LIFECORE BIOMEDICAL INC DE
For the period ended Feb 25, 2024. Filed Aug 9, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Feb 25, 2024 · Filed Aug 9, 2024
Extracted filing text, with the paragraph anchors used by the comparison.
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Table of Contents
FORM 10-Q
For the Fiscal Quarter Ended February 25, 2024
INDEX
| Page | |||
|---|---|---|---|
| Part I. | Financial Information | ||
| Item 1. | Financial Statements (Unaudited) | ||
| a) | Condensed Consolidated Balance Sheets as of February 25, 2024 and May 28, 2023 | 1 | |
| b) | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended February 25, 2024 and February 26, 2023 | 2 | |
| c) | Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ (Deficit) Equity for the Three and Nine Months Ended February 25, 2024 and February 26, 2023 | 3 | |
| d) | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 25, 2024 and February 26, 2023 | 4 | |
| e) | Notes to the Condensed Consolidated Financial Statements | 5 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 | |
| Item 4. | Controls and Procedures | 29 | |
| Part II. | Other Information | 31 | |
| Item 1. | Legal Proceedings | 31 | |
| Item 1A. | Risk Factors | 31 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 | |
| Item 3. | Defaults Upon Senior Securities | 37 | |
| Item 4. | Mine Safety Disclosures | 37 | |
| Item 5. | Other Information | 37 | |
| Item 6. | Exhibits | 38 | |
| Signatures | 39 | ||
i
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| February 25, 2024 | May 28, 2023 | |
|---|---|---|
| (unaudited) | ||
| ASSETS | ||
| Current Assets: | ||
| Cash | $3,073 | $19,091 |
| Accounts receivable, less allowance for credit losses | 19,427 | 19,907 |
| Accounts receivable, related party | 12,018 | 9,117 |
| Inventories, net | 39,670 | 40,841 |
| Prepaid expenses and other current assets | 1,969 | 4,919 |
| Total Current Assets | 76,157 | 93,875 |
| Property and equipment, net | 145,367 | 134,390 |
| Operating lease right-of-use assets | 2,510 | 4,282 |
| Goodwill | 13,881 | 13,881 |
| Intangible assets | 4,200 | 4,200 |
| Other long-term assets | 4,126 | 2,917 |
| Total Assets | $246,241 | $253,545 |
| LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT | ||
| Current Liabilities: | ||
| Accounts payable | $15,685 | $22,097 |
| Accrued compensation | 4,070 | 4,145 |
| Other accrued liabilities | 8,892 | 7,142 |
| Current portion of lease liabilities | 4,159 | 1,270 |
| Deferred revenues | 839 | 552 |
| Deferred revenues, related party | 2,392 | 3,503 |
| Current portion of long-term debt, net, related party | 773 | 580 |
| Total Current Liabilities | 36,810 | 39,289 |
| Long-term debt, less current portion, net, related party | 96,336 | 84,256 |
| Revolving credit facility | 19,913 | 16,809 |
| Debt derivative liability, related party | 23,000 | 64,900 |
| Long-term lease liabilities, less current portion | 5,088 | 9,709 |
| Deferred taxes, net | 607 | 380 |
| Deferred revenues, less current portion, related party | — | 2,940 |
| Other non-current liabilities | 5,053 | 174 |
| Total Liabilities | 186,807 | 218,457 |
| Convertible Preferred Stock, $0.001 par value; 2,000 shares authorized; 42 and 39 shares issued and outstanding at February 25, 2024 and May 28, 2023, respectively | 41,748 | 39,318 |
| Stockholders’ Deficit: | ||
| Common Stock, $0.001 par value; 50,000 shares authorized; 30,547 and 30,322 shares issued and outstanding at February 25, 2024 and May 28, 2023, respectively | 30 | 30 |
| Additional paid-in capital | 177,096 | 174,276 |
| Accumulated deficit | (159,440) | (178,536) |
| Total Stockholders’ Deficit | 17,686 | (4,230) |
| Total Liabilities, Convertible Preferred Stock, and Stockholders’ Deficit | $246,241 | $253,545 |
-1-
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| February 25, 2024 | February 26, 2023 | February 25, 2024 | February 26, 2023 | |
| Revenues | $17,054 | $26,536 | $54,528 | $72,123 |
| Revenues, related party | 18,650 | — | 35,847 | — |
| Total Revenues | 35,704 | 26,536 | 90,375 | 72,123 |
| Cost of goods sold | 23,810 | 17,988 | 65,797 | 51,917 |
| Gross profit | 11,894 | 8,548 | 24,578 | 20,206 |
| Operating costs and expenses: | ||||
| Research and development | 2,170 | 2,234 | 6,414 | 6,621 |
| Selling, general and administrative | 9,848 | 10,279 | 28,239 | 26,675 |
| Gain on sale of divested business | — | — | — | (2,108) |
| Restructuring costs | 771 | 2,566 | 918 | 4,176 |
| Total operating costs and expenses | 12,789 | 15,079 | 35,571 | 35,364 |
| Operating loss | (895) | (6,531) | (10,993) | (15,158) |
| Interest expense, net | (921) | (4,833) | (2,546) | (11,672) |
| Interest expense, related party | (3,368) | — | (9,754) | — |
| Change in fair value of debt derivative liability, related party | 21,000 | — | 41,900 | — |
| Other income (expense), net | (814) | 104 | (1,950) | (330) |
| Net income (loss) from continuing operations before taxes | 15,002 | (11,260) | 16,657 | (27,160) |
| Provision for income tax expense | (217) | (70) | (240) | (78) |
| Net income (loss) from continuing operations | 14,785 | (11,330) | 16,417 | (27,238) |
| Discontinued operations: | ||||
| Income (loss) from discontinued operations | $850 | $(25,177) | $2,700 | $(33,041) |
| Income tax (expense) benefit | (3) | — | (21) | — |
| Income (loss) from discontinued operations, net of tax | 847 | (25,177) | 2,679 | (33,041) |
| Net income (loss) | $15,632 | $(36,507) | $19,096 | $(60,279) |
| Basic net income (loss) per share: | ||||
| Income (loss) from continuing operations | $0.48 | $(0.37) | $0.54 | $(0.91) |
| Income (loss) from discontinued operations | 0.03 | (0.83) | 0.09 | (1.11) |
| Total basic net income (loss) per share | $0.51 | $(1.20) | $0.63 | $(2.02) |
| Diluted net income (loss) per share: | ||||
| Income (loss) from continuing operations | $0.40 | $(0.37) | $0.45 | $(0.91) |
| Income (loss) discontinued operations | 0.02 | (0.83) | 0.07 | (1.11) |
| Total diluted net income (loss) per share | $0.42 | $(1.20) | $0.52 | $(2.02) |
| Shares used in per share computation: | ||||
| Basic | 30,488 | 30,304 | 30,450 | 29,838 |
| Diluted | 36,609 | 30,304 | 36,469 | 29,838 |
| Other comprehensive income (loss), net of tax: | ||||
| Net income (loss) | $15,632 | $(36,507) | $19,096 | $(60,279) |
| Net unrealized gain on interest rate swaps (net of tax effect of $16) | $— | $— | $— | $586 |
| Total comprehensive income (loss) | $15,632 | $(36,507) | $19,096 | $(59,693) |
-2-
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY
(Unaudited) (In thousands)
| Three and Nine Months Ended February 25, 2024 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Convertible Preferred Stock · Common Stock · AdditionalPaid-inCapital · Accumulated Deficit · AccumulatedOtherComprehensive Loss · TotalStockholders’Equity | ||||||||||||||||
| Shares · Amount · Shares · Amount | ||||||||||||||||
| Balance at May 28, 2023 | 39 | $39,318 | 30,322 | $30 | $174,276 | $(178,536) | $— | $(4,230) | ||||||||
| Issuance of stock under stock plans, net of shares withheld | — | — | 134 | — | 724 | — | — | 724 | ||||||||
| Convertible Preferred Stock paid-in-kind (“PIK”) dividend | 1 | 748 | — | — | (748) | — | — | (748) | ||||||||
| Accretion of Convertible Preferred Stock | — | 48 | — | — | (48) | — | (48) | |||||||||
| Taxes paid by Company for employee stock plans | — | — | — | — | (45) | — | — | (45) | ||||||||
| Stock-based compensation | — | — | — | — | 1,541 | — | — | 1,541 | ||||||||
| Net loss | — | — | — | — | — | (10,754) | — | (10,754) | ||||||||
| Balance at August 27, 2023 | 40 | $40,114 | 30,456 | $30 | $175,700 | $(189,290) | $— | $(13,560) | ||||||||
| Issuance of stock under stock plans, net of shares withheld | — | — | 3 | — | — | — | — | — | ||||||||
| Convertible Preferred Stock PIK dividend | 1 | 763 | — | — | (763) | — | — | (763) | ||||||||
| Accretion of Convertible Preferred Stock | — | 47 | (47) | (47) | ||||||||||||
| Taxes paid by Company for employee stock plans | — | — | — | — | (12) | — | (12) | |||||||||
| Stock-based compensation | — | — | — | — | 1,585 | — | 1,585 | |||||||||
| Net income | — | — | — | — | — | 14,218 | 14,218 | |||||||||
| Balance at November 26, 2023 | 41 | $40,924 | 30,459 | $30 | $176,463 | $(175,072) | $— | $1,421 | ||||||||
| Issuance of stock under stock plans, net of shares withheld | 88 | — | — | — | — | — | ||||||||||
| Convertible Preferred Stock PIK dividend | 1 | 776 | — | — | (776) | — | — | (776) | ||||||||
| Accretion of Convertible Preferred Stock | — | 48 | — | — | (48) | — | — | (48) | ||||||||
| Taxes paid by Company for employee stock plans | — | — | — | — | (42) | — | — | (42) | ||||||||
| Stock-based compensation | — | — | — | — | 1,499 | — | — | 1,499 | ||||||||
| Net income | — | — | — | — | — | 15,632 | — | 15,632 | ||||||||
| Balance at February 25, 2024 | 42 | $41,748 | 30,547 | $30 | $177,096 | $(159,440) | $— | $17,686 | ||||||||
| Three and Nine Months Ended February 26, 2023 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AdditionalPaid-inCapital · RetainedEarnings (Accumulated Deficit) · AccumulatedOtherComprehensive Loss · TotalStockholders’Equity | |||||||||||||||||||
| Convertible Preferred Stock · Common Stock | |||||||||||||||||||
| Shares · Amount · Shares · Amount | |||||||||||||||||||
| Balance at May 29, 2022 | — | — | 29,513 | 30 | 167,352 | (78,973) | (586) | 87,823 | |||||||||||
| Issuance of stock under stock plans, net of shares withheld | — | — | 80 | — | — | — | — | — | |||||||||||
| Taxes paid by Company for employee stock plans | — | — | — | — | (67) | — | — | (67) | |||||||||||
| Stock-based compensation | — | — | — | — | 785 | — | — | 785 | |||||||||||
| Net loss | — | — | — | — | — | (10,966) | — | (10,966) | |||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 300 | 300 | |||||||||||
| Balance at August 28, 2022 | — | $— | 29,593 | $30 | $168,070 | $(89,939) | $(286) | $77,875 | |||||||||||
| Issuance of stock under stock plans, net of shares withheld | — | — | 76 | — | — | — | — | — | |||||||||||
| Taxes paid by Company for employee stock plans | — | — | — | — | (142) | — | — | (142) | |||||||||||
| Stock-based compensation | — | — | — | — | 1,108 | — | — | 1,108 | |||||||||||
| Net loss | — | — | — | — | — | (12,806) | — | (12,806) | |||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 286 | 286 | |||||||||||
| Issuance of shares to Wynnefield Capital, Inc. | — | — | 628 | — | 4,822 | — | — | 4,822 | |||||||||||
| Balance at November 27, 2022 | — | $— | 30,297 | $30 | $173,858 | $(102,745) | $— | $71,143 | |||||||||||
| Issuance of stock under stock plans, net of shares withheld | — | — | 22 | — | — | — | — | — | |||||||||||
| Proceeds of Convertible Preferred Stock, net of issuance costs | 39 | 38,082 | — | — | — | — | — | — | |||||||||||
| Accretion of Convertible Preferred Stock | — | 25 | — | — | (25) | — | — | (25) | |||||||||||
| Convertible Preferred Stock PIK dividend | — | 428 | — | — | (428) | — | — | (428) | |||||||||||
| Taxes paid by Company for employee stock plans | — | — | — | — | (65) | — | — | (65) | |||||||||||
| Stock-based compensation | — | — | — | — | 903 | — | — | 903 | |||||||||||
| Net loss | — | — | — | — | — | (36,507) | — | (36,507) | |||||||||||
| Balance at February 26, 2023 | 39 | $38,535 | 30,319 | $30 | $174,243 | $(139,252) | $— | $35,021 | |||||||||||
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
| Nine Months Ended | ||
|---|---|---|
| February 25, 2024 | February 26, 2023 | |
| Cash flows from operating activities: | ||
| Net income (loss) | $19,096 | $(60,279) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||
| Impairment of indefinite-lived intangible assets and goodwill | — | 300 |
| Depreciation and amortization | 6,607 | 10,507 |
| Accretion of debt discount, related party | — | — |
| Stock-based compensation expense | 4,603 | 2,796 |
| Deferred taxes | 227 | 57 |
| Interest expense PIK, related party | 9,409 | — |
| Change in debt derivative liability, related party | (41,900) | — |
| Provision for expected credit losses | 77 | 200 |
| Net gain on disposal of property and equipment held and used | 19 | — |
| Right-of-use asset impairment | 1,402 | — |
| Gain on sale of divested business | — | (2,108) |
| Loss on sale of divested business | — | 20,663 |
| Other, net | — | 101 |
| Changes in current assets and current liabilities: | ||
| Accounts receivable | 5,610 | 8,943 |
| Accounts receivable, related party | (8,108) | — |
| Inventories | 1,171 | (14,847) |
| Prepaid expenses, other current assets, and other assets | 1,586 | (1,309) |
| Accounts payable | (4,617) | 11,330 |
| Accrued compensation | (75) | (1,895) |
| Other accrued liabilities | (200) | 8,570 |
| Deferred revenues | 287 | 1,792 |
| Deferred revenues, related party | (4,051) | — |
| Net cash used in operating activities | (8,857) | (15,179) |
| Cash flows from investing activities: | ||
| Purchases of property and equipment | (15,284) | (14,309) |
| Proceeds from the sale of divested business, net of cash acquired | — | 15,666 |
| Net cash (used in) provided by investing activities | (15,284) | 1,357 |
| Cash flows from financing activities: | ||
| Proceeds from exercise of options | 724 | 4,822 |
| Proceeds from long-term debt | — | 3,367 |
| Payments on long-term debt | (386) | (3,199) |
| Proceeds from (payments on) revolving credit facility, net | 3,104 | (24,000) |
| Proceeds from working capital deposit | 5,000 | — |
| Principal payments on finance leases | (96) | — |
| Taxes paid by Company for employee stock plans | (99) | (274) |
| Payments for debt issuance costs | (124) | (3,669) |
| Proceeds from sale of preferred stock, net of issuance costs | — | 38,082 |
| Net cash provided by financing activities | 8,123 | 15,129 |
| Net (decrease) increase in cash | (16,018) | 1,307 |
| Cash, beginning of period | 19,091 | 1,643 |
| Cash, end of period | $3,073 | $2,950 |
| Supplemental disclosure of non-cash investing and financing activities: | ||
| Purchases of property and equipment in accounts payable | $5,433 | $3,918 |
| Capitalized interest expense | $3,250 | $1,052 |
| Convertible Preferred Stock PIK dividend | $2,287 | $428 |
-4-
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization
Lifecore Biomedical, Inc. and its subsidiaries (“Lifecore” or the “Company”) is a fully integrated contract development and manufacturing organization (“CDMO”) that offers capabilities in the development, fill and finish of complex sterile injectable pharmaceutical products in syringes and vials. The Company previously operated a natural food company, through its wholly-owned subsidiary, Curation Foods, Inc. (“Curation”), which was previously focused on the distribution of plant-based foods to retail, club, and food service channels throughout North America. However, upon the sale of the Divested Businesses (as defined below), the Company has ceased to operate the Curation foods business.
Discontinued Operations
During the year ended May 28, 2023, the Company entered into agreements for the sale or disposition of its subsidiaries within the Curation business (a former segment), specifically O Olive Oil and Vinegar® (“O Olive”), Yucatan Foods, LLC (“Yucatan”), and BreatheWay® (“BreatheWay”, and together with O Olive, Yucatan, and BreatheWay, the “Divested Businesses”). The Company completed the disposition of Yucatan and O Olive on February 7, 2023 and April 6, 2023, respectively.
On June 2, 2022, the Company and Curation entered into and closed an Asset Purchase Agreement (the “BreatheWay Purchase Agreement”) with Hazel Technologies, Inc. (the “BreatheWay Purchaser”), pursuant to which Curation sold all of its assets related to BreatheWay packaging technology business to the BreatheWay Purchaser in exchange for an aggregate purchase price of $3.2 million (the “BreatheWay Disposition”). The BreatheWay Purchase Agreement included various representations, warranties, and covenants of the parties generally customary for a transaction of this nature. In connection with the BreatheWay Disposition, the Company received net proceeds of $3.1 million and recorded a gain of $2.1 million in the Condensed Consolidated Statements of Operations for the three and nine months ended February 26, 2023.
The accounting requirements for reporting the Divested Businesses, excluding BreatheWay, as discontinued operations were met on the closing date of each of the divestitures. The BreatheWay Disposition met the requirements for reporting the businesses as assets held for sale in the fourth quarter of fiscal year 2022. Accordingly, the unaudited condensed consolidated financial statements and related condensed notes reflect the results of the Divested Businesses, as discontinued operations for the periods presented. Refer to Note 8 – Discontinued Operations.
Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet as of May 28, 2023, which has been derived from audited financial statements, and the accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company at February 25, 2024, and the results of operations and cash flows for all periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared following GAAP have been condensed or omitted per the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying financial data should be reviewed in conjunction with the audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “2023 Annual Report”). The Company restated its unaudited quarterly financial statements as of and for the three and nine months ended February 26, 2023 (the “Restatement”). Such restated and unaudited quarterly financial statements and related impacted amounts were presented in the Company’s Annual Report on Form 10-K for the year ended May 28, 2023. The discussion of financial results presented in this quarterly report on Form 10-Q reflects such restated amounts.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Sunday of May with quarters within each year ending on the last Sunday of August, November, and February; however, in instances where the last Sunday would result in a quarter being 12-weeks in length, the Company’s policy is to extend that quarter to the following Sunday. A 14th week is included in the fiscal year every five or six years to realign the Company’s fiscal quarters with calendar quarters.
-5-
The results reported in these interim condensed consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year.
As result of the Company exiting all previous food related business as part of the strategic shift in the Company’s operations that was completed as of May 28, 2023, commencing with this Quarterly Report on Form 10-Q, the Company changed its presentation of “Product sales” and “Cost of product sales” to “Revenues” and “Cost of goods sold”, respectively.
Basis of Consolidation
The condensed consolidated financial statements are presented on the accrual basis of accounting in accordance with GAAP and include the accounts of the Company and its subsidiaries. All material inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition; loss contingencies; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived and indefinite-lived assets (including intangible assets and goodwill), and inventory; the valuation and recognition of stock-based compensation, and the valuation of the debt derivative liability.
These estimates involve the consideration of complex factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve and are subject to change from period to period. The actual results may differ from management’s estimates.
Concentrations of Risk
Cash and cash equivalents and trade accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk. Our Company policy limits, among other things, the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued or guaranteed by the U.S. government. The Company maintains cash in U.S. bank accounts, the balance of which may at times exceed the federally insured limit.
During the three months ended February 25, 2024 and February 26, 2023, the Company had sales concentrations of 10% or greater from two customers, accounting for 52% and 15%, and 52% and 14% respectively.
During the nine months ended February 25, 2024, the Company had sales concentrations of 10% or greater from three customers, accounting for 40%,19%, and 10%. During the nine months ended February 26, 2023, the Company had sales concentrations of 10% or greater from two customers, accounting for 40% and 16%.
Three of the Company’s customers had accounts receivable concentrations of 10% or greater, accounting for 38%,14%, and 13% of accounts receivable as of February 25, 2024. Two of the Company’s customers had accounts receivable concentrations of 10% or greater, accounting for 31% and 18%, of accounts receivable as of May 28, 2023.
Contract Assets and Liabilities
Contract assets primarily relate to the Company’s unconditional right to consideration for work completed but not billed at the reporting date. The Company’s contract assets as of February 25, 2024, May 28, 2023 and May 29, 2022, were $3.4 million, $3.2 million and $10.4 million, respectively, and are included within accounts receivable in the Condensed Consolidated Balance Sheets.
Contract liabilities primarily relate to payments received from customers in advance of performance under a contract. The Company’s contract liabilities as of February 25, 2024, May 28, 2023 and May 29, 2022, were $3.5 million, $7.0 million and $0.9 million, respectively, of which $3.2 million and $4.1 million are included in deferred revenue and $0.3 million and $2.9 million are included in non-current liabilities as of February 25, 2024 and May 28, 2023, respectively, in the Condensed Consolidated Balance Sheets. Revenue recognized during the three and nine months ended February 25, 2024, that was included in the contract liability balance at the beginning of fiscal year 2024, was $1.5 million and $5.2 million, respectively.
Revenue recognized during the three and nine months ended February 26, 2023, that was included in the contract liability balance at the beginning of fiscal year 2023, was $0.1 million and $0.5 million, respectively.
-6-
Revenue Recognition
The following tables disaggregates revenue by major product lines and services (in thousands):
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| (In thousands) | February 25, 2024 | February 26, 2023 | February 25, 2024 | February 26, 2023 |
| Contact development and manufacturing organization | $22,306 | $18,015 | $67,522 | $52,488 |
| HA manufacturing | 13,398 | 8,521 | 22,853 | 19,635 |
| Total | $35,704 | $26,536 | $90,375 | $72,123 |
Development services revenues recognized over time were $7.0 million and $9.0 million for the three months ended February 25, 2024 and February 26, 2023, respectively, and $19.2 million and $22.3 million for the nine months ended February 25, 2024 and February 26, 2023, respectively, and are included in contract development and manufacturing organization.
Revenues recognized at a point in time were $28.7 million and $17.5 million for the three months ended February 25, 2024 and February 26, 2023, respectively, and $71.1 million and $49.8 million for the nine months ended February 25, 2024 and February 26, 2023, respectively.
The Company identified certain elements of its agreements with customers for development services in which the Company is the principal in those contracts, therefore it recognizes revenues on a gross basis. For other contracts in which the Company operates as an agent, the Company recognized revenue on a net basis.
Amended and Restated Supply Agreement
On December 22, 2023, the Company entered into an amendment and restatement of a supply agreement with one of its customers (the “Amended Supply Agreement”). The key provisions of the Amended Supply Agreement included an extension of the agreement’s term for certain products through March 31, 2024, revised pricing for certain product purchase orders dated November 1, 2023, and the payment of a $5.0 million working capital deposit to the Company. The working capital deposit was received on December 22, 2023 and (i) may be used for any corporate purpose; (ii) will not accrue interest; and (iii) is required to be repaid, subject to certain defined provisions, upon the termination of the Amended Supply Agreement. On March 14, 2024, this agreement was amended to extend it through December 31, 2026.
Inventories, net
Inventories primarily consist of in-process and finished goods related to sterile injectable pharmaceutical products in syringes, vials and cartridges. This includes premium, pharmaceutical grade HA in bulk form as well as formulated and filled syringes, vials and cartridges for injectable products used in treating a broad spectrum of medical conditions and procedures.
As of February 25, 2024 and May 28, 2023, inventories consisted of the following (in thousands):
| (In thousands) | February 25, 2024 | May 28, 2023 |
|---|---|---|
| Finished goods | $13,113 | $13,141 |
| Raw materials | 18,686 | 17,735 |
| Work in process | 8,802 | 10,349 |
| Inventory reserve | (931) | (384) |
| Total | $39,670 | $40,841 |
The Company recorded adjustments of $1.1 million and $4.9 million to record inventory to its net realizable value as of February 25, 2024 and May 28, 2023, respectively.
The Company’s inventory serves as part of the collateral for certain of the Company’s debt arrangements. Refer to Note 6 – Debt for additional discussion on the Company’s debt arrangements and related collateral.
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Fair Value Measurements
The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments and certain other items measured at fair value. The Company has not elected the fair value option for any of its other eligible financial assets or liabilities.
Applicable accounting guidance establishes a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – observable inputs such as quoted prices for identical instruments in active markets.
Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.
Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.
Cash is stated at cost, which approximates its fair value. The carrying amounts reported in the balance sheets for accounts receivable, accounts payable and accrued liabilities approximate fair value, due to their short-term maturities.
Outstanding borrowings that qualify as financial instruments are carried at cost, which approximates their fair value as of February 25, 2024 and May 28, 2023, due to their short duration, except for the Alcon Research, LLC (“Alcon”) term debt with a fair value of $117.7 million that exceeds carrying value.
The Term Loan Credit Facility (as defined in Note 6 Note 6 – Debt) contains embedded derivatives requiring bifurcation as a derivative instrument. The derivative liability related to the Term Loan Credit Facility is recorded as a discount to the long-term debt in the Condensed Consolidated Financial Statements. The embedded derivative liability is subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a non-operating income (expense). The fair value of the embedded derivative liabilities associated with the Term Loan Credit Facility was estimated using a probability weighted discounted cash flow model to measure the fair value. This involves significant Level 3 inputs and assumptions including (i) an estimated probability and timing of a change in control and event of default, and (ii) a risk-adjusted discount rate. At February 25, 2024 and May 28, 2023, the fair value of the embedded derivative liability approximated $23.0 million and $64.9 million, respectively.
Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on a recurring and non-recurring basis (in thousands):
| Fair Value at February 25, 2024 | Fair Value at May 28, 2023 | |||||
|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |
| Liabilities: | ||||||
| Debt derivative liability(1) | — | — | 23,000 | — | — | 64,900 |
| Total liabilities | — | — | 23,000 | — | — | 64,900 |
(1) As of February 25, 2024 and May 28, 2023, the fair value of the debt derivative liability is included in non-current liabilities in the Company’s Condensed Consolidated Balance Sheets.
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The key inputs to the valuation models that were utilized to estimate the fair value of the debt derivative liability were (i) an estimated probability related to the timing of a change in control over the 12 months following the end of the fiscal period; (ii) the estimated probability related to an event of default of the Supply Agreement with Alcon, as amended, over the 12 months following the end of the fiscal period; and (iii) a risk-adjusted discount rate. Beginning in the second quarter of fiscal year 2024 and continuing through the third quarter of fiscal year 2024, there were sequential declines in the change in control probabilities assumptions in connection with the Company’s review of the strategic alternatives initiative that significantly impacted the fair value of the debt derivative liability. There was no change in the probability related to event of default of the supply agreement during fiscal year 2024.
The risk adjusted discount rate as of February 25, 2024 and May 28, 2023, were as follows:
| February 25, 2024 | May 28, 2023 | |
|---|---|---|
| Assumptions | ||
| Discount rate | 21.3% — 24.2% | 22.3% — 24.5% |
| Implied spread | 17.0% | 18.5% |
| Risk free rate | 4.3% — 7.2% | 3.8% — 6.0% |
The following table reflects the fair value roll forward reconciliation of Level 3 assets and liabilities measured at fair value for the nine months ended February 25, 2024 (in thousands):
| Debt Derivative Liability | |
|---|---|
| Balance as of May 29, 2022 | $— |
| Fair value on issuance(1) | $64,900 |
| Balance as of May 28, 2023 | 64,900 |
| Decrease in fair value(2) | (41,900) |
| Balance as of February 25, 2024 | $23,000 |
(1)At May 28, 2023, the fair value of the embedded derivative liability approximated the fair value upon issuance on May 22, 2023.
(2)For the nine months ended February 25, 2024, the decrease in fair value is recorded within “Change in fair value of debt derivative liability, related party” within the condensed consolidated statement of operations.
Related Party Transactions
The Company has reflected the related party balances on the face of its financial statements beginning in the period which Alcon became a related party, which was as of May 22, 2023 at the time Alcon provided financing to the Company. Prior to providing financing, and continuing subsequently, Alcon was a customer of the Company. Refer to Note 6 – Debt for additional discussion on the Company’s debt agreement with Alcon.
Commitments and Contingencies
Legal Contingencies
In the ordinary course of business, the Company is involved in various legal proceedings and claims.
The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least each fiscal quarter and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal fees are expensed in the period in which they are incurred.
Confidential Settlement Agreement and Release
On August 24, 2023, the Company reached a confidential settlement and release agreement with a third-party insurance underwriter. In connection with this settlement agreement, the Company received a cash payment of $1.9 million on September 19, 2023.
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Landlord Complaints
On January 12, 2024, the landlord for a property leased by Curation filed a complaint of unlawful detainer against the Company in Santa Barbara County Superior Court, seeking possession of the building and alleging past due rent of approximately $0.2 million. The Company has accrued past due rents, but the ultimate exposure to loss will depend on future events and is not reasonably certain at this time.
On January 12, 2024, a landlord for a different property leased by Curation delivered to the Company a pay or quit notice related to such property, seeking payment of past due rent of approximately $0.1 million or requesting Curation to vacate the property. The Company has accrued past due rents, but the ultimate exposure to loss will depend on future events and is not reasonably certain at this time.
Settlement of a Supplier Note Receivable
In February 2024, the Company received approximately $0.9 million in settlement of a note receivable from a former supplier to a divested business (the “Note”). The Company had treated this settlement as a gain contingency, as the original aggregate amount of the Note was written off in a previous period; therefore, it was accounted for during the third quarter of fiscal year 2024 when the payment was received.
SEC Subpoena
On February 16, 2024, the Chicago Regional Office of the SEC has issued a subpoena to the Company seeking documents and information concerning the Restatement. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC. We cannot predict the duration or outcome of this matter at this time.
Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board issued new guidance on income tax disclosures (ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”). Among other requirements, this update adds specific disclosure requirements for income taxes, including: (1) disclosing specific categories in the rate reconciliation and (2) providing additional information for reconciling items that meet quantitative thresholds. The guidance is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2023-09 on the Company’s condensed consolidated financial statements and disclosures.
In November 2023, the FASB issued new guidance on segment reporting (ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”). The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2023-07 on the Company’s condensed consolidated financial statements and disclosures.
- Convertible Preferred Stock
On January 9, 2023, the Company issued an aggregate of 38,750 shares of the Series A Convertible Preferred Stock, par value $0.001 per share (the “Convertible Preferred Stock”), all of which are convertible into shares of common stock at the election of the holders of the Convertible Preferred Stock (each, a “Holder” and collectively, the “Holders”), subject to the exchange and beneficial ownership limitations described below. The Company recorded the Convertible Preferred Stock net of issuance costs of $0.7 million.
Liquidation and Redemption
As of February 25, 2024 and May 28, 2023, the aggregate liquidation preference of the Convertible Preferred Stock approximated $41.7 million and $39.3 million, respectively.
Registration Rights Agreement
On January 9, 2023, in connection with the issuance of the Convertible Preferred Stock, the Company and the Holders also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things,
-10- the Company granted the Holders certain registration rights with respect to the shares of common stock issuable upon the conversion of the Convertible Preferred Stock. The Registration Rights Agreement contains monetary penalties if the Company fails to maintain the effectiveness of the registration statement. As of the February 25, 2024, the Company has accrued approximately $2.3 million in monetary penalties under the Registration Rights Agreement due to the delinquent filing of the Company’s annual and quarterly reports with the SEC.
Classification
The Convertible Preferred Stock is redeemable by the holders after June 29, 2026. Until such date, it is redeemable contingent upon the occurrence of certain events. As a result, the Company has presented the Convertible Preferred Stock outside of permanent equity. The Convertible Preferred Stock was recorded at its issuance date fair value of the net proceeds raised. The current carrying value approximates fair value as it reflects the accumulation of the PIK dividends and accretion of the issue costs.
The Company recorded proceeds of $38.8 million, net of costs associated with the issuance of the Convertible Preferred Stock of approximately $0.7 million, approximating $38.1 million. The discount to the proceeds arising from issuance costs is being amortized up to its full redemption value through June 29, 2026.
During the nine months ended February 25, 2024, the Company recorded PIK dividends of approximately $0.8 million as a reduction to Additional Paid-in Capital and an increased to the Convertible Preferred Stock balance. As of February 25, 2024 and May 28, 2023, there were approximately 41,679 shares and 39,420 shares, respectively, of Convertible Preferred Stock outstanding.
- Stock-based Compensation and Stockholders’ Equity
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of February 25, 2024 and changes during the fiscal year then ended is presented below:
| Options Outstanding | Weighted-Average Exercise Price Per Share | Total Intrinsic Value of Options Exercised(in thousands) | Weighted-Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value | |
|---|---|---|---|---|---|
| Options outstanding at May 28, 2023 | 2,374,325 | $10.88 | |||
| Options granted | 6,300 | $7.51 | |||
| Options exercised | (95,800) | $9.38 | $115 | ||
| Options expired | (119,850) | $11.79 | |||
| Options outstanding at February 25, 2024 | 2,164,975 | $10.88 | 1.21 | $— | |
| Options exercisable at February 25, 2024 | 1,712,287 | $10.95 | 1.90 | $— | |
A summary of the Company’s restricted stock unit (“RSU”) award activity as of February 25, 2024 and changes during the fiscal year then ended is presented below:
| Restricted Stock Units Outstanding | Weighted-Average Grant Date Fair Value Per Share | |
|---|---|---|
| Restricted stock units outstanding at May 28, 2023 | 336,791 | $9.70 |
| Granted | 1,058,556 | $8.25 |
| Vested | (155,942) | $8.03 |
| Restricted stock units outstanding at February 25, 2024 | 1,239,405 | $8.67 |
Stock-Based Compensation Expense
The following table summarizes stock-based compensation by income statement line item:
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| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| (In thousands) | February 25, 2024 | February 26, 2023 | February 25, 2024 | February 26, 2023 |
| Continuing operations: | ||||
| Cost of product sales | $187 | $109 | 549 | $307 |
| Research and development | 42 | 31 | 126 | 173 |
| Selling, general and administrative | 1,265 | 763 | 3,928 | 2,316 |
| Total stock-based compensation | $1,494 | $903 | $4,603 | $2,796 |
As of February 25, 2024, there was $11.4 million of total unrecognized compensation expense related to unvested equity compensation awards granted under the Lifecore incentive stock plans. Total expense is expected to be recognized over the weighted-average period of 1.21 years for stock options and 1.90 years for RSUs.
- Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| (In thousands, except per share amounts) | February 25, 2024 | February 26, 2023 | February 25, 2024 | February 26, 2023 |
| Numerator: | ||||
| Net income (loss) from continuing operations | $14,785 | $(11,330) | $16,417 | $(27,238) |
| Income (loss) from discontinued operations, net of tax | 847 | (25,177) | 2,679 | (33,041) |
| Net income (loss) | $15,632 | $(36,507) | $19,096 | $(60,279) |
| Denominator: | ||||
| Weighted average shares for basic income (loss) per share | 30,488 | 30,304 | 30,450 | 29,838 |
| Potential preferred stock conversion to common stock | 5,899 | — | 5,792 | — |
| Dilutive stock options and RSUs | 222 | — | 227 | — |
| Weighted average shares for diluted income (loss) per share | 36,609 | 30,304 | 36,469 | 29,838 |
| Basic net income (loss) per share: | ||||
| Income (loss) from continuing operations | $0.48 | $(0.37) | $0.54 | $(0.91) |
| Income (loss) from discontinued operations | $0.03 | $(0.83) | $0.09 | $(1.11) |
| Total basic net income (loss) per share | $0.51 | $(1.20) | $0.63 | $(2.02) |
| Diluted net income (loss) per share: | ||||
| Income (loss) from continuing operations | $0.40 | $(0.37) | $0.45 | $(0.91) |
| Income (loss) from discontinued operations | $0.02 | $(0.83) | $0.07 | $(1.11) |
| Total diluted net income (loss) per share | $0.42 | $(1.20) | $0.52 | $(2.02) |
Due to the Company’s net loss for the three months ended February 26, 2023, the net loss per share includes only the weighted average shares outstanding and thus excludes the potential dilutive effect of 87,670 RSUs; no stock options since they were all out of the money; and 38,750 Convertible Preferred Stock, as such impact would be antidilutive. All antidilutive items relate to the Company’s continuing operations.
Due to the Company’s net loss for the nine months ended February 26, 2023, the net loss per share includes only the weighted average shares outstanding and thus excludes the potential dilutive effect of 127,905 RSUs; no stock options since they were all out of the money; and 38,750 Convertible Preferred Stock, respectively, as such impact would be antidilutive. All antidilutive items relate to the Company’s continuing operations.
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See Note 2 – Convertible Preferred Stock for more information on outstanding Convertible Preferred Stock and Note 3 – Stock-based Compensation and Stockholders’ Equity more information on outstanding RSUs and stock options.
- Income Taxes
The provision for income taxes from continuing operations for the three months ended February 25, 2024 and February 26, 2023, was an expense of $0.2 million and an expense of $70.0 thousand, respectively. The provision for income taxes from continuing operations for the nine months ended February 25, 2024 and February 26, 2023, was an expense of $0.2 million and an expense of $78.0 thousand, respectively.
The effective tax rate for the three months ended February 25, 2024 and February 26, 2023 was 1.43% and 0.19%, respectively. The effective tax rate for the nine months ended February 25, 2024 and February 26, 2023 was 1.43% and 0.13%, respectively. The effective tax rate for the three and nine months ended February 25, 2024 and February 26, 2023, was lower than the statutory federal income tax rate of 21% primarily due to the movement of the valuation allowance recorded against certain deferred tax assets, partially offset by the federal and state research and development tax credits.
- Debt
Long-term debt, net consists of the following:
| (In thousands) | February 25, 2024 | May 28, 2023 |
|---|---|---|
| Term loan, related party | $153,477 | $142,503 |
| Equipment sale finance liability, related party | 7,343 | 7,730 |
| Total principal amount of long-term debt | 160,820 | 150,233 |
| Less: unamortized debt discount | (529) | (605) |
| Less: debt discount, related party | (63,182) | (64,792) |
| Total long-term debt, net of discounts | 97,109 | 84,836 |
| Less: current portion of long-term debt, net, related party | (773) | (580) |
| Long-term debt, net | $96,336 | $84,256 |
The future minimum principal payments of the Company’s term loan and equipment sale finance liability for each year presented are as follows (in thousands), excluding forecasted cash and PIK interest:
| Remainder of Fiscal year 2024 | $193 |
|---|---|
| Fiscal year 2025 | 773 |
| Fiscal year 2026 | 773 |
| Fiscal year 2027 | 773 |
| Fiscal year 2028 | 773 |
| Thereafter | 157,535 |
| Total | $160,820 |
Term Loan Credit Facility
On May 22, 2023, Company, Curation and Lifecore Biomedical Operating Company, Inc. (together with the Company and Curation, the “Borrowers”) and Alcon entered into a Credit and Guaranty Agreement (the “Term Loan Credit Facility”). The Term Loan Credit Facility refinanced in full all obligations of the Company and their subsidiaries under its prior term loan credit facility. Upon entry into the Term Loan Credit Facility, the prior term loan credit facility was terminated and all noncompliance with debt covenants were thereby cured.
The Term Loan Credit Facility provides for up to $142.3 million in term loans, subject to certain adjustments based on the post-closing adjustments to the Purchase Price (as defined in the Equipment Sale and Leaseback Agreement, defined below), which were funded in full on May 22, 2023. The obligations under the Term Loan Credit Facility mature on May 22, 2029. The Term Loan Credit Facility is secured by the same collateral that secures the Revolving Credit Facility (as defined below), with relative priorities in respect thereof, as set forth in the Intercreditor Agreement (as defined below).
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The Company had unamortized debt discount amounting to $63.7 million and $65.4 million as of February 25, 2024 and May 28, 2023, respectively, related to the Term Loan Credit Facility, which are recorded as a reduction of the term loan liability in the Condensed Consolidated Balance Sheets.
The Company identified a number of embedded derivatives that require bifurcation from the Term Loan Credit Facility that were separately accounted for in the condensed consolidated financial statements as one compound derivative liability. Certain of these embedded features include change in control provisions, events of default and contingent rate increases and were determined to qualify as an embedded derivative under ASC 815-40. The embedded derivative is classified as a Level 3 financial liability in the fair value hierarchy as of May 28, 2023. The fair value of the embedded derivative liabilities associated with the term loans was estimated using the discounted cash flow method under the income approach. This involves significant Level 3 inputs and assumptions including an estimated probability and timing of a change in control and events of default. The Company will re-evaluate this assessment each reporting period and records any gains or losses in other income (expense). The initial recognition of the embedded derivative liability upon issuance of the Term Loan Credit Facility on May 22, 2023 was $64.9 million and is recorded as a debt derivative liability, related party in the condensed Consolidated Balance Sheets. The bifurcation of the embedded debt derivative fair value of $64.9 million is accounted for as a discount to the Term Loan Credit Facility. Amortization of the debt discount is based on the effective interest method over the term of the debt. At February 25, 2024 and May 28, 2023, the fair value of the embedded derivative liability approximated $23.0 million and $64.9 million, respectively.
As of February 25, 2024 and May 28, 2023, the Company had $153.5 million and $142.5 million in borrowings outstanding under the Term Loan Credit Facility, at an effective annual interest rate of 10.0% and 10.0%, respectively.
As of February 25, 2024 and May 28, 2023, except for the requirements to deliver certain historical financial statements, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility (as discussed below). In December 2023, the Company entered into limited waivers and amendments to credit agreements; refer to Note 9 – Subsequent Events for additional information.
Pledge and Security Agreement
Also on May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as grantors (collectively, the “Grantors”), entered into a Pledge and Security Agreement (the “Term Loan Security Agreement”), dated as of May 22, 2023, with Alcon, as collateral agent. Pursuant to the Term Loan Security Agreement, the Grantors secured their obligations under the Term Loan Credit Facility by granting to Alcon a first priority security interest in certain collateral, including but not limited to equipment, fixtures, real property and intellectual property of the Company. The security interest granted by the Grantors under the Term Loan Security Agreement continues in effect until the payment in full of all of the secured obligations under the Term Loan Credit Facility.
Amendment to Revolving Credit Facility
On May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as guarantors, entered into a Limited Waiver, Consent and Fifth Amendment (the “Revolving Loan Amendment”) to the credit agreement with BMO Harris Bank, N.A. (“BMO”), as lender (the “Revolving Credit Facility”).
The Revolving Loan Amendment provides for, among other things, (i) a waiver of all known existing defaults under the Revolving Credit Facility as of the date of the Revolving Loan Amendment, (ii) the reduction of the maximum amount available under the Revolving Credit Facility to up to the lesser of (x) $40.0 million, less a reserve for certain secured credit products, if any, and (y) the borrowing base (which, pursuant to the Revolving Loan Amendment, was modified to include a further reduction of the borrowing base by an additional $4.0 million), (iii) the modification of the springing minimum fixed charge coverage ratio of 1.00 to 1.00, with such covenant not tested until the fiscal quarter ending on or about February 28, 2024 and, on or thereafter, upon the earlier of the occurrence of an event of default or availability being less than the greater of 10% of the maximum borrowing amount and $4.0 million, (iv) cash dominion at all times that the Revolving Credit Facility remains outstanding, and (v) certain other revisions to align with the terms of the Term Loan Credit Facility and address the relative priorities and credit for borrowings related to the Company’s commercial relationships with Alcon.
The Company records its Revolving Credit Facility deferred finance costs as an asset; as such, $1.7 million were recorded as other assets in the accompanying Condensed Consolidated Balance Sheet as of February 25, 2024. As of May 28, 2023, $0.9 million and $1.4 million were recorded as other current assets and other long-term assets, respectively.
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As of February 25, 2024 and May 28, 2023, the Company had $19.9 million and $16.8 million, respectively, in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of 8.15% and 12.16%, respectively.
As of February 25, 2024, we had approximately $5.7 million available for borrowing under our revolving credit facility.
BMO and Alcon also entered into an Intercreditor agreement regarding their relative rights, as lenders, in the assets of the Company and its subsidiaries that serve as collateral for their respective credit facilities (the “Intercreditor Agreement”).
Amended and Restated Contract Manufacturing Agreement
On December 31, 2023, the Company entered into an Amended and Restated Contract Manufacturing Agreement (the “Amended and Restated CMA”), with Alcon, which amended and restated the existing contract manufacturing agreement between the Company and Alcon related to the Company’s aseptic manufacturing of a variety of ophthalmic viscoelastic injection devices.
The initial term of the Amended and Restated CMA expires December 31, 2031, subject to earlier termination by Alcon under certain circumstances or by either party for a material breach by the other party that is not cured after notice and an opportunity to cure.
The Amended and Restated CMA contains terms and provisions customary for transactions of this type, including forecast and purchase order procedures, prices that are subject to annual index-based adjustments, minimum purchase obligations, on-time-in-full service level metrics and remedies, product warranties and confidentiality and indemnification obligations. In the event the Company is unable to meet specified metrics pursuant to the Amended and Restated CMA, under certain circumstances, Alcon will be entitled to certain financial concessions, as well as certain rights and documents with respect to Alcon purchase orders until applicable metrics are met.
On May 2, 2024, the Company entered into an amendment to the Amended and Restated CMA, in which the lender made a prepayment in the amount of $5.5 million in cash as an advance on future purchases. Under the terms, the lender is entitled to apply the prepayment towards invoices issued by the Company within the scope of the agreement during calendar year 2026.
Limited Waivers and Amendments to Credit Agreements
On December 31, 2023, the Company entered into (i) a Limited Waiver and First Amendment to Credit and Guaranty Agreement (the “Alcon Amendment”), with Alcon, which amended the Term Loan Credit Facility, and (ii) the Limited Waiver and Sixth Amendment to Credit Agreement (the “BMO Amendment” and, together with the Alcon Amendment, the “Credit Agreement Amendments”) which amended the Revolving Credit Facility.
The Alcon Amendment provides for, among other things, (i) a waiver of the specified defaults listed therein under the Term Loan Credit Facility as of the date of the Alcon Amendment, (ii) a waiver of the requirement to deliver certain historical financial statements, (iii) the inclusion of a requirement that the Company notify Alcon in advance of any layoff(s) by the Company and/or its subsidiaries that would result in a reduction in the overall headcount of the Company’s full-time manufacturing and support personnel by more than 20 persons in the aggregate, and (iv) an amendment to the financial reporting requirements under the Term Loan Credit Facility providing additional time for the Company’s delivery of its financials for the quarter ended November 26, 2023.
The BMO Amendment provides for, among other things, (i) a waiver of the specified defaults listed therein under the Revolving Credit Facility as of the date of the BMO Amendment, (ii) a waiver of the requirement to deliver certain historical financial statements, (iii) an amendment to the definition of “Applicable Margin” with respect to loans under the Revolving Credit Facility from December 31, 2023 until the “Specified Adjustment Date” (as defined in the Revolving Credit Facility as amended by the BMO Amendment) (i.e., the date on which 2024 audited annual financial statements and certain other materials are delivered by the Company to BMO), and (iv) an amendment to the definition of “Eligible Accounts” thereunder in respect of certain accounts.
The Company was not required to pay any fees in connection with the Credit Agreement Amendments.
Equipment Sale and Leaseback Agreements
On May 22, 2023, the Company entered into an Equipment Sale and Leaseback Agreement (the “Equipment Sale and Leaseback Agreement”), with Alcon, wherein the Company sold $10.0 million (the “Purchase Price”), subject to certain post-closing adjustments of certain equipment, machinery, and other property associated with the production of sodium hyaluronate
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(the “Equipment”) to Alcon. The Equipment Sale Leaseback Agreement contains an option for the Company to repurchase the Equipment upon the earlier of (i)seven (7) years and (ii) the expansion of the Company’s existing production capacity with respect to sodium hyaluronate, for a purchase price equal to the Purchase Price, less the aggregate of all Paydown Payments (as defined in the Equipment Lease Agreement). The Purchase Price was subsequently reduced to $7.7 million based on the fair value of the Equipment, as required by the terms of the Equipment Sale and Leaseback Agreement. The difference of $2.3 million between the initial sales value of $10.0 million and the $7.7 million was added to the term loan agreement, which resulted in a term loan amount of $142.3 million and the proceeds to Lifecore across the two agreements did not change.
Concurrently with the entry into the Equipment Sale and Leaseback Agreement, the Company entered into an Equipment Lease Agreement (the “Equipment Lease Agreement” and, together with the Equipment Sale Leaseback Agreement, the Term Loan Credit Facility, the Term Loan Security Agreement, and the Revolving Loan Amendment, collectively, the “Refinancing Transactions”), dated May 22, 2023, with Alcon, wherein Alcon leased the equipment back to the Company. The Equipment Lease Agreement expires upon the earlier of (i) May 22, 2033, and (ii) the date that the equipment is repurchased by the Company pursuant to the terms of the Equipment Lease Agreement. Upon the expiration of the Equipment Lease Agreement, the Company shall automatically repurchase the equipment for $1.00 (if not previously repurchased pursuant to the option under the Equipment Sale and Leaseback Agreement).
During the lease term, the Company is obligated to make quarterly rental payments to Alcon equal to (i) 1/40th of the Purchase Price (the “Paydown Payments”), plus (ii)1.5% times the Purchase Price less cumulative Paydown Payments made. The Company concluded that the Equipment Sale and Leaseback Agreement did not meet the requirements for sale-leaseback accounting, therefore the carrying value of the Equipment remains on the Condensed Consolidated Balance Sheets and the $7.7 million Purchase Price (as adjusted) of the equipment sale finance obligation (the “Equipment Sale Finance Liability”) was classified in Long-term debt, net.
The Equipment Lease Agreement contains terms and provisions (including representations, covenants, and conditions) that are generally customary for a commercial lease of this nature, including obligations relating to the use, operation, and maintenance of the equipment. During the term of the lease, Alcon is not permitted to sell or encumber the equipment. Alcon is only entitled to cancel the Equipment Lease Agreement in the event of insolvency, liquidation or bankruptcy, and its remedies for other breaches of the Equipment Lease Agreement are otherwise limited to monetary damages.
- Restructuring Costs
The following table summarizes the restructuring costs recognized in the Company’s Condensed Consolidated Statements of Operations, excluding discontinued operations, in connection with the previously announced restructuring plan.
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| (in thousands) | February 25, 2024 | February 26, 2023 | February 25, 2024 | February 26, 2023 |
| Employee severance and benefit costs | $76 | $2,187 | $215 | $2,282 |
| Lease costs | 684 | 43 | 700 | 88 |
| Other restructuring costs | 11 | 336 | 3 | 1,806 |
| Total restructuring costs | $771 | $2,566 | $918 | $4,176 |
The restructuring plan has been substantially completed as of May 28, 2023. The following table summarizes the restructuring costs recognized in the Company’s Condensed Consolidated Statements of Operations since the inception of the restructuring plan in fiscal year 2020 through February 25, 2024, excluding discontinued operations:
| Total | |
|---|---|
| (in thousands) | |
| Asset write-off costs, net | $13,893 |
| Employee severance and benefit costs | 4,314 |
| Lease costs | 4,814 |
| Other restructuring costs | 7,853 |
| Total restructuring costs | $30,874 |
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The following table presents the movement of the restructuring costs liability from May 28, 2023 through February 25, 2024, excluding discontinued operations, within current liabilities in the Condensed Consolidated Balance Sheet:
| (in thousands) | May 28, 2023 | Expense | Payments | February 25, 2024 |
|---|---|---|---|---|
| Employee severance and benefit costs | $1,600 | $215 | $(1,300) | $515 |
| Lease costs | 257 | 700 | (128) | 829 |
| Other restructuring costs | 1,140 | 3 | (923) | 220 |
| $2,997 | $918 | $(2,351) | $1,564 |
- Discontinued Operations
As discussed in Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies – Discontinued Operations, the Company completed the disposition of Yucatan and O Olive on February 7, 2023 and April 6, 2023, respectively. Yucatan and O Olive represented components of the Company’s previously operated food business and their sale represents a strategic shift in the Company going forward. Accordingly, concurrent with the execution of their respective purchase agreements, Yucatan and O Olive both met the accounting requirements for reporting as discontinued operations for all periods presented. There were no assets or liabilities of Yucatan and O Olive as of February 25, 2024.
The key components of income from discontinued operations for the three and nine months ended February 25, 2024 and February 26, 2023 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| February 25, 2024 | February 26, 2023 | February 25, 2024 | February 26, 2023 | |
| Revenues | $— | $12,190 | $— | $48,954 |
| Cost of product sales | — | 14,056 | — | 50,282 |
| Gross profit | — | (1,866) | — | (1,328) |
| Operating costs and expenses: | ||||
| Research and development | — | 48 | — | 217 |
| Selling, general and administrative | — | 2,536 | — | 9,415 |
| Impairment of intangible asset and goodwill | — | — | — | 1,300 |
| Loss on Sale of Yucatan | — | 20,670 | — | 20,670 |
| Restructuring costs | — | 57 | — | 111 |
| Total operating costs and expenses | — | 23,311 | — | 31,713 |
| Operating loss | — | (25,177) | — | (33,041) |
| Other income (expense), net | 850 | — | 2,700 | — |
| Income (loss) from discontinued operations before taxes | 850 | (25,177) | 2,700 | (33,041) |
| Income tax benefit (expense) | (3) | — | (21) | — |
| Income (loss) from discontinued operations, net of tax | $847 | $(25,177) | $2,679 | $(33,041) |
Cash provided by operating activities by discontinued operations totaled $2.7 million and $0.1 million for the nine months ended February 25, 2024 and February 26, 2023, respectively. Cash used in investing activities by discontinued operations for the nine months ended February 26, 2023 was $0.1 million.
- Subsequent Events
Amended and Restated Contract Manufacturing Agreement
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On May 2, 2024, the Company entered into an amendment to the Amended and Restated CMA, in which the lender made a prepayment in the amount of $5.5 million in cash as an advance on future purchases. Under the terms, the lender is entitled to apply the prepayment towards invoices issued by the Company within the scope of the agreement during calendar year 2026.
Lender Updates
On May 10, 2024, the Company also entered into the Seventh Amendment to the ABL Loan Agreement with its ABL lender to execute a “first-in, last-out” tranche of revolving loans under the ABL Loan Agreement (the “FILO Amendment”). While not increasing the overall revolver commitment of $40 million, the FILO Amendment provides for up to approximately $2.5 million of incremental revolving loan capacity to the Company, subject to a variable cap, without changing the collateral. In connection with the FILO Amendment, the margin rate applicable to the borrowings pursuant to the FILO Amendment was increased to SOFR plus 4.25%, which is expected to increase annual cash interest expense by approximately $44,000 assuming $2.5 million in FILO tranche borrowings thereunder. The maximum capacity of permitted borrowings pursuant to the FILO Amendment will be reduced on a monthly basis commencing October 1, 2025. The Company paid a fee of $50,000 to BMO in connection with the FILO Amendment.
Assignment for the Benefit of Creditors
On May 15, 2024, the Company, as the sole stockholder of Curation, and Curation, as the sole stockholder of each of Camden Fruit Corp. (“Camden”) and Greenline Logistics, Inc. (“Greenline” and, together with Curation and Camden, the “Assignors”), and the board of directors and shareholders of each of the Assignors, determined that it is in the best interests of each of the Assignors and their respective stakeholders, as applicable, to effect a transfer and assignment of substantially all of each of the Assignors assets to SG Service Co., LLC (the “Assignee”) for liquidation and distribution to the creditors of each of the Assignors (the “Assignment”). The Assignment will be effectuated pursuant to that certain General Assignment, by and among the Assignors and the Assignee, and related documentation, pursuant to which all of the Assignors’ currently existing right, title, and interest in all real or personal property and all other assets, whatsoever and wheresoever situated will be assigned, granted, conveyed and transferred to the Assignee, in trust. The Assignee will then liquidate the assets for the general benefit of the Assignors’ respective creditors according to their respective priorities at law to satisfy the Assignors’ obligations. Upon the completion of the Assignment, the Assignee will have sole control over the Assignors’ assets and the Assignors will no longer control the liquidation or distribution of their assets or the resolution of any creditor claims.
Shareholder Cooperation Agreements
On June 28, 2024, the Company entered into cooperation agreements (the “Cooperation Agreements”) with each of (i) the 22NW Investor Group, (ii) the Legion Investor Group, and (iii) the Wynnefield Investor Group, as defined in the respective Cooperation Agreement. Pursuant to the terms of the Cooperation Agreements, the Company, the 22NW Investor Group, the Legion Investor Group, and the Wynnefield Investor Group agreed to take certain actions with respect to board composition matters and agreed to certain customary standstill provisions.
In connection with the Cooperation Agreements, the Company accrued $0.4 million in expenses during fiscal year 2024 and has estimated to incur an additional $1.5 million in costs during the first quarter of 2025, and which are expected to be paid during the second quarter of 2025.
Reduction in Workforce
On July 8, 2024, the Company determined to implement a strategic reduction of the Company’s workforce (the “Workforce Reduction Plan”) to terminate 46 full-time employees of the Company, representing approximately 9% of the Company’s workforce, as part of an initiative to strategically optimize the Company’s cost structure. In connection with the Workforce Reduction Plan, the Company estimates that it will incur termination benefit costs of approximately $1.0 million, which primarily consist of one-time severance benefits. These costs are expected to be incurred in the first quarter of fiscal 2025 and paid during both the first and second quarters of fiscal 2025.
Class Action Complaint
On July 29, 2024, a putative class action complaint was filed on behalf of shareholders of the Company in the United States District Court of Minnesota against the Company and certain of its named executive officers. The complaint generally alleges that statements made to the Company’s shareholders between October 7, 2020, and March 19, 2024 regarding the
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Company’s financial results, internal controls, remediation efforts, periodic reporting, and financial prospects were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs, and attorneys’ fees. The Company believes that the claims are without merit and intends to vigorously defend against them. Any potential loss arising from this claim is not currently probable or estimable.
Amended Lease Agreement
On August 9, 2024,the Company amended its lease agreement dated September, 3, 2015 with 1245, LLP, as lessor, related to office, manufacturing and warehouse space at 1245 Lakeview Drive in Chaska, MN. The primary terms of the amended lease agreement provide for approximately $2.4 million in cash to the Company in exchange for a revised rent payment schedule and an updated purchase option.
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The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.