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, 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. 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. -31- Table of Contents 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. 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: 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. 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). -32- Table of Contents 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 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 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, 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. 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. -33- Table of Contents Three months ended Change February 23, 2025 February 25, 2024 Amount % Revenues: CDMO $ 20,789 $ 22,306 $ (1,517) (7) % HA manufacturing 14,365 13,398 967 7 % Total revenues 35,154 35,704 (550) (2) % Cost of goods sold 25,309 23,810 1,499 6 % Gross profit 9,845 11,894 (2,049) (17) % Gross profit percentage 28.0 % 33.3 % (5.3) % 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 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 % Research and development (“R&D”) R&D expenses consist primarily of product development and commercialization initiatives. 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”) 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. -34- Table of Contents 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 February 23, 2025 February 25, 2024 Amount % Interest expense, net $ (5,481) $ (4,289) $ (1,192) 28 % Change in fair value of debt derivative liability, related party (600) 21,000 (21,600) (103) % Other expense, net 333 (814) 1,147 (141) % Income tax (expense) benefit 8 (217) 225 (104) % Interest expense, net 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 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 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. -35- Table of Contents Other expense, net 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 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 — Nine months ended February 23, 2025 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, 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. 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. Nine months ended Change February 23, 2025 February 25, 2024 Amount % Revenues: CDMO $ 66,579 $ 67,522 $ (943) (1) % HA manufacturing 25,844 22,853 2,991 13 % Total revenues 92,423 90,375 2,048 2 % Cost of goods sold 66,107 65,797 310 — % Gross profit 26,316 24,578 1,738 7 % Gross profit percentage 28.5 % 27.2 % 1.3 % 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. -36- Table of Contents Operating expenses 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 % Research and development (“R&D”) R&D expenses consist primarily of product development and commercialization initiatives. 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”) 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 $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 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 $0.8 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. -37- Table of Contents Non-operating income or expense Nine months ended Change February 23, 2025 February 25, 2024 Amount % Interest expense, net $ (16,314) $ (12,300) $ (4,014) 33 % Change in fair value of debt derivative liability, related party 1,500 41,900 (40,400) (96) % Other expense, net (174) (1,950) 1,776 (91) % Income tax expense (10) (240) 230 (96) % Interest expense, net 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 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 $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 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 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. As of February 23, 2025, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility. -38- Table of Contents 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 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. Indebtedness 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 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% . -39- Table of Contents 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.