SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|For the Fiscal Quarter Ended November 28, 2021, 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: 000-27446
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(IRS Employer Identification Number)|
2811 Airpark Drive
|(Address of principal executive offices)||(Zip Code)|
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
|Common stock, par value $0.001 per share|
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large Accelerated Filer ||☐||Accelerated Filer|| ☒||Emerging Growth Company ||☐|
|Non Accelerated Filer ||☐||Smaller Reporting Company || ☐|| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 3, 2022, there were 29,481,330 shares of common stock outstanding.
For the Fiscal Quarter Ended November 28, 2021
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|November 28, 2021||May 30, 2021|
|Cash and cash equivalents||$||1,091 ||$||1,295 |
|Accounts receivable, less allowance for credit losses||65,276 ||70,013 |
|Inventories||79,433 ||69,663 |
|Prepaid expenses and other current assets||8,721 ||7,350 |
|Total Current Assets||154,521 ||148,321 |
|Investment in non-public company, fair value||— ||45,100 |
|Property and equipment, net||179,929 ||179,559 |
|Operating lease right-of-use assets||11,979 ||20,827 |
|Goodwill||37,329 ||69,386 |
|Trademarks/tradenames, net||25,328 ||25,328 |
|Customer relationships, net||9,799 ||10,792 |
|Other assets||3,239 ||3,611 |
|Total Assets||$||422,124 ||$||502,924 |
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Accounts payable||$||59,098 ||$||47,569 |
|Accrued compensation||7,214 ||12,304 |
|Other accrued liabilities||9,804 ||7,996 |
|Current portion of lease liabilities ||2,988 ||3,889 |
|Deferred revenue||1,160 ||1,130 |
|Line of credit||42,000 ||29,000 |
|Total Current Liabilities||122,264 ||101,888 |
|Long-term debt, net||124,194 ||164,902 |
|Long-term lease liabilities||14,203 ||23,611 |
|Deferred taxes, net||1,367 ||6,140 |
|Other non-current liabilities||3,894 ||3,599 |
|Total Liabilities||265,922 ||300,140 |
Common stock, $0.001 par value; 50,000 shares authorized; 29,481 and 29,333 shares issued and outstanding at November 28, 2021 and May 30, 2021, respectively
|29 ||29 |
|Additional paid-in capital||166,327 ||165,533 |
|Retained earnings (accumulated deficit)||(9,338)||38,580 |
|Accumulated other comprehensive loss||(816)||(1,358)|
|Total Stockholders’ Equity||156,202 ||202,784 |
|Total Liabilities and Stockholders’ Equity||$||422,124 ||$||502,924 |
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands, except per share amounts)
Three Months Ended
|Six Months Ended|
|November 28, 2021||November 29, 2020||November 28, 2021||November 29, 2020|
|$||129,492 ||$||130,904 ||$||258,280 ||$||266,547 |
Cost of product sales
|116,500 ||110,267 ||227,769 ||229,564 |
|12,992 ||20,637 ||30,511 ||36,983 |
Operating costs and expenses:
Research and development
|2,718 ||2,572 ||5,544 ||5,080 |
Selling, general and administrative
|13,835 ||16,106 ||29,774 ||34,009 |
|Impairment of goodwill||32,057 ||— ||32,057 ||— |
|Legal settlement charge||— ||1,763 ||— ||1,763 |
|Restructuring costs||1,412 ||1,662 ||3,974 ||10,066 |
Total operating costs and expenses
|50,022 ||22,103 ||71,349 ||50,918 |
|— ||281 ||— ||563 |
|19 ||10 ||46 ||18 |
|Other income (expense), net||79 ||(11,787)||188 ||(11,808)|
|Net loss before tax||(41,265)||(16,001)||(52,854)||(31,310)|
|Income tax benefit||2,824 ||2,700 ||4,936 ||7,009 |
|Net loss per common share:|
|Shares used in per share computation:|
|29,471 ||29,280 ||29,448 ||29,261 |
|29,471 ||29,280 ||29,448 ||29,261 |
|Other comprehensive income (loss), net of tax:|
Net unrealized gain (losses) on interest rate swaps (net of tax effect of $(100), $(121), $(190), and $(228))
|$||176 ||$||401 ||$||542 ||$||705 |
|Other comprehensive income (loss), net of tax||176 ||401 ||542 ||705 |
|Total comprehensive loss||$||(38,265)||$||(12,900)||$||(47,376)||$||(23,596)|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
Three and Six Months Ended November 28, 2021
Earnings (Accumulated Deficit)
|Balance at May 30, 2021||29,333 ||$||29 ||$||165,533 ||$||38,580 ||$||(1,358)||$||202,784 |
|Issuance of stock under stock plans, net of shares withheld||129 ||— ||— ||— ||— ||— |
