LFCR

Business Context and Reporting Period

This Form 10-Q covers the fiscal quarter and nine months ended February 27, 2011, for Landec Corporation (Note: The input metadata referenced "LIFECORE BIOMEDICAL, INC.", but the filing text identifies the registrant as Landec Corporation, which acquired Lifecore Biomedical in April 2010). Landec operates four core business segments: Food Products Technology (Apio), Export, HA-based Biomaterials (Lifecore), and Technology Licensing. The company designs, develops, and sells polymer products for food, agricultural, and medical applications.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 26% for the quarter and 16% for the nine-month period compared to the prior year. This growth was primarily driven by the inclusion of the HA-based Biomaterials segment (Lifecore), which contributed $12.2 million in quarterly revenue, and a 43% increase in Export sales volume.
• Profitability: Gross profit increased 54% for the quarter and 48% for the nine-month period. However, the Food Products Technology segment saw a 47% decrease in gross profit for the quarter due to produce shortages caused by cold and wet weather in California.
• Operating Expenses: Research and Development expenses increased 128% for the quarter and 135% for the nine-month period, largely due to the inclusion of Lifecore's R&D costs and increased scientific staff in Technology Licensing. SG&A expenses increased 47% for the quarter, driven by Lifecore integration costs and higher accounting/tax fees.
• Liquidity: Cash and cash equivalents decreased by $21.1 million over the nine-month period, primarily due to investing activities including a $15 million investment in Windset Holdings and $4.9 million in capital expenditures.

Guidance, Outlook, and Risks

• Outlook: Management believes cash from operations and existing liquid assets will be sufficient to finance operational and capital requirements for at least the next twelve months. The company expects a limited number of customers to continue accounting for a significant portion of net revenues.
• Contingent Consideration: Landec may be required to pay up to an additional $10.0 million in earnout payments to former Lifecore shareholders if specific revenue targets are met in calendar years 2011 and 2012. Management projects the entire earnout will be paid in the third quarter of fiscal 2012.
• Key Risks:
  • Weather Dependence: The Food Products Technology segment is highly susceptible to weather conditions affecting produce supply and pricing.
  • Customer Concentration: The top five customers accounted for 45% of revenues for the nine months ended February 27, 2011, with Costco Wholesale Corp. alone accounting for 16%.
  • Goodwill Impairment: Goodwill associated with the Technology Licensing unit ($4.8 million) could be fully impaired if Monsanto does not exercise its option to purchase exclusive field rights by December 2011.
  • Debt Covenants: The company must maintain compliance with financial covenants related to its $20 million credit facility with Wells Fargo, including minimum net income and quick ratio requirements.

Investor Verification Checklist

• Verify the status of the $10 million Lifecore earnout and the likelihood of meeting the 2011/2012 revenue targets.
• Monitor the Monsanto agreement expiration in December 2011 to assess the risk of goodwill impairment in the Technology Licensing segment.
• Review the impact of weather patterns on the Apio Food Products Technology segment's supply chain and gross margins.
• Assess the performance and valuation of the $15 million investment in Windset Holdings, which is accounted for at fair value.
• Confirm continued compliance with Wells Fargo debt covenants, specifically the minimum net income requirements for the Lifecore subsidiary.