What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-04-03 compared with 2025-01-02 · 72 added, 68 removed, 151 unchanged (48% of the section changed)

5 unchanged sentences

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.

Potential risks and uncertainties include, without limitation, the timing and expenses associated with operations, government regulations affecting our business, the timing of regulatory approvals, the Company’s ability to successfully enact its business strategies, including with respect to installation, capacity generation and its ability to attract demand for its services, its ability expand its relationship with its existing customers or attract new customers, the impact of inflation on the Company’s business and financial condition, indications of a change in the market cycles in the CDMO market;

changes in business conditions and general economic conditions both domestically and globally, including rising interest rates, fluctuation in foreign currency exchange rates, access to capital, and tariffs and global trade tensions, 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.

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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.

In May 2025, the United States Food and Drug Administration (“FDA”) completed a general drug product good manufacturing practices, or “GMP,” inspection of Lifecore Biomedical.

Lifecore has provided an initial response to the FDA’s Form 483 observations within the expected fifteen calendar day timeframe and anticipates receiving the FDA’s response and resolving the inspection findings during the fourth quarter of fiscal 2025.

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:

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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

For a discussion of significant related party transactions, refer to note 17 to the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Results of operations — Three months ended February 23, 2025

Revenues and gross profit

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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.

Numerous factors can influence gross profit, including HA manufacturing product mix, customer mix, manufacturing costs, timing of production, production yields, volume, sales discounts, and charges for excess or obsolete inventory, among others.

Many of these factors influence or are interrelated with other factors.

2 unchanged sentences

Three months ended Change

November 24, 2024 November 26, 2023 Amount %

CDMO $ 25,610 $ 23,678 $ 1,932 8 %

February 23, 2025 February 25, 2024 Amount %

$ 20,789 $ 22,306 $ (1,517) (7) %

HA manufacturing

14,365 13,398 967 7 %

Total revenues 35,154 35,704 (550) (2) %

2 unchanged sentences

Gross profit percentage 28.0 % 33.3 % (5.3) %

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.

The decrease in revenues was primarily due to a $1.5 million decrease in CDMO revenues, which included $1.7 million of lower sales volume from a customer termination and $1.5 million lower development revenue due to completion of discrete project life-cycles and timing of customer projects, partially offset by $1.1 million of value focused customer pricing initiatives and a $0.9 million contractual take-or-pay arrangement.

In addition, HA manufacturing revenues increased $1.0 million primarily from increased demand from a customer due to their supply chain initiatives.

The $2.0 million unfavorable gross profit is due to a $3.0 million decrease in CDMO gross profit which reflected a $2.5 million fluctuation on the adjustment of inventories to their net realizable value, primarily due to the absence of a favorable adjustment in the prior year due to an improvement in sales prices, and a $0.9 million decrease due to a customer termination resulting in write-off of inventory and equipment that was partially offset by $0.5 million due to an overall favorable sales mix that included a contractual take-or-pay arrangement, lower development revenue and pricing improvements.

There was also a $1.0 million increase in HA manufacturing gross profit due to increased volumes and manufacturing variances.

Operating expenses

Three months ended Change

November 24, 2024 November 26, 2023 Amount %

February 23, 2025 February 25, 2024 Amount %

Research and development $ 2,045 $ 2,170 $ (125) (6) %

Selling, general and administrative 10,093 9,848 245 2 %

Loss on sale or disposal of assets

6,851 — 6,851 n/m

Restructuring costs (115) 771 (886) (115) %

Total operating expenses $ 18,874 $ 12,789 $ 6,085 48 %

1 unchanged sentence

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.

The decrease in R&D expenses is primarily due to fewer headcount for the three months ended February 23, 2025 compared to the prior period.

Selling, general, and administrative (“SG&A”)

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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.

The increase in SG&A expenses was primarily due to $1.1 million increase in stock-based compensation, the majority of which was related to new hire performance stock unit grants to our principal executive officers and partially offset by $0.7 million of lower consulting expenses from finance and accounting consultants.

Also included in SG&A for the current period is $2.2 million primarily related to litigation expenses related to an activist investor matter and the securities class action lawsuit.

The prior period included $2.3 million primarily related to incremental audit and consulting fees related to the financial restatement and expenses related to the divestiture of Curation Foods.

Loss on sale or disposal of assets

The $6.9 million loss on sale or disposal of assets was primarily due to a $6.4 million loss on the sale of the not yet installed, high-speed, multi-purpose isolator-filler that was primarily related to the write-off of historically capitalized interest costs, as well as $0.5 million related to capital projects that were abandoned.

Restructuring costs

The $0.1 million net recovery in the current period includes $0.6 million following the favorable reversal of a historical lease obligation related to the Curation Foods business, for which we had recorded $0.7 million of expense in the prior period.

We anticipate recording an additional reversal of $2.5 million related to that lease obligation in the fourth quarter of fiscal 2025.

The $0.6 million favorable reversal was partially offset by $0.5 million of severance related to the transformation of the finance and accounting department.

Non-operating income or expense

Three months ended Change

November 24, 2024 November 26, 2023 Amount %

February 23, 2025 February 25, 2024 Amount %

Interest expense, net $ (5,481) $ (4,289) $ (1,192) 28 %

3 unchanged sentences

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.

The increase in interest expense, net was primarily a result of an increase of $0.9 million related to the growth in principal, net of unamortized discount, under the Alcon term loans due to interest paid-in-kind and amortization of the initial debt derivative value.

There was an additional net increase of $0.3 million primarily from a reduction in capitalized interest related to the idling, then sale, of the isolator-filler.

Change in fair value of debt derivative liability, related party

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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.

Those changes were primarily due to adjustments to 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.

Other expense, net decreased $1.1 million primarily due to the end of the accumulation of monetary penalties to the preferred stockholders following the filing of registration statements in October 2024.

Income tax benefit or expense

1 unchanged sentence

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

Results of operations — Nine months ended February 23, 2025

Revenues and gross profit

2 unchanged sentences

Lifecore generates revenues from the development and manufacture of HA products and provides contract development and aseptic manufacturing services to customers.

Many of these factors influence or are interrelated with other factors.

1 unchanged sentence

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.

Six Months Ended Change

November 24, 2024 November 26, 2023 Amount %

CDMO $ 45,790 $ 45,217 $ 573 1 %

Nine months ended Change

February 23, 2025 February 25, 2024 Amount %

$ 66,579 $ 67,522 $ (943) (1) %

HA manufacturing

25,844 22,853 2,991 13 %

Total revenues 92,423 90,375 2,048 2 %

2 unchanged sentences

Gross profit percentage 28.5 % 27.2 % 1.3 %

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.

The increase in revenues was due to a $3.0 million increase in HA manufacturing demand primarily due to our largest customer's supply chain initiatives.

The decline in CDMO revenues is primarily due to $2.7 million of reduced volumes primarily driven by a customer working down inventory levels built in the prior year period, $1.7 million of lower sales volume from a customer termination, and $1.7 million lower development revenue due to completion of discrete project life-cycles and timing of customer projects, partially offset by $5.0 million of value focused customer pricing initiatives and a $0.9 million contractual take-or-pay arrangement.

The $1.7 million improvement in gross profit is due to a $1.7 million increase in HA manufacturing gross profit due to increased volumes and manufacturing variances.

There were a combination of factors within CDMO gross profit that offset, including a $2.7 million fluctuation on the adjustment of inventories to their net realizable value, primarily due to the absence of a favorable adjustment in the prior year due to an improvement in sales prices, and a $0.9 million decrease due to a customer termination resulting in write-off of inventory and equipment which were negated by $3.6 million due to a favorable overall sales mix that included a contractual take-or-pay arrangement, lower development revenues and pricing improvements.

Operating expenses

Six Months Ended Change

November 24, 2024 November 26, 2023 Amount %

Nine months ended Change

February 23, 2025 February 25, 2024 Amount %

Research and development $ 6,155 $ 6,414 $ (259) (4) %

Selling, general and administrative 35,066 28,237 6,829 24 %

Loss on sale or disposal of assets

6,895 2 6,893 n/m

Restructuring costs 772 918 (146) (16) %

Total operating expenses $ 48,888 $ 35,571 $ 13,317 37 %

1 unchanged sentence

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.

The decrease in R&D expenses are primarily due to fewer headcount for the nine months ended February 23, 2025 compared to the prior period.

Selling, general, and administrative (“SG&A”)

1 unchanged sentence

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.

The increase in SG&A expenses was primarily due to a $3.8 million increase in stock-based compensation, the majority of which was related to new hire performance stock unit grants to our principal executive officers and a $0.5 million increase primarily related to consulting, legal and accounting fees.

Also included in SG&A for the current period is $9.5 million primarily related to various legacy legal matters related to the SEC subpoena, an activist investor and a securities class action claim, as well as costs associated with the financial restatement.

The prior period included $7.2 million primarily related to incremental audit and consulting fees related to the financial restatement and expenses related to strategic alternatives and the divestiture of Curation Foods.

Loss on sale or disposal of assets

Restructuring costs

The $0.8 million of expense for the current period includes $1.3 million of severance expense related to a first half reduction in force as well as the severance related to the transformation of the finance and accounting department in the third quarter.

These expenses were offset by a recovery of $0.6 million following the favorable reversal of a historical lease obligation related to the Curation Foods business for which we recorded $0.7 million of expense in the prior period.

We anticipate recording an additional reversal of $2.5 million related to that net lease obligation reversal in the fourth quarter of fiscal 2025.

Non-operating income or expense

Six Months Ended Change

November 24, 2024 November 26, 2023 Amount %

Nine months ended Change

February 23, 2025 February 25, 2024 Amount %

Interest expense, net $ (16,314) $ (12,300) $ (4,014) 33 %

3 unchanged sentences

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.

The increase in interest expense, net was primarily a result of an increase of $2.8 million related to the growth in principal, net of unamortized discount, of the Alcon term loans due to interest paid-in-kind and amortization of the initial debt derivative value.

There was an additional net increase of $1.2 million primarily from a reduction in capitalized interest related to the idling, then sale, of the isolator-filler.

Change in fair value of debt derivative liability, related party

6 unchanged sentences

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.

Other expense, net decreased $1.8 million primarily due to the end of the accumulation of monetary penalties to the preferred stockholders following the filing of registration statements in October 2024.

Income tax benefit or expense

2 unchanged sentences

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 .

As of February 23, 2025, the Company had cash of $5.4 million and had approximately $25.5 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 1:1 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.

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)

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.

As of February 23, 2025, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility.

Cash outflows of $3.0 million in the nine-month period of 2025 improved by $13.0 million compared to cash outflows of $16.0 million in the nine-month period of 2024 for the following reasons:

• Financing proceeds of $23.9 million from the issuance of common stock and $2.4 million from a lease amendment in the 2025 period, which we used to repay $17.2 million of borrowings under our revolving credit facility, exceeded the $5.0 million of financing proceeds from a customer deposit and borrowings under the revolving credit facility of $3.1 million received in the 2024 period;

• We received investing proceeds of $7.0 million from the sale of a non-operational isolator-filler, and we reduced capital spending by $4.4 million;

• Net working capital investments required $4.5 million less cash in 2025 compared to 2024, partially offset by a $1.6 million increase in earnings as adjusted for non-cash items.

Contractual obligations

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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.

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.

Refer to note 10 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the terms of outstanding indebtedness, including the Term Loan Credit Facility and Revolving Credit Facility, which is incorporated herein by reference.

As of February 23, 2025 the Company had $169,287 in borrowings outstanding under the Term Loan Credit Facility at an effective annual interest rate of 20.9%, 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.

As of February 23, 2025, the Company had $2,500 in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of 8.67% .

Critical accounting estimates

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis