# Lifecore Biomedical, Inc. \\de\\: Form 10-Q for the period ended Nov 26, 2023

- Company: [Lifecore Biomedical, Inc. \\de\\](/companies/lfcr.md) (CIK 1005286)
- Form: 10-Q
- Filed: 2024-08-09
- Accepted by EDGAR: Aug 9, 2024, 17:14 ET
- Period: 2023-11-26
- Accession: 0001005286-24-000111
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005286/000100528624000111/lfcr-20231126.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005286/000100528624000111/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-11-26.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-08-28 to 2023-11-26 | $30.1m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2023-05-29 to 2023-11-26 | $54.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-08-28 to 2023-11-26 | $20.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-05-29 to 2023-11-26 | $42.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-08-28 to 2023-11-26 | $10.0m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-05-29 to 2023-11-26 | $12.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-08-28 to 2023-11-26 | $2.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-05-29 to 2023-11-26 | $4.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-08-28 to 2023-11-26 | $9.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-05-29 to 2023-11-26 | $18.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-08-28 to 2023-11-26 | −$1.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-05-29 to 2023-11-26 | −$10.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-08-28 to 2023-11-26 | −$64.9k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-05-29 to 2023-11-26 | $23.3k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-08-28 to 2023-11-26 | $14.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-05-29 to 2023-11-26 | $3.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-08-28 to 2023-11-26 | $0.39 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-05-29 to 2023-11-26 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-08-28 to 2023-11-26 | $0.47 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-05-29 to 2023-11-26 | $0.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-08-28 to 2023-11-26 | 36,419,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-05-29 to 2023-11-26 | 36,398,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-05-29 to 2023-11-26 | −$7.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-05-29 to 2023-11-26 | $9.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-11-26 | $3.2m | us-gaap:Cash |
| Current assets | at 2023-11-26 | $76.7m | us-gaap:AssetsCurrent |
| Total assets | at 2023-11-26 | $245.8m | us-gaap:Assets |
| Current liabilities | at 2023-11-26 | $40.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-11-26 | $203.5m | us-gaap:Liabilities |
| Long-term debt | at 2023-11-26 | $92.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-11-26 | $773.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-11-26 | $1.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,033 characters.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1, of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2023 Annual Report.

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933, as amended, and the Exchange Act. Words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “should,” “can have,” “likely” and similar expressions are used to identify forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Potential risks and uncertainties include, without limitation, the timing and expenses associated with operations, the ability to achieve acceptance of our new products in the market place, government regulations affecting our business, the timing of regulatory approvals, the impact of adverse and uncertain economic conditions in the U.S. and international markets, the mix between domestic and international sales, and those other risks mentioned in this report and the 2023 Annual Report.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Accordingly, our actual results could differ materially from those projected in the forward-looking statements for many reasons, including the risk factors listed in Item 1A. “Risk Factors” and in the 2023 Annual Report.

All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this report, the 2023 Annual Report, and hereafter in our other SEC filings and public communications.

You should evaluate all forward-looking statements made by us in the context of all risks and uncertainties described with respect to our business. We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

### The Company

### Corporate Overview

The Company is a fully integrated CDMO that offers highly differentiated capabilities in the development, fill and finish of complex sterile injectable pharmaceutical products in syringes and vials. As a leading manufacturer of premium, injectable grade sodium HA in bulk form as well as formulated and filled syringes and vials for injectable products used in treating a broad spectrum of medical conditions and procedures. Lifecore uses its fermentation process and aseptic formulation and filling expertise to be a leader in the development of HA-based products for multiple applications and to take advantage of non-HA device and drug opportunities which leverage its expertise in manufacturing and aseptic syringe filling capabilities. Lifecore CDMO provides product development services to its partners for HA-based, as well as non-HA based, aseptically formulated and filled products. 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 clinical studies. The Company brings more than 40 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market.

Built over many years of experience, Lifecore separates itself from its competition based on its five areas of expertise, including but not limited to Lifecore’s ability to:

### Establish strategic relationships with market leaders:

Lifecore continues to develop applications for products with partners who have strong marketing, sales, and distribution capabilities to end-user markets. Through its strong reputation and history of providing pharmaceutical grade HA and products, Lifecore has established long-term relationships with global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories and leverages those partnerships to attract new relationships in other medical markets.

