|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
August 30, 2020
|
|
May 31, 2020
|
|
August 25, 2019
|
|
May 26, 2019
|
|
Cash and cash equivalents
|
$
|
589
|
|
|
$
|
360
|
|
|
$
|
1,990
|
|
|
$
|
1,080
|
|
|
Restricted cash
|
193
|
|
|
193
|
|
|
385
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
$
|
782
|
|
|
$
|
553
|
|
|
$
|
2,375
|
|
|
$
|
1,465
|
|
The Company was required to maintain $0.2 million and $0.2 million of restricted cash at August 30, 2020 and May 31, 2020, respectively, related to certain collateral requirements for obligations under its workers' compensation programs. The restricted cash is included in Other assets in the Company’s accompanying Consolidated Balance Sheets.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
August 30, 2020
|
|
May 31, 2020
|
|
Finished goods
|
$
|
27,635
|
|
|
$
|
35,177
|
|
|
Raw materials
|
25,794
|
|
|
25,856
|
|
|
Work in progress
|
6,569
|
|
|
5,278
|
|
|
Total
|
$
|
59,998
|
|
|
$
|
66,311
|
|
If the cost of the inventories exceeds their net realizable value, provisions are recorded currently to reduce them to net realizable value. The Company also records a provision for slow moving and obsolete inventories based on the estimate of demand for its products.
Accounts Receivable and Sales Returns and Allowance for Credit Losses
The Company carries its accounts receivable at their face amounts less an allowance for estimated sales returns and credit losses. Sales return allowances are estimated based on historical sales return amounts.
The Company uses the loss rate method to estimate its expected credit losses on trade accounts receivable and contract assets. In order to estimate expected credit losses, the Company assessed recent historical experience, current economic conditions and any reasonable and supportable forecasts to identify risk characteristics that are shared within the financial asset. These risk characteristics are then used to bifurcate the loss rate method into risk pools. The risk pools were determined based on the industries in which the Company operates. Historical credit loss for each risk pool is then applied to the current period aging as presented in the identified risk pools to determine the needed reserve allowance. At times when there are not current economic conditions or forecasts that may affect future credit losses, the Company has determined that recent historical experience provide the best basis for estimating credit losses.
The information obtained from assessing historical experience, current economic conditions and reasonable and supportable forecasts were used to identify risk characteristics that can affect future credit loss experience. There were no significant risk characteristics identified in the review of historical experiences or in the review of estimates of current economic conditions and forecasts.
Estimating credit losses based on risk characteristics requires significant judgment by management. Significant judgments include, but are not limited to: assessing current economic conditions and the extent to which they are relevant to the existing characteristics of the Company’s financial assets, the estimated life of financial assets, and the level of reliance on historical experience in light of economic conditions. The Company will continually review and update, when necessary, its historical risk characteristics that are meaningful to estimating credit losses, any new risk characteristics that arise in the natural course of business, and the estimated life of its financial assets.
The changes in the Company’s allowance for sales returns and credit losses are summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of
period
|
|
|
|
Provision for expected credit losses
|
|
Write offs,
net of
recoveries
|
|
Balance at
end of period
|
|
Three months ended August 30, 2020
|
$
|
438
|
|
|
|
|
$
|
35
|
|
|
$
|
(169)
|
|
|
$
|
304
|
|
Related Party Transactions
The Company sells and licenses its BreatheWay® food packaging technology to Windset Holdings 2010 Ltd. (“Windset”), in which, as further described in Note 2, the Company has an approximate 26.9% ownership interest. During the three months ended August 30, 2020 and August 25, 2019, the Company recognized revenues of $0.1 million and $0.1 million, respectively. These amounts have been included in Product sales in the accompanying Consolidated Statements of Comprehensive (Loss) Income. The related receivable balances of $0.3 million and $0.5 million are included in Accounts receivable in the accompanying Consolidated Balance Sheets as of August 30, 2020 and May 31, 2020, respectively.
All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.
Debt Issuance Costs
The Company records its line of credit debt issuance costs as an asset, and as such, $1.0 million and $0.1 million were recorded as Prepaid expenses and other current assets, and Other assets in the accompanying Consolidated Balance Sheets, respectively, as of August 30, 2020, and $0.3 million and $0.5 million, respectively, as of May 31, 2020. The Company records its term debt issuance costs as a contra-liability, and as such, $1.0 million and $0.1 million was recorded as Current portion of long-term debt, and Long-term debt, net in the accompanying Consolidated Balance Sheets, respectively, as of August 30, 2020 and $0.4 million and $0.6 million, respectively, as of May 31, 2020.
Financial Instruments
The Company’s financial instruments are primarily composed of commercial-term trade payables, grower advances, notes receivable, debt instruments and derivative instruments. For short-term instruments, the historical carrying amount approximates the fair value of the instrument. The fair value of long-term debt and lines of credit approximates their carrying value.
Cash Flow Hedges
The Company has entered into interest rate swap agreements to manage interest rate risk. These derivative instruments may offset a portion of the changes in interest expense. The Company designates these derivative instruments as cash flow hedges. The Company accounts for its derivative instruments as either an asset or a liability and carries them at fair value in Other assets or Other non-current liabilities. The accounting for changes in the fair value of the derivative instrument depends on the intended use of the derivative instrument and the resulting designation.
For derivative instruments that hedge the exposure to variability in expected future cash flows and are designated as cash flow hedges, the entire change in the fair value of the hedging instrument is recorded as a component of Accumulated other comprehensive loss (“AOCL”) in Stockholders’ Equity. Those amounts are subsequently reclassified to earnings in the same line item in the Consolidated Statement of Operations as impacted by the hedged item when the hedged item affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
Accumulated Other Comprehensive Loss
Comprehensive income (loss) consists of two components, net loss and Other comprehensive (loss) income (“OCI”). OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as a component of stockholders’ equity but are excluded from net (loss) income. The Company’s OCI consists of net deferred gains and losses on its interest rate swap derivative instrument accounted for as a cash flow hedge. The components of AOCL, net of tax, are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
AOCL
|
|
Balance as of May 31, 2020
|
$
|
(2,808)
|
|
|
Other comprehensive loss before reclassifications, net of tax effect
|
(230)
|
|
|
Amounts reclassified from OCI
|
534
|
|
|
Other comprehensive income, net
|
304
|
|
|
Balance as of August 30, 2020
|
$
|
(2,504)
|
|
The Company expects to reclassify approximately $1.9 million into earnings in the next 12 months.
Based on these assumptions, management believes the fair market values of the Company’s financial instruments are not significantly different from their recorded amounts as of August 30, 2020 and May 31, 2020.
Investment in Non-Public Company
On February 15, 2011, the Company made its initial investment in Windset which is reported as an Investment in non-public company, fair value, in the accompanying Consolidated Balance Sheets as of August 30, 2020 and May 31, 2020. The Company has elected to account for its investment in Windset under the fair value option. See Note 2 – Investment in Non-public Company, for further information.
Assets Held for Sale
In January 2020, the Company decided to divest Curation Foods’ salad dressing plant in Ontario, California (“Ontario”). In the third quarter of fiscal year 2020, the Company (1) designated the fixed assets of its office and manufacturing space located in Ontario, California, as assets held for sale, and (2) recognized a $10.9 million impairment loss. The remaining fair value of $2.6 million is included in Property and equipment, net within the Consolidated Balance Sheet as of May 31, 2020. Liabilities of $0.3 million and $2.9 million related to these assets are included in Current portion of lease liabilities and Long-term lease liabilities, respectively, within the Consolidated Balance Sheet as of May 31, 2020. In the first quarter of fiscal year 2021, the Company sold its interest in Ontario. The Company received net cash proceeds of $4.9 million in connection with the sale, and recorded a gain of $2.8 million during the three months ended August 30, 2020, which is included in Restructuring costs within the Consolidated Statements of Comprehensive (Loss) Income.
On June 25, 2020 the Board of Directors approved a plan to close Curation Foods’ underutilized manufacturing operations in Hanover, Pennsylvania (“Hanover”), sell the building and assets related thereto, and consolidate its operations into its manufacturing facilities in Guadalupe, California and Bowling Green, Ohio. The $17.2 million carrying value of these assets is included in Property and equipment, net on the consolidated Balance Sheets as of May 31, 2020, and was not classified as assets held for sale as the plan to sell was not finalized until subsequent to fiscal year end 2020. In the first quarter of fiscal year 2021, the Company (1) designated the property and equipment of Hanover as assets held for sale, (2) recognized an $8.8 million impairment loss, which is included in Restructuring costs within the Consolidated Statements of Comprehensive (Loss) Income, and (3) reclassified the remaining net carrying value of $8.0 million from Property and equipment, net to Prepaid expenses and other current assets within the Consolidated Balance Sheet as of August 30, 2020. Subsequent to the end of the Company’s first quarter of fiscal year 2021, the Company sold the Hanover building and assets related thereto for net proceeds of $8.0 million.
