Lifecore Biomedical, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended November 27, 2022, the second quarter of fiscal 2023. The company changed its name from Landec Corporation to Lifecore Biomedical, Inc. on November 14, 2022, and began trading under the ticker LFCR on November 15, 2022.
The principal businesses were Lifecore, a contract development and manufacturing organization providing sterile injectable, hyaluronic-acid and fermentation products, and Curation Foods, which sold avocado products, olive oil and vinegars. The previously sold Eat Smart business is presented as discontinued operations for prior periods.
Financial performance and liquidity
| Metric | Three months ended Nov. 27, 2022 | Prior comparable period | Six months ended Nov. 27, 2022 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $38.8 million | $43.5 million | $82.2 million | $85.1 million |
| Gross profit | $7.1 million | $14.7 million | $13.4 million | $25.2 million |
| Gross margin | 18.3% | 33.9% | 16.3% | 29.6% |
| Operating income (loss) | $(7.9) million | $4.1 million | $(15.4) million | $1.4 million |
| Net income (loss) from continuing operations | $(12.4) million | $4.2 million | $(23.8) million | $(3.4) million |
| Total net loss | $(12.4) million | $(38.4) million | $(23.8) million | $(47.9) million |
| Basic and diluted loss per share | $(0.42) | $(1.30) | $(0.80) | $(1.63) |
Lifecore revenue declined 13% for the quarter and 3% for the six-month period, primarily because of the timing of CDMO shipments and development activities; fermentation revenue increased. Curation Foods revenue declined 8% for the quarter and 4% for the six-month period, partly because BreatheWay revenue no longer remained after its sale.
Gross profit decreased 52% for the quarter and 47% for the six-month period. Lifecore gross profit was affected by lower revenue and unfavorable mix, while Curation Foods was affected by higher freight and raw-material sourcing costs. Selling, general and administrative expense increased 34% for the quarter and 23% for the six-month period, driven by higher legal, salary, benefits and other corporate costs.
The company recorded a $1.3 million impairment of Curation Foods tradenames, consisting of $1.0 million for Yucatan Foods and $0.3 million for O Olive. Restructuring costs were $0.8 million for the quarter and $1.9 million for the six-month period. Interest expense was $4.2 million for the quarter and $7.9 million for the six-month period.
Operating cash flow was negative $4.5 million for the six months, compared with negative $4.3 million in the prior period. Investing cash flow was negative $3.0 million, including $6.2 million of capital expenditures primarily supporting Lifecore. Financing cash flow was positive $12.7 million, including $5.0 million from common-stock issuance and a net $8.0 million increase in line-of-credit borrowings. Cash increased to $6.8 million from $1.6 million at May 29, 2022.
| Balance-sheet item | Nov. 27, 2022 | May 29, 2022 |
|---|---|---|
| Cash and cash equivalents | $6.8 million | $1.6 million |
| Accounts receivable | $35.7 million | $48.2 million |
| Inventories | $77.5 million | $66.8 million |
| Line of credit | $48.0 million | $40.0 million |
| Current portion of term debt, net | $99.0 million | $98.2 million |
| Total liabilities | $204.9 million | $187.1 million |
| Stockholders’ equity | $74.2 million | $90.7 million |
Material changes versus the prior comparable period
- Revenue fell $4.7 million, or 11%, in the quarter and $2.9 million, or 3%, for the six-month period.
- Gross margin contracted materially because of lower volume and mix at Lifecore and higher freight and sourcing costs at Curation Foods.
- Continuing-operations net loss increased from $3.4 million to $23.8 million for the six months, despite the prior period including substantial interest and other charges associated with debt reduction.
- The prior-year periods included a $44.5 million loss from discontinued Eat Smart operations; no discontinued-operation loss was recorded in the current periods.
- Accounts receivable decreased while inventory increased by approximately $10.7 million, primarily reflecting production-season inventory accumulation at Curation Foods.
- The company issued 627,746 common shares to Wynnefield Capital affiliates for approximately $5.0 million, or $7.97 per share.
Guidance, outlook, risks and unusual items
Management did not provide conventional revenue or earnings guidance. It stated that results may fluctuate because of customer order patterns, seasonality, economic conditions, supply-chain costs, COVID-19 effects, regulatory matters and the timing of customer shipments and approvals.
Going concern: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern for the twelve months following the filing date. The company reported $6.8 million of cash, approximately $147.0 million of borrowings net of issuance costs and cumulative six-month net losses of $23.8 million. It stated that projected liquidity was inadequate to meet obligations for at least one year.
As of the filing date, the company was in default of credit-agreement requirements relating to timely filing and the auditor’s going-concern explanatory paragraph. Management also anticipated violations of minimum fixed-charge coverage, maximum leverage, minimum liquidity and minimum Lifecore gross-profit covenants. Lenders could cancel unfunded commitments, increase interest rates or accelerate outstanding debt, which the company said it could not currently repay. The company was negotiating forbearance and amendments and reviewing strategic alternatives, including additional financing or asset sales.
Subsequent events materially changed the outlook. On January 9, 2023, lenders provided a limited waiver and amended the credit agreements, including revised covenant terms, a reduction of the revolver commitment and deferred term-loan principal payments. The company also issued $38.75 million of Series A convertible preferred stock. On February 7, 2023, it sold the Curation Foods avocado business for $17.5 million in cash, subject to adjustments, and expected to recognize an estimated $15 million to $17 million loss.
Other significant risks include government investigations concerning potential environmental and Foreign Corrupt Practices Act matters at the Yucatan facility, related litigation with a former owner, customer concentration, commodity and freight costs, and the possibility that lenders could foreclose on substantially all company assets if defaults are not resolved.
Disclosure controls were ineffective as of November 27, 2022 because two previously reported material weaknesses remained unremediated: controls over asset recoverability and fair-value measurements, and controls over non-standard transactions such as discontinued operations and restructuring activities.
Facts investors should verify
- Whether the January 2023 credit amendments and subsequent financing provide sufficient liquidity and resolve current and projected covenant defaults.
- The company’s ability to generate positive operating cash flow and fund debt service, capital expenditures and working capital.
- The final proceeds, working-capital adjustments and accounting loss from the February 2023 avocado-business sale, together with any remaining Curation Foods asset sales.
- The effect of reduced revenue and gross margins on Lifecore’s minimum gross-profit covenant and overall debt capacity.
- The status and potential financial impact of the Yucatan compliance investigations and related litigation.
- Progress in remediating the two material weaknesses and whether future filings require additional corrections or restatements.