Business Context and Reporting Period
This Form 10-Q is filed by Landec Corporation, not Lifecore Biomedical, Inc., for the fiscal quarter and six months ended November 28, 2021, compared with the periods ended November 29, 2020. Landec operated through Curation Foods, Lifecore, and Other segments. Lifecore is the biomedical contract development and manufacturing organization within Landec.
Financial Performance and Position
| Metric | Three Months Ended November 28, 2021 | Six Months Ended November 28, 2021 |
|---|---|---|
| Revenue | $129.5 million | $258.3 million |
| Gross profit | $13.0 million | $30.5 million |
| Gross margin | 10.0% | 11.8% |
| Operating loss | $(37.0) million | $(40.8) million |
| Net loss | $(38.4) million | $(47.9) million |
| Net loss per diluted share | $(1.30) | $(1.63) |
| Operating cash flow | Not separately provided | $(4.3) million |
- Curation Foods revenue declined 3% for the quarter and 5% for the six-month period. Lifecore revenue increased 7% and 4%, respectively.
- Lifecore generated $24.9 million of quarterly revenue and $46.9 million for six months, including $21.4 million and $39.2 million, respectively, from CDMO activities.
- Curation Foods gross profit fell 87% for the quarter to $1.3 million and 39% for six months to $13.0 million. Lifecore gross profit increased 12% for the quarter and 13% for six months.
- The quarter and six-month results included a $32.1 million goodwill impairment charge related to the Eat Smart business.
- Cash and cash equivalents were $1.1 million at November 28, 2021, compared with $1.3 million at May 30, 2021. Inventories increased to $79.4 million from $69.7 million.
- Capital expenditures were $13.0 million for six months, including $8.9 million for Lifecore and $4.1 million for Curation Foods.
- Debt consisted of $128.6 million of term-loan principal, net long-term debt of $124.2 million, and $42.0 million outstanding under the revolving line of credit.
- The term loan bore interest at 9.5% and the revolver at 3.0% at November 28, 2021. The company reported compliance with all financial covenants and no defaults.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 1% for the quarter and 3% for six months, primarily due to planned reductions in Curation Foods’ legacy vegetable and tray business and COVID-19-related customer and foodservice disruption.
- Gross margin declined from 15.8% to 10.0% for the quarter and from 13.9% to 11.8% for six months, driven mainly by Curation Foods’ lower volume, product mix, and higher raw-product sourcing costs.
- Net loss increased from $13.3 million to $38.4 million for the quarter and from $24.3 million to $47.9 million for six months, principally because of the goodwill impairment and higher interest expense.
- Interest expense increased to $12.3 million for six months from $6.1 million, reflecting higher rates, refinancing-related financing costs, and prepayment-related interest and penalties.
- Other income improved by $12.0 million for six months because the prior-year period included an $11.8 million decrease in the fair value of the Windset investment.
- Operating cash flow declined from $18.5 million provided in the prior-year six-month period to $4.3 million used, while capital expenditures increased from $7.4 million to $13.0 million.
- Landec sold its Windset investment on June 1, 2021 for $45.1 million and used proceeds substantially for debt reduction; term-loan principal declined by $41.4 million during the six months.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide specific quantitative earnings or revenue guidance.
- Management cited continuing uncertainty from COVID-19, including effects on sales, customer behavior, manufacturing, inventory, employees, and the broader market.
- On December 13, 2021, after the reporting date, Landec completed the sale of the Eat Smart business to Taylor Farms for $73.5 million in cash, subject to a post-closing working-capital adjustment. The business included facilities, inventory, receivables, payables, intellectual property, and related contracts.
- The Eat Smart sale follows the $32.1 million goodwill impairment recorded in the reporting period and materially changes the future composition of Curation Foods.
- Landec continues to cooperate with SEC and DOJ investigations and related Mexican regulatory matters concerning potential environmental and FCPA compliance issues at the acquired Yucatan facility. The company cannot predict the outcome or estimate any potential net loss after indemnification.
- A former Yucatan owner seeks more than $10.0 million in damages; Landec has asserted counterclaims seeking at least $80.0 million. No contingent recovery has been recorded.
- The restructuring plan had incurred $41.4 million through the six months ended November 28, 2021, against an estimated total cost of approximately $45.0 million.
- Management subsequently approved exploring a sublease of the Santa Maria office. The related fixed assets had a net carrying value of $3.4 million, with a $4.3 million right-of-use asset and $5.5 million lease liability at the reporting date; the filing does not estimate any resulting gain or loss.
Investor Verification Priorities
- Verify that the filing issuer is Landec Corporation and determine whether the requested Lifecore Biomedical reference reflects a company-identification error.
- Assess the effect of the Eat Smart disposition on pro forma revenue, margins, debt repayment, liquidity, and the remaining Curation Foods business.
- Review the company’s ability to service high-cost debt given only $1.1 million of cash, $42.0 million of revolver borrowings, negative operating cash flow, and a 9.5% term-loan rate.
- Evaluate whether Curation Foods’ lower margins and COVID-19, sourcing, customer concentration, and foodservice risks are improving.
- Follow developments in the SEC, DOJ, Mexican regulatory, and Yucatan-related legal matters, including potential indemnification recoveries.
- Reconcile the reported goodwill impairment, restructuring charges, asset sales, and subsequent Eat Smart transaction when assessing recurring earnings.