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 July 31, 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 August 31, 1996, 10,672,398 shares of the Registrant's
common stock were outstanding.
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LANDEC CORPORATION
FORM 10-Q For the Quarter Ended July 31, 1996
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements
a) Consolidated condensed balance sheets as of July 31, 1996 and October 31, 1995 3
b) Consolidated statements of operations for the three and nine months ended July 31,
1996 and 1995 4
c) Consolidated statements of cash flows for the nine months ended July 31, 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 7
Part II. Other Information 14
Signature 15
Index to Exhibits 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
July 31, October 31,
1996 1995
---------- ----------
Assets
Current Assets:
Cash and cash equivalents $ 13,565 $ 3,585
Short-term investments 24,066 1,964
Accounts receivable, net 70 53
Inventories 626 488
Prepaid expenses and other current assets 111 115
---------- ----------
Total Current Assets 38,438 6,205
Property and equipment, net 923 993
Other assets 299 149
---------- ----------
$ 39,660 $ 7,347
========== ==========
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current Liabilities:
Convertible notes payable $ - $ 700
Accounts payable 299 291
Accrued compensation 277 302
Other accrued liabilities 197 281
Current portion of capital lease obligations 221 239
Deferred revenue 104 129
---------- ----------
Total Current Liabilities 1,098 1,942
Non-current portion of capital lease obligations 390 558
Redeemable convertible preferred stock at accreted value - 31,276
Stockholder's Equity (Net Capital Deficiency):
Preferred stock - -
Common stock 68,188 536
Notes receivable from shareholders (12) (20)
Deferred compensation (339) (407)
Accumulated deficit (29,665) (26,538)
---------- ----------
Total Stockholders' Equity (Net Capital Deficiency) 38,172 (26,429)
---------- ----------
$ 39,660 $ 7,347
========== ==========
<FN>
See accompanying notes.
</FN>
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LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended July 31, Nine Months Ended July 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues:
Product sales $ 260 $ 44 $ 672 $ 485
License fees -- -- 600 650
Research and development revenues 221 131 903 520
----------- ----------- ----------- -----------
Total revenues 481 175 2,175 1,655
Operating costs and expenses:
Cost of product sales 233 174 772 826
Research and development 973 1,027 2,871 2,803
Selling, general and administrative 784 586 2,008 1,631
----------- ----------- ----------- -----------
Total operating costs and expenses 1,990 1,787 5,651 5,260
----------- ----------- ----------- -----------
Operating loss (1,509) (1,612) (3,476) (3,605)
Interest income 530 59 1,036 192
Interest expense (23) (45) (77) (108)
----------- ----------- ----------- -----------
Net loss $ (1,002) $ (1,598) $ (2,517) $ (3,521)
=========== =========== =========== ===========
Net loss per share $ (0.09) $ (1.35) $ (0.38) $ (2.98)
=========== =========== =========== ===========
Shares used in computation of net loss 10,668 1,184 6,698 1,182
per share =========== =========== =========== ===========
Supplemental net loss per share $ (0.09) $ (0.22) $ (0.27) $ (0.50)
=========== =========== =========== ===========
Shares used in computation of
supplemental net loss per share 10,668 7,205 9,362 7,108
=========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
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LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended July 31,
1996 1995
---------- ----------
Cash flows from operating activities:
Net loss $ (2,517) $ (3,521)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 296 287
Loss on disposal of fixed assets -- 27
Amortization of deferred compensation 84 --
Changes in current assets and liabilities:
Accounts receivable (17) 182
Inventories (138) (220)
Prepaid expenses and other current assets 4 3
Accounts payable 8 (107)
Accrued compensation (25) (38)
Other accrued liabilities (84) 171
Deferred revenue (25) 2,250
---------- ----------
Total adjustments 103 2,555
---------- ----------
Net cash used in operating activities (2,414) (966)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (226) (70)
Increase in other assets (150) (12)
Purchases of available-for-sale securities (25,155) (4,479)
Maturities of available-for-sale securities 3,000 5,300
---------- ----------
Net cash (used for) provided by investing activities: (22,531) 739
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock 35,104 3
Proceeds from repayment of notes receivable 8 3
Payments of capital lease obligations (187) (135)
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 34,925 709
---------- ----------
Net increase in cash and cash equivalents 9,980 482
Cash and cash equivalents at beginning of period 3,585 2,411
---------- ----------
Cash and cash equivalents at end of period $ 13,565 $ 2,893
========== =========
<FN>
See accompanying notes.
</FN>
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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 July 31, 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 nine month periods ended
July 31, 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:
July 31, October 31,
1996 1995
---- ----
(in thousands)
Raw materials . . . . . . . . . . . . $ 135 $ 123
Work in process . . . . . . . . . . . 228 169
Finished goods . . . . . . . . . . . 263 196
--- ---
$ 626 $ 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 expected 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 nine month
periods ended July 31, 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.
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4. Reclassifications
Certain prior year balances have been reclassified to conform with
current year presentation.
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 10-Q 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(R) technology and
related products. The Company launched its first product line, QuickCast(TM)
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 $1,609,000 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 July 31, 1996, the Company's accumulated deficit was
$29,665,000.
Results of Operations
Total revenues were $481,000 for the third quarter of fiscal year 1996
compared to $175,000 for the third quarter of fiscal year 1995. Revenues from
product sales increased to $260,000 in the third quarter of fiscal year 1996
from $44,000 in the third quarter of fiscal year 1995 due to higher sales of
QuickCast splints and casts and the commencement of sales of breathable membrane
products in late 1995. Revenues from research and development funding increased
to $221,000 for the third quarter of fiscal year 1996 from $131,000 for the
third quarter of fiscal year 1995. The increase in research and development
revenue was due primarily to an increase in research and development contracts.
For the first nine months of fiscal year 1996 total revenues were $2,175,000
compared to $1,655,000 during the same period in 1995. Revenue from product
sales for the first nine months in fiscal year 1996 increased to $672,000 from
$485,000 during the same period in 1995 due primarily to the sales of the
breathable membrane products. Revenue from license fees for the first nine
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 nine
months in fiscal year 1996 increased to $903,000 from $520,000 during the same
period in 1995 due to an increase in research and development contracts in
fiscal year 1996. While the Company is making good progress on its development
programs, management anticipates total revenues for fiscal 1996 will be below
those of fiscal 1995 primarily due to the timing of anticipated contract revenue
that will likely materialize beyond the Company's fourth quarter. Also impacting
short term revenue is the decision by Fresh Express Incorporated ("Fresh
Express") to suspend orders of Landec's breathable membranes for its fresh-cut
broccoli and cauliflower packaging primarily due to cost issues. The Company is
working with Fresh Express to address these cost issues. In the meantime, the
Company is continuing other development projects with Fresh Express and other
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potential customers, as well as making progress with Printpack, Inc.
("Printpack"), with whom the Company announced a joint development agreement
earlier this year.
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $233,000 for the third quarter of fiscal year 1996 compared to
$174,000 for the third quarter of fiscal year 1995, an increase of 34%. Cost of
product sales as a percentage of product sales decreased to 90% in the third
quarter of fiscal year 1996 from 395% in the third quarter of fiscal year 1995.
Cost of product sales for the first nine months of fiscal year 1996 was $772,000
compared to $826,000 during the same period in 1995, a decrease of 7%. Cost of
product sales as a percentage of product sales decreased to 115% for the first
nine months of fiscal year 1996 from 170% during the same period in 1995. These
decreases in the cost of product sales were primarily the result of the
increased volume of the breathable membrane product sales and the increased
labor efficiencies in both the QuickCast and breathable membrane product lines.
The Company experienced negative gross margins for its product 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 $973,000 for the third quarter
of fiscal year 1996 compared to $1,027,000 for the third quarter of fiscal year
1995, a decrease of 5%. Research and development expenses decreased primarily in
the QuickCast product line. For the first nine months of fiscal year 1996
research and development expenses were $2,871,000 compared to $2,803,000 during
the same period in 1995, an increase of 2%. Research and development expenses
increased for the first nine months of fiscal 1996 primarily as a result of
increased development costs in the Company's Intelimer Polymer Additive
products. In future periods, however, 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 $784,000 for the
third quarter of fiscal year 1996 compared to $586,000 for the third quarter of
fiscal year 1995, an increase of 34%. For the first nine months of fiscal year
1996 selling, general and administrative expenses were $2,008,000 compared to
$1,631,000 during the same period in 1995, an increase of 23%. 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 $311,000 for the third quarter of
fiscal year 1996 from $224,000 for the third quarter of fiscal year 1995, an
increase of 39%. For the first nine months of fiscal year 1996 sales and
marketing expenses increased to $894,000 compared to $660,000 during the same
period in 1995, an increase of 35%. 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 during
the second and third quarter's 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 third quarter and for the first nine months
of fiscal year 1996 was $507,000 and $959,000, respectively, as compared to
$14,000 and $84,000 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 July 31, 1996 the Company had $37,631,000 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.
-8-
During the nine months ended July 31, 1996 and 1995, Landec used cash
in operations of $2,414,000 and $966,000, respectively. This increase in cash
used in operations in fiscal 1996 as compared to fiscal 1995 was primarily due
to the receipt of $2,125,000 in license fees and research and development
funding in the third quarter of 1995. Revenue was not recognized for these
license fees and research and development funding until the fourth quarter of
fiscal year 1995. Partially offsetting the increase in cash used in operations
was the increase in interest income received from the investment of the initial
public offering proceeds in 1996. 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
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 $1,598,000 and $1,002,000 during the third quarter of fiscal year
1995 and 1996, respectively, and the Company's accumulated deficit as of July
31, 1996 totaled $29,665,000. 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
-9-
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 Hitachi Chemical
Co., Ltd. ("Hitachi Chemical') and The BFGoodrich Company ("BFGoodrich") in
connection with its Intelimer Polymer Additive systems, Fresh Express and
Printpack in connection with its breathable membrane products, Nitta Corporation
("Nitta") and Hitachi Chemical in connection with its industrial adhesive
products and Smith & Nephew Medical Limited ("Smith & Nephew"), Physicians Sales
and Services, Inc. ("Physicians Sales and Services") and North Coast Medical,
Inc. ("North Coast Medical") 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 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 third quarter of fiscal year 1996, development funding from these
collaborative arrangements comprised approximately 46% of the Company's total
revenues. Development funding and license fees from product sales to Hitachi
Chemical, BFGoodrich, Nitta and Smith & Nephew represented approximately 45% of
the Company's revenues for the third quarter of fiscal year 1996. Moreover,
research and development revenue from Hitachi Chemical and Nitta each accounted
for more than 10% of the Company's total revenues for the third 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 its research and development
collaboration with BFGoodrich in the Intelimer Polymer Additives area by
removing certain 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.
In August 1996, Fresh Express informed the Company that it had decided to
suspend orders of Landec's breathable membranes for Fresh Express' fresh-cut
broccoli and cauliflower packaging primarily due to cost issues. The Company is
working with Fresh Express and other potential customers to address these cost
issues, however there can be no assurance that Fresh Express will recommence
orders of Landec's breathable membranes or that other potential customers will
order such products.
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,
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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 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 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 received
within the past year 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
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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 approach with
respect to the QuickCast product line in the United States to include several
national distributors. The Company has entered into distribution agreements with
Physicians Sales and Services, and North Coast Medical, and expects to enter
into additional distribution agreements. Each of the Company's distributors can
cease marketing the Company's products with limited notice and with little or no
penalty. There can be no assurance the Company's distributors will continue to
offer the Company's products or that the Company will be able to recruit
additional or replacement distributors. The loss of one or more of the Company's
major distributors would have a material adverse effect on the Company's
business, operating results and financial condition.
International Operations and Sales. In the third quarter of the fiscal
year 1995 and 1996, approximately 16% and 52%, respectively, 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
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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
minimum amount of $2.0 million per occurrence with a minimum 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.
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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.
11.1 Computation of loss per share (see Note 3 to Financial
Information in Part I of this Form 10-Q).
(b) Reports on Form 8-K.
None.
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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: September 13, 1996
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LANDEC CORPORATION
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
- ------- ------ -------------
11.1 Statement Regarding Computation of Net Loss Per Share 17
27 Financial Data Schedule
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