Business Context and Reporting Period
Company: Lifecore Biomedical, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: January 9, 2023
Reporting Period: Events occurring on January 9, 2023.
This filing details the entry into a Material Definitive Agreement involving a private placement of Series A Convertible Preferred Stock and amendments to existing credit facilities. The company is headquartered in Chaska, Minnesota, and trades on the NASDAQ Global Select Market under the symbol LFCR.
Key Financial Metrics and Capital Structure
Capital Raise: The Company issued and sold 38,750 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $38.75 million. Proceeds are designated for working capital, capital expenditures, debt repayment, and general corporate purposes.
Debt and Liquidity Adjustments:
- Revolving Credit Facility: Maximum availability reduced to the lesser of $60.0 million or a modified borrowing base. The borrowing base calculation now excludes inventory outside the U.S. or Canada and includes a temporary $1.0 million reduction until January 31, 2023.
- Term Loan Interest: Applicable margin increased by 2.0% per annum, payable in-kind (PIK).
- Amortization: First amortization payment deferred until the fiscal quarter ending approximately February 28, 2025.
- Liquidity Covenant: Minimum liquidity requirement set at $1.0 million until May 30, 2023, increasing to $7.5 million thereafter.
Preferred Stock Terms:
- Liquidation Preference: Senior to Common Stock; entitled to purchase price plus accrued dividends.
- Dividends: 7.5% per annum, payable in-kind (PIK). Cash payment option available after June 29, 2026, or earlier upon termination of credit agreement restrictions.
- Conversion Price: $7.00 per share of Common Stock, subject to anti-dilution adjustments.
- Conversion Limits: Subject to a 19.99% exchange limit (aggregate) and a 9.99% beneficial ownership limit per holder unless stockholder approval is obtained.
Material Changes Versus Prior Period
Financial Covenant Waivers: The amendments waived certain past financial covenant defaults and matters related to potential restatements of historical financial statements under the Credit Agreements.
Covenant Modifications:
- Fixed Charge Coverage Ratio: Testing deferred until May 30, 2023. Initial requirement set at 0.75 to 1.00, increasing to 1.20 to 1.00 by November 30, 2024.
- Leverage Ratio: Testing deferred until May 30, 2023. Initial maximum set at 8.00 to 1.00, decreasing to 5.25 to 1.00 by May 30, 2025.
- Indebtedness Cap: Holders of Preferred Stock must approve any new indebtedness if total outstanding indebtedness exceeds $175,000,000.
Board Composition: Two new directors, Nat Calloway and Christopher Kiper, were appointed to the Board of Directors pursuant to the Series A Director Right, effective immediately.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Use of Proceeds: Management intends to use the $38.75 million raised to strengthen the balance sheet, specifically for working capital and debt repayment. The company has agreed to deliver 13-week budgets and cash flow forecasts to lenders and retain a professional advisor until certain conditions are met.
Risks and Contingencies:
- Conversion Restrictions: Conversion of Preferred Stock is limited to prevent dilution exceeding 19.99% of outstanding Common Stock without stockholder approval.
- Dividend Restrictions: Cash dividends on Preferred Stock are restricted until the "Applicable Date" (June 29, 2026, or earlier upon credit agreement changes).
- Liquidity Constraints: The company must maintain minimum liquidity levels ($1.0M to $7.5M) and faces a reduced borrowing base on its revolving credit facility.
- PIK Interest: The increase in term loan interest is capitalized (PIK), which will increase the outstanding principal balance over time.
Investor Verification Checklist
- Verify the specific terms of the "Certificate of Designations" (Exhibit 3.1) regarding the 7.5% PIK dividend and conversion mechanics.
- Confirm the impact of the $1.0 million temporary borrowing base reduction on immediate liquidity availability.
- Review the "Term Loan Amendment" (Exhibit 10.3) to understand the full extent of the PIK interest capitalization and its effect on future debt service.
- Monitor the company's ability to meet the new minimum liquidity covenants ($1.0M initially, rising to $7.5M) and the deferred financial covenant tests starting May 30, 2023.
- Assess the potential dilution impact of the $7.00 conversion price relative to the current market price of Common Stock.