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Item 7. Management’s Discussion and Analysis

2022-09-14 compared with 2021-07-29 · 116 added, 121 removed, 232 unchanged (51% of the section changed)

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Landec Corporation and its subsidiaries (“Landec”, the “Company”, “we” or “us”) design, develop, manufacture, and sell differentiated products for food and biomaterials markets, and license technology applications to partners.

Landec has three reportable business segments – Curation Foods, Lifecore, and Other which are described below.

Landec has three reportable business segments – Lifecore, Curation Foods, and Other which are described below.

Landec’s biomedical company, Lifecore Biomedical®, is a fully integrated contract development and manufacturing organization ("CDMO") that offers highly differentiated capabilities in the development, fill and finish of sterile, injectable pharmaceutical products in syringes and vials.

As a leading manufacturer of premium, injectable grade Hyaluronic Acid, Lifecore brings 37 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market.

Landec’s natural food company, Curation Foods is focused on innovating and distributing plant-based foods with 100% clean ingredients to retail, club and foodservice channels throughout North America.

Curation Foods is able to maximize product freshness through its geographically dispersed family of growers, refrigerated supply chain and patented BreatheWay ® packaging technology.

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.

Landec’s natural food company, Curation Foods, Inc.

(“Curation Foods”) is focused on innovating and distributing plant-based foods with 100% clean ingredients to retail, club and foodservice channels throughout North America.

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

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The Company’s strategy is to maximize the value of our business portfolio by 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 have clear strategic priorities.

On August 10, 2022, Landec formally announced that we will become a CDMO-focused life sciences company with a planned corporate rebranding including renaming the Company to Lifecore Biomedical and exploring potential sales opportunities of the Company’s remaining Curation Foods assets.

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 partner commitments.

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

Project SWIFT will continue to be implemented throughout fiscal 2023, 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 its legacy core vegetable bag and tray business.

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.

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

During the second quarter of fiscal year 2021, the Company sold the underutilized Hanover manufacturing facility building and assets related thereto for net proceeds of $8.0 million.

In the third quarter of fiscal year 2022, the Company sold Curation Foods’ Eat Smart business, including its salad and cut vegetable businesses for a purchase price of $73.5 million in cash, subject to post-closing adjustments based upon net working capital at the Closing Date.

Subsequent to the end of fiscal year 2020, on June 2, 2022, the Company and Curation Foods entered into and closed an Asset Purchase Agreement with Hazel Technologies, Inc.

(the “Purchaser”), pursuant to which Curation Foods sold all of its assets related to BreatheWay packaging technology business to the Purchasers in exchange for an aggregate purchase price of $3.2 million.

3) Organizational Redesign:

Redesigning the organization so that it is the appropriate size for the Company’s future direction.

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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In fiscal 2021 through 2022, the Company focused on redesigning strategic initiatives, developed and elevated internal talent and reduced overall headcount to improve efficiencies.

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The COVID-19 Pandemic

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

the assessment of recoverability of long-lived assets (including intangible assets) and inventory;

the valuation of investments;

the assessment of recoverability of long-lived assets (including intangible assets and goodwill) and inventory;

the valuation and recognition of stock-based compensation.

and the valuation and recognition of contingent liabilities.

These estimates involve the consideration of complex factors and require management to make judgments.

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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:

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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.

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The Company’s customers benefit from the expertise of its scientists who have extensive experience performing such tasks.

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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.

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Lifecore recognizes revenue for these products at the point in time when legal title to the product is transferred to the customer, which is at the time that shipment is made or upon delivery of the product to our customer.

Curation Foods

Curation Foods’ standard terms of sale, both prior to and following the Eat Smart Disposition, 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 revenues recognized towards its performance obligations.

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

Impairment Review of Goodwill and Indefinite-Lived Intangible Asset

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The quantitative test compares the carrying amount of a reporting unit that includes goodwill to its fair value.

The Company determines the fair value using both an income approach and a market approach.

The Company determines the fair value using an income approach.

Under the income approach, fair value is determined based on estimated future cash flows, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Company and the rate of return an outside investor could expect to earn.

Under the market-based approach, information regarding the Company is utilized along with publicly available industry information to determine earnings multiples that are used to value the Company.

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

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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.

