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 August
29, 2010
, 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, including zip code)
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
September 20, 2010, there were 26,441,778 shares of Common Stock
outstanding.
LANDEC
CORPORATION
FORM 10-Q
For the Fiscal Quarter Ended August 29, 2010
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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Financial
Statements
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a)
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Consolidated
Balance Sheets as of August 29, 2010 and May 30, 2010
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3
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b)
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Consolidated
Statements of Income for the Three Months Ended August 29, 2010 and August
30, 2009
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4
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c)
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Consolidated
Statements of Cash Flows for the Three Months Ended August 29, 2010 and
August 30, 2009
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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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18
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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27
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Item
4
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Controls
and Procedures
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27
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Part
II.
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Other
Information
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28
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Item
1.
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Legal
Proceedings
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28
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Item 1A.
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Risk
Factors
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28
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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28
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Item
3.
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Defaults
Upon Senior Securities
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28
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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28
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Item
5.
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Other
Information
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28
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Item
6.
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Exhibits
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28
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Signatures
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29
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-2-
LANDEC
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands except shares and per share amounts)
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August 29,
2010
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May 30,
2010
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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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$ | 9,898 | $ | 27,817 | ||||
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Marketable
securities
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40,736 | 20,421 | ||||||
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Accounts
receivable, less allowance for doubtful accounts of $169 and $189 at
August 29, 2010 and May 30, 2010, respectively
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19,619 | 18,637 | ||||||
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Accounts
receivable, related party
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634 | 729 | ||||||
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Income
taxes receivable
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669 | 739 | ||||||
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Inventories,
net
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18,070 | 16,107 | ||||||
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Notes
and advances receivable
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701 | 241 | ||||||
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Deferred
taxes
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1,364 | 1,262 | ||||||
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Prepaid
expenses and other current assets
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2,227 | 2,989 | ||||||
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Total
Current Assets
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93,918 | 88,942 | ||||||
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Property
and equipment, net
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50,573 | 50,161 | ||||||
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Goodwill,
net
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41,189 | 41,154 | ||||||
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Trademarks/tradenames,
net
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12,428 | 12,428 | ||||||
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Customer
relationships, net
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3,597 | 3,674 | ||||||
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Other
assets
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4,024 | 3,838 | ||||||
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Total
Assets
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$ | 205,729 | $ | 200,197 | ||||
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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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$ | 17,743 | $ | 14,354 | ||||
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Related
party accounts payable
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511 | 349 | ||||||
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Accrued
compensation
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2,046 | 2,043 | ||||||
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Other
accrued liabilities
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2,946 | 3,277 | ||||||
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Deferred
revenue
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2,704 | 3,391 | ||||||
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Current
portion of long-term debt
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4,329 | 4,521 | ||||||
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Total
Current Liabilities
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30,279 | 27,935 | ||||||
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Long-term
debt
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18,826 | 19,249 | ||||||
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Deferred
revenue
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500 | 1,000 | ||||||
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Deferred
taxes
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9,278 | 8,801 | ||||||
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Other
non-current liabilities
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11,172 | 10,737 | ||||||
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Total
Liabilities
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70,055 | 67,722 | ||||||
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Stockholders’
Equity:
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||||||||
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Common
stock,
$0.001
par value; 50,000,000 shares authorized; 26,441,778 and 26,490,259 shares
issued and outstanding at August 29, 2010 and May 30, 2010,
respectively
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27 | 27 | ||||||
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Additional
paid-in capital
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118,678 | 117,730 | ||||||
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Accumulated
other comprehensive loss
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(331 | ) | (179 | ) | ||||
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Retained
earnings
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15,510 | 13,206 | ||||||
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Total
Stockholders’ Equity
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133,884 | 130,784 | ||||||
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Noncontrolling
interest
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1,790 | 1,691 | ||||||
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Total
Equity
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135,674 | 132,475 | ||||||
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Total
Liabilities and Stockholders’ Equity
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$ | 205,729 | $ | 200,197 | ||||
(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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||||||||
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August
29,
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August
30,
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|||||||
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2010
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2009
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Revenues:
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Product
sales
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$ | 62,261 | $ | 58,392 | ||||
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Services
revenue, related party
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1,065 | 1,166 | ||||||
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License
fees
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1,350 | 1,350 | ||||||
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Research,
development and royalty revenues
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277 | 35 | ||||||
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Total
revenues
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64,953 | 60,943 | ||||||
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Cost
of revenue:
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Cost
of product sales
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50,724 | 50,106 | ||||||
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Cost
of product sales, related party
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1,562 | 1,066 | ||||||
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Cost
of services revenue
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850 | 901 | ||||||
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Total
cost of revenue
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53,136 | 52,073 | ||||||
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Gross
profit
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11,817 | 8,870 | ||||||
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Operating
costs and expenses:
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Research
and development
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2,232 | 939 | ||||||
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Selling,
general and administrative
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5,652 | 4,570 | ||||||
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Total
operating costs and expenses
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7,884 | 5,509 | ||||||
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Operating
income
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3,933 | 3,361 | ||||||
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Interest
income
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107 | 288 | ||||||
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Interest
expense
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(227 | ) | (1 | ) | ||||
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Other
expense
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(58 | ) | — | |||||
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Net
income before taxes
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3,755 | 3,648 | ||||||
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Income
tax expense
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(1,352 | ) | (1,282 | ) | ||||
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Consolidated
net income
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2,403 | 2,366 | ||||||
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Non
controlling interest
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(99 | ) | (182 | ) | ||||
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Net
income applicable to Common Stockholders
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$ | 2,304 | $ | 2,184 | ||||
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Basic
net income per share
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$ | 0.09 | $ | 0.08 | ||||
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Diluted
net income per share
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$ | 0.09 | $ | 0.08 | ||||
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Shares
used in per share computation
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Basic
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26,500 | 26,349 | ||||||
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Diluted
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26,719 | 26,716 | ||||||
See
accompanying notes.
-4-
LANDEC
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
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Three
months Ended
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||||||||
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August
29,
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August
30,
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|||||||
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2010
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2009
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Cash
flows from operating activities:
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Net
income applicable to Common Stockholders
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$ | 2,304 | $ | 2,184 | ||||
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Adjustments.
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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1,306 | 762 | ||||||
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Stock-based
compensation expense
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506 | 220 | ||||||
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Tax
benefit from stock-based compensation expense
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(804 | ) | (622 | ) | ||||
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Increase
in long-term receivable
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(200 | ) | (200 | ) | ||||
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Deferred
taxes
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375 | 474 | ||||||
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Non
controlling interest
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99 | 182 | ||||||
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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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(982 | ) | (3,973 | ) | ||||
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Accounts
receivable, related party
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95 | 148 | ||||||
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Income
taxes receivable
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874 | — | ||||||
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Inventories,
net
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(1,963 | ) | (2,610 | ) | ||||
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Issuance
of notes and advances receivable
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(774 | ) | (23 | ) | ||||
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Collection
of notes and advances receivable
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314 | 187 | ||||||
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Prepaid
expenses and other current assets
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762 | 390 | ||||||
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Accounts
payable
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3,389 | 7,183 | ||||||
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Related
party accounts payable
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162 | 85 | ||||||
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Income
taxes payable
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— | 793 | ||||||
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Accrued
compensation
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3 | 565 | ||||||
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Other
accrued liabilities
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104 | (241 | ) | |||||
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Deferred
revenue
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(1,187 | ) | (1,228 | ) | ||||
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Net
cash provided by operating activities
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4,383 | 4,276 | ||||||
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Cash
flows from investing activities:
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Purchases
of property and equipment
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(1,676 | ) | (1,344 | ) | ||||
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Purchase
of marketable securities
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(34,849 | ) | (54,067 | ) | ||||
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Proceeds
from maturities and sales of marketable securities
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14,382 | 11,105 | ||||||
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Net
cash used in investing activities
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(22,143 | ) | (44,306 | ) | ||||
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Cash
flows from financing activities:
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Repurchase
of outstanding common stock
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(362 | ) | — | |||||
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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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Tax
benefit from stock-based compensation expense
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804 | 622 | ||||||
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Payments
on long-term debt
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(615 | ) | — | |||||
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Decrease
in other assets
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14 | — | ||||||
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Net
cash (used in) provided by financing activities
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(159 | ) | 569 | |||||
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Net
decrease in cash and cash equivalents
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(17,919 | ) | (39,461 | ) | ||||
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Cash
and cash equivalents at beginning of period
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27,817 | 43,459 | ||||||
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Cash
and cash equivalents at end of period
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$ | 9,898 | $ | 3,998 | ||||
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Supplemental
schedule of noncash operating activities:
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Income
tax expense not payable
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$ | 1,082 | $ | 622 | ||||
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Long-term
receivable from Monsanto for guaranteed termination fee
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$ | 200 | $ | 200 | ||||
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
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Organization
Landec
Corporation and its subsidiaries (“Landec” or the “Company”) design, develop,
manufacture and sell polymer products for food and agricultural products,
medical devices and licensed partner applications that incorporate Landec’s
patented polymer technologies. The Company has two proprietary
polymer technology platforms: 1) Intelimer® polymers, and 2)
Hyaluronan (“HA”) biopolymers. The Company’s proprietary polymer
technologies are the foundation, and a key differentiating advantage, upon which
Landec has built its business. The Company sells 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,
Hyaluronan-based biomaterials through its Lifecore Biomedical, Inc. (“Lifecore”)
subsidiary and Intellicoat® coated seed products through its Landec Ag LLC
(“Landec Ag”) 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 August 29,
2010 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 30, 2010.
