LIFECORE BIOMEDICAL INC DE

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 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 sodium hyaluronic (“HA”), Lifecore brings over 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. Lifecore recognizes revenue intwo different product categories, CDMO and fermentation.

Lifecore Biomedical previously operated a natural food company, through its wholly owned subsidiary, Curation Foods, Inc. (“Curation Foods”), which was previously focused on the distribution of plant-based foods to retail, club and foodservice channels throughout North America. However, upon the sale of Yucatan on February 7, 2023 (see “Yucatan Disposition and Discontinued Operations” below) and O Olive Oil & Vinegar (“O Olive”) on April 6, 2023 (refer to Note 11), the Company has ceased to operate the Curation Foods business.

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. (the “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.

Discontinued Operations - O Olive Sale, Yucatan Disposition, BreatheWay Disposition and Eat Smart Disposition

On April 6, 2023, the Company completed the sale of its O Olive Oil and Vinegar Business (“O Olive Sale”) for an aggregate sale price of $6.4 million, subject to certain customary post-closing adjustments, consisting of approximately $3.3 million in cash and a $3.1 million seller’s note. The seller’s note matures on March 31, 2026, accrues interest at a rate of 12% payable in kind beginning on October 31, 2023, and is prepayable by the buyer at any time. Net proceeds from the transaction, $1.7 million, were used to repay borrowings under the Company’s credit facilities. The Company recognized a loss on the O Olive Sale amounting to $0.3 million in the fourth quarter of fiscal year ended May 28, 2023, which is recorded in loss from discontinued operations in the Consolidated Statements of Operations. On September 28, 2023, December 11, 2023 and February 22, 2024, the Company received cash payments of $2.4 million, $0.3 million, and $18.0 thousand, respectively, toward the $3.1 million seller’s note.

On February 7, 2023 (the “Yucatan Closing Date”), Company, Camden Fruit Corp., a direct wholly owned subsidiary of Curation Foods and an indirect wholly owned subsidiary of the Company (“Camden” and together with the Curation Foods and the Company, the “Yucatan Sellers”), Yucatan Foods, LLC, a wholly owned subsidiary of the Camden (“Yucatan”), and Yucatan Acquisition Holdings LLC, a wholly owned subsidiary of Flagship Food Group LLC (“Buyer” and together with Yucatan and the Sellers, the “Parties”) completed the sale (the “Yucatan Disposition”) of the Company’s avocado products business, including its Yucatan® and Cabo Fresh® brands, as well as the associated manufacturing facility and operations in Guanajuato, Mexico (the “Business”), pursuant to the terms of a securities purchase agreement executed by the Parties on February 7, 2023 (the “Securities Purchase Agreement”). Pursuant to the Securities Purchase Agreement, Buyer acquired all of the outstanding equity securities of Yucatan for a purchase price of $17.5 million in cash, subject to certain post-closing adjustments at closing, including selling costs, net working capital and other adjustments amounting to $5.0 million. The Company recognized a loss on the Yucatan Disposition of $20.7 million in the third quarter ended February 26, 2023. The loss on the Yucatan Disposition is recorded in loss from discontinued operations in the Consolidated Statement of Operations.

On June 2, 2022, the Company and Curation Foods entered into and closed an Asset Purchase Agreement (the “BreatheWay Purchase Agreement”) with Hazel Technologies, Inc. (the “BreatheWay Purchaser”), pursuant to which Curation Foods sold all of its assets related to BreatheWay packaging technology business to the BreatheWay Purchaser in exchange for an aggregate purchase price of $3.2 million (the “BreatheWay Disposition”). The BreatheWay Purchase Agreement included various representations, warranties and covenants of the parties generally customary for a transaction of this nature. Upon the sale, the Company received net proceeds of $3.1 million and recorded a gain of $2.1 million.

On December 13, 2021, the Company and Curation Foods (together, the “Eat Smart Sellers”), and Taylor Farms Retail, Inc. (“Taylor Farms” and together with the Eat Smart Sellers, the “Parties”) completed the sale (the “Eat Smart Disposition”) of Curation Foods’ Eat Smart business, including its salad and cut vegetable businesses (the “Eat Smart Business”), pursuant to the terms of an asset purchase agreement executed by the Parties on December 13, 2021 (the “Eat Smart Asset Purchase Agreement”). Pursuant to the Eat Smart Asset Purchase Agreement, Taylor Farms acquired the Business for a purchase price of $73.5 million in cash, subject to post-closing adjustments based upon net working capital at closing. As part of the Eat Smart Disposition, Taylor Farms acquired, among other assets 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 and 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 Eat Smart Asset Purchase Agreement. Upon the sale, the Company received net proceeds of $73.5 million and recorded a loss of $0.3 million, which is recorded in loss from discontinued operations in the Consolidated Statements of Operations.

The accounting requirements for reporting the Eat Smart, Yucatan and O Olive businesses as discontinued operations were met when the Eat Smart Disposition, Yucatan Disposition and O Olive Sale were completed on each respective closing date. The BreatheWay disposition did not meet the requirements for reporting the businesses as discontinued operations. Accordingly, the consolidated financial statements and notes to the consolidated financial statements reflect the results of the Eat Smart, Yucatan and O Olive businesses as a discontinued operation for the periods presented. Refer to Note 11 - Discontinued Operations.

In connection with the sale of the Eat Smart, Yucatan and O Olive businesses, the Company has entered into Transition Services Agreements with each respective buyer to provide for a customary and orderly transition of the business, and such fees earned, and costs incurred for such transition services shall be included in continuing operations in subsequent periods. In fiscal year 2022, the Company earned $5.8 million of transition services income related to transition services provided to Taylor Farms related to the Eat Smart Disposition which is meant to defray costs incurred to provide the transition services which are reported within Selling, general and administrative costs. In fiscal year 2023, the Company earned similar transition services income of $0.3 million related to the Yucatan and O Olive dispositions.

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 $5.0 million (the “Offering”). The purchase price for each Share was $7.97. The Offering closed on November 25, 2022. Pursuant to the Wynnefield 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.

On January 9, 2023, the Company simultaneously signed and closed a Securities Purchase Agreement (the “Preferred Share Purchase Agreement”) with a group of certain accredited investors. Refer to Note 2 – Convertible Preferred Stock for additional information.

On May 22, 2023, the Company entered into an amendment to its Revolving Credit Facility (defined below) and entered into the New Term Loan Credit Facility. The New Term Loan Credit Facility refinanced in full all obligations of the Borrowers and their subsidiaries under the Prior Term Loan Credit Facility, which was terminated upon the entry into the New Term Loan Credit Facility and all noncompliance with debt covenants was thereby cured. Refer to Note 6 – Debt.

The Company incurred debt origination costs related to the refinancing transactions and amortizes these costs over the life of the related debt using the straight-line method, which approximates the effective interest method. The unamortized portion of debt origination costs is recorded on the consolidated balance sheets as an offset to its related debt. Amortization of debt origination costs is included as a component of interest expense in the consolidated statements of operations.

Basis of Presentation and Consolidation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include the accounts of Lifecore Biomedical and its subsidiaries, Curation Foods and Lifecore. All material inter-company transactions and balances have been eliminated.

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.

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; and the valuation of debt derivative liability.

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.

Concentrations of Risk

Cash and cash equivalents and trade accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk. Our Company policy limits, among other things, the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued or guaranteed by the U.S. government. The Company routinely assesses the financial strength of customers and, as a consequence, believes that trade receivables credit risk exposure is limited. Credit losses for bad debt are provided for in the consolidated financial statements through a charge to operations. A valuation allowance is provided for known and anticipated credit losses. The recorded amounts for these financial instruments approximate their fair value.

Several of the raw materials the Company uses to manufacture its products are currently purchased from a single source, including raw materials for its HA products.

During the fiscal year ended May 28, 2023, the Company had sales concentrations of 10% or greater from two customers (for fiscal years ended May 29, 2022 and May 30, 2021, three customers had sales concentrations of 10% or greater), accounting for 39% and 18%;26%,22% and 14%; and 32%,23% and 12%, respectively. Two of the Company’s same customers had accounts receivable concentrations of 10% or greater, accounting for 31% and 18% of accounts receivable as of May 28, 2023, and 33% and 16%, as of May 29, 2022.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets is measured by comparison of the carrying amount of the asset to the net undiscounted future cash flow expected to be generated from the asset. If the future undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets’ carrying value is adjusted to fair value. The Company regularly evaluates its long-lived assets for indicators of possible impairment.

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 line 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 (Deficit). Those amounts are subsequently reclassified to earnings in the same line item in the Consolidated Statement of Operations 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 Operations. 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 (Deficit).

Derivative Financial Instruments

The Company accounts for put and call options embedded in the term debt in accordance with ASC Topic 815, Derivatives and Hedging. ASC Topic 815 generally requires companies to bifurcate put and call options embedded in the New Term Loan Credit Facility (as defined in Note 6) from their host instruments and to account for them as free standing derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument that is required to be bifurcated, the bifurcated derivative instruments are accounted for as separate derivative instruments.

The fair value of the embedded features are accounted for as a derivative liability in the Company’s consolidated balance sheets and adjusted to fair value each reporting period. The change in fair value of derivatives is recorded as a component of other income (expense) in the Company’s Consolidated Statements of Operations.

Accumulated Other Comprehensive Loss

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

Based on these assumptions, management believes the fair market values of the Company’s financial instruments are not significantly different from their recorded amounts as of May 28, 2023 and May 29, 2022.

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 forecast 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 pool to determine the needed reserve allowance. At times when there are no current economic conditions or forecasts that may affect future credit losses, the Company has determined that recent historical experience provides the best basis for estimating credit losses.

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

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

The changes in the allowance for credit losses related to accounts receivable are as follows (in thousands):

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 May 28, 2023, and May 29, 2022, were $3.2 million and $10.4 million, respectively, and are included within accounts receivable in the Consolidated Balance Sheets.

Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. The Company’s contract liabilities as of May 28, 2023, and May 29, 2022, were $7.0 million and $0.9 million, respectively, of which $4.1 million and $0.9 million is included in deferred revenue and $2.9 million and $0.0 million is included in other non-current liabilities as of May 28, 2023 and May 29, 2022, respectively, in the Consolidated Balance Sheets. Revenue recognized during the fiscal year ended May 28, 2023 that was included in the contract liability balance at the beginning of fiscal year 2023, was $0.6 million.

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

Aseptic

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

Development Services

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

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 and therefore recognizes development services revenue over time based on the proportion of labor hours incurred compared to total estimated hours for an individual arrangement.

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.

During the fourth fiscal quarter, the Company entered into a bill-and-hold arrangement with a customer under which $3.2 million of product sales were recognized in the year ended May 28, 2023. Revenue for bill-and-hold arrangements is recognized when control transfers to the customer, even though the customer does not have physical possession of the goods. Control transfers when the bill-and-hold arrangement has been determined to have substantive reason, the product is identified as belonging to the customer, the product is ready for physical transfer to the customer and the product cannot be used or directed to another customer.

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

Development services revenues recognized over time were $28.6 million, $35.8 million and $28.2 million for the years ended May 28, 2023, May 29, 2022 and May 30, 2021, respectively, and are included in contract development and manufacturing organization. Revenues recognized at a point in time were $74.6 million, $73.6 million and $70.3 million for the years ended May 28, 2023, May 29, 2022 and May 30, 2021, respectively.

Operations of Eat Smart, Yucatan and O Olive, have been reclassified to discontinued operations for all periods presented.

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 products from the processing facility or distribution center to the end consumer markets.

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 and Cash as presented on the Statements of Cash Flows

The following table provides a reconciliation of cash and cash equivalents reported 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):

Inventories

Inventories are stated at the lower of cost (using the first-in, first-out method) or net realizable value. As of May 28, 2023 and May 29, 2022, inventories consisted of the following (in thousands):

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. The Company recorded adjustments of $4.9 million and $4.6 million to record inventory to its net realizable value as of May 28, 2023 and May 29, 2022, respectively. The amounts reflected in costs of goods sold to record inventory to its net realizable value were expense of $0.3 million and expense of $3.5 million for fiscal years 2023 and 2022, respectively.

Advertising Expense

Advertising expenditures for the Company are expensed as incurred and included in selling, general, and administrative in the accompanying Consolidated Statements of Operations. Advertising expenses for the Company for fiscal years 2023, 2022 and 2021 was $5.1 thousand, $5.6 thousand and $0.1 thousand, respectively.

Related Party Transactions

During the years ended May 28, 2023, May 29, 2022 and May 30, 2021, the Company had sales to Alcon Research, LLC (“Alcon”), a related party, of $40.2 million, $29.4 million and $31.9 million, respectively. The Company had accounts receivable outstanding of $9.1 million and $6.3 million at May 28, 2023 and May 29, 2022, respectively.

On November 25, 2022, the Company entered into a Securities Purchase Agreement (the “Wynnefield Purchase Agreement”) with entities affiliated with Wynnefield Capital, Inc. and controlled by the Company’s director, Nelson Obus (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 $5.0 million (the “Offering”). The purchase price for each Share was $7.97. The Offering closed on November 25, 2022. Pursuant to the Wynnefield 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.

On January 9, 2023, the Company simultaneously signed and closed the Preferred Share Purchase Agreement with a group of qualified investors (the “Purchasers”), including, among others, entities controlled by the Company’s directors Christopher Kiper and Nelson Obus. Pursuant to the Preferred Share Purchase Agreement, the Company issued and sold an aggregate of 38,750 shares of a new series of convertible preferred stock of the Company designated as Series A Convertible Preferred Shares, par value $0.001 per share (the “Convertible Preferred Stock”) for aggregate proceeds of $38.8 million. Each share of Convertible Preferred Stock has the powers, designations, preferences and other rights as are set forth in the Certificate of Designations of the Series A Preferred Stock filed by the Company with the Delaware Secretary of State on January 9, 2023 (the “Certificate of Designations”). The Convertible Preferred Stock ranks senior to the Company’s Common Stock with respect to dividends, distributions, and payments on liquidation, winding up and dissolution.

Upon a liquidation, dissolution, winding up or change of control of the Company, each share of Convertible Preferred Stock will be entitled to receive an amount per share of Convertible Preferred Stock equal to the greater of (i) the purchase price paid by the Purchaser, plus all accrued and unpaid dividends (the “Liquidation Preference”) and (ii) the amount that the holder of

Convertible Preferred Stock (each, a “Holder” and collectively, the “Holders”) would have been entitled to receive at such time if the Convertible Preferred Stock had been converted into Common Stock immediately prior to such liquidation event.

The Holders will be entitled to dividends on the Liquidation Preference at the rate of 7.5% per annum, payable in-kind (“PIK”). The Company may, at its option, pay such dividends in cash from and after the earlier of June 29, 2026, or the termination or waiver of the restriction on cash dividends and/or redemptions that is set forth in the Credit Agreements (as defined in the Certificate of Designations) (such earlier date, the “Applicable Date”). The Holders are also entitled to participate in dividends declared or paid on the Common Stock on an as-converted basis.

Upon certain bankruptcy events, the Company is required to pay to each Holder an amount in cash equal to the Liquidation Preference being redeemed. From and after the Applicable Date, each Holder shall have the right to require the Company to redeem all or any part of the Holder’s Convertible Preferred Stock for an amount equal to the Liquidation Preference.

Each Holder of Convertible Preferred Stock has the right, at its option, to convert its Convertible Preferred Stock, in whole or in part, into fully paid and non-assessable shares of our Common Stock at an initial conversion price equal to $7.00 per share. The conversion price is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events, and is also subject to adjustment in the event of subsequent offerings of Common Stock or convertible securities by the Company for less than the conversion price.

Subject to certain conditions, the Company may from time to time, at its option, require conversion of all or any portion of the outstanding shares of Convertible Preferred Stock to Common Stock if, for at least 20 consecutive trading days during the respective measuring period the closing price of the Common Stock was at least 150% of the conversion price. The Company may not exercise its right to mandatorily convert outstanding shares of Convertible Preferred Stock unless certain liquidity conditions with regard to the shares of Common Stock to be issued upon such conversion are satisfied.

The Holders are entitled to vote with the holders of the shares of Common Stock on all matters submitted for a vote of holders of shares of Common Stock (voting together with the holders of shares of Common Stock as one class) on an as-converted basis, subject to certain limitations.

Additionally, for so long as 30% of the outstanding Convertible Preferred Stock remains outstanding, certain matters will require the approval of the majority of the outstanding Convertible Preferred Stock, voting as a separate class, including (i) amending, altering or repealing any provision of the Certificate of Designations; (ii) amending, altering or repealing any provision of the Company’s Certificate of Incorporation or Bylaws, in each case, in a manner that adversely affects the powers, preferences or rights of the Convertible Preferred Stock; (iii) increasing or decreasing the authorized number of shares of Convertible Preferred Stock (except to provide for the issuance of PIK dividends); (iv) creating (including by reclassification), issuing shares of or increasing the authorized number of shares of any additional class or series of capital stock of the Company unless such class or series rank junior to the Convertible Preferred Stock and are issued at fair market value; (v) purchasing or redeeming or paying, declaring or setting aside any fund for, any dividend or distribution on, any Common Stock or other Junior Stock (as defined in the Certificate of Designations), other than purchases of equity securities of the Company upon the termination of an employee of the Company or any of its subsidiaries in accordance with the terms of such employee’s employment agreement or any equity incentive or similar plan approved by the Board; or (vi) creating, incurring, granting, entering into, permitting, assuming or allowing, directly or indirectly, (a) any indebtedness by the Company (or any of its subsidiaries), excluding equity securities and non-convertible preferred stock (but including convertible debt), at any time when, or as a result of which, the principal amount of the Company’s total outstanding and available indebtedness exceeds $175,000,000, or (b) any lien, charge or other encumbrance on all or substantially all of the Company’s (or any of its subsidiaries’) properties or assets.

Immediately following the closing of the Preferred Share Repurchase Agreement, two Series A Convertible Preferred Stock directors, Nathaniel Calloway and Christopher Kiper, were appointed to the Company’s Board of Directors.

Alcon Supply Agreement

On May 3, 2023, the Company entered into an Amended and Restated Supply Agreement (the “Supply Agreement”), dated May 3, 2023, with Alcon, which amended and restated certain existing supply agreements entered into between the Company and Alcon-Couvreur N.V., an affiliate of Alcon, related to the Company’s manufacture and supply of sodium hyaluronate (“HA”) for Alcon.

The initial term of the Supply Agreement expires December 31, 2033. Following the initial term, the Supply Agreement automatically extends for an additionaltwo-year term unless Alcon provides the Company with a notice of non-renewal prior to the expiration of the initial term. The Supply Agreement also contains certain termination provisions which provide that the agreement may be terminated (a) by Alcon upon six months’ written notice to the Company, or (b) by either party if the other party fails to perform or otherwise breaches any of its material obligations under the Supply Agreement, the non-breaching party notifies the breaching party of its intent to terminate the Supply Agreement, and the breaching party fails to cure such breach.

The Supply Agreement contains terms and provisions customary for transactions of this type, including product warranties and confidentiality and indemnification obligations. Orders of HA pursuant to the Supply Agreement are based on customary forecasting mechanics and are payable by Alcon based on certain prices that are subject to annual index-based adjustments. Pursuant to the Supply Agreement, the Company is also required to commit certain HA manufacturing capacity based on Alcon’s forecasts. Alcon and the Company have also agreed to negotiate in good faith to finalize a plan to increase the Company’s HA manufacturing capacity to meet the anticipated volumes. In the event the Company is unable to supply the agreed-upon volumes and safety stock pursuant to the Supply Agreement, under certain circumstances, Alcon will be entitled to certain rights with respect to the manufacturing and supply of HA for Alcon.

All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.

