XML 19 R8.htm IDEA: XBRL DOCUMENT
v3.24.2.u1

Organization, Basis of Presentation, and Summary of Significant Accounting Policies | 9 Months Ended
--- | ---
Feb. 25, 2024
Accounting Policies [Abstract] |
Organization, Basis of Presentation, and Summary of Significant Accounting Policies | Organization, Basis of Presentation, and Summary of Significant Accounting Policies Organization Lifecore Biomedical, Inc. and its subsidiaries (“Lifecore” or the “Company”) is a fully integrated contract development and manufacturing organization (“CDMO”) that offers capabilities in the development, fill and finish of complex sterile injectable pharmaceutical products in syringes and vials. The Company previously operated a natural food company, through its wholly-owned subsidiary, Curation Foods, Inc. (“Curation”), which was previously focused on the distribution of plant-based foods to retail, club, and food service channels throughout North America. However, upon the sale of the Divested Businesses (as defined below), the Company has ceased to operate the Curation foods business. Discontinued Operations During the year ended May 28, 2023, the Company entered into agreements for the sale or disposition of its subsidiaries within the Curation business (a former segment), specifically O Olive Oil and Vinegar® (“O Olive”), Yucatan Foods, LLC (“Yucatan”), and BreatheWay® (“BreatheWay”, and together with O Olive, Yucatan, and BreatheWay, the “Divested Businesses”). The Company completed the disposition of Yucatan and O Olive on February 7, 2023 and April 6, 2023, respectively. On June 2, 2022, the Company and Curation entered into and closed an Asset Purchase Agreement (the “BreatheWay Purchase Agreement”) with Hazel Technologies, Inc. (the “BreatheWay Purchaser”), pursuant to which Curation 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. In connection with the BreatheWay Disposition, the Company received net proceeds of $3.1 million and recorded a gain of $2.1 million in the Condensed Consolidated Statements of Operations for the three and nine months ended February 26, 2023. The accounting requirements for reporting the Divested Businesses, excluding BreatheWay, as discontinued operations were met on the closing date of each of the divestitures. The BreatheWay Disposition met the requirements for reporting the businesses as assets held for sale in the fourth quarter of fiscal year 2022. Accordingly, the unaudited condensed consolidated financial statements and related condensed notes reflect the results of the Divested Businesses, as discontinued operations for the periods presented. Refer to Note 8 – Discontinued Operations. Basis of Presentation The accompanying Condensed Consolidated Balance Sheet as of May 28, 2023, which has been derived from audited financial statements, and the accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company at February 25, 2024, and the results of operations and cash flows for all periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared following GAAP have been condensed or omitted per the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying financial data should be reviewed in conjunction with the audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “2023 Annual Report”). The Company restated its unaudited quarterly financial statements as of and for the three and nine months ended February 26, 2023 (the “Restatement”). Such restated and unaudited quarterly financial statements and related impacted amounts were presented in the Company’s Annual Report on Form 10-K for the year ended May 28, 2023. The discussion of financial results presented in this quarterly report on Form 10-Q reflects such restated amounts. The Company’s fiscal year is the 52- or 53-week period that ends on the last Sunday of May with quarters within each year ending on the last Sunday of August, November, and February; however, in instances where the last Sunday would result in a quarter being 12-weeks in length, the Company’s policy is to extend that quarter to the following Sunday. A 14th week is included in the fiscal year every five or six years to realign the Company’s fiscal quarters with calendar quarters. The results reported in these interim condensed consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. As result of the Company exiting all previous food related business as part of the strategic shift in the Company’s operations that was completed as of May 28, 2023, commencing with this Quarterly Report on Form 10-Q, the Company changed its presentation of “Product sales” and “Cost of product sales” to “Revenues” and “Cost of goods sold”, respectively. Basis of Consolidation The condensed consolidated financial statements are presented on the accrual basis of accounting in accordance with GAAP and include the accounts of the Company and its subsidiaries. All material inter-company transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition; loss contingencies; 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; the valuation and recognition of stock-based compensation, and the valuation of the 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 maintains cash in U.S. bank accounts, the balance of which may at times exceed the federally insured limit. During the three months ended February 25, 2024 and February 26, 2023, the Company had sales concentrations of 10% or greater from two customers, accounting for 52% and 15%, and 52% and 14% respectively. During the nine months ended February 25, 2024, the Company had sales concentrations of 10% or greater from three customers, accounting for 40%, 19%, and 10%. During the nine months ended February 26, 2023, the Company had sales concentrations of 10% or greater from two customers, accounting for 40% and 16%. Three of the Company’s customers had accounts receivable concentrations of 10% or greater, accounting for 38%, 14%, and 13% of accounts receivable as of February 25, 2024. Two of the Company’s customers had accounts receivable concentrations of 10% or greater, accounting for 31% and 18%, of accounts receivable as of May 28, 2023. Contract Assets and Liabilities Contract assets primarily relate to the Company’s unconditional right to consideration for work completed but not billed at the