The results of operations for the three
months ended August 29, 2010 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 Export 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, Lifecore
and Landec Ag. All material inter-company transactions and balances
have been eliminated.
The
Company follows accounting guidance which addresses the consolidation of
variable interest entities ("VIEs"). Under the accounting 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
accounting 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.
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.
-6-
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.
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 (CDs), money market funds and U.S. Treasuries. Short-term
marketable securities consist of 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 portfolio
as
available
for use in its current operations
. The aggregate amount of CDs
included in marketable securities at August 29, 2010 and May 30, 2010 was
$753,000 and $1.5 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 $28.0 million of its marketable securities and
those due in one to two years represent the remaining $12.7 million of the
Company’s marketable securities as of August 29, 2010. These
investments are classified as marketable securities on the consolidated balance
sheet as of August 29, 2010 and May 30, 2010 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 months ended August 29, 2010 and August 30,
2009. During the three months ended August 29, 2010, the Company
received proceeds of $4.9 million from the sale of marketable
securities. 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, 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 August 29,
2010.
Investment
in Non-Public Company
The
Company’s investment in Aesthetic Sciences Corporation (“Aesthetic Sciences”), a
medical device company, is carried at cost and adjusted for impairment
losses. Since there is no readily available market value
information, the Company periodically reviews this investment to determine if
any other than temporary declines in value have occurred based on the financial
stability and viability of Aesthetic Sciences. Aesthetic Sciences
sold the rights to its Smartfil™ Injector System on July 16,
2010. Landec has evaluated its cost method investment for impairment,
using a discounted cash flow analysis which included the terms of the purchase
agreement. Based on the terms of the agreement, the Company had
determined that its investment in Aesthetic Sciences was other than temporarily
impaired and therefore recorded an impairment loss of $1.0 million as of May 30,
2010. The Company’s carrying value of its investment in Aesthetic
Sciences of $792,000 at August 29, 2010 is reported as a component of other non
current assets.
Fair
Value Measurements
The
Company adopted fair value measurement accounting guidance on May 26, 2008 for
financial assets and liabilities and for 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
accounting guidance 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.
|
|
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Level
2 –
|
inputs
other than quoted prices in active markets that are observable either
directly or indirectly through corroboration with observable market
data.
|
-7-
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Level
3 –
|
unobservable
inputs in which there is little or no market data, which would require the
Company to develop its own
assumptions.
|
As of
August 29, 2010, 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. As of August 29, 2010, the Company recorded to
Other Comprehensive Loss on the Consolidated Balance Sheets an unrealized loss
of $331,000, net of taxes of $210,000, as a result of an interest rate swap
agreement entered into during fiscal year 2010. The unrealized loss
was based on a Level 2 hierarchy for fair value measurements. If the
interest rate swap is terminated or the debt borrowed is paid off prior to April
30, 2015, the amount of unrealized loss or gain included in Other Comprehensive
Income (Loss) would be reclassified to earnings. The Company has no
intentions of terminating the interest rate swap or prepaying the debt in the
next twelve months. The interest rate swap liability is included in
other non-current liabilities as of August 29, 2010 and May 30,
2010. The Company has no other financial assets or liabilities for
which fair value measurement has been adopted.
New
Accounting Pronouncements
Recently Adopted
Pronouncements
Variable
Interest Entities
In June
2009, the FASB issued new guidance which amends the evaluation criteria to
identify the primary beneficiary of a VIE. Additionally, the new
guidance requires ongoing reassessments of whether an enterprise is the primary
beneficiary of the VIE. The Company adopted the new guidance on May
31, 2010 and such adoption did not have an impact on the Company’s results of
operations or financial position for the three months ended August 29,
2010.
Revenue
Recognition
In October 2009, the FASB issued new
guidance in relation to "Multiple-Deliverable Revenue
Arrangements". The new standard changes the requirements for
establishing separate units of accounting in a multiple element arrangement and
requires the allocation of arrangement consideration to each deliverable to be
based on the relative selling price. The Company early
adopted these standards as of May 31, 2010. There will be no
materially modified agreements as a result of the adoption. The
adoption did not have an impact on the Company’s results of operations or
financial position for the three months ended August 29, 2010.
|
2.
|
Acquisition
of Lifecore Biomedical, Inc.
|
On
April 30, 2010 (the “Acquisition Date”), the Company acquired all of the
common stock of Lifecore Biomedical, Inc. (“Lifecore”) under a Stock Purchase
Agreement (“Purchase Agreement”) in order to expand its product offerings and
enter into new markets. Lifecore was a privately-held
hyaluronan-based biomaterials company located in Chaska,
Minnesota. Lifecore is principally involved in the development and
manufacture of products utilizing hyaluronan, a naturally occurring
polysaccharide that is widely distributed in the extracellular matrix of
connective tissues in both animals and humans. In addition, Lifecore
has licensed a sodium hyaluronate cross-linking technology from The Cleveland
Clinic Foundation designed to provide a development vehicle for a product
platform to introduce new products for the existing medical segments, as well as
potentially new market segments. Furthermore, Lifecore is pursuing
other development activities to utilize its fermentation and aseptic filling
capabilities for non-hyaluronan based products.
Under the
Purchase Agreement, the aggregate consideration payable by the Company to the
former Lifecore stockholder at closing consisted of $40.0 million in cash,
which included $6.6 million that is held in an escrow account to secure the
indemnification rights of Landec and other indemnities with respect to certain
matters, including breaches of representations, warranties and covenants
included in the Purchase Agreement. The escrow account is in the name
of the seller and Landec’s right under the escrow agreement consist solely of
its ability to file a claim against the escrow
.
In addition, the
Company may be required to pay in cash up to an additional $10.0 million in
earnout payments based on Lifecore achieving certain revenue targets in calendar
years 2011 and 2012.
-8-
The
acquisition date fair value of the total consideration transferred was
$49.65 million, which consisted of the following (in
thousands):
|
Cash
|
$ | 40,000 | ||
|
Contingent
consideration
|
9,650 | |||
|
Total
|
$ | 49,650 |
The
assets and liabilities of Lifecore were recorded at their respective estimated
fair values as of the date of the acquisition using generally accepted
accounting principles for business combinations. The excess of the purchase
price over the fair value of the net identifiable assets acquired has been
allocated to goodwill. Goodwill represents a substantial portion of the
acquisition proceeds because the Lifecore trade name provides the Company with
entry into the growing, higher margin hyaluronan product market. Management
believes that there is further growth potential by extending Lifecore’s product
lines into new channels.