Property and Equipment and Finite-Lived Intangible Assets

Property and equipment and finite-lived intangible assets are stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense. Depreciation is expensed on a straight-line basis over the estimated useful lives of the respective assets. Customer relationships are amortized to operating expense on an accelerated basis that reflects the pattern in which the economic benefits are consumed. Leasehold improvements are amortized on a straight-line basis over the lesser of the economic life of the improvement or the life of the lease. Depreciation and amortization expense for these assets is recorded either in cost of product sales or selling, general and administrative expenses in the consolidated statement of operations, depending on the asset and its intended use. The Company capitalizes interest on long-term construction in process projects based on their incremental borrowing rate.

The Company capitalizes software development costs for internal use. Capitalization of software development costs begins in the application development stage and ends when the asset is placed into service. The Company amortizes such costs on a straight-line basis over estimated useful lives ofthree toseven years, and the amortization expenses is recorded either in cost of product sales or selling, general and administrative expenses in the consolidated statement of operations, depending on the asset and its intended use.

Property, plant and equipment and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. The Company’s impairment review requires significant management judgment including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the disposal of the assets. The Company conducts quarterly reviews of idle and underutilized equipment, and reviews business plans for possible impairment indicators. Impairment is indicated when the carrying amount of the asset (or asset group) exceeds its estimated future undiscounted cash flows and the impairment is viewed as other than temporary. When impairment is indicated, an impairment charge is recorded for the difference between the asset’s book value and its estimated fair value. Depending on the asset, estimated fair value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value of assets and would increase or decrease any impairment measurement.

During fiscal year 2022, the Company recorded impairment charges of $5.8 million and $11.9 million related to Yucatan's customer relationships, and property & equipment, respectively. These impairment charges were primarily a result of an indication of a decrease in the fair market values of the Yucatan businesses driven by lower market valuations and a decrease in projected cash flows. The Yucatan related impairment charges are included in Loss from discontinued operations on the Consolidated Statements of Operations.

Impairment Review of Goodwill and Indefinite-Lived Intangible Asset

The Company tests its goodwill and trademarks with indefinite lives annually for impairment in the fiscal fourth quarter or earlier if there are indications during a different interim period that these assets may have become impaired.

On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of its indefinite-lived intangible assets and goodwill, based on management’s assessment of changes in its business and other economic factors since the most recent annual evaluation. Such changes, if significant or material, could indicate a need to update the most recent annual tests for impairment of the indefinite-lived intangible assets during the current period. The results of these tests could lead to write-downs of the carrying values of these assets in the current period.

With respect to goodwill, the Company has the option to first assess qualitative factors such as macro-economic conditions, industry and market environment, cost factors, overall financial performance of the Company, cash flow from operating activities, market capitalization, litigation, and stock price. If the result of a qualitative test indicates a potential for impairment of a reporting unit, a quantitative test is performed. The quantitative test compares the carrying amount of a reporting unit that includes goodwill to its fair value. The Company determines the fair value using a 50/50 weighting of the income and market approaches.

To determine the fair value of a reporting unit as part of its quantitative test, the Company uses a discounted cash flow (“DCF”) method under the income approach, as it believes that this approach is the most reliable indicator of the fair value of its businesses and the fair value of their future earnings and cash flows. Under this approach, which requires significant judgments, the Company estimates the future cash flows of each reporting unit and discounts these cash flows at a rate of return that reflects their relative risk and rate of return an outside investor could expect to earn. The cash flows used in the DCF method are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced, and the broader business strategy for the long term. The other key estimates and factors used in the DCF method include, but are not limited to, future volumes, net sales and expense growth rates, and gross margin and gross margin growth rates. Changes in such estimates or the application of alternative assumptions could produce different results. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

For trademarks and other intangible assets with indefinite lives, the Company has the option to first assess qualitative factors such as macro-economic conditions, industry and market environment, cost factors, overall financial performance of the Company, litigation, and changes in the business in its annual, qualitative analysis to test for impairment. If the results of a qualitative test indicate a potential for impairment of an intangible asset with an indefinite life, a quantitative test is performed. The quantitative test compares the estimated fair value of an asset to its carrying amount. If the carrying amount of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying amount and the estimated fair value. The Company uses the income approach to estimate the fair value of its trademarks. This approach requires significant judgments in determining the royalty rates and the assets’ estimated cash flows as well as the appropriate discount rates applied to those cash flows to determine fair value. Changes in such estimates or the use of alternative assumptions could produce different results.

During fiscal year 2022, the Company recorded impairment charges of $32.1 million and $20.0 million related to its Eat Smart business and Yucatan goodwill, respectively. The Company also recorded an impairment charge of $8.4 million related to its Yucatan trademarks. These impairment charges were primarily a result of an indication of a decrease in the fair market values of the Eat Smart and Yucatan businesses driven by lower market valuations and a decrease in projected cash flows. The Eat Smart and Yucatan impairment charges are included in Loss from discontinued operations within the Consolidated Statements of Operations.

During fiscal year 2023, the Company recorded an impairment charge of $1.0 million related to Yucatan 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 and O Olive businesses driven by lower market valuations and a decrease in projected cash flows. The impairment charges are included in Loss from sales in discontinued operations on the Consolidated Statements of Operations.

Other than the goodwill and intangibles write-offs discussed above, there were no other impairment losses for goodwill or intangibles during fiscal years 2023, 2022 and 2021.

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.

Investment in Non-Public Company

On February 15, 2011, the Company made an investment in Windset which is reported at fair value in the accompanying Consolidated Balance Sheets as of May 30, 2021. The Company has elected to account for its investment in Windset under the fair value option. See Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies for further information. On June 1, 2021, the Company sold all of its equity interest in Windset to the Newell Capital Corporation and Newell Brothers Investment 2 Corp.

Deferred Revenue

Cash received in advance of services performed are recorded as deferred revenue.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. The Company maintains valuation allowances when it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the Company’s income tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company considers such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

In addition to valuation allowances, the Company establishes accruals for uncertain tax positions. The tax-contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company’s effective tax rate includes the impact of tax-contingency accruals as considered appropriate by management.

A number of years may elapse before a particular matter, for which the Company has accrued, is audited and finally resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its tax-contingency accruals are adequate to address known tax contingencies. Favorable resolution of such matters could be recognized as a reduction to the Company’s effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the Company’s effective tax rate in the year of resolution. Any resolution of a tax issue may require the use of cash in the year of resolution. The Company’s tax-contingency accruals are recorded in Other accrued liabilities in the accompanying Consolidated Balance Sheets.

Per Share Information

Accounting guidance requires the presentation of basic and diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities and is computed using the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution as if securities or other contracts to issue Common Stock were exercised or converted into Common Stock. Diluted common equivalent shares consist of stock options and restricted stock units, calculated using the treasury stock method.

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

Due to the Company’s net loss in fiscal years 2023, 2022, and 2021 the net loss per share includes only the weighted average shares outstanding and thus excludes restricted stock unit awards (“RSUs”) and stock options, as such impact would be antidilutive. The Company's convertible preferred stock does not participate in losses of the company, and such securities have also been excluded from diluted net loss per share or calculating common and preferred diluted net loss under the two class method. See Note 5 - Stock Based Compensation and Stockholders’ Equity for more information on outstanding RSUs and stock options.

Research and Development Expenses

Costs related to both research and development contracts and Company-funded research is included in research and development expenses. Research and development costs are primarily comprised of salaries and related benefits, supplies, travel expenses, consulting expenses and corporate allocations.

Accounting for Stock-Based Compensation

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 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. The use of Black-Scholes requires the Company to make estimates and assumptions, such as expected volatility, expected term, and risk-free interest rate. RSUs are valued at the closing market price of the Company’s Common Stock on the date of grant. The Company uses the straight-line single option method to calculate and recognize the fair value of stock-based compensation arrangements.

Employee Savings and Investment Plans

The Company sponsors a 401(k) plan (“Lifecore Plan”), which is available to all full-time Lifecore Biomedical employees and allows participants to contribute from 1% to 50% of their salaries, up to the Internal Revenue Service limitation into designated investment funds. The Company matches 100% on the first 3% and 50% on the next 2% contributed by an employee. Employee and Company contributions are fully vested at the time of the contributions. The Company retains the right, by action of the Board of Directors, to amend, modify, or terminate the plan. For fiscal years 2023, 2022 and 2021, the Company contributed $1.5 million, $1.4 million and $1.1 million, respectively, to the Lifecore Plan.

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 not elected the fair value option for any of its other eligible financial assets or liabilities.

Applicable accounting guidance establishes 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.

The New Term Loan Credit Facility contains embedded derivatives requiring bifurcation as a derivative instrument. The derivative liability related to the Term Loan is recorded as a discount to the term loan in the consolidated financial statements. The embedded derivative liability is subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of other expense, net. The fair value of the embedded derivative liabilities associated with the term loan was estimated using a probability weighted discounted cash flow model to measure the fair value. This involves significant Level 3 inputs and assumptions including an (i) estimated probability and timing of a change in control and event of default, and (ii) our risk-adjusted discount rate. At May 28, 2023, the fair value of the embedded derivative liability approximated the fair value upon issuance.

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 Sheets 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 non-recurring basis (in thousands):

The key inputs to the valuation models that were utilized to estimate the fair value of the debt derivative liability were as follows as of May 28, 2023:

The following table reflects the fair value roll forward reconciliation of Level 3 assets and liabilities measured at fair value for the twelve months ended May 29, 2022 (in thousands):

Accounting Pronouncements

On January 9, 2023, upon the issuance of the Series A Convertible Preferred Stock (as defined in Note 2– Convertible Preferred Stock), the Company adopted ASU No. 2020-06, “Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40)”. This ASU simplified the accounting for certain financial instruments with characteristics of liabilities and equity. The FASB reduced the number of accounting models for convertible debt and convertible preferred stock instruments and made certain disclosure amendments to improve the information provided to users.

We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.

