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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33
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Item
3.
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Defaults
Upon Senior Securities
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33
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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33
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Item
5.
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Other
Information
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34
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Item
6.
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Exhibits
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34
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Signatures
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35
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-2-
LANDEC
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
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November 29,
2009
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May 31,
2009
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|||||||
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(Unaudited)
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(1)
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|||||||
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ASSETS
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||||||||
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Current
Assets:
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||||||||
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Cash
and cash equivalents
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$ | 2,222 | $ | 43,459 | ||||
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Marketable
securities
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65,851 | 22,498 | ||||||
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Accounts
receivable, less allowance for doubtful accounts of $203 and $165 at
November 29, 2009 and May 31, 2009, respectively
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16,680 | 15,271 | ||||||
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Accounts
receivable, related party
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368 | 632 | ||||||
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Inventories,
net
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6,782 | 5,829 | ||||||
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Notes
and advances receivable
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1,216 | 186 | ||||||
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Deferred
taxes
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2,161 | 2,161 | ||||||
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Prepaid
expenses and other current assets
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934 | 1,298 | ||||||
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Total
Current Assets
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96,214 | 91,334 | ||||||
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Property,
plant and equipment, net
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24,361 | 22,743 | ||||||
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Goodwill,
net
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27,361 | 27,361 | ||||||
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Trademarks,
net
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8,228 | 8,228 | ||||||
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Other
assets
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4,231 | 3,832 | ||||||
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Total
Assets
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$ | 160,395 | $ | 153,498 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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||||||||
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Current
Liabilities:
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||||||||
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Accounts
payable
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$ | 15,740 | $ | 12,430 | ||||
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Related
party accounts payable
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69 | 299 | ||||||
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Income
taxes payable
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187 | 107 | ||||||
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Accrued
compensation
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1,060 | 1,112 | ||||||
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Other
accrued liabilities
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2,285 | 1,805 | ||||||
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Deferred
revenue
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2,010 | 3,430 | ||||||
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Total
Current Liabilities
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21,351 | 19,183 | ||||||
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Deferred
revenue
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2,000 | 3,000 | ||||||
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Deferred
taxes
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4,593 | 4,119 | ||||||
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Total
Liabilities
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27,944 | 26,302 | ||||||
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Stockholders’
Equity:
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||||||||
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Common
stock, $0.001 par value; 50,000,000 shares authorized; 26,361,315 and
26,326,889 shares issued and outstanding at November 29, 2009 and May 31,
2009, respectively
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26 | 26 | ||||||
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Additional
paid-in capital
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117,875 | 116,158 | ||||||
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Accumulated
other comprehensive income
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92 | — | ||||||
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Retained
earnings
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12,940 | 9,222 | ||||||
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Total
Stockholders’ Equity
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130,933 | 125,406 | ||||||
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Noncontrolling
interest
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1,518 | 1,790 | ||||||
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Total
Equity
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132,451 | 127,196 | ||||||
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Total
Liabilities and Stockholders’ Equity
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$ | 160,395 | $ | 153,498 | ||||
(1)
Derived from audited financial statements.
See
accompanying notes.
-3-
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
(In
thousands, except per share amounts)
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Three Months Ended
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Six Months Ended
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|||||||||||||||
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November 29,
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November 30,
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November 29,
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November 30,
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|||||||||||||
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2009
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2008
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2009
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2008
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Revenues:
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Product
sales
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$ | 58,490 | $ | 55,267 | $ | 116,882 | $ | 124,128 | ||||||||
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Services
revenue, related party
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914 | 998 | 2,080 | 2,156 | ||||||||||||
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License
fees
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1,350 | 1,550 | 2,700 | 3,100 | ||||||||||||
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Research,
development and royalty revenues
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179 | 223 | 213 | 406 | ||||||||||||
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Total
revenues
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60,933 | 58,038 | 121,875 | 129,790 | ||||||||||||
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Cost
of revenue:
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||||||||||||||||
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Cost
of product sales
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52,009 | 48,822 | 102,115 | 108,124 | ||||||||||||
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Cost
of product sales, related party
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755 | 822 | 1,820 | 2,258 | ||||||||||||
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Cost
of services revenue
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752 | 837 | 1,653 | 1,728 | ||||||||||||
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Total
cost of revenue
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53,516 | 50,481 | 105,588 | 112,110 | ||||||||||||
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Gross
profit
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7,417 | 7,557 | 16,287 | 17,680 | ||||||||||||
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Operating
costs and expenses:
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||||||||||||||||
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Research
and development
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942 | 867 | 1,881 | 1,756 | ||||||||||||
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Selling,
general and administrative
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4,182 | 4,449 | 8,752 | 9,125 | ||||||||||||
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Total
operating costs and expenses
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5,124 | 5,316 | 10,633 | 10,881 | ||||||||||||
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Operating
income
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2,293 | 2,241 | 5,654 | 6,799 | ||||||||||||
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Interest
income
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266 | 455 | 554 | 812 | ||||||||||||
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Interest
expense
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(4 | ) | (3 | ) | (5 | ) | (4 | ) | ||||||||
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Net
income before taxes
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2,555 | 2,693 | 6,203 | 7,607 | ||||||||||||
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Income
tax expense
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(895 | ) | (1,063 | ) | (2,176 | ) | (2,974 | ) | ||||||||
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Consolidated
net income
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1,660 | 1,630 | 4,027 | 4,633 | ||||||||||||
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Noncontrolling
interest
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(126 | ) | (132 | ) | (309 | ) | (296 | ) | ||||||||
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Net
income applicable to Common Stockholders
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$ | 1,534 | $ | 1,498 | $ | 3,718 | $ | 4,337 | ||||||||
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Basic
net income per share
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$ | 0.06 | $ | 0.06 | $ | 0.14 | $ | 0.17 | ||||||||
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Diluted
net income per share (Note 5)
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$ | 0.06 | $ | 0.06 | $ | 0.14 | $ | 0.16 | ||||||||
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Shares
used in per share computation:
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||||||||||||||||
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Basic
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26,360 | 26,171 | 26,355 | 26,167 | ||||||||||||
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Diluted
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26,676 | 26,814 | 26,670 | 26,806 | ||||||||||||
See
accompanying notes.
-4-
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
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Six months Ended
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||||||||
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November 29,
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November 30,
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|||||||
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2009
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2008
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Cash
flows from operating activities:
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Net
income applicable to Common Stockholders
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$ | 3,718 | $ | 4,337 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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||||||||
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Depreciation
and amortization
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1,541 | 1,615 | ||||||
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Stock-based
compensation expense
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412 | 474 | ||||||
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Tax
benefit from stock-based compensation expense
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(1,341 | ) | (1,496 | ) | ||||
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Increase
in long-term receivable
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(400 | ) | (400 | ) | ||||
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Noncontrolling
interest
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309 | 296 | ||||||
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Deferred
taxes
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474 | 933 | ||||||
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Changes
in current assets and current liabilities:
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||||||||
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Accounts
receivable, net
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(1,409 | ) | 3,986 | |||||
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Accounts
receivable, related party
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264 | (255 | ) | |||||
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Inventories,
net
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(953 | ) | (336 | ) | ||||
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Issuance
of notes and advances receivable
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(1,363 | ) | (1,322 | ) | ||||
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Collection
of notes and advances receivable
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333 | 636 | ||||||
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Prepaid
expenses and other current assets
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364 | 225 | ||||||
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Accounts
payable
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3,310 | (2,571 | ) | |||||
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Related
party accounts payable
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(230 | ) | (130 | ) | ||||
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Income
taxes payable
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1,421 | 1,748 | ||||||
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Accrued
compensation
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(52 | ) | (1,291 | ) | ||||
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Other
accrued liabilities
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230 | (743 | ) | |||||
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Deferred
revenue
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(2,420 | ) | (2,446 | ) | ||||
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Net
cash provided by operating activities
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4,208 | 3,260 | ||||||
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Cash
flows from investing activities:
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||||||||
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Purchases
of property and equipment
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(3,159 | ) | (2,392 | ) | ||||
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Acquisition
related earnout payments
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— | (7 | ) | |||||
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Issuance
of notes and advances receivable
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— | (2 | ) | |||||
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Collection
of notes and advances receivable
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— | 103 | ||||||
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Purchase
of marketable securities
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(60,495 | ) | (21,992 | ) | ||||
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Proceeds
from maturities of marketable securities
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17,234 | 17,753 | ||||||
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Net
cash used in investing activities
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(46,420 | ) | (6,537 | ) | ||||
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Cash
flows from financing activities:
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||||||||
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Taxes
paid by Company for stock swaps to cover taxes on RSUs
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(53 | ) | — | |||||
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Proceeds
from sale of common stock
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17 | 45 | ||||||
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Tax
benefit from stock-based compensation
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1,341 | 1,496 | ||||||
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Payments
to minority interest holders
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(330 | ) | (315 | ) | ||||
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Net
cash provided by financing activities
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975 | 1,226 | ||||||
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Net
decrease in cash and cash equivalents
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(41,237 | ) | (2,051 | ) | ||||
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Cash
and cash equivalents at beginning of period
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43,459 | 44,396 | ||||||
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Cash
and cash equivalents at end of period
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$ | 2,222 | $ | 42,345 | ||||
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Supplemental
schedule of noncash operating activities:
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||||||||
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Income
tax expense not payable
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$ | 1,341 | $ | 1,496 | ||||
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Long-term
receivable from Monsanto for guaranteed termination fee
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$ | 400 | $ | 400 | ||||
See accompanying
notes
.
-5-
LANDEC
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Organization,
Basis of Presentation and Summary of Significant Accounting
Policies
|
Organization
Landec
Corporation and its subsidiaries ("Landec" or the "Company") design, develop,
manufacture, and sell temperature-activated and other specialty polymer products
for a variety of food products, agricultural products, and licensed partner
applications. The Company sells Intellicoat® coated seed products through its
Landec Ag LLC (“Landec Ag”) subsidiary and specialty packaged fresh-cut
vegetables and whole produce to retailers and club stores, primarily in the
United States and Asia through its Apio, Inc. (“Apio”) subsidiary.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of Landec have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions for
Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) have been
made which are necessary to present fairly the financial position at November
29, 2009 and the results of operations and cash flows for all periods
presented. Although Landec believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information normally included in financial statements and
related footnotes prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted per the rules and
regulations of the Securities and Exchange Commission. The
accompanying financial data should be reviewed in conjunction with the audited
financial statements and accompanying notes included in Landec's Annual Report
on Form 10-K for the fiscal year ended May 31, 2009.
The results of operations for the three
and six months ended November 29, 2009 are not necessarily indicative of the
results that may be expected for an entire fiscal year due to some seasonality
in Apio’s food business, particularly, Apio’s Commodity Trading
business.
Basis
of Consolidation
The
consolidated financial statements are presented on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles and
include the accounts of Landec Corporation and its subsidiaries, Apio and Landec
Ag. All material inter-company transactions and balances have been
eliminated.
The
Company follows FASB guidance concerning the consolidation of variable interest
entities ("VIEs"). Under the guidance, arrangements that are not
controlled through voting or similar rights are accounted for as
VIEs. An enterprise is required to consolidate a VIE if it is the
primary beneficiary of the VIE.
Under the
guidance, a VIE is created when (i) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (ii) the entity's
equity holders as a group either: (a) lack direct or indirect ability to
make decisions about the entity through voting or similar rights, (b) are
not obligated to absorb expected losses of the entity if they occur, or
(c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE, the
enterprise that is deemed to absorb a majority of the expected losses or receive
a majority of expected residual returns of the VIE is considered the primary
beneficiary and must consolidate the VIE.
Under the
initial agreement between Landec and Monsanto Company (“Monsanto”) (see Note 2),
the Company had concluded that Landec Ag was a VIE. The Company had
also determined that it was the primary beneficiary of Landec Ag and therefore
the accounts of Landec Ag were consolidated with the accounts of the
Company. As a result of the amended and restated agreement between
Landec and Monsanto (see Note 2), Landec Ag is no longer deemed to be a VIE,
however, because Landec Ag is wholly owned, it continues to be consolidated with
the accounts of the Company.