|Taxes paid by Company for employee stock plans||— ||— ||(428)||— ||— ||(428)|
|Stock-based compensation||— ||— ||620 ||— ||— ||620 |
|Net loss||— ||— ||— ||(9,477)||— ||(9,477)|
|Other comprehensive income, net of tax||— ||— ||— ||— ||366 ||366 |
|Balance at August 29, 2021||29,462 ||$||29 ||$||165,725 ||$||29,103 ||$||(992)||$||193,865 |
|Issuance of stock under stock plans, net of shares withheld||19 ||— ||— ||— ||— ||— |
|Taxes paid by Company for employee stock plans||— ||— ||(84)||— ||— ||(84)|
|Stock-based compensation||— ||— ||686 ||— ||— ||686 |
|Net loss||— ||— ||— ||(38,441)||— ||(38,441)|
|Other comprehensive income, net of tax||— ||— ||— ||— ||176 ||176 |
|Balance at November 28, 2021||29,481 ||$||29 ||$||166,327 ||$||(9,338)||$||(816)||$||156,202 |
Three and Six Months Ended November 29, 2020
Earnings (Accumulated Deficit)
|Balance at May 31, 2020||29,224 ||$||29 ||$||162,578 ||$||71,245 ||$||(2,808)||$||231,044 |
|Issuance of stock under stock plans, net of shares withheld||18||—||—||—||—||—|
|Taxes paid by Company for employee stock plans||—||—||(82)||—||—||(82)|
|Other comprehensive income, net of tax||—||—||—||—||304||304|
|Balance at August 30, 2020||29,242||$||29 ||$||163,388 ||$||60,245 ||$||(2,504)||$||221,158 |
|Issuance of stock under stock plans, net of shares withheld||81||—||—||—||—||—|
|Taxes paid by Company for employee stock plans||—||—||(215)||—||—||(215)|
|Other comprehensive income, net of tax||— ||— ||— ||— ||401||401|
|Balance at November 29, 2020||29,323||$||29 ||$||164,068 ||$||46,944 ||$||(2,103)||$||208,938 |
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|Six Months Ended|
|November 28, 2021||November 29, 2020|
|Cash flows from operating activities:|
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities:|
|Impairment of goodwill||32,057 ||— |
|Depreciation, amortization of intangibles, debt costs and right-of-use assets||10,959 ||9,826 |
|Stock-based compensation expense||1,306 ||1,787 |
|Provision for expected credit losses||196 ||102 |
|Net loss (gain) on disposal of property and equipment held and used||22 ||(34)|
|(Gain) loss on disposal of property and equipment related to restructuring, net||(92)||6,005 |
|Change in investment in non-public company, fair value||— ||11,800 |
|Other, net||(111)||21 |
|Changes in current assets and current liabilities:|
|Accounts receivable, net||4,541 ||9,559 |
|Prepaid expenses and other current assets||(1,784)||1,539 |
|Accounts payable||15,148 ||10,539 |
|Other accrued liabilities||1,163 ||4,627 |
|Deferred revenue||30 ||292 |
|Net cash (used in) provided by operating activities||(4,306)||18,456 |
|Cash flows from investing activities:|
|Sale of Investment in non-public company||45,100 ||— |
|Purchases of property and equipment||(13,010)||(7,407)|
|Proceeds from sales of property and equipment||1,082 ||12,885 |
|Net cash provided by investing activities||33,172 ||5,478 |
|Cash flows from financing activities:|
|Payments on long-term debt||(41,426)||(20,062)|
|Proceeds from lines of credit||26,000 ||24,000 |
|Payments on lines of credit||(13,000)||(24,400)|
|Payments for debt issuance costs||(132)||(1,237)|
|Taxes paid by Company for employee stock plans||(512)||(297)|
|Net cash used in financing activities||(29,070)||(21,996)|
|Net (decrease) increase in cash, cash equivalents and restricted cash||(204)||1,938 |
|Cash, cash equivalents and restricted cash, beginning of period||1,295 ||553 |
|Cash, cash equivalents and restricted cash, end of period||$||1,091 ||$||2,491 |
|Supplemental disclosure of non-cash investing and financing activities:|
|Purchases of property and equipment on trade vendor credit||$||1,105 ||$||1,526 |
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies
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.
Landec’s biomedical company, Lifecore Biomedical, Inc. (“Lifecore”), is a fully integrated contract development and manufacturing organization (“CDMO”) that offers highly differentiated capabilities in the development, fill and finish of sterile, injectable-grade pharmaceutical products in syringes and vials. As a leading manufacturer of premium, injectable grade Hyaluronic Acid, Lifecore brings 36 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market. Lifecore recognizes revenue in two different product categories, CDMO and Fermentation.
