Lifecore Biomedical, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal quarter ended August 27, 2023, Lifecore’s first quarter of fiscal 2024. Lifecore operates as a contract development and manufacturing organization focused on complex sterile injectable products, including hyaluronic acid products, syringes, and vials. The Company completed its exit from its former food businesses by May 28, 2023; those businesses are reported as discontinued operations.
The filing was signed August 9, 2024. Management stated that prior quarterly financial statements were restated and that disclosure controls were ineffective because of material weaknesses in internal control over financial reporting.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total revenue | $24.5 million | $23.7 million | Up 3% |
| Gross profit | $2.7 million | $6.0 million | Down 54% |
| Gross margin | 11.1% | 25.2% | Down 14.1 percentage points |
| Operating loss | $8.6 million | $3.3 million | Higher loss |
| Net loss | $10.8 million | $11.0 million | Improved $0.2 million |
| Continuing-operations loss per share | $0.41 | $0.23 | Higher loss per share |
| Total loss per share | $0.35 | $0.37 | Improved |
| Adjusted EBITDA | $(2.0) million | $1.4 million | Declined $3.4 million |
CDMO revenue increased $3.3 million to $21.5 million, while HA manufacturing revenue decreased $2.5 million to $3.0 million, primarily because of shipment timing. Gross profit declined principally because of unfavorable sales and product mix, including lower development revenue and unfavorable mix in the aseptic commercial business.
Research and development expense was $2.1 million, broadly stable year over year. Selling, general and administrative expense increased 14% to $9.2 million, driven primarily by higher stock-based compensation and audit and consulting fees. The prior-year period included a $2.1 million gain on the sale of the BreatheWay business and $1.0 million of restructuring costs; the current period included a small $10 thousand restructuring credit.
Net cash used in operating activities was $8.3 million versus $1.1 million in the prior-year period. Capital expenditures were $5.1 million versus $3.4 million. Financing activities provided $2.9 million, including $2.3 million of net revolver borrowings and $0.7 million from stock option exercises. Cash declined to $8.6 million from $19.1 million at May 28, 2023.
At August 27, 2023, current assets were $82.8 million and current liabilities were $35.4 million. Inventories were $41.7 million, including $4.0 million of cumulative inventory write-down adjustments to net realizable value during the periods disclosed. Stockholders’ deficit was $13.6 million.
Debt and financing
- Term loan borrowings from related-party lender Alcon were $146.1 million, with a 10.0% effective annual interest rate and maturity on May 22, 2029.
- Revolving credit borrowings were $19.1 million at a 9.99% effective annual interest rate; approximately $6.3 million remained available.
- Total principal long-term debt was $153.8 million before discounts. The balance sheet also included a $64.7 million Level 3 debt derivative liability.
- The Company entered into refinancing transactions with Alcon on May 22, 2023. These transactions cured prior known debt covenant noncompliance, and management reported compliance with applicable financial covenants at quarter-end.
- The revolving facility had a maximum commitment of up to $40.0 million, subject to borrowing-base limitations and an additional $4.0 million borrowing-base reduction.
Material changes versus the prior comparable period
- Revenue increased modestly, but gross profit and gross margin declined substantially because of unfavorable sales mix and shipment timing.
- Operating expenses increased 23%, primarily because the prior period benefited from a business-sale gain and the current period incurred higher SG&A expenses.
- Interest expense shifted between non-related-party and related-party classifications following the Alcon refinancing. Total reported interest expense, including related-party interest, was approximately $3.9 million.
- Cash flow deteriorated materially, with operating cash use increasing by $7.2 million and capital expenditures increasing by $1.7 million.
- The former food businesses generated no revenue in the current quarter and produced $1.9 million of discontinued-operation income, compared with a $4.3 million loss in the prior-year quarter.
- Convertible preferred stock increased to $40.1 million because of paid-in-kind dividends and accretion. The preferred stock is redeemable by holders after June 29, 2026, subject to the stated terms.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific quantitative revenue or earnings guidance. Management stated that existing cash, operating cash flow, and revolver availability were expected to fund operating and capital requirements for at least the next twelve months, while also noting that additional financing may be required if those sources are insufficient.
- Customer concentration was significant: three customers represented 31%, 21%, and 15% of quarterly revenue. Two customers represented 40% and 16% of accounts receivable at quarter-end.
- The SEC issued a subpoena in February 2024 seeking information regarding the restatement. The Company stated that it is cooperating and cannot predict the duration or outcome.
- Disclosure controls were not effective at quarter-end because of material weaknesses in internal control over financial reporting. Remediation efforts included third-party assistance, planned additional accounting personnel, enhanced review controls, SOX governance, training, and expanded internal audit procedures.
- The Company’s financial position remained highly leveraged, with significant debt, high interest rates, negative equity, recurring losses, and limited revolver availability.
- The Alcon financing and commercial arrangements create related-party and customer concentration exposure. Alcon also holds security interests in substantial Company collateral.
- The Company recorded $1.9 million from a confidential insurance settlement after quarter-end. Subsequent events also included amendments and waivers to credit agreements, a $5.0 million working-capital deposit under an amended supply agreement, and further commercial agreements with Alcon.
- The filing disclosed subsequent legal and operational matters, including landlord claims, an SEC investigation related to the restatement, an assignment for the benefit of creditors involving former food-business entities, a later workforce reduction, and a shareholder class-action complaint. The filing states that the class-action loss was not probable or estimable.
Investor verification priorities
- Verify the restated prior-period amounts and the nature, scope, and remediation status of the material weaknesses in internal controls.
- Assess liquidity after quarter-end, including actual revolver availability, cash burn, debt service, covenant compliance, and the effect of subsequent waivers and amendments.
- Evaluate the sustainability of the CDMO revenue increase and whether gross-margin pressure from product mix and shipment timing has continued.
- Review the terms, conversion features, potential dilution, and redemption provisions of the convertible preferred stock.
- Assess dependence on Alcon and other concentrated customers, including the impact of supply agreements, minimum purchase obligations, pricing provisions, and related-party financing.
- Reconcile subsequent legal, regulatory, restructuring, workforce, and former food-business liabilities with the amounts accrued or disclosed in the filing.