### Expand medical applications for HA:

Due to the growing knowledge of the unique characteristics of HA and Lifecore’s unique strength and history as a trusted manufacturer of pharmaceutical injectable grade HA products, Lifecore continues to identify and pursue opportunities for the use of HA in other medical applications, such as wound care, aesthetic surgery, drug delivery, next generation orthopedics and device coatings, and through sales to academic and corporate research customers. Further applications may involve expanding process development activity and/or additional licensing of technology.

### Utilize manufacturing infrastructure to meet customer demand:

Lifecore has made strategic capital investments in its CDMO business focusing on extending its aseptic filling capacity and capabilities to meet increasing partner demand and to attract new contract filling opportunities outside of HA markets. Lifecore is using its manufacturing capabilities to provide contract manufacturing and development services to its partners in the area of sterile pre-filled syringes and vials, as well as fermentation and purification requirements.

### Maintain flexibility in product development and supply relationships:

Lifecore’s vertically integrated development and manufacturing capabilities allow it to establish a variety of contractual relationships with global corporate partners. Lifecore’s role in these relationships extends from supplying HA raw materials to providing technology transfer and development services to manufacturing aseptically filled, finished sterile products, and assuming full supply chain responsibilities.

### Deliver consistent quality:

Lifecore has built a world class quality and regulatory system that is demonstrated in its results, processes and customer relationships. With over 40 years of a superior track record with global regulatory bodies (FDA, EMA, ANVISA, etc.), Lifecore is the partner of choice for companies looking for proven experience in delivering QbD, cGMP compliance, and manufacturing excellence with pharmaceutical elegance and quality. Lifecore’s world class quality and regulatory system and excellent track record with the global regulatory bodies ensure partners that they will safely bring innovative therapies to market.

### Reportable Segments

The Company operates as one reportable segment. This is based on the objectives of the business and how our chief operating decision maker, the President and Chief Executive Officer, monitors operating performance and allocates resources.

### Related Party Transactions

For a discussion of significant related party transactions, refer to Note 1 – Related Party Transactions within the notes to the condensed consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q.

### Results of Operations

### Revenues and Gross Profit:

Lifecore generates revenues from two integrated activities: (1) CDMO and (2) HA manufacturing. Lifecore generates revenues from the development and manufacture of HA products and provides contract development and aseptic manufacturing services to customers.

As result of the Company exiting all previous food related business as part of the strategic shift in the Company’s operations that was completed as of May 28, 2023, commencing with this Quarterly Report on Form 10-Q, the Company changed its presentation of “Product sales” and “Cost of product sales” to “Revenues” and “Cost of goods sold,” respectively.

Numerous factors can influence gross profit, including HA manufacturing product mix, customer mix, manufacturing costs, volume, sales discounts, and charges for excess or obsolete inventory, among others. Many of these factors influence or are interrelated with other factors. The Company includes in cost of goods sold all of the following costs: raw materials (including packaging, syringes, fermentation and purification supplies), direct labor, overhead (including indirect labor, depreciation, and facility-related costs), and shipping and shipping-related costs.

*(In thousands, except percentages)*

|  | Three Months Ended November 26, 2023 | November 27, 2022 | Change Amount% |  | Six Months Ended November 26, 2023 | November 27, 2022 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total Revenues | $30,150 | $21,864 | $8,286 | 38% | $54,672 | $45,587 | $9,085 | 20% |
| Gross Profit | $9,957 | $5,679 | $4,278 | 75% | $12,685 | $11,658 | $1,027 | 9% |

Total revenues for the three months ended November 26, 2023, compared to the same period last year, was due to a $7.5 million increase in CDMO revenues due to increased demand and a $0.8 million increase in fermentation revenues due to the timing of shipments.

The increase in gross profit for the three months ended November 26, 2023, compared to the same period last year, was primarily due to increased revenues resulting in a favorable volume variance of $2.2 million and a favorable sales mix as evidenced by a favorable rate variance of $2.1 million.

