It has been a whirlwind year for Beyond Meat (NYSE:BYND) investors. BYND stock produced monumental returns following its May IPO; then despite turning in a 250% revenue increase in the third quarter, BYND stock lost 20% of its value when its lockup period expired.
With Beyond Meat stock trading at under $85 per share, many believe the worst is over for the plant-based burger maker. However, although the headlines regarding the firm’s Q3 results were mostly positive, long-term investors may want to have a closer look at BYND’s financials before deciding to ride out the turbulence.
EARNINGS: Beyond Meat Q3 EPS $0.06 vs. $0.03 Est.; Q3 Revs. $92.0M vs. $82.2M Est. • $BYND down nearly 9% after-hours https://t.co/heSXtJAhzr pic.twitter.com/FqdLmEvZFJ
— CNBC Now (@CNBCnow) October 28, 2019
According to BYND’s income statement, the firm’s ‘restructuring expenses’ have increased by 174% over the past three months. Beyond Meat set aside $2.3 million for restructuring expenses in Q3, bringing the total for the year up to $3.5 million. To put that into perspective, BYND’s ‘restructuring expenses’ in the third quarter totaled more than half of its net income. Right now, they make up about 8% of the firm’s overall operating expenses— that’s double the impact they had in the year-ago quarter.
What makes these ‘restructuring expenses’ so important is a footnote at the bottom of Beyond Meat’s quarterly results that defines them as “Primarily comprised of legal and other expenses associated with the dispute with a co-manufacturer with whom an exclusive supply agreement was terminated in May 2017.”
Buried inside BYND stock’s prospectus was a brief reference to a lawsuit with the firm’s ex-manufacturer Don Lee. Don Lee alleges that BYND broke its exclusive manufacturing contract, stole trade secrets used to develop the Beyond Burger, and shared them with new suppliers. Up until the last quarter, the lawsuit was largely viewed as a spat between the ex-partners. But in September, Beyond Meat’s legal troubles escalated when a judge sided with Don Lee and set a trial date for May 2020.
That’s the dispute Beyond is referencing with it’s ‘restructuring expenses,’ and from the marked increase in provisions it looks like BYND is readying for a costly battle.
If Don Lee is successful, Florida trail attorney Donald E. Peterson says BYND would likely be ordered to pay Don Lee for lost profits.
“The remedy that the court is most likely to grant if Don Lee Farms prevails is to order Beyond Meat to pay [Don Lee]’s actual damages — [Don Lee]’s profits over the life of the contract.”
Without the details of Don Lee’s contract with Beyond Meat, it’s difficult to estimate the financial impact that it could have on the company. The product in question, the Beyond Burger, makes up 70% of the firm’s overall sales, so a sizable portion of Beyond’s revenue could end up in Don Lee’s pocket.
It’s worth noting that $2.3 million is just 3% of Beyond Meat’s revenue for the quarter, so perhaps that’s why no one is questioning it. However, the ballooning legal provisions point to a worrisome trend that long-term investors should be aware of. A further increase in the fourth quarter suggests 2020 could be a bumpy ride for Beyond Meat investors as the court case nears and the possibility of a major payout looms.
Beyond Meat could not be reached for comment on the estimated cost of this lawsuit.
Disclaimer: The above should not be considered trading advice from CCN.com. The writer does not own Beyond Meat stock.