LFCR - NASDAQ

Good morning, and thank you for joining Lifecore's Fiscal 2025 First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Now, I'd like to turn the call over to Stephanie Diaz, Manager of Investor Relations for Lifecore.

Good morning, and thank you for joining us today to discuss Lifecore Biomedical's first quarter fiscal 2025 earnings results. Joining the call today from Lifecore are Paul Josephs, President and Chief Executive Officer; and Ryan Lake, Chief Financial Officer. Before we begin today, I'd like to remind everyone that certain statements made in the course of this conference call contain forward-looking statements. It is important to note that the forward-looking statements made during this call reflect management's judgment and analysis only as of today, October 4, 2024, and the company's actual results could differ materially from those projected in such forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with any forward-looking statements, please see the disclaimer regarding forward-looking statements that is included in our fiscal 2025 first quarter earnings release which was furnished to the SEC today on Form 8-K as well as our other filings with the Securities and Exchange Commission, including, but not limited to, the company's Form 10-Q for Q1 fiscal 2025, which was filed this morning. With that, I'd like to turn the call over to Paul Josephs, Chief Executive Officer.

Thank you, Stephanie. Good morning, everyone, and thank you for joining our fiscal 2025 first quarter update. I joined the Lifecore last spring with a commitment to position the company for long-term success. Today, I'm pleased to report that in my first 100 days, Lifecore has streamlined its operations, added talented new leaders, signed multiple new customers, regained compliance with Nasdaq's listing requirements and successfully raised funds. As a result of these achievements, I am even more confident that our company is now on a path to reaching its business potential and creating great value for our customers, employees, partners and shareholders. I will provide additional details on business development and operations for the period following an overview of our first quarter fiscal 2025 financial results. For that, I'll turn the call over to Ryan.

Thank you, Paul. Good morning, everyone. Before discussing our results, I'd like to say that I'm very pleased to be joining you today in my first earnings results call with Lifecore. My prior experience as a CFO in a public CDMO is highly relevant to the work here at Lifecore, and I'm excited to bring my skill set to the company. I am grateful to all of our stakeholders, including our employees, shareholders, debt holders, vendors and customers for the support they have shown me as I've come up to speed over the past month. I believe the company will have an exciting future, and I look forward to the many opportunities that lie ahead. I'll now provide an overview of Lifecore's first quarter results. Revenues for the quarter ended August 25, 2024, were $24.7 million compared to $24.5 million for the comparable 2023 period. The increase of $0.2 million was primarily driven by a $1.5 million increase in HA manufacturing revenues from our largest customer due to timing of shipments, partially offset by a $1.3 million decrease in CDMO revenues primarily as a result of one customer working down inventory levels built in the prior year period. Gross profit for the quarter ended August 25, 2024, was $5.4 million compared to $2.7 million for the comparable period of 2023. The increase of $2.7 million was primarily due to a favorable sales mix between customers and price increases to our customers within CDMO revenues. Selling, general and administrative expense for the first quarter of fiscal 2025 was $14.8 million compared to $9.2 million for the comparable prior year period. The increase of $5.6 million was primarily due to increases in professional fees of $4.7 million, consisting of $2.4 million in audit fees and legal fees of $2.3 million and non-cash stock-based compensation expense primarily due to the impact of performance stock unit grants of $0.9 million. Interest expense was $5.4 million for the three months ended August 25, 2024, an increase compared to $3.9 million for the comparable period of 2023. The increase of $1.4 million was primarily a result of increased interest expense primarily related to the amortization of the debt discount on the Alcon term loan debt facility along with a reduction in capitalized interest compared to the prior period. For the quarter ended August 25, 2024, the company recorded a net loss of $16.2 million or $0.53 per diluted share as compared to a net loss of $10.8 million or $0.35 per diluted share for the comparable period of 2023. EBITDA as adjusted for the period of negative $1.8 million was consistent with the negative $2 million in the prior year period. This morning, we were pleased to announce the successful closing of a $24.3 million pipe offering with various new and existing shareholders. This is a great sign of confidence and support of management by our shareholder base, our plan for value creation and the tremendous opportunity we have in this growing market. We believe this offering, along with other nondilutive actions, will address the company's near-term liquidity needs. We currently do not have plans to raise additional capital in the near term. Importantly, we believe that the financial stability created with this financing will allow management to focus on growing the business aggressively and without distraction. And one final note, as previously announced on September 12, we were pleased to announce that the company received written notice from the Nasdaq Listing Qualifications Department stating that the company has regained compliance with the filing and annual meeting requirements in the Nasdaq Listing Rules, and Nasdaq has ceased any action to delist the company's common stock. This concludes my financial overview. For those interested in reviewing our non-GAAP reconciliations, please refer to our 8-K filing or the press release issued today. I'll now turn the call back over to Paul for an update on operations and achievements during the period.

Thank you, Ryan. And let me just say welcome. As many of you know, Ryan joined our company the first week of September, and he's been in a full sprint since his first day. During this short time with us, he's recognized the need for capital, but he executed this initiative in record time, working hand in glove with our management team, our Board and our shareholders and achieving a very positive result. Welcome, Ryan. I couldn't be more excited to have you onboard and to partner with you going forward. As discussed last quarter, following a comprehensive evaluation of our company's facility and operations, we implemented a growth strategy based on three primary elements, maximizing our existing base business, advancing our development pipeline towards commercialization and aggressively pursuing new business. I'm pleased to report that during the first quarter, our operational and business development achievements supported each of these initiatives. I would like to first address operations. Subsequent to the quarter end, the company successfully completed the installation and qualification of its high-speed, multipurpose 5-head isolator filler. It is now GMP-ready. The new system positions our company to offer existing and future customers the speed and isolation benefits associated with the state-of-the-art closed system platform. With the addition of this 5-head isolator filler, which is designed for vials, cartridges and prefilled syringes, our company has more than doubled its prior capacity and significantly increased its maximum revenue-generating capacity up to $300 million annually. This new system further extends Lifecore's leadership position in the fill/finish of highly viscous and complex formulations. We have near-term plans to utilize this system to qualify existing commercial products to support planned future growth for existing customers. In addition, we believe this isolator filler creates an opportunity to win new previously nontargeted business opportunities, including fulfilling the needs of customers with less viscous, less complex protein, peptide and antibody products. We have already received significant interest from existing customers as well as new customers in accessing our state-of-the-art isolator filling system. Beyond their efforts to sell into this isolator filler, our business development team had a very solid first quarter. During the period, we signed agreements with four new customers, each of which who brings a new novel program to Lifecore. The highlight of these new business wins is our agreement with Lindy Biosciences, focusing on streamlining the formulation process for Lindy's innovation -- innovative microglassification technology and scaling it for commercial manufacturing for their partners. In addition, we continue to sign expansion agreements with our current development customers. These new and expanded projects span the range of our capabilities. We are pleased to continue to be the partner of choice for so many of our existing and new customers. Our project management team currently manages an impressive development portfolio of 25 different programs amongst a diverse group of customers. Ten of these programs are in late-stage development and have the potential to provide impactful commercial revenue if and when approved. As part of our growth strategy, the company is investing in both our business development infrastructure and our outreach. During the first quarter, we added two new sales representatives, who are expanding our reach into key pharma and biotech hubs in the United States. We also have plans to add at least one additional industry veteran to our business development team to provide additional resources to maximize the sizable opportunity in front of us. In addition, the company is increasing its participation in industry conferences and events. In September and October alone, our team has met with and will meet with prospective and existing customers at multiple industry conferences, including the Medical Aesthetic Injectable Summit in Spain; CPHI in Milan; PDA, the Parenteral Drug Association meeting in Phoenix; and PODD, Partnering Opportunities in Drug Delivery. Importantly, we will be leveraging our leadership position in the field of sterile injectables with Lifecore management presenting and sitting on panels at several of these meetings. We are pleased with the performance of our business development team during the quarter, and we look forward to additional success in the coming quarters. In closing, I believe the achievements of the first quarter demonstrate our early success in executing against our three-pronged growth strategy that I outlined previously. We continue to focus on providing best-in-class services and are responding to our current customers' needs while working closely with them on expansion projects to support their planned growth. I'm encouraged by activity and progression of our development portfolio. Through the signing of numerous agreements for the follow-on work, we are aggressively working with our customers to advance these programs towards commercialization. And finally, through multiple new customer wins during the period as well as the addition of our two new sales representatives, we continue to invest and expand our new business development efforts to secure our future pipeline. With this as a backdrop, we are reaffirming our guidance for fiscal 2025 for both revenue and adjusted EBITDA. Looking forward, we have established medium-term objectives, which target a range of double-digit revenue growth, improved adjusted EBITDA margins that are consistent with those of the most reputable peers in the injectable CDMO sector. Finally, I wish to invite you all to join us at Lifecore's upcoming virtual Investor Day to be held November 21 of this year. During the event, we plan to provide additional detail and color regarding our growing pipeline, projections for future revenue and adjusted EBITDA margins. We are excited to offer this expanded look into the company's operations and objectives, and we hope you all participate. This concludes our prepared remarks for today. Operator, you may now open the call for questions.

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Your line is now open.

Good morning and thanks for taking the questions. Maybe first up on some of the new wins. Obviously, congratulations on the efforts there. Obviously, you provided some details on the Lindy opportunity. I guess regarding that one, they -- and you noted this in your press release that they have recently signed a new contract. Is there an opportunity for you to kind of -- once you've proven that you can manufacture to their needs that you could expand into some of their partner base? And then secondly, could you provide a little bit of color on the other wins, maybe market size, the early stage, late stage? Any additional color on those would be helpful.

Please check your mute button.

Can you hear me now?

Yes, Matt, I can hear you. Paul and Ryan, please check your mute button. Ladies and gentlemen, please stand by. Your conference will resume momentarily. [Technical Difficulty] Matt Hewitt with Craig-Hallum Capital Group. Could you please proceed with your question again?

Absolutely. All right. Good morning, gentlemen. Thank you for taking the questions. Maybe congratulations on the wins here this past quarter. First off, on the Lindy, you provided a little bit of detail in the press release, but I'm just curious if you could expand on that a little bit. You noted that they had recently won a new contract themselves. Will there be an opportunity once you've gotten through the process development for you to kind of expand into their customer base? And then as a second part to that, if you could provide a little bit of color on the other three wins in the quarter, whether they're early stage, later stage, size of the company? Any additional color there would be helpful.

Sure, Matt. Sorry about that, too. The interruption brought to you by Verizon, just a little joke there. Certainly, as it relates to Lindy, we couldn't be more excited about that opportunity and to partner with them. I think it's just indicative of the technical strength of our technical talent here at Lifecore. It was a very competitive process, one in which they looked at a broad range of competitors and chose us not because of price but because of our technical capability. And it just validated one of the reasons I'm so excited to be part of the organization. With regard to the deal itself, it gives us the opportunity to scale Lindy's proprietary technology to commercial scale and then from there on out, partner with their licensees on the commercial manufacturing of their various programs. So that's how we see it playing out over a period of time. Obviously, as they're more successful signing on more and more partners like the global multinational pharmaceutical company that they announced in the past month, it will add to our development portfolio going forward. As it relates to the three other opportunities that we closed, those are all early stage, really specialty pharma, two of them being specialty pharma, one being a large multinational pharmaceutical company.

Got it. And then you noted obviously some puts and takes in the revenues this quarter. Regarding the CDMO customer, do you feel like they've gotten their inventories? Or do you have a sense of they've gotten their inventories in line and whether they'll be coming back here in Q2 or Q3?

As it relates to that, Matt, I think that, that will play itself out through the fiscal year. We've sort of factored that into our fiscal year plans and revenue projections. We anticipate that they will return to what I'll call normalized demand in FY '26.

Got it. Okay. One last one for me. Regarding -- you've added two new sales hires. It sounds like you're going to be adding one more. What is the size of that team now? And then once you've got this third person added, do you feel like you're in a good position? Thank you.

That will bring our entire -- our full sales force to four individuals, Matt, along with the Vice President of Sales and then we have marketing resources on top of that. We're prepared to add additional resources if required, but I feel good with a team of four.

Understood. Thank you.

[Operator Instructions] Our next question comes from the line of [indiscernible] with Stephens Inc. Your line is now open.

Good morning. This is Mac on for Jacob. Just a few quick ones. Ryan, good to hear from you again. Given it's been your first 30 days in the seat, I figured I'd tell you a question real quick. So where are you focusing your efforts in the near term and where do you see the opportunities to improve margins beyond what has already been announced over the past couple of months? And do you feel appropriately sized to support sustainable growth moving forward from here?

Yeah. Thanks, Mac, for the questions. And it’s nice to be talking to you as well. Please give Jacob my regards. I think, just in terms of my key areas of focus here, the first month that's been one on the team, primarily the finance team. It's also been on quite a few SEC filings that we've had come due over the past 30 days and then also capital financing kind of with the recent announcement with the capital raise as well. I think -- and this touches on Matt's question as well. But I think -- and this will get to kind of the EBITDA question that you have. But I think as we look at the revenue guidance for the year of $126.5 million to $130 million, we expect that to be split kind of in the low 40% range in the first half of the year. And we expect that to ramp, so in the mid-50% range in the back half of the year. And yeah, this is a tremendous workload and complexity our teams are managing. As the business evolves, there's supply chain juggling and timing of production runs, completion of those services and also kind of the complexity of trying to figure out the expectation of timing to sign some of the new top -- top new business opportunities that we have that are either outside the pipeline, on top of the pipeline and when we expect to be able to earn that backlog. So overall, we expect gross margins to be relatively consistent with the prior year in the low 30% range with some variability between quarter-to-quarter based on product mix and timing of shipments. And that split for the year will probably be about 30% of the overall gross profit in the first half versus 70% in the second half. And I think as we think about that over time, the majority of our costs are fixed. So once we absorb our fixed costs, we should be able to see leverage improvement as volumes increase. And then in terms of areas where we're looking to improve, overall for the year, we believe OpEx will be in a similar range as the prior year. SG&A expenses, in particular this year, include some expenses that we don't expect to recur on a normalized basis. And they're going to be heavier in the first half of the year primarily as a result of some increased professional fees. And then the cadence would be anticipated to be kind of split about 60% versus the back half of about 40% based on expected reductions and cost savings initiatives that we expect to be able to help improve the run rate. And we estimate kind of in the back half that we'll be able to take out kind of mid-single-digit millions out of the OpEx base. And overall, that will mean adjusted EBITDA because of those items that I mentioned, including kind of those increased professional fees, particularly in the first half of the year, we would expect adjusted EBITDA to be split in the 5% range for the first half of the year and 90% in the back half of the year. But I think there's a lot of opportunities for us to improve that as time goes on as look at our kind of medium-term guidance. And I would just note that we did put a deck out or a slide out in our investor deck as well kind of alluding to what those expectations are over the medium term and how we expect to be able to improve both the revenue CAGR as well as aspirations as it relates to our goal or targeted EBITDA margin range.

Great. Thanks for the color. I’ll leave it there.

Thank you. Our next question comes from the line of Michael Petusky with Barrington Research. Your line is now open.

Hi, good morning. So, Paul, I wanted to make sure that I was tracking with a comment you made in your prepared remarks. When you said -- I think you said 25 development programs, including 10 late stage. So the 10 late stage are not in addition to 25 other development programs, it's 25 total. Is that correct?

25 total, correct.

Okay. So I guess I want to understand. So I think when you guys reported in the spring, obviously, prior to you being in the chair, there was something like, I think, 33 development programs. You guys look like you've added four in this quarter, which to me -- the math would seem to leave 12 that either you guys shut down or that ended or can you just sort of speak to that gap if I'm doing the math right?

You're doing the math right, Mike. And so first of all, thank you for the question. Here's how I look at it, and I want to be very clear is that we have these 25 programs that we believe are active or we know are active, that we're working on towards commercialization with our partners. We do have another approaching 10 or so programs that are in some level of quiescent period that we've taken out of our forward-looking projections. So, to your point, yeah, whether it's a clinical stall or financing related, we've just sort of taken those out of our forward-looking projections. And the other piece I would add, there's a couple of programs that were in there that also were just HA-related. I will say no forward-looking commercial potential revenue, but it was just a single stage development program, sort of taking that out of our forward-looking projection as well.

Okay. And just real quickly to sort of finish it up. On the ones that you sort of described as a clinical stall, et cetera, et cetera, is it possible that some of those sort of revive or is it really we should sort of just essentially look at this as 25 programs, 10 late stage?

No. There is a potential for them to come back 100%. We've just taken them out at this point to be very clear with regard to our active pipeline.

Got you. All right. Excellent. And then, Ryan, I guess, obviously, congrats on the cap raise, gives you guys some room to sort of focus on growing this business. But I'm sure that people are still really super interested in cash flow. Looks like in terms of cash flow from ops slightly negative, free cash flow about negative $4 million. Would you expect that the just reported quarter would be sort of the low watermark in terms of cash flow generation? Or is there anything you can just sort of speak to in terms of cash flow cadence throughout the year? Thanks.

Thanks. So we are expected to burn cash in the first half of this fiscal year and then be cash neutral during the second half of the year as a result of the items I mentioned previously regarding cadence. We believe the equity raise that we just completed, along with other non-dilutive initiatives that we have ongoing, including cost savings initiatives will address the company's near-term liquidity needs and don't have any plans to raise additional capital in the near term.

Okay. Let me just make sure, and I just want to clarify, in terms of cash neutral in the second half, that includes the impact of CapEx, right? So we're talking about free cash neutral, not cash flow from ops neutral, correct?

That is the expectation, yes.

Okay. And would you expect somewhat of an improvement in terms of free cash -- understanding it will still be likely negative in the second quarter, would you expect some improvement in Q2 versus Q1?

I don't have that in front of me, but we are expecting to be negative in the first half versus the second half.

Okay. All right. Very good, guys. Thank you so much.

Thanks, Michael.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Paul Josephs for closing remarks.

Thank you so much. In closing, I wish to thank our investors who continue to support our growth strategy for the future. I wish to acknowledge our customers and collaborators who continue to entrust Lifecore as a partner -- as their partner of choice. And most importantly, I wish to extend my deepest gratitude to our incredibly hardworking and talented team for driving each of the successes at Lifecore. Your dedication is inspiring and no doubt we'll continue to elevate our organization in the industry. We have a bright future ahead of us. With the actions we've taken over the last 100 days as well as the recently announced achievements, I believe our company is positioned to achieve sustainable success in the future as a best-in-class CDMO. Thank you.