-6-
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain
estimates and judgments that affect the amounts reported in the financial
statements and accompanying notes. The accounting estimates that require
management’s most significant, difficult and subjective judgments include
revenue recognition; sales returns and allowances; recognition and measurement
of current and deferred income tax assets and liabilities; the assessment of
recoverability of long-lived assets; the valuation of intangible assets and
inventory; the valuation and nature of impairments of investments; and the
valuation and recognition of stock-based compensation.
These
estimates involve the consideration of complex factors and require management to
make judgments. The analysis of historical and future trends, can require
extended periods of time to resolve, and are subject to change from period to
period. The actual results may differ from management’s estimates.
For
instance, the carrying value of notes and advances receivable, are impacted by
current market prices for the related crops, weather conditions and the fair
value of the underlying security obtained by the Company, such as, liens on
property and crops. The Company recognizes losses when it estimates
that the fair value of the related crops or security is insufficient to cover
the advance or note receivable.
Cash,
Cash Equivalents and Marketable Securities
The Company records all highly liquid
securities with three months or less from date of purchase to maturity as cash
equivalents and consists mainly of certificate of deposits, money market funds
and U.S. Treasuries. Short-term marketable securities consist of
certificates of deposit (CDs) that are FDIC insured and single A or better rated
municipal bonds with original maturities of more than three months at the date
of purchase regardless of the maturity date as the Company
views its
available-for-sale portfolio as
available for use in its
current operations
. The aggregate amount of CDs included in
marketable securities at November 29, 2009 and May 31, 2009 was $3.8 million and
$2.1 million, respectively. The Company classifies all debt
securities with readily determined market values as “available for sale”
.
The contractual
maturities of the Company's marketable securities that are due in less than one
year represent $37.0 million of its marketable securities and those due in one
to two years represents the remaining $28.9 million of the Company’s marketable
securities as of November 29, 2009. These investments are classified
as marketable securities on the consolidated balance sheet as of November 29,
2009 and May 31, 2009 and are carried at fair market
value. Unrealized gains and losses are reported as a component of
stockholders’ equity. The cost of debt securities is adjusted for
amortization of premiums and discounts to maturity. This amortization
is recorded to interest income. Realized gains and losses on the sale
of available-for-sale securities are also recorded to interest income and were
not significant for the three and six months ended November 29, 2009 and
November 30, 2008. The cost of securities sold is based on the
specific identification method.
Financial
Instruments
The Company’s financial instruments are
primarily composed of marketable debt securities, commercial-term trade payables
and grower advances, and notes receivable, as well as long-term notes
receivables and debt instruments. For short-term instruments, the
historical carrying amount is a reasonable estimate of fair
value. Fair values for long-term financial instruments not readily
marketable are estimated based upon discounted future cash flows at prevailing
market interest rates. Based on these assumptions, management
believes the fair market values of the Company’s financial instruments are not
materially different from their recorded amounts as of November 29,
2009.
Investment
in Non-Public Company
Landec’s
investment of $1.8 million in a non-public company is carried at cost and
adjusted for impairment losses, if any. Since there is no
readily available market value information, Landec periodically reviews this
investment to determine if any other than temporary declines in value have
occurred based on the financial stability and viability of the non-public
company. The non-public company is currently in discussions with
several parties to license or sell the rights to certain proprietary assets, and
potential deal terms with more than one party are in late-stage
negotiations. The non-public company's goal is to consummate at deal
in calendar 2010. Landec has evaluated its cost method investment for
impairment, utilizing a discounted cash flow analysis of the preliminary terms
under late-stage discussions with one of the parties. Based on the
expectation that the rights to certain proprietary assets of the non-public
company will be licensed or sold to a third party, Landec has determined there
is no impairment of its investment as of November 29,
2009. However, if the currently proposed or similar deal does
not close, Landec will need to re-evaluate impairment, with maximum exposure
equal to its cost investment.
-7-
New
Accounting Pronouncements
Recently Adopted
Pronouncements
Accounting
Standards Codification
Effective
July 1, 2009, the FASB Accounting Standards Codification (FASB ASC or the
Codification) is the single source of authoritative accounting principles
recognized by the FASB to be applied by non-governmental entities in the
preparation of financial statements in conformity with GAAP. The
adoption of the FASB ASC does not impact the Company’s consolidated financial
statements, however, the Company’s references to accounting literature within
its notes to the condensed consolidated financial statements have been revised
to conform to the Codification beginning with the fiscal quarter ending
November 29, 2009.
Fair
Value Measurements
In
September 2006, the FASB issued new guidance with respect to defining, measuring
and disclosing fair value measurements. The new guidance does not
require new fair value measurements but provides guidance on how to measure fair
value by providing a fair value hierarchy used to classify the source of
information. The new guidance is effective for fiscal years beginning
after November 15, 2007. However, on February 12, 2008, the FASB
delayed the effective date for all non-financial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), to fiscal years beginning after
November 15, 2008, and interim periods within the fiscal years for items within
the scope of the new guidance. The Company adopted the new guidance
on May 26, 2008 for financial assets and financial liabilities and it did not
have any impact on the Company’s results of operations or financial position for
the three and six months ended November 29, 2009. The Company adopted
the new guidance for non-financial assets and liabilities on June 1,
2009. Adoption of the new guidance for non-financial assets and
liabilities did not have a material impact on the Company’s results of
operations or financial position.
Noncontrolling
Interests
In
December 2007, the FASB issued new guidance with respect to noncontrolling
interests in consolidated financial statements. The new guidance requires
the reporting of all noncontrolling interests as a separate component of
stockholders’ equity, the reporting of consolidated net income (loss) as the
amount attributable to both the parent and the noncontrolling interests and the
separate disclosure of net income (loss) attributable to the parent and to the
noncontrolling interests. Changes in a parent’s ownership interest while
the parent retains its controlling interest will be accounted for as equity
transactions and any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary will be initially measured at fair value. Other
than the reporting requirements described above which require retrospective
application, the provisions of the new guidance are to be applied
prospectively. The Company adopted the new guidance on June 1, 2009 and
such adoption did not have a material impact on the Company’s results of
operations or financial position for the three and six months ended November 29,
2009, however, as required, presentation of noncontrolling interests has been
conformed to the requirements of the new guidance for all periods
presented.
Collaborative
Arrangements
In
December 2007, the FASB issued new guidance concerning the accounting for
collaborative arrangements (which does not establish a legal entity within such
arrangement). The consensus indicates that costs incurred and revenues
generated from transactions with third parties (i.e. parties outside of the
collaborative arrangement) should be reported by the collaborators on the
respective line items in their income statements based upon their role as either
principal or agent. Additionally, the consensus provides that income
statement characterization of payments between the participants in a
collaborative arrangement should be based upon existing authoritative guidance;
analogy to such guidance if not within their scope; or a reasonable, rational,
and consistently applied accounting policy election. The Company adopted
the new guidance on June 1, 2009, the adoption of which did not have any impact
on the Company’s results of operations or financial position for the three and
six months ended November 29, 2009.
-8-
Fair
Value Disclosures in Interim Reports
In April
2009, the FASB issued new guidance that requires disclosures about fair value of
financial instruments at interim reporting periods. The new guidance is
effective for interim reporting periods ending after June 15, 2009. The Company
adopted the new guidance on June 1, 2009, the adoption of which did not have any
impact on the Company’s results of operations or financial position for the
three and six months ended November 29, 2009.
Subsequent
Events
In May
2009, the FASB issued new guidance that establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be
issued. The Company adopted the new guidance on June 1, 2009, the adoption
of which did not impact the Company’s consolidated financials other than the
required additional disclosures.
Business
Combinations
In
December 2007, the FASB issued new guidance which significantly changes the
financial accounting and reporting for business combination transactions.
The new guidance requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of the new guidance will, among other
things, impact the determination of acquisition-date fair value of consideration
paid in a business combination (including contingent consideration); exclude
transaction costs from acquisition accounting; and change accounting practices
for acquired contingencies, acquisition-related restructuring costs, in-process
research and development, indemnification assets, and tax benefits. The
Company adopted the new guidance on June 1, 2009, the adoption of which did not
have an impact on the Company’s results of operations or financial position for
the three and six months ended November 29, 2009, however, its provisions will
impact future business combinations.
Recently Issued
Pronouncements
Variable
Interest Entities
In June
2009, the FASB issued new guidance which amends the evaluation criteria to
identify the primary beneficiary of a variable interest entity.
Additionally, the new guidance requires ongoing reassessments of whether an
enterprise is the primary beneficiary of the variable interest entity. The
Company will adopt this new guidance in fiscal year 2011 and is currently
evaluating the impact of its pending adoption on the Company’s consolidated
financial statements.
Fair
Value Measurements
The
Company adopted fair value measurement accounting on May 26, 2008 for financial
assets and liabilities. The Company also adopted fair value measurement
accounting to measure many financial instruments and certain other items at fair
value. The Company did not elect the fair value option for any of its
eligible financial assets or liabilities.
The
guidance for fair value measurement accounting established a three-tier
hierarchy for fair value measurements, which prioritizes the inputs used in
measuring fair value as follows:
Level 1 –
observable inputs such as quoted prices for identical instruments in active
markets.
Level 2 –
inputs other than quoted prices in active markets that are observable either
directly or indirectly through corroboration with observable market
data.
Level 3 –
unobservable inputs in which there is little or no market data, which would
require the Company to develop its own assumptions.
-9-
As of
November 29, 2009, the Company held certain assets that are required to be
measured at fair value on a recurring basis. These included the Company’s
cash equivalents and marketable securities for which the fair value is
determined based on observable inputs that are readily available in public
markets or can be derived from information available in publicly quoted markets.
Therefore, the Company has categorized its cash equivalents and marketable
securities as Level 1. The Company has no other financial assets or
liabilities for which fair value measurement has been adopted.
Reclassifications
Certain reclassifications have been
made to prior period financial statements to conform to the current period
presentation.
|
2.
|
License
Agreement with Monsanto
Company
|
On
December 1, 2006, Landec sold its direct marketing and sales seed company,
Fielder’s Choice Direct (“FCD”), which included the Fielder’s Choice Direct
®
and
Heartland Hybrid
®
brands,
to American Seeds, Inc., a wholly owned subsidiary of Monsanto Company
(“Monsanto”). The acquisition price for FCD was $50 million in cash paid
at the close. During fiscal year 2007, Landec recorded income from the
sale, net of direct expenses and bonuses, of $22.7 million. The income
that was recorded is equal to the difference between the fair value of FCD of
$40 million and its net book value, less direct selling expenses and
bonuses. In accordance with generally accepted accounting principles, the
portion of the $50 million of proceeds in excess of the fair value of FCD, or
$10 million, was allocated to the technology license agreement described below
and will be recognized as revenue ratably over the five year term of the
technology license agreement or $2 million per year beginning December 1,
2006. The fair value was determined by management.
On
December 1, 2006, Landec also entered into a five-year co-exclusive technology
license and polymer supply agreement (“the Agreement”) with Monsanto for the use
of Landec’s Intellicoat
polymer
seed coating technology. Under the terms of the Agreement, Monsanto will pay
Landec Ag $2.6 million per year in exchange for (1) a co-exclusive right to use
Landec’s Intellicoat
temperature-activated
seed coating technology worldwide during the license period, (2) the right to be
the exclusive global sales and marketing agent for the Intellicoat seed coating
technology, and (3) the right to purchase Landec Ag at any time during the five
year term of the Agreement. Monsanto will also fund all operating costs,
including all Intellicoat
research
and development, product development and non-replacement capital costs during
the five year agreement period.
The
Agreement also provides for a fee payable to Landec of $4 million if Monsanto
elects to terminate the agreement or $10 million if Monsanto elects to purchase
Landec Ag. If the purchase option is exercised before the fifth
anniversary of the Agreement, or if Monsanto elects to terminate the Agreement,
all annual license fees and supply payments that have not been paid to Landec Ag
will become due upon the purchase. If Monsanto does not exercise
its purchase option by the fifth anniversary of the Agreement, Landec will
receive the termination fee and all rights to the Intellicoat
seed
coating technology will revert to Landec. Accordingly, Landec will receive
minimum guaranteed payments of $17 million for license fees and polymer supply
payments over five years or $23 million in maximum payments if Monsanto elects
to purchase Landec Ag. The minimum guaranteed payments and the deferred
gain of $2 million per year described above will result in Landec recognizing
revenue and operating income of $5.4 million per year for fiscal years 2008
through 2011 and $2.7 million per year for fiscal years 2007 and 2012. The
incremental $6 million to be received in the event Monsanto exercises the
purchase option has been deferred and will be recognized upon the exercise of
the purchase option. The fair value of the purchase option was determined
by management to be less than the amount of the deferred revenue.
If
Monsanto exercises its purchase option, Landec and Monsanto will enter into a
new long-term supply agreement in which Landec would continue to be the
exclusive supplier of Intellicoat polymer materials to Monsanto.
For each
of the three and six months ended November 29, 2009 and November 30, 2008,
Landec recognized $1.35 million and $2.7 million, respectively, in revenues from
the Agreement.
-10-
On
November 27, 2009, the Agreement was amended and restated (the “Amended
Agreement”). Under the terms of the Amended Agreement, Monsanto will
continue to pay Landec Ag $2.6 million per year for the two-year remaining term
of the Amended Agreement in exchange for (1) an exclusive right to use Landec’s
Intellicoat
seed
coating technology worldwide during the two-year license period for specific
applications of seed treatments as defined in the Amended Agreement, and (2) the
right to purchase for $10 million any time during the two-year license period
the exclusive rights to the specific applications for seed treatments licensed
to Monsanto by Landec under the Amended Agreement. If Monsanto does not
exercise its purchase option by December 1, 2011, Landec will receive a
termination fee of $4 million and all rights to the Intellicoat
seed
coating technology licensed to Monsanto will revert to Landec. If Monsanto
exercises its purchase option, Landec and Monsanto will enter into a new
long-term supply agreement in which Landec would continue to be the exclusive
supplier of Intellicoat polymer materials to Monsanto. The Amended
Agreement does not impact the accounting for the Monsanto
transaction.
|
3.
|
License
Agreements
|
In
December 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”), a medical device
company. Aesthetic Sciences paid Landec an upfront license fee of $250,000
for the exclusive rights to use Landec's Intelimer
Ò
materials technology for
the development of dermal fillers worldwide. Landec will also receive
royalties on the sale of products incorporating Landec’s technology. In
addition, the Company received shares of preferred stock valued at $1.3 million
which represented a 19.9% ownership interest in Aesthetic Sciences as of
December 2005.
As part
of the original agreement with Aesthetic Sciences, Landec was to receive
additional shares upon the completion of a specific milestone. In
November 2006, that milestone was met and as a result Landec received an
additional 800,000 shares of preferred stock valued at $481,000. The
receipt of the additional 800,000 preferred shares did not change Landec’s 19.9%
ownership interest in Aesthetic Sciences. The $481,000 is included
in other assets in the accompanying Consolidated Balance Sheet and was recorded
as licensing revenue during fiscal year 2007 since Landec has no further
obligations under this agreement. During fiscal year 2009, Aesthetic
Sciences completed a second preferred stock offering in which Landec did not
participate and as a result Landec’s ownership interest in Aesthetic Sciences
was 17.3% as of November 29, 2009 and May 31, 2009.
In March
2006, Landec entered into an exclusive license and research and development
agreement with Air Products and Chemicals, Inc. (“Air Products”). Landec
will provide research and development support to Air Products for three years
with a mutual option for two additional years. The license fees were
recognized as license revenue over a three year period beginning March
2006. In addition, in accordance with the agreement, Landec will receive
40% of the gross profit generated from the sale of products by Air Products
occurring after April 1, 2007, that incorporate Landec’s Intelimer
materials.
In
September 2007, the Company amended its licensing and supply agreement with
Chiquita Brands International, Inc. (“Chiquita”). Under the terms of
the amendment, the license for bananas was expanded to include additional
exclusive fields using Landec’s BreatheWay® packaging technology, and a new
exclusive license was added for the sale and marketing of avocados and mangos
using Landec’s BreatheWay packaging technology. In exchange for expanding
the exclusive fields for bananas and adding a new exclusive field for avocados
and mango, Chiquita agreed to continue to pay minimum gross profits through
December 2009 and recently agreed to pay minimums through at least December
2010.
|
4.
|
Stock-Based
Compensation
|
In the
three and six months ended November 29, 2009, the Company recognized
stock-based compensation expense of $192,000 and $412,000 or $0.01 and $0.02 per
basic and diluted share, respectively, which included $83,000 and $202,000 for
restricted stock unit awards and $109,000 and $210,000 for stock option
grants, respectively. In the three and six months ended November 30,
2008, the Company recognized stock-based compensation expense of $179,000 and
$474,000 or $0.01 and $0.02 per basic and diluted share, respectively, which
included $76,000 and $155,000 for restricted stock unit awards and $103,000 and
$319,000 for stock option grants, respectively.
-11-
The
following table summarizes the stock-based compensation expense by income
statement line item:
|
Three Months
Ended
November 29,
2009
|
Three Months
Ended
November 30,
2008
|
Six Months
Ended
November 29,
2009
|
Six Months
Ended
November 30,
2008
|
|||||||||||||
|
Research
and development
|
$ | 45,000 | $ | 42,000 | $ | 94,000 | $ | 84,000 | ||||||||
|
Selling,
general and administrative
|
$ | 147,000 | $ | 137,000 | $ | 318,000 | $ | 390,000 | ||||||||
|
Total
stock-based compensation expense
|
$ | 192,000 | $ | 179,000 | $ | 412,000 | $ | 474,000 | ||||||||
As of
November 29, 2009, there was $1.4 million of total unrecognized
compensation expense related to unvested equity compensation awards granted
under the Company’s incentive stock plans. Total expense is expected to be
recognized over the weighted-average period of 2.4 years for stock options and
2.0 years for restricted stock unit awards.
During
the six months ended November 29, 2009, the Company granted options to purchase
47,500 shares of Common Stock and 15,833 restricted stock unit
awards.
As of
November 29, 2009, the Company has reserved 4.0 million shares of Common Stock
for future issuance under its current and former stock plans.
|
5.
|
Net
Income Per Diluted Share
|
The following table sets forth the
computation of diluted net income per share (in thousands, except per share
amounts):
|
Three Months
Ended
November 29,
2009
|
Three Months
Ended
November 30,
2008
|
Six Months
Ended
November 29,
2009
|
Six Months
Ended
November 30,
2008
|
|||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net
income
|
$ | 1,534 | $ | 1,498 | $ | 3,718 | $ | 4,337 | ||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted
average shares for basic net income per share
|
26,360 | 26,171 | 26,355 | 26,167 | ||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Stock options and restricted stock
units
|
316 | 643 | 315 | 639 | ||||||||||||
|
Weighted
average shares for diluted net income per share
|
26,676 | 26,814 | 26,670 | 26,806 | ||||||||||||
|
Diluted
net income per share
|
$ | 0.06 | $ | 0.06 | $ | 0.14 | $ | 0.16 | ||||||||
For the
three months ended November 29, 2009 and November 30, 2008, the computation of
the diluted net income per share excludes the impact of options to purchase
1,080,486 shares and 288,834 shares of Common Stock, respectively, as such
impacts would be antidilutive for these periods.
For the
six months ended November 29, 2009 and November 30, 2008, the computation of the
diluted net income per share excludes the impact of options to purchase
1,073,549 shares and 266,405 shares of Common Stock, respectively, as such
impacts would be antidilutive for these periods.
-12-
|
6.
|
Income
Taxes
|
The
estimated annual effective tax rate for fiscal 2010 is currently expected to be
approximately 37%. The provision for income taxes for the three and six months
ended November 29, 2009 was $895,000 and $2.2 million,
respectively.
On
September 30, 2008, California enacted Assembly Bill 1452 which among other
provisions, suspends net operating loss deductions for 2008 and 2009 and extends
the carry forward period of any net operating losses not utilized due to such
suspension; adopts the federal 20-year net operating loss carry forward period;
phases-in the federal two-year net operating loss carryback periods beginning in
2011 and limits the utilization of tax credits to 50 percent of a taxpayer's
taxable income. The Company does not expect this change in tax law to
materially impact its tax provision, except for the increase in the current
state tax liability due to the temporary suspension of the utilization of
California net operating loss carry forwards.
In June
2006, the FASB issued new guidance which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements.
This new guidance prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. It also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure, and
transition.
As of May
31, 2009, the Company had unrecognized tax benefits of approximately
$619,000. Included in the balance of unrecognized tax benefits as of May
31, 2009 is approximately $549,000 of tax benefits that, if recognized, would
result in an adjustment to the Company’s effective tax rate. The Company
does not expect that the amounts of unrecognized tax benefits will change
significantly within the next twelve months.
In
accordance with accounting literature, the Company has decided to classify
interest and penalties related to uncertain tax positions as a component of its
provision for income taxes. The Company did accrue an insignificant amount
of interest and penalties relating to the income tax on the unrecognized tax
benefits as of November 29, 2009 and May 31, 2009.
Due to
tax attribute carryforwards, the Company is subject to examination for tax years
1992 forward for U.S. tax purposes. The Company was also subject to
examination in various state jurisdictions for tax years 1996 forward, none of
which were individually significant.
|
7.
|
Goodwill
and Other Intangibles
|
The
Company tests goodwill and all its other intangible assets with indefinite lives
(collectively, “intangible assets”) for impairment at least annually. When
evaluating goodwill for impairment, the Company first compares the fair value of
the reporting unit to its carrying value to determine if there is an impairment
loss. If the fair value of the reporting unit exceeds its carrying value,
goodwill is considered not impaired. Application of the second step of the
two-step approach is therefore not required. Application of the goodwill
impairment tests require significant judgment by management, including
identification of reporting units, assignment of assets and liabilities to
reporting units, assignment of goodwill to reporting units, determination of the
fair value of each reporting unit and projections of future net cash flows,
which judgments and projections are inherently uncertain.
The
Company considers the results generated from using two approaches to estimate
the fair value of each relevant reporting unit as follows:
|
·
|
The Company uses the market
approach to develop indications of fair value. This approach uses
market values and revenue multiples of other publicly-traded companies
engaged in the same or similar lines of business as the
Company.
|
|
·
|
The Company uses the discounted
cash flow (“DCF”) methodology to develop an additional estimate of fair
value. The DCF methodology recognizes that current value is premised
on the expected receipt of future economic benefits. Indications of value
are developed by discounting projected future net cash flows to their
present value at a rate that reflects both the current return requirements
of the market and the risks inherent in the specific
investment.
|
-13-
The
determination of whether the intangible assets are impaired involves numerous
assumptions, estimates and the application of significant judgment. For the
market approach, considerable judgment is required to select comparable
companies and estimate the multiples of revenues implied by their market values.
For the DCF approach, the Company must exercise judgment in selecting an
appropriate discount rate and must also make numerous assumptions in order to
develop future business and financial forecasts and the related estimates of
future net cash flows. Future net cash flows depend primarily on future product
sales, which are inherently difficult to predict.
The
Company tested its goodwill and other intangible assets with indefinite lives
for impairment as of July 26, 2009 and determined that no adjustments to the
carrying values of the intangible assets were necessary as of that date. On a
quarterly basis, the Company considers the need to update its most recent annual
tests for possible impairment of its intangible assets with indefinite lives,
based on management’s assessment of changes in its business and other economic
factors since the most recent annual evaluation. Such changes, if
significant or material, could indicate a need to update the most recent annual
tests for impairment of the intangible assets during the current period. The
results of these tests could lead to write-downs of the carrying values of the
intangible assets in the current period. No such significant or material
changes in the Company’s business or economic environment have come to the
attention of management since May 31, 2009 through the date of this
report.
|
8.
|
Inventories
|
Inventories are stated at the lower of
cost (first-in, first-out method) or market and consisted of the following (in
thousands):
|
November
29,
2009
|
May 31,
2009
|
|||||||
|
Raw
material
|
$ | 4,207 | $ | 3,721 | ||||
|
Finished
goods
|
2,575 | 2,108 | ||||||
|
Total
|
$ | 6,782 | $ | 5,829 | ||||
|
9.
|
Related
Party
|
Apio
provides cooling and distributing services for farms in which the Chairman of
Apio (the “Apio Chairman”) has a financial interest and purchases produce from
those farms. Apio also purchases produce from Beachside Produce LLC for
sale to third parties. Beachside Produce is owned by a group of entities
and persons, including the Apio Chairman. Revenues and the resulting
accounts receivable and cost of product sales and the resulting accounts payable
are classified as related party items in the accompanying financial statements
as of November 29, 2009 and May 31, 2009 and for the three and six months ended
November 29, 2009 and November 30, 2008.
Apio
leases, for approximately $310,000 on a current annual basis, agricultural land
that is owned by the Apio Chairman. Apio, in turn, subleases that land at cost
to growers who are obligated to deliver product from that land to Apio for value
added products. There is generally no net statement of income impact to Apio as
a result of these leasing activities but Apio creates a guaranteed source of
supply for the value added business. Apio has loss exposure on the leasing
activity to the extent that it is unable to sublease the land. For the three and
six months ended November 29, 2009, the Company subleased all of the land leased
from the Apio Chairman and received sublease income of $62,000 and $140,000,
respectively, which is equal to the amount the Company paid to lease that land
for the periods.
Apio's
domestic commodity vegetable business was sold to Beachside Produce, effective
June 30, 2003. The Apio Chairman is a 12.5% owner in Beachside
Produce. During the three and six months ended November 29, 2009, the
Company recognized revenues of $213,000 and $422,000, respectively, from the
sale of products to Beachside Produce. The related accounts receivable
from Beachside Produce are classified as related party in the accompanying
financial statements as of November 29, 2009 and May 31, 2009.
-14-
All
related party transactions are monitored quarterly by the Company and approved
by the Audit Committee of the Board of Directors.
|
10.
|
Comprehensive
Income
|
Comprehensive
income consists of net income and other comprehensive income which for Landec
includes changes in unrealized gains and losses on marketable securities.
Accumulated other comprehensive income is reported as a component of
stockholders’ equity. For both the three and six months ended November 29,
2009 comprehensive income from unrealized gains on marketable securities, net of
income taxes, was $92,000.
|
11.
|
Stockholders’
Equity
|
During the three and six months ended
November 29, 2009, 2,500 and 34,426 shares of Common Stock, respectively, were
issued upon the vesting of RSUs and upon the exercise of options under the
Company’s equity plans.
On October 15, 2009, following
stockholder approval at the Annual Meeting of Stockholders of the Company, the
2009 Stock Incentive Plan (the “Plan”) became effective and replaced the
Company’s 2005 Stock Incentive Plan. Employees (including officers),
consultants and directors of the Company and its subsidiaries and affiliates are
eligible to participate in the Plan.
The Plan provides for the grant of
stock options (both nonstatutory and incentive stock options), stock grants,
stock units and stock appreciation rights. Awards under the Plan will be
evidenced by an agreement with the Plan participants and 1.9 million shares of
the Company’s Common Stock (“Shares”) are available for award under the
Plan. Under the Plan no recipient may receive awards during any fiscal
year that exceeds the following amounts: (i) stock options covering in excess of
500,000 Shares; (ii) stock grants and stock units covering in excess of 250,000
Shares in the aggregate; or (iii) stock appreciation rights covering more than
500,000 Shares. In addition, awards to non-employee directors are
discretionary. However, a non-employee director may not be granted awards
covering in excess of 30,000 Shares in the aggregate during any fiscal
year.
|
12.
|
Business
Segment Reporting
|
Landec
operates in three business segments: the Food Products Technology segment, the
Commodity Trading segment and the Technology Licensing segment. The Food
Products Technology segment markets and sells specialty packaged whole and
fresh-cut vegetables that incorporate the BreatheWay specialty packaging for the
retail grocery, club store and food services industry. In addition, the
Food Products Technology segment sells BreatheWay packaging to partners for
non-vegetable products. The Commodity Trading segment consists of revenues
generated from the purchase and sale of primarily whole commodity fruit and
vegetable products to Asia and domestically to Wal-Mart. The Technology
Licensing segment licenses Landec’s patented Intellicoat seed coatings to the
farming industry and licenses the Company’s Intelimer polymers for personal care
products and other industrial products. Corporate includes corporate general and
administrative expenses, non Food Products Technology interest income and
Company-wide income tax expenses. All of the assets of the Company are located
within the United States of America. The Company’s international sales are
primarily to Canada, Taiwan, Indonesia, and Japan. Operations by business
segment consisted of the following (in thousands):
-15-
Operations
and identifiable assets by business segment consisted of the following (in
thousands):
|
Three Months Ended November 29, 2009
|
Food Products
Technology
|
Commodity
Trading
|
Technology
Licensing
|
Corporate
|
TOTAL
|
|||||||||||||||
|
Net
sales
|
$ | 42,326 | $ | 17,074 | $ | 1,533 | $ | — | $ | 60,933 | ||||||||||
|
International
sales
|
$ | 3,571 | $ | 16,480 | $ | ¾ | $ | ¾ | $ | 20,051 | ||||||||||
|
Gross
profit
|
$ | 4,755 | $ | 1,129 | $ | 1,533 | $ | — | $ | 7,417 | ||||||||||
|
Net
income (loss)
|
$ | 1,983 | $ | 479 | $ | 898 | $ | (1,826 | ) | $ | 1,534 | |||||||||
|
Depreciation
and amortization
|
$ | 735 | $ | 4 | $ | 40 | $ | — | $ | 779 | ||||||||||
|
Interest
income
|
$ | 63 | $ | — | $ | — | $ | 203 | $ | 266 | ||||||||||
|
Interest
expense
|
$ | 4 | $ | — | $ | — | $ | — | $ | 4 | ||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | — | $ | 895 | $ | 895 | ||||||||||
|
Three
Months Ended November 30, 2008
|
||||||||||||||||||||
|
Net
sales
|
$ | 37,971 | $ | 18,355 | $ | 1,712 | $ | — | $ | 58,038 | ||||||||||
|
International
sales
|
$ | 3,443 | $ | 17,901 | $ | ¾ | $ | ¾ | $ | 21,344 | ||||||||||
|
Gross
profit
|
$ | 4,707 | $ | 1,138 | $ | 1,712 | $ | — | $ | 7,557 | ||||||||||
|
Net
income (loss)
|
$ | 1,849 | $ | 551 | $ | 1,167 | $ | (2,069 | ) | $ | 1,498 | |||||||||
|
Depreciation
and amortization
|
$ | 774 | $ | 3 | $ | 42 | $ | — | $ | 819 | ||||||||||
|
Interest
income
|
$ | 149 | $ | — | $ | — | $ | 306 | $ | 455 | ||||||||||
|
Interest
expense
|
$ | 3 | $ | — | $ | — | $ | — | $ | 3 | ||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | — | $ | 1,063 | $ | 1,063 | ||||||||||
|
Six Months Ended November 29,
2009
|
||||||||||||||||||||
|
Net
sales
|
$ | 84,181 | $ | 34,776 | $ | 2,918 | $ | — | $ | 121,875 | ||||||||||
|
International
sales
|
$ | 7,007 | $ | 32,431 | $ | ¾ | $ | ¾ | $ | 39,438 | ||||||||||
|
Gross
profit
|
$ | 11,136 | $ | 2,233 | $ | 2,918 | $ | — | $ | 16,287 | ||||||||||
|
Net
income (loss)
|
$ | 5,381 | $ | 1,057 | $ | 1,638 | $ | (4,358 | ) | $ | 3,718 | |||||||||
|
Depreciation
and amortization
|
$ | 1,452 | $ | 7 | $ | 82 | $ | — | $ | 1,541 | ||||||||||
|
Interest
income
|
$ | 95 | $ | — | $ | — | $ | 459 | $ | 554 | ||||||||||
|
Interest
expense
|
$ | 5 | $ | — | $ | — | $ | — | $ | 5 | ||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | — | $ | 2,176 | $ | 2,176 | ||||||||||
|
Six
Months Ended November 30, 2008
|
||||||||||||||||||||
|
Net
sales
|
$ | 81,785 | $ | 44,651 | $ | 3,354 | $ | — | $ | 129,790 | ||||||||||
|
International
sales
|
$ | 7,590 | $ | 39,594 | $ | ¾ | $ | ¾ | $ | 47,184 | ||||||||||
|
Gross
profit
|
$ | 11,991 | $ | 2,335 | $ | 3,354 | $ | — | $ | 17,680 | ||||||||||
|
Net
income (loss)
|
$ | 5,838 | $ | 1,149 | $ | 2,272 | $ | (4,922 | ) | $ | 4,337 | |||||||||
|
Depreciation
and amortization
|
$ | 1,518 | $ | 7 | $ | 90 | $ | — | $ | 1,615 | ||||||||||
|
Interest
income
|
$ | 272 | $ | — | $ | — | $ | 540 | $ | 812 | ||||||||||
|
Interest
expense
|
$ | 4 | $ | — | $ | — | $ | — | $ | 4 | ||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | — | $ | 2,974 | $ | 2,974 | ||||||||||
During the six months ended November
29, 2009 and November 30, 2008, sales to the Company’s top five customers
accounted for 47% and 46%, respectively, of revenues with the Company’s top
customer from the Food Products Technology segment, Costco Wholesale Corp.,
accounting for 19% for the each of the six months ended November 29, 2009 and
November 30, 2008. The Company expects that, for the foreseeable future, a
limited number of customers may continue to account for a significant portion of
its net revenues.
|
13.
|
Subsequent
Events
|
The
Company evaluated subsequent events in accordance with new accounting guidance
through the financial statements filing date of January 7,
2010.
-16-
The following discussion should be read
in conjunction with the unaudited consolidated financial statements and
accompanying notes included in Part I—Item 1 of this Form 10-Q and the audited
consolidated financial statements and accompanying notes and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in Landec’s Annual Report on Form 10-K for the fiscal year ended May
31, 2009.
Except for the historical information
contained herein, the matters discussed in this report are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this Form 10-Q and, in
particular the factors described below in Part II-Item 1A of the Form 10-Q and
those mentioned in Landec’s Annual Report on Form 10-K for the fiscal year ended
May 31, 2009. Landec undertakes no obligation to update or revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
Critical
Accounting Policies and Use of Estimates
There
have been no material changes to the Company's critical accounting policies
which are included and described in the Company’s Form 10-K for the fiscal year
ended May 31, 2009 filed with the Securities and Exchange Commission on August
4, 2009.
The
Company
Landec Corporation and its subsidiaries
(“Landec” or the “Company”) design, develop, manufacture and sell
temperature-activated and other specialty polymer products for a variety of food
products, agricultural products, and licensed partner
applications. This proprietary polymer technology is the foundation,
and a key differentiating advantage, upon which Landec has built its
business.
Landec’s
core polymer products are based on its patented proprietary Intelimer polymers,
which differ from other polymers in that they can be customized to abruptly
change their physical characteristics when heated or cooled through a pre-set
temperature switch. For instance, Intelimer polymers can change
within the range of one or two degrees Celsius from a non-adhesive state to a
highly tacky, adhesive state; from an impermeable state to a highly permeable
state; or from a solid state to a viscous state. These abrupt changes
are repeatedly reversible and can be tailored by Landec to occur at specific
temperatures, thereby offering substantial competitive advantages in Landec’s
target markets.
Following the sale of Landec’s former
direct marketing and sales seed corn company, FCD, to Monsanto in fiscal year
2007, Landec now has three core businesses – Food Products Technology, Commodity
Trading and Technology Licensing (see note 12 of the unaudited financial
statements).
Our Food Products Technology business
is operated through a subsidiary, Apio, Inc., and combines our proprietary food
packaging technology with the capabilities of a large national food supplier and
value-added produce processor. Value-added processing incorporates
Landec's proprietary packaging technology with produce that is processed by
washing, and in some cases cutting and mixing, resulting in packaged produce to
achieve increased shelf life and reduced shrink (waste) and to eliminate the
need for ice during the distribution cycle.
This combination was consummated in 1999 when the Company acquired Apio, Inc.
and certain related entities (collectively, “Apio”).
Our Commodity Trading business is
operated through Apio and combines Apio’s export company, Cal Ex Trading Company
(“Cal-Ex”), with Apio’s domestic buy-sell commodity business that purchases and
sells whole fruit and vegetable products to Asia and domestically to
Wal-Mart.
Our Technology Licensing business
includes our proprietary Intellicoat seed coating technology which we have
licensed to Monsanto and our Intelimer polymer business that licenses and/or
supplies products outside of our Food Products Technology business to companies
such as Air Products and Chemicals, Inc. (“Air Products”) and Nitta Corporation
(“Nitta”).
