LIFECORE BIOMEDICAL, INC. DE 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (All dollar values are in thousands, unless otherwise noted) The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1, of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 26, 2024 (the “2024 Annual Report”). This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933, as amended, and the Exchange Act. Words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “should,” “can have,” “likely” and similar expressions are used to identify forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Potential risks and uncertainties include, without limitation, the timing and expenses associated with operations, the ability to achieve acceptance of new products in the marketplace, government regulations affecting our business, the timing of regulatory approvals, the impact of adverse and uncertain economic conditions in the U.S. and international markets, the mix between domestic and international sales, and those other risks mentioned in this report and the 2024 Annual Report. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Accordingly, our actual results could differ materially from those projected in the forward-looking statements for many reasons, including the risk factors listed in Item 1A. “Risk Factors” of this report and in the 2024 Annual Report. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this report, the 2024 Annual Report, and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of all risks and uncertainties described with respect to our business. We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company The Company is a fully integrated contract development and manufacturing organization (CDMO) that offers highly differentiated capabilities in the development, fill and finish of complex sterile injectable pharmaceutical products in syringes, vials, and cartridges under contract for product sponsors, along with producing premium, injectable grade sodium hyaluronate (HA) for use as an active pharmaceutical ingredient (API). Lifecore uses its experience in handling of viscous, complex products to be a technical leader in contract development services to create a manufacturable, scalable and compliant production process for many types of medicinal products. These services include activities such as formulation technology development, material component definition, analytical method development, filling optimization, packaging design, stability studies, process validation, clinical production and ultimately production of commercially approved products. The Company has more than 40 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market. Built over many years of experience, Lifecore separates itself from its competition based on its five areas of expertise, including but not limited to Lifecore’s ability to: Establish strategic relationships with market leaders Lifecore continues to develop and manufacture products with partners who have strong marketing, sales, and distribution capabilities, reaching the patients they serve. Through its strong reputation and history of providing pharmaceutical grade HA and products, Lifecore has established long-term relationships with global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories and leverages those partnerships to attract new relationships in other medical markets. -21- Table of Contents Expand medical applications for HA Due to the growing knowledge of the unique characteristics of HA and Lifecore’s unique strength and history as a trusted manufacturer of pharmaceutical injectable grade HA products, Lifecore continues to identify and pursue opportunities for the use of HA in other medical applications, such as wound care, aesthetic surgery, drug delivery, next generation orthopedics and device coatings, and through sales to academic and corporate research customers. Further applications may involve expanding process development activity and/or additional licensing of technology. Utilize manufacturing infrastructure to meet customer demand Lifecore has made strategic capital investments in its CDMO business focusing on extending its formulation and filling capacity and capabilities to meet increasing partner demand and regulatory expectations and to attract new contract filling opportunities. Maintain flexibility and speed in product development and supply relationships Lifecore’s vertically integrated development and manufacturing capabilities and strong Quality systems allow it to quickly move a product from development to commercial production. Lifecore’s role extends from supplying HA raw materials to providing technology transfer and development services to manufacture aseptically filled, finished sterile products, and assuming full supply chain responsibilities (from raw material management through packaging and serialization). Deliver consistent quality Lifecore has built a world class quality and regulatory system that is demonstrated in its results, processes and customer relationships. With over 38 years of a superior track record with global regulatory bodies (FDA, EMA, ANVISA, etc.), Lifecore is the partner of choice for companies looking for proven experience in delivering QbD, cGMP compliance, and manufacturing excellence with pharmaceutical elegance and quality. Lifecore’s world class quality and regulatory system and excellent track record with the global regulatory bodies ensure partners that they will safely bring innovative therapies to market. We are focused on driving profitable growth with new product development along with clinical and commercial manufacturing of sterile injectable products. Lifecore seeks to expand its presence in the CDMO marketplace by partnering with biopharmaceutical and biotechnology companies to bring their unique therapies to market. Lifecore’s goal of continuing success will be to execute on its three strategic priorities: 1) Managing Business Development Pipeline: Accelerate product development activities for virtual, small and large biopharmaceutical and biotechnology companies in various stages of the product lifecycle, spanning clinical development stage to commercialization, which aligns with the business’ overall product development strategy. 2) Maximizing Capacity: Meet customer demand by maximizing capacity in the syringe, vial and cartridge multi-purpose filler production line to significantly increase the number of products produced. 3) Advancing Product Commercialization: Continue to seek out opportunities to advance customers’ late-stage product development activities by supporting their clinical programs and commercial process scale-up activities. Reportable Segments The Company operates as one reportable segment. This is based on the objectives of the business and how our chief operating decision maker, the President and Chief Executive Officer, monitors operating performance and allocates resources. Related Party Transactions For a discussion of significant related party transactions, refer to Related Party Transactions within Note 1 to the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. Results of Operations — Three Months Ended November 24, 2024 Revenues and Gross Profit Lifecore generates revenues from two integrated activities: CDMO and HA manufacturing. Lifecore generates revenues from the development and manufacture of HA products and provides contract development and aseptic manufacturing services to customers. -22- Table of Contents Numerous factors can influence gross profit, including HA manufacturing product mix, customer mix, manufacturing costs, timing of production, volume, sales discounts, and charges for excess or obsolete inventory, among others. Many of these factors influence or are interrelated with other factors. The Company includes in cost of goods sold all of the following costs: raw materials (including packaging, syringes, fermentation supplies and purification supplies), direct labor, overhead (including indirect labor, depreciation, and facility-related costs), and shipping and shipping-related costs. Three Months Ended Change November 24, 2024 November 26, 2023 Amount % Revenues: CDMO $ 25,610 $ 23,678 $ 1,932 8 % HA manufacturing 6,954 6,472 482 7 % Total Revenues 32,564 30,150 2,414 8 % Cost of Goods Sold 21,480 20,193 1,287 6 % Gross Profit $ 11,084 $ 9,957 $ 1,127 11 % Gross Profit Percentage 34.0 % 33.0 % 1.0 % The increase in revenues was primarily due to a $1.9 million increase in CDMO revenues, which increase comprised $3.8 million of higher sales volume from our largest customer, partially offset by $1.9 million of lower sales volume from other CDMO customers. In addition, HA manufacturing revenues increased $0.5 million primarily from increased revenue from a customer due to timing, with increased shipments in the second quarter of 2025. The $1.1 million increase in gross profit is primarily due to a $1.6 million increase in CDMO gross profit as a result of price increases to certain customers partially offset by a $0.5 million decrease in HA manufacturing gross profit due to manufacturing variances. Operating Expenses Three Months Ended Change November 24, 2024 November 26, 2023 Amount % Research and development $ 1,924 $ 2,098 $ (174) (8) % Selling, general and administrative 11,119 9,342 1,777 19 % Total Operating Expenses $ 13,043 $ 11,440 $ 1,603 14 % Research and Development (“R&D”) R&D expenses consist primarily of product development and commercialization initiatives. R&D expenses are focused on new products and applications for HA-based and non-HA biomaterials. R&D expenses for the three months ended November 24, 2024 were consistent with the prior period. Selling, General, and Administrative (“SG&A”) SG&A expenses consist of salaries and related costs for administrative, public company and business development functions as well as legal fees, and consulting fees. Public company costs include compliance, audit, tax, insurance and investor relations. The increase in SG&A expenses was primarily due to increases in non-cash stock-based compensation expense of $1.8 million, the majority of which was related to new hire performance stock unit grants to our principal executive officers. -23- Table of Contents Non-Operating Income or Expense Three Months Ended Change November 24, 2024 November 26, 2023 Amount % Interest expense, net $ (5,465) $ (4,073) $ (1,392) 34 % Change in fair value of debt derivative liability, related party 1,200 20,700 (19,500) (94) % Other expense, net (304) (967) 663 (69) % Income tax (expense) benefit (43) 65 (108) (166) % Interest Expense, net The increase in interest expense, net was primarily a result of increased interest expense of $1.0 million related to the Alcon term loan debt, primarily related to amortization of the debt discount. There were also reductions in capitalized interest of $0.3 million as we consider alternative approaches to generating cash flows from a legacy asset that has not yet generated revenue. Change in fair value of debt derivative liability, related party The debt derivative liability, related party, is a set of embedded derivatives recorded at fair value each period. The derivatives represent certain call and put premiums contained in the credit facility that can be exercised upon qualifying events of default or changes in control. Changes in the fair value are recorded as non-operating income or expense. The change in the fair value of debt derivative liability, related party, in 2025 was primarily caused by the absence of significant changes recognized in 2024. Those changes were primarily due to changes in the probability factors related to the timing of a change in control event. Management moved back the estimated timing of that event following the conclusion of a strategic review process at the end of fiscal year 2024. Other Expense, net Other expense, net decreased $0.7 million primarily due to the end of the accumulation of monetary penalties to the preferred stockholders following the filing of late registration statements in October 2024. Income Tax Benefit or Expense The income tax benefit or expense primarily consists of current state income tax obligations and a schedule of net deferred federal tax attributes that are substantially offset by valuation allowances and net operating loss carryforwards. Changes in the income tax benefit or expense are driven by the mix of these various items and were not significant for the periods presented. Results of Operations — Six Months Ended November 24, 2024 Revenues and Gross Profit Lifecore generates revenues from two integrated activities: CDMO and HA manufacturing. Lifecore generates revenues from the development and manufacture of HA products and provides contract development and aseptic manufacturing services to customers. Numerous factors can influence gross profit, including HA manufacturing product mix, customer mix, manufacturing costs, timing of production, volume, sales discounts, and charges for excess or obsolete inventory, among others. Many of these factors influence or are interrelated with other factors. The Company includes in cost of goods sold all of the following costs: raw materials (including packaging, syringes, fermentation supplies and purification supplies), direct labor, overhead (including indirect labor, depreciation, and facility-related costs), and shipping and shipping-related costs. -24- Table of Contents Six Months Ended Change November 24, 2024 November 26, 2023 Amount % Revenues: CDMO $ 45,790 $ 45,217 $ 573 1 % HA manufacturing 11,479 9,455 2,024 21 % Total Revenues 57,269 54,672 2,597 5 % Cost of Goods Sold 40,798 41,987 (1,189) (3) % Gross Profit $ 16,471 $ 12,685 $ 3,786 30 % Gross Profit Percentage 28.8 % 23.2 % 5.6 % The increase in revenues was due to a $2.0 million increase in HA manufacturing revenues primarily due to higher sales volume from our largest customer and a $0.6 million increase in CDMO revenues, which increase comprised $3.3 million of higher sales volume from our largest customer, partially offset by a customer working down inventory levels built in the prior year period of $2.6 million. The $3.8 million improvement in gross profit is due to a $5.1 million increase in CDMO gross profit which reflected a $3.2 million increase due to price increases to certain customers and a $1.9 million increase due to a favorable sales mix, partially offset by a $1.0 million write-down on existing inventories to their net realizable value and a $0.3 million decrease in HA manufacturing gross profit due to manufacturing variances. Operating Expenses Six Months Ended Change November 24, 2024 November 26, 2023 Amount % Research and development $ 4,110 $ 4,244 $ (134) (3) % Selling, general and administrative 25,904 18,538 7,366 40 % Total Operating Expenses $ 30,014 $ 22,782 $ 7,232 32 % Research and Development (“R&D”) R&D expenses consist primarily of product development and commercialization initiatives. R&D expenses are focused on new products and applications for HA-based and non-HA biomaterials. R&D expenses for the six months ended November 24, 2024 were consistent with the prior period. Selling, General, and Administrative (“SG&A”) SG&A expenses consist of salaries and related costs for administrative, public company and business development functions as well as legal fees, and consulting fees. Public company costs include compliance, audit, tax, insurance and investor relations. The increase in SG&A expenses was primarily due to a $4.4 million increase in professional fees, including legal fees related to the civil litigation related to Yucatan Foods, and the stockholder activist settlement. Additionally, non-cash stock-based compensation expense increased by $2.7 million, the majority of which was related to new hire performance stock unit grants to our principal executive officers. -25- Table of Contents Non-Operating Income or Expense Six Months Ended Change November 24, 2024 November 26, 2023 Amount % Interest expense, net $ (10,833) $ (8,010) $ (2,823) 35 % Change in fair value of debt derivative liability, related party 2,100 20,900 (18,800) (90) % Other expense, net (507) (1,138) 631 (55) % Income tax expense (18) (23) 5 (22) % Interest Expense, net The increase in interest expense, net was primarily a result of increased interest expense of $1.9 million related to the Alcon term loan debt, primarily related to amortization of the debt discount. There were also reductions in capitalized interest of $0.6 million as we consider alternative approaches to generating cash flows from a legacy asset that has not yet generated revenue. Change in fair value of debt derivative liability, related party The debt derivative liability, related party, is a set of embedded derivatives recorded at fair value each period. The derivatives represent certain call and put premiums contained in the credit facility that can be exercised upon qualifying events of default or changes in control. Changes in the fair value are recorded as non-operating income or expense. The change in the fair value of debt derivative liability, related party, in 2025 was primarily caused by the absence of significant changes recognized in 2024. Those changes were primarily due to changes in the probability factors related to the timing of a change in control event. Management moved back the estimated timing of that event following the conclusion of a strategic review process at the end of fiscal year 2024. Other Expense, net Other expense, net decreased $0.6 million primarily due to the end of the accumulation of monetary penalties to the preferred stockholders following the filing of late registration statements in October 2024. Income Tax Benefit or Expense The income tax benefit or expense primarily consists of current state income tax obligations and a schedule of net deferred federal tax attributes that are substantially offset by valuation allowances and net operating loss carryforwards. Changes in the income tax benefit or expense are driven by the mix of these various items and were not significant for the periods presented. Liquidity and Capital Resources As of November 24, 2024, the Company had cash of $9.5 million and had approximately $20.9 million available for borrowing under the Revolving Credit Facility . Under the Revolving Credit Facility, the Company is subject to a springing fixed charge ratio covenant of 1.00:1.00 generally in the event that the Company's available liquidity under the Revolving Credit Facility falls below $2.5 million. On October 3, 2024, the Company sold 5.9 million shares of its common stock at $4.10 per share for gross proceeds of $24.3 million. Issuance costs of $0.5 million, primarily related to legal and audit fees, were netted against these proceeds. Also in October 2024, the Company received $2.4 million from the lessor of our second building in Chaska, MN related to a lease amendment incentive. As of November 24, 2024, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility. -26- Table of Contents The changes in cash for the six months ended November 24, 2024 and November 26, 2023, were attributed to the following: Six Months Ended November 24, 2024 November 26, 2023 Cash flows from operating activities: Net (loss) income $ (22,801) $ 3,464 Net loss reconciliation adjustments: Depreciation and amortization 4,037 3,934 Stock-based compensation 5,791 3,110 Non-cash interest expense 9,641 6,670 Change in debt derivative liability (2,100) (20,900) Changes in operating assets and liabilities (1,321) (1) (3,319) (2) Net cash used in operating activities (6,753) (7,041) Purchases of property, plant, and equipment (5,862) (9,315) Net cash used in investing activities (5,862) (9,315) Issuance of common stock, net of fees 23,841 — Proceeds from finance lease incentive 2,400 — Principal payments on debt and finance leases (11,659) (181) Impact of stock-based compensation plans (974) 667 Net cash provided by financing activities 13,608 486 Net increase (decrease) in cash and cash equivalents $ 993 $ (15,870) (1) The primary reason for this use of cash was a $1.6 million decrease in accrued compensation. (2) The primary reason for this use of cash is a $4.3 million decrease in accounts payable. Contractual Obligations The Company’s material contractual obligations for the next five years mainly relate to its debt and lease obligations. The Company’s future capital requirements will depend on numerous factors, including the progress of its research and development programs; the continued development of marketing, sales and distribution capabilities; the ability of the Company to establish and maintain new and existing licensing arrangements; the costs associated with any legal contingencies and employment-related claims; any decision to pursue acquisition opportunities; the timing and amount, if any, of payments received under licensing and research and development agreements; the costs involved in preparing, filing, prosecuting, defending, and enforcing intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of product commercialization activities and arrangements; and other factors. If the Company’s currently available funds, together with the internally generated cash flow from operations are not sufficient to satisfy its capital needs, the Company would be required to seek additional funding through other arrangements with collaborative partners, sale of real estate or other assets, additional debt or bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms, if at all. The Company believes that its cash from operations, potential equity offerings, sale of other assets, along with existing cash, and availability under its Revolving Credit Facility will be sufficient to finance its operational and capital requirements for at least the next twelve months. -27- Table of Contents Long-term Debt Refer to Note 10 – Long-term Debt and Note 17 – Subsequent Events to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the terms of the Company outstanding indebtedness, including the Term Loan Credit Facility and Revolving Credit Facility, which is incorporated herein by reference. As of November 24, 2024 and May 26, 2024, the Company had $165,274 and $157,313 in borrowings outstanding under the Term Loan Credit Facility, at an effective annual interest rate of 22.5% for both periods, which includes the amortization of the debt discount. The stated annual interest rate is 10%. As of November 24, 2024 and May 26, 2024, the Company had $8,500 and $19,691, respectively, in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of approximately 8% for both periods. Critical Accounting Estimates There have been no material changes to the Company’s critical accounting estimates from those disclosed in the Company’s 2024 Annual Report. For a discussion of our critical accounting estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates” in Part II, Item 7 of the Company’s 2024 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 305 of Regulation S-K is not required for Smaller Reporting Companies.