SEC Filing | Lifecore Biomedical

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lndc-20220828

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Quarter Ended August 28, 2022, or


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period for _________ to _________.

Commission file number: 000-27446

LIFECORE BIOMEDICAL, INC.

(Exact name of registrant as specified in its charter)


Delaware			94-3025618
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification Number)


3515 Lyman Boulevard
Chaska	Minnesota	55318
(Address of principal executive offices)		(Zip Code)

(952) 368-4300

(Registrant's telephone number, including area code)

LANDEC CORPORATION

2811 Airpark Drive

Santa Maria, California 93455

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.001 per share	LFCR	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☒

Emerging Growth Company

☐

Non Accelerated Filer

☐

Smaller Reporting Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of March 15, 2023, there were 30,319,208 shares of common stock outstanding.

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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (the “Amendment”) is being filed by Lifecore Biomedical, Inc. (f/k/a Landec Corporation) (the “Company”) to amend and restate its Quarterly Report on Form 10-Q for the quarter ended August 28, 2022 originally filed with the Securities and Exchange Commission (the “SEC”) on October 7, 2022 (the “Original 10-Q”, and, as amended by this Amendment, the “Quarterly Report”) to reflect the restatement of the Company’s unaudited consolidated financial statements as of and for the three months ended August 28, 2022 contained in the Original 10-Q (the “Restatement”).

In addition, the Company is including in this Amendment currently dated certifications from its Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, attached hereto as Exhibits 31.1 and 31.2 and Exhibits 32.1 and 32.2, respectively. The exhibits listed in Part IV-Item 15 “Exhibits and Financial Statement Schedules” are filed herewith in accordance with Rule 12b-15 of the Exchange Act.

This Amendment also includes the Company’s determination that, as of the date of the filing of this Amendment, the date the accompanying consolidated financial statements are being re-issued (the “Amended Filing Date”), the existence of certain conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year following the Amended Filing Date.

On November 14, 2022, the Company changed its name from “Landec Corporation” to “Lifecore Biomedical, Inc.” (the “Name Change”) Currently therewith, the Company also changed the name of its wholly owned subsidiary from “Lifecore Biomedical, Inc.” to “Lifecore Biomedical Operating Company, Inc.” Unless context otherwise requires, all references to “Landec Corporation” or “Landec” contained in the Quarterly Report refer to the Company, and all references to “Lifecore Biomedical, Inc.,” “Lifecore Biomedical,” or “Lifecore” refer to Lifecore Biomedical Operating Company, Inc. In connection with the Name Change, the Company’s common stock began trading under its new Nasdaq ticker symbol “LFCR” on November 15, 2022.

Background of Restatement

On January 31, 2023, the Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, after discussion with management, concluded that the Company’s previously issued (i) audited consolidated financial statements as of and for the year ended May 29, 2022 and (ii) unaudited consolidated financial statements as of and for the three months ended August 28, 2022 (collectively, the “Prior Financial Statements”) should no longer be relied upon and that the Company needed to restate the Prior Financial Statements. This determination resulted from the identification of errors in the Prior Financial Statements related to certain non-cash impairment charges related to the Company’s Curation Foods business contained in the Prior Financial Statements.

Restatement Overview

For a more detailed description of the financial impact of the Restatement, see Note 1 - Correction of Error in Previously Reported Interim Financial Statements (Unaudited), to the consolidated financial statements contained in this Quarterly Report on Form 10-Q/A.

Internal Controls Considerations

In connection with the Restatement described above, management has determined that there was a material weakness in the Company's design and operation of controls related to the assessment of recoverability and measurement of fair value of certain indefinite-lived and long-lived assets, as of May 29, 2022. This is in addition to the existing material weakness in the design and operation of controls related to the accounting for and classification of certain non-standard transactions, which included discontinued operations and restructuring costs, as of May 29, 2022. Due to the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K/A for the fiscal year ended May 29, 2022, our disclosure controls and procedures were not effective as of August 28, 2022. For a discussion of management’s considerations of the Company’s disclosures controls and procedures, internal controls over financial reporting, and material weakness identified, refer to “Controls and Procedures” in Part I, Item 4 of this Quarterly Report on Form 10-Q/A.

Pursuant to Rule 12b-15 promulgated under the Securities Act of 1934, as amended (the “Exchange Act”), this Amendment also contains new certifications by our principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

Going Concern

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In addition, in connection with the preparation of this Form 10-Q/A, the Company has evaluated its financial condition as of the Amended Filing Date. Based on this evaluation, the Company has determined that, as of the Amended Filing Date, the existence of certain conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year following the Amended Filing Date. The assessment of going concern is further discussed under “Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies, in Part I, Item 1.”, “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Going Concern” and “─ Liquidity and Capital Resources”, and “Part II, Item 1A. Risk Factors.”

Summary of Changes in this Quarterly Report on Form 10-Q/A

In connection with the restatement of the foregoing, the Company, in this Amendment:

1.restated the unaudited consolidated financial statements as of and for the three months ended August 28, 2022, in Note 1 Organization, Basis of Presentation, and Summary of Significant Accounting Policies, in Part I, Item 1 of this Quarterly Report on Form 10-Q/A;

2.updated its cautionary note about forward-looking statements in connection with statements regarding the Company’s ability to continue as a going concern;

3.added “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Going Concern” and updated “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” to reflect its determination as to its ability to continue as a going concern; and

4.updated its disclosures regarding its controls and procedures in Part I, Item 4. of this Quarterly Report on Form 10-Q/A.

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LIFECORE BIOMEDICAL, INC.

FORM 10-Q/A

For the Fiscal Quarter Ended August 28, 2022

INDEX


			Page




Part I.	Financial Information

Item 1.	Financial Statements

	a)	Consolidated Balance Sheets as of August 28, 2022 and May 29, 2022	1

	b)	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended August 28, 2022 and August 29, 2021	2

	c)	Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended August 28, 2022 and August 29, 2021	3

	d)	Consolidated Statements of Cash Flows for the Three Months Ended August 28, 2022 and August 29, 2021	4

	e)	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36

Item 4.	Controls and Procedures		36

Part II.	Other Information		38

Item 1.	Legal Proceedings		38

Item 1A.	Risk Factors		38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38

Item 3.	Defaults Upon Senior Securities		38

Item 4.	Mine Safety Disclosures		38

Item 5.	Other Information		38

Item 6.	Exhibits		39

	Signatures		40

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LIFECORE BIOMEDICAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)


	As restated
	August 28, 2022		May 29, 2022
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	4,222	$	1,643
Accounts receivable, less allowance for credit losses	40,934		48,172
Inventories	64,285		66,845
Prepaid expenses and other current assets	7,157		7,052

Total Current Assets	116,598		123,712


Property and equipment, net	117,551		118,531
Operating lease right-of-use assets	8,229		8,580
Goodwill	13,881		13,881
Trademarks/tradenames, net	8,700		8,700
Customer relationships, net	1,346		1,400
Other assets	2,793		3,002

Total Assets	$	269,098	$	277,806

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	16,366	$	15,802
Accrued compensation	6,373		9,238
Other accrued liabilities	7,832		7,647
Current portion of lease liabilities	5,021		5,026
Deferred revenue	803		919
Line of credit	44,000		40,000
Current portion of long-term debt, net	98,569		98,178

Total Current Liabilities	178,964		176,810

Long-term debt, net	—		—
Long-term lease liabilities	9,447		9,983
Deferred tax liability, net	124		126
Other non-current liabilities	199		190

Total Liabilities	188,734		187,109

Stockholders’ Equity:
Common stock, $0.001 par value; 50,000 shares authorized; 29,593 and 29,513 shares issued and outstanding at August 28, 2022 and May 29, 2022, respectively	30		30
Additional paid-in capital	168,070		167,352
Retained earnings (accumulated deficit)	(87,450)		(76,099)
Accumulated other comprehensive loss	(286)		(586)
Total Stockholders’ Equity	80,364		90,697
Total Liabilities and Stockholders’ Equity	$	269,098	$	277,806

See accompanying notes to the consolidated financial statements.

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LIFECORE BIOMEDICAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended
	As restated
	August 28, 2022		August 29, 2021
Product sales	$	43,355	$	41,632
Cost of product sales	37,103		31,197
Gross profit	6,252		10,435
Operating costs and expenses:
Research and development	2,048		1,873
Selling, general and administrative	10,661		9,470



Restructuring costs	1,047		1,834
Total operating costs and expenses	13,756		13,177
Operating loss	(7,504)		(2,742)

Interest income	15		27
Interest expense	(3,678)		(6,678)

Other income (expense), net	(180)		109
Net loss before tax	(11,347)		(9,284)
Income tax (expense) benefit	(4)		1,651
Net loss from continuing operations	(11,351)		(7,633)




Loss from discontinued operations, net of tax	—		(1,844)
Net loss	$	(11,351)	$	(9,477)

Basic net loss per share:
Loss from continuing operations	$	(0.38)	$	(0.26)
Loss from discontinued operations	—		(0.06)
Total basic net loss per share	$	(0.38)	$	(0.32)

Diluted net loss per share:
Loss from continuing operations	$	(0.38)	$	(0.26)
Loss from discontinued operations	—		(0.06)
Total diluted net loss per share	$	(0.38)	$	(0.32)

Shares used in per share computation:
Basic	29,577		29,424
Diluted	29,577		29,424

Other comprehensive income (loss), net of tax:
Net unrealized gain (losses) on interest rate swaps (net of tax effect of $(16) and $(90))	$	300	$	366
Other comprehensive income (loss), net of tax	300		366
Total comprehensive loss	$	(11,051)	$	(9,111)

See accompanying notes to the consolidated financial statements.

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LIFECORE BIOMEDICAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited) (In thousands)


Three Months Ended August 28, 2022
						As restated				As restated
				Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at May 29, 2022	29,513	$	30	$	167,352	$	(76,099)	$	(586)	$	90,697
Issuance of stock under stock plans, net of shares withheld	80	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(67)		—		—		(67)
Stock-based compensation	—	—		785		—		—		785
Net loss	—	—		—		(11,351)		—		(11,351)
Other comprehensive income, net of tax	—	—		—		—		300		300
Balance at August 28, 2022	29,593	$	30	$	168,070	$	(87,450)	$	(286)	$	80,364


Three Months Ended August 29, 2021
				Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at May 31, 2020	29,333	$	29	$	165,533	$	38,580	$	(1,358)	$	202,784
Issuance of stock under stock plans, net of shares withheld	129	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(428)		—		—		(428)
Stock-based compensation	—	—		620		—		—		620
Net loss	—	—		—		(9,477)		—		(9,477)
Other comprehensive income, net of tax	—	—		—		—		366		366
Balance at August 29, 2021	29,462	$	29	$	165,725	$	29,103	$	(992)	$	193,865

See accompanying notes to the consolidated financial statements.

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LIFECORE BIOMEDICAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended
	As restated
	August 28, 2022		August 29, 2021
Cash flows from operating activities:
Net loss	$	(11,351)	$	(9,477)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Depreciation, amortization of intangibles, debt costs and right-of-use assets	4,356		5,054
Gain on sale of BreatheWay	(2,108)		—
Stock-based compensation expense	785		620
Deferred taxes	(17)		(2,138)
Gain on disposal of property and equipment related to restructuring, net	—		(92)
Provision for expected credit losses	—		60
Net loss on disposal of property and equipment held and used	—		16



Other, net	(18)		(70)
Changes in current assets and current liabilities:
Accounts receivable, net	7,238		7,997
Inventory	2,560		248
Prepaid expenses and other current assets	(761)		(2,697)
Accounts payable	581		1,517
Accrued compensation	(2,865)		(3,131)
Other accrued liabilities	183		2,838
Deferred revenue	(116)		86
Net cash (used in) provided by operating activities	(1,533)		831

Cash flows from investing activities:
Proceeds from sale of BreatheWay, net	3,135		—

Purchases of property and equipment	(2,929)		(7,913)
Sale of Investment in non-public company	—		45,100

Proceeds from sales of property and equipment	—		1,082
Net cash provided by investing activities	206		38,269

Cash flows from financing activities:


Payments on long-term debt	(27)		(41,388)
Proceeds from lines of credit	4,000		8,000
Payments on lines of credit	—		(5,000)
Taxes paid by Company for employee stock plans	(67)		(428)
Payments for debt issuance costs	—		(132)

Net cash provided by (used in) financing activities	3,906		(38,948)
Net increase in cash and cash equivalents	2,579		152
Cash and cash equivalents, beginning of period	1,643		1,295
Cash and cash equivalents, end of period	$	4,222	$	1,447

Supplemental disclosure of non-cash investing and financing activities:
Purchases of property and equipment on trade vendor credit	$	2,243	$	1,994

See accompanying notes to the consolidated financial statements.

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LANDEC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies, As Restated

Organization

Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture, and sell differentiated products for food and biomaterials markets, and license technology applications to partners.

Landec’s biomedical company, Lifecore Biomedical, Inc. (“Lifecore”), is a fully integrated contract development and manufacturing organization (“CDMO”) that offers highly differentiated capabilities in the development, fill and finish of sterile, injectable-grade pharmaceutical products in syringes and vials. As a leading manufacturer of premium, injectable grade Hyaluronic Acid, Lifecore brings 37 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market. Lifecore recognizes revenue in two different product categories, CDMO and Fermentation.

Landec’s natural food company, Curation Foods, Inc. (“Curation Foods”), is focused on innovating and distributing plant-based foods with 100% clean ingredients to retail, club and foodservice channels throughout North America. Its products are sold in natural food, conventional grocery and mass retail stores, primarily in the United States and Canada. The company categorizes revenue in three categories: avocado products, olive oil and wine vinegars and technology, which reports revenues for BreatheWay patented supply chain solutions.

Eat Smart Sale and Discontinued Operations

On December 13, 2021 (the “Closing Date”), Landec and Curation Foods (together, the “Sellers”), and Taylor Farms Retail, Inc. (“Taylor Farms” and together with the Sellers, the “Parties”) completed the sale (the “Eat Smart Disposition”) of Curation Foods’ Eat Smart business, including its salad and cut vegetable businesses (the “Business”), pursuant to the terms of an asset purchase agreement executed by the Parties on December 13, 2021 (the “Asset Purchase Agreement”). Pursuant to the Asset Purchase Agreement, Taylor Farms acquired the Business for a purchase price of $73.5 million, subject to post-closing adjustments based upon negotiation of the net working capital balances at the Closing Date. As part of the Eat Smart Disposition, Taylor Farms acquired, among other assets and liabilities related to the Business, the manufacturing facility and warehouses (and corresponding equipment) located in Bowling Green, Ohio and Guadalupe, California, as well as inventory, accounts receivable, accounts payable, intellectual property and information related to the Business, and assumed certain liabilities and executory obligations under the Company’s and Curation Foods’ outstanding contracts related to the Business, in each case, subject to the terms of the Asset Purchase Agreement.

The accounting requirements for reporting the Eat Smart business as a discontinued operation were met when the Eat Smart Disposition was completed on the Closing Date. Accordingly, the consolidated financial statements and notes to the consolidated financial statements reflect the results of the Eat Smart business as a discontinued operation for the periods presented. Refer to Note 9 - Discontinued Operations for additional information.

Basis of Presentation

The accompanying unaudited consolidated financial statements of Landec have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company at August 28, 2022, and the results of operations and cash flows for all periods presented. Although Landec believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying financial data should be reviewed in conjunction

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with the audited financial statements and accompanying notes included in Landec's Annual Report on Form 10-K/A for the fiscal year ended May 29, 2022 (the “Annual Report”).

The Company’s fiscal year is the 52- or 53-week period that ends on the last Sunday of May with quarters within each year ending on the last Sunday of August, November, and February; however, in instances where the last Sunday would result in a quarter being 12-weeks in length, the Company’s policy is to extend that quarter to the following Sunday. A 14th week is included in the fiscal year every five or six years to realign the Company’s fiscal quarters with calendar quarters.

The results of operations for the three months ended August 28, 2022 are not necessarily indicative of the results that may be expected for an entire fiscal year because there is some seasonality in Curation Foods’ business and the order patterns of Lifecore’s customers which may lead to significant fluctuations in Landec’s quarterly results of operations.

Basis of Consolidation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with GAAP and include the accounts of Landec Corporation and its subsidiaries, Lifecore and Curation Foods. All material inter-company transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition; loss contingencies; sales returns and credit losses; recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived and indefinite lived assets (including intangible assets and goodwill), and inventory; and the valuation and recognition of stock-based compensation.

These estimates involve the consideration of complex factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve and are subject to change from period to period. The actual results may differ from management’s estimates.

Going Concern

As of May 29, 2022, the Company had cash and cash equivalents of $1.6 million and outstanding borrowings of $138.2 million, net of issuance costs, and as of November 27, 2022, the Company had cash and cash equivalents of $6.8 million and outstanding borrowings of $147.0 million, net of issuance costs. The Company continues to experience unfavorable market conditions leading to lower than projected sales proceeds from the disposition of its Curation Foods businesses.

The Company performed an assessment, which occurred on the date of the filing of this Form 10-Q/A, to determine whether there were conditions or events that, considered in the aggregate, raised substantial doubt about the Company’s ability to continue as a going concern within one year following the date the accompanying consolidated financial statements are being re-issued (the “Amended Filing Date”).

The Company’s ability to meet its liquidity needs for one year following the Amended Filing Date will largely depend on its ability to generate cash in the future. As of November 27, 2022, the Company incurred net losses of $23.8 million, and the Company’s ability to generate cash in the future is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. Based on the Company’s financial projections as of the Amended Filing Date, the Company does not believe that it will have adequate liquidity to meet its obligations for at least one year following the Amended Filing Date.

The Company further considered how these factors and uncertainties have and could impact its ability to meet the obligations specified in the New Credit Agreements with the Lenders (each as defined in Note 6 - Debt) for at least one year following the Amended Filing Date. As of the Amended Filing Date, the Company determined that it was not in compliance with the covenant under the New Credit Agreements requiring the timely filing of financial statements. In addition, the inclusion of a going concern explanatory paragraph in the auditor’s report issued by Ernst and Young LLP in connection with the restated audited financial statements for the year ended May 29, 2022 included in the Company’s Annual Report on Form 10-K/A also violates the covenants under the New Credit Agreements.

In addition, based on the Company’s current financial projections for the one-year period following the Amended Filing Date, the Company anticipates that it will not be in compliance with certain financial covenants under the New Credit

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Agreements during the one-year period following the Amended Filing Date, including the minimum fixed charge coverage ratio covenant for the fiscal quarters ending May 30, 2023 through November 30, 2023; the maximum leverage ratio covenant as of the fiscal quarters ending May 30, 2023 through November 30, 2023; the minimum liquidity covenant for each of the fiscal quarters ended as of February 26, 2023 through May 30, 2024; and the minimum Lifecore gross profit covenant for the fiscal quarters ending February 26, 2023 through August 30, 2023. Pursuant to the terms of the New Credit Agreements, as a result of the Company’s failure to comply with the covenants described above, the agents and the lenders under the New Credit Agreements are entitled to immediately cancel all unfunded commitments and to accelerate the maturity of all of the outstanding debt thereunder, at which time all such outstanding borrowings would become immediately due and payable by the Company. In addition, as a result of such defaults, under the New Credit Agreements, the Company will be subject to increased interest rates for any outstanding borrowings thereunder prior to repayment and, even if the agent and the lenders under the Refinance Revolver (as defined in Note 6 - Debt) do not exercise their rights to immediately accelerate all outstanding obligations, such lenders may refuse to fund additional borrowings thereunder, which the Company relies upon for short-term liquidity needs.

Although the Company is currently in default, as of the Amended Filing Date, the agents and the Lenders have not taken any action to accelerate the maturity of the debt under the New Credit Agreements, nor have the Lenders under the Refinance Revolver indicated that they intend to prevent the Company from incurring additional borrowings thereunder. In such an event, however, the Company does not currently have sufficient liquidity to fund payment of the amounts that would be due under the New Credit Agreements nor does management have projected future cash flows to repay these outstanding borrowings under the New Credit Agreements if such amounts were to become payable. The Company’s inability to raise additional capital on acceptable terms in the near future, whether for purposes of funding payments required under the New Credit Agreements or providing additional liquidity needed for its operations, could have a material adverse effect on its business, results of operations, liquidity and financial condition.

In response to these conditions, the Company is currently in negotiations with the Lenders to seek a forbearance and amendment agreement to remedy the Company’s current and anticipated noncompliance with its covenants under the New Credit Agreements. The Company also intends to conduct a review of its strategic alternatives, which may involve seeking additional or alternative financing or the sale of all or a portion the Company. These processes are ongoing, however, and there can be no assurances that they will result in the completion of any such amendment, transaction or other alternative that would alleviate such conditions under the New Credit Agreements or the circumstances that give rise to substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the Amended Filing Date.

Accordingly, the Company determined that it cannot be certain that the Company’s plans and initiatives would be effectively implemented within one year after the Amended Filing Date. Without giving effect to the Company’s plans and initiatives, it is unlikely that the Company will be able to generate sufficient cash flows to meet its required financial obligations, including its debt service and other obligations due to third parties within one year after the Amended Filing Date. The existence of these conditions and events raise substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the Amended Filing Date.

The accompanying unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for one year following the Amended Filing Date. As such, the accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

As a result, all outstanding borrowings under the New Credit Agreements are classified as short term on the Consolidated Balance Sheets as of August 28, 2022 and May 29, 2022.

Cash and Cash Equivalents

The Company records all highly liquid securities with three months or less from date of purchase to maturity as cash equivalents. Cash equivalents consist mainly of money market funds. The market value of cash equivalents approximates their historical cost given their short-term nature.

Reconciliation of Cash and Cash Equivalents as presented on the Statements of Cash Flows

The following table provides a reconciliation of cash and cash equivalents and cash and cash equivalents, discontinued operations within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:

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(In thousands)	August 28, 2022		May 29, 2022		August 29, 2021		May 30, 2021
Cash and cash equivalents	$	4,222	$	1,643	$	1,406	$	1,159
Cash and cash equivalents, discontinued operations	—		—		41		136


Cash and cash equivalents	$	4,222	$	1,643	$	1,447	$	1,295

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consist of the following:


(In thousands)	August 28, 2022		May 29, 2022
Finished goods	$	25,266	$	33,029
Raw materials	27,402		24,221
Work in progress	11,617		9,595
Total	$	64,285	$	66,845

If the cost of the inventories exceeds their net realizable value, provisions are recorded currently to reduce them to net realizable value. The Company also records a provision for slow moving and obsolete inventories based on the estimate of demand for its products.

Accounts Receivable, Sales Returns and Allowance for Credit Losses

The Company carries its accounts receivable at their face amounts less an allowance for estimated sales returns and credit losses. Sales return allowances are estimated based on historical sales return amounts.

The Company uses the loss rate method to estimate its expected credit losses on trade accounts receivable and contract assets. In order to estimate expected credit losses, the Company assessed recent historical experience, current economic conditions and any reasonable and supportable forecasts to identify risk characteristics that are shared within the financial asset. These risk characteristics are then used to bifurcate the loss rate method into risk pools. The risk pools were determined based on the industries in which the Company operates. Historical credit loss for each risk pool is then applied to the current period aging as presented in the identified risk pools to determine the needed reserve allowance. At times when there are no current economic conditions or forecasts that may affect future credit losses, the Company has determined that recent historical experience provides the best basis for estimating credit losses.

The information obtained from assessing historical experience, current economic conditions and reasonable and supportable forecasts were used to identify risk characteristics that can affect future credit loss experience. There were no significant risk characteristics identified in the review of historical experiences or in the review of estimates of current economic conditions and forecasts.

Estimating credit losses based on risk characteristics requires significant judgment by management. Significant judgments include, but are not limited to: assessing current economic conditions and the extent to which they are relevant to the existing characteristics of the Company’s financial assets, the estimated life of financial assets, and the level of reliance on historical experience in light of economic conditions. The Company will continually review and update, when necessary, its historical risk characteristics that are meaningful to estimating credit losses, any new risk characteristics that arise in the natural course of business, and the estimated life of its financial assets.

The changes in the Company’s allowance for sales returns and credit losses are summarized in the following table (in thousands):


	Balance at beginning of period		Provision (benefit) for expected credit losses		Write offs, net of recoveries		Balance at end of period
Three months ended August 29, 2021	$	85	$	—	$	—	$	85
Three months ended August 28, 2022	$	65	$	—	$	—	$	65

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Debt Issuance Costs

The Company records its line of credit debt issuance costs as an asset, and as such, $0.7 million and $1.7 million were recorded as Prepaid expenses and other current assets, and Other assets in the accompanying Consolidated Balance Sheets, respectively, as of August 28, 2022, and $0.7 million and $1.9 million, respectively, as of May 29, 2022. The Company records its term debt issuance costs as a contra-liability, and as such, $1.5 million and $3.6 million was recorded as Current portion of long-term debt, net, and Long-term debt, net in the accompanying Consolidated Balance Sheets, respectively, as of August 28, 2022 and $1.5 million and $4.0 million, respectively, as of May 29, 2022.

Financial Instruments

The Company’s financial instruments are primarily composed of commercial-term trade payables, debt instruments, and derivative instruments. For short-term instruments, the historical carrying amount approximates the fair value of the instrument. The fair value of long-term debt and lines of credit approximates their carrying value.

Cash Flow Hedges

The Company has entered into interest rate swap agreements to manage interest rate risk. These derivative instruments may offset a portion of the changes in interest expense. The Company designates these derivative instruments as cash flow hedges. The Company accounts for its derivative instruments as either an asset or a liability and carries them at fair value in Other assets or Other non-current liabilities. The accounting for changes in the fair value of the derivative instrument depends on the intended use of the derivative instrument and the resulting designation.

For derivative instruments that hedge the exposure to variability in expected future cash flows and are designated as cash flow hedges, the entire change in the fair value of the hedging instrument is recorded as a component of Accumulated other comprehensive loss (“AOCL”) in Stockholders’ Equity. Those amounts are subsequently reclassified to earnings in the same line item in the Consolidated Statements of Comprehensive (Loss) Income as impacted when the hedged item affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.

During the third quarter of fiscal year 2021, the Company discontinued its hedge accounting prospectively since it was determined that the derivatives are no longer highly effective in offsetting changes in the net investment. The derivatives continue to be carried at fair value in the accompanying Consolidated Balance Sheets with changes in their fair values from the date of discontinued hedge accounting recognized in current period earnings in Other income (expense), net in the Consolidated Statements of Comprehensive (Loss) Income. Amounts previously accumulated in AOCL during the period of effectiveness will continue to be realized over the remaining term of the underlying forecasted debt payments as a component of AOCL in Stockholders’ Equity.

Accumulated Other Comprehensive Loss

Comprehensive income (loss) consists of two components, net loss and Other comprehensive income (loss) (“OCI”). OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as a component of stockholders’ equity but are excluded from net loss. The Company’s OCI consists of net deferred gains and losses on its interest rate swap derivative instruments. The components of AOCL, net of tax, are as follows:


(In thousands)	AOCL
Balance as of May 29, 2022	$	(586)

Amounts reclassified from OCI	300
Other comprehensive income, net	$	300
Balance as of August 28, 2022	$	(286)

The Company expects to reclassify approximately $0.3 million into earnings in the next 12 months.

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Assets Held for Sale

In May 2021 the Board of Directors approved a plan to sell Curation Foods’ Rock Hill, South Carolina distribution facility. There was no impairment recorded in fiscal year 2021. The asset was sold on June 9, 2021 for gross proceeds of $1.1 million. A gain of $0.6 million was recorded upon the sale, which is included in loss from discontinued operations within the Consolidated Statements of Comprehensive (Loss) Income.

In May 2022 the Board of Directors approved a plan to sell the assets of Curation Foods’ BreatheWay packaging technology business. The $1.0 million carrying value of these assets ($0.9 million of inventory and $0.1 million net book value of property and equipment) are included in Prepaid expenses and other current assets on the Consolidated Balance Sheets as of May 29, 2022, and were classified as assets held for sale. There was no impairment recorded in fiscal year 2022. These assets were sold during the first quarter of fiscal year 2023 for net proceeds of $3.1 million. A gain of $2.1 million was recorded upon the sale, which is included in Selling, general and administrative within the Consolidated Statements of Comprehensive (Loss) Income.

Leases

Under Topic 842, the Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is a quoted rate based on the understanding of what the Company's credit rating would be. Certain agreements may contain the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset. The Company, when reasonably certain to exercise the option, considers these options in determining the measurement of the lease. The Company's lease agreements do not contain any material residual value guarantees.

The Company's lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. The Company combines fixed payments for non-lease components with lease payments and accounts for them together as a single lease component which increases the amount of lease assets and liabilities.

Payments under lease arrangements are primarily fixed; however, certain lease agreements contain variable payments, which are expensed as incurred and are not included in the operating lease assets and liabilities. These amounts primarily include payments affected by changes in price indices.

Intangible Assets

The Company’s intangible assets are comprised of customer relationships with a finite estimated useful life of 12 years, and trademarks/tradenames and goodwill with indefinite useful lives.

Fair Value Measurements

The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments and certain other items measured at fair value. The Company has elected the fair value option for its investment in a non-public company. The Company has not elected the fair value option for any of its other eligible financial assets or liabilities.

The accounting guidance established a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:

Level 1 – observable inputs such as quoted prices for identical instruments in active markets.

Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.