-17-
Landec was incorporated on October 31,
1986. We completed our initial public offering in 1996 and our Common
Stock is listed on The NASDAQ Global Select Market under the symbol “LNDC.” Our
principal executive offices are located at 3603 Haven Avenue, Menlo Park,
California 94025 and our telephone number is (650) 306-1650.
Description
of Core Business
Landec participates in three core
business segments– Food Products Technology, Commodity Trading and Technology
Licensing.
Food
Products Technology Business
The Company began marketing its
proprietary Intelimer-based BreatheWay® membranes in 1996 for use in the
fresh-cut produce packaging market, one of the fastest growing segments in the
produce industry. Landec’s proprietary BreatheWay
packaging technology
when combined with fresh-cut or whole produce results in packaged produce with
increased shelf life and reduced shrink (waste) without the need for ice during
the distribution cycle. The resulting products are referred to as
“value-added” products. In 1999, the Company acquired Apio, its then
largest customer in the Food Products Technology business and one of the
nation’s leading marketers and packers of produce and specialty packaged
fresh-cut vegetables. Apio utilizes state-of-the-art fresh-cut
produce processing technology and year-round access to specialty packaged
produce products which Apio distributes to the top U.S. retail grocery chains,
major club stores and to the foodservice industry. The Company’s proprietary
BreatheWay packaging business has been combined with Apio into a subsidiary that
retains the Apio, Inc. name. This vertical integration within the
Food Products Technology business gives Landec direct access to the large and
growing fresh-cut and whole produce market. During the fiscal year
ended May 31, 2009, Apio shipped nearly sixteen million cartons of produce to
leading supermarket retailers, wholesalers, foodservice suppliers and club
stores throughout the United States and internationally, primarily in
Asia.
There are
four major distinguishing characteristics of Apio that provide competitive
advantages in the Food Products Technology market:
|
|
Value-Added Supplier:
Apio has structured its business as a marketer and seller of fresh-cut and
whole value-added produce. It is focused on selling products
under its Eat Smart® brand and other brands for its fresh-cut and whole
value-added products. As retail grocery and club store chains
consolidate, Apio is well positioned as a single source of a broad range
of products.
|
|
|
Reduced Farming
Risks:
Apio reduces its farming risk by not taking
ownership of farmland, and instead, contracts with growers for
produce. The year-round sourcing of produce is a key component
to the fresh-cut and whole value-added processing
business.
|
|
|
Lower Cost Structure:
Apio has strategically invested in the rapidly growing fresh-cut and whole
value-added business. Apio’s 136,000 square foot value-added
processing plant, recently expanded from 96,000 square feet, is automated
with state-of-the-art vegetable processing equipment. Virtually
all of Apio’s value-added products utilize Apio’s proprietary BreatheWay
packaging
technology. Apio’s
strategy is to operate one large central processing facility in one of
California’s largest, lowest cost growing regions (Santa Maria Valley) and
use packaging technology to allow for the nationwide delivery of fresh
produce products.
|
-18-
|
|
Expanded Product Line Using
Technology:
Apio, through the use of its BreatheWay packaging
technology, is
introducing on average fifteen new value-added products each
year. These new product offerings range from various sizes of
fresh-cut bagged products, to vegetable trays, to whole produce, to
vegetable salads and snack packs. During the last twelve
months, Apio has introduced 13 new
products.
|
Apio
established its Apio Packaging division in 2005 to advance the sales of
BreatheWay packaging technology for shelf-life sensitive vegetables and
fruit.
Apio
Packaging’s first program has concentrated on bananas and was formally
consummated when Apio entered into an agreement to supply Chiquita Brands
International, Inc. (“Chiquita”) with its proprietary banana packaging
technology on a worldwide basis for the ripening, conservation and shelf-life
extension of bananas for most applications on an exclusive basis and for other
applications on a non-exclusive basis. In addition, Apio provides
Chiquita with ongoing research and development and process technology support
for the BreatheWay membranes and bags, and technical service support throughout
the customer chain in order to assist in the development and market acceptance
of the technology.
For its
part, Chiquita provides marketing, distribution and retail sales support for
Chiquita® bananas sold worldwide in BreatheWay packaging. To maintain
the exclusive license, Chiquita must meet quarterly minimum purchase thresholds
of BreatheWay banana packages.
The
initial market focus for the BreatheWay banana packaging technology using
Chiquita bananas has been commercial outlets that normally do not sell bananas
because of their short shelf-life – outlets such as quick serve restaurants,
convenience stores and coffee chain outlets.
In fiscal
year 2008, the Company expanded the use of its BreatheWay technology to avocados
under an expanded licensing agreement with Chiquita. Commercial sales
of avocados packaged in Landec’s BreatheWay packaging into the food service
industry began late in fiscal year 2008 and market trials are currently underway
for retail applications.
The Company’s specialty packaging for
case liner products reduces freight expense up to 50% for certain produce
commodities by eliminating the weight and space consumed by ice. In
addition to reducing the cost of freight, the removal of ice from the
distribution system offers additional benefits.
Product
enhancements in the fresh-cut vegetable line include fresh-cut vegetable trays
designed to look like they were freshly made in the retail grocery store or at
home. The rectangular tray design is convenient for storage in
consumers’ refrigerators and expands the Company’s wide-ranging vegetable tray
line.
In May
2007, Apio entered into an 18-month research and development agreement with
Natick Soldier Research, Development & Engineering Center, a branch of the
U.S. Military, to develop commercial uses for Landec’s BreatheWay packaging
technology within the U.S. Military by significantly increasing the shelf life
of produce for overseas shipments. Apio is now an approved vendor for
its BreatheWay packaging technology to the U.S. Military.
In June
2008, Apio entered into a collaboration agreement with Seminis Vegetable Seeds,
Inc., a wholly-owned subsidiary of Monsanto, to develop novel broccoli and
cauliflower products for the exclusive sale by Apio in the North American
market. These novel products will be packaged in Landec’s proprietary
BreatheWay packaging and will be sold to retail grocery chains, club stores and
the food service industry. Field trials for the initial target
varieties began in the Fall of 2008.
In
addition, the Company has commercialized new lines of fresh cut vegetable side
dishes, vegetable salads and vegetable snacks.
-19-
Commodity
Trading Business
Commodity
Trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex, and from the purchase and sale of whole commodity fruit
and vegetable products domestically to Wal-Mart. The Commodity
Trading business is a buy/sell business that realizes a commission-based margin
on average in the 5-6% range.
Technology
Licensing Businesses
The
Technology and Market Opportunity: Intellicoat Seed Coatings
Following
the sale of FCD, Landec Ag’s strategy has been to work closely with Monsanto to
further develop our patented, functional polymer coating technology for sale
and/or licensing to the seed industry. In accordance with its
license, supply and R&D agreement with Monsanto, Landec Ag is currently
focused on commercializing products for the seed corn market and then plans to
broaden the technology to other seed crop applications.
Landec's
Intellicoat seed coating applications are designed to control seed germination
timing, increase crop yields, reduce risks and extend crop-planting windows.
These coatings are currently available on hybrid corn, soybeans and male inbred
corn used for seed production. In fiscal year 2000, Landec Ag
launched its first commercial product, Pollinator Plus
â
coatings, which is a
coating application used by seed companies as a method for spreading pollination
to increase yields and reduce risk in the production of hybrid seed
corn. There are approximately 650,000 acres of seed production in the
United States and in 2009 Pollinator Plus was used by 18 seed companies on
approximately 22% of the seed corn production acres in the U.S.
Monsanto
announced last year that it formed a new business called the Seed Treatment
Business which will allow Monsanto to develop its seed treatment requirements
internally. The concept of seed treatments is to place an insecticide
or fungicide directly onto the seed surface in order to protect the seed and the
seedling as it emerges. Landec’s Intellicoat seed coating technology
could be an integral and proprietary part of Monsanto’s commitment to building a
major position in seed treatments worldwide by using Landec’s seed coatings as a
“carrier” of insecticides/fungicides which can be dispensed at the appropriate
time based on time or soil temperature. During fiscal year 2009, we
focused on validating the use of Landec’s coating technology for these
applications.
The
Technology and Market Opportunity: Intelimer Polymer Applications
We
believe our technology has commercial potential in a wide range of industrial,
consumer and medical applications beyond those identified in our core
businesses. For example, our core patented technology, Intelimer
materials, can be used to trigger catalysts, insecticides or fragrances just by
changing the temperature of the Intelimer materials or to activate adhesives
through controlled temperature change. In order to exploit these
opportunities, we have entered into and will enter into licensing and
collaborative corporate agreements for product development and/or distribution
in certain fields. However, given the infrequency and
unpredictability of when the Company may enter into any such licensing and
research and development arrangements, the Company is unable to disclose its
financial expectations in advance of entering into such
arrangements.
Industrial
Materials and Adhesives
Landec’s
industrial product development strategy is to focus on coatings, catalysts,
resins, additives and adhesives in the polymer materials
market. During the product development stage, the Company identifies
corporate partners to support the ongoing development and testing of these
products, with the ultimate goal of licensing the applications at the
appropriate time.
Intelimer
Polymer Systems
Landec
has developed latent catalysts useful in extending pot-life, extending shelf
life, reducing waste and improving thermoset cure methods. Some of
these latent catalysts are currently being distributed by Akzo-Nobel Chemicals
B.V. through our licensing agreement with Air Products. The Company
has also developed Intelimer polymer materials useful in enhancing the
formulating options for various personal care products. The rights to
develop and sell Landec’s latent catalysts and personal care technologies were
licensed to Air Products in March 2006.
-20-
Personal
Care and Cosmetic Applications
Landec’s
personal care and cosmetic applications strategy is focused on supplying
Intelimer materials to industry leaders for use in lotions and creams, and
potentially color cosmetics, lipsticks and hair care. The Company's
partner, Air Products, is currently shipping products to L’Oreal for use in
lotions and creams. To date, the sales of Landec materials used in
L’Oreal products have not been material to the Company’s financial
results
Medical
Applications
In
December 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences Corporation (“Aesthetic Sciences”). Aesthetic
Sciences paid Landec an upfront license fee of $250,000 for the exclusive rights
to use Landec's Intelimer materials technology for the development of dermal
fillers worldwide. Landec will also receive royalties on the sale of
products incorporating Landec’s technology. In addition, the Company
has received shares of preferred stock valued at $1.8 million which as of May
31, 2009 represented a 17.3% ownership interest in Aesthetic
Sciences. At this time, the Company is unable to predict the ultimate
outcome of the collaboration with Aesthetic Sciences and the timing or amount of
future revenues, if any.
Results
of Operations
Revenues
(in
thousands):
|
Three months
ended 11/29/09
|
Three months
ended 11/30/08
|
Change
|
Six months
ended 11/29/09
|
Six months
ended 11/30/08
|
Change
|
|||||||||||||||||||
|
Apio
Value Added
|
$ | 41,733 | $ | 37,314 | 12 | % | $ | 83,024 | $ | 80,316 | 3 | % | ||||||||||||
|
Apio
Packaging
|
593 | 657 | (10 | )% | 1,157 | 1,469 | (21 | )% | ||||||||||||||||
|
Technology
Subtotal
|
42,326 | 37,971 | 11 | % | 84,181 | 81,785 | 3 | % | ||||||||||||||||
|
Apio
Trading
|
17,074 | 18,355 | (7 | )% | 34,776 | 44,651 | (22 | )% | ||||||||||||||||
|
Total
Apio
|
59,400 | 56,326 | 5 | % | 118,957 | 126,436 | (6 | )% | ||||||||||||||||
|
Tech.
Licensing
|
1,533 | 1,712 | (10 | )% | 2,918 | 3,354 | (13 | )% | ||||||||||||||||
|
Total
Revenues
|
$ | 60,933 | $ | 58,038 | 5 | % | $ | 121,875 | $ | 129,790 | (6 | )% | ||||||||||||
Apio
Value Added
Apio’s
value-added revenues consist of revenues generated from the sale of specialty
packaged fresh-cut and whole value-added processed vegetable products that are
washed and packaged in our proprietary packaging and sold under Apio’s Eat Smart
brand and various private labels. In addition, value-added revenues
include the revenues generated from Apio Cooling, LP, a vegetable cooling
operation in which Apio is the general partner with a 60% ownership
position.
The
increase in Apio’s value-added revenues for the three and six months ended
November 29, 2009 compared to the same periods last year was primarily due to an
increase in value-added unit sales volumes of 27%
and 14%,
respectively, partially offset by a shift in sales mix to more lower priced bag
sales volumes from higher priced tray sales volumes this year compared to the
same periods last year. In addition, the first quarter of fiscal year
2009 included 14 weeks of revenue compared to 13 weeks during the first quarter
of fiscal year 2010.
Apio
Packaging
Apio
packaging revenues consist of Apio’s packaging technology business using its
BreatheWay membrane technology.
The first commercial
application included in Apio packaging is our banana packaging
technology.
The
decrease in Apio packaging revenues for the three and six months ended November
29, 2009 compared to the same periods last year was primarily due to the
reduction in contractual minimum payments received from Chiquita under the
amended Chiquita license agreement.
-21-
Apio
Trading
Apio
trading revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia through Apio’s
export company, Cal-Ex, and from the purchase and sale of whole commodity fruit
and vegetable products domestically to Wal-Mart. The export portion
of trading revenues for the three and six months ended November 29, 2009 was
$16.5 million and $32.4 million, or 97% and 93%, respectively, of total trading
revenues.
The
decrease in revenues in Apio’s trading business for the three and six months
ended November 29, 2009 compared to the same periods last year was primarily due
to and 6% and 17%, respectively, decrease in export sales volumes as a result of
a decreased supply of produce to export, primarily fruit, and a $2.7 million
decrease in domestic commodity sales for the six months ended November 29, 2009
(no change for the second quarter) to Wal-Mart due to the planned exiting of
most of our domestic buy/sell business with Wal-Mart. In addition,
the first quarter of fiscal year 2009 included 14 weeks of revenue compared to
13 weeks during the first quarter of fiscal year 2010.
Technology
Licensing
Technology
licensing revenues consist of revenues generated from the licensing agreements
with Monsanto, Air Products and Nitta.
The
decrease in Technology Licensing revenues for the three and six months ended
November 29, 2009 compared to the same periods of the prior year was primarily
due to the completion of the license fee payments from Air Products in fiscal
year 2009.
Gross Profit
(in
thousands):
|
Three months
ended 11/29/09
|
Three months
ended 11/30/08
|
Change
|
Six months
ended 11/29/09
|
Six months
ended 11/30/08
|
Change
|
|||||||||||||||||||
|
Apio
Value Added
|
$ | 4,250 | $ | 4,084 | 4 | % | $ | 10,115 | $ | 10,665 | (5 | )% | ||||||||||||
|
Apio
Packaging
|
505 | 623 | (19 | )% | 1,021 | 1,326 | (23 | )% | ||||||||||||||||
|
Technology
Subtotal
|
4,755 | 4,707 | 1 | % | 11,136 | 11,991 | (7 | )% | ||||||||||||||||
|
Apio
Trading
|
1,129 | 1,138 | (1 | )% | 2,233 | 2,335 | (4 | )% | ||||||||||||||||
|
Total
Apio
|
5,884 | 5,845 | 1 | % | 13,369 | 14,326 | (7 | )% | ||||||||||||||||
|
Tech.
Licensing
|
1,533 | 1,712 | (10 | )% | 2,918 | 3,354 | (13 | )% | ||||||||||||||||
|
Total
Gross Profit
|
$ | 7,417 | $ | 7,557 | (2 | )% | $ | 16,287 | $ | 17,680 | (8 | )% | ||||||||||||
General
There are numerous factors that can
influence gross profit including product mix, customer mix, manufacturing costs,
volume, sale discounts and charges for excess or obsolete inventory, to name a
few. Many of these factors influence or are interrelated with other
factors. Therefore, it is difficult to precisely quantify the impact
of each item individually. The Company includes in cost of sales all
the costs related to the sale of products in accordance with U.S. generally
accepted accounting principles. These costs include the following:
raw materials (including produce, seeds and packaging), direct labor, overhead
(including indirect labor, depreciation, and facility related costs) and
shipping and shipping related costs. The following discussion
surrounding gross profit includes management’s best estimates of the reasons for
the changes for the three and six months ended November 29, 2009, compared to
the same periods last year as outlined in the table above.
Apio Value-Added
The increase in gross profit for Apio’s
value-added specialty packaging vegetable business for the three months ended
November 29, 2009 compared to the same period last year was primarily due to the
gross profit realized from the 12% increase in revenues for that period which
was partially offset by (1) increased costs for produce, (2) shortages of
produce which resulted in the Company buying produce on the open market at
prices above contracted prices and (3) a shift in mix to lower margin bag sales
from higher margin tray sales. The decrease in gross profit for
Apio’s value-added specialty packaged vegetable business for the six months
ended November 29, 2009 compared to the same period last year was primarily due
to (1) increased costs for produce, (2) shortages of produce which resulted in
the Company buying produce on the open market at prices above contracted prices
and (3) a shift in mix to lower margin bag sales from higher margin tray sales
and (4) the first quarter of fiscal year 2009 included 14 weeks of gross profit
compared to 13 weeks during the first quarter of fiscal year
2010. These decreases were partially offset by the gross profit
realized from the 3% increase in revenues in the six months ended November 29,
2009.
-22-
Apio Packaging
The decrease in gross profit for Apio
Packaging for the three and six months ended November 29, 2009 compared to the
same periods last year was primarily due to the reduction of contractual minimum
payments received from Chiquita under the amended Chiquita license
agreement.
Apio Trading
Apio’s trading business is a buy/sell
business that realizes a historical commission-based margin in the 5% to 6%
range. The decrease in Apio trading gross profit for the three and
six months ended November 29, 2009 compared to the same periods last year was
due to a 7% and 22%, respectively, decrease in revenues. In addition,
the first quarter of fiscal year 2009 included 14 weeks of gross profit compared
to 13 weeks during the first quarter of fiscal year
2010. The percentage decrease in revenues was greater
than the percentage decrease in gross profit because the decrease in revenues
was primarily due to decreased domestic commodity volume sales which is a 2%
margin business and decreased export of fruit which realizes lower gross margins
than the gross margins realized from the export of vegetables.
Technology
Licensing
The
decrease in Technology Licensing gross profit for the three and six months ended
November 29, 2009 compared to the same period of the prior year was primarily
due to the completion of the license fee payments from Air Products in fiscal
year 2009.
Operating Expenses
(in
thousands):
|
Three months
ended 11/29/09
|
Three months
ended 11/30/08
|
Change
|
Six months
ended 11/29/09
|
Six months
ended 11/30/08
|
Change
|
|||||||||||||||||||
|
Research
and Development:
|
||||||||||||||||||||||||
|
Apio
|
$ | 307 | $ | 322 | (5 | )% | $ | 601 | $ | 673 | (11 | )% | ||||||||||||
|
Tech.
Licensing
|
635 | 545 | 17 | % | 1,280 | 1,083 | 18 | % | ||||||||||||||||
|
Total
R&D
|
$ | 942 | $ | 867 | 9 | % | $ | 1,881 | $ | 1,756 | 7 | % | ||||||||||||
|
Selling,
General and Administrative:
|
||||||||||||||||||||||||
|
Apio
|
$ | 3,048 | $ | 3,136 | (3 | )% | $ | 6,111 | $ | 6,636 | (8 | )% | ||||||||||||
|
Corporate
|
1,134 | 1,313 | (14 | )% | 2,641 | 2,489 | 6 | % | ||||||||||||||||
|
Total
S,G&A
|
$ | 4,182 | $ | 4,449 | (6 | )% | $ | 8,752 | $ | 9,125 | (4 | )% | ||||||||||||
Research and Development
Landec’s research and development
expenses consist primarily of expenses involved in the development and process
scale-up initiatives. Research and development efforts at Apio are
focused on the Company’s proprietary BreatheWay membranes used for packaging
produce, with recent focus on extending the shelf life of bananas and other
shelf-life sensitive vegetables and fruit. In the Technology
Licensing business, the research and development efforts are focused on the
Company’s proprietary Intellicoat coatings for seeds, primarily corn seed and on
uses for our proprietary Intelimer polymers outside of food and
agriculture.
The increase in research and
development expenses for the three and six months ended November 29, 2009
compared to the same periods last year was not significant.
-23-
Selling,
General and Administrative
Selling, general and administrative
expenses consist primarily of sales and marketing expenses associated with
Landec’s product sales and services, business development expenses and staff and
administrative expenses.
The decrease in selling, general and
administrative expenses for the three and six months ended November 29, 2009
compared to the same periods last year was not significant.
Other
(in
thousands):
|
Three months
ended 11/29/09
|
Three months
ended 11/30/08
|
Change
|
Six months
ended 11/29/09
|
Six months
ended 11/30/08
|
Change
|
|||||||||||||||||||
|
Interest
Income
|
$ | 266 | $ | 455 | (42 | )% | $ | 554 | $ | 812 | (32 | )% | ||||||||||||
|
Interest
Expense
|
$ | (4 | ) | $ | (3 | ) | 33 | % | $ | (5 | ) | $ | (4 | ) | 25 | % | ||||||||
|
Income
Taxes
|
$ | (895 | ) | $ | (1,063 | ) | (16 | )% | $ | (2,176 | ) | $ | (2,974 | ) | (27 | )% | ||||||||
|
Noncontrolling
Interest
|
$ | (126 | ) | $ | (132 | ) | (5 | )% | $ | (309 | ) | $ | (296 | ) | 4 | % | ||||||||
Interest Income
The decrease in interest income for the
three and six months ended November 29, 2009 compared to the same periods last
year was primarily due to lower yields on investments due to declines in
interest rates.
Interest Expense
The decrease in interest expense during
the three and six months ended November 29, 2009 compared to the same periods
last year was not significant.
Income Taxes
The decrease in the income tax expense
for the three and six months ended November 29, 2009 is due to a 5% and 19%,
respectively, decrease in net income before taxes compared to the same periods
last year and a decrease in the Company’s effective tax rate, after taking into
account the expense for noncontrolling interest, to 37% for both the three and
six months ended November 29, 2009 compared to 41.5% and 40.7% for the three and
six months ended November 30, 2008, respectively.
Noncontrolling Interest
The noncontrolling interest consists of
the limited partners’ equity interest in the net income of Apio Cooling,
LP.
The increase in the noncontrolling
interest for the three and six months ended November 29, 2009 compared to the
same periods last year was not significant.
Liquidity
and Capital Resources
As of November 29, 2009, the Company
had cash and cash equivalents of $2.2 million, a net decrease of $41.3 million
from $43.5 million at May 31, 2009.
Cash Flow from Operating
Activities
Landec generated $4.2 million of cash
flow from operating activities during the six months ended November 29, 2009
compared to generating $3.3 million of cash flow from operating activities for
the six months ended November 30, 2008.
The primary sources of
cash from operating activities during the six months ended November 29, 2009
were from generating $3.7 million of net income and non-cash related net
expenses of $1.0 million, partially offset by a net decrease of $505,000 in
working capital. The primary changes in working capital were (a) a
$1.4 million increase in accounts receivable due to November 2009 export
revenues being higher than May 2009 export revenues, (b) a $1.0 million increase
in inventories resulting from the timing of receipts and the build up of
inventories in advance of the holiday season, (c) a $1.0 million net increase in
notes and advances receivable due to farming advances for the winter season, (d)
a $3.3 million increase in accounts payable resulting from the timing of
payments and the increase in cost of sales due to November 2009 cost of sales
being higher than May 2009 cost of sales, and (e) a $2.4 million decrease in
deferred revenue primarily due to recognizing $2.7 million of revenue associated
with deferred revenue from the Monsanto licensing agreement during the first six
months of fiscal year 2010.
-24-
Cash
Flow from Investing Activities
Net cash used in investing activities
for the six months ended November 29, 2009 was $46.4 million compared to $6.5
million for the same period last year. The primary uses of cash in
investing activities during the first six months of fiscal year 2010 were for
the purchase of $3.2 million of property, plant and equipment primarily for the
further expansion of Apio’s value-added processing facility and the further
automation of Apio’s value-added processing facility and from the net purchase
of $43.2 million of marketable securities.
Cash Flow from Financing
Activities
Net cash provided by financing
activities for the six months ended November 29, 2009 was $1.0 million compared
to $1.2 million for the same period last year. The primary source of
cash from financing activities during the first six months of fiscal year 2010
was the tax benefit from stock-based compensation of $1.3 million.
