This document consists of 32 pages, of which this is page
Number 1. The index to Exhibits is on Page 16.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter Ended April 30, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 Haven Avenue
Menlo Park, California 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(415) 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
--- ---
As of May 31, 1996, 10,674,858 shares of the Registrant's common stock were
outstanding.
-1-
LANDEC CORPORATION
FORM 10-Q For the Quarter Ended April 30, 1996
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial Statements
Item 1. a) Consolidated condensed balance sheets as of April 30, 1996 and October 31, 1995 3
b) Consolidated statements of operations for the three and six months ended April 30,
1996 and 1995 4
c) Consolidated statements of cash flows for the six months ended April 30, 1996 and 1995 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Part II. Other Information 14
Signature 15
Index to Exhibits 16
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
April 30, October 31,
1996 1995
---------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 20,181 $ 3,585
Short-term investments 19,025 1,964
Accounts receivable, net 63 53
Inventories 508 488
Prepaid expenses and other current assets 237 115
---------------- ---------------
Total Current Assets 40,014 $ 6,205
Property and equipment, net 987 993
Other assets 123 149
---------------- ---------------
$ 41,124 $ 7,347
================ ===============
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current Liabilities:
Convertible notes payable $ - $ -
Accounts payable 298 291
Accrued compensation 326 302
Other accrued liabilities 423 281
Current portion of capital lease obligations 213 239
Deferred revenue 304 129
---------------- ---------------
Total Current Liabilities 1,564 1,942
Non-current portion of capital lease obligations 448 558
Redeemable convertible preferred stock at accreted value - 31,276
Stockholder's Equity (Net Capital Deficiency):
Preferred stock - -
Common stock 68,130 536
Notes receivable from shareholders (12) (20)
Deferred compensation (351) (407)
Accumulated deficit (28,655) (26,538)
---------------- ---------------
Total Stockholders' Equity (Net Capital Deficiency) 39,112 (26,429)
---------------- ---------------
$ 41,124 $ 7,347
================ ===============
<FN>
See accompanying notes.
</FN>
-3-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share data)
Three Months Ended April 30, Six Months Ended April 30,
1996 1995 1996 1995
------------ ----------- ------------ ------------
Revenues:
Product sales $ 281 $ 198 $ 412 $ 441
License fees 600 450 600 650
Research and development revenues 394 196 682 389
------------ ----------- ------------ ------------
Total revenues 1,275 844 1,694 1,480
------------ ----------- ------------ ------------
Operating costs and expenses:
Cost of product sales 295 327 539 652
Research and development 945 921 1,898 1,776
Selling, general and administrative 733 538 1,224 1,045
------------ ----------- ------------ ------------
Total operating costs and expenses 1,973 1,786 3,661 3,473
------------ ----------- ------------ ------------
Operating loss (698) (942) (1,967) (1,993)
Interest income 439 63 506 133
Interest expense (8) (35) (54) (63)
------------ ----------- ------------ ------------
Net loss $ (267) $ (914) $ (1,515) $ (1,923)
============ =========== ============ ============
Net loss per share $ (0.03) $ (0.77) $ (0.32) $ (1.63)
============ =========== ============ ============
Shares used in computation of net loss per share 8,874 1,182 4,713 1,181
============ =========== ============ ============
Supplemental net loss per share $ (0.03) $ (0.13) $ (0.17) $ (0.27)
Shares used in computation of supplemental net
loss per share ============ =========== ============ ============
10,016 7,095 8,709 7,060
============ =========== ============ ============
<FN>
See accompanying notes.