As of August 28, 2022 and May 29, 2022, the Company held certain assets and liabilities that are required or it elected to be measured at fair value on a recurring basis, including its interest rate swap contracts.

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The fair value of the Company’s interest rate swap contracts is determined based on model inputs that can be observed in a liquid market, including yield curves, and is categorized as a Level 2 fair value measurement and is included in Prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets.

As of May 29, 2022, related to the assets of Curation Foods’ BreatheWay packaging technology business, the Company had $1.0 million in Prepaid expenses and other current assets within the Consolidated Balance Sheet meeting the criteria of held for sale. These assets are recognized at the lower of cost or fair value less cost to sell using market approach. The fair value of these assets are classified as level 3 in the fair value hierarchy due to a mix of unobservable inputs utilized such as independent research in the market as well as actual quotes from market participants.

Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following table summarizes the fair value of the Company’s assets and liabilities that are measured at fair value on a recurring and nonrecurring basis (in thousands):


	Fair Value at August 28, 2022						Fair Value at May 29, 2022
Assets:	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets held for sale - nonrecurring	$	—	$	—	$	—	$	—	$	—	$	1,027
Current assets, discontinued operations
Assets held for sale - nonrecurring	—		86		—		—		—		—
Property & equipment, as restated	$	—	$	—	$	—	$	—	$	3,500	$	1,400
Customer relationships, as restated	$	—	$	—	$	—	$	—	$	—	$	4,000
Total assets	$	—	$	86	$	—	$	—	$	3,500	$	6,427

Revenue Recognition

The Company follows the five step, principles-based model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. Revenue, net of estimated allowances and returns, is recognized when or as the Company satisfies its performance obligations under a contract and control of the product is transferred to the customer.

Lifecore

Lifecore generates revenue from two integrated activities: CDMO and Fermentation. CDMO is comprised of aseptic and development services. Lifecore’s standard terms of sale are generally included in its contracts and purchase orders. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. Lifecore has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation. Lifecore’s standard payment terms with its customers generally range from 30 days to 60 days.

Aseptic

Lifecore provides aseptic formulation and filling of syringes and vials with precisely formulated medical grade HA and non-HA materials for injectable products used for medical purposes. In instances where our customers contract with us to aseptically fill syringes or vials with our HA, the goods are not distinct in the context of the contract. Lifecore recognizes revenue for these products at the point in time when legal title to the product is transferred to the customer, which is at the time that shipment is made or upon delivery of the product.

Development Services

Lifecore provides product development services to assist its customers in obtaining regulatory approval for the commercial sale of their drug product. These services include activities such as technology development, material component changes, analytical method development, formulation development, pilot studies, stability studies, process validation and production of materials for use within clinical studies. The Company’s customers benefit from the expertise of its scientists who have extensive experience performing such tasks.

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Each of the promised goods and services are not distinct in the context of the contract as the goods and services are highly interdependent and interrelated. The services described above are significantly affected by each other because Lifecore would not be able to fulfill its promise by transferring each of the goods or services independently.

Revenues generated from development services arrangements are recognized over time as Lifecore is creating an asset without an alternate use as it is unique to the customer. Furthermore, the Company has an enforceable right to payment for the performance completed to date for its costs incurred in satisfying the performance obligation plus a reasonable profit margin. For each of the development activities performed by Lifecore as described above, labor is the primary input (i.e., labor costs represent the majority of the costs incurred in the completion of the services). The Company determined that labor hours are the best measure of progress as it most accurately depicts the effort extended to satisfy the performance obligation over time.

Fermentation

Lifecore manufactures and sells pharmaceutical-grade sodium hyaluronate (“HA”) in bulk form to its customers. The HA produced is distinct as customers are able to utilize the product provided under HA supply contracts when they obtain control. Lifecore recognizes revenue for these products at the point in time when legal title to the product is transferred to the customer, which is at the time that shipment is made or upon delivery of the product to our customer.

Curation Foods

Curation Foods’ standard terms of sale, both prior to and following the Eat Smart Disposition, are generally included in its contracts and purchase orders. Revenue is recognized at the time shipment is made or upon delivery as control of the product is transferred to the customer. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. Curation Foods has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation. Curation Foods’ standard payment terms with its customers generally range from 30 days to 90 days. Certain customers may receive cash-based incentives (including: volume rebates, discounts, and promotions), which are accounted for as variable consideration to Curation Foods’ performance obligations. Curation Foods estimates these sales incentives based on the expected amount to be provided to its customers and reduces revenues recognized towards its performance obligations. The Company has not historically had and does not anticipate significant changes in its estimates for variable consideration.

The Company disaggregates its revenue by segment based on how it markets its products and services and reviews results of operations. The following tables disaggregate segment revenue by major product lines and services:


(In thousands)	Three Months Ended
Lifecore:	August 28, 2022		August 29, 2021
Contract development and manufacturing organization	$	18,247	$	17,789
Fermentation	5,456		4,163

Total	$	23,703	$	21,952


(In thousands)	Three Months Ended
Curation Foods:	August 28, 2022		August 29, 2021
Avocado products	$	17,093	$	16,962
Olive oil and wine vinegars	2,559		2,340
Technology	—		378
Total	$	19,652	$	19,680

Contract Assets and Liabilities

Contract assets primarily relate to the Company’s conditional right to consideration for work completed but not billed at the reporting date. The Company’s contract assets as of August 28, 2022 and May 29, 2022, were $12.8 million and $10.2 million, respectively.

Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company’s contract liabilities as of August 28, 2022 and May 29, 2022, were $0.8 million and $0.9 million, respectively.

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Revenue recognized during the three months ended August 28, 2022, that was included in the contract liability balance at the beginning of fiscal year 2023, was $0.3 million.

Shipping and Handling Costs

Amounts billed to third-party customers for shipping and handling are included as a component of revenues. Shipping and handling costs incurred are included as a component of cost of products sold and represent costs incurred to ship product from the processing facility or distribution center to the end consumer markets.

Legal Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings and claims.

The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least each fiscal quarter and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal fees are expensed in the period in which they are incurred.

Compliance Matters and Related Litigation

On December 1, 2018, the Company acquired all of the voting interests and substantially all of the assets of Yucatan Foods (the “Yucatan Acquisition”), which owns a guacamole manufacturing plant in Mexico called Procesadora Tanok, S de RL de C.V. (“Tanok”).

On October 21, 2019, the Company retained Latham & Watkins, LLP to conduct an internal investigation relating to potential environmental and Foreign Corrupt Practices Act (“FCPA”) compliance matters associated with regulatory permitting at the Tanok facility in Mexico. The Company subsequently disclosed to the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) the conduct under investigation, and these agencies have commenced an investigation. The Company has also disclosed the conduct under investigation to the Mexican Attorney General’s Office, which has commenced an investigation, and to Mexican regulatory agencies. The Company is cooperating in the government investigations and requests for information. The conduct at issue began prior to the Yucatan Acquisition, and the agreement for the Yucatan Acquisition provides the Company with certain indemnification rights that may allow the Company to recover the cost of a portion of the liabilities that have been and may be incurred by the Company in connection with these compliance matters. On September 2, 2020, one of the former owners of Yucatan filed a lawsuit against the Company in Los Angeles County Superior Court for breach of employment agreement, breach of contract, breach of holdback agreement, declaratory relief and accounting, and related claims. The Plaintiff seeks over $10 million in damages, including delivery of shares of his stock held in escrow for the indemnification claims described above. On November 3, 2020, the Company filed an answer and cross-complaint against the Plaintiff and other parties for fraud, indemnification, and other claims, and seeking no less than $80 million in damages.

At this stage, the ultimate outcome of these or any other investigations, legal actions, or potential claims that may arise from the matters under investigation is uncertain and the Company cannot reasonably predict the timing or outcomes, or estimate the amount of net loss after indemnification, or its effect, if any, on its financial statements. Separately, there are indemnification provisions in the purchase agreement that may allow the Company to recover costs for fraud or breach of the purchase agreement from the seller. Because recovery of amounts are contingent upon a legal settlement, no amounts have been recorded as recoverable costs for the three months ended August 28, 2022.

During the third quarter of fiscal year 2021 the Company reached a resolution with its insurance carrier that resulted in a recovery of $1.6 million which is recorded as a reduction of Selling, general and administrative in the Consolidated Statements of Operations for the fiscal year ended May 30, 2021. Absent further material developments in the investigation, the Company does not expect additional material recovery from the insurance carrier.

Correction of Error in Previously Reported Interim Financial Statements (Unaudited)

The Company is restating its previously issued unaudited consolidated financial statements as of and for the three months ended August 28, 2022 (“Prior Financial Statements”) as previously reported in our Quarterly Report on Form 10-Q and filed with the Securities and Exchange Commission on October 7, 2022 (the “Original Quarterly Report”).

The Company has assessed the materiality of these errors in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 99 (“SAB”), Materiality and SAB No. 108, Quantifying Financial Statement Misstatements, and has concluded that the errors are material to the financial statements and therefore the Prior Financial Statements should be

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restated. The Restatement did not impact or require corrections to the financial information related to the Lifecore segment in the Prior Financial Statements.

This restatement reflected in the tables below results from corrections by us related to:

(i) adjustments to the amounts of depreciation of property and equipment and amortization of long-lived assets related to Yucatan Foods, including its related tax effect; and

(ii) adjustments to the amounts of property and equipment, customer relationships and tradename resulting from the impairment of long-lived and indefinite-lived assets related to Yucatan Foods.

The effects of these errors on our previously reported unaudited consolidated balance sheet as presented in the Original Quarterly Report are as follows:


	As reported				As restated
(in thousands)	August 28, 2022		Adjustment		August 28, 2022
ASSETS
Property and equipment, net	$	129,024	$	(11,473)	$	117,551
Trademarks/tradenames, net	$	8,400	$	300	$	8,700
Customer relationships, net	$	6,875	$	(5,529)	$	1,346
Total Assets	$	285,800	$	(16,702)	$	269,098

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deferred tax liability, net	$	291	$	(167)	$	124
Total Liabilities	$	188,901	$	(167)	$	188,734
Accumulated deficit	$	(70,915)	$	(16,535)	$	(87,450)
Total Stockholders’ Equity	$	96,899	$	(16,535)	$	80,364
Total Liabilities and Stockholders’ Equity	$	285,800	$	(16,702)	$	269,098

The effects of this error on our previously reported interim consolidated statement of comprehensive (loss) income for the three-month period ended August 28, 2022 as presented in the Original Prior Quarterly Report are as follows:

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	Three Months Ended
	As reported				As restated
	August 28, 2022		Adjustment		August 28, 2022
Product sales	$	43,355	$	—	$	43,355
Cost of product sales	37,534		(431)		37,103
Gross profit	5,821		431		6,252
Operating costs and expenses:
Research and development	2,048		—		2,048
Selling, general and administrative	10,883		(222)		10,661



Restructuring costs	1,047		—		1,047
Total operating costs and expenses	13,978		(222)		13,756
Operating loss	(8,157)		653		(7,504)

Interest income	15		—		15
Interest expense	(3,678)		—		(3,678)

Other income (expense), net	(180)		—		(180)
Net loss before tax	(12,000)		653		(11,347)
Income tax (expense) benefit	(64)		60		(4)
Net loss from continuing operations	(12,064)		713		(11,351)




Loss from discontinued operations, net of tax	—		—		—
Net loss	$	(12,064)	$	713	$	(11,351)

Basic net loss per share:
Loss from continuing operations	$	(0.41)	$	0.03	$	(0.38)
Loss from discontinued operations	—		—		—
Total basic net loss per share	$	(0.41)	$	0.03	$	(0.38)

Diluted net loss per share:
Loss from continuing operations	$	(0.41)	$	0.03	$	(0.38)
Loss from discontinued operations	—		—		—
Total diluted net loss per share	$	(0.41)	$	0.03	$	(0.38)








Total comprehensive loss	$	(11,764)	$	713	$	(11,051)

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The effects of this error on our previously reported consolidated statement of changes in stockholders' equity for the year ended August 28, 2022 as presented in the Prior Quarterly Report are as follows:


	As reported		As reported		Adjustment		As restated		As restated
	Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity				Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
(In thousands)
Balance at May 29, 2022	$	(58,851)	$	107,945	$	(17,248)	$	(76,099)	$	90,697
Issuance of stock under stock plans, net of shares withheld	—		—		—		—		—
Taxes paid by Company for employee stock plans	—		(67)		—		—		(67)
Stock-based compensation	—		785		—		—		785
Net loss	(12,064)		(12,064)		713		(11,351)		(11,351)
Other comprehensive income, net of tax	—		300		—		—		300
Balance at August 28, 2022	$	(70,915)	$	96,899	$	(16,535)	$	(87,450)	$	80,364

The effects of this error on our previously reported consolidated statement of cash flows for the three-month period ended August 28, 2022 as presented in the Original Prior Quarterly Report are as follows:


	Three Months Ended
	As reported				As restated
(in thousands)	August 28, 2022		Adjustment		August 28, 2022
Cash flows from operating activities:
Net loss	$	(12,064)	$	713	$	(11,351)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization of intangibles, debt costs and right-of-use assets	$	5,009	$	(653)	$	4,356
Deferred taxes	$	43	$	(60)	$	(17)









Net cash (used in) provided by operating activities	$	(1,533)	$	—	$	(1,533)

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The effects of this error on our previously reported diluted earnings per share for the three-month period ended August 28, 2022 as presented in Note 4 - Diluted Earnings of the unaudited consolidated financial statements reported in the Original Prior Quarterly Report are as follows:


	Three Months Ended
	As reported				As restated
(in thousands, except per share amounts)	August 28, 2022		Adjustment		August 28, 2022
Numerator:
Net loss	$	(12,064)	$	713	$	(11,351)

Denominator:
Weighted average shares for basic and diluted net loss per share	29,577		—		29,577

Basic Diluted net loss per share	$	(0.41)	$	0.03	$	(0.38)

The effects of this error on our previously reported income taxes per share for the three-month period ended August 28, 2022 as presented in Note 5 - Income Taxes of the unaudited consolidated financial statements reported in the Original Prior Quarterly Report are as follows:


	Three Months Ended
	As reported						As restated
(in thousands, except effective tax rate)	August 28, 2022			Adjustment			August 28, 2022

Income tax (expense) benefit	$	0.1	million	$	(0.1)	million	$	4.0	thousand
Effective Tax Rate	0.5		%	(0.5)		%	—		%

The effects of this error on our previously reported operations by business segment for the three-month period ended August 28, 2022 as presented in Note 7 - Business Segment Reporting of the unaudited consolidated financial statements reported in the Original Prior Quarterly Report are as follows:


(In Thousands)	Lifecore		Curation Foods		Other		Total
Three Months Ended August 28, 2022
Depreciation and amortization, as reported	$	1,771	$	2,820	$	11	$	4,602
Adjustment	—		(653)		—		(653)
Depreciation and amortization, as restated	$	1,771	$	2,167	$	11	$	3,949

Net income (loss) from continuing operations, as reported	$	502	$	(3,374)	$	(9,192)	$	(12,064)
Adjustment	—		653		60		713
Net income (loss) from continuing operations, as restated	$	502	$	(2,721)	$	(9,132)	$	(11,351)

Gross Profit, as reported	$	6,101	$	(280)	$	—	$	5,821
Adjustment	—		431		—		431
Gross Profit, as restated	$	6,101	$	151	$	—	$	6,252

Income tax (benefit) expense, as reported	$	158	$	(1,065)	$	971	$	64
Adjustment	—		—		(60)		(60)
Income tax (benefit) expense, as restated	$	158	$	(1,065)	$	911	$	4

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2. Investment in Non-public Company

On February 15, 2011, Curation Foods entered into a share purchase agreement (the “Windset Purchase Agreement”) with Windset. Pursuant to the Windset Purchase Agreement, Curation Foods purchased from Windset 150,000 Senior A preferred shares for $15.0 million and 201 common shares for $201. On July 15, 2014, Curation Foods increased its investment in Windset by purchasing from the Newell Capital Corporation an additional 68 common shares and 51,211 junior preferred shares of Windset for $11.0 million. After this purchase, the Company’s common shares represented a 26.9% ownership interest in Windset. The Senior A preferred shares yielded a cash dividend of 7.5% annually. The dividend was payable within 90 days of each anniversary of the execution of the Windset Purchase Agreement. The non-voting junior preferred stock did not yield a dividend unless declared by the Board of Directors of Windset and no such dividend has been declared.

On June 1, 2021, the Company and Curation Foods entered into and closed a Share Purchase Agreement (the “Purchase Agreement”) with Newell Capital Corporation and Newell Brothers Investment 2 Corp., as Purchasers (the “Purchasers”) and Windset, pursuant to which Curation Foods sold all of its equity interests of Windset to the Purchasers in exchange for an aggregate purchase price of $45.1 million.

3. Stock-based Compensation and Stockholders' Equity

Stock-Based Compensation Activity

The estimated fair value for stock options, which determines the Company’s calculation of stock-based compensation expense, is based on the Black-Scholes option pricing model. Restricted stock units (“RSUs”) are valued at the closing market price of the Company’s common stock on the grant date. The Company uses the straight-line method to recognize the fair value of stock-based compensation arrangements.

During the three months ended August 28, 2022, the Company granted 725,000 options to purchase shares of common stock and awarded 255,000 RSUs.

As of August 28, 2022, the Company has reserved 3.6 million shares of common stock for future issuance under its current and former equity plans.

Stock-Based Compensation Expense

The Company’s stock-based awards include stock option grants and RSUs. The Company records compensation expense for stock-based awards issued to employees and directors in exchange for services provided based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods, generally the vesting period.

The following table summarizes stock-based compensation by income statement line item:


	Three Months Ended
(In thousands)	August 28, 2022		August 29, 2021
Continuing operations:
Cost of product sales	$	101	$	81
Research and development	90		49
Selling, general and administrative	594		534
Discontinued Operations:
Cost of product sales	—		(44)
Total stock-based compensation	$	785	$	620

As of August 28, 2022, there was $6.9 million of total unrecognized compensation expense related to unvested equity compensation awards granted under the Landec incentive stock plans. Total expense is expected to be recognized over the weighted-average period of 2.43 years for stock options and 2.24 years for RSUs.

Stock Repurchase Plan

On July 14, 2010, the Board of Directors of the Company approved the establishment of a stock repurchase plan which allows for the repurchase of up to $10.0 million of the Company’s common stock. The Company may still repurchase up to $3.8 million of the Company’s common stock under the Company’s stock repurchase plan. The Company may repurchase its

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common stock from time to time in open market purchases or in privately negotiated transactions. The timing and actual number of shares repurchased is at the discretion of management of the Company and will depend on a variety of factors, including stock price, corporate and regulatory requirements, market conditions, the relative attractiveness of other capital deployment opportunities and other corporate priorities. The stock repurchase program does not obligate Landec to acquire any amount of its common stock and the program may be modified, suspended or terminated at any time at the Company's discretion without prior notice. During the three months ended August 28, 2022 and August 29, 2021, the Company did not purchase any shares on the open market.

4. Diluted Earnings Per Share, As Restated

The following table sets forth the computation of diluted earnings per share:


	Three Months Ended
	As restated
(In thousands, except per share amounts)	August 28, 2022		August 29, 2021
Numerator:
Net loss	$	(11,351)	$	(9,477)
Denominator:
Weighted average shares for basic net loss per share	29,577		29,424
Effect of dilutive securities:
Stock options and restricted stock units	—		—
Weighted average shares for diluted net loss per share	29,577		29,424

Diluted net loss per share	$	(0.38)	$	(0.32)

Due to the Company’s net loss for the three months ended August 28, 2022 and August 29, 2021, the net loss per share includes only the weighted average shares outstanding and thus excludes RSUs and stock options, as such impact would be antidilutive. See Note 3 - Stock Based Compensation and Stockholders' Equity for more information on outstanding RSUs and stock options.

5. Income Taxes, As Restated

The provision for income taxes from continuing operations for the three months ended August 28, 2022 and August 29, 2021, was a benefit of $0.0 million, as restated, and a benefit of $1.7 million, respectively. The effective tax rate for the three months ended August 28, 2022 and August 29, 2021 was 0% and 18%, respectively. The effective tax rate for the three months ended August 28, 2022, was lower than the statutory federal income tax rate of 21% primarily due to the movement of the valuation allowance recorded against certain deferred tax assets, partially offset by the impact of federal and state research and development tax credits.

As of August 28, 2022 and May 29, 2022, the Company had unrecognized tax benefits of $1.1 million and $1.0 million, respectively. Included in the balance of unrecognized tax benefits as of August 28, 2022 and May 29, 2022, is $1.0 million and $0.9 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next twelve months.

The Company has elected to classify interest and penalties related to uncertain tax positions as a component of its provision for income taxes. The Company has accrued an insignificant amount of interest and penalties relating to the income tax on the unrecognized tax benefits as of August 28, 2022 and May 29, 2022.

Due to tax attribute carryforwards, the Company is subject to examination for tax years 2013 forward for U.S. tax purposes. The Company is also subject to examination in various state jurisdictions for tax years 2012 forward, none of which were significant.

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6. Debt

Long-term debt, net consists of the following:


(In thousands)	August 28, 2022		May 29, 2022
Term loan	$	103,712	$	103,712
Total principal amount of long-term debt	103,712		103,712
Less: unamortized debt issuance costs	(5,143)		(5,534)
Total long-term debt, net of unamortized debt issuance costs	98,569		98,178
Less: current portion of long-term debt, net	(98,569)		(98,178)
Long-term debt, net	$	—	$	—

On December 31, 2020, the Company refinanced its existing term loan and revolving credit facility by entering into two separate Credit Agreements (the "New Credit Agreements") with BMO and Goldman Sachs Specialty Lending Group, L.P. (“Goldman”) and Guggenheim Credit Services, LLC ("Guggenheim"), as lenders (collectively, the “Refinance Lenders”). Pursuant to the credit agreement related to the revolving credit facility, BMO has provided the Company, Curation Foods and Lifecore, as co-borrowers, with an up to $75.0 million revolving line of credit (the “Refinance Revolver”) and serves as administrative agent of the Refinance Revolver. Pursuant to the credit agreement related to the term loan, Goldman and Guggenheim have provided the Company, Curation Foods and Lifecore, as co-borrowers, with an up to $170.0 million term loan facility (split equally between Goldman and Guggenheim) (the “Refinance Term Loan”) and Goldman serves as administrative agent of the Refinance Term Loan. The Refinance Revolver and Refinance Term Loan are guaranteed, and secured by, substantially all of the Company’s and the Company's direct and indirect subsidiaries' assets.

The Refinance Term Loan matures on December 31, 2025. The Refinance Revolver matures on December 31, 2025 or, if the Refinance Term Loan remains outstanding on such date, ninety (90) days prior to the maturity date of the Refinance Term Loan (on October 2, 2025).

The Refinance Term Loan provides for principal payments by the Company of 5% per annum, payable quarterly in arrears in equal installments, commencing on March 30, 2023, with the remainder due at maturity.

Interest on the Refinance Revolver is based upon the Company’s average availability, at a per annum rate of either (i) LIBOR rate plus a spread of between 2.00% and 2.50% or (ii) base rate plus a spread of between 1.00% and 1.50%, plus a commitment fee, as applicable, of 0.375%. Interest on the Refinance Term Loan is at a per annum rate based on either (i) the base rate plus a spread of 7.50% or (ii) the LIBOR rate plus a spread of 8.50%. The Refinance Term Loan Credit Agreement also provides that in the event of a prepayment of any amount other than the scheduled installments within twelve months after the closing date, a penalty will be assessed equal to the aggregate amount of interest that would have otherwise been payable from date of prepayment event until twelve months after the closing date plus 3% of the amount prepaid.

The New Credit Agreements provide the Company the right to increase the revolver commitments under the Refinance Revolver, subject to the satisfaction of certain conditions (including consent from BMO), by obtaining additional commitments from either BMO or another lending institution at an amount of up to $15.0 million.

The New Credit Agreements contain customary financial covenants and events of default under which the obligations thereunder could be accelerated and/or the interest rate increased in specified circumstances.

In connection with the New Credit Agreements, the Company incurred debt issuance costs from the lender and third-parties of $10.3 million.

Concurrent with the close of the New Credit Agreements, the Company repaid all outstanding borrowings under the previous Credit Agreement, and terminated such previous Credit Agreement. In connection with the repayment of borrowings under such previous Credit Agreement, the Company recognized a loss in fiscal year 2021 of $1.1 million, as a result of the non-cash write-off of unamortized debt issuance costs related to the refinancing under the New Credit Agreements.

In April 2022 the Company amended the New Credit Agreements to make available again $20.0 million of term debt that had been previously repaid. In connection with this amendment, the Company incurred debt issuance costs from the lender of $0.7 million.

As of August 28, 2022, $44.0 million was outstanding on the Refinance Revolver, at an interest rate of 4.1%. As of August 28, 2022, the Refinance Term Loan had an interest rate of 10.1%. As of August 28, 2022, the Company was in

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compliance with all financial covenants and had no events of default under the New Credit Agreements. However, as of the Amended Filing Date, the Company was not in compliance with the covenants under the New Credit Agreements and therefore all outstanding amounts under these agreements, as amended (See Note. 10 Subsequent Events), have been reclassified as current.

Derivative Instruments

On November 1, 2016, the Company entered into an interest rate swap contract (the “2016 Swap”) with BMO at a notional amount of $50.0 million. The 2016 Swap had the effect of changing the Company’s previous term loan obligation from a variable interest rate to a fixed 30-day LIBOR rate of 1.22%. The 2016 Swap matured in September 2021.

On June 25, 2018, the Company entered into an interest rate swap contract (the “2018 Swap”) with BMO at a notional amount of $30.0 million. The 2018 Swap had the effect on the Company’s previous debt of converting the first $30.0 million of the total outstanding amount of the Company’s 30-day LIBOR borrowings from a variable interest rate to a fixed 30-day LIBOR rate of 2.74%. The 2018 Swap matured in September 2021.

On December 2, 2019, the Company entered into an interest rate swap contract (the "2019 Swap") with BMO at a notional amount of $110.0 million which decreases quarterly. The 2019 Swap had the effect on our previous debt of converting primarily all of the $110.0 million of the total outstanding amount of the Company's 30-day LIBOR borrowings from a variable interest rate to a fixed 30-day LIBOR rate of 1.53%. The 2019 Swap will mature in November 2022.

7. Business Segment Reporting, As Restated

The Company operates using three strategic reportable business segments, aligned with how the Chief Executive Officer, who is the chief operating decision maker (“CODM”), manages the business: the Lifecore segment, the Curation Foods segment, and the Other segment.

The Lifecore segment sells products utilizing hyaluronan, a naturally occurring polysaccharide that is widely distributed in the extracellular matrix of connective tissues in both animals and humans, and non-HA products for medical use primarily in the Ophthalmic, Orthopedic and other markets.

The Curation Foods business includes (i) three natural food brands, including O Olive Oil & Vinegar, Yucatan Foods, and Cabo Fresh, and (ii) BreatheWay® activities. The Curation Foods segment includes sales of BreatheWay packaging to partners for fruit and vegetable products, sales of olive oils and wine vinegars under the O brand, and sales of avocado products under the brands Yucatan Foods and Cabo Fresh. In December 2021, the Company completed the Eat Smart Disposition. As a result, the Company met the requirements of ASC 205-20 to report the results of the Eat Smart business as discontinued operations. The operating results for the Eat Smart business, in all periods presented, have been reclassified to discontinued operations and are no longer reported in the Curation Foods business segment. See Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies – Eat Smart Sale and Discontinued Operations for further discussion.

The Other segment includes corporate general and administrative expenses, non-Lifecore and non-Curation Foods interest expense, interest income, and income tax expenses. Corporate overhead is allocated between segments based on actual utilization and relative size.

All of the Company's assets are located within the United States of America except for its Yucatan production facility in Mexico.

The Company’s international sales by geography are based on the billing address of the customer and were as follows, excluding discontinued operations:


	Three Months Ended
(In millions)	August 28, 2022		August 29, 2021
Switzerland	$	4.0	$	3.4
Canada	3.7		3.5




All Other Countries	1.9		1.7

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Operations by business segment consisted of the following:


(In thousands)	Lifecore		Curation Foods		Other		Total
			As restated				As restated
Three Months Ended August 28, 2022
Net sales	$	23,703	$	19,652	$	—	$	43,355
Gross profit	6,101		151		—		6,252
Net (loss) income from continuing operations	502		(2,721)		(9,132)		(11,351)
Loss from discontinued operations, net of tax	—		—		—		—
Depreciation and amortization	1,771		2,167		11		3,949

Interest income	15		—		—		15
Interest expense	—		—		3,678		3,678
Income tax (benefit) expense	158		(1,065)		911		4
Corporate overhead allocation	1,038		334		(1,372)		—













Three Months Ended August 29, 2021
Net sales	$	21,952	$	19,680	$	—	$	41,632
Gross profit	5,764		4,671		—		10,435
Net (loss) income from continuing operations	580		(284)		(7,929)		(7,633)
Loss from discontinued operations, net of tax	—		(1,844)		—		(1,844)
Depreciation and amortization	1,547		881		26		2,454

Interest income	20		—		7		27
Interest expense	—		137		6,541		6,678
Income tax (benefit) expense	183		(218)		(1,616)		(1,651)
Corporate overhead allocation	1,137		1,471		(2,608)		—