Capital
Expenditures
During the six months ended November
29, 2009, Landec completed a 40,000 square foot expansion of Apio’s value-added
processing facility and purchased vegetable processing equipment to support the
further automation of Apio’s value added processing facility. These
expenditures represented the majority of the $3.2 million of capital
expenditures.
Landec is not a party to any agreements
with, or commitments to, any special purpose entities that would constitute
material off-balance sheet financing other than the operating lease commitments
listed above.
Landec’s future capital requirements
will depend on numerous factors, including the progress of its research and
development programs; the continued development of marketing, sales and
distribution capabilities; the ability of Landec to establish and maintain new
collaborative and licensing arrangements; any decision to pursue additional
acquisition opportunities; weather conditions that can affect the supply and
price of produce, the timing and amount, if any, of payments received under
licensing and research and development agreements; the costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; the ability to comply with regulatory requirements; the emergence of
competitive technology and market forces; the effectiveness of product
commercialization activities and arrangements; and other factors. If
Landec’s currently available funds, together with the internally generated cash
flow from operations are not sufficient to satisfy its capital needs, Landec
would be required to seek additional funding through other arrangements with
collaborative partners, additional bank borrowings and public or private sales
of its securities. There can be no assurance that additional funds,
if required, will be available to Landec on favorable terms if at
all.
Landec believes that its cash from
operations, along with existing cash, cash equivalents and marketable securities
will be sufficient to finance its operational and capital requirements for at
least the next twelve months.
None.
-25-
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with participation of our Chief Executive Officer and our
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in reports filed under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission, and are effective in providing reasonable assurance that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal
controls over financial reporting during the quarter ended November 29, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
-26-
The
Company is involved in litigation arising in the normal course of
business. The Company is currently not a party to any legal
proceedings which management believes could result in the payment of any amounts
that would be material to the business or financial condition of the
Company.
The risk factors set forth below
include material changes to, and supersede the descriptions of, the risk factors
disclosed in Item 1A of the Company’s Form 10-K for the year ended May 31,
2009.
Landec
desires to take advantage of the “Safe Harbor” provisions of the Private
Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under
the Securities Exchange Act of 1934. Specifically, Landec wishes to
alert readers that the following important factors could in the future affect,
and in the past have affected, Landec’s actual results and could cause Landec’s
results for future periods to differ materially from those expressed in any
forward-looking statements made by or on behalf of Landec. Landec
assumes no obligation to update such forward-looking statements.
The
United States’ Economy is Currently Undergoing a Period of Slowdown and
Unprecedented Volatility, Which May Have an Adverse Effect on Our
Business
The U.S.
and international economy and financial markets have experienced significant
slowdown and volatility due to uncertainties related to the availability of
credit, energy prices, difficulties in the banking and financial services
sectors, softness in the housing market, severely diminished market liquidity,
geopolitical conflicts, falling consumer confidence and rising unemployment
rates. This slowdown has and could further lead to reduced demand for our
products, which in turn, would reduce our revenues and adversely affect our
business, financial condition and results of operations. In
particular, the slowdown and volatility in the global markets have resulted in
softer demand and more conservative purchasing decisions by customers, including
a tendency toward lower-priced products, which could negatively impact our
revenues, gross margins and results of operations. In addition to a
reduction in sales, our profitability may decrease during downturns because we
may not be able to reduce costs at the same rate as our sales decline. These
slowdowns are expected to worsen if current economic conditions are prolonged or
deteriorate further. We cannot predict the ultimate severity or length of the
current economic crisis, or the timing or severity of future economic or
industry downturns.
Given the
current unfavorable economic environment, our customers may have difficulties
obtaining capital at adequate or historical levels to finance their ongoing
business and operations, which could impair their ability to make timely
payments to us. This may result in lower sales and/or additional
inventory or bad debt expense for Landec. In addition to the impact
of the economic downturn on our customers, some of our vendors and growers may
experience a reduction in their availability of funds and cash flows, which
could negatively impact their business as well as ours. A continuing
or deepening downturn of the U.S. economy, including increased volatility in the
credit markets, could adversely impact our customers’ and vendors’ ability or
willingness to conduct business with us on the same terms or at the same levels
as they have historically.
We are
unable to predict the likely duration and severity of the current disruption in
the financial markets and adverse economic conditions in the U.S. and other
countries and such conditions, if they persist or worsen, will further adversely
impact our business, operating results, and financial
condition. Further, these conditions and uncertainty about future
economic conditions make it challenging for Landec to forecast its operating
results, make business decisions, and identify the risks that may affect its
business, sources and use of cash, financial condition and results of
operations.
-27-
Our
Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock Price
to Decline
In the past, our results of operations
have fluctuated significantly from quarter to quarter and are expected to
continue to fluctuate in the future. Historically, Landec Ag has been
the primary source of these fluctuations, as its revenues and profits were
concentrated over a few months during the spring planting season (generally
during our third and fourth fiscal quarters). In addition, Apio can
be heavily affected by seasonal and weather factors which have impacted
quarterly results, such as the high cost of sourcing product in June/July 2006
and January 2007 due to a shortage of essential value-added produce
items. Our earnings may also fluctuate based on our ability to
collect accounts receivables from customers and note receivables from growers
and on price fluctuations in the fresh vegetables and fruits
markets. Other factors that affect our food and/or agricultural
operations include:
|
|
the
seasonality of our supplies;
|
|
|
our
ability to process produce during critical harvest
periods;
|
|
|
the
timing and effects of ripening;
|
|
|
the
degree of perishability;
|
|
|
the
effectiveness of worldwide distribution
systems;
|
|
|
total
worldwide industry volumes;
|
|
|
the
seasonality of consumer demand;
|
|
|
foreign
currency fluctuations; and
|
|
|
foreign
importation restrictions and foreign political
risks.
|
As a result of these and other factors,
we expect to continue to experience fluctuations in quarterly operating
results.
We
May Not Be Able to Achieve Acceptance of Our New Products in the
Marketplace
Our success in generating significant
sales of our products will depend in part on the ability of us and our partners
and licensees to achieve market acceptance of our new products and
technology. The extent to which, and rate at which, we achieve market
acceptance and penetration of our current and future products is a function of
many variables including, but not limited to:
|
|
price;
|
|
|
safety;
|
|
|
efficacy;
|
|
|
reliability;
|
|
|
conversion
costs;
|
|
|
marketing
and sales efforts; and
|
|
|
general
economic conditions affecting purchasing
patterns.
|
We may not be able to develop and
introduce new products and technologies in a timely manner or new products and
technologies may not gain market acceptance. We are in the early
stage of product commercialization of certain Intelimer-based specialty
packaging, Intellicoat seed coatings and other Intelimer polymer products and
many of our potential products are in development. We believe that
our future growth will depend in large part on our ability to develop and market
new products in our target markets and in new markets. In particular,
we expect that our ability to compete effectively with existing food products,
agricultural, industrial and medical companies will depend substantially on
successfully developing, commercializing, achieving market acceptance of and
reducing the cost of producing our products. In addition, commercial
applications of our temperature switch polymer technology are relatively new and
evolving. Our failure to develop new products or the failure of our
new products to achieve market acceptance would have a material adverse effect
on our business, results of operations and financial condition.
-28-
We
Face Strong Competition in the Marketplace
Competitors may succeed in developing
alternative technologies and products that are more effective, easier to use or
less expensive than those which have been or are being developed by us or that
would render our technology and products obsolete and
non-competitive. We operate in highly competitive and rapidly
evolving fields, and new developments are expected to continue at a rapid
pace. Competition from large food products, agricultural, industrial
and medical companies is expected to be intense. In addition, the
nature of our collaborative arrangements may result in our corporate partners
and licensees becoming our competitors. Many of these competitors
have substantially greater financial and technical resources and production and
marketing capabilities than we do, and may have substantially greater experience
in conducting clinical and field trials, obtaining regulatory approvals and
manufacturing and marketing commercial products.
We
Have a Concentration of Manufacturing in One Location for Apio and May Have to
Depend on Third Parties to Manufacture Our Products
Any disruptions in our primary
manufacturing operation at Apio’s facility in Guadalupe, California would reduce
our ability to sell our products and would have a material adverse effect on our
financial results. Additionally, we may need to consider seeking
collaborative arrangements with other companies to manufacture our
products. If we become dependent upon third parties for the
manufacture of our products, our profit margins and our ability to develop and
deliver those products on a timely basis may be affected. Failures by
third parties may impair our ability to deliver products on a timely basis and
impair our competitive position. We may not be able to continue to
successfully operate our manufacturing operations at acceptable costs, with
acceptable yields, and retain adequately trained personnel.
Our
Dependence on Single-Source Suppliers and Service Providers May Cause Disruption
in Our Operations Should Any Supplier Fail to Deliver Materials
We may experience difficulty acquiring
materials or services for the manufacture of our products or we may not be able
to obtain substitute vendors. We may not be able to procure
comparable materials at similar prices and terms within a reasonable
time. Several services that are provided to Apio are obtained
from a single provider. Several of the raw materials we use to
manufacture our products are currently purchased from a single source, including
some monomers used to synthesize Intelimer polymers and substrate materials for
our breathable membrane products. Any interruption of our
relationship with single-source suppliers or service providers could delay
product shipments and materially harm our business.
We
May Be Unable to Adequately Protect Our Intellectual Property
Rights
We may receive notices from third
parties, including some of our competitors, claiming infringement by our
products of patent and other proprietary rights. Regardless of their
merit, responding to any such claim could be time-consuming, result in costly
litigation and require us to enter royalty and licensing agreements which may
not be offered or available on terms acceptable to us. If a
successful claim is made against us and we fail to develop or license a
substitute technology, we could be required to alter our products or processes
and our business, results of operations or financial position could be
materially adversely affected. Our success depends in large part on
our ability to obtain patents, maintain trade secret protection and operate
without infringing on the proprietary rights of third parties. Any
pending patent applications we file may not be approved and we may not be able
to develop additional proprietary products that are patentable. Any
patents issued to us may not provide us with competitive advantages or may be
challenged by third parties. Patents held by others may prevent the
commercialization of products incorporating our
technology. Furthermore, others may independently develop similar
products, duplicate our products or design around our patents.
Our
Operations Are Subject to Regulations that Directly Impact Our
Business
Our food packaging products are subject
to regulation under the Food, Drug and Cosmetic Act (the “FDC
Act”). Under the FDC Act, any substance that when used as intended
may reasonably be expected to become, directly or indirectly, a component or
otherwise affect the characteristics of any food may be regulated as a food
additive unless the substance is generally recognized as safe. We
believe that food packaging materials are generally not considered food
additives by the FDA because these products are not expected to become
components of food under their expected conditions of use. We
consider our breathable membrane product to be a food packaging material not
subject to regulation or approval by the FDA. We have not received
any communication from the FDA concerning our breathable membrane
product. If the FDA were to determine that our breathable membrane
products are food additives, we may be required to submit a food additive
petition for approval by the FDA. The food additive petition process
is lengthy, expensive and uncertain. A determination by the FDA that
a food additive petition is necessary would have a material adverse effect on
our business, operating results and financial condition.
-29-
Federal, state and local regulations
impose various environmental controls on the use, storage, discharge or disposal
of toxic, volatile or otherwise hazardous chemicals and gases used in some of
the manufacturing processes. Our failure to control the use of, or to
restrict adequately the discharge of, hazardous substances under present or
future regulations could subject us to substantial liability or could cause our
manufacturing operations to be suspended and changes in environmental
regulations may impose the need for additional capital equipment or other
requirements.
Our agricultural operations are subject
to a variety of environmental laws including, the Food Quality Protection Act of
1966, the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the
Comprehensive Environmental Response, Compensation and Liability
Act. Compliance with these laws and related regulations is an ongoing
process. Environmental concerns are, however, inherent in most
agricultural operations, including those we conduct. Moreover, it is
possible that future developments, such as increasingly strict environmental
laws and enforcement policies could result in increased compliance
costs.
The Company is subject to the
Perishable Agricultural Commodities Act (“PACA”) law. PACA regulates
fair trade standards in the fresh produce industry and governs all the products
sold by Apio. Our failure to comply with the PACA requirements could
among other things, result in civil penalties, suspension or revocation of a
license to sell produce, and in the most egregious cases, criminal prosecution,
which could have a material adverse effect on our business.