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. Its products are sold in natural food, conventional grocery and mass retail stores, primarily in the United States and Canada. The company categorizes revenue in three categories, fresh packaged salads and vegetables, avocado products and technology which reports revenues for BreatheWay patented supply chain solutions. Included in the Curation Foods segment and fresh packaged salads and vegetables revenue disaggregation is O Olive Oil & Vinegar (“O”), which is a premier producer of California specialty olive oils and wine vinegars. Also included in the Curation Foods segment are the dividends from and Landec’s share of the change in the fair market value of the Company’s 26.9% investment in Windset Holdings 2010 Ltd. (“Windset”), until the Company sold that investment on June 1, 2021.
Basis of Presentation
The accompanying unaudited consolidated financial statements of Landec have been prepared in accordance with U.S. 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 November 28, 2021, 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 “SEC”). 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 30, 2021 (the “Annual Report”).
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 results of operations for the six months ended November 28, 2021 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 material inter-company transactions and balances have been eliminated.
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 by the Company is not a VIE.
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 credit losses; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived and indefinite lived assets (including intangible assets), and inventory; 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
The Company records all highly liquid securities with three months or less from date of purchase to maturity as cash equivalents. Cash equivalents consist mainly of money market funds. The market value of cash equivalents approximates their historical cost given their short-term nature.
Reconciliation of Cash and Cash Equivalents and Restricted Cash as presented on the Statements of Cash Flows
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:
|(In thousands)||November 28, 2021||May 30, 2021||November 29, 2020||May 31, 2020|
|Cash and cash equivalents||$||1,091 ||$||1,295 ||$||2,491 ||$||360 |
|Restricted cash||— ||— ||— ||193 |
|Cash, cash equivalents and restricted cash||$||1,091 ||$||1,295 ||$||2,491 ||$||553 |
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consist of the following:
|(In thousands)||November 28, 2021||May 30, 2021|
|Finished goods||$||42,967 ||$||39,493 |
|Raw materials||31,924 ||23,942 |
|Work in progress||4,542 ||6,228 |
|Total||$||79,433 ||$||69,663 |
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, 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 no current economic conditions or forecasts that may affect future credit losses, the Company has determined that recent historical experience provides 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|
|Provision for expected credit losses||Write offs,|
end of period
|Six months ended November 29, 2020||$||438 ||$||102 ||$||(263)||$||277 |
|Six months ended November 28, 2021||$||279 ||$||196 ||$||(148)||$||327 |
Related Party Transactions
The Company sells and licenses its BreatheWay® food packaging technology to Windset, in which, as further described in Note 2, the Company had a 26.9% ownership interest until it sold that interest on June 1, 2021. During the three and six months ended November 29, 2020, the Company recognized revenues of $0.1 million and $0.3 million, respectively, from product sales to and license fees from Windset. This amount has been included in Product sales in the accompanying Consolidated Statements of Comprehensive (Loss) Income. The receivable balance of $0.1 million is included in Accounts receivable in the accompanying Consolidated Balance Sheets as of May 30, 2021.
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, $0.7 million and $2.1 million were recorded as Prepaid expenses and other current assets, and Other assets in the accompanying Consolidated Balance Sheets, respectively, as of November 28, 2021, and $0.7 million and $2.4 million, respectively, as of May 30, 2021. The Company records its term debt issuance costs as a contra-liability, and as such, $1.4 million and $4.5 million was recorded as Other accrued liabilities, and Long-term debt, net in the accompanying Consolidated Balance Sheets, respectively, as of November 28, 2021 and $1.4 million and $5.1 million, respectively, as of May 30, 2021.
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 Statements of Comprehensive (Loss) Income as impacted 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.
During the third quarter of fiscal year 2021, the Company discontinued its hedge accounting prospectively since it was determined that the derivatives are no longer highly effective in offsetting changes in the net investment. The derivatives continue to be carried at fair value in the accompanying Consolidated Balance Sheets with changes in their fair values from the date of discontinued hedge accounting recognized in current period earnings in Other income (expense), net in the Consolidated Statements of Comprehensive (Loss) Income. Amounts previously accumulated in AOCL during the period of effectiveness will continue to be realized over the remaining term of the underlying forecasted debt payments as a component of AOCL in Stockholders’ Equity.
