Business Context and Reporting Period
This Form 10-K is for Landec Corporation, not a filing labeled “Lifecore Biomedical, Inc.” or “2021 Q4.” It covers the fiscal year ended May 29, 2022, with comparative years ended May 30, 2021 and May 31, 2020. Landec operated through Lifecore Biomedical, a sterile injectable contract development and manufacturing organization, and Curation Foods, a natural foods business. On August 10, 2022, the Company announced plans to become a CDMO-focused life sciences company, rebrand as Lifecore Biomedical, and explore sales of remaining Curation Foods assets.
Reportable segments were Lifecore, Curation Foods, and Other, which primarily included corporate costs, interest, and taxes. The Company had 689 full-time employees as of May 29, 2022.
Financial Results and Key Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $185.8 million | $171.5 million | Up 8% |
| Gross profit | $50.4 million | $50.5 million | Essentially flat |
| Gross margin | 27.1% | 29.4% | Down approximately 230 bps |
| Operating loss | $(41.3) million | $(0.1) million | Materially worse |
| Net loss from continuing operations | $(46.3) million | $(9.6) million | Materially worse |
| Net loss from discontinued operations | $(51.2) million | $(23.1) million | Materially worse |
| Net loss | $(97.4) million | $(32.7) million | Materially worse |
| Basic and diluted loss per share | $(3.31) | $(1.12) | Worse by $2.19 |
| Cash flow from operations | $(24.4) million | $15.0 million | Declined $39.4 million |
| Capital expenditures | $28.1 million | $23.8 million | Up $4.3 million |
Lifecore revenue increased 11% to $109.3 million, driven primarily by higher CDMO development activity and aseptic commercial shipments. Lifecore gross profit increased 14% to $43.7 million, and its gross margin improved to 40.0% from 39.0%.
Curation Foods revenue increased 4% to $76.5 million, but gross profit declined 46% to $6.6 million. Higher freight and raw-material sourcing costs pressured the segment. Curation Foods reported a continuing-operations loss of $30.4 million, compared with a $0.4 million loss in FY2021.
Operating expenses included $46.1 million of selling, general and administrative expense, $28.7 million of goodwill and intangible-asset impairment, and $9.0 million of restructuring costs. Interest expense increased to $17.4 million from $10.4 million. Transition-services income related to the Eat Smart sale was $5.8 million.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $1.6 million at May 29, 2022, compared with $1.2 million at May 30, 2021.
- Operating activities used $24.4 million of cash, primarily reflecting the net loss and working-capital investment.
- Investing activities provided $81.8 million, including $73.5 million of gross proceeds from the Eat Smart disposition and $45.1 million from the sale of the Windset investment, partially offset by $28.1 million of capital expenditures.
- Financing activities used $57.0 million, including $86.4 million of term-loan repayments, partially offset by a $20.0 million term-loan draw and an $11.0 million net revolver draw.
- At year-end, $40.0 million was outstanding on the revolver at 3.0%, and $103.7 million was outstanding on the term loan at 9.5%. Debt was secured by substantially all Company and subsidiary assets.
- Total principal debt was $143.7 million, while contractual debt obligations, including interest, totaled $184.5 million. Total contractual obligations, including leases and purchase commitments, were $256.6 million.
- The Company stated that cash from operations, existing cash, and revolver availability were expected to fund operational and capital requirements for at least the next twelve months. However, liquidity was constrained by low cash balances, operating cash usage, high interest costs, and substantial debt maturities.
Material Changes Versus the Prior Comparable Period
- Lifecore continued to grow, with revenue up 11% and gross margin expanding by approximately 100 basis points.
- Consolidated gross profit was flat despite higher revenue because Curation Foods experienced significant cost inflation and freight pressure.
- Operating loss widened sharply due to impairment charges, restructuring activity, higher SG&A, and increased interest expense.
- Net loss increased to $97.4 million, largely because of discontinued-operations losses and impairment charges.
- The Company completed the sale of Eat Smart to Taylor Farms on December 13, 2021, for a stated purchase price of $73.5 million, subject to post-closing adjustments. Eat Smart results were classified as discontinued operations for all periods presented.
- The Company sold its Windset investment for $45.1 million on June 1, 2021.
- On June 2, 2022, after year-end, the Company sold its BreatheWay packaging technology business for $3.2 million and expected to record an approximately $2.0 million gain in the first quarter of FY2023.
- FY2022 included $20.0 million of Yucatan Foods goodwill impairment, $8.7 million of Yucatan trademark impairment, and $32.1 million of Eat Smart goodwill impairment recorded in discontinued operations.
- The Company restated previously reported FY2022 interim financial information, including the third-quarter Form 10-Q, primarily to correct classification of discontinued-operations, transition-services, restructuring, and disposition-related items.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific numerical revenue, earnings, or margin guidance in the filing. The stated strategic direction was to invest in Lifecore’s CDMO growth, maximize syringe and vial capacity, expand development and commercialization programs, and continue simplifying Curation Foods through Project SWIFT. Project SWIFT was expected to continue through FY2023.
- The Company identified a material weakness in internal control over financial reporting involving the completeness and accuracy of non-standard transactions, including discontinued operations and restructuring activity. Management concluded that disclosure controls and internal controls were ineffective as of May 29, 2022, and the independent auditor issued an adverse opinion on internal control effectiveness.
- COVID-19 continued to pose risks related to labor availability, supply chains, logistics costs, customer demand, elective medical procedures, and manufacturing operations.
- The Company was exposed to customer concentration: two customers accounted for 16% and 13% of consolidated revenue in FY2022, and 26% and 13% of accounts receivable at year-end.
- Lifecore depends on regulatory approvals, customer development programs, a limited customer base, specialized manufacturing capacity, and certain single-source suppliers.
- Debt agreements contained financial covenants and events of default that could accelerate borrowings. Substantially all assets were pledged as collateral.
- The Company had $54.9 million of raw-material purchase commitments and substantial lease, debt, and interest obligations.
- Government investigations relating to potential environmental and Foreign Corrupt Practices Act compliance matters at the Tanok facility in Mexico remained unresolved. The filing states that the ultimate outcome and potential net loss could not be reasonably estimated; possible indemnification rights had not been recorded as recoverable assets.
- The Company recorded a $0.5 million charge related to a wage-and-hour settlement in FY2022, classified within discontinued operations.
Important Facts for Investors to Verify
- Confirm that the applicable filing is the Landec Corporation FY2022 Form 10-K, since the request metadata identifies a different company name and period.
- Review the restated interim financial statements and Note 1 to understand the effect of reclassifications on continuing and discontinued operations.
- Assess whether Lifecore’s revenue growth and 40.0% gross margin can offset corporate costs, Curation Foods losses, high interest expense, and required capital spending.
- Review debt maturities, covenant requirements, revolver availability, refinancing needs, and the Company’s ability to fund operations with only $1.6 million of cash at year-end.
- Monitor remediation of the material weakness and any subsequent auditor assessment of internal-control effectiveness.
- Evaluate the unresolved Tanok investigations, related litigation, indemnification rights, and potential financial exposure.
- Verify the completion and accounting effects of the post-year-end BreatheWay sale and the Company’s planned rebranding and strategic transition to a CDMO-focused business.