reporting date. The Company’s contract assets as of February 25, 2024, May 28, 2023 and May 29, 2022, were $3.4 million, $3.2 million and $10.4 million, respectively, and are included within accounts receivable in the Condensed Consolidated Balance Sheets. Contract liabilities primarily relate to payments received from customers in advance of performance under a contract. The Company’s contract liabilities as of February 25, 2024, May 28, 2023 and May 29, 2022, were $3.5 million, $7.0 million and $0.9 million, respectively, of which $3.2 million and $4.1 million are included in deferred revenue and $0.3 million and $2.9 million are included in non-current liabilities as of February 25, 2024 and May 28, 2023, respectively, in the Condensed Consolidated Balance Sheets. Revenue recognized during the three and nine months ended February 25, 2024, that was included in the contract liability balance at the beginning of fiscal year 2024, was $1.5 million and $5.2 million, respectively. Revenue recognized during the three and nine months ended February 26, 2023, that was included in the contract liability balance at the beginning of fiscal year 2023, was $0.1 million and $0.5 million, respectively. Revenue Recognition The following tables disaggregates revenue by major product lines and services (in thousands):
| Three Months Ended |  | Nine Months Ended |
(In thousands) | February 25, 2024 |  | February 26, 2023 |  | February 25, 2024 |  | February 26, 2023 |
Contact development and manufacturing organization | $ | 22,306 |  |  | $ | 18,015 |  |  | $ | 67,522 |  |  | $ | 52,488 |  |
HA manufacturing | 13,398 |  |  | 8,521 |  |  | 22,853 |  |  | 19,635 |  |
Total | $ | 35,704 |  |  | $ | 26,536 |  |  | $ | 90,375 |  |  | $ | 72,123 |  |
Development services revenues recognized over time were $7.0 million and $9.0 million for the three months ended February 25, 2024 and February 26, 2023, respectively, and $19.2 million and $22.3 million for the nine months ended February 25, 2024 and February 26, 2023, respectively, and are included in contract development and manufacturing organization. Revenues recognized at a point in time were $28.7 million and $17.5 million for the three months ended February 25, 2024 and February 26, 2023, respectively, and $71.1 million and $49.8 million for the nine months ended February 25, 2024 and February 26, 2023, respectively. The Company identified certain elements of its agreements with customers for development services in which the Company is the principal in those contracts, therefore it recognizes revenues on a gross basis. For other contracts in which the Company operates as an agent, the Company recognized revenue on a net basis. Amended and Restated Supply Agreement On December 22, 2023, the Company entered into an amendment and restatement of a supply agreement with one of its customers (the “Amended Supply Agreement”). The key provisions of the Amended Supply Agreement included an extension of the agreement’s term for certain products through March 31, 2024, revised pricing for certain product purchase orders dated November 1, 2023, and the payment of a $5.0 million working capital deposit to the Company. The working capital deposit was received on December 22, 2023 and (i) may be used for any corporate purpose; (ii) will not accrue interest; and (iii) is required to be repaid, subject to certain defined provisions, upon the termination of the Amended Supply Agreement. On March 14, 2024, this agreement was amended to extend it through December 31, 2026. Inventories, net Inventories primarily consist of in-process and finished goods related to sterile injectable pharmaceutical products in syringes, vials and cartridges. This includes premium, pharmaceutical grade HA in bulk form as well as formulated and filled syringes, vials and cartridges for injectable products used in treating a broad spectrum of medical conditions and procedures. As of February 25, 2024 and May 28, 2023, inventories consisted of the following (in thousands):
(In thousands) | February 25, 2024 |  | May 28, 2023
Finished goods | $ | 13,113 |  |  | $ | 13,141 |
Raw materials | 18,686 |  |  | 17,735 |
Work in process | 8,802 |  |  | 10,349 |
Inventory reserve | (931) |  |  | (384) |
Total | $ | 39,670 |  |  | $ | 40,841 |
The Company recorded adjustments of $1.1 million and $4.9 million to record inventory to its net realizable value as of February 25, 2024 and May 28, 2023, respectively. The Company’s inventory serves as part of the collateral for certain of the Company’s debt arrangements. Refer to Note 6 – Debt for additional discussion on the Company’s debt arrangements and related collateral. 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. Cash is stated at cost, which approximates its fair value. The carrying amounts reported in the balance sheets for accounts receivable, accounts payable and accrued liabilities approximate fair value, due to their short-term maturities. Outstanding borrowings that qualify as financial instruments are carried at cost, which approximates their fair value as of February 25, 2024 and May 28, 2023, due to their short duration, except for the Alcon Research, LLC (“Alcon”) term debt with a fair value of $117.7 million that exceeds carrying value. The Term Loan Credit Facility (as defined in Note 6 Note 6 – Debt) contains embedded derivatives requiring bifurcation as a derivative instrument. The derivative liability related to the Term Loan Credit Facility is recorded as a discount to the long-term debt in the Condensed 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 non-operating income (expense). The fair value of the embedded derivative liabilities associated with the Term Loan Credit Facility was estimated using a probability weighted discounted cash flow model to measure the fair value. This involves significant Level 3 inputs and assumptions including (i) an estimated probability and timing of a change in control and event of default, and (ii) a risk-adjusted discount rate. At February 25, 2024 and May 28, 2023, the fair value of the embedded derivative liability approximated $23.0 million and $64.9 million, respectively. 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):
| Fair Value at February 25, 2024 |  | Fair Value at May 28, 2023
| Level 1 |  | Level 2 |  | Level 3 |  | Level 1 |  | Level 2 |  | Level 3
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Debt derivative liability(1) | — |  |  | — |  |  | 23,000 |  |  | — |  |  | — |  |  | 64,900 |
Total liabilities | — |  |  | — |  |  | 23,000 |  |  | — |  |  | — |  |  | 64,900 |
(1) As of February 25, 2024 and May 28, 2023, the fair value of the debt derivative liability is included in non-current liabilities in the Company’s Condensed Consolidated Balance Sheets. The key inputs to the valuation models that were utilized to estimate the fair value of the debt derivative liability were (i) an estimated probability related to the timing of a change in control over the 12 months following the end of the fiscal period; (ii) the estimated probability related to an event of default of the Supply Agreement with Alcon, as amended, over the 12 months following the end of the fiscal period; and (iii) a risk-adjusted discount rate. Beginning in the second quarter of fiscal year 2024 and continuing through the third quarter of fiscal year 2024, there were sequential declines in the change in control probabilities assumptions in connection with the Company’s review of the strategic alternatives initiative that significantly impacted the fair value of the debt derivative liability. There was no change in the probability related to event of default of the supply agreement during fiscal year 2024. The risk adjusted discount rate as of February 25, 2024 and May 28, 2023, were as follows:
|  | February 25, 2024 |  | May 28, 2023 |
Assumptions |  |  |  |  |
Discount rate |  | 21.3% — 24.2% |  | 22.3% — 24.5% |
Implied spread |  | 17.0% |  | 18.5% |
Risk free rate |  | 4.3% — 7.2% |  | 3.8% — 6.0% |
The following table reflects the fair value roll forward reconciliation of Level 3 assets and liabilities measured at fair value for the nine months ended February 25, 2024 (in thousands):
| Debt Derivative Liability
Balance as of May 29, 2022 | $ | — |
Fair value on issuance(1) | $ | 64,900 |
Balance as of May 28, 2023 | 64,900 |
Decrease in fair value(2) | (41,900) |
Balance as of February 25, 2024 | $ | 23,000 |
(1)At May 28, 2023, the fair value of the embedded derivative liability approximated the fair value upon issuance on May 22, 2023. (2)For the nine months ended February 25, 2024, the decrease in fair value is recorded within “Change in fair value of debt derivative liability, related party” within the condensed consolidated statement of operations. Related Party Transactions The Company has reflected the related party balances on the face of its financial statements beginning in the period which Alcon became a related party, which was as of May 22, 2023 at the time Alcon provided financing to the Company. Prior to providing financing, and continuing subsequently, Alcon was a customer of the Company. Refer to Note 6 – Debt for additional discussion on the Company’s debt agreement with Alcon. 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. Confidential Settlement Agreement and Release On August 24, 2023, the Company reached a confidential settlement and release agreement with a third-party insurance underwriter. In connection with this settlement agreement, the Company received a cash payment of $1.9 million on September 19, 2023. Landlord Complaints On January 12, 2024, the landlord for a property leased by Curation filed a complaint of unlawful detainer against the Company in Santa Barbara County Superior Court, seeking possession of the building and alleging past due rent of approximately $0.2 million. The Company has accrued past due rents, but the ultimate exposure to loss will depend on future events and is not reasonably certain at this time. On January 12, 2024, a landlord for a different property leased by Curation delivered to the Company a pay or quit notice related to such property, seeking payment of past due rent of approximately $0.1 million or requesting Curation to vacate the property. The Company has accrued past due rents, but the ultimate exposure to loss will depend on future events and is not reasonably certain at this time. Settlement of a Supplier Note Receivable In February 2024, the Company received approximately $0.9 million in settlement of a note receivable from a former supplier to a divested business (the “Note”). The Company had treated this settlement as a gain contingency, as the original aggregate amount of the Note was written off in a previous period; therefore, it was accounted for during the third quarter of fiscal year 2024 when the payment was received. SEC Subpoena On February 16, 2024, 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. Accounting Pronouncements In December 2023, the Financial Accounting Standards Board issued new guidance on income tax disclosures (ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”). Among other requirements, this update adds specific disclosure requirements for income taxes, including: (1) disclosing specific categories in the rate reconciliation and (2) providing additional information for reconciling items that meet quantitative thresholds. The guidance is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2023-09 on the Company’s condensed consolidated financial statements and disclosures. In November 2023, the FASB issued new guidance on segment reporting (ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”). The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2023-07 on the Company’s condensed consolidated financial statements and disclosures.

X
- References No definition available. + Details
Name: | us-gaap_AccountingPoliciesAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 235 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/235/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 275 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/275/tableOfContent Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 810 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/810/tableOfContent Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/205/tableOfContent + Details
Name: | us-gaap_OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureAndSignificantAccountingPoliciesTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration