Landec(LFCR) - 2024 Q4 - Annual Report

Cautionary Note About Forward-Looking Statements Summary of Forward-Looking Statements This section warns that forward-looking statements in the 10-K are subject to risks and uncertainties, and actual results may differ materially - Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations[5][6] - Potential risks include timing and expenses of operations, market acceptance of new products, government regulations, economic conditions, and the mix of domestic and international sales[5] - The company undertakes no obligation to publicly update or revise any forward-looking statement, except as required by law[7] Part I Item 1. Business Lifecore Biomedical, Inc. is a CDMO specializing in sterile injectable HA and non-HA pharmaceutical products, operating as a single segment with a focus on strategic partnerships and quality - Lifecore Biomedical, Inc. is a fully integrated CDMO specializing in the development, fill, and finish of sterile injectable pharmaceutical products, including complex HA and non-HA formulations[8] - The company's core strengths include establishing strategic relationships with market leaders, expanding medical applications for HA (e.g., wound care, aesthetic surgery, drug delivery), utilizing manufacturing infrastructure to meet demand, maintaining flexibility in product development and supply, and delivering consistent quality with a strong regulatory track record[9][11][12][13][14] - Lifecore's strategic priorities are managing its business development pipeline, maximizing capacity in its syringe, vial, and cartridge production lines, and advancing product commercialization for its partners[15] - The company operates in one reportable segment (Lifecore) and produces HA exclusively through bacterial fermentation at its Chaska, Minnesota facilities, which also handle non-HA manufacturing, aseptic filling, analytical services, and distribution[17][19][20] - Lifecore faces significant competition from full-service contract manufacturers and large pharmaceutical companies with greater financial and technical resources[21] - Products and operations are subject to extensive government regulation by the FDA and foreign agencies, requiring rigorous approvals and compliance with manufacturing and quality standards[23][24] - As of May 26, 2024, the company had 524 full-time employees. A strategic workforce reduction of 46 employees (approximately 9%) was implemented on July 8, 2024, to optimize cost structure, incurring an estimated $1.0 million in termination benefit costs[25][26] Item 1A. Risk Factors This section details significant risks including material weaknesses in internal controls, high leverage, customer concentration, regulatory compliance, and potential Nasdaq delisting - The company has identified material weaknesses in its internal control over financial reporting, which, if not remediated, could adversely affect its business and financial results[32][34] - Lifecore is highly leveraged, with approximately $164.5 million in total indebtedness as of May 26, 2024, and limited capital, necessitating additional capital raising in the immediate future, which could dilute existing stockholders[36][42][46] - Failure to timely file SEC reports and prior financial restatements have resulted in, and may continue to cause, material adverse consequences, including potential Nasdaq delisting, stockholder litigation, and difficulties in raising capital[48][50] - A significant portion of revenue is concentrated on a few large customers, including Alcon (also a primary lender), making the company vulnerable to order cancellations or delays[53][54] - The company's operations and products are subject to extensive governmental regulation by the FDA and foreign countries; non-compliance can lead to penalties, product recalls, or suspension of operations[70][74] - The Common Stock may be delisted from Nasdaq due to past non-compliance with listing rules, which would significantly and adversely affect liquidity, market price, and ability to raise equity[96][99][100] - The Convertible Preferred Stock has rights, preferences, and privileges that are preferential to Common Stock holders, providing significant influence to its holders[91][92] - Cyberattacks or security breaches could compromise confidential business information, disrupt operations, or harm the company's reputation[107][108][111] Item 1B. Unresolved Staff Comments No unresolved staff comments from the SEC are reported - There are no unresolved staff comments[121] Item 1C. Cybersecurity Lifecore implements a NIST-based cybersecurity risk management program, overseen by the Audit Committee, with no material threats identified - Lifecore has a cybersecurity risk management program based on the NIST Cybersecurity Framework, integrated into its enterprise risk management[122] - The program includes risk assessments, a multi-year cybersecurity roadmap, a contracted third-party security team, external service providers, employee training, and an incident response plan[123] - No known cybersecurity threats have materially affected or are reasonably likely to materially affect the company's operations, business strategy, or financial condition[124] - The Board's Audit Committee oversees cybersecurity and other information technology risks, receiving periodic reports and updates from management[125] Item 2. Properties Lifecore owns a 148,200 sq ft facility and leases two others in Minnesota, totaling 102,334 sq ft, for its operations Principal Physical Properties (as of May 26, 2024) | Location | Ownership | Facilities | Square Footage | | :--------------- | :-------- | :------------------------------------------------- | :------------- | | Chaska, MN | Owned | Office, laboratory, and manufacturing space | 148,200 | | Chaska, MN | Leased | Office, manufacturing, and warehouse space | 80,950 | | Chanhassen, MN | Leased | Warehouse and office space | 21,384 | - Leases for facilities expire at various dates through 2033[128] - All owned real property is subject to liens in favor of the lenders under the 2020 credit agreement[128] - The company believes its existing facilities are in good condition and suitable for its business, with no anticipated significant difficulty in retaining or replacing them[129] Item 3. Legal Proceedings Legal proceedings information is incorporated by reference from Note 9 – Commitments and Contingencies in Part IV, Item 15 - Information regarding legal proceedings is incorporated by reference from 'Part IV, Item 15. Note 9 - Commitments and Contingencies' in this Annual Report on Form 10-K[130] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[131] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Lifecore's Common Stock trades on NASDAQ (LFCR), has approximately 46 holders, and the company does not anticipate paying cash dividends - The Common Stock is traded on the NASDAQ Global Select Market under the symbol 'LFCR'[133] - As of August 23, 2024, there were approximately 46 holders of record of the Common Stock[135] - The company has not paid any dividends on its Common Stock since inception and intends to retain all future earnings for business, not anticipating cash dividends in the foreseeable future[135] - During the fiscal year ended May 26, 2024, Lifecore issued RSU awards (525,000 shares) and PSU awards (up to 1,500,000 shares) to Paul Josephs under its Equity Inducement Plan, relying on the exemption from registration afforded by Section 4(a)(2) of the Securities Act[135][136] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[137] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 revenues increased by 24% to $128.3 million, with a net income of $12.0 million, despite high leverage and decreased liquidity - Lifecore is a fully integrated CDMO, leveraging its expertise in HA and non-HA products, strategic partnerships, manufacturing capacity, and quality systems to drive profitable growth[138][139][140][141][143] Revenues and Gross Profit (FY2024 vs. FY2023) | Metric | FY2024 (in thousands) | FY2023 (in thousands) | Change Amount (in thousands) | Change % | | :------------- | :-------------------- | :-------------------- | :--------------------------- | :------- | | Total Revenues | $128,261 | $103,269 | $24,992 | 24% | | Gross Profit | $41,850 | $27,985 | $13,865 | 50% | - The increase in revenues was due to a $20.2 million increase in CDMO revenues (new product launch and increased order volume) and a $4.8 million increase in fermentation revenues. Gross profit improvement was driven by favorable volume variance ($6.8 million) and sales mix/inventory adjustments ($7.1 million), leading to a 553 basis points increase in gross profit margin[148][150] Operating Expenses (FY2024 vs. FY2023) | Expense Category | FY2024 (in thousands) | FY2023 (in thousands) | Change Amount (in thousands) | Change % | | :-------------------------- | :-------------------- | :-------------------- | :--------------------------- | :------- | | Research and Development | $8,575 | $8,736 | $(161) | (2)% | | Selling, general and administrative | $40,463 | $38,969 | $1,494 | 4% | | Gain on sale of divested business | $0 | $(2,108) | $2,108 | 100% | | Restructuring costs | $1,656 | $4,184 | $(2,528) | (60)% | | Total Operating Expenses | $50,694 | $49,781 | $913 | 2% | - SG&A expenses increased primarily due to higher non-cash stock-based compensation ($2.6 million) and a non-cash right-of-use impairment ($1.4 million), partially offset by reduced consulting fees. Restructuring costs decreased significantly as the divestiture of Curation Foods businesses was substantially complete[153][155] Other Income (Expenses) (FY2024 vs. FY2023) | Item | FY2024 (in thousands) | FY2023 (in thousands) | Change Amount (in thousands) | Change % | | :-------------------------------------------- | :-------------------- | :-------------------- | :--------------------------- | :------- | | Interest expense, net | $(18,090) | $(17,581) | $(509) | 3% | | Transition services income | $0 | $349 | $(349) | (100)% | | Loss on debt extinguishment | $0 | $(23,741) | $23,741 | (100)% | | Other (expense) income, net | $(3,052) | $(1,159) | $(1,893) | 163% | | Change in fair value of debt derivative liability, related party | $39,500 | $0 | $39,500 | 100% | | Provision for income tax (expense) benefit | $(183) | $(308) | $125 | (41)% | - A $39.5 million increase in the change in fair value of debt derivative liability (related party) was recorded in FY2024, reflecting a reduction in its fair market value due to sequential declines in change in control probabilities assumptions[159] Consolidated Adjusted EBITDA (FY2024, FY2023, FY2022) | Metric | FY2024 (in thousands) | FY2023 (in thousands) | FY2022 (in thousands) | | :----------------------------------- | :-------------------- | :-------------------- | :-------------------- | | Net income (loss) | $12,013 | $(99,563) | $(116,715) | | Total EBITDA | $38,240 | $(71,359) | $(99,320) | | Total adjusted EBITDA - Consolidated | $20,206 | $11,091 | $20,412 | - Cash and cash equivalents decreased by $10.6 million to $8.5 million as of May 26, 2024. Net cash provided by operating activities was $0.2 million in FY2024, a significant improvement from $17.4 million used in FY2023[166] - Net cash used in investing activities was $17.9 million in FY2024, primarily for equipment purchases. Net cash provided by financing activities was $7.5 million, mainly from revolving credit facility proceeds[171][174] - Total indebtedness was approximately $164.5 million as of May 26, 2024, with $12.3 million available under the revolving credit facility. The company anticipates needing additional capital for growth and capital expenditures[36][177][438] - The Term Loan Credit Facility (related party) had $157.3 million outstanding at an effective annual interest rate of 22.5% in FY2024. The Revolving Credit Facility had $19.7 million outstanding at an effective annual interest rate of 8.35%[178][431][436] - Critical accounting estimates include revenue recognition (CDMO and fermentation), impairment review of goodwill and indefinite-lived intangible assets, income taxes, and the valuation of debt derivative liability[203][206][213][217][220] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Lifecore's financial performance is exposed to interest rate fluctuations, primarily affecting its variable-rate Revolving Credit Facility - The company's net interest expense is sensitive to changes in the general level of interest rates, affecting both net interest expense and the fair value of its debt[222] - Interest on the Revolving Credit Facility is based on variable SOFR rates plus a spread, while the Term Loan Facility has a fixed interest rate of 10% per annum[222] - A hypothetical 100 basis point increase or decrease in weighted average interest rates under the refinance revolver would increase or decrease annual interest expense by approximately $0.2 million[222] Item 8. Financial Statements and Supplementary Data Consolidated financial statements and supplementary data are incorporated by reference from Part IV, Item 15 - The consolidated financial statements and supplementary data are incorporated by reference from Part IV, Item 15 of this Annual Report on Form 10-K[223] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure are reported - This item is not applicable[223] Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, with remediation efforts underway - The company's disclosure controls and procedures were not effective as of May 26, 2024, due to material weaknesses in internal control over financial reporting[225] - Management believes the consolidated financial statements fairly present the company's financial condition, results of operations, and cash flows despite the identified material weaknesses[226] - Material weaknesses were identified in the COSO framework components: Control Environment, Risk Assessment, Information and Communication, Monitoring, and Control Activities[228][229] - Remediation plans include engaging third-party consultants, adding qualified accounting and finance personnel, performing updated risk assessments, implementing new and enhanced controls, conducting broad-based training, and expanding the internal audit function[230][232] - The independent registered public accounting firm, BDO USA, P.C., issued an adverse opinion on the company's internal control over financial reporting as of May 26, 2024[247][260] - No material changes in internal controls over financial reporting occurred during the quarter ended May 26, 2024, except for the described remediation efforts[234] Item 9B. Other Information No officers or directors adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter - No officers or directors adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended May 26, 2024[235] Item 9C. Disclosure Regarding Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[235] Part III Item 10. Directors, Executive Officers and Corporate Governance Information for this item will be provided in the definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed by September 23, 2024[237] Item 11. Executive Compensation Executive compensation information will be provided in the definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed by September 23, 2024[238] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information will be provided in the definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed by September 23, 2024[239] Item 13. Certain Relationships and Related Transactions, and Director Independence Related transactions and director independence information will be provided in the definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed by September 23, 2024[240] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information will be provided in the definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders, to be filed by September 23, 2024[241] Part IV Item 15. Exhibits and Financial Statement Schedules This section includes consolidated financial statements, independent auditor reports, critical audit matters, and an extensive index of exhibits - The section includes the Reports of Independent Registered Public Accounting Firm from BDO USA, P.C. (for FY2024) and Ernst & Young LLP (for FY2023 and FY2022), providing opinions on the consolidated financial statements[244][246][256] - BDO USA, P.C. also issued an adverse opinion on the company's internal control over financial reporting as of May 26, 2024[247][260] - Critical audit matters identified include revenue recognition for development services (due to management's estimates of labor hours) and the fair value of debt derivative liability, related party (due to management judgment in determining inputs for valuation)[251][253][254] - The consolidated financial statements presented include: Balance Sheets, Statements of Operations, Statements of Comprehensive Income (Loss), Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity, and Statements of Cash Flows for the years ended May 26, 2024, May 28, 2023, and May 29, 2022[244][269][272][274][277][279] - Detailed Notes to Consolidated Financial Statements (Notes 1 through 12) provide further information on organization, accounting policies, discontinued operations, debt, leases, income taxes, and subsequent events[244][282][490] - An Index of Exhibits lists various agreements, corporate documents, and certifications filed or incorporated by reference[244][491][492][494][495][496] Item 16. Form 10-K Summary No Form 10-K Summary is provided in this report - No Form 10-K Summary is provided[245] Signatures Summary of Signatures The Annual Report on Form 10-K was signed on August 26, 2024, by key executives and directors, with a Power of Attorney included - The Annual Report on Form 10-K was signed on August 26, 2024[497] - Key signatories include Paul Josephs (President and CEO) and John D. Morberg (EVP, CFO, and Secretary), along with other directors[497][498] - A Power of Attorney grants Paul Josephs and John D. Morberg authority to sign amendments to the report[497]