The
following table summarizes the estimated fair values of Lifecore’s assets
acquired and liabilities assumed and related deferred income taxes, effective
April 30, 2010, the date the Company obtained control of
Lifecore. Changes to the fair values of the assets acquired and
liabilities assumed may be recorded in future periods as the Company finalizes
its estimates of the fair value (in thousands).
|
Cash
and cash equivalents
|
$ | 318 | ||
|
Accounts
receivable, net
|
1,860 | |||
|
Inventories,
net
|
9,009 | |||
|
Property
and equipment
|
25,529 | |||
|
Other
tangible assets
|
1,455 | |||
|
Intangible
assets
|
7,900 | |||
|
Total
identifiable assets acquired
|
46,071 | |||
|
Accounts
payable and other liabilities
|
(2,983 | ) | ||
|
Long-term
debt
|
(4,157 | ) | ||
|
Deferred
taxes
|
(3,109 | ) | ||
|
Total
liabilities assumed
|
(10,249 | ) | ||
|
Net
identifiable assets acquired
|
35,822 | |||
|
Goodwill
|
13,828 | |||
|
Net
assets acquired
|
$ | 49,650 |
The
Company used a combination of the market and cost approaches to estimate the
fair values of the Lifecore assets acquired and liabilities
assumed.
Inventory
A step-up
in the value of inventory of $523,000 was recorded in the allocation of the
purchase price based on valuation estimates. During the three months
ended August 29, 2010, $162,000 of this step-up was charged to cost of products
sold as the inventory was sold. As of August 29, 2010, $269,000 of
the step-up remained in inventory.
Intangible
Assets
The
Company identified two intangible assets in connection with the Lifecore
acquisition: trade names valued at $4.2 million, which is considered to be an
indefinite life asset and therefore will not be amortized; and customer base
valued at $3.7 million with a twelve year useful life. The trade name intangible
asset was valued using the relief from royalty valuation method and the customer
relationship intangible asset was valued using the multi-period excess earnings
method.
Goodwill
The
excess of the consideration transferred over the fair values assigned to the
assets acquired and liabilities assumed was $13.8 million, which represents
the goodwill amount resulting from the acquisition which can be attributable to
its long history and future prospects. None of the goodwill is expected to be
deductible for income tax purposes. The Company will test goodwill
for impairment on an annual basis or sooner, if deemed necessary. As
of August 29, 2010, there were no changes in the recognized amount of
goodwill resulting from the acquisition of Lifecore.
-9-
Liability for
Contingent Consideration
In
addition to the cash consideration paid to the former shareholder of Lifecore,
the Company may be required to pay up to an additional $10.0 million in
earnout payments based on Lifecore achieving certain revenue targets in calendar
years 2011 and 2012. The fair value of the liability for the
contingent consideration recognized on the acquisition date was $9.7 million and
$9.65 million, as of August 29, 2010 and May 30, 2010, respectively, and is
classified as a non current liability in the Consolidated Balance
Sheets. The Company determined the fair value of the liability for
the contingent consideration based on a probability-weighted discounted cash
flow analysis. This fair value measurement is based on significant
inputs not observed in the market and thus represents a Level 3
measurement. The Company projects that it will pay the entire $10
million earn out during the third quarter of fiscal year 2012.
|
3.
|
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 is being 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 Monsanto Agreement”) with Monsanto
for the use of Landec’s Intellicoat
polymer
seed coating technology. Under the terms of the Monsanto Agreement,
Monsanto agreed to pay Landec Ag $2.6 million per year. The Monsanto
Agreement was amended in November 2009. Under the terms of the
amended Monsanto Agreement, Monsanto continues to have an exclusive license to
use Landec’s Intellicoat polymer technology for specific seed treatment
applications. Over the remaining two-year term of the amended
Monsanto Agreement, Monsanto will investigate uses of Landec’s Intellicoat
technology in a variety of seed categories in the field exclusively licensed to
Monsanto.
Along
with regaining the use of the Intellicoat technology outside of the specific
applications licensed to Monsanto under the amended Monsanto Agreement, Landec
has assumed responsibility for Landec Ag’s operating expenses and realizes all
the revenues and profits from the sales of existing and new Intellicoat seed
coating products.
The
Monsanto Agreement also provides for a fee payable to Landec Ag of $4 million if
Monsanto elects to terminate the Monsanto Agreement or $10 million if Monsanto
elects to purchase the rights to the exclusive field. If the purchase
option is exercised before December 2011, or if Monsanto elects to terminate the
Monsanto Agreement, all annual license fees and supply payments that have not
been paid to Landec Ag will become due upon the purchase or
termination. If Monsanto does not exercise its purchase
option by December 2011 Landec Ag will receive the termination fee and all
rights to the Intellicoat
seed
coating technology will revert to Landec. Accordingly, we will
receive aggregate minimum guaranteed payments of $17 million for license fees
and polymer supply payments over five years or $23 million in aggregate maximum
payments if Monsanto elects to purchase the rights to the exclusive
field. 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 elects to purchase the rights to the exclusive field, a gain or loss on
the sale will be recognized at the time of purchase. If Monsanto
exercises its purchase option, we expect to enter into a new long-term supply
agreement with Monsanto pursuant to which Landec would continue to be the
exclusive supplier of Intellicoat polymer materials to Monsanto.
For each
of the three months ended August 29, 2010 and August 30, 2009, Landec recognized
$1.35 million in revenue from the Monsanto Agreement.
-10-
|
4.
|
Other
License Agreements
|
In
December 2005, Landec entered into an exclusive licensing agreement with
Aesthetic Sciences whereby 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 under the
agreement. Landec would also receive royalties on the sale of
products incorporating Landec’s technology. In addition, the Company
received shares of preferred stock originally 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 originally 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. 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 August
29, 2010 and May 30, 2010. Aesthetic Sciences sold the rights to its
Smartfil™ Injector System on July 16, 2010. Landec has evaluated its
investment in Aesthetic Sciences for impairment, utilizing a discounted cash
flow analysis under the terms of the purchase agreement. Based on the
terms of the recent sale, the Company had determined that its investment was
other than temporarily impaired and therefore recorded an impairment charge of
$1.0 million as of May 30, 2010. The Company’s carrying value of its
investment in Aesthetic Sciences of $792,000 is included in other non current
assets.
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 are being recognized as license revenue over
a three year period beginning March 2006. In addition, in accordance
with the agreement, Landec receives 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. The agreement
with Chiquita, which terminates in December 2011 (Chiquita has a five year
renewal option), requires Chiquita to pay annual gross profit minimums to Landec
in order for Chiquita to maintain its exclusive license for bananas, avocados
and mangos. Under the terms of the agreement, Chiquita must notify
Landec before December 1
st
of each
year whether it is going to maintain its exclusive license for the following
calendar year and thus agree to pay the minimums for that
year. Landec was notified by Chiquita in November 2009 that Chiquita
wanted to maintain its exclusive license for calendar year 2010 and thus agreed
at that time to pay the minimum gross profit for calendar year
2010.
In June 2010, Apio entered into an
exclusive license agreement with Windset Farms (“Windset”) for Windset to
utilize Landec’s proprietary breathable packaging to extend the shelf life of
greenhouse grown cucumbers, peppers and tomatoes (“exclusive
products”). In accordance with the agreement,
Apio
receive
d
a one-time upfront research and
development fee of $100,000 and
will receive
license fees equal to 3% of net revenue
of the exclusive products utilizing the
proprietary breathable
packaging
technology, with
or without the
BreatheWay®
trademark. The
ongoing license fees are subject to annual minimums of $150,000 for
each of the three types of exclusive
product as each is added to the exclusive agreement.
|
5.
|
Stock-Based
Compensation
|
In the
three months ended August 29, 2010, the Company recognized stock-based
compensation expense of $506,000 or $0.02 per basic and diluted share, which
included $244,000 for restricted stock unit awards and $262,000 for stock
option grants. In the three months ended August 30, 2009, the Company
recognized stock-based compensation expense of $220,000 or $0.01 per basic and
diluted share, which included $119,000 for restricted stock unit awards and
$101,000 for stock option grants.
