LIFECORE BIOMEDICAL, INC. annual report, FY2023

Lifecore Biomedical, Inc. Form 10-K Summary

Reporting period: Fiscal year ended May 28, 2023. The request references “2022 Q4,” but the provided filing is a fiscal 2023 Form 10-K, including restated prior-period and quarterly information. Fourth-quarter fiscal 2023 revenue was $31.1 million, gross profit was $7.8 million, continuing-operations net loss was $37.0 million, and total net loss was $39.3 million.

Business Context

• Lifecore is now a single-segment, fully integrated contract development and manufacturing organization focused on sterile injectable products, pharmaceutical-grade sodium hyaluronate, fermentation, aseptic filling, and product development services.
• The Company exited its Curation Foods business through the sales of Yucatan on February 7, 2023 and O Olive on April 6, 2023. Eat Smart had been sold in December 2021, and BreatheWay was sold in June 2022.
• Curation Foods is presented as discontinued operations, and historical segment information has been recast to the current Lifecore structure.
• The Company changed its name from Landec Corporation to Lifecore Biomedical, Inc. in November 2022 and trades under LFCR.

Key Financial Metrics

Metric	FY2023	FY2022, restated	Change
Revenue	$103.3 million	$111.3 million	Down 7%
Gross profit	$28.0 million	$39.1 million	Down 28%
Gross margin	27.1%	35.1%	Down approximately 8.0 percentage points
Operating loss	$21.8 million	$11.8 million	Loss increased
Net loss from continuing operations	$64.2 million	$15.5 million	Loss increased materially
Net loss, consolidated	$99.6 million	$116.7 million	Loss decreased primarily because of lower discontinued-operation losses
Basic net loss per share	$3.32	$3.97	Improved, but remained a loss
Adjusted EBITDA	$7.2 million	$17.8 million	Down 59%

• CDMO revenue declined $10.0 million, primarily because of shipment timing and delayed onboarding of new customers. Fermentation revenue increased $3.9 million due to higher demand.
• Development-services revenue was $28.6 million, compared with $35.8 million in FY2022. Revenue recognized at a point in time was $74.6 million.
• Research and development expense increased 11% to $8.7 million. SG&A increased 12% to $39.0 million, primarily due to legal, compliance, and litigation costs.
• Restructuring costs declined to $4.2 million from $8.4 million. The Company recorded a $2.1 million gain on the BreatheWay sale.
• FY2023 included a $23.7 million loss on debt extinguishment, consisting of a $12.9 million prepayment penalty, $7.5 million of unamortized financing-fee write-offs, and $3.3 million of third-party fees.
• Inventory was $40.8 million at year-end and included a $4.9 million reduction to net realizable value. Property and equipment, net, was $134.4 million.

Cash Flow, Debt, and Liquidity

• Cash and cash equivalents were $19.1 million at May 28, 2023, compared with $1.0 million at May 29, 2022.
• Operating cash flow was negative $17.4 million, improving from negative $22.6 million in FY2022.
• Investing cash flow was negative $4.8 million, including $21.5 million of capital expenditures for Lifecore capacity and equipment, partly offset by proceeds from divestitures.
• Financing cash flow was positive $39.7 million, including $150.0 million of long-term debt proceeds, $38.1 million of preferred-stock proceeds, and $4.8 million of common-stock proceeds.
• Total principal debt was approximately $150.2 million, consisting of $142.5 million under the new Alcon term loan and $7.7 million of equipment-sale finance liability. The balance sheet also included $16.8 million drawn under the revolving credit facility.
• The Alcon term loan matures May 22, 2029, bears a fixed 10% interest rate, and generally pays interest in kind until the third anniversary. The revolving facility matures December 31, 2025.
• The Company stated that cash, operating cash flow, and available revolver capacity were expected to fund operations and capital needs for at least the next twelve months. However, liquidity remained highly dependent on operating performance, covenant compliance, lender waivers, and access to financing.

Material Changes Versus the Prior Comparable Period

• The Company completed the transition from a diversified food and biomaterials company to a Lifecore-focused biomedical CDMO.
• Revenue and gross margin declined, with the revenue reduction concentrated in CDMO development and shipment timing. Fermentation partially offset the decline.
• Continuing-operations losses increased substantially because of lower gross profit, higher SG&A and R&D, higher interest expense, and the $23.7 million debt-extinguishment charge.
• Consolidated net loss improved because FY2022 included substantially larger losses and impairment charges from discontinued Curation operations.
• The Company raised $5.0 million through a common-stock offering and $38.8 million through Series A convertible preferred stock. The preferred stock has a 7.5% payment-in-kind dividend, senior liquidation rights, conversion rights at an initial $7.00 per share, and significant voting and consent rights.
• The Company entered into an expanded long-term supply relationship with Alcon, which is both a significant customer and the lender under the new term loan. Alcon represented approximately 39% of FY2023 sales based on the disclosed customer concentration table.

Restatement, Controls, Outlook, and Risks

• The filing restates FY2022, FY2021, and multiple interim periods. The principal errors involved inventory valuation, capitalized interest, revenue and cost-of-sales presentation, discontinued-operations classification, and receivables related to divested businesses.
• Management and Ernst & Young concluded that material weaknesses existed in internal control over financial reporting. The weaknesses involved the control environment, risk assessment, information and communication, monitoring, and accounting for non-standard transactions.
• Disclosure controls were ineffective as of May 28, 2023, and management had not completed remediation as of the filing date. The Company engaged a third-party consultant and was developing a remediation plan.
• The Company filed late periodic reports, received a Nasdaq delisting determination, and requested a hearing to appeal. The filing also disclosed an SEC subpoena seeking documents and information concerning the restatement.
• Management’s strategic priorities are to advance the business-development pipeline, maximize syringe and vial capacity, and support customer product commercialization. The filing does not provide formal revenue or earnings guidance.
• Important operating risks include customer concentration, dependence on Alcon, manufacturing and quality failures, regulatory approvals and inspections, single-source suppliers, pricing pressure, substantial leverage, covenant compliance, and the need to generate sufficient cash flow.
• The Company remains exposed to legal and regulatory matters related to divested businesses, including former Yucatan compliance matters. Subsequent to year-end, the DOJ declined prosecution under the FCPA subject to $406,505 of disgorgement and continued cooperation.
• As of the filing, the Company had incurred approximately $2.0 million of monetary penalties under the Series A registration-rights agreement related to delinquent SEC filings.

Investor Verification Priorities

• Verify the final restated FY2022 and FY2021 results and the detailed impact of the restatement on revenue, inventory, retained earnings, taxes, and cash flow.
• Confirm current liquidity, revolver availability, minimum-liquidity compliance, debt balances, interest paid in cash versus in kind, and any subsequent lender waivers or amendments.
• Assess whether Lifecore can restore CDMO growth, achieve planned capacity utilization, and convert its development-services pipeline into commercial shipments.
• Review customer concentration and the commercial, financing, default, and termination implications of the Company’s relationship with Alcon.
• Track remediation and auditor testing of the material weaknesses, timely filing status, Nasdaq listing status, and any developments from the SEC subpoena.
• Evaluate the dilution and senior economic rights associated with the Series A convertible preferred stock, including its 7.5% PIK dividend, conversion limits, redemption rights, and board-designation rights.
• Review remaining indemnification, litigation, environmental, FCPA, landlord, and other contingent liabilities associated with the divested Curation Foods businesses.