# LIFECORE BIOMEDICAL, INC. \DE\ (LFCR) FY 2025 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LIFECORE BIOMEDICAL, INC. \DE\'s 10-K for fiscal year 2025.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1005286/000100528625000108/lfcr-20250525.htm
Accession: 0001005286-25-000108
Filing date: 2025-08-07
Report date: 2025-05-25
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LFCR/
All MD&A years: /company/LFCR/mda/
Previous year: /company/LFCR/mda/fy2024/ (FY 2024)

Item 7.    Management’s discussion and analysis of financial condition and results of operations

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The following discussion should be read in conjunction with the Company’s consolidated financial statements and notes contained in Part IV, Item 15 of this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Part I, Item 1A. Risk Factors” and “Cautionary Note About Forward-Looking Statements” contained in this Annual Report on Form 10-K.

Overview

Lifecore is a fully integrated CDMO that offers highly differentiated clinical and commercial capabilities in the development, cGMP manufacturing and aseptic filling of complex formulations and highly viscous sterile injectable pharmaceutical drug or medical device products in syringes, vials and cartridges, across a wide variety of modalities. We manufacture HA in bulk form as well as for use in formulated and filled syringes and vials for our customers’ injectable products used in treating a broad spectrum of medical conditions and procedures, including ophthalmic and orthopedic applications. We also offer product development service capabilities to our customers that include analytical method development and validation, formulation development, sterile filtration, process scale-up, pilot studies, stability studies, process validation and production of materials for clinical studies.

During fiscal year 2025, Lifecore continued to execute on the previously announced strategic initiatives to support higher performance as a CDMO. We have made significant improvements to our revenue generating capacity, financial position, management team, governance, financial reporting and stock exchange compliance, and business development efforts. In addition, we implemented various process improvements to ensure improved productivity and discipline in key areas of our business. Based on all of these improvements, together with our competitive advantages and our strategic plan described below, we believe that we are well-positioned for future growth.

For additional information, see “Part I, Item 1. Business” of this Annual Report on Form 10-K.

Financial overview

Lifecore generates revenues from two activities within a single, integrated segment: CDMO and HA manufacturing. CDMO includes aseptic formulation and filling of syringes, vials and cartridges for injectable products used for medical purposes and product development services to assist its customers in obtaining regulatory approval for the commercial sale of their device or drug product. HA manufacturing includes the production and sale of pharmaceutical-grade, non-animal-sourced HA using our proprietary, fermentation-based HA process in bulk form.

The following costs are included in cost of goods sold: 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.

Numerous factors can influence gross profit, including product mix, customer mix, manufacturing costs, timing of production, production yields, volume, sales discounts, contractual provisions, and charges for excess or obsolete inventory, among others. Many of these factors influence or are interrelated with other factors.

R&D expenses consist primarily of product development and commercialization initiatives.

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.

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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.

Results of operations – Fiscal year ended May 25, 2025 compared to year ended May 26, 2024

Revenues and gross profit

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The increase in revenues was due to a $7.1 million increase in HA manufacturing demand primarily due to our largest customer's supply chain initiatives. The HA manufacturing revenue increase was partially offset by the $6.5 million decline in CDMO revenues that is primarily due to $6.2 million lower development revenue due to completion of a discrete development project in the prior comparable period, timing of customer project lifecycles, $4.3 million of reduced volumes primarily driven by a customer working down inventory levels built in the prior fiscal year period, and $3.2 million of lower sales volume from a customer termination, partially offset by $5.4 million of value focused customer pricing initiatives and $1.8 million from a contractual take-or-pay arrangement recognized in fiscal year 2025.

The $1.6 million decrease in gross profit is due to a $5.9 million decrease in CDMO gross profit, partially offset by a net $4.3 million increase in HA manufacturing gross profit due to increased volumes and manufacturing variances. There were a combination of factors within CDMO gross profit including a $3.3 million fluctuation on the adjustment of inventories to their net realizable value primarily due to the absence of a favorable adjustment in the prior fiscal year due to an improvement in sales prices, a $2.1 million decrease due to a customer termination that also resulted in a write-off of inventory and equipment, and an otherwise consistent overall sales mix that included a contractual take-or-pay arrangement and pricing improvements that offset the margin on lower development revenues described above.

Operating expenses

[[GREPCENT_TABLE]]
[["","Year ended","","Change"],["(in thousands)","May 25, 2025","","May 26, 2024","","Amount","","%"],["Research and development","$","8,258","","","$","8,575","","","$","(317)","","","(4)","%"],["Selling, general and administrative","44,046","","","40,463","","","3,583","","","9","%"],["Loss on sale or disposal of assets, net of portion classified as cost of sales","6,986","","","\u2014","","","6,986","","","n/m"],["Restructuring (recovery) costs","(1,747)","","","1,656","","","(3,403)","","","(205)","%"],["Total operating expenses","$","57,543","","","$","50,694","","","$","6,849","","","14","%"]]
[[/GREPCENT_TABLE]]

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Research and development (“R&D”)

The decrease of $0.3 million in R&D expenses was primarily due to fewer headcount for the fiscal year ended May 25, 2025 compared to the prior period.

