Lifecore Biomedical, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended February 25, 2024, compared with February 26, 2023. The request identifies “2023 Q1,” but the filing covers fiscal 2024 third quarter. The filing was signed and filed August 9, 2024 and states that the financial statements were unaudited and prior-period amounts were restated.
Business Context
Lifecore is a contract development and manufacturing organization focused on complex sterile injectable products, including pharmaceutical-grade hyaluronic acid, syringes and vials. The Company completed its exit from the former Curation Foods business; those results are presented as discontinued operations. Lifecore operates as one reportable segment.
Key Financial Metrics
| Metric | Three months ended Feb. 25, 2024 | Three months ended Feb. 26, 2023 | Nine months ended Feb. 25, 2024 | Nine months ended Feb. 26, 2023 |
|---|---|---|---|---|
| Total revenue | $35.7 million | $26.5 million | $90.4 million | $72.1 million |
| Gross profit | $11.9 million | $8.5 million | $24.6 million | $20.2 million |
| Gross margin | 33.3% | 32.2% | 27.2% | 28.0% |
| Operating income (loss) | $(0.9) million | $(6.5) million | $(11.0) million | $(15.2) million |
| Net income (loss) | $15.6 million | $(36.5) million | $19.1 million | $(60.3) million |
| Diluted earnings (loss) per share | $0.42 | $(1.20) | $0.52 | $(2.02) |
| Adjusted EBITDA | $6.4 million | $4.5 million | $9.8 million | $7.4 million |
- Quarterly revenue increased 35%, driven by a $4.9 million increase in fermentation revenue and a $4.3 million increase in CDMO revenue. Nine-month revenue increased 25%.
- Quarterly gross margin improved 110 basis points, primarily from higher fermentation revenue and favorable volume. Nine-month gross margin declined 82 basis points because of lower development revenue, unfavorable CDMO mix and a lower proportion of fermentation revenue.
- Net income included a $21.0 million quarterly and $41.9 million nine-month gain from the decrease in the fair value of a related-party debt derivative liability. This was a significant non-cash and valuation-sensitive item.
- Continuing operations generated net income of $14.8 million for the quarter and $16.4 million for the nine months. Discontinued operations contributed $0.8 million and $2.7 million, respectively.
- Cash used in operating activities was $8.9 million for the nine months, compared with $15.2 million in the prior-year period. Capital expenditures were $15.3 million, compared with $14.3 million.
- Cash declined to $3.1 million at February 25, 2024 from $19.1 million at May 28, 2023. Financing activities provided $8.1 million, including $3.1 million of net revolver borrowings and $0.7 million from stock-plan exercises.
Debt and Liquidity
- Total principal long-term debt was $160.8 million, consisting primarily of a $153.5 million Alcon-related term loan and a $7.3 million equipment sale-finance liability. The term loan carries an effective annual interest rate of 10.0% and matures May 22, 2029.
- Revolver borrowings were $19.9 million at an 8.15% effective annual rate, with approximately $5.7 million available for borrowing. The facility has a stated maximum of up to $40.0 million, subject to borrowing-base and other limitations.
- The Company stated that it was in compliance with financial covenants as of February 25, 2024, although prior defaults were waived and credit agreements were amended.
- Management stated that cash from operations, existing cash and revolver availability are expected to fund operational and capital requirements for at least the next twelve months. Elsewhere, the filing states that the Company anticipates needing additional capital and may seek additional financing.
Material Changes, Outlook and Unusual Items
- An amended supply agreement received a $5.0 million working-capital deposit in December 2023. The agreement was subsequently extended through December 31, 2026, and is subject to repayment provisions upon termination.
- An amended and restated contract manufacturing agreement with Alcon runs initially through December 31, 2031 and includes minimum purchase obligations and performance requirements. A subsequent amendment provided a $5.5 million prepayment in May 2024 against future 2026 purchases.
- The Company recorded $0.9 million of restructuring costs during the nine months, compared with $4.2 million in the prior-year period. The restructuring plan was substantially completed as of May 28, 2023.
- The SEC issued a subpoena on February 16, 2024 seeking information concerning the Company’s restatement. The Company stated that it is cooperating and cannot predict the duration or outcome.
- Disclosure controls were not effective as of February 25, 2024 because of material weaknesses in internal control over financial reporting. Remediation efforts include third-party assistance, additional accounting personnel, enhanced controls, training and expanded internal audit activities.
- The filing provides no formal revenue or earnings guidance. Management emphasizes demand growth, expansion of manufacturing capabilities and development of additional HA and non-HA applications, but results remain subject to customer demand, product mix, capacity execution and financing availability.
Principal Risks and Contingencies
- The Company is highly leveraged and has limited cash. Covenant breaches could permit lenders to stop funding, accelerate debt and pursue collateral consisting of substantially all Company assets.
- Nasdaq initiated delisting proceedings related to late SEC filings, and the Company had not yet received a final decision from the Nasdaq Hearings Panel as described in the filing. Delisting could reduce liquidity, impair financing access and potentially breach contractual arrangements.
- The Company has a history of late filings and multiple restatements, creating risks of SEC action, shareholder litigation, additional reporting penalties and loss of investor confidence.
- Customer and financing concentration with Alcon creates interdependent commercial, operational and credit risks. Alcon accounted for a substantial portion of quarterly revenue, although the filing does not identify the customer by name in the revenue concentration disclosure.
- The Company accrued approximately $2.3 million in penalties under the Convertible Preferred Stock registration rights agreement due to delinquent filings. The preferred stock had a February 25, 2024 liquidation preference of approximately $41.7 million and is redeemable by holders after June 29, 2026, subject to specified terms.
- Subsequent events included a shareholder class-action complaint, workforce-reduction plans, shareholder cooperation agreements, assignment-for-creditors proceedings involving former Curation entities and additional lease and financing amendments.
Investor Verification Checklist
- Confirm the final status of Nasdaq’s delisting proceedings and the Company’s subsequent SEC filing compliance.
- Review the restatement history, SEC subpoena, material weaknesses and remediation testing results.
- Reconcile reported net income and adjusted EBITDA to remove the non-cash debt-derivative gain and other adjustments.
- Assess cash burn, capital-expenditure requirements, revolver availability and the feasibility and terms of any required capital raise.
- Review Alcon contract terms, customer concentration, minimum purchase obligations, covenant linkages and potential effects of any supply-agreement breach.
- Evaluate the conversion, dilution, redemption, penalty and consent rights associated with the Convertible Preferred Stock.