Correction of Error in Previously Reported Fiscal Year 2022 and 2021 Annual Financial Statements

The Company is restating its previously issued audited consolidated financial statements as of and for the years ended May 29, 2022 and May 30, 2021 (“Prior Financial Statements”), as well as the interim periods within those fiscal years and interim periods within fiscal year 2023, in the fiscal year 2023 Annual Report on Form 10-K (the “Restatement”). The Restatement results from the identification of errors related to the accounting for net realizable value of its inventory, capitalized interest for construction in progress, revenue and cost of goods sold, and reclassification of the presentation of certain operating costs and expenses of continuing operations and discontinued operations. The restatement also includes previously unrecorded adjustments, including out of period errors, being recorded in the correct accounting period. Impacts for periods prior to fiscal year 2021 have been accumulated and presented as an adjustment to the beginning balance of retained earnings for the May 30, 2021 fiscal year.

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

For a more detailed description of the financial impact of the restatements of the Non-Reliance Periods, see Note 13 - Correction of Errors in Previously Reported Fiscal Year 2022 and 2021 Annual Financial Statements and Note 14 – Unaudited Quarterly Consolidated Financial Information included in Part IV, Item 15 of this Annual Report on Form 10-K.

2. Convertible Preferred Stock

On January 9, 2023, the Company issued an aggregate of 38,750 shares of the Series A Convertible Preferred Stock, par value $0.001 per share (the “Convertible Preferred Stock”), all of which are convertible into shares of Common Stock at the election of the holders of the Convertible Preferred Stock, subject to the exchange and beneficial ownership limitations described below. The Convertible Preferred Stock ranks senior to the Company’s Common Stock with respect to dividends, distributions and payments on liquidation, winding-up and dissolution. Upon issuance, the shares of the Convertible Preferred Stock are fully paid and non-assessable, which means that its holders have paid their purchase price in full and are not required to pay additional funds. The Company recorded the Convertible Preferred Stock net of issuance costs of $0.7 million. The issuance costs are being accounted for similar to a discount on the Convertible Preferred Stock that is being reduced over the period ending June 29, 2026 (using the effective interest method) as a charge to additional paid in capital.

Dividends

The holders of Convertible Preferred Stock are entitled to dividends on the Liquidation Preference (as defined below) at the rate of 7.5% per annum, payable in-kind (“PIK”). The Company may, at its option, pay such dividends in cash from and after the earlier of June 29, 2026, or the termination or waiver of the restriction on cash dividends and/or redemptions that is set forth in the Credit Facilities (such earlier date, the “Applicable Date”). The holders are also entitled to participate in dividends declared or paid on the Common Stock on an as-converted basis.

Liquidation and Redemption

Upon a liquidation, dissolution, winding up or change of control of the Company, each share of Convertible Preferred Stock will be entitled to receive an amount per share of Convertible Preferred Stock equal to the greater of (i) the purchase price paid by the purchaser at issuance, plus all accrued and unpaid dividends (the “Liquidation Preference”) and (ii) the amount that the holder of Convertible Preferred Stock (each, a “Holder” and collectively, the “Holders”) would have been entitled to receive at such time if the Convertible Preferred Stock had been converted into Common Stock immediately prior to such liquidation event. Upon certain bankruptcy events, the Company is required to pay to each Holder an amount in cash equal to the Liquidation Preference being redeemed. From and after the Applicable Date, each Holder shall have the right to require the Company to redeem all or any part of such Holder’s Convertible Preferred Stock for an amount equal to the Liquidation Preference. At the time of a redemption, if the Company does not have sufficient funds to redeem any preferred shares submitted for redemption, each holder is entitled to receive interest on the unpaid portion of the redemption at 1% per month until fully paid (the “1% contingent interest”). As of May 28, 2023, the aggregate liquidation preference of the Convertible Preferred Stock approximated $39.3 million.

Conversion

Each Holder has the right, at its option, to convert its Convertible Preferred Stock, in whole or in part, into fully paid and non-assessable shares of Common Stock at an initial conversion price equal to $7.00 per share. The conversion price is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events, and is also subject to adjustment in the event of subsequent offerings of Common Stock or convertible securities by the Company for less than the conversion price. Pursuant to the terms of the Certificate of Designations of the Convertible Preferred Stock filed by the Company with the Delaware Secretary of State on January 9, 2023, unless and until approval of the Company’s stockholders is obtained as contemplated by NASDAQ listing rules, no Holder may convert shares of Convertible Preferred Stock through either an optional or a mandatory conversion into shares of Common Stock if and solely to the extent that the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock that is equal to 19.99% of the amount of Common Stock of the Company outstanding on the date on which we issued the Convertible Preferred Stock (the “Exchange Limit”). Additionally, subject to certain exceptions and waiver by each Holder, the Company will not issue any shares of Common Stock to any respective Holder to the extent that such issuance of Common Stock would result in such Holder beneficially owning in excess of 9.99% of the then-outstanding Common Stock (together with the Exchange Limit, the “Conversion Limits”). Subject to certain conditions, the Company may from time to time, at its option, require conversion of all or any portion of the outstanding shares of Convertible Preferred Stock to Common Stock if, for at least 20 consecutive trading days during the respective measuring period the closing price of the Common Stock was at least 150% of the conversion price (the “Mandatory Conversion Right”). The Company may not exercise this Mandatory Conversion Right unless certain conditions with regard to the shares of Common Stock to be issued upon such conversion are satisfied.

Voting

Each Holder is entitled to vote with the holders of the shares of Common Stock on all matters submitted for a vote of holders of shares of Common Stock (voting together with the holders of shares of Common Stock as one class). Each Holder is entitled the whole number of votes equal to the number of shares of Common Stock into which such Holder’s shares of Convertible Preferred Stock would be convertible on the record date for the vote or consent (subject to the Conversion Limits).

Registration Rights Agreement

On January 9, 2023, in connection with the issuance of the Convertible Preferred Stock, the Company and the Holders also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, the Company granted the Holders certain registration rights with respect to the shares of Common Stock issuable upon conversion of the Convertible Preferred Stock. The Registration Rights Agreement contains monetary penalties if the registration statement is not declared effective by the SEC within 90 days of the issuance of the Convertible Preferred Stock on January 9, 2023, or if earlier, the fifth business day after the SEC notifies the Company that the registration statement is not subject to further review. The Registration Rights Agreement also contains monetary penalties if the Company fails to maintain the effectiveness of the registration statement once deemed effective by the SEC. As of May 28, 2023, the Company has accrued $0.5 million in monetary penalties under the Registration Rights Agreement that was paid in June 2023. As of the date of this Annual Report on Form 10-K, the Company has incurred $2.0 million in monetary penalties under the Registration Rights Agreement due to delinquent filing of the annual and quarterly reports with the SEC.

Classification

The Convertible Preferred Stock is redeemable by the holders after June 29, 2026. Accordingly, the Convertible Preferred Stock is redeemable contingent upon the occurrence of an event that is not probable. As a result, the Company has presented the Convertible Preferred Stock outside of permanent equity. The Convertible Preferred Stock was recorded at its issuance date fair value of the net proceeds raised and will not require subsequent measurement until it becomes probable of being redeemable.

The Company recorded proceeds of $38.8 million, net of costs associated with the issuance of the Convertible Preferred Stock of $0.7 million, totaling $38.1 million. The discount to the proceeds arising from issuance costs is being amortized up to its full redemption value through June 29, 2026. As of May 28, 2023, the Company recorded PIK dividends of $1.2 million and accretion of discount of $0.1 million as a reduction to Additional Paid in Capital and an increase to the Convertible Preferred Stock balance to $39.3 million. As of May 28, 2023, there were approximately 39,000 shares of Convertible Preferred Stock outstanding.

3. Property and Equipment

Property and equipment consists of the following (in thousands):

Depreciation and amortization expense for property and equipment for the fiscal years ended May 28, 2023, May 29, 2022 and May 30, 2021 was $10.3 million, $7.1 million and $5.3 million, respectively. Amortization related to finance leases, which is included in depreciation expense, was $0.1 million for the fiscal years ended May 28, 2023, May 29, 2022, and May 30, 2021.

During fiscal years 2023, 2022 and 2021, the Company capitalized $0.4 million, $0.3 million, and $0.4 million in software development costs, respectively. Amortization related to capitalized software was $0.5 million, $0.4 million, and $0.4 million for fiscal years ended May 28, 2023, May 29, 2022 and May 30, 2021, respectively. The unamortized computer software costs as of May 28, 2023 and May 29, 2022 were $1.8 million and $1.8 million, respectively. Capitalized interest on construction projects was $3.6 million, $2.1 million, and $1.8 million for fiscal years ended May 28, 2023, May 29, 2022 and May 30, 2021, respectively.

The Company recorded animpairment of property and equipment related to the Curation Foods Santa Maria Office leasehold improvements of $3.7 million and an impairment of property and equipment related to Yucatan of $11.9 million for the year ended May 29, 2022, which are recorded in Loss on discontinued operations on the Consolidated Statements of Operations. There wereno impairments to Property & Equipment for the year ended May 28, 2023.

Assets Held for Sale

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 wasno impairment recorded in fiscal year 2022. These assets were sold in fiscal year 2023 for gross proceeds of $3.1 million and for a gain of $2.1 million.

4. Goodwill and Intangible Assets

Goodwill

Goodwill was $13.9 million as of both May 28, 2023 and May 29, 2022. There wereno changes in goodwill during fiscal years 2023 and 2022. We have determined that Lifecore is the appropriate reporting unit for testing goodwill for impairment.

Intangible Assets

As of May 28, 2023 and May 29, 2022, the Company's intangible assets consisted of the following (in thousands):

Amortization expense related to finite-lived intangible assets was $0.3 million for both fiscal year 2022 and 2021. There wasno amortization expense during fiscal year 2023. As the finite-lived intangible assets are fully amortized as of May 28, 2023, there is no future amortization expense.