</FN>
4
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended April 30,
1996 1995
------------ -----------
Cash flows from operating activities:
Net loss $ (1,515) $ (1,923)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 195 195
Loss on disposal of fixed assets -- 24
Amortization of deferred compensation 56 --
Changes in current assets and liabilities:
Accounts receivable (10) 69
Inventories (20) (206)
Prepaid expenses and other current assets (122) 27
Accounts payable 7 (74)
Accrued compensation 24 (1)
Other accrued liabilities 142 86
Deferred revenue 175 131
------------ -----------
Total adjustments 196 32
------------ -----------
Net cash used in operating activities (1,068) (1,672)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (189) (25)
Increase in other assets 26 (12)
Purchases of available-for-sale securities (20,108) (3,960)
Maturities of available-for-sale securities 3,000 5,300
------------ -----------
Net cash (used for) provided by investing activities: (17,271) 1,303
------------ -----------
Cash flows from financing activities:
Proceeds from sale of common stock 35,062 3
Proceeds from repayment of notes receivable 9 2
Payments of capital lease obligations (136) (86)
Proceeds from capital lease financing of prior year capital expenditures -- 138
Proceeds from issuance of convertible notes payable -- 700
------------ -----------
Net cash provided by financing activities 34,935 757
------------ -----------
Net increase in cash and cash equivalents 16,596 388
Cash and cash equivalents at beginning of period 3,585 2,411
------------ -----------
Cash and cash equivalents at end of period $ 20,181 $ 2,799
============ ===========
<FN>
See accompanying notes.
</FN>
5
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Landec
Corporation (the "Company" or "Landec") have been prepared in accordance with
generally accepted accounting principles 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 necessary to present fairly the financial
position, results of operations, and cash flows at April 30, 1996, and for all
periods presented, have been made. Although the Company 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 generally accepted
accounting principles have been condensed or omitted pursuant to 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 notes thereto included in the Company's Registration Statement on
Form S-1 (Registration Statement File. No. 33-80733) and related prospectus for
the Company's initial public offering of its Common Stock, which was completed
on February 15, 1996.
The results of operations for the three and six month periods ended
April 30, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ended October 31, 1996.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consisted of the following:
April 30 October 31,
1996 1995
---- ----
(in thousands)
Raw materials . . . . . . . . . . . . . . . . . . . $ 119 $ 123
Work in process . . . . . . . . . . . . . . . . . . 210 169
Finished goods . . . . . . . . . . . . . . . . . . 179 196
--- ---
$ 508 $ 488
=== ===
3. Net Loss Per Share
Except as noted below, historic net loss per share is computed using
the weighted average number of common shares outstanding. Common equivalent
shares are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options,
convertible notes payable and preferred stock) issued during the 12-month period
prior to the initial filing of the proposed offering at prices below the assumed
public offering price have been included in the calculation as if they were
outstanding for all periods through October 31, 1995 (using the treasury stock
method for stock options and initial public offering price of $11.00 per share).
As described above, the antidilutive effect of certain stock options is
included in the calculation of loss per share for the three month and six month
periods ended April 30, 1995, but is excluded from the calculation after that
date. Supplemental per share data is provided to show the calculation on a
consistent basis for the periods presented. It has been computed as described
above, but excludes the antidilutive effect of common equivalent shares from
stock options and warrants issued at prices substantially below the public
offering price during the 12-month period prior to the initial filing of the
public offering, and also gives retroactive effect from the date of issuance to
the conversion of preferred stock and promissory notes which automatically
converted to common shares upon the closing of the Company's initial public
offering.
6
4. Shareholders' Equity
On February 15, 1996 the Company completed an initial public offering
of 2,800,000 shares of common stock at a price of $12.00 per share. The net
proceeds to the Company from the initial public offering were approximately
$31.2 million, after deducting underwriting discounts and commissions.
Upon completion of the initial public offering all 6,674,415
outstanding shares of redeemable convertible preferred stock and $700,000 of
notes payable were automatically converted into 6,674,415 and 176,432 shares of
common stock, respectively.
In March 1996, the underwriters exercised their overallotment option to
purchase 420,000 shares of common stock for $12.00 per share. The Company
received an additional $4.7 million in offering proceeds, after deducting
underwriting discounts and commissions.
5. Reclassifications
Certain prior year balances have been reclassified to conform with
current year presentation.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto included in Part
I--Item 1 of this Form 10Q and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended October 31, 1995 contained in the
Company's Registration Statement on Form S-1 (Registration Statement No.
33-80733) and related prospectus for the Company's initial public offering of
its Common Stock, which was completed on February 15, 1996.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that 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 report and, in particular
the factors described below under "Additional Factors That May Affect Future
Results," and those mentioned in the Company's prospectus dated February 15,
1996, under "Risk Factors."