Gross profit margin percentage increased from 26.0% to 33.0% for the three months ended November 26, 2023. The 705 basis points (“bps”) improvement is due to a 732 bps increase in CDMO gross profit margin percentage as a result of a favorable sales mix in the aseptic commercial business and a 233 bps increase primarily due to adjustments to write down inventories to their net realizable value in the comparable periods partially offset by a 260 bps reduction resulting from a lower percentage of total sales being fermentation revenues.

Total revenues for the six months ended November 26, 2023, compared to the same period last year, was due to a $10.8 million increase in CDMO revenues due to increased demand, partially offset by a $1.7 million decrease in fermentation revenues due to the timing of shipments.

The increase in gross profit for the six months ended November 26, 2023, compared to the same period last year, was due to increased revenues resulting in a favorable volume variance of $2.3 million partially offset by an unfavorable sales mix as evidenced by an unfavorable rate variance of $1.3 million.

Gross profit margin percentage decreased from 25.6% to 23.2% for the six months ended November 26, 2023. The 237 basis points (“bps”) reduction is due to a 288 bps reduction in CDMO gross profit margin percentage as a result of lower development revenues and an unfavorable sales mix in the aseptic commercial business and a 370 bps reduction resulting from the decrease in fermentation revenues partially offset by a 421 bps increase primarily due to adjustments to write down inventories to their net realizable value in the comparable periods.

### Operating Expenses:

*(In thousands)*

|  | Three Months Ended November 26, 2023 | November 27, 2022 | Change Amount% |  | Six Months Ended November 26, 2023 | November 27, 2022 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and Development | $2,098 | $2,177 | $(79) | (4)% | $4,244 | $4,388 | $(144) | (3)% |
| Selling, general and administrative | $9,185 | $8,291 | $894 | 11% | $18,391 | $16,395 | $1,996 | 12% |
| Gain on sale of divested business | $— | $— | $— | —% | $— | $(2,108) | $2,108 | (100)% |
| Restructuring costs | $157 | $563 | $(406) | (72)% | $147 | $1,610 | $(1,463) | (91)% |
| Total Operating Expenses | $11,440 | $11,031 | $409 | 4% | $22,782 | $20,285 | $2,497 | 12% |

#### Research and Development (“R&D”)

R&D expenses consist primarily of product development and commercialization initiatives. R&D expenses are focused on new products and applications for HA-based and non-HA biomaterials.

The decrease in R&D expenses for the three and six months ended November 26, 2023 compared to the same period last year was not significant.

#### Selling, General, and Administrative (“SG&A”)

SG&A expenses consist primarily of sales and marketing expenses associated with Lifecore’s revenue and services, business development expenses, and staff and administrative expenses.

The increase in total SG&A expenses for the three months ended November 26, 2023, compared to the same period last year, was primarily due to increased personnel costs including increased headcount of $0.7 million, increases in non-cash stock-based compensation expense due to the higher mix of RSU grants over stock options of $0.4 million , consulting fees incurred in completing the year-end audit for fiscal year 2023 of $0.4 million, and other operating expenses of $0.2 million, partially offset by reductions in audit fees of $0.8 million.

The increase in total SG&A expenses for the six months ended November 26, 2023, compared to the same period last year, was primarily due to increased personnel costs including increased headcount of $1.0 million, consulting fees incurred in completing the year-end audit for fiscal year 2023 of $1.2 million, and other operating expenses of $0.2 million, partially offset by reductions in legal fees of $0.4 million.

#### Gain on sale of divested business

On June 2, 2022, the Company closed an Asset Purchase Agreement for the sale of all of its assets related to the BreatheWay packaging technology business and recorded a gain of $2.1 million in its Condensed Consolidated Statement of Operations for the six months ended November 27, 2022.

#### Restructuring Costs

Restructuring costs for the three months ended November 26, 2023 decreased by $0.4 million, compared to the prior year period, as a result of the restructuring plan to divest the Curation Foods businesses being substantially complete. The restructuring costs for the three months ended November 26, 2023 included a $0.2 million expense in employee severance and benefit costs.

Restructuring costs for the six months ended November 26, 2023 decreased by $1.5 million, compared to the prior year period, as a result of the restructuring plan to divest the Curation Foods businesses being substantially complete. The restructuring costs for the six months ended November 26, 2023 include a $0.2 million expense in employee severance and benefit costs.

**Other:**

*(In thousands)*

|  | Three Months Ended November 26, 2023 | November 27, 2022 | Change Amount% |  | Six Months Ended November 26, 2023 | November 27, 2022 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $(832) | $(3,608) | $2,776 | (77)% | $(1,625) | $(6,839) | $5,214 | (76)% |
| Interest expense, related party | $(3,241) | $— | $(3,241) | —% | $(6,385) | $— | $(6,385) | —% |
| Change in fair value of debt derivative liability, related party | $20,700 | $— | $20,700 | —% | $20,900 | $— | $20,900 | —% |
| Other income (expense), net | $(967) | $(237) | $(730) | 308% | $(1,138) | $(434) | $(704) | 162% |
| Provision for income tax (expense) benefit | $65 | $(4) | $69 | (1,725)% | $(23) | $(8) | $(15) | 188% |

-23-

#### Interest Expense, net

The decrease in interest expense for the three and six months ended November 26, 2023, compared to the same period last year, was primarily a result of the Company’s Term Loan Credit Facility (defined below) being determined to be a related party and being segregated into a separate line item. The remaining interest expense in the current period relates to only the Company’s revolving credit facility, which increased in connection with an increased principle balance and increase in interest rates.

#### Interest Expense, related party

The increase in interest expense from related party for the three and six months ended November 26, 2023, compared to the same periods in the prior year, was a result of the determination of the lender in the Company’s Term Loan Credit Facility (defined below) was a related party on May 22, 2023. As a result, the Company’s Term Loan Credit Facility was reclassified into a separate line item.

#### Change in fair value of debt derivative liability, related party

The increase in change in fair value of debt derivative liability, related party for the three and six months ended November 26, 2023, compared to the same periods in the prior year, was due to a change in the fair market value in the current period of the debt derivative liability as a result of the Company’s Term Loan Credit Facility. The key inputs to the valuation models that were utilized to estimate the fair value of the debt derivative liability were (i) an estimated probability related to the timing of a change in control over the 12 months following the end of the fiscal period; (ii) the estimated probability related to an event of default of the Supply Agreement with Alcon, as amended, over the 12 months following the end of the fiscal period; and (iii) a risk-adjusted discount rate. Beginning in the second quarter of fiscal year 2024, there was a decline in the change in control probability assumption in connection with the Company’s review of the strategic alternatives initiative that significantly impacted the fair value of the debt derivative liability. There was no change in the probability related to event of default of the Supply Agreement during fiscal year 2024. There was no derivative liability in the prior period.

#### Other (Expense) Income

The increase in other (expense) income for the three and six months ended November 26, 2023, compared to the same periods last year, was not significant.

#### Income Taxes

The change in the income tax provision for the three and six months ended November 26, 2023 was primarily due to the valuation allowance recorded against certain deferred tax assets, partially offset by the impact of federal and state research and development tax credits.

### Non-GAAP Financial Information and Reconciliations

EBITDA and Consolidated adjusted EBITDA are non-GAAP financial measures. EBITDA from continuing operations represents net income (loss) from continuing operations before interest expense, interest income, income tax (benefit) expense, and depreciation and amortization expense. Adjusted EBITDA from continuing operations reflects adjustments to EBITDA from continuing operations to identify items that, in management’s judgment, significantly affect the assessment of earnings results between periods. This information is provided in order to allow investors to make meaningful comparisons of the Company’s earnings performance between periods and to view the Company’s business from the same perspective as Company management. As the Company cannot predict the timing and amount of charges that include, but are not limited to, items such as costs associated with our reorganization including associated divestitures, movement of headquarters, transactional impacts of these transactions, remaining costs associated with divested businesses and associated cost of third parties (collectively, “Reorganization Costs”), restructuring programs, mark-to-market adjustments on derivative contracts, non- interest financing costs, stock compensation, product launch and start-up costs and other items that may arise from time to time that would impact comparability, management does not consider these costs when evaluating the Company’s performance, when making decisions regarding the allocation of resources, in determining incentive compensation, or in determining earnings estimates. EBITDA from continuing operations and adjusted EBITDA from continuing operations are performance measures commonly used by management to assess operating performance and incentive compensation, and the Company believes they are commonly reported and widely used by investors and other interested parties as a measure of a company’s operating performance between periods.

The table below includes reconciliations of these non-GAAP financial measures to their respective most directly comparable financial measures calculated in accordance with GAAP.

*(In thousands, except percentages)*

|  | Three Months Ended November 26, 2023 | November 27, 2022 | Six Months Ended November 26, 2023 | November 27, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $14,218 | $(12,806) | $3,464 | $(23,772) |
| Interest expense, net | 4,073 | 3,608 | 8,010 | 6,839 |
| Provision for income tax (benefit) expense | (65) | 4 | 23 | 8 |
| Depreciation and amortization on property and equipment | 1,988 | 2,277 | 3,935 | 6,061 |
| **EBITDA** | $20,214 | $(6,917) | $15,432 | $(10,864) |
| Restructuring costs | 157 | 563 | 147 | 1,610 |
| Reorganization costs (1) | 2,162 | 2,793 | 4,899 | 4,054 |
| Change in fair value of debt derivatives | (20,700) | — | (20,900) | — |
| Financing fees (non-interest) | 1,109 | 253 | 1,361 | 253 |
| Start-up costs | 487 | — | 726 | — |
| Contract cancellation | 297 | — | 297 | — |
| Franchise tax equivalent to income tax | 94 | 60 | 176 | 131 |
| Gain on sale of divested business | — | — | — | (2,108) |
| (Gain) Loss from discontinued operations, net of taxes | 24 | 3,605 | (1,832) | 7,864 |
| Stock-based compensation | 1,578 | 1,112 | 3,110 | 1,896 |
| **Total adjusted EBITDA - Consolidated** | $5,422 | $1,469 | $3,416 | $2,836 |

(1) Reorganization costs mainly relate to activities in connection with the approved restructuring plan.

a. For the three months ended November 26, 2023, the Company incurred non-recurring charges primarily related to: (i) $0.4 million in fees for exploration of strategic opportunities to best position Lifecore as a standalone CDMO, (ii) $1.0 million of incremental audit and consulting fees specifically related to the audit of the numerous non-standard transactions that occurred in fiscal year 2023 associated with the sale of the Yucatan and O Olive businesses, (iii) $0.5 million of costs associated with maintaining abandoned facilities (including the prior headquarters) after the sale of the businesses and incremental compensation expenses for reorganization of the business including costs associated with duplicative roles as the headquarters transitioned to Minnesota, and (iv) $0.3 million litigation costs associated with the divested businesses.

b. For the three months ended November 27, 2022, the Company incurred non-recurring charges primarily related to: (i) $2.0 million of incremental audit and consulting fees specifically related to the audit of the numerous non-standard transactions that occurred in fiscal year 2022 associated with the sale of the Eat Smart business and (ii) $0.5 million for financial advisor and legal fees related to management of the prior term loan lenders and (iii) $0.3 million litigation costs associated with the divested businesses.

c. For the six months ended November 26, 2023, the Company incurred non-recurring charges primarily related to: (i) $1.2 million in fees for exploration of strategic opportunities to best position Lifecore as a stand alone CDMO, (ii) $1.6 million of incremental audit and consulting fees specifically related to the audit of the numerous non-standard transactions that occurred in fiscal year 2023 associated with the sale of the Yucatan and O Olive businesses, (iii) $1.2 million of costs associated with maintaining abandoned facilities (including the prior headquarters) after the sale of the businesses and incremental compensation expenses for reorganization of the business including costs associated with duplicative roles as the headquarters transitioned to Minnesota, and (iv) $0.9 million litigation costs associated with the divested businesses.

d. For the six months ended November 27, 2022, the Company incurred non-recurring charges primarily related to: (i) $3.1 million of incremental audit and consulting fees specifically related to the audit of the numerous non-standard transactions that occurred in fiscal year 2022 associated with the sale of the Eat Smart business and (ii) $0.7 million for financial advisor and legal fees related to management of the prior term loan lenders and (iii) $0.3 million litigation costs associated with the divested businesses.

