Lifecore Biomedical, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended February 26, 2023, compared with February 27, 2022. The filing was signed June 2, 2023. The company changed its name from Landec Corporation to Lifecore Biomedical, Inc. and its Nasdaq ticker from LNDC to LFCR in November 2022.
Business Context
Lifecore is a contract development and manufacturing organization providing sterile injectable pharmaceutical development, fill-finish services, and pharmaceutical-grade hyaluronic acid products. The company also operated the Curation Foods business, but sold Yucatan Foods in February 2023 and O Olive Oil and Vinegar in April 2023. Eat Smart and Yucatan are presented as discontinued operations; O Olive is classified as discontinued beginning in the fourth quarter of fiscal 2023.
Financial Performance and Liquidity
| Metric | Three months ended February 26, 2023 | Three months ended February 27, 2022 | Nine months ended February 26, 2023 | Nine months ended February 27, 2022 |
|---|---|---|---|---|
| Revenue | $27.6 million | $37.4 million | $77.7 million | $90.1 million |
| Gross profit | $6.0 million | $12.9 million | $19.6 million | $31.6 million |
| Gross margin | 21.7% | 34.4% | 25.2% | 35.1% |
| Operating loss | $9.7 million | $8.6 million | $20.6 million | $9.3 million |
| Net loss from continuing operations | $15.5 million | $6.6 million | $34.7 million | $11.4 million |
| Net loss | $40.2 million | $13.1 million | $64.0 million | $61.1 million |
| Basic net loss per share | $1.33 | $0.45 | $2.14 | $2.07 |
Revenue drivers: Lifecore revenue declined 24% in the quarter and 12% year to date. CDMO revenue decreased primarily because of shipment timing, lower development revenue, and delays onboarding new customers. Fermentation revenue decreased in the quarter but increased year to date. Curation Foods revenue declined 51% in the quarter and 29% year to date, partly because BreatheWay was sold in June 2022.
Profitability: Lifecore gross profit decreased 53% in the quarter and 38% year to date, reflecting lower revenue and unfavorable sales mix. Curation Foods gross profit was negative in the quarter and declined year to date because of higher freight and raw-material sourcing costs. Interest expense increased 42% in the quarter to $5.8 million, primarily because of higher interest rates.
Cash flow and capital spending: Operating activities used $17.2 million in the first nine months, compared with $22.0 million in the prior-year period. Investing activities provided $3.3 million, including $12.5 million from the Yucatan sale and $3.1 million from the BreatheWay sale, offset by $12.3 million of capital expenditures. Financing activities provided $15.1 million, including $38.1 million of net preferred-stock proceeds, $4.8 million of common-stock proceeds, and net borrowing activity.
Balance sheet and liquidity: Cash and cash equivalents were $3.0 million at February 26, 2023, versus $1.0 million at May 29, 2022. Inventories were $48.7 million and accounts receivable were $32.4 million. Debt consisted of $16.0 million under the revolver and $107.1 million of term-loan principal, or $115.0 million net of debt issuance costs. Stockholders’ equity was $34.2 million, while accumulated deficit was $140.1 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 26% in the quarter and 14% year to date.
- Gross margin fell by approximately 12.7 percentage points in the quarter and 9.9 percentage points year to date.
- Continuing-operations net loss increased to $34.7 million year to date from $11.4 million.
- Total net loss included $29.3 million of discontinued-operations losses year to date, including a $21.0 million loss on the Yucatan disposition.
- The company issued approximately $5.0 million of common stock to Wynnefield Capital and $38.1 million of net Series A convertible preferred-stock proceeds.
- The Series A preferred stock carries a 7.5% annual PIK dividend, had a February 26, 2023 carrying amount of $38.5 million, and initially converts at $7.00 per common share, subject to limitations.
- Goodwill and intangible-asset impairment charges totaled $1.3 million year to date, including $1.0 million related to Yucatan and $0.3 million related to O Olive.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management cited customer shipment timing, delayed customer onboarding, seasonality, supply-chain and cost pressures, regulatory requirements, COVID-19-related uncertainty, and customer concentration as important operating variables. Two Lifecore customers represented 37% and 15% of year-to-date revenue, and two customers represented 47% and 10% of accounts receivable at February 26, 2023.
At February 26, 2023, the company was not compliant with all financial covenants under its credit facilities and had previously reported substantial doubt about its ability to continue as a going concern. Subsequent to quarter-end, on May 22, 2023, it refinanced the prior term loan with up to $140.0 million of Alcon term financing maturing in 2029 at a fixed 10% rate, amended its revolving facility, waived known defaults, and stated that covenant noncompliance was cured. The amended revolver has availability of up to the lesser of $40.0 million, subject to reserves, and the borrowing base. The company also entered into a $10.0 million equipment sale-leaseback with Alcon.
Management concluded as of the filing date that liquidity and forecast operating cash flow were sufficient for at least the next 12 months. However, the new financing has significant interest, collateral, minimum-liquidity, and restrictive-covenant requirements. The Alcon supply agreement runs initially through December 31, 2033, requires capacity commitments, and provides Alcon certain rights if Lifecore cannot meet specified supply obligations.
Two material weaknesses in internal control over financial reporting remained unremediated: controls over asset recoverability and fair-value measurements, and controls over non-standard transactions including discontinued operations and restructuring activity. Disclosure controls were therefore not effective as of February 26, 2023.
The company remains involved in SEC, DOJ, Mexican, and related legal investigations concerning alleged environmental and FCPA compliance matters associated with the former Yucatan facility. The filing states that outcomes, timing, and any recoverable or unrecoverable losses cannot presently be estimated. A former Yucatan owner seeks more than $10 million, while the company has asserted counterclaims seeking at least $80 million.
The company expects to recognize a loss on the April 6, 2023 sale of O Olive, but the filing does not provide a range for that loss. The company also incurred approximately $0.8 million of registration-related monetary penalties associated with the preferred-stock financing.
Investor Verification Checklist
- Verify the May 22, 2023 refinancing terms, actual funded amount, debt balances, interest capitalization, collateral, and covenant compliance.
- Assess whether Lifecore revenue recovery depends on shipment timing, new-customer onboarding, and the expanded Alcon relationship.
- Review customer concentration and the consequences of any loss, delay, or renegotiation involving major Lifecore customers.
- Confirm the final accounting impact of the Yucatan and O Olive divestitures, including post-closing adjustments and any additional sale losses.
- Monitor operating cash burn, inventory levels, capital expenditures, revolver availability, and compliance with the minimum liquidity covenant.
- Track remediation of the two material weaknesses and any future restatements or corrections involving asset valuations and discontinued operations.
- Follow developments in the SEC, DOJ, Mexican investigations, related litigation, indemnification rights, and potential liabilities.