Overview
Since its inception in October 1986, the Company has been primarily
engaged in the research and development of its Intelimer technology and related
products. The Company launched its first product line, QuickCast splints and
casts, in April 1994. The Company launched its second product line, breathable
membranes for the fresh-cut produce packaging market, in September 1995. To
date, the Company has recognized $1,349,000 in total QuickCast product and
breathable membrane sales. The balance of revenues to date have resulted from
license fees, collaborative arrangements and Small Business Innovative Research
("SBIR") government grants. The Company has been unprofitable since its
inception and expects to incur additional losses, primarily due to the
continuation of its research and development activities and expenditures
necessary to further develop its manufacturing and marketing capabilities. From
inception through April 30, 1996, the Company's accumulated deficit was
$28,655,000.
Results of Operations
Total revenues were $1,275,000 for the second quarter of fiscal year
1996 compared to $844,000 for the second quarter of fiscal year 1995. Revenues
from product sales increased to $281,000 in the second quarter of fiscal year
1996 from $198,000 in the second quarter of fiscal year 1995 due primarily to
the commencement of sales of breathable membrane products in late 1995. Revenues
from license fees increased to $600,000 for the second quarter of fiscal year
1996 from $450,000 in the second quarter of fiscal year 1995. Revenues from
research and development funding increased to $394,000 for the second quarter of
fiscal year 1996 from $196,000 for the second quarter of fiscal year 1995. The
increase in license fees and research and development revenue was due primarily
to increased fees and funding under an expanded agreement with Nitta
Corporation. For the first six months of fiscal year 1996 total revenues were
$1,694,000 compared to $1,480,000 during the same period in 1995. Revenue from
product sales for the first six months in fiscal year 1996 decreased to $412,000
from $441,000 during the same period in 1995 due to a decrease in sales of
QuickCast products which more than offset the increase in sales of the
breathable membrane products. Revenue from license fees for the first six months
in fiscal year 1996 decreased to $600,000 from $650,000 during the same period
in 1995. Revenue from research and development funding for the first six months
in fiscal year 1996 increased to $682,000 from $389,000 during the same period
in 1995 due to an increase in research and development contracts in fiscal year
1996. In March of 1996, the Company agreed to amend their research and
development collaboration with BFGoodrich in the industrial latent curing area
by removing the exclusivity restrictions. This change could result in a
short-term reduction in research and development revenues that may be offset by
other contract revenue.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $295,000 for the second quarter of fiscal year 1996 compared
to $327,000 for the second quarter of fiscal year 1995, a decrease of 10%. Cost
of product sales as a percentage of product sales decreased to 105% in the
second quarter of fiscal year 1996 from 165% in the second quarter of fiscal
year 1995. Cost of product sales for the first six months of fiscal year 1996
was $539,000 compared to $652,000 during the same period in 1995, a decrease of
17%. Cost of
8
product sales as a percentage of product sales decreased to 131% for the first
six months of fiscal year 1996 from 148% during the same period in 1995. These
decreases in the cost of product sales was primarily the result of the ramp-up
and increased volume of the breathable membrane product sales. The Company
experienced negative gross margins for its products sales due to the early stage
of commercialization of the Company's products and related product start-up
costs. The Company anticipates that if revenues from product sales increases,
gross margins will improve as the fixed portion of cost of product sales will be
allocated over higher sales. Improvements in gross margins due to increased
products sales, if any, may be offset in the future if the Company increases the
fixed portion of cost of product sales. Due to the early stage of
commercialization, however, the Company is unable to predict with any certainty
future gross margins.
Research and development expenses were $945,000 for the second quarter
of fiscal year 1996 compared to $921,000 for the second quarter of fiscal year
1995, an increase of 3%. For the first six months of fiscal year 1996 research
and development expenses were $1,898,000 compared to $1,776,000 during the same
period in 1995, an increase of 7%. Research and development expenses increased
primarily as a result of increased development costs in the Company's latent
curing products. In future periods, the Company expects that spending for
research and development will continue to increase in absolute dollars, although
it may vary as a percentage of total revenues.
Selling, general and administrative expenses were $733,000 for the
second quarter of fiscal year 1996 compared to $538,000 for the second quarter
of fiscal year 1995, an increase of 36%. For the first six months of fiscal year
1996 selling, general and administrative expenses were $1,224,000 compared to
$1,045,000 during the same period in 1995, an increase of 17%. Selling, general
and administrative expenses increased primarily as a result of increased sales
and marketing expenses and the additional administrative costs associated with
supporting a public company. Selling, general and administrative expenses
consist primarily of sales and marketing expenses associated with the Company's
product sales, business development expenses, staff and administrative expenses.
Sales and marketing expenses increased to $378,000 for the second quarter of
fiscal year 1996 from $222,000 for the second quarter of fiscal year 1995. For
the first six months of fiscal year 1996 sales and marketing expenses increased
to $583,000 compared to $436,000 during the same period in 1995. The increase in
sales and marketing expenses was attributable to the costs to support the market
introduction of the breathable membrane products launched in late fiscal year
1995 and the cost of launching two new national U.S. distributors for the
QuickCast products in the second quarter of fiscal year 1996. The Company
expects that selling, general and administrative spending will increase in
future periods, although it may vary as a percentage of total revenues.
Net interest income for the second quarter and for the first six months
of fiscal year 1996 was $431,000 and $452,000, respectively, as compared to
$28,000 and $70,000 for the comparable periods in 1995. Net interest income
increased due to interest income from the initial public offering proceeds.
Liquidity and Capital Resources
As of April 30, 1996 the Company had $39,206,000 of cash, cash
equivalents and short-term investments. On February 15, 1996 the Company
completed an initial public offering of 2,800,000 shares of common stock at a
price of $12.00 per share. The net proceeds (after deducting underwriting
discounts) to the Company from the initial public offering were approximately
$31.2 million. In March 1996, the Company received an additional $4.7 million in
net proceeds resulting from the exercise of the underwriters' overallotment
option.
During the six months ended April 30, 1996 and 1995, Landec used cash
in operations of $1,068,000 and $1,672,000, respectively. This decrease in cash
used in operations was due primarily to the increase in interest income from the
initial public offering proceeds. The Company believes that existing cash, cash
equivalents and short-term investments, including the proceeds from the initial
public offering, will be sufficient to finance its operational and capital
requirements through at least fiscal 1997. The Company's future capital
requirements, however, depend on numerous factors, including the progress of its
research and development programs; the development of commercial scale
manufacturing capabilities; the development of marketing, sales and distribution
capabilities; the ability of the Company to maintain existing collaborative
arrangements and establish and maintain new collaborative arrangements; payments
received under research and development agreements; the costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; complying with regulatory requirements; competing technological and
market developments; the effectiveness of product commercialization activities
and arrangements; and other factors. If the Company's currently available funds
9
together with the internally generated cash flow, are not sufficient to satisfy
its financing needs, the Company would be required to seek additional funding
through other arrangements with collaborative partners, bank borrowings and
public or private sales of its securities. The Company has no credit facility or
other committed sources of capital. There can be no assurance that additional
funds, if required, will be available to the Company on favorable terms.
Additional Factors That May Affect Future Results
The Company desires to take advantage of the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that the following important factors, as well as
other factors, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
quarters to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company.
History of Operating Losses and Accumulated Deficit. The Company has
incurred net losses in each year since its inception, including net losses of
approximately $914,000 and $267,000 during the second quarter of fiscal year
1995 and 1996, respectively, and the Company's accumulated deficit as of April
30, 1996 totaled $28,655,000. The Company expects to incur additional losses for
the foreseeable future. The amount of future net losses and time required by the
Company to reach profitability are highly uncertain.
Early Commercialization; Dependence on New Products and Technologies;
Uncertainty of Market Acceptance. While the Company recently commenced marketing
certain of its products, it is in the early stage of product commercialization
and many of its potential products are in development. The Company believes that
its future success will depend in large part on its ability to develop and
market new products in its target markets and in new markets. In particular, the
Company expects that its ability to compete effectively with existing
industrial, food packaging, medical and agricultural companies will depend
substantially on successfully developing, commercializing, achieving market
acceptance of and reducing the cost of producing the Company's products. In
addition, commercial applications of the Company's temperature switch polymer
technology are relatively new and evolving. There can be no assurance that the
Company will be able to successfully develop, commercialize, achieve market
acceptance of or reduce the cost of producing the Company's products, or that
the Company's competitors will not develop competing technologies that are less
expensive or otherwise superior to those of the Company. There can be no
assurance that the Company will be able to develop and introduce new products
and technologies in a timely manner or that new products and technologies will
gain market acceptance. The failure to develop and market successfully new
products could have a material adverse effect on the Company's business,
operating results and financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners to
achieve market acceptance of the Company's products and technology. The extent
to which, and rate at which, market acceptance and penetration are achieved by
the Company's current and future products is a function of many variables
including, but not limited to, price, safety, efficacy, reliability, conversion
costs and marketing and sales efforts, as well as general economic conditions
affecting purchasing patterns. There can be no assurance that markets for the
Company's products will develop or that the Company's products and technology
will be accepted and adopted. The failure of the Company's products to achieve
market acceptance could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Collaborative Partners. The Company's strategy for the
development, clinical and field testing, manufacturing, commercialization and
marketing of certain of its current and future products includes entering into
various collaborations with corporate partners, licensees and others. To date,
the Company has entered into collaborative arrangements with The BFGoodrich
Company ("BFGoodrich") and Hitachi Chemical Co., Ltd. ("Hitachi Chemical") in
connection with its latent curing catalyst systems, Fresh Express Incorporated
("Fresh Express") in connection with its breathable membrane products, Nitta
Corporation ("Nitta") and Hitachi Chemical in connection with its adhesive
products and Smith & Nephew Medical Limited ("Smith & Nephew") in connection
with its QuickCast orthopedic products. The Company is dependent on its
corporate partners to develop, test, manufacture and/or market certain of its
products. Although the Company believes that its partners in these
collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the
10
amount and timing of resources to be devoted to these activities are not within
the control of the Company. A significant portion of Landec's revenues to date
have been derived from commercial research and development collaborations and
license agreements. In the second quarter of fiscal year 1996, development
funding from these collaborative arrangements comprised approximately 78% of the
Company's total revenues. Development funding and license fees from product
sales to BFGoodrich, Hitachi Chemical, Nitta and Smith & Nephew represented
approximately 69% of the Company's revenues for the second quarter of fiscal
year 1996. Moreover, research and development revenue and license fees from
Nitta accounted for a significant portion of the Company's total revenues for
the second quarter of fiscal year 1996. There can be no assurance that such
partners will perform their obligations as expected or that the Company will
derive any additional revenue from such arrangements. There can be no assurance
that the Company's partners will pay any additional option or license fees to
the Company or that they will develop and market any products under the
agreements. Moreover, certain of the collaborative agreements provide that they
may be terminated at the discretion of the corporate partner, and certain of the
collaborative agreements provide for termination under certain circumstances.
In March of 1996, the Company agreed to amend their research and development
collaboration with BFGoodrich in the industrial latent curing area by removing
the exclusivity restrictions. This amendment will allow Landec to explore direct
distribution and other licensing and product development opportunities while
continuing the collaboration with BFGoodrich on a non-exclusive basis. This
change could result in a short-term reduction in research and development
revenues.
There can be no assurance that the partners will not pursue existing or
alternative technologies in preference to the Company's technology. Furthermore,
there can be no assurance that the Company will be able to negotiate additional
collaborative arrangements in the future on acceptable terms, if at all, or that
such collaborative arrangements will be successful. To the extent that the
Company chooses not to or is unable to establish such arrangements, it would
experience increased capital requirements to undertake research, development,
manufacture, marketing or sale of its current and future products in such
markets. There can be no assurance that the Company will be able to
independently develop, manufacture, market, or sell its current and future
products in the absence of such collaborative agreements.
Competition and Technological Change. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large industrial, food packaging,
medical and agricultural companies is expected to be intense. In addition, the
nature of the Company's collaborative arrangements may result in its corporate
partners becoming competitors of the Company. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company, and may have substantially greater
experience in conducting clinical and field trials, obtaining regulatory
approvals and manufacturing and marketing commercial products. There can be no
assurance that these competitors will not succeed in developing alternative
technologies and products that are more effective, easier to use or less
expensive than those which have been or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive.
Limited Manufacturing Experience; Dependence on Third Parties. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. There can be no assurance that the Company will be able to
achieve this. The Company has experienced negative gross margins for its product
sales to date. The Company intends to build or acquire large-scale polymer
manufacturing and formulations facilities by 1998. Production in
commercial-scale quantities may involve technical challenges for the Company.
Establishing its own manufacturing capabilities would require significant
scale-up expenses and additions to facilities and personnel. The Company may
also consider seeking collaborative arrangements with other companies to
manufacture certain of its products. If the Company is dependent upon third
parties for the manufacture of its products, then the Company's profit margins
and its ability to develop and deliver such products on a timely basis may be
adversely affected. Moreover, there can be no assurance that such parties will
adequately perform and any failures by third parties may delay the submission of
products for regulatory approval, impair the Company's ability to deliver
products on a timely basis, or otherwise impair the Company's competitive
position. The occurrence of any of these factors could have a material adverse
effect on the Company's business, operating results and financial condition. The
manufacture of the Company's products will be subject to periodic inspection by
regulatory authorities. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals on a timely basis or at all. Delays in
receipt
11
of or failure to receive such approvals or loss of previously received approvals
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Single Source Suppliers. Many of the raw materials used
in manufacturing certain of the Company's products are currently purchased from
a single source, including certain monomers used to synthesize Intelimer
polymers and substrate materials for the Company's breathable membrane products.
Upon manufacturing scale-up, the Company may enter into alternative supply
arrangements. Although to date the Company has not experienced difficulty
acquiring materials for the manufacture of its products, no assurance can be
given that interruptions in supplies will not occur in the future, that the
Company will be able to obtain substitute vendors, or that the Company will be
able to procure comparable materials at similar prices and terms within a
reasonable time. Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture its products and, consequently,
could materially and adversely affect the Company's business, operating results
and financial condition.
Patents and Proprietary Rights. The Company's success depends in large
part on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that any pending patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technology. The Company has received, and may in the future receive,
from third parties, including some of its competitors, notices claiming that it
is infringing third party patents or other proprietary rights. For example, the
Company recently received a letter alleging that the Company's breathable
membrane product infringes patents of another party. The Company has
investigated this matter and believes that its breathable membrane product does
not infringe the specified patents of such party. The Company has received an
opinion of patent counsel that the breathable membrane product does not infringe
any valid claims of such patents. If the Company were determined to be
infringing any third-party patent, the Company could be required to pay damages,
alter its products or processes, obtain licenses or cease certain activities. If
the Company is required to obtain any licenses, there can be no assurance that
the Company will be able to do so on commercially favorable terms, if at all.
Litigation, which could result in substantial costs to and diversion of effort
by the Company, may also be necessary to enforce any patents issued or licensed
to the Company or to determine the scope and validity of third-party proprietary
rights. Any such litigation or interference proceeding, regardless of outcome,
could be expensive and time consuming and could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology and,
consequently, could have a material adverse effect on the Company's business,
operating results and financial condition.
Government Regulation. The Company's products and operations are
subject to substantial regulation in the United States and foreign countries.
Although Landec believes that it will be able to comply with all applicable
regulations regarding the manufacture and sale of its products and polymer
materials, such regulations are always subject to change and depend heavily on
administrative interpretations and the country in which the products are sold.
There can be no assurance that future changes in regulations or interpretations
relating to such matters as safe working conditions, laboratory and
manufacturing practices, environmental controls, and disposal of hazardous or
potentially hazardous substances will not adversely effect the Company's
business. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations in the future,
or that such laws or regulations will not have a material adverse effect on the
Company's business, operating results and financial condition. Failure to comply
with the applicable regulatory requirements can, among other things, result in
fines, injunctions, civil penalties, suspensions or withdrawal of regulatory
approvals, product recalls, product seizures, including cessation of
manufacturing and sales, operating restrictions and criminal prosecution.
Limited Sales or Marketing Experience. The Company has only limited
experience marketing and selling its products. While the Company intends to
distribute certain of its products through its corporate partners and other
distributors, the Company intends to sell certain other products through a
direct sales force. Establishing sufficient marketing and sales capability may
require significant resources. There can be no assurance that the Company will
be able to recruit and retain skilled sales management, direct salespersons or
distributors, or that the Company's sales efforts will be successful. The
Company is currently in the process of changing its distribution
12
approach with respect to the QuickCast product line in the United States to
include several national distributors. To the extent that the Company enters
into distribution arrangements for the sale of its products, the Company will be
dependent on the efforts of third parties. There can be no assurance that such
efforts will be successful.
International Operations and Sales. In the second quarter of the fiscal
year 1995 and 1996, approximately 66% of the Company's total revenues were
derived from product sales to and collaborative agreements with international
customers, and the Company expects that international revenues will continue to
account for a significant portion of its total revenues. A number of risks are
inherent in international transactions. International sales and operations may
be limited or disrupted by the regulatory approval process, government controls,
export license requirements, political instability, price controls, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies have or may establish
product standards different from those in the United States, and any inability
to obtain foreign regulatory approvals on a timely basis could have an adverse
effect on the Company's international business and its financial condition and
results of operations. While the Company's foreign sales are priced in dollars,
fluctuations in currency exchange rates may reduce the demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries to which the products are sold. There can be no assurance that
regulatory, geopolitical and other factors will not adversely impact the
Company's operations in the future or require the Company to modify its current
business practices.
Quarterly Fluctuations in Operating Results. The Company's results of
operations have varied significantly from quarter to quarter. Quarterly
operating results will depend upon several factors, including the timing and
amount of expenses associated with expanding the Company's operations, the
timing of collaborative agreements with, and performance of, potential partners,
the timing of regulatory approvals and new product introductions, the mix
between pilot production of new products and full-scale manufacturing of
existing products and the mix between domestic and export sales. In addition,
the Company cannot predict rates of licensing fees and royalties received from
its partners or ordering rates by its distributors, some of which place
infrequent stocking orders, while others order at regular intervals. As a result
of these and other factors, the Company expects to continue to experience
significant fluctuations in quarterly operating results, and there can be no
assurance that the Company will become or remain consistently profitable in the
future.
Product Liability Exposure and Availability of Insurance. The testing,
manufacturing, marketing, and sale of the products being developed by the
Company involve an inherent risk of allegations of product liability. While no
product liability claims have been made against the Company to date, if any such
claims were made and adverse judgments obtained, they could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has taken and intends to continue to take what
it believes are appropriate precautions to minimize exposure to product
liability claims, there can be no assurance that it will avoid significant
liability. The Company currently maintains product liability insurance in the
amount of $1.0 million per claim with an annual aggregate limit of $2.0 million.
There can be no assurance that such coverage is adequate or will continue to be
available at an acceptable cost, if at all. A product liability claim, product
recall or other claim with respect to uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on the Company's
business, operating results and financial condition.
No Prior Public Market; Possible Volatility of Stock Price. Factors
such as announcements of technological innovations, the attainment of (or
failure to attain) milestones in the commercialization of the Company's
technology, new products, new patents or changes in existing patents, or
development of new, collaborative arrangements by the Company, its competitors
or other parties, as well as government regulations, investor perception of the
Company, fluctuations in the Company's operating results and general market
conditions in the industry may cause the market price of the Company's Common
Stock to fluctuate significantly. In addition, the stock market in general has
recently experienced extreme price and volume fluctuations, which have
particularly affected the market prices of technology companies and which have
been unrelated to the operating performance of such companies. These broad
fluctuations may adversely effect the market price of the Company's Common
Stock.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.12+ Agreement dated February 26, 1996 between the
Registrant and Nitta Corporation.
10.13 Letter dated March 29, 1996 regarding the Agreement
dated as of July 29, 1995 between the Registrant and
BFGoodrich Company.
11.1 Computation of loss per share (see Note 1 to Financial
Information in Part I of this Form 10-Q).
(b) Reports on Form 8-K.
None.
+CONFIDENTIAL TREATMENT REQUESTED.
14
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/ JOY T. FRY
-----------------------------------------------
Joy T. Fry
Vice President, Finance and Administration
and Chief Financial Officer
(Duly Authorized and Principal Financial and
Accounting Officer)
Date: June 7, 1996
15
LANDEC CORPORATION
INDEX TO EXHIBITS
Exhibit Sequentially Numbered
Number Exhibit Page
10.12+ Agreement dated February 26, 1996 between the Registrant 17
and Nitta Corporation.
10.13 Letter dated March 29, 1996 regarding the Agreement dated 31
as of July 29, 1995 between the Registrant and BFGoodrich Company.
11.1 Statement Regarding Computation of Net Loss Per Share 32
27 Financial Data Schedule 33
+CONFIDENTIAL TREATMENT REQUESTED.
16