5. Stock-based Compensation and Stockholders’ Equity

Common Stock and Stock Option Plans

On October 16, 2019, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2019 Stock Incentive Plan (the “Plan”) became effective and replaced the Company’s 2013 Stock Incentive Plan (the “2013 Plan”). Employees (including officers), consultants and directors of the Company and its subsidiaries and affiliates are eligible to participate in the Plan.

The Plan provides for the grant of stock options (both nonstatutory and incentive stock options), stock grants, stock units and stock appreciation rights. Awards under the Plan will be evidenced by an agreement with the Plan participants and 2.0 million shares of the Company’s Common Stock (“Shares”) were initially available for award under the Plan. Under the Plan, no recipient may receive awards during any fiscal year that exceeds the following amounts: (i) stock options covering in excess of 500,000 Shares in the aggregate; (ii) stock grants and stock units covering in excess of 250,000 Shares in the aggregate; or (iii) stock appreciation rights covering more than 500,000 Shares in the aggregate. In addition, awards to non-employee directors are discretionary. However, a non-employee director may not be granted awards in excess of an aggregate fair market value of $120,000 during any fiscal year. The exercise price of the options is the fair market value of the Company’s Common Stock on the date the options are granted. As of May 28, 2023,2,302,740 options to purchase shares and restricted stock units (“RSUs”) were outstanding.

On October 10, 2013, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2013 Plan became effective and replaced the Company’s 2009 Stock Incentive Plan. Employees (including officers), consultants and directors of the Company and its subsidiaries and affiliates were eligible to participate in the 2013 Plan. The 2013 Plan provided for the grant of stock options (both nonstatutory and incentive stock options), stock grants, stock units and stock appreciation rights. Under the 2013 Plan,2.0 million shares were initially available for awards and as of May 28, 2023,408,375 options to purchase shares and RSUs were outstanding.

At May 28, 2023, the Company had 4.2 million common shares reserved for future issuance under the Company’s stock incentive plans.

Convertible Preferred Stock

The Company has authorized 2.0 million shares of convertible preferred stock, and as of May 28, 2023 and May 29, 2022 has 38,750 and 0 shares, respectively, of convertible preferred stock outstanding.

Grant Date Fair Value

The Company uses the Black-Scholes option pricing model to calculate the grant date fair value of stock option awards. The use of an option pricing model requires the Company to make estimates and assumptions, including the expected stock price volatility, expected life of option awards, risk-free interest rate, and expected dividend yield which have a significant impact on the fair value estimates. As of May 28, 2023, May 29, 2022 and May 30, 2021, the fair value of stock option grants were estimated using the following weighted average assumptions:

Stock-Based Compensation Activity

A summary of the activity under the Company’s stock option plans as of May 28, 2023 and changes during the fiscal year then ended is presented below:

A summary of the Company’s restricted stock unit award activity as of May 28, 2023 and changes during the fiscal year then ended is presented below:

Stock-Based Compensation Expense

The following table summarizes the stock-based compensation by statement of operations line item:

As of May 28, 2023, there was $4.2 million of total unrecognized compensation expense related to unvested equity compensation awards granted under the Company’s stock incentive plans. Total expense is expected to be recognized over the weighted-average period of 1.80 years for stock options and 1.36 years for restricted stock unit awards.

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 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 the Company 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 fiscal years 2023, 2022 and 2021, the Company didnot repurchase any shares.

6. Debt

Prior Term Loan Facility

On December 31, 2020, the Company refinanced its previously existing term loan and revolving credit facility by entering into (i) a credit agreement with Goldman Sachs Specialty Lending Group, L.P. (“Goldman”) and Guggenheim Credit Services, LLC (“Guggenheim”), as lenders, which provided the Company, Curation Foods and Lifecore, as co-borrowers, with term loan borrowings of up to $170.0 million (the “Prior Term Loan Facility”), and (ii) a credit agreement with BMO Harris Bank, N.A. (“BMO”) as lender, which 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 together with Prior Term Loan Facility, the “Credit Facilities”). The Revolving Credit Facility is, and the Prior Term Loan Facility was, guaranteed, and secured by, substantially all of the Company’s and the Company’s direct and indirect subsidiaries’ assets.

In April 2022, the Company amended the Credit Facilities to make available an additional $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.

On January 9, 2023, the Company entered into further amendments to the Credit Facilities to, among other things, provide for the limited waiver from events of default under the Credit Facilities related to certain financial covenant requirements, as well as a waiver of certain existing terms and covenants under the Prior Term Loan, including with respect to the fixed coverage ratio leverage ratio and minimum liquidity covenants,2% increase of annual interest rate, which was payable in kind, and a one-time amendment fee in an amount equal to 3% of the principal amount as of January 9, 2023. This amendment also reduced the maximum commitment under the Revolving Credit Facility from $75.0 million to $60.0 million, which was further reduced to $40.0 million upon the sale of Yucatan.

The Prior Term Loan Facility would have matured on December 31, 2025. The Revolving Credit Facility matures on December 31, 2025.

Interest on the Revolving Credit Facility is based upon the Company’s average availability, at a per annum rate of either (i) SOFR 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% and plus (iii) for the period from December 1, 2022 until January 31, 2023, additional 2% per annum. Interest on the Prior Term Loan Facility was at a per annum rate based on either (i) the base rate plus a spread of 7.50% or (ii) the SOFR rate plus a spread of 8.50%. The Prior Term Loan Credit Facility also provided 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 Revolving Credit Facility contains, and the Prior Term Loan Facility contained, 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 January 2023 amendments to the Credit Facilities, the Company incurred debt issuance costs from the lender and third-parties of $4.2 million (comprised of $1.1 million in cash and $3.1 million paid-in-kind) and $62.5 thousand, respectively, during the year ended May 28, 2023.

On May 22, 2023, the Company entered into the New Term Loan Credit Facility (as defined below) with Alcon. The proceeds of this New Term Loan Credit Facility were used to repay the Prior Term Loan Facility in its entirety. In connection with the New Term Loan Credit Facility, the Company recorded a loss on debt extinguishment in the consolidated statement of operations amounting to $23.7 million, comprised of a prepayment penalty of $12.9 million, write-off unamortized deferred financing fees related to the Prior Term Loan Credit Facility of $7.5 million and third-party fees of $3.3 million.

New Term Loan Credit Facility

On May 22, 2023, the Company, Curation and Lifecore Biomedical (together with the Company and Curation, the “Borrowers”), certain of the Company’s other subsidiaries, as guarantors, and Alcon, as administrative agent, collateral agent and lender, entered into that certain Credit and Guaranty Agreement (the “New Term Loan Credit Facility”). The New Term Loan

Credit Facility refinanced in full all obligations of the Borrowers and their subsidiaries under the Prior Term Loan Credit Facility, which was terminated upon the entry into the New Term Loan Credit Facility and all noncompliance with debt covenants was thereby cured. Prior to the New Term Loan Credit Facility and continuing, Alcon was/is a significant customer of the Company.

The New 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 New Term Loan Credit Facility mature on May 22, 2029. The New Term Loan Credit Facility is secured by the same collateral that secures the Revolving Credit Facility, with relative priorities in respect thereof, as set forth in the Intercreditor Agreement (as defined below).

The loans under the New Term Loan Credit Facility have a fixed interest rate equal to 10% per annum. Interest is payable-in-kind until the third anniversary of the closing date and following the third anniversary of the closing date is payable at a rate equal to 3% per annum in cash with the remainder payable-in-kind, in each case, unless otherwise elected by the Borrowers to pay a greater proportion in cash. The New Term Loan Credit Facility contains customary affirmative covenants including, but not limited to, financial reporting requirements and maintenance of existence requirements and negative covenants, including, but not limited to, limitations on the incurrence of debt, liens, investments, restricted payments, restricted debt payments, and affiliate transactions. The New Term Loan Credit Facility contains one financial covenant, a minimum liquidity covenant, requiring $4.0 million of Consolidated Liquidity (as defined in the New Term Loan Credit Facility) as of the end of each fiscal quarter of the Company.

The Company identified a number of embedded derivatives that require bifurcation from the New Term Loan Credit Facility that were separately accounted for in the consolidated financial statements as one compound derivative liability. Certain of these embedded features include change in control provisions, events of default and contingent rate increases and were determined to qualify as an embedded derivative under ASC 815-40. The embedded derivative and the New Term Loan Credit Facility obligation have been netted to result in a net embedded derivative liability and is classified as a Level 3 financial liability in the fair value hierarchy as of May 28, 2023. The fair value of the embedded derivative liabilities associated with the term loans was estimated using the discounted cash flow method under the income approach. This involves significant Level 3 inputs and assumptions including an estimated probability and timing of a change in control and events of default. The Company will re-evaluate this assessment each reporting period and record any gains or losses in other income (expense). The initial recognition of the embedded derivative liability upon issuance of the New Term Loan Credit Facility on May 22, 2023 was $64.9 million and is recorded as a reduction the term loan obligation in the consolidated Balance Sheets. Amortization of the debt discount is based on the effective interest method over the term of the debt. The amortization of the debt discount between the issuance of May 22, 2023 and May 28, 2023 amounted to $0.1 million. At May 28, 2023, the fair value of the embedded derivative liability approximated the fair value upon issuance.

Pledge and Security Agreement

Also on May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as grantors (collectively, the “Grantors”), entered into that certain Pledge and Security Agreement (the “Term Loan Security Agreement”), dated as of May 22, 2023, with Alcon, as collateral agent. Pursuant to the Term Loan Security Agreement, the Grantors secured their obligations under the New Term Loan Credit Facility by granting to Alcon, as collateral agent, a first priority security interest in certain collateral, including but not limited to equipment, fixtures, real property and intellectual property. The security interest granted by the Grantors under the Term Loan Security Agreement continues in effect until the payment in full of all of the secured obligations under the New Term Loan Credit Facility.

Amendment to Revolving Credit Facility

On May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as guarantors, entered into a Limited Waiver, Consent and Fifth Amendment (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 Agreement as of the date of the Revolving Loan Amendment, (ii) the reduction of the maximum amount available under the Revolving Credit Agreement 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 New Term Loan Credit Facility and address the relative priorities and credit for borrowings related to the Company’s commercial relationships with Alcon.

