SEC Filing | Lifecore Biomedical

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Fiscal Quarter Ended November 27, 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.

Table of Contents

LIFECORE BIOMEDICAL, INC

FORM 10-Q

For the Fiscal Quarter Ended November 27, 2022

INDEX


			Page




Part I.	Financial Information

Item 1.	Financial Statements

	a)	Consolidated Balance Sheets as of November 2 7 , 2022 and May 29, 2022	1

	b)	Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended November 27 , 2022 and November 28 , 2021	2

	c)	Consolidated Statement of Changes in Stockholders’ Equity for the Three and Six Months Ended November 27, 2022 and November 28, 2021	3

	d)	Consolidated Statements of Cash Flows for the Six Months Ended November 27, 2022 and November 28, 2021	4

	e)	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33

Item 4.	Controls and Procedures		33

Part II.	Other Information		35

Item 1.	Legal Proceedings		35

Item 1A.	Risk Factors		35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3.	Defaults Upon Senior Securities		37

Item 4.	Mine Safety Disclosures		37

Item 5.	Other Information		37

Item 6.	Exhibits		38

	Signatures		39

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LIFECORE BIOMEDICAL, INC

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)


	November 27, 2022		May 29, 2022
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	6,830	$	1,643
Accounts receivable, less allowance for credit losses	35,689		48,172
Inventories	77,524		66,845
Prepaid expenses and other current assets	7,049		7,052

Total Current Assets	127,092		123,712


Property and equipment, net	118,852		118,531
Operating lease right-of-use assets	7,951		8,580
Goodwill	13,881		13,881
Trademarks/tradenames, net	7,400		8,700
Customer relationships, net	1,292		1,400
Other assets	2,605		3,002

Total Assets	$	279,073	$	277,806

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	27,971	$	15,802
Accrued compensation	4,602		9,238
Other accrued liabilities	10,426		7,647
Current portion of lease liabilities	5,013		5,026
Deferred revenue	731		919
Line of credit	48,000		40,000
Current portion of long-term debt, net	98,953		98,178

Total Current Liabilities	195,696		176,810

Long-term debt, net	—		—
Long-term lease liabilities	8,999		9,983
Deferred taxes, net	10		126
Other non-current liabilities	201		190

Total Liabilities	204,906		187,109

Stockholders’ Equity:
Common stock, $0.001 par value; 50,000 shares authorized; 30,297 and 29,513 shares issued and outstanding at November 27, 2022 and May 29, 2022, respectively	30		30
Additional paid-in capital	174,036		167,352
Retained earnings (accumulated deficit)	(99,899)		(76,099)
Accumulated other comprehensive loss	—		(586)
Total Stockholders’ Equity	74,167		90,697
Total Liabilities and Stockholders’ Equity	$	279,073	$	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				Six Months Ended
	November 27, 2022		November 28, 2021		November 27, 2022		November 28, 2021
Product sales	$	38,802	$	43,452	$	82,157	$	85,084
Cost of product sales	31,694		28,737		68,797		59,934
Gross profit	7,108		14,715		13,360		25,150
Operating costs and expenses:
Research and development	2,118		1,856		4,166		3,729
Selling, general and administrative	10,773		8,012		21,435		17,482
Impairment of indefinite-lived intangible assets	1,300		—		1,300		—


Restructuring costs	823		707		1,870		2,541
Total operating costs and expenses	15,014		10,575		28,771		23,752
Operating (loss) income	(7,906)		4,140		(15,411)		1,398

Interest income	16		19		31		46
Interest expense	(4,219)		(3,094)		(7,897)		(9,772)

Other income (expense), net	(336)		79		(515)		188
Net (loss) income before tax	(12,445)		1,144		(23,792)		(8,140)
Income tax (expense) benefit	(4)		3,085		(8)		4,736
Net (loss) income from continuing operations	(12,449)		4,229		(23,800)		(3,404)

Discontinued operations:
Loss from discontinued operations	$	—	$	(42,409)	$	—	$	(44,714)
Income tax (expense) benefit	—		(261)		—		200
Loss from discontinued operations, net of tax	—		(42,670)		—		(44,514)
Net loss	$	(12,449)	$	(38,441)	$	(23,800)	$	(47,918)

Basic net loss per share:
(Loss) income from continuing operations	$	(0.42)	$	0.14	$	(0.80)	$	(0.12)
Loss from discontinued operations	—		(1.45)		—		(1.51)
Total basic net loss per share	$	(0.42)	$	(1.30)	$	(0.80)	$	(1.63)

Diluted net loss per share:
(Loss) income from continuing operations	$	(0.42)	$	0.14	$	(0.80)	$	(0.12)
Loss from discontinued operations	—		(1.45)		—		(1.51)
Total diluted net loss per share	$	(0.42)	$	(1.30)	$	(0.80)	$	(1.63)

Shares used in per share computation:
Basic	29,634		29,471		29,605		29,448
Diluted	29,634		29,471		29,605		29,448

Other comprehensive income, net of tax:
Net unrealized gain on interest rate swaps (net of tax effect of $0, $(100), $(16) and $(190))	$	286	$	176	$	586	$	542
Other comprehensive income, net of tax	286		176		586		542
Total comprehensive loss	$	(12,163)	$	(38,265)	$	(23,214)	$	(47,376)

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 and Six Months Ended November 27, 2022
				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
Issuance of stock under stock plans, net of shares withheld	76									—
Taxes paid by Company for employee stock plans				(142)						(142)
Stock-based compensation				1,108						1,108
Net loss						(12,449)				(12,449)
Other comprehensive income, net of tax								286		286
Issuance of shares to Wynnefield Capital, Inc.	628	—		5,000		—		—		5,000
Balance at November 27, 2022	30,297	$	30	$	174,036	$	(99,899)	$	—	$	74,167


Three and Six Months Ended November 28, 2021
				Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Common Stock
	Shares	Amount

Balance at May 30, 2021	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
Issuance of stock under stock plans, net of shares withheld	19	—		—		—		—		—
Taxes paid by Company for employee stock plans	—	—		(84)		—		—		(84)
Stock-based compensation	—	—		686		—		—		686
Net loss	—	—		—		(38,441)		—		(38,441)
Other comprehensive income, net of tax	—	—		—		—		176		176
Balance at November 28, 2021	29,481	$	29	$	166,327	$	(9,338)	$	(816)	$	156,202

See accompanying notes to the consolidated financial statements.

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LIFECORE BIOMEDICAL, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended
	November 27, 2022		November 28, 2021
Cash flows from operating activities:
Net loss	$	(23,800)	$	(47,918)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of indefinite-lived intangible assets and goodwill	1,300		32,057
Depreciation, amortization of intangibles, debt costs and right-of-use assets	7,237		10,959
Gain on sale of BreatheWay	(2,108)		—
Stock-based compensation expense	1,893		1,306
Deferred taxes	(13)		(4,963)
(Gain) loss on disposal of property and equipment related to restructuring, net	—		(92)
Provision for expected credit losses	—		196
Net loss (gain) on disposal of property and equipment held and used	22		22



Other, net	86		(111)
Changes in current assets and current liabilities:
Accounts receivable, net	12,483		4,541
Inventories	(10,679)		(9,770)
Prepaid expenses and other current assets	(585)		(1,784)
Accounts payable	11,730		15,148
Accrued compensation	(4,636)		(5,090)
Other accrued liabilities	2,777		1,163
Deferred revenue	(188)		30
Net cash used in operating activities	(4,481)		(4,306)

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

Purchases of property and equipment	(6,182)		(13,010)
Sale of Investment in non-public company	—		45,100

Proceeds from sales of property and equipment	—		1,082
Net cash (used in) provided by investing activities	(3,047)		33,172

Cash flows from financing activities:


Proceeds from sale of common stock	5,000		—
Payments on long-term debt	(76)		(41,426)
Proceeds from lines of credit	8,800		26,000
Payments on lines of credit	(800)		(13,000)
Taxes paid by Company for employee stock plans	(209)		(512)
Payments for debt issuance costs	—		(132)

Net cash provided by (used in) financing activities	12,715		(29,070)
Net increase (decrease) in cash and cash equivalents	5,187		(204)
Cash and cash equivalents, beginning of period	1,643		1,295
Cash and cash equivalents, end of period	$	6,830	$	1,091

Supplemental disclosure of non-cash investing and financing activities:
Purchases of property and equipment on trade vendor credit	$	2,700	$	1,105

See accompanying notes to the consolidated financial statements.

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LIFECORE BIOMEDICAL, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Organization

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

Lifecore Biomedical’s biomedical company, Lifecore Biomedical Operating Company, 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.

Lifecore Biomedical’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 two categories: avocado products and olive oil and wine vinegars.

On November 14, 2022, the Company filed an amendment to the Certificate of Incorporation to change the Company’s name from Landec Corporation to Lifecore Biomedical, Inc. (“Name Change”), which was approved by the board of directors of the Company and became effective on November 14, 2022. In connection with the Name Change, the Company’s common stock began trading under its new Nasdaq ticker symbol “LFCR” on November 15, 2022. References to “Landec” or “Landec Corporation” refer to operations and/or transactions of the Company prior to the Name Change.

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.

Securities Purchase Agreement

On November 25, 2022, the Company entered into a Securities Purchase Agreement (the “Wynnefield Purchase Agreement”) with entities affiliated with Wynnefield Capital, Inc. (the “Purchasers”). Pursuant to the Wynnefield Purchase Agreement, the Company agreed to sell an aggregate of 627,746 shares of its common stock (the “Shares”) for aggregate gross proceeds of approximately $5.0 million (the “Offering”). The purchase price for each Share was $7.97. The Offering closed on November 25, 2022. Pursuant to the Purchase Agreement, the Company granted the Purchasers certain piggyback registration rights and agreed, among other things, to indemnify such parties under any registration statement filed that includes the Shares from certain losses, claims, damages and liabilities.

Basis of Presentation

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The accompanying unaudited consolidated financial statements of Lifecore Biomedical 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 November 27, 2022, and the results of operations and cash flows for all periods presented. Although Lifecore Biomedical 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 with the audited financial statements and accompanying notes included in Lifecore Biomedical’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 and six months ended November 27, 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 Lifecore Biomedical’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 Lifecore Biomedical 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 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, 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 issued (the “Filing Date”).

The Company’s ability to meet its liquidity needs for one year following the 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 Filing Date, the Company does not believe that it will have adequate liquidity to meet its obligations for at least one year following the 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 (as defined in Note 6 - Debt) for at least one year following the Filing Date. As of the Filing Date, the Company determined that it was not in compliance with the covenant under the New

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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 for the year ended May 29, 2022 filed on the date of this report 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 Filing Date, the Company anticipates that it will not be in compliance with certain financial covenants under the New Credit Agreements during the one-year period following the 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 Revolving Credit Facility (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 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 Revolving Credit Facility 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 of 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 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 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 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 Filing Date.

These 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 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 November 27, 2022 and May 29, 2022 contained in these unaudited consolidated financial statements.

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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:


(In thousands)	November 27, 2022		May 29, 2022		November 28, 2021		May 30, 2021
Cash and cash equivalents	$	6,830	$	1,643	$	1,091	$	1,159
Cash and cash equivalents, discontinued operations	—		—		—		136


Cash and cash equivalents	$	6,830	$	1,643	$	1,091	$	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)	November 27, 2022		May 29, 2022
Finished goods	$	38,882	$	33,029
Raw materials	26,959		24,221
Work in progress	11,683		9,595
Total	$	77,524	$	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

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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 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
Six months ended November 27, 2022	$	65	$	—	$	—	$	65
Six months ended November 28, 2021	$	85	$	(14)	$	—	$	71

Debt Issuance Costs

The Company records its line of credit debt issuance costs as an asset, and as such, $0.7 million and $1.5 million were recorded as Prepaid expenses and other current assets, and Other assets in the accompanying Consolidated Balance Sheets, respectively, as of November 27, 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, $4.7 million was recorded as a reduction to Current portion of long-term debt, net, and Long-term debt, net in the accompanying Consolidated Balance Sheets, respectively, as of November 27, 2022, and $5.5 million 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:

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

Amounts reclassified from OCI	586
Other comprehensive income, net	$	586
Balance as of November 27, 2022	$	—

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.

Long-lived and Indefinite-Lived 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.

During the quarter ended November 27, 2022, the Company recorded an impairment charge of $1.0 million related to Yucatan Foods indefinite-lived intangible asset related to trademarks/tradenames. In addition, during the quarter ended November 27, 2022, the Company recorded an impairment charge of $0.3 million related to O Olive’s indefinite-lived intangible asset for their trademarks/tradenames. The impairments were determined using the royalty savings method to estimate the fair value of its trademarks and was primarily a result of an indication of a decrease in the fair market value of the Yucatan Foods and O Olive businesses driven by lower market valuations and a decrease in projected cash flows. The impairment charge is included in the line item “Impairment of indefinite-lived intangible assets” on the Consolidated Statements of Comprehensive (Loss) Income, and is reported in the Curation Foods business segment (See Note 7).

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.

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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 November 27, 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.

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 November 27, 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 operation
Assets held for sale - nonrecurring	—		—		—		—		—		—
Property & equipment, as restated	—		—		—		—		3,500		—
Customer relationship, as restated	—		—		—		—		—		1,400
Tradenames, as restated	—		—		—		—		—		4,000
Total assets	—		—		—		—		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

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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.

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				Six Months Ended
Lifecore:	November 27, 2022		November 28, 2021		November 27, 2022		November 28, 2021
Contact development and manufacturing organization	$	16,032	$	21,363	$	34,279	$	39,152
Fermentation	5,659		3,583		11,114		7,746

Total	$	21,691	$	24,946	$	45,393	$	46,898

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(In thousands)	Three Months Ended				Six Months Ended
Curation Foods:	November 27, 2022		November 28, 2021		November 27, 2022		November 28, 2021
Avocado products	$	14,915	$	15,381	$	32,009	$	32,343
Olive Oil and vinegars	2,196		2,508		4,755		4,848
Technology	—		617		—		995
Total	$	17,111	$	18,506	$	36,764	$	38,186

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 November 27, 2022 and May 29, 2022, were $8.4 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 November 27, 2022 and May 29, 2022, were $0.7 million and $0.9 million, respectively. Revenue recognized during the three and six months ended November 27, 2022, that was included in the contract liability balance at the beginning of fiscal year 2023, was $0.1 million and $0.4 million, respectively.

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

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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 and six months ended November 27, 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.

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 “Newell 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 November 27, 2022, the Company granted 17,850 options to purchase shares of common stock and awarded 3,825 RSUs. During the six months ended November 27, 2022, the Company granted 743,050 options to purchase shares of common stock and awarded 259,090 RSUs.

As of November 27, 2022, the Company has reserved 3.4 million shares of common stock for future issuance under its current and former equity plans.

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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				Six months ended
(In thousands)	November 27, 2022		November 28, 2021		November 27, 2022		November 28, 2021
Continuing operations:
Cost of product sales	$	97	$	75	198		$	153
Research and development	52		51		142		100
Selling, general and administrative	959		552		1,553		1,087
Discontinued Operations:
Cost of product sales	—		8		—		(34)
Total stock-based compensation	$	1,108	$	686	$	1,893	$	1,306

As of November 27, 2022, there was $5.7 million of total unrecognized compensation expense related to unvested equity compensation awards granted under the Lifecore incentive stock plans. Total expense is expected to be recognized over the weighted-average period of 2.26 for stock options and 2.29 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 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 Lifecore Biomedical 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 six months ended November 27, 2022 and November 28, 2021, the Company did not purchase any shares on the open market or in privately negotiated transactions.

4. Diluted Earnings Per Share

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


	Three Months Ended				Six Months Ended
(In thousands, except per share amounts)	November 27, 2022		November 28, 2021		November 27, 2022		November 28, 2021
Numerator:
Net loss	$	(12,449)	$	(38,441)	$	(23,800)	$	(47,918)
Denominator:
Weighted average shares for basic net loss per share	29,634		29,471		29,605		29,448
Effect of dilutive securities:
Stock options and restricted stock units	—		—		—		—
Weighted average shares for diluted net loss per share	29,634		29,471		29,605		29,448

Basic and Diluted net loss per share	$	(0.42)	$	(1.30)	$	(0.80)	$	(1.63)

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Due to the Company’s net loss for the three and six months ended November 27, 2022 and November 28, 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

The provision for income taxes from continuing operations for the six months ended November 27, 2022 and November 28, 2021, was an (expense)/benefit of $(8.0) thousand and $4.7 million, respectively. The effective tax rate for the six months ended November 27, 2022 and November 28, 2021 was 0.1% and 9.4%, respectively. The effective tax rate for the six months ended November 27, 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 federal and state research and development tax credits.

As of November 27, 2022 and May 29, 2022, the Company had unrecognized tax benefits of $1.0 million and $1.0 million, respectively. Included in the balance of unrecognized tax benefits as of November 27, 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 November 27, 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.

6. Debt

Long-term debt, net consists of the following:


(In thousands)	November 27, 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	(4,759)		(5,534)
Total long-term debt, net of unamortized debt issuance costs	98,953		98,178
Less: current portion of long-term debt, net	(98,953)		(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 “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 “Revolving Credit Facility”) and serves as administrative agent of the Revolving Credit Facility. 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 “Term Loan”) and Goldman serves as administrative agent of the Term Loan. The Revolving Credit Facility and Term Loan are guaranteed, and secured by, substantially all of the Company’s and the Company’s direct and indirect subsidiaries’ assets.

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

The 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.

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Interest on the Revolving Credit Facility 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 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 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 Revolving Credit Facility, 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 November 27, 2022, $48.0 million was outstanding on the Revolving Credit Facility, at an interest rate of 5.6%. As of November 27, 2022, the Term Loan had an interest rate of 10.1%.

As of November 27, 2022, the Company was in compliance with all financial covenants and had no events of default under the New Credit Agreements. However, as of the Filing Date, the Company was not compliance with the covenants under the New Credit Agreements. Please see Note 1 – Going Concern for more information.

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 matured in November 2022.

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7. Business Segment Reporting

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 activities from three natural food brands, including O Olive Oil & Vinegar, Yucatan Foods, and Cabo Fresh. The Curation Foods segment includes 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				Six Months Ended
(In millions)	November 27, 2022		November 28, 2021		November 27, 2022		November 28, 2021
Switzerland	$	4.0	$	2.0	$	8.0	$	5.4
Canada	2.6		2.9		6.2		6.4
Czech Republic	1.0		0.8		1.7		1.7
Ireland	1.0		0.7		1.7		0.8
All Other Countries	0.5		0.9		1.0		1.7

Operations by business segment consisted of the following:


(In thousands)	Lifecore		Curation Foods		Other		Total
Three Months Ended November 27, 2022
Net sales	$	21,691	$	17,111	$	—	$	38,802
Gross profit	6,675		433		—		7,108
Net (loss) income from continuing operations	916		(3,295)		(10,070)		(12,449)
Loss from discontinued operations, net of tax	—		—		—		—
Depreciation and amortization	1,843		588		11		2,442

Interest income	16		—		—		16
Interest expense	—		—		4,219		4,219
Income tax (benefit) expense	290		(836)		550		4
Corporate overhead allocation	1,022		283		(1,305)		—

Six Months Ended November 27, 2022
Net sales	$	45,393	$	36,764	$	—	$	82,157
Gross profit	12,776		584		—		13,360

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Net (loss) income from continuing operations	1,419		(6,017)		(19,202)		(23,800)
Loss from discontinued operations, net of tax	—		—		—		—
Depreciation and amortization	3,614		2,756		21		6,391
Dividend income	—		—		—		—
Interest income	31		—		—		31
Interest expense	—		1		7,896		7,897
Income tax (benefit) expense	448		(1,901)		1,461		8
Corporate overhead allocation	2,060		617		(2,677)		—




(In thousands)	Lifecore		Curation Foods		Other		Total
Three Months Ended November 28, 2021
Net sales	$	24,946	$	18,506	$	—	$	43,452
Gross profit	11,715		3,000		—		14,715
Net (loss) income from continuing operations	5,682		(747)		(706)		4,229
Loss from discontinued operations, net of tax	—		(42,670)		—		(42,670)
Depreciation and amortization	1,673		886		26		2,585

Interest income	19		—		—		19
Interest expense	—		136		2,958		3,094
Income tax (benefit) expense	1,794		(579)		(4,300)		(3,085)
Corporate overhead allocation	1,078		1,231		(2,309)		—

Six Months Ended November 28, 2021
Net sales	$	46,898	$	38,186	$	—	$	85,084
Gross profit	17,479		7,671		—		25,150
Net (loss) income from continuing operations	6,262		(1,030)		(8,636)		(3,404)
Loss from discontinued operations, net of tax	—		(44,514)		—		(44,514)
Depreciation and amortization	3,220		1,767		52		5,039
Dividend income	—		—		—		—
Interest income	39		—		7		46
Interest expense	—		273		9,499		9,772
Income tax (benefit) expense	1,977		(797)		(5,916)		(4,736)
Corporate overhead allocation	2,215		2,702		(4,917)		—

During the six months ended November 27, 2022 and November 28, 2021, the Company had sales concentrations of 10% or greater from two customers. The Company’s top two customers accounted for 19% and 10% of revenues for the six months ended November 27, 2022, and 13% and 12% for the six months ended November 28, 2021. The Company had accounts receivable concentrations of 10% or greater from three customers accounting for 21%, 14%, and 10% of accounts receivable as of November 27, 2022, and two customers as of November 28, 2021 accounting for 14% and 10%.

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8. Restructuring Costs

During fiscal year 2020, the Company announced a restructuring plan to drive enhanced profitability, focus the business on its strategic assets and redesign the organization to be the appropriate size to compete and thrive. This includes a reduction-in-force, a reduction in leased office spaces and the sale of non-strategic assets.

The following table summarizes the restructuring costs recognized in the Company’s Consolidated Statements of Comprehensive (Loss) Income, by Business Segment, excluding discontinued operations:


(in thousands)	Curation Foods		Other		Total
Three Months Ended November 27, 2022

Employee severance and benefit costs	$	36	$	—	$	36
Lease costs	25		—		25
Other restructuring costs	125		637		762
Total restructuring costs	$	186	$	637	$	823

(in thousands)	Curation Foods		Other		Total
Six Months Ended November 27, 2022
Employee severance and benefit costs	244		—		244
Lease costs	45		—		45
Other restructuring costs	319		1,262		1,581
Total restructuring costs	$	608	$	1,262	$	1,870

Employee severance and benefit costs

Employee severance and benefit costs are costs incurred as a result of reduction-in-force driven by our restructuring plan and closure of offices and facilities. These costs were driven primarily by reduction-in-force related to our Curation Foods segment.

Lease Costs

In August 2020, the Company closed its leased Santa Clara, California office and entered into a sublease agreement. In the fourth quarter of fiscal year 2020 the Company closed its leased Los Angeles, California office and plans to sublease the

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office. The Company approved a plan to explore opportunities to sub lease its Santa Maria office and expects to complete the sublease plan within the next 12 months.

Other restructuring costs

Other restructuring costs are primarily related to consulting costs incurred in connection with the execution of the Company’s restructuring plan to drive enhanced profitability, focus the business on its strategic assets, and redesign the organization to be the appropriate size to compete and thrive.

The following table summarizes the restructuring costs recognized in the Company’s Consolidated Statements of (Loss) Income, by Business Segment, since inception of the restructuring plan in fiscal year 2020 through the six months ended November 27, 2022, excluding discontinued operations:


	Curation Foods		Other		Total
(in thousands)
Asset write-off costs, net	$	7,552	$	418	$	7,970
Employee severance and benefit costs	803		784		1,587
Lease costs	2,263		26		2,289
Other restructuring costs	642		6,160		6,802
Total restructuring costs	$	11,260	$	7,388