Accumulated Other Comprehensive Loss
Comprehensive income (loss) consists of two components, net loss and Other comprehensive income (loss) (“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 instruments. The components of AOCL, net of tax, are as follows:
|Balance as of May 30, 2021||$||(1,358)|
|Amounts reclassified from OCI||542 |
|Other comprehensive income, net||$||542 |
|Balance as of November 28, 2021||$||(816)|
The Company expects to reclassify approximately $0.5 million into earnings in the next 12 months.
Investment in Non-Public Company
On February 15, 2011, the Company made an investment in Windset which is reported as an investment in non-public company, fair value, in the accompanying Consolidated Balance Sheets as of November 28, 2021 and May 30, 2021. 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. On June 1, 2021, the Company sold all of its equity interest in Windset to the Newell Capital Corporation and Newell Brothers Investment 2 Corp.
Assets Held for Sale
In January 2020, the Company decided to seek to divest its Curation Foods salad dressing plant in Ontario, California (“Ontario”). During 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. 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 six months ended November 29, 2020, which is included in Restructuring costs within the Consolidated Statements of Comprehensive (Loss) Income.
In June 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. In the first quarter of fiscal year 2021, the Company recognized an $8.8 million impairment loss, which is included in Restructuring costs within the Consolidated Statements of
Comprehensive (Loss) Income. During the second quarter of fiscal year 2021, the Company sold the Hanover building and assets related thereto for net proceeds of $8.0 million, no gain or loss was recorded upon the sale.
In May 2021 the Board of Directors approved a plan to sell Curation Foods’ Rock Hill, South Carolina distribution facility. The $0.5 million carrying value of this asset was included in prepaid expenses and other current assets on the Consolidated Balance Sheets as of May 30, 2021, and was classified as an asset held for sale. There was no impairment recorded in fiscal year 2021. The asset was sold on June 9, 2021 for gross proceeds of $1.1 million. A gain of $0.6 million was recorded upon the sale, which is included in Restructuring costs within the Consolidated Statements of Comprehensive (Loss) Income.
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.
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.
Impairment Review of Goodwill and Indefinite-Lived Intangible Asset
The Company tests its goodwill and trademarks with indefinite lives annually for impairment in the fiscal fourth quarter or earlier if there are indications during a different interim period that these assets may have become impaired.
On a quarterly basis, the Company considers the need to update its most recent annual tests for impairment of its indefinite-lived intangible assets and goodwill, based on management’s assessment of changes in its business and other economic factors since the most recent annual evaluation. Such changes, if significant or material, could indicate a need to update the most recent annual tests for impairment of goodwill and indefinite-lived intangible assets during the current period. The results of these tests could lead to write-downs of the carrying values of these assets in the current period.
With respect to goodwill, the Company has the option to first assess qualitative factors such as macro-economic conditions, industry and market environment, cost factors, overall financial performance of the Company, cash flow from operating activities, market capitalization, litigation, and stock price. If the result of a qualitative test indicates a potential for impairment of a reporting unit, a quantitative test is performed. The quantitative test compares the carrying amount of a reporting unit that includes goodwill to its fair value. The Company determines the fair value using both an income approach and a market approach. Under the income approach, fair value is determined based on estimated future cash flows, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Company and the rate of return an outside investor could expect to earn. Under the market-based approach, information regarding the Company is utilized along with publicly available industry information to determine earnings multiples that are used to value the Company. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
To determine the fair value of a reporting unit as part of its quantitative test, the Company uses a discounted cash flow ("DCF") method under the income approach, as it believes that this approach is the most reliable indicator of the fair value of its businesses and the fair value of their future earnings and cash flows. Under this approach, which requires significant judgments,
the Company estimates the future cash flows of each reporting unit and discounts these cash flows at a rate of return that reflects their relative risk. The cash flows used in the DCF method are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced, and the broader business strategy for the long term. The other key estimates and factors used in the DCF method include, but are not limited to, future volumes, net sales and expense growth rates, and gross margin and gross margin growth rates. Changes in such estimates or the application of alternative assumptions could produce different results.
For trademarks and other intangible assets with indefinite lives, the Company performs a quantitative analysis to test for impairment. When a quantitative test is performed, the estimated fair value of an asset is compared to its carrying amount. If the carrying amount of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying amount and the estimated fair value. The Company uses the income approach to estimate the fair value of its trademarks. This approach requires significant judgments in determining the royalty rates and the assets’ estimated cash flows as well as the appropriate discount rates applied to those cash flows to determine fair value. Changes in such estimates or the use of alternative assumptions could produce different results.