-11-
The
following table summarizes the stock-based compensation by income statement line
item:
|
Three Months
Ended
August 29, 2010
|
Three Months
Ended
August 30, 2009
|
|||||||
|
Research
and development
|
$ | 146,000 | $ | 49,000 | ||||
|
Sales,
general and administrative
|
360,000 | 171,000 | ||||||
|
Total
stock-based compensation
|
$ | 506,000 | $ | 220,000 | ||||
As of
August 29, 2010, there was $4.2 million of total unrecognized compensation
expense related to unvested equity compensation awards granted under the Landec
incentive stock plans. Total expense is expected to be recognized
over the weighted-average period of 2.5 years for stock options and 2.4 years
for restricted stock unit awards.
|
6.
|
Net
Income Per Diluted Share
|
The following table sets forth the
computation of diluted net income (in thousands, except per share
amounts):
|
Three Months
Ended
August 29, 2010
|
Three Months
Ended
August 30, 2009
|
|||||||
|
Numerator:
|
||||||||
|
Net
income applicable to Common Stockholders
|
$ | 2,304 | $ | 2,184 | ||||
|
Denominator:
|
||||||||
|
Weighted
average shares for basic net income per share
|
26,500 | 26,349 | ||||||
|
Effect
of dilutive securities:
|
||||||||
|
Stock
options and restricted stock units
|
219 | 367 | ||||||
|
Weighted
average shares for diluted net income per share
|
26,719 | 26,716 | ||||||
|
Diluted
net income per share
|
$ | 0.09 | $ | 0.08 | ||||
For the
three months ended August 29, 2010 and August 30, 2009, the computation of the
diluted net income per share excludes the impact of options to purchase 2.0
million shares and 881,613 shares of Common Stock, respectively, as such impacts
would be antidilutive for these periods.
|
7.
|
Income
Taxes
|
The
estimated annual effective tax rate for fiscal year 2011 is currently expected
to be approximately 37%. The provision for income taxes for the three months
ended August 29, 2010 was $1.4 million.
As of May
30, 2010, the Company had unrecognized tax benefits of approximately
$868,000. Included in the balance of unrecognized tax benefits as of
May 30, 2010 is approximately $708,000 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 guidance, 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 not accrue interest and
penalties relating to the income tax on the unrecognized tax benefits as of
August 29, 2010 and May 30, 2010 as the amounts were not significant.
Due to
tax attribute carryforwards, the Company is subject to examination for tax years
1994 forward for U.S. tax purposes. The Company was also subject to
examination in various state jurisdictions for tax years 1998 forward, none of
which were individually significant.
-12-
|
8.
|
Goodwill
and Other Intangibles
|
The
Company’s intangible assets are comprised of customer relationships with an
estimated useful life of twelve years and trademarks/trade names and goodwill
with indefinite lives (collectively, “intangible assets”), which the Company
recognized in accordance with accounting guidance (i) upon the acquisition of
Lifecore in April 2010, our HA-based Biomaterials reporting unit, (ii) upon the
acquisition of Apio in December 1999, which consists of our Food Products
Technology and Export reporting units and (iii) from the repurchase of all non
controlling interests in the common stock of Landec Ag in December
2006. Accounting guidance defines goodwill as “the excess of the cost
of an acquired entity over the net of the estimated fair values of the assets
acquired and the liabilities assumed at date of acquisition.” All
intangible assets, including goodwill, associated with the acquisitions of
Lifecore and Apio were allocated to our HA-based Biomaterials reporting unit and
our Food Products Technology reporting unit, respectively, pursuant to
accounting guidance based upon the allocation of assets and liabilities acquired
and consideration paid for each reporting unit. The consideration
paid for the Export reporting unit approximated its fair market value at the
time of acquisition, and therefore no intangible assets were recorded in
connection with the Company’s acquisition of this reporting
unit. Goodwill associated with the Technology Licensing reporting
unit consists entirely of goodwill resulting from the repurchase of the Landec
Ag non controlling interests.
The
Company tests its intangible assets for impairment at least annually, in
accordance with accounting guidance. When evaluating indefinite-lived
intangible assets for impairment, accounting guidance requires the Company to
compare the fair value of the asset to its carrying value to determine if there
is an impairment loss. When evaluating goodwill for impairment, accounting
guidance requires the Company to first compare 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 not considered impaired; thus application of the second step
of the two-step approach under accounting guidance is not
required. Application of the intangible assets impairment tests
requires significant judgment by management, including identification of
reporting units, assignment of assets and liabilities to reporting units,
assignment of intangible assets to reporting units, and the determination of the
fair value of each indefinite-lived intangible asset and reporting unit based
upon projections of future net cash flows, discount rates and market multiples,
which judgments and projections are inherently uncertain.
Property,
plant and equipment and finite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances occur that indicate that
the carrying amount of an asset (or asset group) may not be recoverable. The
Company’s impairment review requires significant management judgment including
estimating the future success of product lines, future sales volumes, revenue
and expense growth rates, alternative uses for the assets and estimated proceeds
from the disposal of the assets. The Company conducts quarterly reviews of idle
and underutilized equipment, and reviews business plans for possible impairment
indicators. Impairment occurs when the carrying amount of the asset (or asset
group) exceeds its estimated future undiscounted cash flows and the impairment
is viewed as other than temporary. When impairment is indicated, an impairment
charge is recorded for the difference between the asset’s book value and its
estimated fair value. Depending on the asset, estimated fair value may be
determined either by use of a discounted cash flow model or by reference to
estimated selling values of assets in similar condition. The use of different
assumptions would increase or decrease the estimated fair value of assets and
would increase or decrease any impairment measurement.
The
Company tested its indefinite-lived intangible assets and goodwill for
impairment as of July 25, 2010 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,
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.
The
Company uses the discounted cash flow (“DCF”) approach to develop an estimate of
fair value. The DCF approach 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. The market approach was not used to value the Food
Products Technology, Hyaluronan-based Biomaterials and Technology Licensing
reporting units (the “Reporting Units”) because insufficient market comparables
exist to enable the Company to develop a reasonable fair value of its intangible
assets due to the unique nature of each of the Company’s Reporting
Units.
The DCF
approach requires the Company to exercise judgment in determining 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. These net cash flows are discounted at a rate
that reflects both the current return requirements of the market and the risks
inherent in the specific investment.
-13-
The DCF
associated with the Technology Licensing reporting unit is based on the Monsanto
Agreement with Monsanto. Under the Monsanto Agreement, Monsanto has
agreed to pay Landec Ag a license fee of $2.6 million in cash per year for five
years beginning in December 2006, and a fee of $4.0 million if Monsanto elects
to terminate the Agreement, or $10.0 million if Monsanto elects to purchase the
rights to the exclusive field. If the purchase option is exercised
before December 2011, or if Monsanto elects to terminate the Monsanto Agreement,
all annual license fees that have not been paid to Landec Ag will become due
upon the purchase or termination. As of August 29, 2010, the fair
value of the Technology Licensing reporting unit, as determined by the DCF
approach, exceeded its book value, and therefore, no intangible asset impairment
was deemed to exist.
The DCF
associated with the Food Products Technology reporting unit is based on
management’s five-year projection of revenues, gross profits and operating
profits by fiscal year and assumes a 37% effective tax rate for each
year. Management takes into account the historical trends of Apio and
the industry categories in which Apio operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. As of August 29, 2010, the fair value of the Food
Products Technology reporting unit, as determined by the DCF approach, exceeded
its book value, and therefore, no intangible asset impairment was deemed to
exist.
The fair
value of indefinite and finite-lived intangible assets associated with our
acquisition of Lifecore on April 30, 2010, was determined using a DCF model
based on management’s five-year projections of revenues, gross profits and
operating profits by fiscal year and assumes a 33% effective tax rate for each
year. Management takes into account the historical trends of Lifecore and the
industry categories in which Lifecore operates along with inflationary factors,
current economic conditions, new product introductions, cost of sales, operating
expenses, capital requirements and other relevant data when developing its
projection. The trade name intangible asset was valued using the relief from
royalty valuation method and the customer relationship intangible asset was
valued using the multi-period excess earnings method. The fair value of goodwill
was calculated as the excess of consideration paid, including the fair value of
contingent consideration under the terms of the purchase agreement, over the
fair value of the tangible and intangible assets acquired less liabilities
assumed. The Company updated its analysis of the fair value of the
indefinite-lived intangible assets and goodwill as of its annual impairment
analysis date, concluding that the fair value of the Hyaluronan-based
Biomaterials reporting unit, as determined by the DCF approach, exceeded its
book value, and therefore, no intangible asset impairment was deemed to exist.