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

The increase of $3.6 million in SG&A expenses was primarily due to a $3.7 million increase in stock-based compensation, the majority of which was related to new hire performance stock unit grants to our executive officers. Also included in SG&A expenses for the current period is $11.6 million primarily related to legal expenses related to legacy matters including the SEC subpoena, an activist investor and a securities class action claim, as well as costs associated with the legacy financial restatement. The prior period included $10.2 million primarily related to incremental audit and consulting fees for the legacy financial restatement, expenses related to strategic alternatives and the divestiture of Curation Foods, and $1.7 million of other one-time costs associated with becoming a standalone CDMO.

Loss on sale or disposal of assets

The $7.0 million loss on sale or disposal of assets was primarily due to a $6.4 million loss on the sale of certain excess equipment that was primarily related to the write-off of historically capitalized interest costs, as well as $0.6 million related to capital projects that were abandoned.

Restructuring costs

The $1.7 million net recovery for the current fiscal year includes a recovery of $3.2 million following the favorable reversal of a historical lease obligation of the divested Curation Foods business, for which we recorded $1.0 million of expense in the prior fiscal year. The current fiscal year recovery was partially offset by $1.4 million of severance expense related to the transformation of the finance and accounting department.

Non-operating income or expense

[[GREPCENT_TABLE]]
[["","Year ended","","Change"],["(in thousands)","May 25, 2025","","May 26, 2024","","Amount","","%"],["Interest expense, net","$","(21,835)","","","$","(18,090)","","","$","(3,745)","","","21","%"],["Change in fair value of debt derivative liability, related party","409","","","39,500","","","(39,091)","","","(99)","%"],["Other expense, net","(3)","","","(3,052)","","","3,049","","","(100)","%"],["Income tax expense","(43)","","","(183)","","","140","","","(77)","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net

The increase in interest expense, net of interest income, was primarily from $3.8 million more interest related to the Alcon term loans, which will continue to grow due to accumulating interest paid-in-kind and amortization of the debt discount.

Change in fair value of debt derivative liability, related party

The change in the fair value of debt derivative liability, related party, in fiscal year 2025 was primarily caused by the absence of significant changes recognized in fiscal year 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.

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Other expense, net

The decrease of $3.0 million in other expense was primarily driven by a $2.7 million decrease compared to the prior fiscal year for monetary penalties associated with late filings accrued under the registration rights agreement with the preferred stockholders (see “Part IV, Item 15. Note 11 - Equity” elsewhere in this Annual Report on Form 10-K).

Income tax expense

Neither income tax expense nor its changes were material to the periods presented.

Liquidity and capital resources

As of May 25, 2025, the Company had cash of $8.3 million and, based on the borrowing base at May 25, 2025, the Company had approximately $27.3 million available for borrowing under the Revolving Credit Facility of the $40 million maximum committed amount. 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 May 25, 2025, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility. See “Part IV, Item 15. Note 10 - Debt” in this Annual Report on Form 10-K for a summary of the Term Loan Credit Facility and Revolving Credit Facility.

Cash outflows of $0.2 million during the fiscal year ended May 25, 2025 improved by $10.4 million compared to cash outflows of $10.6 million during the fiscal year ended May 26, 2024 for the following reasons:

•Financing proceeds, net, of $23.9 million from the issuance of common stock in October 2024 and $2.4 million from a lease amendment in the fiscal year 2025 period were used to repay a net $17.2 million of borrowings under our revolving credit facility, $0.9 million of other borrowings and $1.3 million related to employee stock plans, compared to $5.0 million of financing proceeds from a customer deposit and net borrowings under the revolving credit facility of $2.9 million received in the fiscal year 2024 period;

•We received investing proceeds of $7.0 million from the sale of excess equipment in January 2025, and we reduced capital spending by $5.0 million in fiscal year 2025 compared to fiscal year 2024;

•Net working capital investments required $1.0 million more cash in fiscal year 2025 compared to fiscal year 2024, partially offset by a $0.5 million increase in earnings as adjusted for non-cash items.

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Contractual and other cash 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 our future capital expenditure requirements; development, production and manufacturing activities; administrative requirements (including salaries, insurance expenses and legal compliance costs); ability to establish and maintain new and existing customer arrangements; the costs associated with any legal proceedings and claims; any decision to pursue acquisition opportunities; the timing and amount of amounts payable or payments owed under customer agreements; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of customers’ activities and arrangements; payment of the accrued and unpaid liquidation preference on shares of the Convertible Preferred Stock, if required; payments required under the Term Loan Credit Facility and Revolving Credit Facility; 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 various financing transactions or arrangements, including equity financing, debt financing, collaborations, strategic alliances or licensing arrangements, or other means. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms, if at all.

The Company’s principal sources of liquidity consist of its existing cash, cash generated by operations (if any), proceeds from the sale of certain excess equipment, and availability under its Revolving Credit Facility. The Company expects these sources will be sufficient to finance its current operational and capital requirements for at least the next twelve months.

There is no assurance that our cash, cash generated from operations, if any, and available borrowing under the Revolving Credit Facility will be sufficient to fund our anticipated capital needs and operating expenses, particularly if we do not generate revenues in the amounts currently anticipated or if our operating costs are greater than anticipated.

Indebtedness

Refer to “Part IV, Item 15. Note 10. – Debt” elsewhere in this Annual Report on Form 10-K 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 May 25, 2025 the Company had $173.5 million 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%, which is payable-in-kind until May 2026, following which interest is payable at a fixed rate of 3% per annum in cash with the remainder payable-in-kind. The obligations under the Term Loan Credit Facility mature on May 22, 2029. Interest paid-in-kind under the Term Loan Credit Facility in fiscal year 2025 was $16.3 million.

As of May 25, 2025, the Company had $2.5 million in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of 8.69%. The Company repaid those borrowings in June 2025 and this repayment was a condition to the Company being able to access any other borrowings under the Revolving Credit Facility. The obligations under the Revolving Credit Facility mature on November 26, 2027. Interest paid under the Revolving Credit Facility in fiscal year 2025 was $0.9 million.

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Critical accounting policies and estimates

This management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes.

We have determined that certain accounting policies and estimates are critical to the preparation of the financial statements. We have prepared the following additional disclosures to supplement our summary of significant accounting policies located in note 1 to the consolidated financial statements in “Part IV, Item 15” of this Annual Report on Form 10-K.

Valuation of debt derivative liability

The Company reported a fair value of its debt derivative liability of $25.0 million, and recorded income from changes in the fair value of its debt derivative liability of $0.4 million and $39.5 million for the fiscal years ended May 25, 2025 and May 26, 2024, respectively.

The debt derivative liability represents the fair value of various features in the Term Loan Credit Agreement that require bifurcation and accounting as a derivative instrument. Its fair value is estimated using a discounted cash flow method that includes annually weighted probabilities that certain call and put premiums are exercised upon qualifying events of default or changes in control. Management makes key judgments and estimates that are input into the valuation model, the most sensitive of which is the probability and timing of a change in control event occurring over the remaining term of the debt. Changes in these assumptions could result in a significant increase to our liabilities and expenses. For example, if all other assumptions were held equal, a one year acceleration of the most likely date of a change in control would have increased the fair value of the debt derivative liability and increased our net loss by $3.2 million for the year ended May 25, 2025.

Revenue recognition for development services

The Company recognized revenues for development services of $23.2 million and $29.4 million for the fiscal years ended May 25, 2025 and May 26, 2024, respectively. Revenue for these services is recognized over time based on highly subjective measures of progress. To measure progress, management uses a proportion of labor hours incurred compared to the total estimated hours at the individual development project level.

Individual development projects can be unique, complex and/or novel. Determining the total estimated hours to complete any given project is highly subjective, and so the total amount of development revenue recognized by the Company is sensitive to changes in those hours. To mitigate the risk of such changes, management utilizes several data points to estimate total project hours, including project quotations and periodic status updates from project managers. If total project hours were underestimated by 10% on $10 million of development projects that were halfway complete at the end of the year, we would overstate development revenue by $0.5 million.

Qualitative impairment reviews of goodwill and other indefinite-lived intangible assets

The Company reported goodwill of $13.9 million and indefinite-lived intangible assets of $4.2 million as of May 25, 2025. We are required to review these assets on an annual basis to determine whether impairment may exist. The impairment analysis consists of an optional qualitative assessment potentially followed by a quantitative analysis. If we determine that the carrying value of these assets exceeds their fair value, an impairment charge is recorded for the excess.

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The critical judgments involved in our annual qualitative testing include an assessment of unfavorable events, an analysis of prior year valuation assumptions and their sensitivity to change, and in the case of goodwill, a comparison of its carrying value against its fair value based on our market capitalization, derived from quoted stock prices, and balance sheet carrying values. We make judgments about whether any of that information puts our goodwill or other indefinite-lived intangible assets at enough risk of impairment to warrant the performance of more rigorous quantitative testing.

In fiscal year 2025, the Company’s qualitative assessment indicated a minimal risk of impairment. For example, with respect to our qualitative testing of goodwill, even a 50% decrease in our quoted stock price would not have caused the carrying value of our goodwill to exceed its fair value. We observed a similar amount of sensitivity to changes in assumptions for our indefinite-lived intangible assets.