### Liquidity and Capital Resources

As of November 26, 2023, the Company had cash of $3.2 million, a net decrease of $15.9 million from $19.1 million balance as of May 28, 2023.

#### Cash Flows From Operating Activities

Net cash used in operating activities during the six months ended November 26, 2023 was $7.3 million, compared to $3.5 million of net cash used in operating activities for the same period last year. The primary uses of net cash in operating activities during the six months ended November 26, 2023 were (1) $3.5 million in net loss offset by certain non-cash adjustments approximating $7.2 million to reconcile to net cash used in operating activities. The non-cash adjustments include (i) $7.5 million of depreciation/amortization and stock-based compensation expense; (ii) $(20.9) million change in debt derivative liability; (iii) $6.2 million of interest expense paid-in-kind; and (iv) $0.1 million of other adjustments. Changes in current assets and current liabilities approximated $3.6 million of a net decrease to working capital.

The primary factors for the $3.6 million net cash uses related to operating working capital during the six months ended November 26, 2023, was uses of cash consisting of (i) an increase of $1.2 million in accounts receivable; (ii) an increase of $0.6 million in inventories; (iii) a decrease in other accrued liabilities of $2.7 million; and (iv) a decrease in accounts payable of $4.3 million due to timing of payments, offset by sources of cash from (i) a decrease of $1.7 million in prepaid expenses and other current assets; and (ii) an increase in deferred revenues of $4.2 million.

#### Cash Flows From Investing Activities

Net cash used in investing activities during the six months ended November 26, 2023 was $9.0 million, compared to $4.1 million of net cash used in investing activities for the same period last year. Net cash used in investing activities during the six months ended November 26, 2023 was due to the purchase of $9.0 million of equipment to support the growth of the Company’s business. The six months ended November 27, 2022 included cash provided of $3.1 million of proceeds from the sale of BreatheWay offset by $7.2 million of purchases of property and equipment.

#### Cash Flows From Financing Activities

Net cash provided by financing activities during the six months ended November 26, 2023 was $0.5 million compared to $12.7 million of net cash provided by financing activities for the same period last year. The net cash provided by financing activities during the six months ended November 26, 2023 was primarily due to net proceeds on the Company’s Revolving Credit Facility of $0.1 million and $0.7 million of proceeds from the sale of common stock, net of issuance costs.

The net cash provided by financing activities during the six months ended November 27, 2022 was primarily due to proceeds from a sale of common stock for $5.0 million and an $8.8 million net increase in the Company’s line of credit.

#### Capital Expenditures

During the six months ended November 26, 2023, the Company incurred $9.0 million of capital expenditures, primarily for purchased property and equipment to support the growth of the business, compared to capital expenditures of $7.2 million for the six months ended November 27, 2022.

#### Contractual Obligations

The Company’s material contractual obligations for the next five years mainly relate to its debt obligations.

The Company’s future capital requirements will depend on numerous factors, including the progress of its research and development programs; the continued development of marketing, sales and distribution capabilities; the ability of the Company to establish and maintain new licensing arrangements; the costs associated with employment-related claims; any decision to pursue additional acquisition opportunities; the timing and amount, if any, of payments received under licensing and research and development agreements; the costs involved in preparing, filing, prosecuting, defending, and enforcing intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of product commercialization activities and arrangements; and other factors. If the Company’s currently available funds, together with the internally generated cash flow from operations are not sufficient to satisfy its capital needs, the Company would be required to seek additional funding through other arrangements with collaborative partners, additional bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms, if at all.

The Company believes that its cash from operations, along with existing cash and availability under its Revolving Credit Facility will be sufficient to finance its operational and capital requirements for at least the next twelve months.