In connection with the entry into the Revolving Loan Amendment, the Company also agreed to pay to BMO an amendment fee of $1.2 million, $0.8 million of which is paid concurrently with the Company’s entry into the Revolving Loan Amendment. The remaining $0.4 million obligation is payable at the earlier of (i) repayment in full of the Company’s obligations, and termination of all commitments, under the Revolving Credit Facility and (ii) the occurrence of a Change of Control (as defined in the Revolving Credit Facility). The Company will accrete the remaining amendment fee over the life of the credit facility. In connection with the entry into the Revolving Loan Amendment, the Company recorded $1.2 million of debt origination costs.

BMO and Alcon also entered into an intercreditor agreement regarding their relative rights, as lenders, in the assets of the Company and its subsidiaries that serve as collateral for their respective credit facilities (the “Intercreditor Agreement”).

As the Company's borrowings under the Amended Loan Amendments for the next twelve months will increase to above the $16.8 million as of the balance sheet date, and scheduled repayments is not due until December 31, 2025, we have determined the line of credit to be classified as a long-term liability as of May 28, 2023.

Equipment Sale and Leaseback Agreements

On May 22, 2023, the Company entered into that certain Equipment Sale and Leaseback Agreement (the “Equipment Sale and Leaseback Agreement”), dated May 22, 2023, with Alcon, wherein the Company sold $10.0 million (subject to certain post-closing adjustments) (the “Purchase Price”) of certain equipment, machinery, and other property associated with the production of sodium hyaluronate (the “Equipment”) to Alcon. 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 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 that certain Equipment Lease Agreement (the “Equipment Lease Agreement” and, together with the Equipment Sale Leaseback Agreement, the New Term Loan Credit Facility, the Term Loan Security Agreement, and the Revolving Loan Amendment, collectively, the “Refinancing Transactions”), dated May 22, 2023, 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) 1/40th of the Purchase Price (the “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 balance sheet and the $7.7 million Purchase Price (as adjusted) of the equipment sale finance obligation (the “Equipment Sale Finance Liability”) has been classified in Long Term debt.

The Equipment Lease Agreement contains terms and provisions (including representations, covenants and conditions) that are generally customary for a commercial lease of this nature, including obligations relating to the use, operation and maintenance of the Equipment. During the term of the lease, Alcon is not permitted to sell or encumber the Equipment. Alcon is only entitled to cancel the Equipment Lease Agreement in the event of insolvency, liquidation or bankruptcy, and its remedies for other breaches of the Equipment Lease Agreement are otherwise limited to monetary damages.

As of May 28, 2023, the Company had $16.8 million in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of 12.16%. As of May 28, 2023, the Company had $142.5 million in borrowings outstanding under the New Term Loan Facility, at an effective annual interest rate of 10.0%.

As of May 28, 2023, the Company was in compliance with all financial covenants under the New Term Loan Facility and Revolving Credit Facility. The Company obtained a waiver for the timing of delivery of financial statements and certain amendments to the credit agreements from both of their lenders. See Note 15, Subsequent Events, for further discussion.

Long-term debt consists of the following as of May 28, 2023 and May 29, 2022 (in thousands):

The future minimum principal payments of the Company’s term loan and equipment sale finance liability for each year presented are as follows (in thousands), excluding forecasted cash and paid-in-kind interest:

7. Income Taxes

The (benefit) provision for income taxes from continuing operations consisted of the following:

The actual (benefit) provision for income taxes from continuing operations differs from the statutory U.S. federal income tax rate as follows:

(1) Statutory rate was 21.0% for fiscal year 2023, 2022 and 2021.

The effective tax rate for fiscal year 2023 changed from a tax benefit of 25.19% to a tax provision of 0.48% in comparison to fiscal year 2022 after adjustment for discontinued operations. The decrease in the effective tax rate for fiscal year 2023 was primarily due to a significant valuation allowance increase and the impairment of Yucatan goodwill. The income tax (provision) benefit from discontinued operations for fiscal years 2023, 2022, and 2021 of $0.0 million, $0.7 million, and $1.4 million are not included in the above income tax benefit from continuing operations.

The effective tax rate for fiscal year 2022 changed from a tax provision benefit of 21.32% to a tax provision benefit of 25.19% in comparison to fiscal year 2021 after adjustment for discontinued operations. The increase in the income tax benefit for fiscal year 2022 was primarily due to significant decrease in the Company’s loss before tax from continuing operations, and the decrease in change in valuation allowance which offsets the impairment of Yucatan goodwill.

Significant components of deferred tax assets and liabilities reported in the accompanying Consolidated Balance Sheets consisted of the following:

The effective tax rates for fiscal years 2023 and 2022 differ from the blended statutory federal income tax rate of 21% as a result of several factors, including the change in valuation allowance related with federal, state and foreign deferred balances, foreign rate differential, change in ending state deferred blended rate, impairment of goodwill and intangibles, and the benefit of federal and state research and development credits.

As of May 28, 2023, the Company had federal, California, Indiana, and other state net operating loss carryforwards of approximately $171.8 million, $70.7 million, $33.7 million, and $33.1 million respectively. These losses expire in different periods through 2032, if not utilized. The Company acquired additional net operating losses through the acquisition of Greenline. Utilization of these acquired net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of 1986 and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation.

As of May 28, 2023, the Company has federal, California, and Minnesota research and development tax credit carryforwards of approximately $3.3 million, $2.2 million, and $1.7 million, respectively. The research and development tax credit carryforwards have an unlimited carryforward period for California purposes,20-year carryforward for federal purposes, and 15-year carryforward for Minnesota purposes.

Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, we determined that as of May 28, 2023, a valuation allowance of federal $41.1 million, and state $11.7 million should be recorded as a result of uncertainty around the utilization of federal and state net operating losses, and federal capital loss carryforward.

The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

As of May 28, 2023, the total amount of net unrecognized tax benefits is $1.2 million, of which, $1.0 million, if recognized, would affect the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest is not material as of May 28, 2023. The Company does not expect its unrecognized tax benefits to decrease within the next twelve months.

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

8. Leases

Operating Leases

The Company has entered into various non-cancellable operating lease agreements for manufacturing and distribution facilities, equipment and office space. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company leases facilities and equipment under operating lease agreements with various terms and conditions, which expire at various dates through fiscal year 2033. Certain of these leases have renewal options.

Finance Leases

On September 3, 2015, Lifecore leased an 80,950 square foot building in Chaska, MN, two miles from its current facility. The initial term of the lease wasseven years withtwo five-year renewal options. In December 2022, Lifecore exercised one of the options to renew the lease for an additional five years. The lease contains a buyout option at any time during the renewal period with the purchase price equal to the mortgage balance on the lessor’s loan secured by the building. Gross assets recorded under finance leases, included in property and equipment, net, were $3.9 million and $3.8 million as of May 28, 2023 and May 29, 2022, respectively. Accumulated amortization associated with finance leases was $0.8 million and $0.7 million as of May 28, 2023 and May 29, 2022, respectively. The monthly lease payment was initially $34,000 and increases by 2.4% per year. Lifecore and the lessor made capital improvements prior to occupancy and thus the lease did not become effective until January 1, 2016. Lifecore is currently using the building for warehousing and final packaging.

The components of lease cost were as follows:

The Company’s leases have original lease periods ending between 2023 and 2033. The Company’s maturity analysis of operating and finance lease liabilities as of May 28, 2023 are as follows:

Supplemental cash flow information related to leases are as follows:

During May 2021 we entered into a transportation management, warehousing, and transportation services agreement with Castellini Company, LLC to outsource Curation Foods’ fresh packaged salads and vegetables logistics management, including transportation, warehousing and distribution. In connection with this arrangement, during the fiscal year ended May 30, 2021 the Company recorded a $1.7 million impairment of our operating lease right-of-use assets related to certain vehicle leases, which is included in Loss from discontinued operations within the Consolidated Statements of Operations.

As disclosed in Note 13 - Restructuring Costs, impairments of our operating lease right-of-use assets were recorded in Restructuring cost in the accompanying Consolidated Statements of Operations for the years ended May 28, 2023 and May 29, 2022. During the years ended May 28, 2023 and May 29, 2022, the Company recorded impairments related to the Curation Foods Santa Maria office lease of $0.6 million and $1.6 million, respectively, and our Curation Foods Los Angeles, California office lease of $0.1 million and $0.4 million, respectively.

9. Commitments and Contingencies

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.

Claims Alleging Unfair Labor Practices

Curation Foods was previously the target of a union organizing campaign which had included three unsuccessful attempts to unionize Curation Foods’ formerly owned Guadalupe, California processing plant. The campaign had involved a union and over 100 former and current employees of Pacific Harvest, Inc. and Rancho Harvest, Inc. (collectively “Pacific Harvest”), Curation Foods’ former labor contractors at its Guadalupe, California processing facility, bringing legal actions before various state and federal agencies, the California Superior Court, and initiating over 100 individual arbitrations against Curation Foods and Pacific Harvest.

The legal actions consisted of various claims, all of which were settled in fiscal year 2017. Under the settlement agreement, the plaintiffs were to be paid inthree installments. The Company and Pacific Harvest each agreed to pay one half of the settlement payments. The Company paid the entire firsttwo installments and Pacific Harvest agreed to reimburse the Company for its $2.1 million portion. During the fiscal year 2020, the Company’s review for collectability concluded that a reserve of $1.2 million, representing the outstanding balance, would be recorded. The Company makes ongoing estimates relating to the collectability of receivables. A reserve is established for any note when there is reasonable doubt that the principal or interest will be collected in full. The Company may write off uncollectable receivables after collection efforts are exhausted. The Company’s conclusion regarding collectability changed as a result of Pacific Harvest communicating their refusal to pay combined with their bringing claims against the Company. During the fiscal year ended May 30, 2021, the Company agreed to discharge Pacific Harvest from the $1.2 million receivable as part of a settlement agreement with Pacific Harvest (see other litigation matters section below for additional information).

Compliance Matters

On December 1, 2018, the Company acquired all of the voting interests and substantially all of the assets of Yucatan (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 voluntarily self-disclosed to the SEC and the U.S. Department of Justice (“DOJ”) the conduct under investigation, and these agencies commenced an investigation. The Company also disclosed the conduct under investigation to the Office of the Attorney General in Mexico, which in December 2021 decided (a) that Curation Foods, Inc., did not commit or participate in the criminal conduct disclosed, (b) no criminal action would be taken against Curation Foods, Inc., (c) that no criminal liability was established against Tanok and Yucatan after they were acquired by Curation Foods, Inc., and (d) the decisions do not apply to any individuals who may be responsible for misconduct. The Company also disclosed the misconduct to other regulators in Mexico. The Company continues to cooperate in the government investigations and requests for information. The Company is negotiating a potential resolution of DOJ’s investigation. 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 former equity holders of Yucatan for fraud, indemnification, and other claims, and seeking no less than $80 million in damages. The Company has since reached settlements with several of the cross-defendants, pursuant to which the settling cross-defendants agreed that certain of the shares of stock they received when the Company acquired Yucatan be sold and the proceeds paid to the Company. The matter is proceeding against the Plaintiff and the remaining cross-defendants.

On November 16, 2023, the Company and the U.S. Department of Justice (the “DOJ”) executed a letter (“Declination Letter”) in which the DOJ has declined to prosecute the Company for violations of the Foreign Corrupt Practices Act (the “FCPA”) involving the Company’s formerly-held subsidiary, Yucatan Foods L.P. (“Yucatan”). Pursuant to the Declination Letter, in connection with the DOJ’s declination to prosecute, the Company has agreed to pay disgorgement in the amount of $406,505, and to continue to fully cooperate with any ongoing government investigations and any prosecutions that might result in the future.

At this stage, the ultimate outcome of these or any other investigations, legal actions, or potential claims that may arise from the matters under investigation is uncertain and the Company cannot reasonably predict the timing or outcomes, or estimate the amount of net loss after indemnification, or its effect, if any, on its financial statements. Separately, there are indemnification provisions in the purchase agreement that may allow the Company to recover costs for breach of the purchase agreement from the seller. Because recovery of amounts is contingent upon a legal settlement, no amounts have been recorded as recoverable costs through May 28, 2023.

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.

SEC Subpoena

The Chicago Regional Office of the SEC has issued a subpoena to the Company seeking documents and information concerning the Restatement. The Company is in the process of responding to the subpoena and intends to cooperate with the SEC. We cannot predict the duration or outcome of this matter at this time.

Other Litigation Matters

On February 14, 2020, a complaint was filed against the Company, Curation Foods, the Company’s CEO at the time, Albert Bolles, the Company’s former CFO Gregory Skinner, and other defendants in Santa Barbara County Superior Court, entitled Pacific Harvest, Inc., et al. v. Curation Foods, Inc., et al. (No. 20CV00920). The case was brought by Pacific Harvest, Inc. (“Pacific”) and Rancho Harvest, Inc. (“Rancho”), two related companies that have provided labor and employee staffing services to Curation Foods. Among other things, Pacific and Rancho allege that Curation Foods wrongfully decreased its use of Pacific’s staffing services and misappropriated Pacific’s trade secrets when Curation Foods increased its use of another staffing company and transitioned Pacific’s employees to the other staffing company. Pacific and Rancho also allege that Curation Foods breached agreements between the parties related to a loan from Curation Foods, on which Pacific and Rancho have ceased making payments. Pacific Harvest and Rancho asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, intentional interference with contracts and potential economic advantage, misappropriation of trade secrets under California’s Uniform Trade Secrets Act, business practices in violation of California Unfair Competition Law, fraud, defamation, violation of California Usury Law, breach of fiduciary duty, and declaratory relief regarding the parties’ rights and obligations under certain of the parties’ contracts. On March 15, 2021, the Company executed a settlement agreement related to this matter. In connection with the settlement agreement, the Company recorded a $1.8 million charge after considering the total settlement amount and insurance recoveries, and this amount is included in Legal settlement charge in the Consolidated Statements of Operations for the fiscal year ended May 30, 2021. The final settlement amount was paid to the plaintiffs by Curation Foods, its co-defendants, and insurers on April 14, 2021. Pursuant to the settlement agreement, the case was dismissed with prejudice on April 23, 2021.

In June of 2021 a complaint was filed against the company alleging multiple wage and hour claims. On June 6, 2022 the Company reached an agreement to settle all causes of action alleged by the Plaintiff under the California Labor Code, the California Business and Professionals Code, the applicable Wage Order, and the Private Attorneys General Act (the “PAGA”). In connection with the settlement agreement the Company recorded a $0.5 million charge, and this amount is included in Loss from discontinued operations costs in the Consolidated Statements of Operations for the fiscal year ended May 28, 2023.

10. Business Segment Reporting

Lifecore Biomedical operates asone reportable segment, Lifecore, which is described in further detail below. This is based on the objectives of the business and how our chief operating decision maker (CODM), the President and Chief Executive Officer, monitors operating performance and allocates resources.

Change in Reportable Segments

The Company previously operated in principallytwo reportable segments, Lifecore and Curation, and disclosed Other which included corporate activities. During the fourth quarter of fiscal year 2023, in connection with the previously announced strategic shift and upon the sale of Yucatan and O Olive, the Company has ceased to operate the Curation Foods business. As a result, the Company changed the level of detail at which our CODM regularly reviews and manages the businesses, resulting in a change to our reportable segments. With the exit of the Curation Foods business, the “Curation” segment ceased to exist; and “Other”, which previously included corporate general, interest, income tax and other general and administrative expenses, was incorporated into the single “Lifecore” segment.

We now manage and report our operating results throughone reportable segment: Lifecore. This change allows us to better align our business models, resources, and cost structure to the specific current and future growth of our business, while maintaining the necessary information and transparency to our stockholders. Our historical segment information has been recast to conform to the current segment structure.

11. Discontinued Operations

As discussed in Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies - Discontinued Operations - O Olive Sale, Yucatan Disposition, BreatheWay Disposition and Eat Smart Disposition, during fiscal year 2023 we completed the O Olive Sale, Yucatan Disposition and BreatheWay Disposition, and during fiscal year 2022 we completed the Eat Smart Disposition. The accounting requirements for reporting the Eat Smart, Yucatan and O Olive businesses as discontinued operations were met when the Eat Smart Disposition, Yucatan Disposition and O Olive Sale were completed on each respective closing date. The BreatheWay Disposition did not meet the requirements for reporting the businesses as discontinued operations; therefore, the amounts are included in continuing operations for the years ended May 28 2023, May 29, 2022 and May 30, 2021 relate to BreatheWay. Accordingly, the consolidated financial statements and notes to the consolidated financial statements reflect the results of the Eat Smart, Yucatan and O Olive businesses as a discontinued operation for the periods presented.

The key components of loss from discontinued operations for the fiscal years ended May 28, 2023, May 29, 2022, and May 30, 2021 were as follows (in thousands):

Cash provided by (used in) operating activities by the O Olive, Yucatan, and Eat Smart businesses totaled $0.1 million, $(13.6) million, and $22.0 thousand for the years ended May 28, 2023, May 29, 2022, and May 30, 2021, respectively.

Cash provided by (used in) investing activities from the O Olive, Yucatan, and Eat Smart businesses totaled $(42.0) thousand, $105.3 million, and $5.3 million for the years ended May 28, 2023, May 29, 2022, and May 30, 2021, respectively.

Depreciation and amortization expense of the O Olive, Yucatan, and Eat Smart businesses totaled $0.4 million, $7.6 million, and $11.2 million for the years ended May 28, 2023, May 29, 2022, and May 30, 2021, respectively.

Capital expenditures of the O Olive, Yucatan, and Eat Smart businesses totaled $42.0 thousand, $4.5 million, and $7.6 million for the years ended May 28, 2023, May 29, 2022, and May 30, 2021, respectively.

The carrying amounts of the major classes of assets and liabilities of O Olive and Yucatan businesses included in assets and liabilities of discontinued operations are as follows (in thousands):

12. 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 Operations for the fiscal year ended May 28, 2023:

Asset Write-off Costs

Asset write-off costs are costs related to impairment or disposal of property and equipment as part 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. These costs are included in restructuring costs within the Consolidated Statements of Operations.

In the fourth quarter of fiscal year 2020, the Company recognized a $1.9 million impairment loss related to BreatheWay equipment and an additional $1.9 million impairment loss related to BreatheWay equipment in the third quarter of fiscal year 2021, both as a result of our changing business model driven by our restructuring plan.

The Company leases its main office located in Santa Maria, California (the “Santa Maria Office”). During the third quarter of fiscal year 2022, the Company approved a plan to explore opportunities to sub lease its Santa Maria Office. The Santa Maria Office assets, included as lease hold improvements within property and equipment, net, had been designated as held for use within the Consolidated Balance Sheets as of May 29, 2022, as no finalized plan for disposition existed at the balance sheet date. The Company recognized a $5.3 million impairment loss, which is included in Restructuring costs within the Consolidated Statements of Operations ($3.7 million included in asset write-off costs related to lease hold improvements impairment and $1.6 million included in lease costs related to right-of-use asset impairment) for the year ended May 29, 2022. The Company executed a sub-lease in March 2023 with plans to sublease additional space within the first half of fiscal year 2024.

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 a reduction-in-force related to our Curation Foods business.

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 office.