During the three and six months ended November 28, 2021, the Company recorded an impairment charge of $32.1 million related Goodwill for the Eat Smart business. The impairment charge was primarily a result of an indication of a decrease in the fair market value of our Eat Smart business driven by lower market valuations for the Eat Smart business and a decrease in projected cash flows. This impairment charge is included in the line item Impairment of goodwill on the Consolidated Statements of Comprehensive (Loss) Income, and is in the Curation Foods business segment.
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 November 28, 2021 and May 30, 2021, 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. The investment in Windset was required to be measured at fair value on a recurring basis at May 30, 2021.
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 May 30, 2021, related to Curation Foods’ distribution facility in Rock Hill, South Carolina the Company had $0.5 million in prepaid expenses and other current assets within the Consolidated Balance Sheet meeting the criteria of assets held for sale. These assets are recognized at the lower of cost or fair value less cost to sell using market approach. The fair value of these assets are classified as level 3 in the fair value hierarchy due to a mix of unobservable inputs utilized such as independent research in the market as well as actual quotes from market participants. See Note 8 for additional information.
The Company elected the fair value option of accounting for its investment in Windset. The calculation of fair value utilized significant unobservable inputs, including projected cash flows, growth rates, and discount rates. As a result, the Company’s investment in Windset was considered to be a Level 3 measurement investment. The Company sold its entire investment in Windset on June 1, 2021 for $45.1 million. No gain or loss was recorded upon the sale of the Company’s investment in Windset.
In determining the fair value of the investment in Windset, the Company utilized the following significant unobservable inputs in the discounted cash flow models:
|November 28, 2021 Range|
|May 30, 2021 Range|
|Revenue growth rates||N/A|
|Expense growth rates||N/A|
0% to 8% (5.5%)
Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on a recurring and nonrecurring basis:
|(In thousands)||Fair Value at November 28, 2021||Fair Value at May 30, 2021|
|Assets:||Level 1||Level 2||Level 3||Level 1||Level 2||Level 3|
|Assets held for sale - nonrecurring||$||— ||$||— ||$||— ||$||— ||$||— ||$||515 |
|Investment in non-public company||— ||— ||— ||— ||— ||45,100 |
|Total assets||$||— ||$||— ||$||— ||$||— ||$||— ||$||45,615 |
|Interest rate swap contracts||$||— ||$||830 ||$||— ||$||— ||$||1,736 ||$||— |
|Total liabilities||$||— ||$||830 ||$||— ||$||— ||$||1,736 ||$||— |
The following table reflects the fair value roll forward reconciliation of Level 3 assets and liabilities measured at fair value for the six months ended November 28, 2021:
|(In thousands)||Windset Investment|
|Balance as of May 30, 2021||$||45,100 |
|Sale of Investment in non-public company||(45,100)|
|Balance as of November 28, 2021||$||— |
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 or as the Company satisfies its performance obligations under a contract and control of the product is transferred to the customer.
Curation Foods’ standard terms of sale are generally included in its contracts and purchase orders. Revenue is recognized at the time shipment is made or upon delivery as control of the product is transferred to the customer. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. Curation Foods has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation. Curation Foods’ 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 Curation Foods’ performance obligations. Curation Foods 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 has not historically had and does not anticipate significant changes in its estimates for variable consideration.
Lifecore generates revenue from two integrated activities: CDMO and Fermentation. CDMO is comprised of aseptic and development services. Lifecore’s standard terms of sale are generally included in its contracts and purchase orders. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. Lifecore has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation. Lifecore’s standard payment terms with its customers generally range from 30 days to 60 days.
Lifecore provides aseptic formulation and filling of syringes and vials with precisely formulated medical grade HA and non-HA materials for injectable products used for medical purposes. In instances where our customers contract with us to aseptically fill syringes or vials with our HA, the goods are not distinct in the context of the contract. Lifecore recognizes revenue for these products at the point in time when legal title to the product is transferred to the customer, which is at the time that shipment is made or upon delivery of the product.
Lifecore provides product development services to assist its customers in obtaining regulatory approval for the commercial sale of their drug product. These services include activities such as technology development, material component changes, analytical method development, formulation development, pilot studies, stability studies, process validation and production of materials for use within clinical studies. The Company’s customers benefit from the expertise of its scientists who have extensive experience performing such tasks.
Each of the promised goods and services are not distinct in the context of the contract as the goods and services are highly interdependent and interrelated. The services described above are significantly affected by each other because Lifecore would not be able to fulfill its promise by transferring each of the goods or services independently.
Revenues generated from development services arrangements are recognized over time as Lifecore is creating an asset without an alternate use as it is unique to the customer. Furthermore, the Company has an enforceable right to payment for the performance completed to date for its costs incurred in satisfying the performance obligation plus a reasonable profit margin. For each of the development activities performed by Lifecore as described above, labor is the primary input (i.e., labor costs represent the majority of the costs incurred in the completion of the services). The Company determined that labor hours are the best measure of progress as it most accurately depicts the effort extended to satisfy the performance obligation over time.