#### Debt

As of November 26, 2023 and May 28, 2023, the Company had $16.9 million and $16.8 million, respectively, in borrowings outstanding under the Revolving Credit Facility (defined below), at an effective annual interest rate of 10.18% and 12.16%, respectively.

As of November 26, 2023 and May 28, 2023, the Company had $149.7 million and $142.5 million in borrowings outstanding under the Term Loan Credit Facility, at an effective annual interest rate of 10.0% and 10.0%, respectively.

As of November 26, 2023 and May 28, 2023, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility.

#### Term Loan Credit Facility

On May 22, 2023, the Company, Curation and Alcon entered into the Term Loan Credit Facility. The Term Loan Credit Facility refinanced in full all obligations of the Company and their subsidiaries under its prior term loan credit facility. Upon entry into the Term Loan Credit Facility, its prior term loan credit facility was terminated and all noncompliance with debt covenants were thereby cured. Prior to the Term Loan Credit Facility and presently, Alcon is a significant customer of the Company.

The Term Loan Credit Facility provides for up to $142.3 million in term loans, subject to certain adjustments based on the post-closing adjustments to the Purchase Price (as defined in the Equipment Sale and Leaseback Agreement, defined below), which were funded in full on May 22, 2023. The obligations under the Term Loan Credit Facility mature on May 22, 2029.

#### Revolving Credit Facility

On May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as guarantors, entered into the Revolving Loan Amendment to the Revolving Credit Facility.

The Revolving Loan Amendment provides for, among other things, (i) a waiver of all known existing defaults under the Revolving Credit Facility as of the date of the Revolving Loan Amendment, (ii) the reduction of the maximum amount available under the Revolving Credit Facility to up to the lesser of (x) $40.0 million, less a reserve for certain secured credit products, if any, and (y) the borrowing base (which, pursuant to the Revolving Loan Amendment, was modified to include a further reduction of the borrowing base by an additional $4.0 million), (iii) the modification of the springing minimum fixed charge coverage ratio of 1.00 to 1.00, with such covenant not tested until the fiscal quarter ending on or about February 28, 2024 and, on or thereafter, upon the earlier of the occurrence of an event of default or availability being less than the greater of 10% of the maximum borrowing amount and $4.0 million, (iv) cash dominion at all times the Revolving Credit Facility remains outstanding, and (v) certain other revisions to align with the terms of the Term Loan Credit Facility and address the relative priorities and credit for borrowings related to the Company’s commercial relationships with Alcon.

As of November 26, 2023, we had approximately $9.1 million available for borrowing under our revolving credit facility.

#### Equipment Sale and Leaseback Agreements

On May 22, 2023, the Company entered into the Equipment Sale and Leaseback Agreement, with Alcon, wherein the Company sold the Equipment to Alcon for the Purchase Price. The Equipment Sale Leaseback Agreement contains an option for the Company to repurchase the Equipment upon the earlier of (i) seven (7) years and (ii) the expansion of the Company’s existing production capacity with respect to sodium hyaluronate, for a purchase price equal to the Purchase Price, less the aggregate of all Paydown Payments (as defined in the Equipment Lease Agreement). The Purchase Price was subsequently reduced to $7.7 million based on the fair value of the Equipment, as required by the terms of the Equipment Sale and Leaseback Agreement. The difference of $2.3 million between the initial sales value of $10.0 million and the $7.7 million million was added to the term loan agreement, which resulted in a term loan amount of $142.3 million and the proceeds to Lifecore across the two agreements did not change.

Concurrently with the entry into the Equipment Sale and Leaseback Agreement, the Company entered into Refinancing Transactions with Alcon, wherein Alcon leased the Equipment back to the Company. The Equipment Lease Agreement expires upon the earlier of (i) May 22, 2033, and (ii) the date that the Equipment is repurchased by the Company pursuant to the terms of the Equipment Lease Agreement. Upon the expiration of the Equipment Lease Agreement on May 22, 2033, the Company shall automatically repurchase the Equipment for $1.00 (if not previously repurchased pursuant to the option under the Equipment Sale and Leaseback Agreement).

During the lease term, the Company is obligated to make quarterly rental payments to Alcon equal to (i) Paydown Payments plus (ii) 1.5% times the Purchase Price less cumulative Paydown Payments made. The Company concluded that the Equipment Sale and Leaseback Agreement did not meet the requirements for sale-leaseback accounting, therefore the carrying value of the Equipment remains on the Condensed Consolidated Balance Sheet and the Equipment Sale Finance Liability was classified in Long Term debt.

### Critical Accounting Estimates

There have been no material changes to the Company’s critical accounting estimates from those disclosed in the Company’s 2023 Annual Report. For a discussion of our critical accounting estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates” in Part II, Item 7 of the Company’s 2023 Annual Report.

## Market risk

As filed, 360 characters.

There have been no material changes to the Company’s Quantitative and Qualitative Disclosures About Market Risk from those disclosed in the 2023 Annual Report. For a discussion of our Quantitative and Qualitative Disclosures About Market Risk, refer to “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of the 2023 Annual Report.

## Controls and procedures

As filed, 4,696 characters.

#### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of November 26, 2023, due to the material weaknesses in internal control over financial reporting that were disclosed in the 2023 Annual Report. The Company is in the process of determining a plan for the remediation of the material weaknesses in internal control over financial reporting.

#### Management’s Plan for Remediation of the Material Weaknesses

Management, with the oversight of the Audit Committee, is committed to remediating the control deficiencies. The remediation efforts are intended to both address the identified material weaknesses and to enhance our overall control environment.

Steps taken by management to date include the following:

- Engaged a third-party consultant to assist with remediation efforts, including enhancing our risk assessment, evaluating gaps in current processes and controls, and developing a remediation plan.
- We have committed to adding a sufficient number of qualified personnel within our accounting and finance team with the appropriate qualified experience in financial reporting, consolidations, technical accounting, and application of U.S. GAAP.

In addition to the above efforts undertaken, the Company plans to initiate the following steps intended to remediate the material weaknesses described above and strengthen its internal control over financial reporting:

- Performing an updated risk assessment responsive to changes in the business and establishing processes to update timely for future changes.
- Implementing new and enhanced controls and procedures responsive to our risk assessment at an appropriate level of precision related to management review and the completeness of controls required to support the financial reporting framework.
- Conducting broad based training over the application of the 2013 COSO Framework for key process owners and control operators.
- Implementing a Section 302 sub-certification program by business leadership and process owners to reinforce the Company’s culture of compliance.
- Evaluating accounting policies and procedures by performing a detailed review of the Company’s policies against GAAP and SEC reporting checklists.
- Establishing and implementing a SOX Steering Committee.
- Implementing a process to identify and maintain the information required to support the functioning of internal controls over financial reporting.
- Enhancing reviews of non-recurring transactions, including preparing technical accounting memos and consulting with subject matter experts, as needed.
- Expanding the Internal Audit function to perform timely assessment of design and operating effectiveness of controls and evaluation of remediation of control deficiencies.

The material weaknesses will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. As we continue to evaluate operating effectiveness and monitor improvements to our internal control over financial reporting, we may take additional measures to address control deficiencies or modify the remediation plan described above.

#### Changes in Internal Control over Financial Reporting

Except for the remediation planning efforts described above, there have been no changes in our system of internal control over financial reporting during the quarter ended November 26, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 752 characters.

You should carefully consider the risks described in Part I, Item 1A, “Risk Factors” of the 2023 Annual Report, as our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein and herein. Some statements in this report, including statements in the risk factors, constitute forward-looking statements. These risks are not the only risks that may affect us. Additional risks that we are not aware of or do not believe are material at the time of this filing may also become important factors that adversely affect our business. There have been no material changes to our risk factors as previously disclosed under Part I, Item 1A “Risk Factors” in the 2023 Annual Report.

Filed Aug 9, 2024.
Source: SEC EDGAR, the filing index for accession 0001005286-24-000111. Last ingested by Listed: Nov 5, 2026, 12:15 ET. No prices; not investment advice.