LIFECORE BIOMEDICAL, INC. quarterly report, Q3 FY2020

Business Context and Reporting Period

The filing is Landec Corporation’s Form 10-Q for the fiscal quarter ended February 23, 2020, covering the three and nine months ended February 23, 2020, with comparisons to February 24, 2019. The filing identifies Landec Corporation—not Lifecore Biomedical, Inc.—as the registrant. Landec operates Curation Foods, Lifecore, and an Other corporate segment. Curation Foods sells packaged salads, vegetables, olive oils, vinegars, and guacamole products; Lifecore provides pharmaceutical-grade hyaluronan products and aseptic contract development and manufacturing services.

Financial Performance and Position

Metric	Three Months Ended February 23, 2020	Three Months Ended February 24, 2019	Nine Months Ended February 23, 2020	Nine Months Ended February 24, 2019
Revenue	$152.9 million	$155.6 million	$434.2 million	$404.8 million
Gross profit	$20.0 million	$21.6 million	$50.9 million	$54.8 million
Gross margin	13.1%	13.9%	11.7%	13.5%
Operating income (loss)	$(15.0) million	$3.2 million	$(25.4) million	$3.0 million
Net income (loss) from continuing operations	$(11.5) million	$1.5 million	$(23.0) million	$1.8 million
Net income (loss) per diluted share	$(0.39)	$0.04	$(0.79)	$0.02

Segment revenue: Curation Foods revenue decreased 3% to $127.5 million in the quarter but increased 6% to $373.9 million for the nine-month period. Lifecore revenue increased 7% to $25.4 million in the quarter and 17% to $60.3 million year to date.
Segment gross profit: Curation Foods gross profit declined 8% in the quarter and 16% year to date. Lifecore gross profit declined 6% in the quarter but increased 9% year to date.
Operating expenses: Research and development was $2.7 million for the quarter and $8.4 million year to date. Selling, general and administrative expense rose 20% in the quarter to $18.8 million and 23% year to date to $54.0 million. Restructuring costs were $13.5 million in the quarter and $13.9 million year to date.
Cash flow: Operating activities used $4.3 million during the first nine months, compared with $17.4 million provided in the prior-year period. Investing activities used $19.3 million, primarily for $22.1 million of capital expenditures. Financing activities provided $25.0 million.
Liquidity: Cash and cash equivalents were $2.6 million at February 23, 2020, compared with $1.1 million at May 26, 2019. Including restricted cash, total cash, cash equivalents, and restricted cash was $2.8 million.
Debt: The Company reported $58.5 million outstanding under its revolver and $117.0 million of term-loan principal. Total debt was stated in MD&A as $180.7 million, compared with $81.8 million at February 24, 2019. Interest expense increased 97% year to date to $6.5 million.
Balance sheet: Total assets were $550.1 million and stockholders’ equity was $247.7 million at February 23, 2020. Inventory increased to $67.1 million from $54.1 million at May 26, 2019, while accounts payable increased to $63.7 million from $54.0 million.

Material Changes Versus the Prior Comparable Period

Revenue increased 7% for the nine-month period primarily because Yucatan Foods contributed $32.1 million and salad revenue increased $9.4 million. These gains were partly offset by planned reductions in packaged vegetables and weather-related green bean supply issues.
Quarterly revenue declined 2% because of a planned $7.2 million reduction in non-strategic packaged vegetable revenue and a $2.2 million weather-related decline in green bean revenue. These effects were partly offset by higher Yucatan, BreatheWay, and salad revenue.
Curation Foods margins weakened due to high-cost avocado inventory, weather-related raw-material pressures, and lower-margin packaged vegetable sales. Lifecore’s year-to-date improvement reflected stronger development services, fermentation, and aseptic revenue.
The Company incurred $13.5 million of restructuring costs, including a $10.9 million impairment related to the planned divestiture of its Ontario, California salad dressing plant, employee severance, lease costs, and other restructuring expenses.
SG&A increased primarily because of legal and compliance costs, consulting costs, a $1.2 million reserve related to a Pacific Harvest receivable, and higher Lifecore personnel costs.
Landec adopted the new lease standard, recording approximately $30.0 million of operating lease right-of-use assets and $31.1 million of operating lease liabilities at adoption. It also early adopted income-tax guidance, producing a $0.4 million quarterly benefit.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management stated that cash from operations, existing cash, and cash equivalents were expected to be sufficient to fund operational and capital requirements for at least the next twelve months. No specific revenue or earnings guidance was provided.
The Company’s Project SWIFT restructuring is intended to improve profitability, focus Curation Foods on strategic assets, reduce facilities and workforce, and divest non-strategic assets. The Ontario plant divestiture was expected to be completed in the first half of fiscal 2021.
On March 19, 2020, lenders amended the credit agreement after the Company exceeded the prior maximum total leverage covenant. The February 23, 2020 covenant was retroactively increased to 5.75-to-1.00; the reported leverage ratio was 5.55-to-1.00. The threshold falls to 5.00-to-1.00 for the quarter ending May 31, 2020 and declines thereafter to 3.50-to-1.00 by November 2021.
The amendment added minimum monthly EBITDA and maximum capital-expenditure covenants through May 31, 2020, increased reporting requirements, and required $0.5 million of bank fees. Failure to comply could permit acceleration of debt secured by substantially all Company assets.
The Company disclosed ongoing SEC, DOJ, Mexican Attorney General, and Mexican regulatory investigations concerning potential environmental and Foreign Corrupt Practices Act matters related to regulatory permitting at the Tanok facility in Mexico. The ultimate outcome and potential financial exposure could not be estimated.
COVID-19 had not materially affected operations or financial results as of the filing, but management warned of potential impacts on customer behavior, supply chains, labor, manufacturing, inventory, financing, debt covenants, and elective medical procedures affecting Lifecore.
Additional litigation was disclosed involving packaging purchases and claims by Pacific Harvest and Rancho Harvest. No liabilities were accrued because loss was not considered probable or reasonably estimable at the filing date.
The Company discontinued its Now Planting business in fiscal 2019; prior-period results were reclassified as discontinued operations.

Most Important Facts to Verify

Confirm the intended issuer: the supplied filing is for Landec Corporation, ticker LNDC, and not Lifecore Biomedical, Inc.
Review the Seventh Amendment’s leverage, EBITDA, capital-expenditure, and reporting covenants and the Company’s ability to remain compliant as thresholds tighten.
Assess whether Project SWIFT delivers sustainable margin improvement after the Ontario divestiture, office closures, workforce reductions, and other restructuring actions.
Monitor cash generation, inventory growth, capital expenditures, debt repayments, revolver availability, and refinancing risk through the October 2022 debt maturity.
Track the SEC, DOJ, and Mexican investigations and any related indemnification, penalties, remediation costs, or insurance recoveries.
Evaluate COVID-19 effects on Curation Foods demand and supply chains and on Lifecore customer programs and elective medical procedures.
Assess customer concentration: the filing reports that the top five customers represented approximately 39% to 44% of nine-month revenue, with Costco and Walmart each representing a significant share.