Lifecore manufactures and sells pharmaceutical-grade sodium hyaluronate (“HA”) in bulk form to its customers. The HA produced is distinct as customers are able to utilize the product provided under HA supply contracts when they obtain control. Lifecore recognizes revenue for these products at the point in time when legal title to the product is transferred to the customer, which is at the time that shipment is made or upon delivery of the product to our customer.
The Company disaggregates its revenue by segment based on how it markets its products and services and reviews results of operations. The following tables disaggregate segment revenue by major product lines and services:
|(In thousands)||Three Months Ended||Six Months Ended|
|Curation Foods:||November 28, 2021||November 29, 2020||November 28, 2021||November 29, 2020|
|Fresh packaged salads and vegetables||$||88,548 ||$||92,423 ||$||178,044 ||$||188,601 |
|Avocado products||15,381 ||14,713 ||32,343 ||31,730 |
|Technology||617 ||549 ||995 ||1,192 |
|Total||$||104,546 ||$||107,685 ||$||211,382 ||$||221,523 |
|(In thousands)||Three Months Ended||Six Months Ended|
|Lifecore:||November 28, 2021||November 29, 2020||November 28, 2021||November 29, 2020|
|Contact development and manufacturing organization||$||21,363 ||$||18,259 ||$||39,152 ||$||34,747 |
|Fermentation||3,583 ||4,960 ||7,746 ||10,277 |
|Total||$||24,946 ||$||23,219 ||$||46,898 ||$||45,024 |
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 November 28, 2021 and May 30, 2021, were $12.6 million and $10.6 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 November 28, 2021 and May 30, 2021, were $1.3 million and $0.9 million, respectively. Revenue recognized during the three and six months ended November 28, 2021, that was included in the contract liability balance at the beginning of fiscal year 2022, was $0.0 million and $0.2 million, respectively.
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.
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.
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 U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) the conduct under investigation, and these agencies have commenced an investigation. The Company also disclosed the conduct under investigation to the Office of the Attorney General in Mexico,
which recently decided (a) that Curation Foods, Inc., did not commit or participate in the criminal conduct disclosed, (b) no criminal action would be taken against Curation Foods, Inc., (c) that no criminal liability was established against Tanok and Yucatan Foods after they were acquired by Curation Foods, Inc., and (d) the decisions do not apply to any individuals who may be responsible for misconduct. The Company also disclosed the misconduct to other regulators in Mexico. The Company continues to cooperate 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. On November 3, 2020, the Company filed an answer and cross-complaint against the Plaintiff and other parties for fraud, indemnification, and other claims, and seeking no less than $80 million in damages.
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 its effect, if any, on its financial statements. Separately, there are indemnification provisions in the purchase agreement that may allow the Company to recover costs for breach of the purchase agreement from the seller. Because recovery of amounts are contingent upon a legal settlement, no amounts have been recorded as recoverable costs through November 28, 2021.
During the third quarter of fiscal year 2021 the Company reached a resolution with its insurance carrier that resulted in a recovery of $1.6 million. Absent further material developments in the investigation, the Company does not expect additional material recovery from the insurance carrier.
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 represented a 26.9% ownership interest in Windset. The Senior A preferred shares yielded a cash dividend of 7.5% annually. The dividend was payable within 90 days of each anniversary of the execution of the Windset Purchase Agreement. The non-voting junior preferred stock did not yield a dividend unless declared by the Board of Directors of Windset and no such dividend has been declared.
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 and six months ended November 29, 2020, the Company recorded $0.3 million and $0.6 million in dividend income, respectively. The change in the fair market value of the Company’s investment in Windset for the three and six months ended November 29, 2020 was a decrease of $11.8 million, and is included in Other expenses (income) in the accompanying Consolidated Statements of Comprehensive (Loss) Income.
On June 1, 2021, the Company and Curation Foods entered into and closed a Share Purchase Agreement (the “Purchase Agreement”) with Newell Capital Corporation and Newell Brothers Investment 2 Corp., as Purchasers (the “Purchasers”) and Windset, pursuant to which Curation Foods sold all of its equity interests of Windset to the Purchasers in exchange for an aggregate purchase price of $45.1 million.
3. Stock-based Compensation and Stockholders' Equity
Stock-Based Compensation Activity
The estimated fair value for stock options, which determines the Company’s calculation of stock-based compensation expense, is based on the Black-Scholes option pricing model. Restricted stock units (“RSUs”) are valued at the closing market
price of the Company’s common stock on the grant date. The Company uses the straight-line method to recognize the fair value of stock-based compensation arrangements.
During the three months ended November 28, 2021, the Company granted 0 options to purchase shares of common stock and awarded 0 RSUs. During the six months ended November 28, 2021, the Company granted 703,000 options to purchase shares of common stock and awarded 83,000 RSUs.
As of November 28, 2021, the Company has reserved 3.8 million shares of common stock for future issuance under its current and former equity plans.
Stock-Based Compensation Expense
The Company’s stock-based awards include stock option grants and RSUs. The Company records compensation expense for stock-based awards issued to employees and directors in exchange for services provided based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods, generally the vesting period.
The following table summarizes stock-based compensation by income statement line item:
|Three Months Ended||Six Months Ended|
|(In thousands)||November 28, 2021||November 29, 2020||November 28, 2021||November 29, 2020|
|Cost of product sales||$||83 ||$||123 ||119 ||$||182 |
|Research and development||51 ||64 ||100 ||126 |
|Selling, general and administrative||552 ||705 ||1,087 ||1,479 |
|Total stock-based compensation||$||686 ||$||892 ||1,306 ||$||1,787 |
As of November 28, 2021, there was $3.9 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 2.21 years for stock options and 1.24 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 $3.8 million of the Company’s common stock under the Company’s stock repurchase plan. The Company may repurchase its common stock from time to time in open market purchases or in privately negotiated transactions. The timing and actual number of shares repurchased is at the discretion of management of the Company and will depend on a variety of factors, including stock price, corporate and regulatory requirements, market conditions, the relative attractiveness of other capital deployment opportunities and other corporate priorities. The stock repurchase program does not obligate Landec to acquire any amount of its common stock and the program may be modified, suspended or terminated at any time at the Company's discretion without prior notice. During the six months ended November 28, 2021, the Company did not purchase any shares on the open market.
4. Diluted Earnings Per Share
The following table sets forth the computation of diluted earnings per share:
|Three Months Ended||Six Months Ended|
(In thousands, except per share amounts)
|November 28, 2021||November 29, 2020||November 28, 2021||November 29, 2020|
|Numerator:|| || |
|Net loss applicable to common stockholders||$||(38,441)||$||(13,301)||$||(47,918)||$||(24,301)|
|Weighted average shares for basic net loss per share||29,471 ||29,280 ||29,448 ||29,261 |
|Effect of dilutive securities:|
|Stock options and restricted stock units||— ||— ||— ||— |
|Weighted average shares for diluted net loss per share||29,471 ||29,280 ||29,448 ||29,261 |
|Diluted net loss per share||$||(1.30)||$||(0.45)||$||(1.63)||$||(0.83)|
Due to the Company’s net loss for the three and six months ended November 28, 2021 and November 29, 2020, the net loss per share includes only weighted average shares outstanding. For the three months ended November 28, 2021 and November 29, 2020, the computation of the diluted net loss per share excludes the impact of options to purchase 2.7 million and 3.2 million shares of common stock, respectively, as such impacts would be antidilutive for these periods. For the six months ended November 28, 2021 and November 29, 2020, the computation of the diluted net loss per share excludes the impact of options to purchase 2.2 million and 2.3 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 six months ended November 28, 2021 and November 29, 2020, was a benefit of $4.9 million and $7.0 million, respectively. The effective tax rate for the six months ended November 28, 2021 and November 29, 2020 was 9% and 22%, respectively. The effective tax rate for the six months ended November 28, 2021, was lower than the statutory federal income tax rate of 21% primarily due to the movement of the valuation allowance recorded against certain deferred tax assets, partially offset by the impact of state taxes.
As of November 28, 2021 and May 30, 2021, the Company had unrecognized tax benefits of $1.1 million and $0.9 million, respectively. Included in the balance of unrecognized tax benefits as of November 28, 2021 and May 30, 2021, is $1.0 million and $0.8 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next twelve months.
The Company has elected to classify interest and penalties related to uncertain tax positions as a component of its provision for income taxes. The Company has accrued an insignificant amount of interest and penalties relating to the income tax on the unrecognized tax benefits as of November 28, 2021 and May 30, 2021.
Due to tax attribute carryforwards, the Company is subject to examination for tax years 2017 forward for U.S. tax purposes. The Company is also subject to examination in various state jurisdictions for tax years 2015 forward, none of which were significant.