There were no impairment indicators identified by the Company in its analysis of
impairment associated with the acquired finite-lived intangible
assets.
9. Inventories
Inventories are stated at the lower of
cost (first-in, first-out method) or market and consisted of the following (in
thousands):
|
August 29,
2010
|
May 30,
2010
|
|||||||
|
Raw
materials
|
$ | 6,586 | $ | 6,868 | ||||
|
Work
in progress
|
3,158 | 2,013 | ||||||
|
Finished
goods
|
8,326 | 7,226 | ||||||
|
Total
|
$ | 18,070 | $ | 16,107 | ||||
10. Debt
On April 30, 2010 in conjunction
with the acquisition of Lifecore, Lifecore entered into a new $20 million Credit
Agreement with Wells Fargo Bank N.A. (“Wells Fargo”) with a five year term that
provides for equal monthly principal payments plus
interest. All of Lifecore’s assets, valued at approximately $79
million as of August 29, 2010, have been pledged to secure the debt incurred
pursuant to the Credit Agreement. Landec is the guarantor of the
debt.
On August
19, 2004, Lifecore issued variable rate industrial revenue bonds (“IRB”).
These bonds were assumed by Landec in the acquisition of Lifecore (see Note
2). The bonds are collateralized by a bank letter of credit which is
secured by a first mortgage on the Company’s facility in Chaska,
Minnesota. In addition, the Company pays an annual remarketing
fee equal to 0.125% and an annual letter of credit fee of
0.50%.
The
Credit Agreement and the IRB contain certain restrictive covenants, which
require Lifecore to meet certain financial tests, including minimum levels of
net income, minimum quick ratio, minimum fixed coverage ratio and maximum
capital expenditures.
-14-
On August
9, 2010 and September 14, 2010, the Company amended its Credit Agreement with
Wells Fargo to modify certain financial covenants. As of August 29,
2010, the Company was in compliance with all covenants.
Long-term
debt consists of the following (in thousands):
|
August 29, 2010
|
May 30, 2010
|
|||||||
|
Credit
agreement with Wells Fargo; due in monthly payments of $333,333 through
April 30, 2015 with interest payable monthly at Libor plus 2% per
annum
|
$ | 19,000 | $ | 19,667 | ||||
|
Industrial
revenue bond issued by Lifecore; due in annual payments through 2020 with
interest at a variable rate set weekly by the bond remarketing agent
(0.50% and 2.56% at August 29, 2010 and May 30, 2010,
respectively)
|
4,155 | 4,103 | ||||||
|
Total
|
23,155 | 23,770 | ||||||
|
Less
current portion
|
(4,329 | ) | (4,521 | ) | ||||
|
Long-term
portion
|
$ | 18,826 | $ | 19,249 | ||||
The maturities on the IRB are held in a
sinking fund account, recorded in Prepaid expenses and other current asset in
the accompanying Consolidated Balance Sheets and is paid out each year on
September 1
st
.
11. Derivative
Financial Instruments
The
Company is exposed to interest rate risks primarily through borrowings under its
Credit Agreement with Wells Fargo (see Note 10). Interest on all of
the Company’s borrowings under its Credit Agreement is based upon variable
interest rates. As of August 29, 2010, the Company had borrowings of
$19.0 million outstanding under its Credit Agreement which bear interest at a
rate equal to the one-month LIBOR plus 2%. As of August 29, 2010, the
interest rate on borrowings under the Credit Agreement was accruing at
2.375%.
In May
2010, the Company entered into a five-year interest rate swap agreement under
the Company’s Credit Agreement which expires on April 30, 2015. The
interest rate swap was designated as a cash flow hedge of future interest
payments of LIBOR and has a notional amount of $20 million. As a result of the
interest rate swap transaction, the Company fixed for a five-year period the
interest rate at 4.24% subject to market based interest rate risk on $20 million
of borrowings under its Credit Agreement. The Company’s obligations
under the interest rate swap transaction as to the scheduled payments were
guaranteed and secured on the same basis as is its obligations under the Credit
Agreement. As of August 29, 2010, the Company recorded to Other
Comprehensive Loss on the Consolidated Balance Sheets an unrealized loss of
$331,000, net of taxes of $210,000, as a result of the interest rate
swap. The unrealized loss was based on Level 2 hierarchy for fair
value measurements. If the interest rate swap is terminated or the
debt borrowed is paid off prior to April 30, 2015, the amount of unrealized loss
or gain included in Other Comprehensive Income (Loss) would be reclassified to
earnings. The Company has no intentions of terminating the interest
rate swap or prepaying the debt in the next twelve months. The
interest rate swap liability is included in other non current liabilities as of
August 29, 2010 and May 30, 2010.
|
12.
|
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 that supply produce to Apio, 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 August 29, 2010 and May 30,
2010 and for the three months ended August 29, 2010 and August 30,
2009.
Apio's
domestic commodity vegetable business was sold to Beachside Produce in
2003. The Apio Chairman is a 12.5% owner in Beachside
Produce. During the three months ended August 29, 2010 and August 30,
2009, the Company recognized revenues of $183,000 and $210,000, 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 August 29, 2010 and May 30,
2010.
-15-
All
related party transactions are monitored quarterly by the Company and approved
by the Audit Committee of the Board of Directors.
|
13.
|
Comprehensive
Loss
|
Comprehensive
loss consists of net income and other comprehensive income for which Landec
includes changes in unrealized gains and losses on its interest rate swap with
Wells Fargo Bank, N.A. Accumulated other comprehensive loss is
reported as a component of stockholders’ equity. For the three
months ended August 29, 2010, the comprehensive loss from the unrealized loss on
the interest rate swap, net of $105,000 of income taxes, was
$152,000. There was no comprehensive income or loss for the three
months ended August 30, 2009.
14. Stockholders’
Equity
During the three months ended August
29, 2010, 17,519 shares of Common Stock were issued upon the vesting of
restricted stock units and upon the exercise of options under the Company’s
equity plans.
During
the three months ended August 29, 2010, the Company granted options to purchase
10,000 shares of common stock and 3,333 restricted stock unit
awards.
As of
August 29, 2010 the Company has reserved 3.6 million shares of Common Stock for
future issuance under its current and former equity plans.
On July
14, 2010, the Company announced that the Board of Directors of the Company had
approved the establishment of a stock repurchase plan which allows for the
repurchase of up to $10 million of the Company’s Common
Stock. The Company may repurchase its common stock from time to
time in open market purchases or in privately negotiated
transactions. The timing and actual number of shares repurchased is
at the discretion of management of the Company and will depend on a variety of
factors, including stock price, corporate and regulatory requirements, market
conditions, the relative attractiveness of other capital deployment
opportunities and other corporate priorities. The stock repurchase
program does not obligate Landec to acquire any amount of its common stock and
the program may be modified, suspended or terminated at any time at the
Company's discretion without prior notice. During the three months
ended August 29, 2010, the Company repurchased on the open market 66,000 shares
of its Common Stock for $362,000.
-16-
|
15.
|
Business
Segment Reporting
|
Landec
operates in four business segments: the Food Products Technology segment, the
Export segment, the HA-based Biomaterials segment and the Technology Licensing
segment. The Food Products Technology segment markets and packs
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 Export segment consists of revenues generated from the
purchase and sale of primarily whole commodity fruit and vegetable products to
Asia. The HA-based Biomaterials segment sells products utilizing
hyaluronan, a naturally occurring polysaccharide that is widely distributed in
the extracellular matrix of connective tissues in both animals and humans for
medical use in the ophthalmic, orthopedic and veterinary markets. 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 Europe,
Canada, Taiwan, Indonesia, China and Japan. Operations and
identifiable assets by business segment consisted of the following (in
thousands):
|
Three Months Ended August 29,
2010
|
Food Products
Technology
|
Export
|
HA-based
Biomaterials
|
Technology
Licensing
|
Corporate
|
TOTAL
|
||||||||||||||||||
|
Net
sales
|
$ | 40,558 | $ | 16,483 | $ | 6,385 | $ | 1,527 | $ | — | $ | 64,953 | ||||||||||||
|
International
sales
|
$ | 4,605 | $ | 16,446 | $ | 4,433 | $ | ¾ | $ | ¾ | $ | 25,484 | ||||||||||||
|
Gross
profit
|
$ | 6,363 | $ | 932 | $ | 2,995 | $ | 1,527 | $ | — | $ | 11,817 | ||||||||||||
|
Net
income (loss)
|
$ | 3,603 | $ | 377 | $ | 694 | $ | 572 | $ | (2,942 | ) | $ | 2,304 | |||||||||||
|
Depreciation
and amortization
|
$ | 783 | $ | 2 | $ | 484 | $ | 37 | $ | — | $ | 1,306 | ||||||||||||
|
Interest
income
|
$ | 29 | $ | — | $ | 26 | $ | — | $ | 52 | $ | 107 | ||||||||||||
|
Interest
expense
|
$ | 2 | $ | — | $ | 225 | $ | — | $ | — | $ | 227 | ||||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | — | $ | — | $ | 1,352 | $ | 1,352 | ||||||||||||
|
Three Months Ended August 30,
2009
|
||||||||||||||||||||||||
|
Net
sales
|
$ | 41,856 | $ | 17,702 | $ | ― | $ | 1,385 | $ | — | $ | 60,943 | ||||||||||||
|
International
sales
|
$ | 3,436 | $ | 15,950 | $ | ― | $ | ¾ | $ | ¾ | $ | 19,386 | ||||||||||||
|
Gross
profit
|
$ | 6,381 | $ | 1,104 | $ | ― | $ | 1,385 | $ | — | $ | 8,870 | ||||||||||||
|
Net
income (loss)
|
$ | 3,398 | $ | 578 | $ | ― | $ | 740 | $ | (2,532 | ) | $ | 2,184 | |||||||||||
|
Depreciation
and amortization
|
$ | 716 | $ | 3 | $ | ― | $ | 43 | $ | — | $ | 762 | ||||||||||||
|
Interest
income
|
$ | 32 | $ | — | $ | ― | $ | — | $ | 256 | $ | 288 | ||||||||||||
|
Interest
expense
|
$ | 1 | $ | — | $ | ― | $ | — | $ | — | $ | 1 | ||||||||||||
|
Income
tax expense
|
$ | — | $ | — | $ | ― | $ | — | $ | 1,282 | $ | 1,282 | ||||||||||||
During the three months ended August
29, 2010 and August 30, 2009, sales to the Company’s top five customers
accounted for 42% and 50%, respectively, of revenues with the Company’s top
customer from the Food Products Technology segment, Costco Wholesale Corp.,
accounting for 15% and 19% for the three months ended August 29, 2010 and August
30, 2009, respectively. 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.
16. Subsequent
Events
On September 14, 2010, the Company
amended its Credit Agreement with Wells Fargo to modify certain financial
covenants.
-17-
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
30, 2010.
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 any factors described below in Part II-Item 1A of this Form 10-Q
and those mentioned in Landec’s Annual Report on Form 10-K for the fiscal year
ended May 30, 2010. 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 Form 10-K for the fiscal year ended May
30, 2010 filed with the Securities and Exchange Commission on August 12,
2010.
The
Company
Landec Corporation and its subsidiaries
(“Landec” or the “Company”) design, develop, manufacture and sell polymer
products for food and agricultural products, medical devices and licensed
partner applications that incorporate Landec’s patented polymer
technologies. The Company has two proprietary polymer technology
platforms: 1) Intelimer® polymers, and 2) Hyaluronan (“HA”)
biopolymers. The Company’s proprietary polymer technologies are the
foundation, and a key differentiating advantage, upon which Landec has built its
business.
After the
acquisition of Lifecore Biomedical, Inc. (“Lifecore”) on April 30, 2010, Landec
now has four core businesses – Food Products Technology, Export, HA-based
Biomaterials and Technology Licensing, each of which is described
below.
Our
wholly-owned subsidiary, Apio, operates our Food Products Technology business,
combining Landec’s proprietary food packaging technology with the capabilities
of a large national food supplier and value-added produce
processor. In Apio’s value-added operations, produce is processed by
trimming, washing, mixing, and packaging into bags and trays that incorporate
Landec’s BreatheWay
®
membrane
technology. The BreatheWay membrane increases shelf life and reduces
shrink (waste) for retailers and, for certain products, eliminates the need for
ice during the distribution cycle and helps to ensure that consumers receive
fresh produce by the time the product makes its way through the supply
chain. Apio also licenses the BreatheWay technology to Chiquita
Brands
International, Inc. (“Chiquita”) for packaging and distribution of bananas and
avocados and to Windset Farms for packaging of greenhouse grown cucumbers,
peppers and tomatoes.
Apio also
operates the Export business through its Cal Ex Trading Company
(“Cal-Ex”). The Export business purchases and sells whole fruit and
vegetable products to predominantly Asian markets.
Our newly
acquired wholly-owned subsidiary, Lifecore, operates our HA-based Biomaterials
business and is principally involved in the development and manufacture of
products utilizing hyaluronan, a naturally occurring polysaccharide that is
widely distributed in the extracellular matrix of connective tissues in both
animals and humans. Lifecore’s products are primarily sold to three
medical segments: (1) Ophthalmic, (2) Orthopedic and (3)
Veterinary. Lifecore also supplies hyaluronan to customers pursuing
other medical applications, such as aesthetic surgery, medical device coatings,
tissue engineering and pharmaceuticals. Lifecore leverages its
proprietary fermentation process to manufacture premium, pharmaceutical-grade
hyaluronan, and its proprietary aseptic filling capabilities to deliver HA
finished goods to its customers. Lifecore also manufactures and sells
its own HA-based finished goods. Lifecore is known in the medical
segments as a premium supplier of HA. Its name recognition allows
Lifecore to acquire new customers and sell new products with only a small
marketing or sales capability.
-18-
Landec’s Technology Licensing business
develops proprietary polymer technologies and applies them in a wide range of
applications including seed coatings and treatments, temperature indicators,
controlled release systems, drug delivery, pressure sensitive adhesives and
personal care products. These applications are commercialized through
partnerships with third parties resulting in licensing and royalty
revenues. For example, Monsanto Company (“Monsanto”) has an exclusive
license to our Intellicoat® seed coating technology for specific seed treatment
applications, Air Products and Chemicals, Inc. (“Air Products”) has an exclusive
license to our Intelimer polymers for personal care products and Nitta
Corporation (“Nitta”) licenses Landec’s proprietary pressure sensitive adhesives
for use in the manufacture of electronic components by their
customers.
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 four core
business segments: Apio, Inc. with the Food Products Technology and
Export businesses, Lifecore Biomedical, Inc., with Hyaluronan-based Biomaterials
business and Landec’s Technology Licensing business.
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. During the fiscal year ended May 30, 2010,
Apio shipped nearly seventeen million cartons of produce to leading supermarket
retailers, wholesalers, foodservice suppliers and club stores throughout the
United States and internationally, primarily in Canada.
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 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.
-19-
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 12 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.
The Company’s specialty packaging for case liner products extends the shelf life
of certain produce commodities up to 50%. This shelf life extension
can enable the utilization of alternative distribution strategies to gain
efficiencies or reach new markets while maintaining product quality to the end
customer.
Apio
Packaging’s first program has concentrated on bananas and was formally
consummated when Apio entered into an agreement to supply 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.
In fiscal
year 2008, the Company expanded the use of its BreatheWay technology to include
avocados and mangos 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 commercial retail sales began in fiscal year 2010.
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 and will take several years to
develop.
In June
2010, Apio entered into an exclusive license agreement with Windset Farms for
Windset to utilize Landec’s proprietary breathable packaging to extend the shelf
life of greenhouse grown cucumbers, peppers and tomatoes.
Export
Business
Export
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. The Export business is a buy/sell business that
realizes a commission-based margin on average in the 6-7% range.
Hyaluronan-based
Biomaterials Business
Our
HA-based Biomaterials business, operated through our Lifecore subsidiary, was
acquired by Landec on April 30, 2010.
Lifecore intends to use its proprietary
fermentation process and aseptic formulation and filling expertise to be a
leader in the development of HA-based products for multiple applications and to
take advantage of non-HA device and drug opportunities which leverage our
expertise in HA manufacture and syringe filling
capabilities. Elements of Lifecore’s strategy include the
following:
·
Establish strategic relationships
with market leaders.
Lifecore will continue to develop
applications for products with partners who have strong marketing, sales and
distribution capabilities to end-user markets. Lifecore through its
strong reputation and history of providing premium HA products has been able to
establish long-term relationships with the market leading companies such as
Alcon and Abbott Medical Optics in ophthalmology, and Musculoskeletal Transplant
Foundation (MTF) and Novartis AG in orthopedics.
-20-
·
Expand medical applications for
hyaluronan
. Due to the growing knowledge of the unique
characteristics of HA and the role it plays in normal physiology, Lifecore
continues to identify and pursue further uses for HA in other medical
applications, such as wound care, aesthetic surgery, adhesion prevention, drug
delivery, device coatings and pharmaceuticals. Further applications may involve
expanding process development activity and/or additional licensing of
technology.
·
License HA technology from third
parties.
Lifecore currently has no commercial products using
cross-linking technology and as a result, Lifecore entered into a world-wide
exclusive license and development agreement with the Cleveland Clinic Foundation
to develop and commercialize HA-based products and related applications. The
license is for patented HA-based cross-linking technology, Corgel
TM
Biohydrogel products, that can be used for products in aesthetics,
orthopedics, ophthalmology and other medical fields.
Given
the broad number of applications, Lifecore anticipates that it will sublicense
the technology for certain applications while retaining manufacturing
rights.
·
Utilize manufacturing infrastructure
to pursue contract aseptic filling and fermentation opportunities.
Lifecore will continue
to evaluate providing contract services for opportunities that are suited for
the capital and facility investment related to aseptic filling equipment,
fermentation and purification.
·
Maintain flexibility in product
development and supply relationships.
Lifecore’s vertically
integrated development and manufacturing capabilities allow it to establish a
variety of relationships with global corporate partners. Lifecore’s role in
these relationships extends from supplying HA raw materials to manufacturing of
aseptically-packaged, finished sterile products to developing and manufacturing
its own proprietary products.
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
and supply 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 2010 Pollinator Plus was used by 10 seed companies on
approximately 18% of the seed corn production acres in the U.S.
Monsanto
announced in 2008 that it had 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 2010 we
amended our agreement with Monsanto and as a result our development activities
are focused on a specific technology of interest to Monsanto.
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 other
segments. For example, our core patented technology, Intelimer
materials, can be used to trigger release of 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.
-21-
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
Latent Catalyst 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 rights to
develop and sell Landec’s latent catalysts and personal care technologies were
licensed to Air Products in March 2006.
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, as well
as color cosmetics, lipsticks and hair care. The Company's partner,
Air Products, is currently shipping products to L’Oreal, The Mentholatum Company
and other companies for use in lotions and creams. The rights to
develop and sell Landec’s polymers for personal care products were licensed to
Air Products in March 2006 along with the latent catalyst rights.
Intelimer
Drug Delivery Polymers
Landec
has been developing both biodegradable and non-biodegradable polymers for use in
drug delivery applications targeting the use of its highly crystalline polymers
and the tunable physical properties to minimize or eliminate burst, extend drug
release profiles and deliver novel valuable properties to the pharma
industry.
Results
of Operations
Revenues
(in
thousands):
|
Three months
ended 8/29/10
|
Three months
ended 8/30/09
|
Change
|
||||||||||
|
Apio
Value Added
|
$ | 39,645 | $ | 41,292 | (4 | )% | ||||||
|
Apio
Packaging
|
913 | 564 | 62 | % | ||||||||
|
Food
Technology
|
40,558 | 41,856 | (3 | )% | ||||||||
|
Export
|
16,483 | 17,702 | (7 | )% | ||||||||
|
Total
Apio
|
57,041 | 59,558 | (4 | )% | ||||||||
|
HA
|
6,385 | — | N/M | |||||||||
|
Tech.
Licensing
|
1,527 | 1,385 | 10 | % | ||||||||
|
Total
Revenues
|
$ | 64,953 | $ | 60,943 | 7 | % | ||||||
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
decrease in Apio’s value-added revenues for the three months ended August 29,
2010 compared to the first quarter of last year was primarily due to a decrease
in value-added unit sales volumes of 7% partially offset by a product mix change
to greater sales of higher priced tray products from lower priced bag products
compared to the same period last year.
-22-
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
increase in Apio packaging revenues for the three months ended August 29, 2010
compared to the same period last year was primarily due to the sale of
BreatheWay membranes to Chiquita for use on avocado applications.
Export
Apio
export revenues consist of revenues generated from the purchase and sale of
primarily whole commodity fruit and vegetable products to Asia by
Cal-Ex. Apio records revenue equal to the sale price to third parties
because it takes title to the product while in transit.
The
decrease in revenues in Apio’s export business for the three months ended August
29, 2010 compared to the same period last year was due to the discontinuation of
the domestic buy/sell business at the end of fiscal year 2010, resulting in $1.7
million of lower domestic sales partially offset by a $494,000 increase in
export sales.
Hyaluronan-based
(“HA”) Biomaterials
The
Company’s Lifecore subsidiary principally generates revenue through the sale of
products containing HA. Lifecore was acquired on April 30,
2010.
Technology
Licensing
Technology
licensing revenues consist of revenues generated from the licensing agreements
with Monsanto, Air Products and Nitta.
The
increase in Technology Licensing revenues for the three months ended August 29,
2010 compared to the same period of the prior year was not significant to
consolidated Landec revenues.
Gross Profit
(in
thousands):
|
Three months
ended 8/29/10
|
Three months
ended 8/30/09
|
Change
|
||||||||||
|
Apio
Value Added
|
$ | 5,611 | $ | 5,865 | (4 | )% | ||||||
|
Apio
Packaging
|
752 | 516 | 46 | % | ||||||||
|
Food
Technology
|
6,363 | 6,381 | (0 | )% | ||||||||
|
Export
|
932 | 1,104 | (16 | )% | ||||||||
|
Total
Apio
|
7,295 | 7,485 | (3 | )% | ||||||||
|
HA
|
2,995 | — | N/M | |||||||||
|
Tech.
Licensing
|
1,527 | 1,385 | 10 | % | ||||||||
|
Total
Gross Profit
|
$ | 11,817 | $ | 8,870 | 33 | % | ||||||
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
of 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, casein, 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 first quarter of fiscal year 2011 compared to the same
period last year as outlined in the table above.
-23-
Apio
Value-Added
The decrease in gross profit for Apio’s
value-added specialty packaged vegetable business for the three months ended
August 29, 2010 compared to the same period last year was primarily due to the
4% decrease in revenues.
Apio Packaging
The
increase in gross profit for Apio Packaging for the three months ended August
29, 2010 compared to the same period last year was primarily due to the sale of
BreatheWay membranes to Chiquita for use on avocado applications.
Export
Apio’s export business is a buy/sell
business that realizes a commission-based margin in the 6-7%
range. The decrease in gross profit for Apio’s export business during
the three months ended August 29, 2010 compared to the same period last year was
due to the 7% decrease in revenues and from a change in the mix of export
products that resulted in lower per unit margins.
HA-based
Biomaterials
Lifecore
was acquired on April 30, 2010.
Technology
Licensing
The
increase in Technology Licensing gross profit for the three months ended August
29, 2010 compared to the same period of the prior year was due to increased
royalty revenues from Air Products and Nitta.
Operating Expenses
(in
thousands):
|
Three months
ended 8/29/10
|
Three months
ended 8/30/09
|
Change
|
||||||||||
|
Research
and Development:
|
||||||||||||
|
Apio
|
$ | 223 | $ | 294 | (24 | )% | ||||||
|
HA
|
1,054 | — | N/M | |||||||||
|
Tech.
Licensing
|
955 | 645 | 48 | % | ||||||||
|
Total
R&D
|
$ | 2,232 | $ | 939 | 138 | % | ||||||
|
Selling,
General and Administrative:
|
||||||||||||
|
Apio
|
$ | 3,021 | $ | 3,063 | (1 | )% | ||||||
|
HA
|
989 | — | N/M | |||||||||
|
Corporate
|
1,642 | 1,507 | 9 | % | ||||||||
|
Total
S,G&A
|
$ | 5,652 | $ | 4,570 | 24 | % | ||||||
Research and Development
Landec’s research and development
expenses consist primarily of expenses involved in product development and
commercialization 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 HA business,
the research and development efforts are focused on new products and
applications for HA-based biomaterials. In the Technology Licensing
business, the research and development efforts are focused on uses for the
proprietary Intelimer polymers outside of food and HA.
The increase in research and
development expenses for the three months ended August 29, 2010 compared to the
same period last year was primarily due to the research and development expenses
for Lifecore and from an increase in scientific staff at Corporate to support
the development of new product applications.
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.
-24-
The increase in selling, general and
administrative expenses for the three months ended August 29, 2010 compared to
the same period last year was primarily due to the selling, general and
administrative expenses for Lifecore.
Other
(in
thousands):
|
Three months
ended 8/29/10
|
Three months
ended 8/30/09
|
Change
|
||||||||||
|
Interest
Income
|
$ | 107 | $ | 288 | (63 | )% | ||||||
|
Interest
Expense
|
$ | (227 | ) | $ | (1 | ) | N/M | |||||
|
Other
Expense
|
$ | (58 | ) | $ | — | N/M | ||||||
|
Income
Taxes
|
$ | (1,352 | ) | $ | (1,282 | ) | 5 | % | ||||
|
Non
controlling interest
|
$ | (99 | ) | $ | (182 | ) | (46 | )% | ||||
Interest
Income
The decrease in interest income for the
three months ended August 29, 2010 compared to the same period last year was
primarily due to less cash to investment due to the cash used to acquire
Lifecore on April 30, 2010 and from lower yields on investments due to declines
in interest rates.
Interest Expense
The increase in interest expense during
the three months ended August 29, 2010 compared to the same period last year was
due to the new credit facility entered into on April 30, 2010 in conjunction
with the acquisition of Lifecore.
Other Expenses
The other expense is for the
amortization of the discount on Lifecore’s earn out obligation (see Note
2).
Lifecore was acquired on April 30,
2010.
Income Taxes
The increase in the income tax expense
is due to a 5% increase in net income before taxes during the three months ended
August 29, 2010 compared to the same period last year.
Non controlling Interest
The non controlling interest consists
of the limited partners’ equity interest in the net income of Apio Cooling,
LP.
The decrease in the non controlling
interest for the three months ended August 29, 2010 compared to the first
quarter of last year was not significant.
Liquidity
and Capital Resources
As of August 29, 2010, the Company had
cash and cash equivalents of $9.9 million, a net decrease of $17.9 million from
$27.8 million at May 30, 2010.
Cash Flow from Operating
Activities
Landec generated $4.4 million of cash
flow from operating activities during the three months ended August 29, 2010
compared to generating $4.3 million of cash flow from operating activities for
the three months ended August 30, 2009.
The primary sources of
cash from operating activities during the three months ended August 29, 2010
were from (1) generating $2.3 million of net income, (2) non-cash related net
expenses of $1.3 million and (3) a net increase of $797,000 in working
capital. The primary changes in working capital were (a) a $2.0
million increase in inventories resulting from the timing of receipts and the
build up of inventories at Apio in advance of the holiday season, (b) a $3.4
million increase in accounts payable resulting from the timing of payments and
the increase in cost of sales due to August 2009 cost of sales being higher than
May 2009 cost of sales, and (c) a $1.2 million decrease in deferred revenue
primarily due to recognizing $1.4 million of revenue associated with deferred
revenue from the Monsanto licensing agreement during the first three months of
fiscal year 2011.
-25-
Cash Flow from Investing
Activities
Net cash used in investing activities
for the three months ended August 29, 2010 was $22.1 million compared to $44.3
million for the same period last year. The primary uses of cash in
investing activities during the first quarter of fiscal year 2011 were for the
purchase of $1.7 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 the purchase of
equipment at Lifecore to support the addition of new customers and from the net
purchases of $20.5 million of marketable securities.
Cash Flow from Financing
Activities
Net cash used in financing activities
for the three months ended August 29, 2010 was $159,000 compared to net cash
provided by financing activities of $569,000 for the same period last
year. The use of cash in financing activities during the first
quarter of fiscal year 2011 was primarily from $615,000 of long-term debt
payments and the repurchase of $362,000 of the Company’s outstanding Common
Stock, partially offset by the tax benefit from stock-based compensation of
$804,000
Capital
Expenditures
During the three months ended August
29, 2010, Landec continued its 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 and it purchased equipment
to support the addition of new customers at Lifecore. These
expenditures represented the majority of the $1.7 million of capital
expenditures.
Debt
On April 30, 2010 in conjunction with
the acquisition of Lifecore, Lifecore entered into a new $20 million Credit
Agreement with Wells Fargo Bank N.A. (“Wells Fargo”) with a five year term that
provides for equal monthly principal payments plus interest. The
Credit Agreement contains certain restrictive covenants, which require Lifecore
to meet certain financial tests, including minimum levels of net income, minimum
quick ratio, minimum fixed coverage ratio and maximum capital
expenditures. All of Lifecore’s assets have been pledged to secure
the debt incurred pursuant to the Credit Agreement. Landec is the
guarantor of the debt. On August 9, 2010 and September 14, 2010, the Company
amended its Credit Agreement with Wells Fargo to amend certain financial
covenants. As of August 29, 2010, $19.0 million was outstanding under
the Credit Agreement. The Company was in compliance with all
financial covenants as of August 29, 2010.
On May 4,
2010, the Company entered into an interest rate swap agreement that has the
economic effect of modifying the variable interest obligations associated with
the $20 million Credit Agreement so that the interest payable is effectively
fixed at a rate of 4.24% (see Note 11).
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.
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.
-26-
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.
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 August 29, 2010 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
-27-
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.
There
have been no material changes to the Company's risk factors which are included
and described in the Form 10-K for the fiscal year ended May 30, 2010 filed with
the Securities and Exchange Commission on August 12, 2010.
(c)
The
following table contains the Company’s stock repurchases of equity securities
for the first quarter of the fiscal year 2011:
Issuer
Purchases of Equity Securities
|
Period
(1)
|
(a)
Total
Number of Shares (or Units) Purchased
|
(b)
Average
Price Paid per Share (or Unit)
|
(c)
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
(d)
Maximum
Number (or Approximate Dollar Value) or Shares (or Units) that May Yet Be
Purchased Under the Plans or Programs
|
|
Month
#1 May 30, 2010 to June 27, 2010
|
N/A
|
N/A
|
N/A
|
N/A
|
|
Month
#2 June 28, 2010 to July 25, 2010
|
0
|
N/A
|
0
|
$10,000,000
|
|
Month
#3 July 26, 2010 to August 29, 2010
|
66,000
|
$5.48
|
66,000
|
$9,638,000
|
|
TOTAL
|
66,000
|
$5.48
|
66,000
|
$9,638,000
|
|
(1)
|
The
reported periods conform to the Company’s fiscal calendar composed of
thirteen weeks under a 4 week, 4 week and 5 week
structure.
|
On July
14, 2010, the Company announced that the Board of Directors of the Company had
approved the establishment of a stock repurchase plan which allows for the
repurchase of up to $10 million of the Company’s Common Stock. The
Company may repurchase its Common Stock from time to time in open market
purchases or in privately negotiated transactions. The timing and
actual number of shares purchased is at the discretion of management of the
Company and will depend on a variety of factors, including stock price,
corporate and regulatory requirements, market conditions, the relative
attractiveness of other capital deployment opportunities and other corporate
priorities. The stock repurchase program does not obligate Landec to
acquire any amount of its Common Stock and the program may be modified,
suspended or terminated at any time at the Company’s discretion without prior
notice.
None.
None.
None.
|
Exhibit
|
||
|
Number
|
Exhibit Title:
|
|
|
10.31
|
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.
|
|
|
10.32+
|
Amendment
No. 2 to the Credit Agreement by and between Lifecore Biomedical, LLC and
Wells Fargo Bank, N.A. dated September 14, 2010.
|
|
|
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.
|
-28-
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: October
1, 2010
-29-
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