Lifecore Biomedical Inc (LFCR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec fourth quarter and fiscal year 2011 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions.) As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Mr.

Gary Steele, Chairman and CEO of Landec Corporation.

Please go ahead, sir.

Good morning and thank you for joining Landec's year-end and fourth quarter fiscal year 2011 earnings call.

I have with me today Greg Skinner, our Chief Financial Officer.

This call is being webcast by Thomson Reuters and can be accessed at Landec's website at www.landec.com on the Investor Relations page.

The webcast is available for 30 days through August 26, 2011.

A replay of the teleconference will be available for one week, until midnight Eastern Time Wednesday, August 3, 2011, by dialing 888-266-2081 or 703-925-2533.

The access code for the replay is 1540771.

During today's call, we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially.

These risks are outlined in our filings with the Securities and Exchange Commission, including the Company's Form 10-K for fiscal year 2010.

For our fiscal year 2011, which ended in May, revenues grew 16% to $276.7 million, and adjusted EPS grew to $0.33 per share prior to a one-time $4.8 million non-cash, non-tax-deductible impairment charge for the write-off of Landec Ag's goodwill.

Landec generated $14.5 million in cash from the operations this past year, up 93% from our prior fiscal year.

Cash balances remained strong at $36.3 million.

Landec's achievement and results in 2011 fiscal year are based on substantial progress in each of our businesses.

Our acquisition of Lifecore exceeded our expectations in the first year.

In addition to the successful integration of our Lifecore Biomedical business with Landec, Lifecore demonstrated substantial growth in revenues, from $20 million prior to the acquisition to $32.5 million, representing a 63% increase in sales for our fiscal year.

Lifecore EBITDA grew from $2.9 million prior to our acquisition to $9.9 million this past fiscal year, reflecting substantial leveraging of Lifecore's capacity utilization as we increased unit volume sales to customers.

We had expected $7.7 million to $8 million in EBITDA, but Lifecore was able to generate $9.9 million in EBITDA and achieve the sales growth, as I mentioned, of over 60%.

Revenues in our Apio food business increased by 3%, or by $7.3 million, in spite of quite difficult consumer economic conditions in the food sector and in spite of terrible weather in major produce-growing regions.

Extremely poor weather in California and Arizona adversely affected our ability to source produce for our value-added specialty packaging food business, resulting in approximately $5 million in weather-related variances.

In spite of those difficult conditions, we continued to serve our customers well during this time period.

In the fourth quarter, the industry fresh-picked category grew 3%, which was the first time the category has shown any growth in several years.

Also in the fourth quarter, we resumed sales growth in Apio's value-added vegetable business, and we grew revenues 9% in the quarter.

During fiscal year 2011, we also continued to work closely with Chiquita to expand the Chiquita to Go banana program and to launch the Fresh & Ready avocado product line, with both programs utilizing our BreatheWay proprietary packaging technology.

Both programs continue to expand.

The newer avocado program is delivering fully ripened and ready-to-eat avocados to consumers.

And at the same time, the program is delivering to participating retailers good revenue growth in a new category for Chiquita, providing double-digit sales increases compared to conventional avocados.

In our third fiscal quarter, we announced the $15 million equity investment in Windset Farms.

Apio, our food subsidiary, had an existing exclusive license agreement with Windset and views the equity investment as a continuation of our ongoing strategic partnership in the fresh produce market.

Apio views Windset Farms as the most advanced hydroponic greenhouse producer in North America, where the demand for hydroponically grown produce is rising rapidly.

The hydroponic process, just as an aside, uses no soil and only a fraction of the water required in field production.

Furthermore, the process results in higher yields per acre, and it is not burdened with traditional weather-related risks.

In our existing license agreement, Windset Farms licensed from us the exclusive rights to Apio's BreatheWay packaging technology for use with their hydroponic, greenhouse-grown cucumbers, tomatoes, and peppers.

As part of our strategic equity investment in Windset, we also received a 7.5% annual dividend on our investment.

And quarterly, we will recognize 20.1% of the change in their fair market value.

By example, from the closing date of February 15, 2011, through the end of fiscal year 2011, which was this past May, Landec recognized $328,000 in dividends and $662,000 in income from the increase in the fair market value of its investment in Windset.

Windset has purchased 222 acres of land in Santa Maria Valley, and these properties are near Apio's operations, and we're constructing 64 acres of indoor vegetable production for numerous varieties of hydroponically grown tomatoes.

And this project is to be completed this fall.

In this synergistic relationship, Windset uses our packaging technology, we have access to their high-quality produce product lines grown hydroponically, we earn a 7.5% dividend, and we benefit from the change in the fair value of Windset, which we expect to further increase as they complete their Santa Maria greenhouse project early this fall.

Also in fiscal year 2011, although later than we anticipated, we have advanced our work with Monsanto to the beginning stages of biological trials.

More on this later.

During fiscal year 2011, the use of Landec's Intelimer additive materials technology for personal care cosmetic products advanced and has now been formulated into over 50 products.

And notably during fiscal year 2011, we generated cash flow from operations of $14.5 million, up 93% from the prior year, and we have maintained a strong balance sheet of over $36 million.

Now I'll turn the call over to Greg, who will fill us in on the specifics of our financial results.

Thank you, Gary, and good morning, everyone.

In yesterday's news release, Landec reported that for the fourth quarter fiscal year 2011, revenues increased 17% to $68.1 million versus revenues of $58.2 million for the fourth quarter of last year.

The increase in total revenues during this year's fourth quarter compared to last year's fourth quarter was primarily due to, first, a $4.1 million increase in Lifecore revenues, which was acquired on April 30, 2010; second, a $3.9 million, or 9%, increase in revenues from Apio's value-added vegetable business; and third, a $1.7 million, or 15%, increase in Apio's export revenues.

For the fourth quarter of fiscal year 2011, Landec's net loss was $2.7 million, or $0.10 per share, compared to a loss of $1.5 million, or $0.06 per share, for the fourth quarter of last year.

The increase in the net loss during the fourth quarter of fiscal year 2011 compared to the fourth quarter last year was due to a $4.8 million impairment charge for the write-off of Landec Ag's goodwill and a $455,000 pre-tax loss at Lifecore due to the timing of shipments between the third and fourth quarters this past year.

These increases in the net loss were partially offset by the absence of the $3.7 million of non-recurring impairment and acquisition-related charges recorded during the fourth quarter of last year and from a $363,000 increase in pre-tax income for Apio.

Excluding the impairment charge during the fourth quarter of fiscal year 2011 and the non-recurring charges during the fourth quarter of fiscal year 2010, adjusted earnings per share for the fourth quarter of fiscal years 2011 and 2010 would have been $0.08 and $0.09, respectively.

Landec Ag's goodwill of $4.8 million had been generated in connection with the sale of Fielder's Choice Direct to Monsanto and had resulted from Landec's purchase of the remaining shares of Landec Ag's common stock still owned by employees and not already owned by Landec.

In the subsequent joint program with Monsanto, while there's been good technical progress on the controlled release of actives from seed-supplied coating, it became apparent during the fourth quarter that conclusive biological test results are probably not achievable in the four months left in the agreement before Monsanto has to make its purchase option decision.

The uncertainty related to whether Monsanto will exercise its purchase option for the exclusive license deal to technology, and the fact that Landec Ag is projected to be unprofitable for several years absent any ongoing relationship with Monsanto, these were the main factors contributing to the decrease in the estimated fair value of the Landec Ag business, and thus full impairment of the related goodwill.

For fiscal year 2011, revenues increased 16% to $276.7 million, versus revenues of $238.2 million for the same period a year ago.

The increase in revenues during fiscal year 2011 compared to fiscal year 2010 was due to a $31 million increase in revenues from Lifecore and a $7.4 million increase in Apio revenues.

For fiscal year 2011, net income was basically flat with last year, at $3.9 million, or $0.15 per diluted share.

There were several offsetting items which resulted in net income being virtually unchanged from last year.

Items that decreased net income were, first, the $4.8 million goodwill impairment charge; second, a net decrease in pre-tax income of $3 million at Apio, primarily due to weather-related produce sourcing issues in Apio's value-added vegetable business; third, a $2.9 million increase in technology licensing and corporate operating expenses due to several factors, including, first, a full year of Landec Ag operating expenses compared to only 0.5 year in fiscal year 2010, as operating expenses for the first half of fiscal year 2010 were reimbursed by Monsanto; second, an increase in stock-based compensation expense; third, an increase in R&D expenses due to the hiring of additional scientific staff; and fourth, an increase in accounting and tax service fees.

Items that increased net income were Lifecore's net income of $7.3 million and the absence of $3.7 million of non-recurring charges which negatively impacted net income in fiscal year 2010.

Excluding the $4.8 million impairment charge during fiscal year 2011 and the $3.7 million of non-recurring charges in fiscal year 2010, adjusted net income per share for fiscal years 2011 and 2010 would have been $0.33 and $0.29, respectively.

For fiscal year 2011, capital expenditures were $6.7 million, and depreciation and amortization was $5.3 million.

Gary?

With Lifecore Biomedical now in place, Landec is focused on three core businesses.

The first we describe as our bio-agricultural applications business, encompassing our food packaging and processing business and our seed coating partnership.

The second business for us is our biomedical applications business, encompassing the medical devices and materials that we make at Lifecore as well as our personal care additives and our drug delivery program.

The third area encompasses other licensing activities for applications such as specialty adhesives and functional coatings.

Let me say a few words about important and existing partner programs.

We continue to support our licensing partners such as Chiquita with the rollout of its Fresh & Ready to Eat avocado program.

Chiquita has demonstrated, with retail and food service customers, that sales volume goes up and product shrink goes down for avocados packaged with our BreatheWay technology.

We continue our exclusive program with Monsanto, and Monsanto has just now begun important biological studies.

Both parties are committing sizable levels of technical resources to the joint program, especially given the December 1, 2011, contractual decision date ahead of us.

As Greg mentioned, we just don't know how these biological results will turn out or what decision Monsanto will make.

Landec and Monsanto may decide, before the current agreement terminates on December 1, 2011, to extend the purchase option date for Monsanto in order to have more biological test data.

We'll keep you posted.

We have stepped up our technology licensing activities, but at this time we cannot disclose any details of our discussions -- they're early stage -- except that we are focused on selecting partners that can succeed in commercializing our technology, even if upfront license fees are relatively small.

The current fiscal year, starting June 1, is off to a good start.

In our bio-agricultural applications businesses, encompassing our food packaging and processing and seed coating businesses, weather is very good so far for our Apio food business subsidiary.

We hope that the recent fresh-cut industry category growth of 3% will continue or increase.

We plan to introduce several new products and product lines at Apio in the coming quarters.

Windset is ahead of its construction schedule by several months.

We expect Windset to launch new BreatheWay packaged products for cucumbers in the next quarter or two, and we plan to purchase high-value, unique tomatoes from Windset's new Santa Maria operation for our Apio vegetable tray business.

And Chiquita reports continued good results in its avocado program with retailers and food service operators as it continues to line up and strengthen its year-round sourcing for avocados.

And as stated earlier, Monsanto is committing sizable resources to our joint program.

In our biomedical applications field, which encompasses our medical devices and materials, personal care additives and drug delivery program, Lifecore has several products in review at the FDA.

We plan to offer expanded opportunities and offerings from Lifecore.

We expect further penetration into the personal care products market this year beyond the current 50 products we are currently in.

And the collaborative technology evaluation in the drug delivery area is providing us with new insights as to where our technology might add value in drug delivery.

In our licensing activities, we are moving forward on a number of early-stage licensing discussions.

Regarding our guidance for fiscal year 2012, we plan to grow revenues in the range of 5%, and after adding back the $4.8 million impairment charge to net income for fiscal year 2011, we plan to grow net income by 30% to 40%.

As we look to further growth in fiscal year 2012 and beyond, our focus is very clear.

Our goals are to grow Lifecore's business by utilizing Lifecore's strength in ophthalmology, its strong position in viscoelastic materials and sterile filling; secondly, intend to grow Apio's food business and maintain Apio's margins; third, maintain a strong balance sheet; fourth, find new investment opportunities for growth and margin enhancement; fifth, support Chiquita with its rollout plans for avocados and bananas and some other targets in the tropical fruit area; sixth, support Monsanto with strong technical contributions; and seventh, find new applications for our BreatheWay packaging technology.

We do see growth opportunities, and we are expanding our investment in R&D to take advantage of these opportunities while continuing to shift the revenue mix to higher-margin businesses, as evidenced in the results for fiscal year 2011.

We have a growth plan for this year and years to come, and we are now ready for your questions.

(Operator Instructions.) Tony Brenner, ROTH Capital Partners.

I have three question.

First of all, how will Windset's fair market value be determined each quarter?

There is actually a formula within the agreement, which as long as that formula continues to approximate fair market value, that's the formula we're going to use.

I can tell you, on an annual basis, Tony, we're going to have to get an appraisal done, and it's based on a discounted cash flow model.

Okay.

Secondly, regarding the earnings guidance that's in the release, it implies an unusual quarterly pattern, with a very low first quarter and an especially strong fourth quarter.

What's the reason for that?

Well, it's a combination of things.

One is the Lifecore shipment pattern, and we're making our best guesstimates on what we think the customer order patterns are going to be.

And we do have quite a bit of insight to this, because they ask their customers for a six months' type of forecast.

So usually they come pretty close.

And then secondly, it's our best estimate on the change in the fair market value of Windset, which is the biggest swinger here.

And it's because when the Santa Maria project (technical difficulty) the products that will be sold from that project, obviously, that becomes commercialized, you're going to see a significant increase in fair value, which should be in our fourth quarter.

I see.

Last question.

I didn't go back and check, but I'm pretty sure that this is the first release, in at least a decade, in which the word "banana" doesn't appear.

Does that mean that bananas are, at least for the time being, out of the picture in terms of being a potential growth driver?

I mentioned it at least one time, Tony, so no.

In your remarks you did, but it's not in the release.

Oh, in the release.

Okay, thank you.

No, it doesn't imply that at all.

They're expanding their Chiquita to Go program.

I'm going to give you a personal point of view here, and that is that recent events in the posting of calorie counts and more visibility to consumers in terms of what they're consuming and whether it's good or bad for them is leading people, like McDonald's, who recently announced that it's going to put sliced apples in Happy Meals, I think there's more pressure on those types of operations to start to support the sale of healthy produce.

So no.

We're expanding the Chiquita to Go program, not only in the US, but there seems to be new energy in Europe.

There were some changes at Chiquita that led to some management changes in Europe, and they seem to be putting some energy behind it.

So if it wasn't mentioned, it's our oversight.

It's not because anything is of less enthusiasm or less interest.

As I recall, there was something like -- it's been, for a fair amount of time, there have been roughly 7,000 outlets in which Chiquita to Go has appeared.

Has that number changed?

Are there any meaningful accounts that have been added?

The last time we gave a number -- and it has been several years, because the emphasis at Chiquita became more on volume than it was on the number of sites -- the last time we gave numbers, it was in the 20,000 to 25,000 sites.

And I would only guess that that number -- it has to be higher, because they've been expanding.

Okay, thank you.

I think it's 25,000 sites.

And they're in two-thirds of Starbucks, and I think there's -- goshdoggit, I think there's -- trying to remember the number of Starbucks in North America.

But I think it's around 11,000.

Thank you.

Chris Krueger, Northland Capital.

Following up on the last question, I just want to be clear on your quarter-to-quarter guidance for the fourth quarter, which is expected to be higher than second and third.

That is mostly, or largely, based on the Windset project starting to sell product?

Is that clear?

Mostly, yes.

Okay.

On the avocado rollout, do you have an idea of what percentage of grocery retailers are selling those products now, and where that was a quarter ago?

Gosh, I don't, but it's small.

They have -- it's a little bit like Patton in Europe.

They've got to roll it out consistent with their ability to do year-round sourcing.

You can't launch avocados just for a few months and then withdraw.

You have to have year-round sourcing.

And so they've been lining up their sourcing from North America, Central America, and South America.

But the last time we mentioned any specific site data -- Chris, you may recall, I think it was a quarter or two ago -- they were in 1,500 sites.

And that is expanding.

But I couldn't tell you.

So it's relatively small in terms of market share, but what they're finding is that when they're in that site, the velocity goes up in double-digit ways, and the shrink goes down appreciably.

So I think they're just trying to track this rollout so that they don't get ahead of their supply lines.

Okay.

One last question.

On Lifecore, you indicated they have several products in review with the FDA right now.

I was wondering if you can just give us a little bit more insight into the types of products.

Are they offshoots of what you currently are selling, or do they bring it to new markets, or just a little bit more detail on that?

They are, in the ophthalmology field, they're viscoelastic materials, which is what Lifecore does and makes.

So they are in that same strong area that Lifecore focuses on.

So view those as more in the product extension arena rather than a totally new platform.

Okay.

So like, fair to say that current customers, if these gain approval, you could probably get deeper into current customers as well?

Well, yes, that's exactly the right way to think about it, exactly.

All right.

That's all I've got.

Thank you.

Morris Ajzenman, Griffin Securities, Inc.

Hey, for this, your fiscal '12, you've been talking about corporate licensing deals for a while.

You can't be that specific until something happens, but should we expect something to happen over the 12 months, this current fiscal year?

And I guess this takes time, but are we getting close to something being announced, potentially?

Would you settle for an answer that says I don't know?

Is that an appropriate answer to your question?

Because it's hard to judge these things.

We were close to one last year, spent a lot of time on it, and at the end of the day, it just didn't make sense to go forward.

We could not agree on terms that we felt were fair for our shareholders, so we walked.

So those are the types of things that can happen in licensing discussion.

Let's just say that there's a handful, five fingers on a hand, of licensing discussions going on right now.

And we like them because there's good fit for our technology.

But I just can't tell you, Morris, whether one or more of these are going to hit.

But I would think that if you had five in the hopper and you could really come to terms, at least one of them would come to fruition.

So that's the best answer I can give you.

I'd hate to mislead you and tell you absolutely.

Who knows?

Fair enough.

One last question here.

When you do that, you give us some of the projected revenue and earnings growth for this coming fiscal year, you lumped together, and it's a big number, increase in Apio pre-tax and Windset, $0.29 and $0.31.

Would you care to convert those two apart to give us some idea of what, so we can understand what you see happening this year with those two parts?

Morris, can we take it offline?

Because I don't have that immediately available.

Thank you.

Will Lauber, Sterling Capital.

I've got a few questions here.

I've got some of the easy ones first.

So Windset dividends, when do those hit?

Is it the same quarter, or is it every quarter?

We book it monthly.

It's every quarter.

It's paid annually in May.

So our first payment will be in May of 2012.

But you book it monthly.

But we book it monthly.

So it's May, and $1.25 million per year.

We book whatever that is divided by four per quarter -- $280,000?

Okay.

And that cash actually hits in May?

And then we get paid in May, yes.

Okay.

And I guess, Greg, on your cash flow assumptions in the release, coming up with the free cash flow somewhere, approximately $9 million to $10 million, and then assuming you don't push out the Monsanto deal more than a year, you'd have about $4 million there, so your cash balance should increase somewhere along the lines of $13 million to $15 million?

Am I correct in that?

That's probably in the ballpark, because the $4 million, remember, is not part of operating.

So the guidance was operating cash flow.

The $4 million will be considered investing, so in a different section of your cash flow.

And anything dealing with the increase in Windset, which is projected to be a fairly sizable amount this next year, that is deferred and just becomes part of your investment.

You don't get that cash until a put or call at the end of Year 6.

Okay.

So if I'm in the ballpark, it leads to the next question.

I guess you guys could pretty much use your cash proceeds over the next year to eliminate the debt.

I'm just thinking of your thought there.

What are you guys paying on your debt, again?

And then I assume you're still mainly in short-term Treasuries and munis, which are probably not yielding you too much at all?

That's right.

You got that right.

But we are, the debt is 4.2%.

It's fixed, so we fixed it with a swap.

The issue right now is because LIBOR hasn't moved.

And in anticipation, when you enter into a swap, you're hedging against the fact that the LIBOR could go through the roof, and instead of paying a current variable of 2.5%, it suddenly jumps to 6%.

Well, when you're in that type of position, if we (technical difficulty), we would have a sizable loss on breaking that swap.

So it would not make sense, until LIBOR goes up and we could at least get out of it at no cost, or no expense, let's put it that way.

Okay.

And I think in some of your past calls, you had mentioned that you had opened an East Coast warehouse for Apio.

When do you expect to start seeing some business from that?

We already have business.

It's in the Southeast.

It's up and running.

It's modest at this point, but it gives us a spot on the East Coast to access some customers who needed some next-day deliveries, especially for the tray business that we're in.

So it's fulfilling that purpose.

But we'd like to expand it further.

And then I don't know if you got the chance to look at The Wall Street Journal today, but in the D section there was a story in there about salads, and they mentioned Fresh Express and said they adjust the plastic it uses for the bags to allow in the right amount of oxygen for each leaf variety.

I wanted to know if this is an opportunity for Apio at all.

So if I recall right, didn't you used to do heads of lettuce for the military in trials or something like that?

We did.

Where we add value in lettuce is if you needed 40 or 60, 50 days of shelf life, which very few people need.

The lettuce, you may recall, Will, in our past calls, the lettuce family, the leaf lettuce family, barely respires.

Its requirements for maintaining an atmosphere are really minimal.

Our technology is, frankly, overkill.

And we've avoided the whole lettuce area for a retailer because they don't need 40 or 50 days of shelf life, obviously.

And so I suspect what Fresh Express is using is something called MicroPerf.

It's got little tiny holes in the film, and it allows some of the CO2 to get out.

But generally speaking, the leaf lettuce family -- I'm using a generalization here -- is just not really a good target for us.

Okay.

And then my last question, you had mentioned about, a section in there about the licensing deals, and you mentioned the cutbacks that big companies have made in their R&D budgets.

If you can just tell me if my thinking's wrong here.

I thought that, at least in the long term, that might be a plus for you guys in that you could operate as an outsourced R&D for other companies.

Is that thinking wrong?

That's exactly our thinking and why we've hired a couple of business development people in the last year, because we believe that during the great recession and the severe cutbacks in R&D, people, they've improved their income statements, but long term, they're going to be short on new products.

And so we anticipated that people would start to come out of their shells and start to inquire about new technologies, et cetera.

And that's what we're seeing, and that's why I mentioned that we are starting to see a handful of potential licensing discussions get started here.

And it's partly because we've stepped it up ourselves.

But how those turn out and when they turn out is hard to say.

But, Will, I think that's exactly correct.

I think that people are starting to say, "Hey, we've got to figure out how to get new products, and maybe we'd go outside."

Are you going to these new potential partners with a product that's pretty far along?

Or how involved would they have to be in, in the testing?

Of the handful of discussions we have, one is pretty far along and another one is absolutely bare-bones, "Gosh, can you even do it?" It looks on paper good, but you haven't done the first experiment.

And then the rest are in between.

So we've got the full spectrum.

Okay.

Thank you very much.

(Operator Instructions.) John Walthausen, Walthausen and Company.

I had a question about -- let's, okay, assuming that Monsanto exercises the termination thing.

What is the expense saving -- and I guess probably two different scenarios -- one, if you see significant interest by other ag people for that seed technology, and the other is if you don't?

Right.

Understand your question.

Let's say they terminate, we get a $4 million check, we go our separate ways.

We have been currently spending a little over $1 million a year of our own money supporting that program.

So there's $1 million there that potentially we could save.

On the other hand, we are in early -- very early -- discussions with other potential ag partners involving applications currently outside the Monsanto field because, obviously, we're working exclusively with them.

But those contacts would be the same contacts, the same potential partners, that might be interested in what we're doing with Monsanto.

So I don't want you to think that we're just sitting on our hands here waiting for a phone call.

So we're not.

But to answer your question, we're currently spending about $1.1 million -- somewhere between $1 million and $1.5 million in R&D in support of this program.

It's a big program for us.

We're very interested in its success.

So we have these other conversations going on.

So there's some parallel processing going on.

Right, so presumably, if you're getting somebody who has a strong degree of interest, who maintains some of that spending but not necessarily all of it?

Right.

That's a fair way to put it.

Or would you try to match it, make it so it's earnings neutral rather than a drag?

We'd try to match it, because that's how we started out with Monsanto.

And they were paying for all the R&D to support.

There was a little bit of a quid pro quo, if you recall, maybe, from about a year to a year and a half ago, where they were having some major layoffs, and they were having problems supporting outside R&D funding while they were laying off their own people.

So we came to a quid pro quo, where we took back some rights that we had given to them in this option agreement, took those back in return for supporting our own R&D.

So it was a good decision at the time.

We're still happy with that.

But in general, we like to have R&D totally supported.

And that's what we would see.

Okay, okay, good.

Thanks.

Warwick Jarvis, Trailhead.

Yes, I had a question.

The personal care side, do you have a number as far as what your revenues were from that?

And is it safe to assume that comes in on the research and development and royalty revenue line?

Yes.

Yes.

That's exactly where it's at.

It is the majority of those revenues.

Okay, so you're in 50 products right now, and what's the outlook for that over the next year or so?

I think it's pretty good.

A year ago, I think we were in less than 20.

So remember, our partner is Air Products.

They are the exclusive marketing supplier worldwide.

They've been challenged in that when they got in this business, they didn't have the sales force and the marketing force, they didn't have the formulators.

And they were intending to acquire those capabilities through an acquisition, and they have not been able to do that.

They've tried, but they haven't been able to do it.

So in the last year or so, they've been hiring some of their own people and entering into distributor agreements and putting a small group of formulators into their labs.

So for us, it's been frustratingly slow.

But hopefully, we have some momentum now.

And more importantly, we have credibility, because no one knew who in the hang Landec was in the personal care field until recent years.

So we would expect that this is going to expand.

Is it going to be a huge part of Landec in the next year or two?

No, but it's very lucrative.

It's a high-margin business for us.

So you're in 50 products now.

How many formulations, or how many of your products, are in those 50 products?

Is each one distinct?

Roughly -- yes, I think I understand your questions.

There are roughly three products, okay?

And then in this world, you give them these codes and numbers, and I won't bore you with those.

But there are roughly three products that go into those 50 formulations.

So our largest customer, by example, is L'Oreal.

Another one would be a company called Mentholatum, those types of companies.

And so we're primarily drawing off of three product lines.

And then recently, in Milan, there was a launch of a fourth product line that is just now being introduced that Air Products is very, very enthusiastic about, as are we.

Okay, great.

And then there's quite a buzz online about these clear -- I think they're Clear Fresh bags from Apio.

Yes, right.

Can you talk a little bit about that?

Boy, I'd love to.

We're trying to sort it out ourselves.

There's a lot of blogging going on about how great they are.

We've only launched this product initially -- let me tell everybody what Clearly Fresh bags are.

Up until recently, the only way you could have access to the Landec packaging technology was buying a product that had the produce already in it, and it was fully sealed, and it had our BreatheWay patch on it, and it had our brand, Eat Smart, on and on and on.

And the more we thought about it, we said, "Well, sometimes you may want to not buy it that way.

Maybe you just want to buy the bag."

And so we started this initiative in the last year, and we decided that we would scope the market initially, just by putting it on the Internet and using our website, et cetera, et cetera.

And we were getting a lot of interest in this technology, and it works and helps people extend the shelf life, and you can put the produce of your choice in the bag.

We wanted to make sure it was working first, and that's why we did this limited launch.

And now we are going to do a trial, a fairly sizable trial, at an unnamed major retailer, and they will be displaying these.

Think of this as on a kiosk.

They can hang from a rack.

And it probably wouldn't be too far from the banana display.

And we want to just see how well it sells in Peoria -- you know, I'm using Peoria by example -- how well does it do in a retail setting?

And one of the things we're learning is that the retailers ask a fairly straightforward question, and that is, "Should this be in the center aisle?" meaning should it be over where you can get garbage bags and Glad bags and things like that, or should it be over in the produce aisle?

We would prefer it to be over in the produce aisle.

So that's the kind of thing that we're determining.

The next thing we're determining is how can we use the state-of-the-art knowledge and capabilities that are now evolving in social media and various types of Internet marketing that can really get this thing broadly out there?

So it may sound like baby steps and, frankly, I guess it is.

But we're really pleased with the initial reaction.

Even though it's a small number of folks, it's very positive.

Okay, good.

Well, we ordered some, and they seem to work.

Good.

Thank you.

And that's all I have.

Thank you.

Nelson Obus, Wynnefield Capital.

Just in regard to the write-down that took place as a result of your accounting analysis of the ongoing relationship with Monsanto, is there any kind of accounting nuance that required you to take the write-down now as opposed to perhaps the next quarter, if there were a termination?

Yes, Nelson, this is Greg.

You have to go through an annual goodwill impairment.

And as part of that, you have to give your outside appraiser projections, and you have to put some probabilities around those projections.

And one of the biggest revenue items from the Landec Ag side of things would be the $6 million option payment from Monsanto that is due if they elect to write the check on December 1.

And we had to put some probabilities around it.

We were looking at the information we had at the time.

We were just starting biological tests.

And at this point, it was difficult to say, "Yes, they're going to write us a check." In fact, we had to put a probability around it that right now, given the data that we have, it's more likely than not that they're not going to write that check on December 1.

We may end up extending the agreement, but that's yet to be discussed.

But when you go through that analysis and you probability weight it and you look at discounted cash flows, and then you come up with a fair value of Landec Ag and compare it to the book value, the analysis showed that the goodwill was fully impaired.

Okay, so that's an annual calculation.

Yes.

So the answer to your question is, as you know, annually you're going to go through, in much more detail, those types of questions.

And we had hoped, frankly, to have more biological data at this point.

We don't have it.

It's just starting.

So we just, and we also felt that in general, if you have a choice, try to be conservative in accounting.

And this is the most conservative way you can be, and we felt that was prudent.

Is it a lack of data or a lack of positive data?

Lack of data.

I know you know this.

You can do all the chemistry in the world, but until you put it on seeds and the plants grow and you're doing biological trials, you don't know how well it's going to work.

Does it get taken up in the root system?

Does it get to the right parts of the plant?

Is it effective in killing the bugs that you want to kill?

On and on and on.

So it's just the lack of data.

It's not a lack of enthusiasm.

They're putting a lot of people on this program, as are we.

So it's testimony to the interest both parties have in getting to the data.

So essentially, was there a delay in terms of these tests?

Yes.

Oh, okay.

Yes, there was.

Just, okay, just caused by dealing with a large company, et cetera, or whatever.

Well, I don't want to put all the burden on them.

There were just things that in science come up, and we had to work more on those things and get some things tweaked and modified, and we did, and now we can start getting some data.

Got you.

Does the growing season figure in, in terms of getting that data?

No.

No?

No.

You can get a lot of data in laboratories and greenhouses.

Got it, okay.

Thanks.

Thank you.

There are no further questions in the queue at this time.

I'd like to turn the program back to management for any further remarks.

Again, thank you very much for taking the time to hear our earnings report and to be with us today.

So we look forward to keeping you updated.

Many thanks.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.