Long-term debt, net consists of the following:
|(In thousands)||November 28, 2021||May 30, 2021|
|$||128,647 ||$||170,000 |
|Total principal amount of long-term debt||128,647 ||170,000 |
|Less: unamortized debt issuance costs||(4,453)||(5,098)|
|Total long-term debt, net of unamortized debt issuance costs||124,194 ||164,902 |
|Less: current portion of long-term debt, net||— ||— |
|Long-term debt, net||$||124,194 ||$||164,902 |
On December 31, 2020, the Company refinanced its existing Term Loan and Revolver by entering into two separate Credit Agreements (the "New Credit Agreements") with BMO and Goldman Sachs Specialty Lending Group, L.P. (“Goldman”) and Guggenheim Credit Services, LLC ("Guggenheim"), as lenders (collectively, the “Refinance Lenders”). Pursuant to the credit agreement related to the revolving credit facility, BMO has provided the Company, Curation Foods and Lifecore, as co-borrowers, with an up to $75.0 million revolving line of credit (the “Refinance Revolver”) and serves as administrative agent of the Refinance Revolver. Pursuant to the credit agreement related to the term loan, Goldman and Guggenheim have provided the Company, Curation Foods and Lifecore, as co-borrowers, with an up to $170.0 million term loan facility (split equally between Goldman and Guggenheim) (the “Refinance Term Loan”) and Goldman serves as administrative agent of the Refinance Term Loan. The Refinance Revolver and Refinance Term Loan are guaranteed, and secured by, substantially all of the Company’s and the Company's direct and indirect subsidiaries' assets.
The Refinance Term Loan matures on December 31, 2025. The Refinance Revolver matures on December 31, 2025 or, if the Refinance Term Loan remains outstanding on such date, ninety (90) days prior to the maturity date of the Refinance Term Loan (on October 2, 2025).
The Refinance Term Loan provides for principal payments by the Company of 5% per annum, payable quarterly in arrears in equal installments, commencing on March 30, 2023, with the remainder due at maturity.
Interest on the Refinance Revolver is based upon the Company’s average availability, at a per annum rate of either (i) LIBOR rate plus a spread of between 2.00% and 2.50% or (ii) base rate plus a spread of between 1.00% and 1.50%, plus a commitment fee, as applicable, of 0.375%. Interest on the Refinance Term Loan is at a per annum rate based on either (i) the base rate plus a spread of 7.50% or (ii) the LIBOR rate plus a spread of 8.50%. The Refinance Term Loan Credit Agreement also states that in the event of a prepayment of any amount other than the scheduled installments within twelve months after the closing date, a penalty will be assessed equal to the aggregate amount of interest that would have otherwise been payable from date of prepayment event until twelve months after the closing date plus 3% of the amount prepaid.
The New Credit Agreements provide the Company the right to increase the revolver commitments under the Refinance Revolver, subject to the satisfaction of certain conditions (including consent from BMO), by obtaining additional commitments from either BMO or another lending institution at an amount of up to $15.0 million.
The New Credit Agreements contain customary financial covenants and events of default under which the obligations thereunder could be accelerated and/or the interest rate increased in specified circumstances.
In connection with the New Credit Agreements, the Company incurred debt issuance costs from the lender and third-parties of $10.3 million.
Concurrent with the close of the New Credit Agreements, the Company repaid all outstanding borrowings under the previous Credit Agreement, and terminated such previous Credit Agreement. In connection with the repayment of borrowings under such previous Credit Agreement, the Company recognized a loss in fiscal year 2021 of $1.1 million, as a result of the non-cash write-off of unamortized debt issuance costs related to the refinancing under the New Credit Agreements.
As of November 28, 2021, $42.0 million was outstanding on the Refinance Revolver, at an interest rate of 3.00%. As of November 28, 2021, the Refinance Term Loan had an interest rate of 9.5%. As of November 28, 2021, the Company was in compliance with all financial covenants and had no events of default under the New Credit Agreements.
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 had the effect of changing the Company’s previous Term Loan obligation from a variable interest rate to a fixed 30-day LIBOR rate of 1.22%. The 2016 Swap matured in September 2021.
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 had the effect on the Company’s previous debt 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%. The 2018 Swap matured in September 2021.
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 had the effect on our previous debt 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 1.53%. The 2019 Swap will mature in November 2022.
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 the Company’s previously held investment in Windset. The Curation Foods segment includes activities to market and pack specialty packaged whole and fresh-cut fruit and vegetables, the majority of which incorporate the BreatheWay specialty packaging for the retail grocery, club store and food services industry and are sold primarily under the Eat Smart brand and various private labels. The Curation Foods segment also includes sales of BreatheWay packaging to partners for fruit and vegetable products, sales of olive oils and wine vinegars under the O brand, sales of avocado products under the brands Yucatan Foods and Cabo Fresh, and activity related to the Company’s previously held investment in Windset.
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: