What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-07-29 compared with 2020-08-14 · 142 added, 120 removed, 211 unchanged (55% of the section changed)

13 unchanged sentences

Also included in the Curation Foods segment operating results are the dividends and Landec’s share of the change in the fair market value of the Company’s 26.9% investment ownership of Windset, a leading edge grower of hydroponically-grown produce.

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Included in the Other segment is Corporate, which includes corporate general and administrative expenses, non-Curation Foods and non-Lifecore interest income and income tax expenses.

The Company’s strategy is to maximize the value of our business portfolio by improving operating margins at Curation Foods, investing in growth to drive momentum at Lifecore while driving profitable growth across the organization with consumer insights driven innovation.

Each of our business segments are in different life stages and are have clear strategic priorities.

Each of our business segments are in different life stages and have clear strategic priorities.

Lifecore is the Company’s FDA approved CDMO business, which is focused on driving profitable growth with product development and manufacturing of sterile injectable products.

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The Company believes that the decisive actions of Project SWIFT will help improve the Company’s operating cost structure, enhance profitability, and strengthen its balance sheet with an overall aim to deliver long-term value to shareholders.

Curation Foods intends to continue to deliver high levels of product quality and safety, while successfully executing on its customer, grower, and

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partner commitments.

Curation Foods intends to continue to deliver high levels of product quality and safety, while successfully executing on its customer, grower, and partner commitments.

Project SWIFT will continue to be implemented throughout fiscal 2022, with three strategic priorities designed to improve Curation Foods’ overall financial performance and profitability:

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Simplify the business by divesting non-core assets.

In fiscal 2020 the Company initiated the strategic sale process of the Company’s Ontario, California salad dressing manufacturing facility, which had yet to become operational and a review of strategic options for of its legacy core vegetable bag and tray business.

In June 2020 the Company began exploring opportunities for the planned divestiture of its underutilized Hanover manufacturing facility.

In the first quarter of fiscal year 2021, the Company sold its interest in Ontario for net proceeds of $4.9 million.

In June 2020 the Company began exploring opportunities for the divestiture of its underutilized Hanover manufacturing facility, and during the second quarter of fiscal year 2021, the Company sold the Hanover building and assets related thereto for net proceeds of $8.0 million.

3) Organizational Redesign:

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In fiscal 2021, the Company focused on redesigning strategic initiatives, developed and elevated internal talent and reduced overall headcount to improve efficiencies.

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.

We expect to benefit from engaging with a strategic logistics partner to increase our distribution reach into markets that we do not currently serve, improve efficiency by increased distribution frequency in existing markets and reduce our overall operating costs, thereby bringing greater value to our stockholders.

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The COVID-19 Pandemic

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The accounting estimates that require management’s most significant and subjective judgments include revenue recognition;

loss contingencies, sales returns and allowances;

self-insurance liabilities;

loss contingencies, sales returns and credit losses;

recognition and measurement of current and deferred income tax assets and liabilities;

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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 the Company has completed its performance obligations under a contract and control of the product is transferred to the customer.

Substantially all revenue is recognized at the time shipment is made or upon delivery as control of the product is transferred to the customer.

Revenue for development service contracts are generally recognized based upon the labor hours expended relative to the total expected hours as a measure of progress to depict transfer of control of the service over time.

The services are not distinct and are accounted for as a single performance obligation for each customer.

The Company’s standard terms of sale are generally included in its contracts, purchase orders, and invoices.

As such, all revenue is considered revenue recognized from contracts with customers.

Shipping and other transportation costs charged to

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customers are recorded in both revenue and cost of goods sold.

The Company has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

The Company’s standard payment terms with its customers generally range from 30 days to 90 days.

Certain customers may receive cash-based incentives (including:

volume rebates, discounts, and promotions), which are accounted for as variable consideration to the Company’s performance obligations.

The Company estimates these sales incentives based on the expected amount to be provided to its customers and reduces revenues recognized towards its performance obligations.

The Company does not anticipate significant changes in its estimates for variable consideration.

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.

Curation Foods

Curation Foods’ standard terms of sale are generally included in its contracts and purchase orders.

Revenue is recognized at the time shipment is made or upon delivery as control of the product is transferred to the customer.

Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold.

Curation Foods has elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

Curation Foods’ standard payment terms with its customers generally range from 30 days to 90 days.

Certain customers may receive cash-based incentives (including volume rebates, discounts, and promotions), which are accounted for as variable consideration to Curation Foods’ performance obligations.

Curation Foods estimates these sales incentives based on the expected amount to be provided to its customers and reduces revenue recognized towards its performance obligations.

The Company has not historically had and does not anticipate significant changes in its estimates for variable consideration.

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.

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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.

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.

Impairment Review of Goodwill and Indefinite-Lived Intangible Asset

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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.

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.

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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.

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The O impairment charges were primarily a result of the recently updated (lowered) financial outlook for the O reporting unit, related to a recent shift in strategic focus within the Curation Foods business segment.

The Yucatan Foods' impairment charges were primarily a result of an increase in the Yucatan Foods carrying value and in increase in discount rate, as a result of uncertainty in forecasting the effects of COVID-19 and general economic uncertainties.

The Yucatan Foods' impairment charges were primarily a result of an increase in the Yucatan Foods carrying value and an in increase in the discount rate, as a result of uncertainty in forecasting the effects of COVID-19 and general economic uncertainties.

These impairment charges are included in the line item “impairment of goodwill and intangible assets” on the Consolidated Statements of Operations, and both are in the Curation Foods business segment.

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There was no impairment charge during fiscal year 2021.

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.

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The Company’s tax-contingency accruals are recorded in Other accrued liabilities in the accompanying Consolidated Balance Sheets.

Stock-Based Compensation

The Company’s stock-based awards include stock option grants and restricted stock unit awards (“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.

Derivative Financial Instruments

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.

Pursuant to the adoption of ASU 2017-12, 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) income (“AOCI”) in Stockholders’ Equity.

Those amounts are subsequently reclassified to earnings in the same line item in the Consolidated Statement of Operations as impacted by the hedge item 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.

Fair Value Measurements

The Company uses fair value measurement accounting for financial assets and liabilities and for financial instruments and certain other items measured at fair value.

The Company has elected the fair value option for its investment in a non-public company.

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

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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.

As of May 31, 2020, the Company held certain assets and liabilities that were required to be measured at fair value on a recurring basis, including its interest rate swap, its minority interest investment in Windset, and its contingent consideration liability from the acquisition of O .

The fair value of the Company’s interest rate swap contracts is determined based on model inputs that can be observed in a liquid market, including yield curves, and is categorized as a Level 2 fair value measurement and is included in Other assets or Other non-current liabilities in the accompanying Consolidated Balance Sheets.

As of May 31, 2020, there was no contingent consideration due to the former owners of O .

However, prior to May 31, 2020, the fair value of the Company’s contingent consideration liability from the acquisition of O utilized significant unobservable inputs, including projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), and discount rates.

As a result, the Company’s contingent consideration liability associated with the O acquisition was considered a Level 3 measurement liability and is included in Other non-current liabilities in the accompanying Consolidated Balance Sheets.

The Company has elected the fair value option of accounting for its investment in Windset.

The calculation of fair value utilizes significant unobservable inputs, including projected cash flows, growth rates, and discount rates.

As a result, the Company’s investment in Windset is considered to be a Level 3 measurement investment.

The change in the fair value of the Company’s investment in Windset for the twelve months ended May 31, 2020 was due to the Company’s 26.9% minority interest in the change in the fair market value of Windset during the period.

See “Note 1 – Organization, Basis of Presentation, and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements for additional discussion of the Company's accounting for fair value measurement.

Recent Accounting Pronouncements

Refer to Note 1 - Organization, Basis of Presentation, and Summary of Significant Accounting Policies in the notes to our consolidated financial statements for a description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.

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Results of Operations

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(1) CDMO and (2) fermentation.

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(In thousands, except percentages) Year Ended Change Year Ended Change

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Curation Foods

The increase in Curation Foods’ revenues for fiscal year 2020, compared to the same period last year, was primarily due to (1) the addition of Yucatan Foods, which was acquired on December 1, 2018, that contributed a comparative increase of $34.9 million in revenues, (2) a $12.7 million increase in salad revenues, and (3) a $3.1 million increase in BreatheWay revenues.

The decrease in Curation Foods’ revenues for fiscal year 2021 compared to fiscal year 2020 was primarily due to a $57.7 million decrease in revenues in the fresh packaged salads and vegetables product line, which was primarily due to (1) a $35.5 million planned shift away from non-strategic revenue streams, including packaged vegetables in bags and trays, (2) an $11.6 million decrease in green bean revenues driven by a decrease in demand from food service customers during the COVID-19 pandemic, and (3) a $6.9 million decrease in salad revenues driven by a decrease in demand during the COVID-19 pandemic.

The increase in Curation Foods’ revenues for fiscal year 2020 compared to fiscal year 2019, was primarily due to (1) the addition of Yucatan Foods, which was acquired on December 1, 2018, that contributed a comparative increase of $34.9 million in revenues, (2) a $12.7 million increase in salad revenues, and (3) a $3.1 million increase in BreatheWay revenues.

These increases were partially offset by a $17.3 million planned decrease in revenues from packaged vegetables in bags and trays, and a $9.0 million decrease in green bean revenues due to weather-related events that resulted in lower yields.

The increase in Curation Foods’ revenues for fiscal year 2019 compared to fiscal year 2018 was primarily due to $27.3 million of revenues from the Yucatan Foods business.

In addition, revenues increased $2.1 million from salad sales and $1.5 million from O olive oil and vinegar sales.

These increases were partially offset by a $5.5 million decrease in (1) green bean sales due to shortages of green beans during December and January, as a result of weather-related events in the Southeast, and (2) tray sales due to lower unit volume sales.

The increase in Lifecore’s revenues for fiscal year 2021 compared to fiscal year 2020 was primarily due to a $10.5 million increase in CDMO revenues resulting from increased demand from existing customers that drove an increase in aseptic filling commercial shipments, and a $1.7 million increase in fermentation sales due to higher sales to existing customers.

The increase in Lifecore’s revenues for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $10.4 million increase in CDMO revenues from an increase in development services activities and an increase in aseptic filling commercial shipments, primarily due to higher sales to existing customers, partially offset by a $0.4 million decrease in fermentation sales to existing customers.

The increase in Lifecore’s revenues for fiscal year 2019 compared to fiscal year 2018 was primarily due to a $10.1 million increase in CDMO revenues from an increase in development services activities and an increase in aseptic filling commercial shipments, primarily due to higher sales to existing customers.

Gross Profit :

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raw materials (including produce, seeds, packaging, syringes and fermentation and purification supplies), direct labor, overhead (including indirect labor, depreciation, and facility-related costs), and shipping and shipping-related costs.

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(In thousands, except percentages)

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Curation Foods

The decrease in gross profit for the Curation Foods business for fiscal year 2020, compared to fiscal year 2019, was primarily due to (1) the sale of avocado products that were produced during the fourth quarter of fiscal 2019 and first quarter of fiscal 2020 when the costs of avocados were substantially higher than current production costs, (2) adverse weather-related events impacting raw material supply during fiscal year 2020, and (3) lower gross profit driven by a planned de-emphasis of packaged

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vegetables in bags and trays.

The increase in gross profit for the Curation Foods business for fiscal year 2021 compared to fiscal year 2020 was primarily due to an increase in gross profits from avocado products driven by the sale of products in fiscal 2021 produced with lower cost avocados than those used for products sold in fiscal 2020, which was partially offset by (1) the decrease in gross profits primarily driven by the decrease in revenues from our planned shift away from non-strategic fresh packaged salads and vegetables segment revenue streams (primarily packaged vegetables in bags and trays), (2) the decrease in gross profits driven by a decrease in royalty revenue of $1.6 million due to nonrecurring royalty transactions, and (3) business interruption insurance recoveries received in fiscal year 2020.

The decrease in gross profit for the Curation Foods business for fiscal year 2020 compared to fiscal year 2019 was primarily due to (1) the sale of avocado products that were produced during the fourth quarter of fiscal 2019 and first quarter of fiscal 2020 when the costs of avocados were substantially higher than current production costs, (2) adverse weather-related events impacting raw material supply during fiscal year 2020, and (3) lower gross profit driven by a planned de-emphasis of packaged vegetables in bags and trays.

These decreases were partially offset by an increase in gross profits from the increase in BreatheWay revenues.

The decrease in gross profit for the Curation Foods business for fiscal year 2019 compared to fiscal year 2018 was primarily due to lower sales of green beans and higher input costs for raw materials, labor, packaging, and, freight.

These increases were partially offset by $3.8 million of gross profit from the Yucatan Foods business and gross profit from higher salad sales.

The net of these factors resulted in the gross margin decreasing to 10.2% in fiscal year 2019 compared to 10.8% in fiscal year 2018.

The increase in Lifecore’s gross profit for fiscal year 2021 compared to fiscal year 2020 was primarily due to a 14% increase in revenues, as well as a favorable product mix change in fiscal year 2021.

As a result, Lifecore’s gross margin increased to 39.0% in fiscal year 2021 from 38.3% in fiscal year 2020.

The increase in Lifecore’s gross profit for fiscal year 2020 compared to fiscal year 2019 was primarily due to a 13% increase in revenues partially offset by temporary manufacturing inefficiencies in the fourth quarter of fiscal year 2020 associated with new safety protocols primarily due to the COVID-19 pandemic.

As a result, Lifecore's gross margin decreased to 38.3% in fiscal year 2020 from 41.8% in fiscal year 2019.

The increase in Lifecore’s gross profit for fiscal year 2019 compared to fiscal year 2018 was due to a 16% increase in revenues partially offset by an unfavorable product mix change in fiscal year 2019 to a higher percentage of revenues coming from lower margin aseptically filled product sales.

As a result, Lifecore’s gross margin decreased to 41.8% in fiscal year 2019 from 43.7% in fiscal year 2018.

Operating Expenses :

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$ 10,222 $ 11,099 $ (877) (8)% $ 11,099 $ 11,466 $ (367) (3)%

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The decrease in R&D expenses for fiscal year 2021 compared to fiscal year 2020 was primarily due to (1) a $1.1 million decrease in our Curation Foods segment primarily driven by a decrease in consulting and other professional services related to a packaging redesign and brand restage, partially offset by (2) an increase in Lifecore’s R&D expenses primarily due to higher salary and benefit expenses, including increased headcount.

The decrease in R&D expenses for fiscal year 2020 compared to fiscal year 2019 was primarily due to (1) a $0.9 million decrease in our Other segment primarily due to discontinuing most R&D activities at corporate, (2) a $0.3 million decrease in our Curation Foods segment driven by a decrease in legal and other professional services, partially offset by (3) an increase in Lifecore’s R&D expenses primarily due to higher salary and benefit expenses driven by an increase in headcount related to increased development activities.

The decrease in R&D expenses for fiscal year 2019 compared to fiscal year 2018 was primarily due to a decrease in R&D expenses in our Other segment as a result of a decrease in product development activities for our new ventures and from a reduction in R&D expenses at Lifecore due to a higher percentage of R&D personnel working on production (charged to cost of sales) this fiscal year compared to last fiscal year.

Selling, General and Administrative ("SG&A")

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

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(In thousands, except percentages)

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$ 65,364 $ 72,188 $ (6,824) (9)% $ 72,188 $ 62,062 $ 10,126 16%

The increase in SG&A expenses for fiscal year 2020 compared to fiscal year 2019 was due to (1) a $6.8 million increase in our Other segment primarily due to a (a) $6.0 million increase in legal fees related to compliance and other legal matters and (b) a $3.0 million greater reduction of the earnout liability (reduction of SG&A costs) associated with the O acquisition in the same period last year compared to the current period, and (c) a $1.8 million decrease in salaries and related benefits due to a decrease in headcount and bonus expense, (2) a $2.3 million increase in our Curation Foods business primarily due to (a) $3.0 million of increased SG&A at Yucatan Foods, which is primarily due to a full year of SG&A expenses in fiscal 2020 compared to a partial year in fiscal 2019, net of merger and acquisition costs incurred, in the same period last year, (b) the $1.2 million reserve for the receivable from Pacific Harvest, partially offset by, (c) a $1.6 million decrease in consulting fees, most of which was associated with Curation Foods’ cost saving initiatives, and (3) a $1.0 million increase in our Lifecore business SG&A due to higher salary and benefit expenses driven by an increase in headcount.

The increase in SG&A expenses for fiscal year 2019 compared to fiscal year 2018 was due to (1) a $11.7 million increase at Curation Foods primarily due to (a) $4.3 million of SG&A at Yucatan Foods, (b) $3.3 million of merger and acquisition costs, (c) a $2.1 million increase in SG&A expenses at Eat Smart, and (d) an increase in consulting fees, most of which was associated with Curation Foods’ cost saving initiatives, and (2) a $0.7 million increase at Lifecore due to new hires and increased salary and benefit expenses.

These increases were partially offset by a $0.4 million decrease at Corporate primarily due to a $3.5 million reduction of the earnout liability associated with the O acquisition, partially offset by severance-related charges, legal fees, and consulting fees.

The decrease in SG&A expenses for fiscal year 2021 compared to fiscal year 2020 was primarily due to a $7.5 million decrease at Curation Foods primarily due to cost savings driven by our restructuring efforts associated with Project SWIFT and lower salary and related expenses.

These decreases were partially offset by a $0.6 million increase at Lifecore due to increased salary and benefit expenses, including increased headcount.

The increase in SG&A expenses for fiscal year 2020 compared to fiscal year 2019 was due to (1) a $6.8 million increase in our Other segment primarily due to a (a) $6.0 million increase in legal fees related to compliance and other legal matters and (b) a $3.0 million greater reduction of the earn out liability (reduction of SG&A costs) associated with the O acquisition in the same period last year compared to the current period, and (c) a $1.8 million decrease in salaries and related benefits due to a decrease in headcount and bonus expense, (2) a $2.3 million increase in our Curation Foods business primarily due to (a) $3.0 million of increased SG&A at Yucatan Foods, which is primarily due to a full year of SG&A expenses in fiscal 2020 compared to a partial year in fiscal 2019, net of merger and acquisition costs incurred, in the same period last year, (b) the $1.2 million reserve for the receivable from Pacific Harvest, partially offset by, (c) a $1.6 million decrease in consulting fees, most of which was associated with Curation Foods’ cost saving initiatives, and (3) a $1.0 million increase in our Lifecore business SG&A due to higher salary and benefit expenses driven by an increase in headcount.

Impairment of Goodwill and Intangible assets, Legal Settlement Charge, and Restructuring Costs

(In thousands, except percentages) Year Ended Change Year Ended Change

May 30, 2021 May 31, 2020 Amount % May 31, 2020 May 26, 2019 Amount %

Impairment of Goodwill and Intangible Assets

$ — $ 12,953 $ (12,953) (100)% $ 12,953 $ — $ 12,953 100%

Legal Settlement Charge 1,763 — 1,763 100% — — — —%

Restructuring Costs 17,621 17,285 336 2% 17,285 — 17,285 100%

During fiscal year 2020, the Company recorded an impairment charge of $1.1 million and $3.5 million related to its O and Yucatan Foods trademarks, respectively.

The Company also recorded an impairment charge of $5.2 million and $2.7 million related to its O and Yucatan Foods goodwill, respectively.

The Yucatan Foods impairment charges were primarily a result of an increase in the Yucatan Foods carrying

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value and in increase in discount rate, as a result of uncertainty in forecasting the effects of COVID-19 and general economic uncertainties.

Refer to Note 1 - Impairment Review of Goodwill and Indefinite-Lived Intangible Asset in the notes to our consolidated financial statements for more information.

In fiscal year 2021 the Company executed a settlement agreement related to a legal matter with Pacific Harvest, Inc.

and Rancho Harvest, Inc., 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.

Refer to Note 10 - Commitments and Contingencies - Legal Contingencies in the notes to our consolidated financial statements for more information.

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 Company recorded $17.6 million and $17.3 million in fiscal years 2021 and 2020, respectively, related to the restructuring plan.

Refer to Note 14 - Restructuring Costs in the notes to our consolidated financial statements for more information.

(In thousands, except percentages) Year Ended Change Year Ended Change

May 30, 2021 May 31, 2020 Amount % May 31, 2020 May 26, 2019 Amount %

Dividend Income $ 1,125 $ 1,125 $ — —% $ 1,125 $ 1,650 $ (525) (32)%

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Interest Expense (15,344) (9,603) $ (5,741) 60% (9,603) (5,230) (4,373) 84%

Other Expense (4,395) 1,600 (5,995) N/M 1,600 2,900 (1,300) (45)%

Loss on Debt Refinancing (1,110) — $ (1,110) —% — — — —%

Other Income (Expense) (11,689) (4,395) $ (7,294) 166% (4,395) 1,600 (5,995) N/M

Income Tax (Expense) Benefit

13,116 (1,518) 14,634 N/M (1,518) 9,363 (10,881) N/M

Non-controlling Interest Expense

— — — —% — (94) 94 (100)%

7,801 13,116 $ (5,315) (41) 13,116 (1,518) 14,634 N/M

Dividend Income

Dividend income is derived from the dividends accrued during each period on the Company’s $15.0 million Senior A and $7.0 million Senior B preferred stock investment in Windset, which yields a cash dividend of 7.5% annually.

The decrease in dividend income for fiscal year 2020 compared to fiscal year 2019 was due to the sale of the Company’s $7.0 million Senior B preferred stock to Windset in the fourth quarter of fiscal year 2019.

Dividend income is derived from the dividends accrued during each period on the Company’s previously held $15.0 million Senior A and $7.0 million Senior B preferred stock investment in Windset, which each yielded a cash dividend of 7.5% annually.

There was no change in dividend income for the fiscal year ended May 30, 2021 compared to May 31, 2020.

The decrease in dividend income for fiscal year 2020 compared to fiscal year 2019 was due to the sale of the Company’s previously held $7.0 million Senior B preferred stock to Windset in the fourth quarter of fiscal year 2019.

Subsequent to fiscal year end 2021, the Company sold its remaining investment in Windset on June 1, 2021.

Interest Income

The decrease in interest income in fiscal year 2020 compared to fiscal year 2019 was not significant.

The decrease in interest income in fiscal 2019 compared to fiscal 2018 was not significant.

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The decrease in interest income in fiscal year 2021 compared to fiscal year 2020, and 2020 compared to fiscal 2019 was not significant.

Interest Expense

The increase in interest expense for fiscal year 2020, compared to the same periods last year, was a result of an increase in total debt from $149.0 million as of May 26, 2019 to $190.3 million as of May 31, 2020.

The increase in debt was primarily due to additional borrowings to fund working capital requirements and new equipment purchases during the last twelve months.

The increase in interest expense during fiscal year 2019 compared to fiscal year 2018 was primarily due to additional borrowings to fund the acquisition of Yucatan Foods at the beginning of the third quarter of fiscal 2019 as well as the Company’s line of credit balance increasing from $27.0 million as of fiscal year ended May 27, 2018 to $52.0 million as of fiscal year ended May 26, 2019 primarily to fund new equipment purchases during fiscal year 2019.

The increase in interest expense during fiscal year 2021 compared to fiscal year 2020 was primarily the result of (i) an increased interest rate, due to the Company's increased Total Leverage Ratio (as defined in the Credit Agreement), combined with our debt refinancing in December 2020 at higher interest rates, (ii) an increase in deferred financing costs from those incurred in connection with the Company's amendments to the Credit Agreement since May 31, 2020 combined with our debt refinancing in December 2020, and (iii) an increase in total outstanding debt from $190.3 million as of May 31, 2020 to $193.9 million as of May 30, 2021.

The increase in interest expense during fiscal year 2020, compared to fiscal year 2019, was the result of an increase in total debt from $149.0 million as of May 26, 2019 to $190.3 million as of May 31, 2020.

The increase in debt was primarily due to additional borrowings to fund working capital requirements and new equipment purchases during fiscal year 2020.

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Loss on Debt Refinancing

The loss on debt refinancing was due to a write-off of unamortized debt issuance costs in connection with the Company refinancing its debt in December 2020.

Other Income (Expense)

The decrease in other income (expense) for fiscal year 2020 was primarily a result of the change in fair value of the Company’s investment in Windset, which decreased $4.2 million for the twelve months ended May 31, 2020, compared to an increase of $1.6 million for the twelve months ended May 26, 2019.

The decrease in other income (expense) for fiscal year 2019 was a result of the change in the fair value of the Company’s investment in Windset, which increased $1.6 million for the twelve months ended May 26, 2019, compared to an increase of $2.9 million for the twelve months ended May 27, 2018.

The decrease in other income (expense) for fiscal year 2021 was primarily the result of the change in fair value of the Company’s previously held investment in Windset, which decreased $11.8 million for the twelve months ended May 30, 2021, compared to a decrease of $4.2 million for the twelve months ended May 31, 2020.

The decrease in other income (expense) for fiscal year 2020 was a result of the change in the fair value of the Company’s previously held investment in Windset, which decreased $4.2 million for the twelve months ended May 31, 2020, compared to an increase of $1.6 million for the twelve months ended May 26, 2019.

Subsequent to fiscal year end 2021, the Company sold its investment in Windset on June 1, 2021.

Income Tax (Expense) Benefit

The change in income tax (expense) benefit for fiscal year 2020 compared to fiscal year 2019 was due to the decrease in the Company’s profit before tax, carryback of net operating losses driven by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and the benefit of federal and state research and development credits.

The increase in the income tax expense (benefit) during fiscal year 2019 compared to fiscal year 2018 was due to the income tax benefit from the Tax Cuts and Jobs Act of 2017 (“TCJA”), which resulted in a significant tax benefit during fiscal year 2018 whereas the tax expense for fiscal year 2019 is based on pre-tax income.

Non-controlling Interest Expense

The non-controlling interest expense consisted of the Company’s limited partnership interest in the net income of Apio Cooling, LP.

The Company purchased the remaining non-controlling interest in Apio Cooling, LP during the fourth quarter of fiscal year 2018 and dissolved Apio Cooling, LP during the first month of fiscal year 2019.

The increase in non-controlling interest for fiscal year 2019 compared to fiscal year 2018 was not significant.

The change in income tax (expense) benefit for fiscal year 2021 compared to fiscal year 2020 was primarily due to the Company’s reduction in net loss before income taxes and the Company’s effective tax rate decreasing to 19% in fiscal year 2021 from 26% in fiscal year 2020.

The effective tax rate differs for fiscal year 2021 from the statutory federal income tax rate of 21% as a result of several factors, including the Company’s benefit of federal and state research and development credits, and the change in valuation allowance established against federal, California, and other state attributes expected to expire prior to recognition.

The change in income tax (expense) benefit for fiscal year 2020 compared to fiscal year 2019 was primarily due to the decrease in the Company’s profit before income taxes, carryback of net operating losses driven by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and the benefit of federal and state research and development credits.

Liquidity and Capital Resources

As of May 31, 2020, the Company had cash and cash equivalents of $0.4 million, a net decrease of $0.7 million from $1.1 million at May 26, 2019.

As of May 30, 2021, the Company had cash and cash equivalents of $1.3 million, a net increase of $0.9 million from $0.4 million at May 31, 2020.

Cash Flows from Operating Activities

The Company used $17.0 million of cash for operating activities during fiscal year 2020 compared to generating $16.0 million of cash from operating activities during fiscal year 2019.

The primary uses of net cash used in operating activities during fiscal year 2020 were from (1) a $5.4 million reduction in deferred taxes, (2) a net increase of $27.7 million in working capital, and (3) a $38.2 million net loss, inclusive of, (a) $29.0 million from the restructuring and impairment of assets charges and the Pacific Harvest note receivable reserve, (b) $21.3 million of depreciation/amortization and stock based compensation expense, and (c) $4.2 million decrease in fair value of the Company’s investment in Windset.

The primary factors for the increase in working capital during fiscal year 2020 were (1) a $12.2 million increase in inventory, primarily to support the planned sales growth at Lifecore and Yucatan Foods, (2) a $6.8 million increase in prepaid expenses and other current assets driven by an increase in the Company’s income tax refund receivable as a result of the fiscal year 2020 net loss from continuing operations before taxes and carrybacks of net operating losses related to the CARES Act, and (3) a $6.6 million increase in accounts receivable driven by an increase in revenues in the fourth quarter of fiscal year 2020 compared to fiscal year 2019 coupled with timing of customer payments.

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Net cash provided by operating activities during fiscal year 2021 was $15.0 million compared to the use of $17.0 million of cash from operating activities during fiscal year 2020.

The primary sources of net cash provided by operating activities during fiscal year 2021 were from (1) Lifecore’s net income from continuing operations and (2) a net decrease of $8.9 million in working capital.

These sources of cash were offset by Curation Foods and Other operating loss from continuing operations.

The primary factors for the decrease in working capital during fiscal year 2021 were (1) a $7.9 million decrease in prepaid expenses and other current assets primarily due to the Company’s receipt of income tax refunds related to fiscal year 2020’s net loss from continuing operations before taxes and carrybacks of net operating losses related to the CARES Act, (2) a $5.8 million decrease in accounts receivable driven by an decrease in Curation Foods’ revenues in the fourth quarter of fiscal year 2021 compared to fiscal year 2020 coupled with timing of customer payments, and (3) a $3.3 million increase in accrued compensation primarily related to the amount and timing of bonus payments and deferred payroll taxes under the CARES Act.

These decreases in working capital during 2021 were partially offset by (1) a $6.0 million decrease in accounts payable primarily due to the timing of cash payments and (2) a $3.4 million increase in inventory primarily to support the planned sales growth at Lifecore.

Cash Flows from Investing Activities

Net cash used in investing activities for fiscal year 2021 was $10.9 million compared to $23.9 million for the same period last year.

The use of cash in investing activities for fiscal year 2020, was primarily due to the purchase of $26.7 million of equipment to support the growth of the Company’s Curation Foods and Lifecore businesses, partially offset by the receipt of $2.4 million primarily related to the sale of the Companys San Rafael, California office building.

The use of cash in investing activities for fiscal year 2021, was primarily due to the purchase of $23.8 million of equipment to support the growth of the Company’s Lifecore and Curation Foods businesses, partially offset by the receipt of $12.9 million primarily related to the sale of Curation Foods’ factories in Hanover, Pennsylvania and Ontario, California.

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Cash Flows from Financing Activities

Net cash provided by financing activities for fiscal year 2020 was $40.0 million compared to $79.0 million for the same period last year.

The net cash provided by financing activities during fiscal year 2020 was primarily due to $27.5 million of borrowings under the Company's term loan and from a $25.4 million net increase in the Company’s line of credit.

The cash provided by these financing activities were primarily used for $26.7 million of capital expenditures, $17.0 million of operating activities, and $11.1 million of long-term debt payments.

Net cash used in financing activities for fiscal year 2021 was $3.4 million compared to $40.0 million of net cash provided by financing activities for the same period last year.

The net cash used by financing activities during fiscal year 2021 was primarily due to the $48.4 million net pay down on the Company’s revolving line of credit and $10.5 million of debt issuance costs incurred to refinance the Company's term loan and revolving line of credit.

The net cash used by these financing activities was primarily offset by the $55.9 million of net cash received from the increase in the Company’s refinanced term loan.

Capital Expenditures

During fiscal year 2020, Landec incurred $26.7 million of capital expenditures, which was primarily represented by facility expansions and purchased equipment to support the growth of the Curation Foods and Lifecore businesses.

Compared to capital expenditures of $44.7 million for fiscal year 2019.

On September 23, 2016, the Company entered into a Credit Agreement with JPMorgan, BMO, and City National Bank, as lenders (collectively, the “Lenders”), and JPMorgan as administrative agent, pursuant to which the Lenders provided the Company with a $100.0 million revolving line of credit (the “Revolver”) and a $50.0 million term loan facility (the “Term Loan”), guaranteed by each of the Company’s direct and indirect subsidiaries and secured by substantially all of the Company’s assets, with the exception of the Company’s investment in Windset.

Landec incurred $23.8 million of capital expenditures during fiscal year 2021, which were primarily represented by continued facility modifications and expansions and equipment purchases intended to increase production capacity to support the growth and increased production efficiency of the Lifecore and Curation Foods businesses.

Capital expenditures incurred during fiscal year 2020 were $26.7 million.

On September 23, 2016, the Company entered into a Credit Agreement with JPMorgan, BMO Harris Bank N.A.

("BMO"), and City National Bank, as lenders (collectively, the “Lenders”), and JPMorgan as administrative agent, pursuant to which the Lenders provided the Company with a $100.0 million revolving line of credit (the “Revolver”) and a $50.0 million term loan facility (the “Term Loan”), guaranteed by each of the Company’s direct and indirect subsidiaries and secured by substantially all of the Company’s assets, with the exception of the Company’s investment in Windset.

On November 30, 2018, the Company entered into the Fourth Amendment to the Credit Agreement, which increased the Term Loan to $100.0 million and the Revolver to $105.0 million.

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Interest on both the Revolver and the Term Loan continues to be based upon the Company’s Total Leverage Ratio, at a per annum rate of either (i) the prime rate plus a spread of between 0.25% and 3.00% or (ii) the Eurodollar rate plus a spread of between 1.25% and 4.00%.

Subsequent to fiscal year end 2020, on July 15, 2020, the Company entered into the Eighth Amendment to the Credit Agreement (the “Eighth Amendment”), which among other things, (i) modified the definition of EBITDA to increase the limit on permitted exclusions for certain unusual, extraordinary or one-time cash items for each fiscal quarter ending on or after February 28, 2021, to a maximum of 20% of EBITDA, and (ii) restricted the Company from making Capital Expenditures over certain thresholds.

Interest continues to be based on the Company’s Total Leverage Ratio, now at a revised per annum Applicable Rate of either (i) the prime rate plus a spread of between 0.75% and 3.50% or (ii) the Eurodollar rate plus a spread of between 1.75% and 4.50%, plus, in each case, a commitment fee, as applicable, of between 0.15% and 0.55%, as further described in the Eighth Amendment.

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The Credit Agreement provides the Company the right to increase the Revolver commitments and/or the Term Loan commitments by obtaining additional commitments either from one or more of the Lenders or another lending institution at an amount of up to $10.0 million.

The Credit Agreement continues to contain customary financial covenants and events of default under which the obligation could be accelerated and/or the interest rate increased.

As of May 31, 2020, the Company was in compliance with all financial covenants under the Credit Agreement, other than the maximum Total Leverage Ratio covenant, which noncompliance was waived by the lenders pursuant to the Eighth Amendment.

As of May 31, 2020, $77.4 million was outstanding on the Revolver, at an interest rate of 4.38% under the Eurodollar option.

On July 15, 2020, the Company entered into the Eighth Amendment to the Credit Agreement (the “Eighth Amendment”), which among other things, (i) modified the definition of EBITDA to increase the limit on permitted exclusions for certain unusual, extraordinary or one-time cash items for each fiscal quarter ending on or after February 28, 2021, to a maximum of 20% of EBITDA, and (ii) restricted the Company from making Capital Expenditures over certain thresholds.

Interest continued to be based on the Company’s Total Leverage Ratio, at a revised per annum Applicable Rate of either (i) the prime rate plus a spread of between 0.75% and 3.50% or (ii) the Eurodollar rate plus a spread of between 1.75% and 4.50%, plus, in each case, a commitment fee, as applicable, of between 0.15% and 0.55%, as further described in the Eighth Amendment.

On December 31, 2020, the Company refinanced its existing Term Loan and Revolver by entering into two separate Credit Agreements (the "New Credit Agreements") with BMO and Goldman Sachs Specialty Lending Group, L.P.

(“Goldman”) and Guggenheim Credit Services, LLC ("Guggenheim"), as lenders (collectively, the “Refinance Lenders”).

Pursuant to the credit agreement related to the revolving credit facility, BMO has provided the Company, Curation Foods and Lifecore, as co-borrowers, with an up to $75.0 million revolving line of credit (the “Refinance Revolver”) and serves as administrative agent of the Refinance Revolver.

Pursuant to the credit agreement related to the term loan, Goldman and Guggenheim have provided the Company, Curation Foods and Lifecore, as co-borrowers, with an up to $170.0 million term loan facility (split equally between

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Goldman and Guggenheim) (the “Refinance Term Loan”) and Goldman serves as administrative agent of the Refinance Term Loan.

The Refinance Revolver and Refinance Term Loan are guaranteed, and secured by, substantially all of the Company’s and the Company's direct and indirect subsidiaries' assets.

The Refinance Term Loan matures on December 31, 2025.

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

The Refinance Term Loan provides for principal payments by the Company of 5% per annum, payable quarterly in arrears in equal installments, commencing on March 30, 2023, with the remainder due at maturity.

Interest on the Refinance Revolver is based upon the Company’s average availability, at a per annum rate of either (i) LIBOR rate plus a spread of between 2.00% and 2.50% or (ii) base rate plus a spread of between 1.00% and 1.50%, plus a commitment fee, as applicable, of 0.375%.

Interest on the Refinance Term Loan is at a per annum rate based on either (i) the base rate plus a spread of 7.50% or (ii) the LIBOR rate plus a spread of 8.50%.

The New Credit Agreements provide the Company the right to increase the revolver commitments under the Refinance Revolver, subject to the satisfaction of certain conditions (including consent from BMO), by obtaining additional commitments from either BMO or another lending institution at an amount of up to $15.0 million.

The New Credit Agreements contain customary financial covenants and events of default under which the obligations thereunder could be accelerated and/or the interest rate increased in specified circumstances.

In connection with the New Credit Agreements, the Company incurred debt issuance costs from the lender and third-parties of $10.2 million.

Concurrent with the close of the New Credit Agreements, the Company repaid all outstanding borrowings under the current Credit Agreement, and terminated the Credit Agreement.

In connection with the repayment of borrowings under the Credit Agreement, the Company recognized a loss in fiscal year 2021 of $1.1 million, as a result of the non-cash write-off of unamortized debt issuance costs related to the refinancing under the New Credit Agreements.

As of May 30, 2021, (i) $29.0 million was outstanding on the Refinance Revolver, at an interest rate of 3.0%, (ii) $170.0 million was outstanding on the Refinance Term Loan, at an interest rate of 9.5%, and (iii) the Company was in compliance with all financial covenants and had no events of default under the New Credit Agreements.

Contractual Obligations

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weather conditions that can affect the supply and price of produce, the timing and amount, if any, of payments received under licensing and research and development agreements;

the costs involved in preparing, filing, prosecuting, defending, and enforcing intellectual property rights;

the costs involved in preparing, filing,

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prosecuting, defending, and enforcing intellectual property rights;

the ability to comply with regulatory requirements;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis