SEC Filing | Lifecore Biomedical

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lndc-20200223

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Quarter Ended February 23, 2020, or


[ ]			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period for _________ to _________.

Commission file number: 0-27446

LANDEC CORPORATION

(Exact name of registrant as specified in its charter)


Delaware			94-3025618
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification Number)

5201 Great America Parkway, Suite 232

Santa Clara, California 95054

(Address of principal executive offices)

Registrant's telephone number, including area code:

(650) 306-1650

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	LNDC	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ___	Accelerated Filer X	Emerging Growth Company ___
Non Accelerated Filer ___	Smaller Reporting Company ___

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X

As of March 27, 2020, there were 29,182,178 shares of Common Stock outstanding.

Table of Contents

LANDEC CORPORATION

FORM 10-Q

For the Fiscal Quarter Ended February 23, 2020

INDEX

Page

Facing sheet

Index

Part I.

Financial Information

Item 1.

Financial Statements

Consolidated Balance Sheets as of February 23, 2020 and May 26, 2019

Consolidated Statements of Comprehensive Income and Loss for the Three and Nine Months Ended February 23, 2020 and February 24, 2019

Consolidated Statement of Changes in Stockholders' Equity for the Three and Nine Months Ended February 23 , 20 20 and February 24, 2019

Consolidated Statements of Cash Flows for the Nine Months Ended February 23, 2020 and February 24, 2019

Notes to Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

LANDEC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)


	February 23, 2020		May 26, 2019
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,607	$	1,080
Accounts receivable, less allowance for doubtful accounts	69,763		69,565
Inventories	67,059		54,132
Prepaid expenses and other current assets	9,382		8,264
Total Current Assets	148,811		133,041

Investment in non-public company, fair value	61,300		61,100
Property and equipment, net	191,782		200,027
Operating leases	25,187		—
Goodwill	77,246		76,742
Trademarks/tradenames, net	29,928		29,928
Customer relationships, net	13,782		15,319
Other assets	2,024		2,934
Total Assets	$	550,060	$	519,091

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	63,660	$	53,973
Accrued compensation	8,458		10,687
Other accrued liabilities	11,111		10,001
Current portion of lease liabilities	3,900		75
Deferred revenue	618		499
Line of credit	58,500		52,000
Current portion of long-term debt, net	11,723		9,791
Other current liabilities, discontinued operations	—		65
Total Current Liabilities	157,970		137,091

Long-term debt, net	104,539		87,193
Long-term lease liabilities	26,757		3,532
Deferred taxes, net	11,662		19,393
Other non-current liabilities	1,464		1,738
Total Liabilities	302,392		248,947

Stockholders’ Equity:
Common stock, $0.001 par value; 50,000 shares authorized; 29,182 and 29,102 shares issued and outstanding at February 23, 2020 and May 26, 2019, respectively	29		29
Additional paid-in capital	162,077		160,341
Retained earnings	86,394		109,710
Accumulated other comprehensive (loss) income	(832)		64
Total Stockholders’ Equity	247,668		270,144
Total Liabilities and Stockholders’ Equity	$	550,060	$	519,091

See accompanying notes to the consolidated financial statements.

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LANDEC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND LOSS

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	February 23, 2020		February 24, 2019		February 23, 2020		February 24, 2019
Product sales	$	152,928	$	155,554	$	434,235	$	404,779
Cost of product sales	132,881		133,985		383,338		349,988
Gross profit	20,047		21,569		50,897		54,791
Operating costs and expenses:
Research and development	2,747		2,739		8,390		8,005
Selling, general and administrative	18,783		15,588		54,000		43,791
Restructuring costs	13,528		—		13,934		—
Total operating costs and expenses	35,058		18,327		76,324		51,796
Operating (loss) income	(15,011)		3,242		(25,427)		2,995

Dividend income	281		413		843		1,238
Interest income	46		34		96		113
Interest expense	(2,211)		(1,771)		(6,455)		(3,275)
Other income, net	67		—		61		1,600
Net (loss) income from continuing operations before tax	(16,828)		1,918		(30,882)		2,671
Income tax benefit (expense)	5,310		(385)		7,840		(917)
Net (loss) income from continuing operations	$	(11,518)	$	1,533	$	(23,042)	$	1,754

Discontinued operations:
Loss from discontinued operations	$	—	$	(609)	$	—	$	(1,415)
Income tax benefit	—		143		—		333
Loss from discontinued operations, net of tax	—		(466)		—		(1,082)
Net (loss) income applicable to common stockholders	$	(11,518)	$	1,067	$	(23,042)	$	672

Basic net loss per share:
(Loss) income from continuing operations	$	(0.39)	$	0.05	$	(0.79)	$	0.06
Loss from discontinued operations	—		(0.02)		—		(0.04)
Total basic net (loss) income per share	$	(0.39)	$	0.03	$	(0.79)	$	0.02

Diluted net loss per share:
(Loss) income from continuing operations	$	(0.39)	$	0.05	$	(0.79)	$	0.06
Loss from discontinued operations	—		(0.01)		—		(0.04)
Total diluted net (loss) income per share	$	(0.39)	$	0.04	$	(0.79)	$	0.02

Shares used in per share computation
Basic	29,170		28,919		29,155		28,140
Diluted	29,170		29,151		29,155		28,399

Other comprehensive loss, net of tax:
Net unrealized losses on interest rate swaps (net of tax effect of $124, $215, $305, $190)	$	(411)	$	(595)	$	(896)	$	(608)
Other comprehensive loss, net of tax	(411)		(595)		(896)		(608)
Total comprehensive (loss) income	$	(11,929)	$	472	$	(23,938)	$	64

See accompanying notes to the consolidated financial statements.

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LANDEC CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)


Three and Nine Months Ended February 23, 2020
				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at May 26, 2019	29,102	$	29	$	160,341	$	109,710	$	64	$	270,144
ASC 842 transition adjustment	—	—		—		(274)		—		(274)
Issuance of stock under stock plans	44	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(55)		—		—		(55)
Stock-based compensation	—	—		528		—		—		528
Net loss	—	—		—		(4,784)		—		(4,784)
Other comprehensive loss, net of tax	—	—		—		—		(612)		(612)
Balance at August 25, 2019	29,146	$	29	$	160,814	$	104,652	$	(548)	$	264,947
Issuance of stock under stock plans	17	—		30		—		—		30
Taxes paid by Company for employee stock plans	—	—		(75)		—		—		(75)
Stock-based compensation	—	—		787		—		—		787
Net loss	—	—		—		(6,740)		—		(6,740)
Other comprehensive income, net of tax	—	—		—		—		127		127
Balance at November 24, 2019	29,163	$	29	$	161,556	$	97,912	$	(421)	$	259,076
Issuance of stock under stock plans	19	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(45)		—		—		(45)
Stock-based compensation	—	—		566		—		—		566
Net loss	—	—		—		(11,518)		—		(11,518)
Other comprehensive loss, net of tax	—	—		—		—		(411)		(411)
Balance at February 23, 2020	29,182	$	29	$	162,077	$	86,394	$	(832)	$	247,668

See accompanying notes to the consolidated financial statements.

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Three and Nine Months Ended February 24, 2019
				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at May 27, 2018	27,702	$	28	$	142,087	$	109,299	$	1,148	$	252,562
Issuance of stock under stock plans	47	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(10)		—		—		(10)
Stock-based compensation	—	—		728		—		—		728
Net income	—	—		—		190		—		190
Other comprehensive loss, net of tax	—	—		—		—		(89)		(89)
Balance at August 26, 2018	27,749	$	28	$	142,805	$	109,489	$	1,059	$	253,381
Issuance of stock under stock plans	36	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(237)		—		—		(237)
Stock-based compensation	—	—		938		—		—		938
Net loss	—	—		—		(585)		—		(585)
Other comprehensive income, net of tax	—	—		—		—		76		76
Balance at November 25, 2018	27,785	$	28	$	143,506	$	108,904	$	1,135	$	253,573
Issuance of stock under stock plans	18	—		230		—		—		230
Issuance of common stock in connection with Yucatan Foods acquisition	1,203	1		15,067		—		—		15,067
Taxes paid by Company for employee stock plans	—	—		(95)		—		—		(95)
Stock-based compensation	—	—		816		—		—		816
Net income	—	—		—		1,067		—		1,067
Other comprehensive loss, net of tax	—	—		—		—		(595)		(595)
Balance at February 24, 2019	29,006	$	29	$	159,524	$	109,971	$	540	$	270,064

See accompanying notes to the consolidated financial statements.

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LANDEC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	February 23, 2020		February 24, 2019
Cash flows from operating activities:
Consolidated net (loss) income	$	(23,042)	$	672
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, amortization of intangibles and amortization of debt costs	13,800		10,506
Stock-based compensation expense	1,881		2,482
Deferred taxes	(7,881)		540
Change in investment in non-public company, fair value	(200)		(1,600)
Change in contingent consideration liability	(500)		(3,500)
Net loss (gain) on disposal of property and equipment	135		(24)
Pacific Harvest note receivable reserve	1,202		—
Non-cash restructuring and impairment of assets charges	11,518		—
Other, net	139		—
Changes in current assets and current liabilities:
Accounts receivable, net	(198)		315
Inventories	(12,927)		(1,024)
Prepaid expenses and other current assets	551		1,066
Accounts payable	11,791		11,912
Accrued compensation	(2,230)		(3,061)
Other accrued liabilities	1,504		755
Deferred revenue	119		(1,590)
Net cash (used in) provided by operating activities	(4,338)		17,449

Cash flows from investing activities:
Purchases of property and equipment	(22,118)		(33,144)
Acquisition of Yucatan Foods (Note 2), net of cash acquired	—		(59,872)
Proceeds from collections of notes receivable	364		404
Proceeds from sales of fixed assets	2,432		239
Net cash used in investing activities	(19,322)		(92,373)

Cash flows from financing activities:
Proceeds from sale of common stock	30		230
Taxes paid by Company for employee stock plans	(175)		(342)
Proceeds from debt	27,500		60,000
Payments on long-term debt	(8,094)		(2,564)
Proceeds from lines of credit	84,400		34,000
Payments on lines of credit	(77,900)		(17,000)
Payments for debt issuance costs	(766)		(509)
Net cash provided by financing activities	24,995		73,815
Net increase (decrease) in cash, cash equivalents and restricted cash	1,335		(1,109)
Cash, cash equivalents and restricted cash, beginning of period	1,465		3,216
Cash, cash equivalents and restricted cash, end of period	$	2,800	$	2,107

Supplemental disclosure of non-cash investing activities:
Purchases of property and equipment on trade vendor credit	$	1,793	$	3,035
Pacific Harvest note receivable reserve	$	1,202	$	—

See accompanying notes to the consolidated financial statements.

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LANDEC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies

Organization

Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture, and sell differentiated products for food and biomaterials markets, and license technology applications to partners.

The Company sells specialty packaged branded Eat Smart^® and private label fresh-cut vegetables and whole produce to retailers, club stores, and food service operators, primarily in the United States and Canada. The Company also sells premier specialty olive oils and wine vinegars under its O Olive Oil & Vinegar^® (“O”) brand to natural food, conventional grocery and mass retail stores primarily in the United States and Canada. The majority of Yucatan^® and Cabo Fresh^® branded guacamole and avocado products are sold in the U.S. grocery channel, but they are also sold in U.S. mass retail, Canadian grocery retail and foodservice channels.

Landec sells its food products through its subsidiary, Curation Foods, Inc. (“Curation Foods”), which serves as the corporate umbrella for a portfolio of four natural food brands, including the Company’s flagship brand Eat Smart as well as three emerging natural food brands, consisting of O olive oil and vinegar products, and its two new brands, Yucatan and Cabo Fresh authentic guacamole and avocado products, acquired by the Company through the acquisition of Yucatan Foods on December 1, 2018. O, Yucatan and Cabo Fresh are referred to collectively as “Emerging Brands”. See Note 2 - Acquisitions for more details.

The Company has two proprietary polymer technology platforms: 1) Intelimer^® polymers, and 2) hyaluronan (“HA”) biopolymers.

The Company sells HA-based and non-HA biomaterials and related services through its Lifecore Biomedical, Inc. (“Lifecore”) subsidiary, which are used for multiple applications, including the manufacture of pharmaceutical-grade sodium hyaluronate in bulk form as well as formulated and filled syringes and vials for injectable products. The Company’s HA biopolymers and non-HA materials are proprietary in that they are specially formulated for specific customers to meet strict regulatory requirements.

The Company’s technologies, along with its customer relationships and tradenames, are the foundation and key differentiating advantages upon which Landec has built its business.

Basis of Presentation

The accompanying unaudited consolidated financial statements of Landec have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company at February 23, 2020, and the results of operations and cash flows for all periods presented. Although Landec believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The accompanying financial data should be reviewed in conjunction with the audited financial statements and accompanying notes included in Landec's Annual Report on Form 10-K for the fiscal year ended May 26, 2019.

The Company’s fiscal year is the 52- or 53-week period that ends on the last Sunday of May with quarters within each year ending on the last Sunday of August, November, and February; however, in instances where the last Sunday would result in a quarter being 12-weeks in length, the Company’s policy is to extend that quarter to the following Sunday. A 14th week is included in the fiscal year every five or six years to realign the Company’s fiscal quarters with calendar quarters. The Company's fiscal year 2020 is a 53-week period and the fourth quarter of fiscal year 2020 is a 14-week period.

In May 2019, the Company discontinued the Now Planting business. As a result, the Now Planting business, which was launched during the second quarter of fiscal year 2019, has been reclassified as a discontinued operation under the provisions of Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations ("ASC 205-20") for the three and nine months ended February 24, 2019.

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The results of operations for the nine months ended February 23, 2020 are not necessarily indicative of the results that may be expected for an entire fiscal year because there is some seasonality in Curation Foods’ business and the order patterns of Lifecore’s customers which may lead to significant fluctuations in Landec’s quarterly results of operations.

Basis of Consolidation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with GAAP and include the accounts of Landec Corporation and its subsidiaries, Curation Foods and Lifecore. All intercompany transactions and balances have been eliminated. The financial results of Yucatan Foods have been included in the Company's consolidated financial statements from the date of acquisition on December 1, 2018.

Arrangements that are not controlled through voting or similar rights are reviewed under the guidance for variable interest entities (“VIEs”). A company is required to consolidate the assets, liabilities, and operations of a VIE if it is determined to be the primary beneficiary of the VIE.

An entity is a VIE and subject to consolidation, if by design: a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, or b) as a group the holders of the equity investment at risk lack any one of the following three characteristics: (i) the power, through voting rights or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity. The Company reviewed the consolidation guidance and concluded that the equity investment in the non-public company are not VIEs.

Reclassifications

Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition; loss contingencies; sales returns and allowances; inventories; self-insurance liabilities; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets including intangible assets and inventory; the valuation of investments; and the valuation and recognition of stock-based compensation.

These estimates involve the consideration of complex factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve and are subject to change from period to period. The actual results may differ from management’s estimates.

Cash and Cash Equivalents