Other restructuring costs

Other restructuring costs primarily related to consulting costs to execute 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 restructuring plan has been substantially completed as of May 28, 2023. The following table summarizes the restructuring costs recognized in the Company’s Consolidated Statements of Operations since inception of the restructuring plan in fiscal year 2020 through the fiscal year ended May 28, 2023, excluding discontinued operations:

13. Correction of Errors in Previously Reported Fiscal Year 2022 and 2021 Annual Financial Statements

The Company is restating (the “Restatement”) the previously issued consolidated financial statements as of and for the fiscal years ended May 29, 2022 (“FY22”) and May 30, 2021 (“FY21”) included in the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (the “SEC”), the Company’s unaudited consolidated financial statements as of and for the periods ending August 30, 2020, November 29, 2020, February 28, 2021, August 29, 2021, November 28, 2021, February 27, 2022, August 28, 2022, November 27, 2022 and February 26, 2023 included in the Company’s Quarterly Reports on Form 10-Q filed with the SEC as presented in note 14. Unaudited Quarterly Consolidated Financial Information (collectively, the “Non-Reliance Periods”).

The following descriptions of the restatement adjustments within the respective Non-Reliance Periods exclude a description of errors previously identified and concluded as immaterial that were also corrected as part of the restatement. The more significant adjustments to the Lifecore segment financial statements, are described as follows:

1. The Company restated the Lifecore segment revenues and cost of sales in FY22 and FY21 to gross up revenues and cost of sales for certain performance obligations the Company acted as a principal in the arrangements.

2. The Company restated inventories and cost of sales to write down inventories to their net realizable value in FY22 and FY21 which reduced inventories and increased cost of sales during those periods.

3. The Company restated property and equipment and interest expense to record capitalized interest on assets under construction in FY22 and FY21 which increased property and equipment and reduced interest expense during those periods.

4. The Company restated FY21 opening retained earnings to account for the cumulative effect of the above restatements.

The more significant restatement adjustments to the Company’s former Curation Foods segment financial information is described as follows:

1. The Company restated FY21 opening retained earnings related to its former Curation Foods businesses non-current other receivables that were not collectable prior to the fiscal year periods presented in the consolidated FY23 financial statements.

2. The Company restated the presentation of certain operating costs and expenses of continuing operations and discontinued operations affecting FY22 and FY21.

In addition to the errors described above, the Company corrected certain items that were previously uncorrected and immaterial adjustments to prior periods, but are now being corrected as a part of the restatement.

Description of Annual Restatement Tables

The following tables present the impact of the restatement on our previously reported consolidated statements of operations, comprehensive loss, balance sheet, convertible preferred stock and stockholder’s equity (deficit), cash flows, and certain disclosures for the two years ended May 29, 2022, for which the values were derived from our Annual Report on Form 10-K for the fiscal year ended May 29, 2022 filed on September 14, 2022, as amended by Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended May 29, 2022 filed on March 16, 2023. The tables present the amounts as previously reported in the respective filings, adjustments to restate (restatement), as restated, and then reclassifications for discontinued operations to conform to the presentation in the consolidated financial statements as of and for the fiscal year ended May 28, 2023.

As of and for the year ended May 29, 2022

The effects of the restatement on the consolidated balance sheet as of May 29, 2022 are summarized in the following table:

The effects of the restatement on the consolidated statement of operations and comprehensive income (loss) for the year ended May 29, 2022 are summarized in the following table:

The effects of the restatement on the consolidated statement of stockholders’ equity (deficit) for the year ended May 29, 2022 are summarized in the following table:

The effects of the restatement on the consolidated statement of cash flows for the year ended May 29, 2022 are summarized in the following table:

The effects of this error on our previously reported fiscal year 2022 changes in the Company’s allowance for sales returns and credit losses for the year ended May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2022 inventories as of May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2022 basic and diluted net loss per share for the year ended May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2022 disaggregated revenue for the year ended May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2022 property and equipment, net as of May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 3, are as follows:

The effects of this error on our previously reported fiscal year 2022 income taxes as of and for the year ended May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 7, are as follows:

The effects of this error on our previously reported fiscal year 2022 segment reporting for the year ended May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 10, are as follows.

The segment table below has been restated to reflect the correction of accounting errors within the consolidated financial statements for the period ending year ended May 29, 2022. Refer to Note 13 for the related income statement line items reported in the segment table of the Company after giving effect to the discontinued operations previously reported under the Curation segment. The Company disclosed Other to reconcile the segment information to the consolidated financial statements.

The effects of this error on our previously reported fiscal year 2021 discontinued operations as of and for the year ended May 30, 2021 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 12, are as follows:

The effects of this error on our previously reported fiscal year 2022 restructuring cost for the year ended May 29, 2022 as presented in the Company’s fiscal year 2022 Annual Report on Form 10-K/A Note 13, are as follows:

As of and for the year ended May 30, 2021

The effects of the restatement on the consolidated balance sheet as of May 30, 2021 are summarized in the following table:

The effects of the restatement on the consolidated statement of operations and comprehensive income (loss) for the year ended May 30, 2021 are summarized in the following table:

The effects of the restatement on the consolidated statement of stockholders’ equity (deficit) for the year ended May 30, 2021 are summarized in the following table:

The effects of the restatement on the consolidated statement of cash flows for the year ended May 30, 2021 are summarized in the following table:

The effects of this error on our previously reported fiscal year 2021 changes in the Company’s allowance for sales returns and credit losses for the year ended May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2021 inventories as of May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2021 basic and diluted net loss per share for the year ended May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2021 fair value measurement as of May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 1, are as follows:

(1) The restatement adjustment also included a reclassification from discontinued operations to continuing operations.

The effects of this error on our previously reported fiscal year 2021 disaggregated revenue for the year ended May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 1, are as follows:

The effects of this error on our previously reported fiscal year 2021 property and equipment, net as of May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 4, are as follows:

The effects of this error on our previously reported fiscal year 2021 income taxes as of and for the year ended May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 8, are as follows:

The effects of this error on our previously reported fiscal year 2021 segment reporting for the year ended May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 11, are as follows.

The segment table below has been restated to reflect the correction of accounting errors within the consolidated financial statements for the period ending year ended May 30, 2021. Refer to Note 13 for the related income statement line items reported in the segment table of the Company after giving effect to the discontinued operations previously reported under the Curation segment. The Company disclosed Other to reconcile the segment information to the consolidated financial statements.

The effects of this error on our previously reported fiscal year 2021 restructuring cost for the year ended May 30, 2021 as presented in the Company’s fiscal year 2021 Annual Report on Form 10-K Note 14, are as follows:

14. Unaudited Quarterly Consolidated Financial Information

The quarterly financial information for fiscal years 2023 and 2022 has been reclassified to present the information after taking into effect the O Olive Sale, Yucatan Disposition, and Eat Smart Disposition as disclosed in Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies - Discontinued Operations - O Olive Sale, Yucatan Disposition, BreatheWay Disposition and Eat Smart Disposition.

The following is a summary of the unaudited quarterly results of operations for fiscal years 2023 and 2022 (in thousands, except for per share amounts).

The following is a summary of the unaudited quarterly results of operations for fiscal years 2023, 2022 and 2021 (in thousands, except for per share amounts). Refer to see Note 13 - Correction of Errors in Previously Reported Fiscal Year 2022 and 2021 Annual Financial Statements.

Description of Quarterly Restatement Tables

In lieu of filing amended quarterly reports on Form 10-Q, the tables below represent our restated unaudited consolidated financial statements for each of the previously completed quarters during the fiscal years ended May 28, 2023, May 29, 2022, May 30, 2021. The following tables present the impact of the restatement on our previously reported consolidated statements of operations, balance sheets, statements of stockholders' equity (deficit), statements of cash flows, and certain disclosures for which the values were derived from our Quarterly Reports on Form 10-Q for the interim periods of fiscal years 2023, 2022 and 2021. For further information on the restatement, refer to Note 13 - Correction of Error in Previously Reported Fiscal Year 2022 and 2021 Financial Statements.

As of and for the three and nine months ended February 26, 2023

The effects of the restatement on the consolidated balance sheet as of February 26, 2023 are summarized in the following table:

The effects of the restatement on the consolidated statement of operations and comprehensive income (loss) for the three months February 26, 2023 are summarized in the following table:

The effects of the restatement on the consolidated statement of operations and comprehensive income (loss) for the nine months February 26, 2023 are summarized in the following table:

The effects of the restatement on the consolidated statement of convertible preferred stock and stockholders' equity (deficit) for the three and nine months ended February 26, 2023 are summarized in the following table:

The effects of the restatement on the consolidated statement of cash flows for the nine months ended February 26, 2023 are summarized in the following table:

The effects of this error on our previously reported changes in the Company’s allowance for sales returns and credit losses for the nine months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 1, are as follows:

The effects of this error on our previously reported inventories as of February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 1, are as follows:

The effects of this error on our previously reported basic and diluted net loss per share for the three months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 1, are as follows:

The effects of this error on our previously reported basic and diluted net loss per share for the nine months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 1, are as follows:

The effects of this error on our previously reported disaggregated revenue for the three months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 1, are as follows:

The effects of this error on our previously reported disaggregated revenue for the nine months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 1, are as follows:

The effects of this error on our previously reported segment reporting as of and for the three months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 7, are as follows.

The segment table below has been restated to reflect the correction of accounting errors within the consolidated financial statements as of and for the three months ended February 26, 2023. Refer to Note 14 for the related income statement line items reported in the segment table of the Company after giving effect to the discontinued operations previously reported under the Curation segment. The Company disclosed Other to reconcile the segment information to the consolidated financial statements.

The effects of this error on our previously reported segment reporting for the nine months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 7, are as follows.

The segment table below has been restated to reflect the correction of accounting errors within the consolidated financial statements for the nine months ended February 26, 2023. Refer to Note 14 for the related income statement line items reported in the segment table of the Company after giving effect to the discontinued operations previously reported under the Curation segment. The Company disclosed Other to reconcile the segment information to the consolidated financial statements.

The effects of this error on our previously reported discontinued operations as of February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 9, are as follows:

The effects of this error on our previously reported restructuring cost for the three months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 8, are as follows:

The effects of this error on our previously reported restructuring cost for the nine months ended February 26, 2023 as presented in the Company’s Quarterly Report on Form 10-Q Note 8, are as follows:

As of and for the three and six months ended November 27, 2022

The effects of the restatement on the consolidated balance sheet as of November 27, 2022 are summarized in the following table: