Lifecore Biomedical (LFCR) Risk Analysis

In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. Stockholder activism, which could take many forms or arise in a variety of situations, has been increasing recently. Volatility in the stock price of our Common Stock or other reasons may in the future cause it to become the target of securities litigation or stockholder activism. Securities litigation and stockholder activism, including potential proxy contests, could result in substantial costs and divert management's and Board's attention and resources from our business. Additionally, such securities litigation and stockholder activism could give rise to perceived uncertainties as to our future, adversely affect its relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist stockholder matters. Further, its stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and stockholder activism.

Over the past few years, we implemented our previously announced stockholder value creation program, Project SWIFT, which was designed to strategically realign our business to focus on its strategic assets and redesign the organization, including the divestiture of substantially all of our Curation Foods business and assets and a structuring of the overall business. We are still in the process of integrating these changes, and have experienced challenges in connection therewith, including additional restructuring costs, unexpected operational challenges, including with respect to financial reporting as described elsewhere in this Annual Report on Form 10-K, and similar or other issues may arise in the future. In addition, we may not be able to realize the expected benefits from such realignment and restructuring plans or other similar restructurings on the anticipated timing, or at all. The implementation of our restructuring efforts, including the potential reduction of our facilities and workforce, may not improve our operational and cost structure or result in greater efficiency of our organization; and we may not be able to support sustainable revenue growth and profitability following such restructurings.

In June 2024, we entered into cooperation agreements with various existing stockholders of the Company, including 22NW, who had previously submitted a nomination proposal to elect six directors to the Board and to hold a special meeting to address certain stockholder proposals, pursuant to which we agreed to the appointment of certain Board observers and Board members and other changes to the composition and structure of the Board and its committees, in return for certain customary confidentiality and standstill provisions. The Company also previously entered into similar arrangements with Legion Partners and Wynnefield Capital. Each of 22NW, Legion Partners and Wynnefield Capital (and their respective affiliates) continue to beneficially own significant percentages of the Company's Common Stock, including beneficially owning Convertible Preferred Stock. Although the cooperation agreements contained standstill provisions with respect to customary governance-related activism, it did not contain a release from litigation claims, and thus 22NW or other investors remain able to bring such claims against the Company. These negotiations resulted in substantial costs for us, and future activism may similarly create substantial costs for us in the future. Activist investors may attempt to effect changes in our strategic direction and how we are governed, or to acquire control over us. Some investors seek to increase short-term stockholder value by advocating corporate actions, such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. In addition, holders of Convertible Preferred Stock may have interests that are different from, or may conflict with, those of other stockholders. While we welcome varying opinions from all stockholders, activist campaigns that contest or conflict with our strategic direction could have an adverse effect on our financial condition, results of operations and cash flows, as responding to proxy contests and other actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of our Board and senior management from the pursuit of business strategies. In addition, perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, may cause concern to our current or potential customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

As previously publicly disclosed, we have failed to timely file certain of our periodic reports with the SEC. We failed to timely file our Annual Report on Form 10-K for the fiscal year ended May 28, 2023, which we filed late on March 20, 2024. We failed to timely file our Quarterly Reports on Form 10-Q for the periods ending August 27, 2023, November 26, 2023, and February 25, 2024, which we filed late on August 9, 2024. Also as previously publicly disclosed, we have restated previously issued financial statements for several periods, including, most recently, on May 20, 2024, the restatement of our previously issued consolidated financial statements as of and for the fiscal years ended May 29, 2022, and May 30, 2021 included in the Company's Annual Reports on Form 10-K or Form 10-K/A, and our 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 or Form 10-Q/A. Our failure to timely file certain periodic reports with the SEC and our prior restatements have had, and may in the future have further, material adverse consequences to, and pose significant risk to, our business, which could materially and adversely affect our business, our financial condition, our results of operations and our cash flows. These adverse consequences include, but are not limited to, the potential delisting of our Common Stock on the Nasdaq Stock Exchange ("Nasdaq"), stockholder litigation, SEC investigations, stockholder activism, violations of our obligations under our existing material arrangements, including our credit agreements and the terms of our Convertible Preferred Stock, our ability to raise capital on attractive terms, or at all, significant fluctuations in the value of our Common Stock, among others. See the following Risk Factors "-Our Common Stock may be delisted from Nasdaq, which could significantly adversely affect us, our business, and the value and liquidity of our Common Stock;" "-Actions of activist stockholders could be disruptive and costly, and the possibility that activist stockholders may seek changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business;" "-We have limited capital and expect to need to raise additional capital in the near future;" and "-We are highly leveraged, and our contractual obligations may limit our operational flexibility and cash flow available to invest in the ongoing needs of our business or otherwise adversely affect our results of operations" for more information. Our failure to timely file certain periodic reports with the SEC and our prior restatements have subjected us to, and may in the future, subject us to further, stockholder litigation or governmental or regulatory investigations. For example, as further described "Note 9 – Commitments and Contingencies - SEC Subpoena" to our unaudited consolidated financial statements contained in this Annual Report on Form 10-K, on February 16, 2024, the Chicago Regional Office of the SEC issued a subpoena to the Company seeking documents and information concerning the Restatement. Also, as further described "Note 12- Subsequent Events-Class Action Complaint" to our unaudited consolidated financial statements contained in this Annual Report on Form 10-K, on July 29, 2024, shareholder David Carew filed a putative class action complaint on behalf of our stockholders in the United States District Court of Minnesota, captioned Carew v. Lifecore Biomedical, Inc., et. al., No. 0:24-cv-03028 (D. Minn. 2024), against us and certain of our current and prior named executive officers (the "Defendants"). The complaint generally alleges that statements made to our shareholders between October 7, 2020 and March 19, 2024 regarding our financial results, internal controls, remediation efforts, periodic reporting, and financial prospects were false and misleading in violation of Section 10(b) of the Exchange Act, and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs, and attorneys' fees. In addition, in March 2024, one of our stockholders, 22NW, LP ("22NW"), threatened to bring claims against us relating to its acquisition of economic interests in the Company, including its investment in the Convertible Preferred Stock. We have incurred, and may be required in future to incur further, significant legal fees and other expenses related to this threatened litigation by 22NW, the Carew securities class action lawsuit, and the SEC investigation. In addition, any adverse determination in any of these matters could expose us to significant liabilities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We also may fail to be timely on our future filings, which, in addition to the risks and consequences described above, may create further harm to us. For example, as further described in "Note 2-Convertible Preferred Stock-Registration Rights Agreement" to our unaudited condensed consolidated financial statements contained in this Annual Report on Form 10-K, we have been incurring penalty fees owed to holders of our Convertible Preferred Stock under the Registration Rights Agreement as a result of our failure to maintain effectiveness of the registration statement related to the registration of the shares of Common Stock issuable upon the conversion of the Convertible Preferred Stock, and we expect to continue to incur those fees unless or until we are able to become current on our periodic reports, and are thus able to request effectiveness for the registration statement. In addition, the holders of Convertible Preferred Stock may raise additional claims resulting from the Company's inability to timely and accurately report its financial information, which could cause further harm to the Company and its stockholders, all of which could materially and adversely affect to our business, our financial condition, results of operations and cash flows.

We have not paid any dividends on our Common Stock since inception and do not expect to in the foreseeable future. Any dividends may be subject to preferential dividends payable on any preferred stock we may issue.

In the past, our results of operations have fluctuated significantly from quarter to quarter and are expected to continue to fluctuate in the future. Lifecore can be affected by the timing of orders from its relatively small customer base and the timing of the shipment of those orders. Our earnings may also fluctuate based on our ability to collect accounts receivable from customers. Other factors that affect our operations include: - our ability to obtain an adequate supply of labor;- the availability and quantity of our supplies;- the effectiveness of worldwide distribution systems;- total worldwide industry volumes;- the timing of consumer demand; and - foreign importation restrictions and foreign political risks.

We anticipate the need to raise additional capital to execute on our strategies for growth and to fund our significant capital expenditures. We may be unable to obtain additional capital when required or on favorable terms. Future capital expenditures, including the installation of our fillers, our exploration, development, production and marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) have required, and are anticipated to continue to require, a substantial amount of additional capital and cash flow. In addition, the Revolving Credit Facility matures on December 31, 2025, which, if not extended, will need to be refinanced. We may pursue sources of additional capital through various financing transactions or arrangements, including equity financing, collaboration, strategic alliances or licensing arrangements, debt financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our resources may not be sufficient to fund our growth strategies and budgeted capital expenditures, which could have significant adverse impacts on our business, financial condition, results of operations, and cash flows. In addition, if we do not succeed in raising additional capital in the near-term, we may determine in subsequent periods that substantial doubt exists as to our ability to continue as a going concern for the year following the reporting of our financial statements for such period, which management must assess in connection with the issuance of its financial statements for each period based on the events and conditions at that time (including any significant indebtedness that may become due during that year, such as the Revolving Credit Facility, as noted above). If we were to make that determination in connection with the filing of any subsequent periodic report, it our ability to continue as a going concern for the year following the reporting of our financial statements for such period, which management must assess in connection with the issuance of its financial statements for each period based on the events and conditions at that time (including any significant indebtedness that may become due during that year, such as the Revolving Credit Facility, as noted above). If we were to make that determination in connection with the filing of any subsequent periodic report, it would cause a violation of our covenants under our credit agreements, as well as other significant adverse impacts to us, including but not limited to harm to our reputation, investor confidence, customer relationships, relationships with our lenders, and the willingness for third parties to do business with us on favorable terms, or at all, in the future, costs and distractions for management and the business, and additional challenges in raising capital on favorable terms, or at all. Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in our industry in particular), our recent operating and delinquent reporting history, our risk of delisting, our prospects for expansion, and the recently announced changes to our Board and key employees. Further, the holders of our Convertible Preferred Stock are entitled to certain participation rights with respect to any equity financing (subject to certain limitations) and certain consent rights related to further increases in indebtedness or other material transactions, in each case, as further described under the applicable documents related thereto, which could adversely impact the Company's ability to obtain financing terms on favorable terms, or at all. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, third parties may be reluctant to provide the services we need in order to operate and we may be required to cease our operations, divest our assets at unattractive prices or obtain financing on unattractive terms. Any additional capital raised through the sale of equity may dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. In addition, the holders of the Convertible Preferred Stock, by virtue of their anti-dilutive protections and participation rights, may cause such an equity raise to be further dilutive to the Company's other existing stockholders, and potentially create further consolidation of ownership among our largest stockholders. In addition, the terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, which may have a further dilutive effect. If we raise additional funds through collaboration, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us. Debt financing, if available, would result in increased fixed payment obligations, may be subject to consent requirements from our lenders and holders of Convertible Preferred Stock and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt or making capital expenditures. We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.

We have acquired other businesses in the past and may make additional acquisitions in the future. The successful integration of new business acquisitions may require substantial effort from the Company's management. The diversion of the attention of management and any difficulties encountered in the transition process could have a material adverse effect on the Company's ability to realize the anticipated benefits of the acquisitions. The successful combination of new businesses also requires coordination of research and development activities, manufacturing, sales and marketing efforts. In addition, the process of combining organizations located in different geographic regions could cause the interruption of, or a loss of momentum in, the Company's activities. There can be no assurance that the Company will be able to retain key management, technical, sales and customer support personnel, or that the Company will realize the anticipated benefits of any acquisitions, and the failure to do so would have a material adverse effect on the Company's business, results of operations and financial condition.