Leases
Under Topic 842, the Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is a quoted rate based on the understanding of what the Company's credit rating would be. Certain agreements may contain the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset. The Company, when reasonably certain to exercise the option, considers these options in determining the measurement of the lease. The Company's lease agreements do not contain any material residual value guarantees.
The Company's lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. The Company combines fixed payments for non-lease components with lease payments and accounts for them together as a single lease component which increases the amount of lease assets and liabilities.
Payments under lease arrangements are primarily fixed; however, certain lease agreements contain variable payments, which are expensed as incurred and are not included in the operating lease assets and liabilities. These amounts primarily include payments affected by changes in price indices.
Intangible Assets
The Company’s intangible assets are comprised of customer relationships with a finite estimated useful life ranging from 11 years to 13 years, and trademarks/tradenames and goodwill with indefinite useful lives.
Finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. Indefinite lived intangible assets are reviewed for impairment at least annually. For goodwill and other indefinite-lived intangible assets, the Company performs a qualitative impairment analysis in accordance with ASC 350-30-35.
Partial Self-Insurance on Employee Health and Workers Compensation Plans
The Company provides health insurance benefits to eligible employees under self-insured plans whereby the Company pays actual medical claims subject to certain stop loss limits and self-insures its worker's compensation claims. The Company records self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but not reported. Any projection of losses concerning the Company's liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as inflation rates, changes in severity, benefit level changes, medical costs, and claims settlement patterns. This self-insurance liability is included in Other accrued liabilities in the accompanying Consolidated Balance Sheets and represents management's best estimate of the amounts that have not been paid as of August 30, 2020 and May 31, 2020. It is reasonably possible that the expense the Company ultimately incurs could differ and adjustments to future reserves may be necessary. As of June 1, 2020, the Company ceased to provide health insurance benefits under a self-insured plan, and instead provides health insurance under a premium-based health plan.
Business Interruption Insurance Recoveries
In the third quarter of fiscal year 2019, the Company recalled five SKUs of Eat Smart single-serve Salad Shake-Ups!™. In the fourth quarter of fiscal year 2019, the Company submitted a product recall claim. During the three months ended August 30, 2020 and August 25, 2019, the Company recognized $0.0 million and $2.4 million of business interruption insurance recoveries, respectively. Amounts received on insurance recoveries related to business interruption are recorded as a reduction to Cost of product sales in the Consolidated Statements of Comprehensive (Loss) Income and are classified as operating cash flows.
Fair Value Measurements
The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments and certain other items measured at fair value. The Company has elected the fair value option for its investment in a non-public company. The Company has not elected the fair value option for any of its other eligible financial assets or liabilities.
The accounting guidance established a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – observable inputs such as quoted prices for identical instruments in active markets.
Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.
Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.
As of August 30, 2020 and May 31, 2020, the Company held certain assets and liabilities that are required or it elected to be measured at fair value on a recurring basis, including its interest rate swap contracts and its minority interest investment in Windset.
The fair value of the Company’s interest rate swap contracts is determined based on model inputs that can be observed in a liquid market, including yield curves, and is categorized as a Level 2 fair value measurement and is included in Other assets or Other non-current liabilities in the accompanying Consolidated Balance Sheets.
As of August 30, 2020 and May 31, 2020, the Company held certain assets that were required to be measured at fair value on a non-recurring basis. The fair market value of the assets held for sale, less the costs to sell, was $8.0 million and $2.6 million as of August 30, 2020 and May 31, 2020, respectively. The fair market value of Hanover (classified as an asset held for sale) as of August 30, 2020, was based on the actual subsequent to quarter end sales price, and therefore was classified within Level 1. The fair market value of Ontario (classified as an asset held for sale) as of May 31, 2020, was based on third-party valuations, which primarily used the market approach, and the inputs utilized were comparable sales of similar assets, which are generally unobservable and are supported by little or no market data, and therefore were classified within Level 3.
The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value utilizes significant unobservable inputs, including projected cash flows, growth rates, and discount rates. As a result, the Company’s investment in Windset is considered to be a Level 3 measurement investment. The change in the fair value of the Company’s investment in Windset for the three months ended August 30, 2020, was due to the Company's 26.9% minority interest in the change in the fair market value of Windset during the period.
In determining the fair value of the investment in Windset, the Company utilizes the following significant unobservable inputs in the discounted cash flow models:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2020 Range
(Weighted Average)
|
|
May 31, 2020 Range
(Weighted Average)
|
|
Revenue growth rates
|
6% to 7% (6.4%)
|
|
6% to 7% (6.4%)
|
|
Expense growth rates
|
6% to 8% (6.6%)
|
|
6% to 8% (6.6%)
|
|
Income tax rates
|
15%
|
|
15%
|
|
Discount rates
|
12%
|
|
12%
|
The revenue growth, expense growth, and income tax rate assumptions are considered to be the Company's best estimate of the trends in those items over the discount period. The discount rate assumption takes into account the risk-free rate of return, the market equity risk premium, and the company’s specific risk premium and then applies an additional discount for lack of liquidity of the underlying securities. The discounted cash flow valuation model used by the Company has the following sensitivity to changes in inputs and assumptions:
|
|
|
|
|
|
|
|
(In thousands)
|
Impact on value of investment in Windset as of August 30, 2020
|
|
10% increase in revenue growth rates
|
$
|
1,100
|
|
|
10% increase in expense growth rates
|
$
|
(800)
|
|
|
10% increase in income tax rates
|
$
|
(300)
|
|
|
10% increase in discount rates
|
$
|
(2,200)
|
|
Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on a recurring and nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Fair Value at August 30, 2020
|
|
|
|
|
|
Fair Value at May 31, 2020
|
|
|
|
|
|
Assets:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale - nonrecurring
|
$
|
8,027
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,607
|
|
|
Investment in non-public company
|
—
|
|
|
—
|
|
|
56,900
|
|
|
—
|
|
|
—
|
|
|
56,900
|
|
|
Total assets
|
$
|
8,027
|
|
|
$
|
—
|
|
|
$
|
56,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59,507
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
3,154
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,578
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
3,154
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,578
|
|
|
$
|
—
|
|
The following table reflects the fair value roll forward reconciliation of Level 3 assets and liabilities measured at fair value for the three months ended August 30, 2020:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Windset Investment
|
|
|
|
Balance as of May 31, 2020
|
$
|
56,900
|
|
|
|
|
Fair value change
|
—
|
|
|
|
|
Balance as of August 30, 2020
|
$
|
56,900
|
|
|
|
Revenue Recognition
The Company follows the five step, principles-based model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as control of the product is transferred to the customer. Revenue for development service contracts are generally recognized based upon the labor hours expended relative to the total expected hours as a measure of progress to depict transfer of control of the service over time. The services are not distinct and are accounted for as a single performance obligation for each customer.
For descriptions of the Company’s product offerings and segments refer to Note 11 – Business Segment Reporting in our annual report on Form 10-K for the year ended May 31, 2020.
The Company’s standard terms of sale are generally included in its contracts, purchase orders, and invoices. As such, all revenue is considered revenue recognized from contracts with customers. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. The Company has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation. The Company’s standard payment terms with its customers generally range from 30 days to 90 days. Certain customers may receive cash-based incentives (including: volume rebates, discounts, and promotions), which are accounted for as variable consideration to the Company’s performance obligations. The Company estimates these sales incentives based on the expected amount to be provided to its customers and reduces revenues recognized towards its performance obligations. The Company does not anticipate significant changes in its estimates for variable consideration.
The Company disaggregates its revenue by segment product lines based on how it markets its products and reviews results of operations. The following tables disaggregate segment revenue by major product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
|
|
|
|
|
|
|
Curation Foods:
|
August 30, 2020
|
|
August 25, 2019
|
|
|
|
|
Fresh packaged salads and vegetables
|
$
|
96,179
|
|
|
$
|
109,831
|
|
|
|
|
|
Avocado products
|
17,017
|
|
|
16,200
|
|
|
|
|
|
Technology
|
643
|
|
|
642
|
|
|
|
|
|
Total
|
$
|
113,839
|
|
|
$
|
126,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
|
|
|
|
|
|
|
Lifecore:
|
August 30, 2020
|
|
August 25, 2019
|
|
|
|
|
Contract development and manufacturing organization
|
$
|
16,488
|
|
|
$
|
11,303
|
|
|
|
|
|
Fermentation
|
5,316
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
21,804
|
|
|
$
|
12,041
|
|
|
|
|
Contract Assets and Liabilities
Contract assets primarily relate to the Company’s conditional right to consideration for work completed but not billed at the reporting date. The Company’s contract assets as of August 30, 2020 and May 31, 2020, were $9.1 million and $9.0 million, respectively.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company’s contract liabilities as of August 30, 2020 and May 31, 2020, were $0.0 million and $0.0 million, respectively. Revenue recognized during the three months ended August 30, 2020, that was included in the contract liability balance at the beginning of fiscal year 2021, was $0.0 million.
Shipping and Handling Costs
Amounts billed to third-party customers for shipping and handling are included as a component of revenues. Shipping and handling costs incurred are included as a component of cost of products sold and represent costs incurred to ship product from the processing facility or distribution center to the end consumer markets.
Legal Contingencies
In the ordinary course of business, the Company is involved in various legal proceedings and claims.
The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least each fiscal quarter and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal fees are expensed in the period in which they are incurred.
Claims Alleging Unfair Labor Practices
Curation Foods has been the target of a union organizing campaign which has included three unsuccessful attempts to unionize Curation Foods’ Guadalupe, California processing plant. The campaign has involved a union and over 100 former and current employees of Pacific Harvest, Inc. and Rancho Harvest, Inc. (collectively "Pacific Harvest"), Curation Foods’ former labor contractors at its Guadalupe, California processing facility, bringing legal actions before various state and federal agencies, the California Superior Court, and initiating over 100 individual arbitrations against Curation Foods and Pacific Harvest.
The legal actions consisted of various claims, all of which were settled in fiscal year 2017. Under the settlement agreement, the plaintiffs were to be paid in three installments. The Company and Pacific Harvest each agreed to pay one half of the settlement payments. The Company paid the entire first two installments and Pacific Harvest agreed to reimburse the Company for its $2.1 million portion. As of May 31, 2020, the outstanding balance of the receivable was $1.2 million. The Company makes ongoing estimates relating to the collectability of receivables. A reserve is established for any note when there is reasonable doubt that the principal or interest will be collected in full. The Company may write-off uncollectable receivables after collection efforts are exhausted. During the fiscal year 2020, the Company’s review for collectability concluded that a receivable reserve of $1.2 million would be recorded. The Company's conclusion regarding collectability changed as a result of Pacific Harvest communicating their refusal to pay combined with their bringing claims against the Company. As of August 30, 2020, the reserve balance remained at $1.2 million.
Compliance Matters and Related Litigation
On December 1, 2018, the Company acquired all of the voting interests and substantially all of the assets of Yucatan Foods (the “Yucatan Acquisition”), which owns a guacamole manufacturing plant in Mexico called Procesadora Tanok, S de RL de C.V. (“Tanok”).
On October 21, 2019, the Company retained Latham & Watkins, LLP to conduct an internal investigation relating to potential environmental and Foreign Corrupt Practices Act (“FCPA”) compliance matters associated with regulatory permitting at the Tanok facility in Mexico. The Company subsequently disclosed to the SEC and the U.S. Department of Justice (“DOJ”) the conduct under investigation, and these agencies have commenced an investigation. The Company has also disclosed the conduct under investigation to the Mexican Attorney General’s Office, which has commenced an investigation, and to Mexican regulatory agencies. The Company is cooperating in the government investigations and requests for information. The conduct at issue began prior to the Yucatan Acquisition, and the agreement for the Yucatan Acquisition provides the Company with certain indemnification rights that may allow the Company to recover the cost of a portion of the liabilities that have been and may be incurred by the Company in connection with these compliance matters. On September 2, 2020, one of the former owners of Yucatan filed a lawsuit against the Company in Los Angeles County Superior Court for breach of employment agreement, breach of contract, breach of holdback agreement, declaratory relief and accounting, and related claims The Plaintiff seeks over $10.0 million in damages, including delivery of shares of his stock held in escrow for the indemnification claims described above. The Company intends to contest this lawsuit vigorously and to pursue its indemnification claims against all former owners of Yucatan.
At this stage, the ultimate outcome of these or any other investigations, legal actions, or potential claims that may arise from the matters under investigation is uncertain and the Company cannot reasonably predict the timing or outcomes, or estimate the amount of net loss after indemnification or insurance recovery, or its effect, if any, on its financial statements. Separately, there are indemnification provisions in the purchase agreement that allow the Company to recover costs for breach of warranty, etc. from the seller. Because recovery of amounts are contingent upon the outcome of legal proceedings, no amounts have been recorded as recoverable costs through August 30, 2020. Nor are there any insurance claims recorded as they are similarly contingent.
Other Litigation Matters
On February 10, 2020, a complaint was filed against Curation Foods in the United States District Court for the Northern District of Georgia, Printpack, Inc. v. Curation Foods, Inc., alleging breach of contract pertaining to Curation Foods’ purchase of certain poly film packaging from the plaintiff. The plaintiff sought an unspecified amount of monetary damages, litigation expenses, and interest. The lawsuit was dismissed during the first quarter of fiscal year 2021.
On February 14, 2020, a complaint was filed against the Company, Curation Foods, the Company's current CEO Albert Bolles, the Company’s former Chief Financial Officer Gregory Skinner, and other defendants (collectively, the “Landec Parties”) in Santa Barbara County Superior Court, entitled Pacific Harvest, Inc., et al. v. Curation Foods, Inc., et al. (No. 20CV00920). The case was brought by Pacific Harvest, Inc. (“Pacific”) and Rancho Harvest, Inc. (“Rancho”), two related companies that have provided labor and employee staffing services to Curation Foods. Among other things, Pacific and Rancho allege that Curation Foods wrongfully decreased its use of Pacific’s staffing services and misappropriated Pacific’s trade secrets when Curation Foods increased its use of another staffing company and transitioned Pacific’s employees to the other staffing company. Pacific and Rancho also allege that Curation Foods breached agreements between the parties related to a loan from Curation Foods. Based on this alleged breach, Pacific and Rancho have ceased making payments. Plaintiffs assert claims for breach of contract, breach of the implied covenant of good faith and fair dealing, intentional interference with contracts and potential economic advantage, misappropriation of trade secrets under California’s Uniform Trade Secrets Act, business practices in violation of California Unfair Competition Law, fraud, defamation, violation of California Usury Law, breach of fiduciary duty, and declaratory relief regarding the parties’ rights and obligations under certain of the parties’ contracts. The Landec Parties' deadline to respond to the complaint is currently set for October 21, 2020. Given the preliminary stage of the litigation, at this time the Company is unable to determine whether any loss is probable or reasonably estimate a range of such loss, and accordingly has not accrued any liability associated with these matters. The Company intends to defend and pursue its interests in this case vigorously.
Recent Accounting Guidance
Recently Adopted Pronouncements
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”), which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The Accounting Standards Update generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted. The Company adopted ASU 2018-15 on June 1, 2020, and the adoption of this standard did not have an impact on the Company’s consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The guidance eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Entities will no longer have to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13 on June 1, 2020, and the adoption of this standard did not have an impact on the Company’s consolidated financial statements. As required by ASU 2018-13, the Company included additional disclosures in the Fair Value Measurement section related to the range and weighted average rates used to develop significant inputs for the Level 3 investment.
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. Effective June 1, 2020, the Company adopted ASC 326 using the transition method introduced by ASU 2016-13. The adoption of ASC 326 did not have a material impact on our consolidated financial statements.
Under ASC 326, the Company changed its policy for assessing credit losses to include consideration of a broader range of information to estimate credit losses over the life of its financial assets. As of August 30, 2020 the financial assets of the Company within the scope of the assessment comprised of trade accounts receivable, contract assets, and deposits. See the Accounts Receivable and Sales Returns and Allowance for Credit Losses section within Note 1 for further discussion of the Company's accounting for credit losses.
2. Investment in Non-public Company
On February 15, 2011, Curation Foods entered into a share purchase agreement (the “Windset Purchase Agreement”) with Windset. Pursuant to the Windset Purchase Agreement, Curation Foods purchased from Windset 150,000 Senior A preferred shares for $15.0 million and 201 common shares for $201. On July 15, 2014, Curation Foods increased its investment in Windset by purchasing from the Newell Capital Corporation an additional 68 common shares and 51,211 junior preferred shares of Windset for $11.0 million. After this purchase, the Company’s common shares represent a 26.9% ownership interest in Windset. The Senior A preferred shares yield a cash dividend of 7.5% annually. The dividend is payable within 90 days of each anniversary of the execution of the Windset Purchase Agreement. The non-voting junior preferred stock does not yield a dividend unless declared by the Board of Directors of Windset and no such dividend has been declared.
The Shareholders’ Agreement between Curation Foods and Windset, as amended on March 15, 2017, includes a put and call option (the “Put and Call Option”), which can be exercised on or after March 31, 2022, whereby Curation Foods can exercise the put to sell its common, Senior A preferred shares, and junior preferred shares to Windset, or Windset can exercise the call to purchase those shares from Curation Foods, in either case, at a price equal to 26.9% of the fair market value of Windset’s common shares, plus the liquidation value of the preferred shares of $20.1 million ($15.0 million for the Senior A preferred shares and $5.1 million for the junior preferred shares). Under the terms of the arrangement with Windset, the Company is entitled to designate one of five members on the Board of Directors of Windset.
The investment in Windset does not qualify for equity method accounting as the investment does not meet the criteria of in-substance common stock due to returns through the annual dividend on the non-voting senior preferred shares that are not available to the common stockholders. As the put and call options require all of the various shares to be put or called in equal proportions, the Company has deemed that the investment, in substance, should be treated as a single security for purposes of accounting.
The fair value of the Company’s investment in Windset was determined utilizing the Windset Purchase Agreement’s put/call calculation for value and a discounted cash flow model based on projections developed by Windset that were reviewed by Landec, and considers the put and call conversion options. These features impact the duration of the cash flows utilized to derive the estimated fair values of the investment. These two discounted cash flow models’ estimate for fair value are then weighted. Assumptions included in these discounted cash flow models will be evaluated quarterly based on Windset’s actual and projected operating results to determine the change in fair value.
During the three months ended August 30, 2020 and August 25, 2019, the Company recorded $0.3 million and $0.3 million, respectively, in dividend income. The increase in the fair market value of the Company’s investment in Windset for the three months ended August 30, 2020 and August 25, 2019, was $0.0 million and $0.0 million, respectively and is included in Other expenses (income) in the accompanying Consolidated Statements of Comprehensive (Loss) Income.
3. Stock-based Compensation and Stockholders' Equity
Stock-Based Compensation Activity
The estimated fair value for stock options, which determines the Company’s calculation of stock-based compensation expense, is based on the Black-Scholes option pricing model. Restricted stock units (“RSUs”) are valued at the closing market price of the Company’s common stock on the grant date. The Company uses the straight-line method to recognize the fair value of stock-based compensation arrangements.
During the three months ended August 30, 2020, the Company granted 551,600 options to purchase shares of common stock and awarded 88,531 RSUs.
As of August 30, 2020, the Company has reserved 4.2 million shares of common stock for future issuance under its current and former equity plans.
Stock-Based Compensation Expense
The Company’s stock-based awards include stock option grants and RSUs. The Company records compensation expense for stock-based awards issued to employees and directors in exchange for services provided based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods, generally the vesting period.
The following table summarizes stock-based compensation by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
(In thousands)
|
August 30, 2020
|
|
August 25, 2019
|
|
|
|
|
|
Cost of sales
|
$
|
123
|
|
|
$
|
(26)
|
|
|
|
|
|
|
Research and development
|
64
|
|
|
30
|
|
|
|
|
|
|
Selling, general and administrative
|
705
|
|
|
524
|
|
|
|
|
|
|
Total stock-based compensation
|
$
|
892
|
|
|
$
|
528
|
|
|
|
|
|
As of August 30, 2020, there was $5.4 million of total unrecognized compensation expense related to unvested equity compensation awards granted under the Landec incentive stock plans. Total expense is expected to be recognized over the weighted-average period of 2.56 years for stock options and 1.58 years for RSUs.
Stock Repurchase Plan
On July 14, 2010, the Board of Directors of the Company approved the establishment of a stock repurchase plan, which allows for the repurchase of up to $10.0 million of the Company’s common stock. The Company may still repurchase up to $3.8 million of the Company’s common stock under the Company’s stock repurchase plan. The Company may repurchase its common stock from time to time in open market purchases or in privately negotiated transactions. The timing and actual number of shares repurchased is at the discretion of management of the Company and will depend on a variety of factors, including stock price, corporate and regulatory requirements, market conditions, the relative attractiveness of other capital deployment opportunities and other corporate priorities. The stock repurchase program does not obligate Landec to acquire any amount of its common stock and the program may be modified, suspended or terminated at any time at the Company's discretion without prior notice. During the three months ended August 30, 2020, the Company did not purchase any shares on the open market.
4. Diluted Earnings Per Share
The following table sets forth the computation of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
August 30, 2020
|
|
August 25, 2019
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
$
|
(11,000)
|
|
|
$
|
(4,784)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares for basic net loss per share
|
29,242
|
|
|
29,139
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
—
|
|
|
—
|
|
|
|
|
|
|
Weighted average shares for diluted net loss per share
|
29,242
|
|
|
29,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
$
|
(0.38)
|
|
|
$
|
(0.16)
|
|
|
|
|
|
Due to the Company’s net loss for the three months ended August 30, 2020 and August 25, 2019, the net loss per share includes only weighted average shares outstanding. For the three months ended August 30, 2020 and August 25, 2019, the computation of the diluted net loss per share excludes the impact of options to purchase 2.2 million and 2.6 million shares of common stock, respectively, as such impacts would be antidilutive for these periods.
5. Income Taxes
The provision for income taxes for the three months ended August 30, 2020 and August 25, 2019, was a benefit of $4.3 million and $1.4 million, respectively. The effective tax rate for the three months ended August 30, 2020 and August 25, 2019 was 28% and 22%, respectively. The effective tax rate for the three months ended August 30, 2020, was higher than the statutory federal income tax rate of 21% primarily due to the generation of federal & state research and development (“R&D”) credits and movements of the valuation allowance recorded against certain deferred tax assets, partially offset by the impact of state taxes and stock based compensation.
As of August 30, 2020 and May 31, 2020, the Company had unrecognized tax benefits of $0.9 million and $0.8 million, respectively. Included in the balance of unrecognized tax benefits as of August 30, 2020 and May 31, 2020, is $0.8 million and $0.7 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next twelve months.
The Company has elected to classify interest and penalties related to uncertain tax positions as a component of its provision for income taxes. The Company has accrued an insignificant amount of interest and penalties relating to the income tax on the unrecognized tax benefits as of August 30, 2020 and May 31, 2020.
Due to tax attribute carryforwards, the Company is subject to examination for tax years 2017 forward for U.S. tax purposes. The Company is also subject to examination in various state jurisdictions for tax years 2015 forward, none of which were individually significant.
6. Debt
Long-term debt, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
August 30, 2020
|
|
May 31, 2020
|
|
Term loan
|
$
|
106,000
|
|
|
$
|
114,000
|
|
|
Total principal amount of long-term debt
|
106,000
|
|
|
114,000
|
|
|
Less: unamortized debt issuance costs
|
(1,054)
|
|
|
(1,083)
|
|
|
Total long-term debt, net of unamortized debt issuance costs
|
104,946
|
|
|
112,917
|
|
|
Less: current portion of long-term debt, net
|
(11,027)
|
|
|
(11,554)
|
|
|
Long-term debt, net
|
$
|
93,919
|
|
|
$
|
101,363
|
|
On September 23, 2016, the Company entered into a Credit Agreement with JPMorgan, BMO, and City National Bank, as lenders (collectively, the “Lenders”), and JPMorgan as administrative agent, pursuant to which the Lenders provided the Company with a $100.0 million revolving line of credit (the “Revolver”) and a $50.0 million term loan facility (the “Term Loan”), guaranteed by each of the Company’s direct and indirect subsidiaries and secured by substantially all of the Company’s assets, with the exception of the Company’s investment in Windset.
On November 30, 2018, the Company entered into the Fourth Amendment to the Credit Agreement, which increased the Term Loan to $100.0 million and the Revolver to $105.0 million.
On October 25, 2019, the Company entered into the Sixth Amendment to the Credit Agreement, which increased the Term Loan to $120.0 million and decreased the revolver to $100.0 million.
On March 19, 2020, the Company entered into the Seventh Amendment to the Credit Agreement (the "Seventh Amendment"), which among other changes, retroactively increased the maximum Total Leverage Ratio (as defined in the Credit Agreement as the ratio of the Company’s total indebtedness on such date to the Company’s consolidated EBITDA for the period of four consecutive fiscal quarters ended on or most recently prior to such date) to 5.75 to 1.00 for the fiscal quarter ended February 23, 2020, which decreases back to 5.00 to 1.00 for the fiscal quarter ending May 31, 2020. The maximum Total Leverage Ratio thereafter decreases by 25 basis points each subsequent fiscal quarter thereafter, until it reaches 3.50 for the fiscal quarter ending November 28, 2021, and then remains fixed through maturity. The Seventh Amendment also introduced additional financial covenants that remain in effect through May 31, 2020, including minimum cumulative monthly Unadjusted EBITDA thresholds and maximum capital expenditures, as well as additional reporting requirements and frequencies. Interest on both the Revolver and the Term Loan continued to be based upon the Company’s Total Leverage Ratio, at a per annum rate of either (i) the prime rate plus a spread of between 0.25% and 3.00% or (ii) the Eurodollar rate plus a spread of between 1.25% and 4.00%. The Seventh Amendment also provided for the acceleration of the maturity of the Term Loan from October 25, 2022 to September 23, 2021 if the Company fails to be in compliance with certain financial covenants.
On July 15, 2020, the Company entered into the Eighth Amendment to the Credit Agreement (the “Eighth Amendment”), which among other things, (i) modified the definition of EBITDA to increase the limit on permitted exclusions for certain unusual, extraordinary or one-time cash items for each fiscal quarter ending on or after February 28, 2021, to a maximum of 20% of EBITDA, and (ii) restricted the Company from making Capital Expenditures over certain thresholds. Interest continues to be based on the Company’s Total Leverage Ratio, now at a revised per annum Applicable Rate of either (i) the prime rate plus a spread of between 0.75% and 3.50% or (ii) the Eurodollar rate plus a spread of between 1.75% and 4.50%, plus, in each case, a commitment fee, as applicable, of between 0.15% and 0.55%, as further described in the Eighth Amendment.
The Credit Agreement provides the Company the right to increase the Revolver commitments and/or the Term Loan commitments by obtaining additional commitments either from one or more of the Lenders or another lending institution at an amount of up to $10.0 million.
Both the Revolver and the Term Loan mature on September 23, 2021, with the Term Loan requiring quarterly principal payments of $3.0 million and the remainder continuing to be due at maturity. The Credit Agreement contains customary financial covenants and events of default under which the obligation could be accelerated and/or the interest rate increased. As of August 30, 2020, the Company was in compliance with all financial covenants and events of default provisions under the Credit Agreement.
As of August 30, 2020, $69.0 million was outstanding on the Revolver, at an interest rate of 4.66%.
The Company's outstanding indebtedness under the Credit Agreement will mature and become due on September 23, 2021. The Company's currently available liquidity plus the expected additional cash generated by operations prior to that maturity date are not expected to be sufficient to pay such debt obligations prior to or at the maturity date without additional financing. Management is actively pursuing refinancing options and is currently in discussions with several third-party lenders to seek to negotiate a refinancing that would extend the maturity of the Company’s indebtedness and provide greater flexibility for the Company. Management believes its current refinancing plans are probable to occur and appropriately mitigate the risk that the Company will not be able to meet its obligations as they become due. Therefore, the financial statements have been prepared assuming the Company will continue as a going concern. The Company believes that its cash from operations, along with existing cash and cash equivalents, will be sufficient to finance its operational and capital requirements for at least the next twelve months, assuming the Company is able to execute its plan to refinance its debt. However, there is no guarantee we will able to refinance, or be able to do so on favorable terms. See Item 1A. “Risk Factors” for more information.
Derivative Instruments
On November 1, 2016, the Company entered into an interest rate swap contract (the “2016 Swap”) with BMO at a notional amount of $50.0 million. The 2016 Swap has the effect of changing the Company’s Term Loan obligation from a variable interest rate to a fixed 30-day LIBOR rate of 1.22%.
On June 25, 2018, the Company entered into an interest rate swap contract (the “2018 Swap”) with BMO at a notional amount of $30.0 million. The 2018 Swap has the effect of converting the first $30.0 million of the total outstanding amount of the Company’s 30-day LIBOR borrowings from a variable interest rate to a fixed 30-day LIBOR rate of 2.74%.
On December 2, 2019, the Company entered into an interest rate swap contract (the "2019 Swap") with BMO at a notional amount of $110.0 million which decreases quarterly. The 2019 Swap has the effect of converting primarily all of the $110.0 million of the total outstanding amount of the Company's 30-day LIBOR borrowings from a variable interest rate to a fixed 30-day LIBOR rate of 1.526%.
7. Business Segment Reporting
The Company operates using three strategic reportable business segments, aligned with how the Chief Executive Officer, who is the chief operating decision maker (“CODM”), manages the business: the Curation Foods segment, the Lifecore segment, and the Other segment.
The Curation Foods business includes (i) four natural food brands, including Eat Smart, O Olive Oil & Vinegar, Yucatan Foods, and Cabo Fresh, (ii) BreatheWay® activities, and (iii) activity related to our 26.9% investment in Windset. The Curation Foods segment includes (a) activities to market and pack specialty packaged whole and fresh-cut fruits and vegetables, the majority of which incorporate the BreatheWay specialty packaging under either the Eat Smart brand or various private labels, (b) O brand of olive oils and vinegars, and (c)Yucatan Foods and Cabo Fresh brand of avocado products.
The Lifecore segment sells products utilizing hyaluronan, a naturally occurring polysaccharide that is widely distributed in the extracellular matrix of connective tissues in both animals and humans, and non-HA products for medical use primarily in the Ophthalmic, Orthopedic and other markets.
The Other segment includes corporate general and administrative expenses, non-Curation Foods and non-Lifecore interest expense, interest income, and income tax expenses. Corporate overhead is allocated between segments based on actual utilization and relative size.
All of the Company's assets are located within the United States of America except for its Yucatan production facility in Mexico.
The Company’s international sales by geography are based on the billing address of the customer and were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
(In millions)
|
August 30, 2020
|
|
August 25, 2019
|
|
|
|
|
|
Canada
|
$
|
16.5
|
|
|
$
|
20.7
|
|
|
|
|
|
|
Belgium
|
3.9
|
|
|
—
|
|
|
|
|
|
|
Ireland
|
0.8
|
|
|
1.4
|
|
|
|
|
|
|
All Other Countries
|
1.7
|
|
|
1.7
|
|
|
|
|
|
Operations by business segment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Curation Foods
|
|
Lifecore
|
|
Other
|
|
Total
|
|
Three Months Ended August 30, 2020
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
113,839
|
|
|
$
|
21,804
|
|
|
$
|
—
|
|
|
$
|
135,643
|
|
|
Gross profit
|
11,345
|
|
|
5,002
|
|
|
—
|
|
|
16,347
|
|
|
Net (loss) income
|
(8,271)
|
|
|
112
|
|
|
(2,841)
|
|
|
(11,000)
|
|
|
Depreciation and amortization
|
3,410
|
|
|
1,310
|
|
|
28
|
|
|
4,748
|
|
|
Dividend income
|
281
|
|
|
—
|
|
|
—
|
|
|
281
|
|
|
Interest income
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Interest expense
|
1,376
|
|
|
—
|
|
|
1,733
|
|
|
3,109
|
|
|
Income tax (benefit) expense
|
(2,612)
|
|
|
35
|
|
|
(1,732)
|
|
|
(4,309)
|
|
|
Corporate overhead allocation
|
1,856
|
|
|
1,403
|
|
|
(3,259)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 25, 2019
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
126,673
|
|
|
$
|
12,041
|
|
|
$
|
—
|
|
|
$
|
138,714
|
|
|
Gross profit
|
12,822
|
|
|
2,514
|
|
|
—
|
|
|
15,336
|
|
|
Net loss
|
(2,171)
|
|
|
(1,395)
|
|
|
(1,218)
|
|
|
(4,784)
|
|
|
Depreciation and amortization
|
3,205
|
|
|
1,185
|
|
|
23
|
|
|
4,413
|
|
|
Dividend income
|
281
|
|
|
—
|
|
|
—
|
|
|
281
|
|
|
Interest income
|
20
|
|
|
—
|
|
|
5
|
|
|
25
|
|
|
Interest expense
|
1,376
|
|
|
—
|
|
|
699
|
|
|
2,075
|
|
|
Income tax benefit
|
(586)
|
|
|
(465)
|
|
|
(314)
|
|
|
(1,365)
|
|
|
Corporate overhead allocation
|
1,696
|
|
|
976
|
|
|
(2,672)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended August 30, 2020 and August 25, 2019, sales to the Company’s top five customers accounted for 51% and 49% of sales, respectively. The Company’s top two customers, Costco Wholesale Corporation and Walmart Stores, Inc., from the Curation Foods segment, accounted for 19% and 14%, respectively, of revenues for the three months ended August 30, 2020, and 14% and 20%, respectively, for the three months ended August 25, 2019.
8. Restructuring Costs
During fiscal year 2020, the Company announced a restructuring plan to drive enhanced profitability, focus the business on its strategic assets and redesign the organization to be the appropriate size to compete and thrive. This includes a reduction-in-force, a reduction in leased office spaces, and the sale of non-strategic assets.
In the first quarter of fiscal year 2021, the Company sold its interest in Ontario. The Company received net cash proceeds of $4.9 million in connection with the sale, and recorded a gain of $2.8 million which is included in Restructuring costs within the Consolidated Statements of Comprehensive (Loss) Income. See the Assets Held for Sale section within Note 1 for additional information.
In the first quarter of fiscal year 2021, the Company recognized a $8.8 million impairment loss related to its Hanover building and related assets thereto, which is included in Restructuring costs within the Consolidated Statements of Comprehensive (Loss) Income. See the Assets Held for Sale section within Note 1 for additional information.
In August 2020, the Company closed its leased Santa Clara, California office and entered into a sublease agreement. In the fourth quarter of fiscal year 2020 the Company closed its leased Los Angeles, California office and plans to sublease the office.
The following table summarizes the restructuring costs recognized in the Company’s Consolidated Statements of (Loss) Income, by Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Curation Foods
|
|
Lifecore
|
|
Other
|
|
Total
|
|
Three Months Ended August 30, 2020
|
|
|
|
|
|
|
|
|
Asset write-off costs, net
|
$
|
6,005
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,005
|
|
|
Employee severance and benefit costs
|
905
|
|
|
—
|
|
|
—
|
|
|
905
|
|
|
Lease costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other restructuring costs
|
847
|
|
|
—
|
|
|
647
|
|
|
1,494
|
|
|
Total restructuring costs
|
$
|
7,757
|
|
|
$
|
—
|
|
|
$
|
647
|
|
|
$
|
8,404
|
|
The following table summarizes the restructuring costs recognized in the Company’s Consolidated Statements of (Loss) Income, by Business Segment, since inception of the restructuring plan in fiscal year 2020 through the three months ended August 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curation Foods
|
|
Lifecore
|
|
Other
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Asset write-off costs, net
|
$
|
18,667
|
|
|
$
|
—
|
|
|
$
|
418
|
|
|
$
|
19,085
|
|
|
Employee severance and benefit costs
|
2,373
|
|
|
—
|
|
|
784
|
|
|
3,157
|
|
|
Lease costs
|
392
|
|
|
—
|
|
|
26
|
|
|
418
|
|
|
Other restructuring costs
|
1,871
|
|
|
—
|
|
|
1,158
|
|
|
3,029
|
|
|
Total restructuring costs
|
$
|
23,303
|
|
|
$
|
—
|
|
|
$
|
2,386
|
|
|
$
|
25,689
|
|
The total expected cost related to the restructuring plan is approximately $27.0 million.
9. Subsequent Events
Hanover, Pennsylvania Manufacturing Facility
As previously disclosed in the Assets Held for Sale section within Note 1, the Company made plans to sell its Hanover facility. Subsequent to the end of the Company’s first fiscal quarter, on September 4, 2020, the Company sold the Hanover building and assets related thereto for net proceeds of $8.0 million. The Company does not expect any additional impact to earnings during its second quarter of fiscal year 2021 related to this sale.
COVID-19 Pandemic
There are many uncertainties regarding the current novel coronavirus (“COVID-19”) pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. The COVID-19 pandemic as well as the actions taken in response to the pandemic, have had, and we believe will continue to have, significant adverse impacts on many aspects of the Company’s operations, directly and indirectly, including with respect to sales, customer behaviors, business and manufacturing operations, inventory, the Company’s employees, and the market generally, and the scope and nature of these impacts continue to evolve each day. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic, and intends to continue to make adjustments to its responses accordingly.
The Company is subject to several recently issued accounting pronouncements. Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements of the Notes to the Consolidated Financial Statements which is contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, describes these new accounting pronouncements and is incorporated herein by reference.
The Company
Corporate Overview
Landec Corporation and its subsidiaries (“Landec,” the “Company”, "we" or "us") design, develop, manufacture, and sell differentiated products for food and biomaterials markets, and license technology applications to partners.
Landec’s natural food company, Curation Foods, Inc. (“Curation Foods”) is focused on innovating and distributing plant-based foods with 100% clean ingredients to retail, club and foodservice channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed family of growers, refrigerated supply chain and patented BreatheWay® packaging technology.
Landec’s biomedical company, Lifecore Biomedical, Inc. (“Lifecore”), is a fully integrated CDMO that offers highly differentiated capabilities in the development, fill and finish of sterile, injectable pharmaceutical products in syringes and vials. As a leading manufacturer of premium, injectable grade Hyaluronic Acid, Lifecore brings 35 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market.
Landec was incorporated in California on October 31, 1986 and reincorporated as a Delaware corporation on November 6, 2008. Landec’s common stock is listed on The NASDAQ Global Select Market under the symbol “LNDC”. The Company’s principal executive offices are located at 2811 Airpark Drive Santa Maria, California 93455, and the telephone number is (650) 306-1650.
Reportable Segments
Landec has three reportable business segments – Curation Foods, Lifecore and Other, which are described below.
Curation Foods
Curation Foods Overview
Based in Santa Maria, California, Curation Foods’ primary business is the processing, marketing and selling of fresh packaged plant based salads and vegetables. Curation Foods serves as the corporate umbrella for its patented BreatheWay® packaging technology and for its portfolio of four natural food brands, including the Company’s legacy and flagship brand Eat Smart® as well as its three more recently acquired natural food brands, O Olive Oil & Vinegar® (“O”) products, and Yucatan® and Cabo Fresh authentic guacamole and avocado products. The major distinguishing characteristics of Curation Foods that provide a competitive advantage are its insight-driven product innovation, diversified fresh food supply chain, refrigerated supply chain and customer reach. We believe that Curation Foods is well positioned as a single source supplier of a broad range of products. Curation Foods also has three East Coast processing facilities and five East Coast distribution centers for nationwide delivery of its packaged salads and vegetable products. As of May 31, 2020, our products were available in over 86% of retail and club stores across North America.
During fiscal 2019, the Company redefined the strategy for its Curation Foods segment in order to improve the Company’s overall profitability by launching Project SWIFT, a value creation program designed to transform the Curation Foods business by simplifying the business, realigning its resources and seeking to improve the Company’s balance sheet through three strategic priorities - optimizing its operations networks, maximizing strategic assets and redesigning the organization to be more competitive.
Curation Foods Brands
Eat Smart: The Company sells specialty fresh packaged Eat Smart branded and private label salads, fresh-cut vegetables and whole produce to retailers, club stores, and food service operators, primarily in the United States and Canada. Within the Eat Smart brand, produce is processed by trimming, washing, sorting, blending, and packaging into bags and trays.
O Olive Oil & Vinegar: The Company acquired O on March 1, 2017. O, founded in 1995, is based in Petaluma, California, and is the premier producer of California specialty olive oils and wine vinegars. Its products are sold in natural food, conventional grocery and mass retail stores, primarily in the United States and Canada.
Yucatan & Cabo Fresh Avocado Products: The Company acquired Yucatan Foods on December 1, 2018. Yucatan Foods was founded in 1991. As part of the acquisition of Yucatan Foods, Curation Foods acquired the newly built production facility in Guanajuato, Mexico. The Yucatan Foods business added a double-digit growth platform, a lower-cost infrastructure in Mexico, and higher margin product offerings that generally exhibit less sourcing volatility. The Company manufactures and sells Yucatan and Cabo Fresh guacamole and avocado food products primarily to the U.S. grocery channel, but also to the U.S. mass retail, Canadian grocery retail and foodservice channels.
BreatheWay Packaging Technology: The Company’s BreatheWay membrane technology establishes a beneficial packaging atmosphere adapting to changing fresh product respiration and temperature in order to extend freshness naturally. The BreatheWay supply chain packaging technology extends shelf-life and reduces shrink (waste) for retailers and helps to ensure that consumers receive fresh produce by the time the product makes its way through the distribution chain to the consumer. The Company generates revenue from the sale to and/or use of its BreatheWay patented packaging technology by partners such as Windset, for packaging of its greenhouse grown cucumbers and peppers. In addition, the Company sells its complete supply chain solution for fresh pallets of product ensuring more marketable fruit and vegetables at retail. Most vegetable products packaged in the Company’s BreatheWay packaging technology achieve a shelf-life of approximately 17 days. These packaging license relationships generate revenues either from product sales or royalties once commercialized. The Company is engaged in the testing and development of other BreatheWay products. The Company manufactures its BreatheWay packaging through selected qualified contract manufacturers.
Windset: The Company holds a 26.9% noncontrolling investment ownership in Windset, a leading-edge grower of hydroponically grown produce. The Company believes that Windset’s know-how and growing practices of hydroponically grown produce will result in higher yields with competitive growing costs that will provide dependable year-round supply to Windset’s customers. In addition, the produce grown in Windset’s greenhouses uses significantly less water than field grown crops and has a very high safety profile as no soil is used in the growing process. Windset owns and operates greenhouses in British Columbia, Canada and California. In addition to growing produce in its own greenhouses, Windset has numerous marketing arrangements with other greenhouse growers and utilizes buy/sell arrangements to meet fluctuation in demand from their customers. The Curation Foods segment operating results include the dividends and Landec’s share of the change in fair market value of its investment in Windset.
Lifecore Biomedical
Lifecore, located in Chaska, Minnesota, is a fully integrated CDMO that offers highly differentiated capabilities in the development, fill and finish of sterile, injectable pharmaceutical products in syringes and vials. It is involved in the manufacture of pharmaceutical-grade sodium hyaluronate (“HA”) in bulk form as well as formulated and filled syringes and vials for injectable products used in treating a broad spectrum of medical conditions and procedures. Lifecore uses its fermentation process and aseptic formulation and filling expertise to be a leader in the development of HA-based products for multiple applications and to take advantage of non-HA device and drug opportunities which leverage its expertise in manufacturing and aseptic syringe filling capabilities.
Lifecore provides product development services as a CDMO to its partners for HA-based, as well as non-HA based, aseptically formulated and filled products. These services include activities such as technology transfer, material component changes, analytical method development, formulation development, pilot studies, stability studies, process validation, and production of materials for clinical studies.
Built over many years of experience, Lifecore separates itself from its competition based on its five areas of expertise, including but not limited to Lifecore’s ability to:
Establish strategic relationships with market leaders:
Lifecore continues to develop applications for products with partners who have strong marketing, sales, and distribution capabilities to end-user markets. Through its strong reputation and history of providing pharmaceutical grade HA and products, Lifecore has established long-term relationships with global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories, and leverages those partnerships to attract new relationships in other medical markets.
Expand medical applications for HA:
Due to the growing knowledge of the unique characteristics of HA and Lifecore’s unique strength and history as a trusted manufacturer of pharmaceutical injectable grade HA products, Lifecore continues to identify and pursue opportunities for the use of HA in other medical applications, such as wound care, aesthetic surgery, drug delivery, next generation orthopedics and device coatings, and through sales to academic and corporate research customers. Further applications may involve expanding process development activity and/or additional licensing of technology.
Utilize manufacturing infrastructure to meet customer demand:
Lifecore has made strategic capital investments in its CDMO business focusing on extending its aseptic filling capacity and capabilities to meet increasing partner demand and to attract new contract filling opportunities outside of HA markets. Lifecore is using its manufacturing capabilities to provide contract manufacturing and development services to its partners in the area of sterile pre-filled syringes and vials, as well as fermentation and purification requirements.
Maintain flexibility in product development and supply relationships:
Lifecore’s vertically integrated development and manufacturing capabilities allow it to establish a variety of contractual relationships with global corporate partners. Lifecore’s role in these relationships extends from supplying HA raw materials to providing technology transfer and development services to manufacturing aseptically filled, finished sterile products, and assuming full supply chain responsibilities.
Deliver consistent quality:
Lifecore has built a world class quality and regulatory system that is demonstrated in their results, processes and customer relationships. With over 35 years of a superior track record with global regulatory bodies (FDA, EMA, ANVISA, etc.), Lifecore is the partner of choice for companies looking for proven experience in delivering QbD, cGMP compliance, and manufacturing excellence with pharmaceutical elegance and quality. Lifecore’s world class quality and regulatory system and excellent track record with the global regulatory bodies ensure partners that they will safely bring innovative therapies to market.
Other
Included in the Other segment is Corporate, which includes corporate general and administrative expenses, non-Curation Foods and non-Lifecore interest income and income tax expenses.
COVID-19 Pandemic
There are many uncertainties regarding the current novel coronavirus (“COVID-19”) pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. The COVID-19 pandemic as well as the actions taken in response to the pandemic, have had, and we believe will continue to have, significant adverse impacts on many aspects of the Company’s operations, directly and indirectly, including with respect to sales, customer behaviors, business and manufacturing operations, inventory, the Company’s employees, and the market generally, and the scope and nature of these impacts continue to evolve each day. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic, and intends to continue to make adjustments to its responses accordingly.
Results of Operations
Revenues:
Curation Foods revenues consist of revenues generated from (1) the sale of specialty packaged fresh-cut and whole processed vegetable products and salads that are washed and packaged in most cases in the Company’s proprietary BreatheWay packaging and sold primarily under the Eat Smart brand and various private labels, (2) O Olive oils and wine vinegars, and (3) Yucatan and Cabo Fresh branded guacamole and avocado products. In addition, the Curation Foods reportable business segment includes the revenues generated from the sale of BreatheWay packaging to license partners.
Lifecore generates revenues from the development and manufacture of HA products and providing contract development and aseptic manufacturing services to customers. Lifecore generates revenues from two integrated activities: (1) CDMO and (2) fermentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2020
|
|
August 25, 2019
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
Curation Foods
|
$
|
113,839
|
|
|
$
|
126,673
|
|
|
$
|
(12,834)
|
|
|
(10)
|
%
|
|
|
|
|
|
|
|
|
|
Lifecore
|
21,804
|
|
|
12,041
|
|
|
9,763
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
$
|
135,643
|
|
|
$
|
138,714
|
|
|
$
|
(3,071)
|
|
|
(2)
|
%
|
|
|
|
|
|
|
|
|
Curation Foods
The decrease in Curation Foods’ revenues for the three months ended August 30, 2020, compared to the same period last year, was primarily due to a $6.6 million planned shift away from non-strategic revenue streams, including packaged vegetables in bags and trays, a $3.5 million decrease in green bean revenues driven by a decrease in demand from food service customers during the COVID-19 pandemic, and a $2.9 million decrease in salads as a result of decreased volume during the COVID-19 pandemic.
Lifecore
The increase in Lifecore’s revenues for the three months ended August 30, 2020, compared to the same period last year, was due to a $5.2 million increase in CDMO revenues from an increase in aseptic filling commercial shipments, due to increased demand from existing customers, and a $4.6 million increase in fermentation sales primarily due to timing of shipments.
Gross Profit:
There are numerous factors that can influence gross profit including product mix, customer mix, manufacturing costs, volume, sales discounts and charges for excess or obsolete inventory, to name a few. Many of these factors influence or are interrelated with other factors. The Company includes in cost of sales all of the following costs: raw materials (including produce, seeds, packaging, syringes and fermentation and purification supplies), direct labor, overhead (including indirect labor, depreciation, and facility-related costs) and shipping and shipping-related costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2020
|
|
August 25, 2019
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
Curation Foods
|
$
|
11,345
|
|
|
$
|
12,822
|
|
|
$
|
(1,477)
|
|
|
(12)
|
%
|
|
|
|
|
|
|
|
|
|
Lifecore
|
5,002
|
|
|
2,514
|
|
|
2,488
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
$
|
16,347
|
|
|
$
|
15,336
|
|
|
$
|
1,011
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
Curation Foods
The decrease in gross profit for the Curation Foods business for the three months ended August 30, 2020, compared to the same period last year, was primarily due to the decrease in revenues, partially offset by an increase in gross profits from avocado products due to selling products in the first quarter of fiscal 2021 produced with lower cost avocados compared to fiscal 2020.
Lifecore
The increase in gross profit for the Lifecore business for the three months ended August 30, 2020, compared to the same period last year, was due primarily to the increased revenue in both CDMO and fermentation, as well as a favorable sales mix.
Operating Expenses:
Research and Development
R&D expenses consist primarily of product development and commercialization initiatives. R&D expenses in our Curation Foods business are primarily focused on innovating our current product lines and on the Company’s proprietary BreatheWay membranes used for packaging produce, with a focus on extending the shelf-life of sensitive vegetables and fruit. In the Lifecore business, the R&D expenses are focused on new products and applications for HA-based and non-HA biomaterials. For Other, the R&D expenses are primarily focused on creating and developing new innovative lines of products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2020
|
|
August 25, 2019
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
Curation Foods
|
$
|
938
|
|
|
$
|
1,324
|
|
|
$
|
(386)
|
|
|
(29)
|
%
|
|
|
|
|
|
|
|
|
|
Lifecore
|
1,570
|
|
|
1,451
|
|
|
119
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
46
|
|
|
(46)
|
|
|
(100)
|
%
|
|
|
|
|
|
|
|
|
|
Total R&D
|
$
|
2,508
|
|
|
$
|
2,821
|
|
|
$
|
(313)
|
|
|
(11)
|
%
|
|
|
|
|
|
|
|
|
The decrease in R&D expenses for the three months ended August 30, 2020, compared to the same periods last year, was primarily due to lower professional service expenses related to brand restage initiatives and new product development in the salad kit and avocado products product lines at Curation Foods which took place during the first quarter of fiscal year 2020, and decreases in our Other segment primarily due to discontinuation of R&D activities at Corporate. These decreases were partially offset by higher salary and benefits expenses at Lifecore driven by an increased headcount.
Selling, General, and Administrative (“SG&A”)
SG&A expenses consist primarily of sales and marketing expenses associated with Landec’s product sales and services, business development expenses, and staff and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2020
|
|
August 25, 2019
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
Curation Foods
|
$
|
10,584
|
|
|
$
|
11,484
|
|
|
$
|
(900)
|
|
|
(8)
|
%
|
|
|
|
|
|
|
|
|
|
Lifecore
|
1,880
|
|
|
1,947
|
|
|
(67)
|
|
|
(3)
|
%
|
|
|
|
|
|
|
|
|
|
Other
|
5,439
|
|
|
3,464
|
|
|
1,975
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
$
|
17,903
|
|
|
$
|
16,895
|
|
|
$
|
1,008
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
The increase in SG&A expenses for the three months ended August 30, 2020, compared to the same period last year, was due to a $2.0 million increase at our Other segment primarily due to an increase in legal fees from compliance and other litigation matters which was partially offset by a $0.9 million decrease in our Curation Foods business primarily due to cost savings driven by our restructuring efforts and lower salary and bonus expenses compared to the same period last year.
Other:
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(In thousands)
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Three Months Ended
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Change
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August 30, 2020
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August 25, 2019
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Amount
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%
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Dividend Income
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$
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281
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$
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281
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$
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—
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—
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%
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Interest Income
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$
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8
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$
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25
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$
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(17)
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(68)
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%
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Interest Expense
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$
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(3,109)
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$
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(2,075)
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$
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(1,034)
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50
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%
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Other Income (Expense)
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$
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(21)
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$
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—
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$
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(21)
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N/M
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Income Tax Benefit
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$
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4,309
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$
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1,365
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$
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2,944
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216
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%
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Dividend Income
Dividend income is derived from the dividends accrued on the Company’s $15.0 million Senior A preferred stock investment in Windset, which yields a cash dividend of 7.5% annually.
Interest Income
The decrease in interest income for the three months ended August 30, 2020, compared to the same periods last year, was not significant.
Interest Expense
The increase in interest expense for the three months ended August 30, 2020, compared to the same period last year, was primarily a result of an increase in total debt from $165.1 million as of August 25, 2019 to $173.9 million, and related increases in deferred financing costs, as of August 30, 2020. The increase in debt was primarily due additional borrowings to fund working capital requirements and new equipment purchases during the last twelve months.
Other Income (Expense)
The increase in other income for the three months ended August 30, 2020, compared to the same periods last year, was not significant.
Income Taxes
The effective tax rate for the three months ended August 30, 2020 was higher than the statutory federal income tax rate of 21% primarily due to the generation of federal & state R&D credits and movements of the valuation allowance recorded against certain deferred tax assets, partially offset by the impact of state taxes and stock based compensation.
Liquidity and Capital Resources
As of August 30, 2020, the Company had cash and cash equivalents of $0.6 million, a net increase of $0.2 million from $0.4 million as of May 31, 2020.
Cash Flow from Operating Activities
Net cash provided by operating activities during the three months ended August 30, 2020 was $17.0 million, compared to $5.4 million of net cash used in operating activities for the three months ended August 25, 2019. The primary sources of net cash provided by operating activities during the three months ended August 30, 2020 were (1) $20.4 million net decrease in working capital, (2) $6.0 million of depreciation/amortization and stock based compensation expense, and (3) $6.0 million from the non-cash restructuring and impairment of assets charges. These sources of cash were offset by (1) a $11.0 million net loss, and (2) a $4.4 million reduction in deferred taxes.
The primary factors for the decrease in working capital during the three months ended August 30, 2020, were (1) a $11.2 million decrease in accounts receivable due to the timing of customer payment receipts, (2) a planned $6.3 million decrease in inventory driven by slowing avocado products production during peak fruit prices, (3) a $1.4 million decrease in prepaid expenses and other current assets driven primarily by timing of prepayments, and (4) an $0.9 million decrease in accounts payable due primarily to the timing of payments.
Cash Flow from Investing Activities
Net cash provided by investing activities during the three months ended August 30, 2020 was $0.2 million compared to $9.7 million used in investing activities for the same period last year. Net cash provided by investing activities during the three months ended August 30, 2020, was primarily due to the receipt of $4.9 million related to the sale of the Company's Ontario, California facility, offset by the purchase of $4.6 million of equipment to support the growth of the Company’s Curation Foods and Lifecore businesses.
Cash Flow from Financing Activities
Net cash used in financing activities during the three months ended August 30, 2020 was $17.0 million compared to $16.0 million provided by financing activities for the same period last year. The net cash used in financing activities during the three months ended August 30, 2020, was primarily due to $8.0 million of debt pay downs under the Company's term loan and from an $8.4 million net decrease in the Company’s line of credit.
Capital Expenditures
During the three months ended August 30, 2020, Landec incurred $4.6 million of capital expenditures, which was primarily represented by facility expansions and purchased equipment to support the growth of the Curation Foods and Lifecore businesses, compared to capital expenditures of $10.0 million for the three months ended August 25, 2019. During the three months ended August 30, 2020, capital expenditures for Lifecore and Curation Foods were $2.7 million and $1.9 million, respectively.
Debt
On September 23, 2016, the Company entered into a Credit Agreement with JPMorgan Chase Bank (“JPMorgan”), BMO Harris Bank N.A. and City National Bank, as lenders (collectively, the “Lenders”), and JPMorgan as administrative agent, pursuant to which the Lenders provided the Company with a $100.0 million revolving line of credit (the “Revolver”) and a $50.0 million term loan facility (the “Term Loan”), guaranteed by each of the Company’s direct and indirect subsidiaries and secured by substantially all of the Company’s assets, with the exception of the Company’s investment in Windset.
On November 30, 2018, the Company entered into the Fourth Amendment to the Credit Agreement, whereby the Term Loan was increased to $100.0 million and the Revolver was increased to $105.0 million.
On October 25, 2019, the Company entered into the Sixth Amendment to the Credit Agreement, which increased the Term Loan to $120.0 million and decreased the Revolver to $100.0 million.
On March 19, 2020, the Company entered into the Seventh Amendment to the Credit Agreement (the "Seventh Amendment"), which among other changes, retroactively increased the maximum Total Leverage Ratio (as defined in the Credit Agreement as the ratio of the Company’s total indebtedness on such date to the Company’s consolidated EBITDA for the period of four consecutive fiscal quarters ended on or most recently prior to such date) to 5.75 to 1.00 for the fiscal quarter ended February 23, 2020, which decreases back to 5.00 to 1.00 for the fiscal quarter ending May 31, 2020. The maximum Total Leverage Ratio thereafter decreases by 25 basis points each subsequent fiscal quarter thereafter, until it reaches 3.50 for the fiscal quarter ending November 28, 2021, and then remains fixed through maturity. The Seventh Amendment also introduced additional financial covenants that remain in effect through May 31, 2020, including minimum cumulative monthly Unadjusted EBITDA thresholds and maximum capital expenditures, as well as additional reporting requirements and frequencies. Interest on both the Revolver and the Term Loan continued to be based upon the Company’s Total Leverage Ratio, at a per annum rate of either (i) the prime rate plus a spread of between 0.25% and 3.00% or (ii) the Eurodollar rate plus a spread of between 1.25% and 4.00%. The Seventh Amendment also provided for the acceleration of the maturity of the Term Loan from October 25, 2022 to September 23, 2021 if the Company fails to be in compliance with certain financial covenants.
On July 15, 2020, the Company entered into the Eighth Amendment to the Credit Agreement (the “Eighth Amendment”), which among other things, (i) modified the definition of EBITDA to increase the limit on permitted exclusions for certain unusual, extraordinary or one-time cash items for each fiscal quarter ending on or after February 28, 2021, to a maximum of 20% of EBITDA, and (ii) restricted the Company from making Capital Expenditures over certain thresholds. Interest continues to be based on the Company’s Total Leverage Ratio, now at a revised per annum Applicable Rate of either (i) the prime rate plus a spread of between 0.75% and 3.50% or (ii) the Eurodollar rate plus a spread of between 1.75% and 4.50%, plus, in each case, a commitment fee, as applicable, of between 0.15% and 0.55%, as further described in the Eighth Amendment.
The Credit Agreement provides the Company the right to increase the Revolver commitments and/or the Term Loan commitments by obtaining additional commitments either from one or more of the Lenders or another lending institution at an amount of up to $10.0 million.
Both the Revolver and the Term Loan mature on September 23, 2021, with the Term Loan requiring quarterly principal payments of $3.0 million and the remainder continuing to be due at maturity. The Credit Agreement contains customary financial covenants and events of default under which the obligation could be accelerated and/or the interest rate increased. As of August 30, 2020, the Company was in compliance with all financial covenants and events of default under the Credit Agreement.
As of August 30, 2020, $69.0 million was outstanding on the Revolver, at an interest rate of 4.66%.
The Company's outstanding indebtedness under the Credit Agreement will mature and become due on September 23, 2021. The Company's currently available liquidity plus the expected additional cash generated by operations prior to that maturity date are not expected to be sufficient to pay such debt obligations prior to or at the maturity date without additional financing. Management is actively pursuing refinancing options and is currently in discussions with several third-party lenders to seek to negotiate a refinancing that would extend the maturity of the Company’s indebtedness and provide greater flexibility for the Company. Management believes its current refinancing plans are probable to occur and appropriately mitigate the risk that the Company will not be able to meet its obligations as they become due. Therefore, the financial statements have been prepared assuming the Company will continue as a going concern. The Company believes that its cash from operations, along with existing cash and cash equivalents, will be sufficient to finance its operational and capital requirements for at least the next twelve months, assuming the Company is able to execute its plan to refinance its debt. However, there is no guarantee we will able to refinance, or be able to do so on favorable terms. See Item 1A. “Risk Factors” for more information.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company is not a party to any agreements with, or commitments to, any special purpose entities that would constitute material off-balance sheet financing. There have been no material changes to our long-term contractual obligations as reported in our most recent Annual Report filed on Form 10-K for the fiscal year ended May 31, 2020. See Note 6 – Debt for further information on the Company’s loans.