Landec(LFCR) - 2020 Q3 - Quarterly Report

Part I Financial Information This section presents Landec Corporation's consolidated financial statements and management's discussion for the three and nine months ended February 23, 2020, highlighting a net loss of $23,042 thousand, increased assets to $550,060 thousand, and liabilities to $302,392 thousand Financial Statements The consolidated financial statements present Landec Corporation's financial position as of February 23, 2020, and its results of operations for the three and nine months then ended, showing a net loss of $23,042 thousand for the nine-month period, driven by restructuring costs and challenges in the Curation Foods segment Consolidated Balance Sheet Highlights (in thousands) | Account | Feb 23, 2020 | May 26, 2019 | | :--- | :--- | :--- | | Total Current Assets | $148,811 | $133,041 | | Total Assets | $550,060 | $519,091 | | Total Current Liabilities | $157,970 | $137,091 | | Total Liabilities | $302,392 | $248,947 | | Total Stockholders' Equity | $247,668 | $270,144 | Consolidated Statement of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three Months Ended Feb 23, 2020 | Three Months Ended Feb 24, 2019 | Nine Months Ended Feb 23, 2020 | Nine Months Ended Feb 24, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $152,928 | $155,554 | $434,235 | $404,779 | | Gross Profit | $20,047 | $21,569 | $50,897 | $54,791 | | Operating (Loss) Income | ($15,011) | $3,242 | ($25,427) | $2,995 | | Net (Loss) Income from Continuing Operations | ($11,518) | $1,533 | ($23,042) | $1,754 | | Diluted Net (Loss) Income per Share | ($0.39) | $0.04 | ($0.79) | $0.02 | Consolidated Statement of Cash Flows Highlights (Nine Months Ended, in thousands) | Cash Flow Activity | Feb 23, 2020 | Feb 24, 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($4,338) | $17,449 | | Net cash used in investing activities | ($19,322) | ($92,373) | | Net cash provided by financing activities | $24,995 | $73,815 | Note 1: Business Overview and Accounting Policies The company operates in two main segments, Curation Foods and Lifecore Biomedical, and adopted the new lease accounting standard (ASC 842) in fiscal 2020, recognizing $30.0 million in right-of-use assets and $31.1 million in operating lease liabilities - The company designs, develops, manufactures, and sells differentiated products for food (Curation Foods) and biomaterials (Lifecore) markets[22] - Upon adopting the new lease standard ASC 842, the company recorded $30.0 million of operating lease right-of-use assets and $31.1 million of operating lease liabilities at the beginning of fiscal year 2020[97] - The Now Planting business was discontinued in May 2019 and its results have been reclassified to discontinued operations for prior periods[30] Note 9: Business Segment Reporting The company reports results for three segments: Curation Foods, Lifecore, and Other, with Curation Foods generating $373,906 thousand in revenue but a net loss of $23,154 thousand, while Lifecore generated $60,329 thousand in revenue and net income of $6,974 thousand, alongside significant customer concentration Segment Performance (Nine Months Ended Feb 23, 2020, in thousands) | Segment | Net Sales | Gross Profit | Net (Loss) Income from Continuing Operations | | :--- | :--- | :--- | :--- | | Curation Foods | $373,906 | $28,874 | ($23,154) | | Lifecore | $60,329 | $22,023 | $6,974 | | Other | $— | $— | ($6,862) | | Total | $434,235 | $50,897 | ($23,042) | - For the nine months ended February 23, 2020, the company's top two customers, Costco and Wal-Mart, accounted for 15% and 18% of total revenues, respectively[157] Note 11: Restructuring Costs In Q3 fiscal 2020, the company initiated a restructuring plan, resulting in $13,528 thousand in charges for the quarter and $13,934 thousand for the nine-month period, primarily related to the Curation Foods segment and including an $11,054 thousand impairment loss - The company announced a restructuring plan in Q3 2020 to enhance profitability, which includes a reduction-in-force, reduction in leased office space, and sale of non-strategic assets[160] Restructuring Costs (in thousands) | Cost Category | Three Months Ended Feb 23, 2020 | Nine Months Ended Feb 23, 2020 | | :--- | :--- | :--- | | Asset write-off costs | $10,648 | $11,054 | | Employee severance and benefit costs | $1,745 | $1,745 | | Lease costs | $418 | $418 | | Other restructuring costs | $717 | $717 | | Total Restructuring Costs | $13,528 | $13,934 | Note 12: Subsequent Events Subsequent to the quarter's end, on March 19, 2020, the company amended its credit agreement to retroactively increase the maximum Total Leverage Ratio covenant for the quarter ended February 23, 2020, to 5.75 to 1.00, while also noting the evolving uncertainties of the COVID-19 pandemic - On March 19, 2020, the company amended its credit agreement, retroactively increasing the Total Leverage Ratio covenant to 5.75 to 1.00 for the quarter ended Feb 23, 2020, to avoid a breach[164] - The company acknowledged the evolving and uncertain impact of the COVID-19 pandemic on its business, operations, and financial results[165] Management's Discussion and Analysis (MD&A) Management's discussion attributes the 7% year-over-year revenue growth for the nine-month period to the acquisition of Yucatan Foods and strong performance in the Lifecore segment, but notes a 7% decline in gross profit due to higher avocado costs and weather-related issues, leading to a consolidated net loss due to increased SG&A and restructuring charges, impacting liquidity and requiring a debt covenant amendment Results of Operations For the nine months ended Feb 23, 2020, total revenues increased 7% to $434,235 thousand, driven by Lifecore and Curation Foods (boosted by the Yucatan acquisition), but total gross profit fell 7% to $50,897 thousand due to Curation Foods' decline, and operating expenses rose significantly, leading to a consolidated operating loss of $25,427 thousand Revenue by Segment (in thousands) | Segment | Nine Months Ended Feb 23, 2020 | Nine Months Ended Feb 24, 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Curation Foods | $373,906 | $353,014 | $20,892 | 6% | | Lifecore | $60,329 | $51,765 | $8,564 | 17% | | Total Revenues | $434,235 | $404,779 | $29,456 | 7% | - The increase in Curation Foods' nine-month revenue was primarily due to the Yucatan Foods acquisition, which contributed $32.1 million, offset by a $15.9 million planned decrease in lower-margin vegetable products[207] Gross Profit by Segment (in thousands) | Segment | Nine Months Ended Feb 23, 2020 | Nine Months Ended Feb 24, 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Curation Foods | $28,874 | $34,570 | ($5,696) | (16)% | | Lifecore | $22,023 | $20,221 | $1,802 | 9% | | Total Gross Profit | $50,897 | $54,791 | ($3,894) | (7)% | - The increase in nine-month SG&A expenses was driven by a $4.0 million increase in legal fees from compliance matters and a $1.2 million reserve for a receivable from Pacific Harvest[220] Liquidity and Capital Resources As of February 23, 2020, the company had $2,600 thousand in cash, with cash used in operating activities totaling $4,338 thousand for the nine-month period, a significant reversal from the prior year, and total debt increased to $180,700 thousand, leading to non-compliance with its total leverage ratio covenant, which was subsequently waived and amended - Cash used in operating activities was $4,338 thousand for the nine months ended Feb 23, 2020, compared to $17,449 thousand provided by operations in the prior-year period[230] - Total debt increased from $81,800 thousand as of February 24, 2019 to $180,700 thousand as of February 23, 2020, primarily to fund the Yucatan Foods acquisition and equipment purchases[224][225] - As of February 23, 2020, the company was not in compliance with its maximum Total Leverage Ratio covenant; the covenant was retroactively amended after the quarter-end to 5.75 to 1.00, compared to the company's actual ratio of 5.55 to 1.0[242] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to its market risk disclosures since its Annual Report on Form 10-K for the fiscal year ended May 26, 2019 - There have been no material changes to the information regarding quantitative and qualitative disclosures about market risk since the last annual report[245] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of February 23, 2020, with no material changes to internal control over financial reporting identified during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[246] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[247] Part II Other Information This section covers various other information, including legal proceedings and risk factors Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, with further details provided in Note 1 of the financial statements, including ongoing matters such as unfair labor practice claims, an FCPA investigation related to its Mexican subsidiary (Tanok), and breach of contract lawsuits - The company is involved in various legal proceedings and claims, with further details provided in the notes to the financial statements[250] - Key legal matters include an internal investigation related to potential environmental and FCPA compliance at its Tanok facility in Mexico, which has led to investigations by the SEC, DOJ, and Mexican authorities[91] Risk Factors The company highlights several key risks, including the potential failure of its "Project SWIFT" restructuring, adverse effects of the COVID-19 pandemic, risk of non-compliance with amended credit facility covenants, intense market competition, high customer concentration, and risks associated with international operations including FCPA compliance - The "Project SWIFT" restructuring program may not achieve anticipated results and exposes the company to additional costs and operational risks[252] - The COVID-19 pandemic poses a risk to the business through potential disruptions to manufacturing, supply chains, labor, and changes in consumer demand[253] - The company's credit facility contains restrictive covenants; a failure to comply, such as the recent breach of the leverage ratio covenant, could result in default and acceleration of debt[254][255] - A significant portion of revenue is derived from a small number of customers, with Wal-Mart and Costco accounting for 17% and 15% of revenues, respectively, in the first nine months of fiscal 2020[257]