Adverse
Weather Conditions and Other Acts of God May Cause Substantial Decreases in Our
Sales and/or Increases in Our Costs
Our Food Products Technology business
is subject to weather conditions that affect commodity prices, crop yields, and
decisions by growers regarding crops to be planted. Crop diseases and
severe conditions, particularly weather conditions such as floods, droughts,
frosts, windstorms, earthquakes and hurricanes, may adversely affect the supply
of vegetables and fruits used in our business, which could reduce the sales
volumes and/or increase the unit production costs. Because a significant portion
of the costs are fixed and contracted in advance of each operating year, volume
declines due to production interruptions or other factors could result in
increases in unit production costs which could result in substantial losses and
weaken our financial condition.
We
Depend on Strategic Partners and Licenses for Future Development
Our strategy for development, clinical
and field testing, manufacture, commercialization and marketing for some of our
current and future products includes entering into various collaborations with
corporate partners, licensees and others. We are dependent on our corporate
partners to develop, test, manufacture and/or market some of our
products. Although we believe that our partners in these
collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
to these activities are not within our control. Our partners may not
perform their obligations as expected or we may not derive any additional
revenue from the arrangements. Our partners may not pay any
additional option or license fees to us or may not develop, market or pay any
royalty fees related to products under the agreements. Moreover, some
of the collaborative agreements provide that they may be terminated at the
discretion of the corporate partner, and some of the collaborative agreements
provide for termination under other circumstances. Our partners may pursue
existing or alternative technologies in preference to our
technology. Furthermore, we may not be able to negotiate additional
collaborative arrangements in the future on acceptable terms, if at all, and our
collaborative arrangements may not be successful.
-30-
Both
Domestic and Foreign Government Regulations Can Have an Adverse Effect on Our
Business Operations
Our products and operations are subject
to governmental regulation in the United States and foreign
countries. The manufacture of our products is subject to periodic
inspection by regulatory authorities. We may not be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in
receipt of or failure to receive approvals or loss of previously received
approvals would have a material adverse effect on our business, financial
condition and results of operations. Although we have no reason to
believe that we will not be able to comply with all applicable regulations
regarding the manufacture and sale of our products and polymer materials,
regulations are always subject to change and depend heavily on administrative
interpretations and the country in which the products are
sold. Future changes in regulations or interpretations relating to
matters such as safe working conditions, laboratory and manufacturing practices,
environmental controls, and disposal of hazardous or potentially hazardous
substances may adversely affect our business.
We are subject to USDA rules and
regulations concerning the safety of the food products handled and sold by Apio,
and the facilities in which they are packed and processed. Failure to
comply with the applicable regulatory requirements can, among other things,
result in:
|
|
fines,
injunctions, civil penalties, and
suspensions,
|
|
|
withdrawal
of regulatory approvals,
|
|
|
product
recalls and product seizures, including cessation of manufacturing and
sales,
|
|
|
operating
restrictions, and
|
|
|
criminal
prosecution.
|
We may be required to incur significant
costs to comply with the laws and regulations in the future which may have a
material adverse effect on our business, operating results and financial
condition.
Our
International Operations and Sales May Expose Our Business to Additional
Risks
For the six months ended November 29,
2009, approximately 33% of our total revenues were derived from product sales to
international customers. A number of risks are inherent in international
transactions. International sales and operations may be limited or
disrupted by any of the following:
|
|
regulatory
approval process,
|
|
|
government
controls,
|
|
|
export
license requirements,
|
|
|
political
instability,
|
|
|
price
controls,
|
|
|
trade
restrictions,
|
|
|
changes
in tariffs, or
|
|
|
difficulties
in staffing and managing international
operations.
|
Foreign regulatory agencies have or may
establish product standards different from those in the United States, and any
inability to obtain foreign regulatory approvals on a timely basis could have a
material adverse effect on our international business, and our financial
condition and results of operations. While our foreign sales are
currently priced in dollars, fluctuations in currency exchange rates may reduce
the demand for our products by increasing the price of our products in the
currency of the countries to which the products are sold. Regulatory,
geopolitical and other factors may adversely impact our operations in the future
or require us to modify our current business practices.
Cancellations
or Delays of Orders by Our Customers May Adversely Affect Our
Business
During the six months ended November
29, 2009, sales to our top five customers accounted for approximately 47% of our
revenues, with our largest customer, Costco Wholesale Corporation, accounting
for approximately 19% of our revenues. We expect that, for the
foreseeable future, a limited number of customers may continue to account for a
substantial portion of our net revenues. We may experience changes in
the composition of our customer base as we have experienced in the past. We do
not have long-term purchase agreements with any of our customers. The
reduction, delay or cancellation of orders from one or more major customers for
any reason or the loss of one or more of our major customers could materially
and adversely affect our business, operating results and financial
condition. In addition, since some of the products processed by Apio
at its Guadalupe, California facility are sole sourced to its customers, our
operating results could be adversely affected if one or more of our major
customers were to develop other sources of supply. Our current
customers may not continue to place orders, orders by existing customers may be
canceled or may not continue at the levels of previous periods or we may not be
able to obtain orders from new customers.
-31-
Our
Sale of Some Products May Increase Our Exposure to Product Liability
Claims
The testing, manufacturing, marketing,
and sale of the products we develop involve an inherent risk of allegations of
product liability. If any of our products were determined or alleged
to be contaminated or defective or to have caused a harmful accident to an
end-customer, we could incur substantial costs in responding to complaints or
litigation regarding our products and our product brand image could be
materially damaged. Either event may have a material adverse effect
on our business, operating results and financial condition. Although
we have taken and intend to continue to take what we believe are appropriate
precautions to minimize exposure to product liability claims, we may not be able
to avoid significant liability. We currently maintain product
liability insurance. While we believe the coverage and limits are
consistent with industry standards, our coverage may not be adequate or may not
continue to be available at an acceptable cost, if at all. A product
liability claim, product recall or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on our business, operating results and financial condition.
Our
Stock Price May Fluctuate in Accordance with Market Conditions
The following events may cause the
market price of our common stock to fluctuate significantly:
|
|
technological
innovations applicable to our
products,
|
|
|
our
attainment of (or failure to attain) milestones in the commercialization
of our technology,
|
|
|
our
development of new products or the development of new products by our
competitors,
|
|
|
new
patents or changes in existing patents applicable to our
products,
|
|
|
our
acquisition of new businesses or the sale or disposal of a part of our
businesses,
|
|
|
development
of new collaborative arrangements by us, our competitors or other
parties,
|
|
|
changes
in government regulations applicable to our
business,
|
|
|
changes
in investor perception of our
business,
|
|
|
fluctuations
in our operating results and
|
|
|
changes
in the general market conditions in our
industry.
|
These
broad fluctuations may adversely affect the market price of our common
stock.
We
May Be Exposed to Employment Related Claims and Costs that Could Materially
Adversely Affect Our Business
We have been subject in the past, and
may be in the future, to claims by employees based on allegations of
discrimination, negligence, harassment and inadvertent employment of illegal
aliens or unlicensed personnel, and we may be subject to payment of workers'
compensation claims and other similar claims. We could incur
substantial costs and our management could spend a significant amount of time
responding to such complaints or litigation regarding employee claims, which may
have a material adverse effect on our business, operating results and financial
condition.
We
Are Dependent on Our Key Employees and if One or More of Them Were to Leave, We
Could Experience Difficulties in Replacing Them and Our Operating Results Could
Suffer
The success of our business depends to
a significant extent upon the continued service and performance of a relatively
small number of key senior management, technical, sales, and marketing
personnel. The loss of any of our key personnel would likely harm our
business. In addition, competition for senior level personnel with
knowledge and experience in our different lines of business is
intense. If any of our key personnel were to leave, we would need to
devote substantial resources and management attention to replace them. As a
result, management attention may be diverted from managing our business, and we
may need to pay higher compensation to replace these employees.
-32-
We
May Issue Preferred Stock with Preferential Rights that Could Affect Your
Rights
Our Board of Directors has the
authority, without further approval of our stockholders, to fix the rights and
preferences, and to issue shares, of preferred stock. In November
1999, we issued and sold shares of Series A Convertible Preferred Stock and in
October 2001 we issued and sold shares of Series B Convertible Preferred Stock.
The Series A Convertible Preferred Stock was converted into 1,666,670 shares of
Common Stock in November 2002 and the Series B Convertible Preferred Stock was
converted into 1,744,102 shares of Common Stock in
May 2004.
The
issuance of new shares of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding stock,
and the holders of such preferred stock could have voting, dividend, liquidation
and other rights superior to those of holders of our Common Stock.
We
Have Never Paid any Dividends on Our Common Stock
We have
not paid any cash dividends on our Common Stock since inception and do not
expect to do so in the foreseeable future. Any dividends may be
subject to preferential dividends payable on any preferred stock we may
issue.
Our
Profitability Could Be Materially and Adversely Affected if it Is Determined
that the Book Value of Goodwill is Higher than Fair Value
Our balance sheet includes an amount
designated as “goodwill” that represents a portion of our assets and our
stockholders’ equity. Goodwill arises when an acquirer pays more for
a business than the fair value of the tangible and separately measurable
intangible net assets. Under Statement of Financial Accounting
Standards No. 142 “
Goodwill
and Other Intangible Assets
”, beginning in fiscal year 2002, the
amortization of goodwill has been replaced with an “impairment test” which
requires that we compare the fair value of goodwill to its book value at least
annually and more frequently if circumstances indicate a possible
impairment. If we determine at any time in the future that the book
value of goodwill is higher than fair value then the difference must be
written-off, which could materially and adversely affect our
profitability.
None.
None.
At the Company’s Annual Meeting of
Stockholders held on October 15, 2009, the following proposals were adopted by
the margins indicated:
|
Number of Shares
|
||||||||
|
Voted For
|
Withheld
|
|||||||
|
1.
Five Class 2 directors were elected by the margins indicated to
serve for a term of office to expire at the second succeeding annual
meeting of stockholders at which their successors will be elected and
qualified:
|
||||||||
|
Gary
T. Steele
|
21,261,161 | 934,789 | ||||||
|
Duke
K. Bristow, Ph.D.
|
21,495,682 | 700,268 | ||||||
|
Dean
Hollis
|
20,049,056 | 2,146,894 | ||||||
|
Robert
Tobin
|
21,330,798 | 865,152 | ||||||
|
Nicholas
Tompkins
|
21,333,292 | 862,658 | ||||||
|
The
Class 1 directors were not up for election at the Annual
Meeting. The four current Class 1 directors, Frederick Frank,
Steven Goldby, Stephen E. Halprin and Richard S. Schneider, Ph.D., will
serve as Class 1 directors until the next Annual Meeting, when their
successors will be elected and qualified.
|
||||||||
-33-
|
Voted
For
|
Voted
Against
|
Abstain
|
||||||||||
|
2.
To ratify the appointment of Ernst & Young LLP as the Company’s
independent registered public accounting firm for fiscal year
2010.
|
22,030,099 | 136,556 | 29,294 | |||||||||
|
Voted
For
|
Voted Against
|
Abstain
|
||||||||||
|
3.
To approve the Company’s 2009 Stock Incentive Plan.
|
14,402,564 | 2,742,174 | 108,160 | |||||||||
|
Item
5.
|
Other
Information
|
None.
|
Item 6.
|
Exhibits
|
|
Exhibit
|
||
|
Number
|
Exhibit Title:
|
|
|
10.25
|
2009
Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to
the Registrant’s Current Report on Form 8-K dated October 19,
2009.
|
|
|
10.26
|
Amended
and Restated License, Supply and R&D Agreement dated November 27, 2009
by and among the Registrant, Landec Ag, LLC and Monsanto Company,
incorporated herein by reference to Exhibit 10.25 to the Registrant’s
Current Report on Form 8-K dated December 3, 2009.
|
|
|
31.1+
|
CEO
Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2+
|
CFO
Certification pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
32.1+
|
CEO
Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2+
|
|
CFO
Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
|
+ Filed
herewith.
-34-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| LANDEC CORPORATION | |
|
By:
|
/s/
Gregory S. Skinner
|
|
Gregory
S. Skinner
|
|
|
Vice
President, Finance and Chief Financial Officer
|
|
|
(Principal
Financial and Accounting
Officer)
|
|
Date: January
7, 2010
-35-
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Other InformationItem 6. Exhibits