The cash flows used in the DCF method are consistent with those the Company uses in its internal planning, which gives consideration to actual business trends experienced, and the broader business strategy for the long term.

The other key estimates and factors used in the DCF method include, but are not limited to, future volumes, net sales and expense growth rates, and gross margin and gross margin growth rates.

The other key estimates and factors used in the DCF method include, but are not limited to, future volumes, net sales and expense growth

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rates, gross margin and gross margin growth rates, and the discount rate applied.

Changes in such estimates or the application of alternative assumptions could produce different results.

For trademarks and other intangible assets with indefinite lives, the Company performs a quantitative analysis to test for impairment.

When a quantitative test is performed, the estimated fair value of an asset is compared to its carrying amount.

For trademarks and other intangible assets with indefinite lives, the Company has the option to first assess qualitative factors such as macro-economic conditions, industry and market environment, cost factors, overall financial performance of the Company, litigation, and changes in the business in its annual, qualitative analysis to test for impairment.

If the results of a qualitative test indicate a potential for impairment of an intangible asset with an indefinite life, a quantitative test is performed.

The quantitative test compares the estimated fair value of an asset to its carrying amount.

If the carrying amount of such asset exceeds its estimated fair value, an impairment charge is recorded for the difference between the carrying amount and the estimated fair value.

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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 an in increase in the 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 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.

There was no impairment charge during fiscal year 2021.

During fiscal year 2022, the Company recorded impairment charges of $32.1 million and $20.0 million related to its Eat Smart business and Yucatan Foods goodwill, respectively.

The Company also recorded an impairment charge of $8.7 million related to its Yucatan Foods trademarks.

These impairment charges were primarily a result of an indication of a decrease in the fair market values of our Eat Smart and Yucatan Foods businesses driven by lower market valuations and a decrease in projected cash flows.

The goodwill impairment charge related to the Eat Smart business goodwill is included in “loss from discontinued operations” within the Consolidated Statements of Operations.

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

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.

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

Curation Foods revenues consist of revenues generated from (1) the sale of specialty packaged fresh-cut and whole processed vegetable products and salads that are washed and packaged in most cases in the Company’s proprietary BreatheWay packaging and sold primarily under the Eat Smart brand and various private labels, (2) O olive oils and wine vinegars, and (3) Yucatan and Cabo Fresh branded guacamole and avocado products.

In addition, the Curation Foods reportable business segment includes the revenues generated from the sale of BreatheWay packaging to license partners.

Lifecore generates revenues from the development and manufacture of pharmaceutical-grade sodium hyaluronate (“HA”) products and providing contract development and aseptic manufacturing services to customers.

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(1) CDMO and (2) fermentation.

Curation Foods revenues for the periods presented consist of revenues generated from sales of (1) Yucatan, Cabo Fresh, and private label branded guacamole and avocado products, (2) O olive oils and wine vinegars, and (3) BreatheWay packaging to license partners.

As a result of the Eat Smart Disposition, the Company met the requirements of ASC 205-20, to report the results of the Eat Smart business as a discontinued operation.

Accordingly, the operating results for the Eat Smart business have therefore been reclassified as a discontinued operations for the periods presented.

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

May 29, 2022 May 30, 2021 Amount % May 30, 2021 May 31, 2020 Amount %

Curation Foods $ 446,074 $ 504,533 $ (58,459) (12)% $ 504,533 $ 481,686 $ 22,847 5%

Lifecore $ 109,320 $ 98,087 $ 11,233 11% $ 98,087 $ 85,833 $ 12,254 14%

Total Revenues $ 544,161 $ 590,366 $ (46,205) (8)% $ 590,366 $ 557,559 $ 32,807 6%

Curation Foods 76,466 73,459 3,007 4% 73,459 74,233 (774) (1)%

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.

Total Revenues $ 185,786 $ 171,546 $ 14,240 8% $ 171,546 $ 160,066 $ 11,480 7%

The increase in Lifecore’s revenues for fiscal year 2022 compared to fiscal year 2021 was primarily due to an $11.0 million increase in CDMO revenues from an increase in development services activities resulting in higher sales to new and existing customers and an increase in aseptic commercial shipments, resulting from increased demand from existing customers, as well as a $0.2 million increase in fermentation sales due to higher sales to existing customers.

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.

Curation Foods

The increase in Curation Foods’ revenues for fiscal year 2022 compared to fiscal year 2021 was primarily driven by increased volume of sales of our guacamole and avocado products and olive oil and wine vinegars.

The decrease in Curation Foods’ revenues for fiscal year 2021 compared to fiscal year 2020 was primarily driven by a decrease in our technology revenue primarily due to a $1.6 million nonrecurring royalty transaction in fiscal year 2020, partially offset by an increase in revenue from our Avocado Products driven by an increase in volume of sales of our guacamole and avocado products.

Gross Profit:

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The Company includes in cost of sales all of the following costs:

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

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(In thousands, except percentages)

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May 30, 2021 May 31, 2020 Amount

Lifecore $ 43,746 $ 38,265 $ 5,481 14% $ 38,265 $ 32,883 $ 5,382 16%

Curation Foods 6,624 12,206 (5,582) (46)% 12,206 6,504 5,702 88%

$ 43,209 $ 42,105 $ 1,104 3% $ 42,105 $ 49,305 $ (7,200) (15)%

38,265 32,883 5,382 16% 32,883 31,698 1,185 4%

Total Gross Profit

$ 50,370 $ 50,471 $ (101) —% $ 50,471 $ 39,387 $ 11,084 28%

Curation Foods

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 increase in Lifecore’s gross profit for fiscal year 2022 compared to fiscal year 2021 was primarily due to an 11% increase in revenues, as well as a favorable product mix change in fiscal year 2022.

As a result, Lifecore’s gross margin increased to 40.0% in fiscal year 2022 from 39.0% in fiscal year 2021.

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.

Curation Foods

The decrease in gross profit for the Curation Foods business for fiscal year 2022 compared to fiscal year 2021 was primarily driven by increased freight costs combined with increased raw product sourcing costs.

Operating Expenses:

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R&D expenses consist primarily of product development and commercialization initiatives.

R&D expenses in our Curation Foods business are primarily focused on innovating our current product lines and on the Company’s proprietary BreatheWay membranes used for packaging produce, with a focus on extending the shelf-life of sensitive vegetables and fruit.

In the Lifecore business, the R&D expenses are focused on new products and applications for HA-based and non-HA biomaterials.

R&D expenses in our Lifecore business are focused on new products and applications for HA-based and non-HA biomaterials.

In the Curation Foods business R&D expenses are primarily focused on innovating our current product lines and on the Company’s proprietary BreatheWay membranes used for packaging produce, with a focus on extending the shelf-life of sensitive vegetables and fruit.

For Other, the R&D expenses are primarily focused on creating and developing new innovative lines of products.

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May 30, 2021 May 31, 2020 Amount

Curation Foods

$ 4,064 $ 5,142 $ (1,078) (21)% $ 5,142 $ 5,444 $ (302) (6)%

6,157 5,910 247 4% 5,910 5,085 825 16%

— 47 (47) (100)% 47 937 (890) (95)%

Lifecore $ 7,359 $ 6,157 $ 1,202 20% $ 6,157 $ 5,910 $ 247 4%

Curation 482 1,266 (784) (62)% 1,266 1,625 (359) (22)%

Other — — — —% — 47 (47) (100)%

$ 7,841 $ 7,423 $ 418 6% $ 7,423 $ 7,582 $ (159) (2)%

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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 increase in R&D expenses for fiscal year 2022 compared to fiscal year 2021 was primarily due an increase in Lifecore’s R&D expenses primarily due to higher salary and benefit expenses, including increased headcount, partially offset but a decrease in Curation Foods R&D expenses due to a decrease in R&D activities.

The decrease in R&D expenses for fiscal year 2021 compared to fiscal year 2020 was primarily due a decrease in Curation Foods and Other R&D expenses due to a decrease in R&D activities in these segments, partially offset by an increase in Lifecore’s R&D expenses primarily due to higher salary and benefit expenses, including increased headcount.

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

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May 29, 2022 May 30, 2021 Amount % May 30, 2021 May 31, 2020 Amount %

Lifecore $ 10,033 $ 8,305 $ 1,728 21% $ 8,305 $ 7,688 $ 617 8%

Curation Foods 19,666 10,920 8,746 80% 10,920 14,616 (3,696) (25)%

$ 38,624 $ 46,130 $ (7,506) (16)% $ 46,130 $ 43,828 $ 2,302 5%

8,305 7,688 617 8% 7,688 6,618 1,070 16%

18,435 18,370 65 —% 18,370 11,616 6,754 58%

Other 16,428 18,435 (2,007) (11)% 18,435 18,370 65 —%

$ 46,127 $ 37,660 $ 8,467 22% $ 37,660 $ 40,674 $ (3,014) (7)%

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.

The increase in SG&A expenses for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $8.8 million increase in the Curation Foods segment driven by costs incurred related to the transition services agreement for the Eat Smart Disposition, and a $1.7 million increase at Lifecore due to increased salary and benefit expenses, including increased headcount.

These decreases were partially offset by a $2.0 million decrease in the Other segment driven by a decrease in legal costs.

The decrease in SG&A expenses for fiscal year 2021 compared to fiscal year 2020 was primarily due to cost cutting and restructuring efforts in our Curation Foods segment associated with Project SWIFT.

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

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Restructuring Costs 8,961 3,759 5,202 138% 3,759 4,054 (295) (7)%

During fiscal year 2022, the Company recorded an impairment charge of $20.0 million related to its Yucatan Foods goodwill.

The Company also recorded an impairment charge of $8.7 million related to its Yucatan Foods trademarks.

These impairment charges were primarily a result of an indication of a decrease in the fair market values of our Yucatan Foods businesses driven by lower market valuations and a decrease in projected cash flows.

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

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.

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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.

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Refer to Note 9 - Commitments and Contingencies - Legal Contingencies in the notes to our consolidated financial statements for more information.

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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.

The Company recorded $9.0 million, $3.8 million, and $4.1 million in fiscal years 2022, 2021, and 2020, respectively, related to the restructuring plan.

Restructuring costs for fiscal year 2022 increased $5.2 million compared to fiscal year 2021 due to increased restructuring activity in our Curation Foods Segment as part of our Project SWIFT initiatives to sell Curation Foods assets and prepare the Company for the transition to Lifecore.

Restructuring costs for fiscal year 2021 decreased $0.3 million compared to fiscal year 2020 due to a decrease in restructuring activity related to continuing operations in our Curation Foods Segment as part of our Project SWIFT initiatives.

Refer to Note 13 - Restructuring Costs in the notes to our consolidated financial statements for more information.

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May 29, 2022 May 30, 2021 Amount % May 30, 2021 May 31, 2020 Amount %

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

Interest Income $ 81 $ 48 $ 33 69% $ 48 $ 72 $ (24) (33)%

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

Interest Expense, net (17,357) (10,387) (6,970) 67% (10,387) (4,646) (5,741) 124%

Transition Services Income 5,814 — 5,814 100% — — — —%

Loss on Debt Refinancing — (1,110) 1,110 (100)% (1,110) — (1,110) 100%

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

Income Tax (Expense) Benefit

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 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.

Other Income (Expense), net 641 111 530 N/M 111 (195) 306 N/M

Income Tax Benefit 5,839 1,903 3,936 207% 1,903 8,774 (6,871) (78)%

Interest Income

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Interest Expense

The increase in interest expense during fiscal year 2022 compared to fiscal year 2021, was primarily a result of prepaid interest and prepayment penalties incurred related to payments made on our term debt resulting from the sales of our investment in Windset and the Eat Smart Disposition, combined with higher interest rates and an increase in deferred financing costs incurred as a result of our debt refinancing in December 2020.

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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Transition Services Income

In fiscal year 2022 the Company earned $5.8 million of transition services income related to transition services provided to Taylor Farms related to the Eat Smart Disposition which is meant to defray costs incurred to provide the transition services which are reported within Selling, general and administrative costs.

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 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 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.

Other Income (Expense), net

The increase in other income (expense), net for fiscal years 2022 and 2021 compared to the respective prior periods was primarily the result of the change in the fair value of our interest rate swap liability.

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Income Tax Benefit

The change in income tax benefit for fiscal year 2022 compared to fiscal year 2021 was primarily due to the Company’s increase in net loss before income taxes from continuing operations and the Company’s effective tax rate for fiscal year 2022 changed from a tax provision benefit of 16.59% to a tax provision benefit of 11.20% in comparison to fiscal year 2021 after adjustment for discontinued operations.

The decrease in the effective tax rate for fiscal year 2022 was primarily due to a significant valuation allowance increase and the impairment of Yucatan Foods goodwill.

The effective tax rate for fiscal year 2021 changed from a tax provision benefit of 28.63% to a tax provision benefit of 16.59% in comparison to fiscal year 2020 after adjustment for discontinued operations.

The decrease in the income tax benefit for fiscal year 2021 was primarily due to a significant decrease in the Company's loss before tax from continuing operations, and the increase in change in valuation allowance which offsets federal and state research and development credits, and $2.8 million of NOL carryback benefit applied only for fiscal year 2020.

Liquidity and Capital Resources

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Cash Flows from Operating Activities

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.

Net cash used in operating activities during fiscal year 2022 was $24.4 million compared to $15.0 million of net cash provided by operating activities during fiscal year 2021.

The primary uses of net cash in operating activities during fiscal year 2022 were (1) a $97.4 million net loss, (2) an $6.6 million net increase in working capital, and (3) a $6.9 million reduction in deferred taxes.

These uses of cash were partially offset by (1) $60.8 million impairment of goodwill and intangible assets, (2) $20.5 million of depreciation/amortization and stock based compensation expense, and (3) $5.5 million Loss on sale of Eat Smart and loss on disposal of property and equipment related to restructuring, net.

The primary factors for the increase in working capital during the fiscal year ended 2022, was a $6.0 million increase in inventory driven by production in our Avocado Products division and to support the sales growth at Lifecore, a $6.1 million increase in accounts receivable driven by sales increases and timing of customer payments, and a $3.2 million net increase in accrued compensation and other accrued liabilities driven by severance accruals, partially offset by an increase in accounts payable of $9.3 million related to the increase in inventory and timing of payments.

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 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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Net cash provided by investing activities during fiscal year 2022 was $81.8 million, compared to $10.9 million of net cash used in investing activities for fiscal year 2021.

Net cash provided by investing activities during fiscal year 2022 was primarily due to the receipt of $73.5 million related to the Eat Smart Disposition (partially offset by a $9.8 million working capital adjustment and cash expenses related to the Eat Smart Disposition), $45.1 million related to the sale of the Company's investment in Windset, partially offset by the purchase of $28.1 million of equipment to support the growth of the Company’s Lifecore and Curation Foods businesses.

Cash Flows from Financing Activities

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.

Net cash used in financing activities during fiscal year 2022 was $57.0 million compared to $3.4 million for the same period last year.

The net cash used in financing activities during fiscal year 2022 was primarily due to $86.4 million of debt pay downs under the Company's term loan, partially offset by a $20.0 million draw on the term loan multi draw accordion feature to fund Lifecore capital expenditures, and an $11.0 million net draw down on the Company’s line of credit.

Capital Expenditures

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Capital expenditures incurred during fiscal year 2021 were $23.8 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.

During the fiscal year ended 2022, capital expenditures for Lifecore and Curation Foods were $23.6 million and $2.7 million, respectively, and capital expenditures for discontinued operations were $1.8 million.

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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.

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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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.

Interest continues 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.

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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.

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

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 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.

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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 Refinance Term Loan Credit Agreement also provides that in the event of a prepayment of any amount other than the scheduled installments within twelve months after the

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closing date, a penalty will be assessed equal to the aggregate amount of interest that would have otherwise been payable from date of prepayment event until twelve months after the closing date plus 3% of the amount prepaid.

The 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.

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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.

In April 2022 the Company amended the New Credit Agreement to make available again $20.0 million of term debt that that had been previously repaid.

In connection with this amendment, the Company incurred debt issuance costs from the lender of $0.7 million.

As of May 29, 2022, (i) $40.0 million was outstanding on the Refinance Revolver, at an interest rate of 3.00%, (ii) $103.7 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.

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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,

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prosecuting, defending, and enforcing intellectual property rights;

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

the ability to comply with regulatory requirements;

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There can be no assurance that additional funds, if required, will be available to the Company on favorable terms, if at all.

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

Off-Balance Sheet Arrangements

The Company is not a party to any agreements with, or commitments to, any special purpose entities that would constitute material off-balance sheet financing.

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