Significant Accounting Policies (Policies)

12 Months Ended

May 28, 2017

Consolidation, Policy [Policy Text Block]

Basis of Presentation

and Consolidation

The consolidated financial statements are presented on t

he accrual basis of accounting in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include the accounts of Landec Corporation and its subsidiaries, Apio and Lifecore. All material inter-company transactions and balances have been eliminated.

Arrangements that are

not

controlled through voting or similar rights are reviewed under t

he guidance for variable interest entities (“VIEs”). A company is required to consolidate the assets, liabilities and operations of a VIE if it is determined to be the primary beneficiary of the VIE.

An entity is a VIE and subject to consolidation, if b

y design: a) the total equity investment at risk is

not

sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders or b) as a group the holders of the equity investment at risk lack any

one

of the following

three

characteristics: (i) the power, through voting rights or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity. The Company reviewed the consolidation guidance and concluded that the partnership interest and equity investment in the non-public company by the Company are

not

VIEs.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and judgments that affect the amounts reported in

the financial statements and accompanying notes. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition; loss contingencies; sales returns and allowances; self-insurance liabilities; 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; and the valuation and recognition of stock-based compensation.

These estimates involve the consideration of complex factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve and are subject to change from period to per

iod. The actual results

may

differ from management’s estimates.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentrations of Risk

Cash and cash equivalents, marketable securities, trade accounts receivable, grower advances and notes receivable are financial instruments that potentially subject the Company to concentrations of credit risk. Our Company policy limits, among other thing

s, the amount of credit exposure to any

one

issuer and to any

one

type of investment, other than securities issued or guaranteed by the U.S. government. The Company routinely assesses the financial strength of customers and growers and, as a consequence, believes that trade receivables, grower advances and notes receivable credit risk exposure is limited. Credit losses for bad debt are provided for in the consolidated financial statements through a charge to operations. A valuation allowance is provided for known and anticipated credit losses. The recorded amounts for these financial instruments approximate their fair value.

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

monomers used to synthesize Intelimer polymers, substrate materials for its breathable membrane products and raw materials for its HA products.

The operations of

Windset Holdings

2010

Ltd. (“Windset”), in which the Company holds a

26.9%

minority investment, are predominantly located in British Columbia, Canada and Santa Maria, California. Routinely, the Company evaluates the financial strength and ability for Windset to continue as a going concern.

During the fiscal year ended

May 28, 2017,

sales to the Company’s top

five

customers accounted for approximately

44%

of total revenue with the top

two

customers from the Packaged Fresh Vegetables segment, Costco (“Costco”) and Wal-mart, Inc. (“Wal-mart”) accounting for approximately

18%

and

14%,

respectively, of total revenues. In addition, approximately

30%

of the Company’s total revenues were derived from product sales to international customers,

none

of which individually accounted for more than

of total revenues. As of

May 28, 2017,

the top

two

customers, Costco and Wal-mart represented approximately

12%

and

17%,

respectively, of total accounts receivable.

During the fiscal year ended

May 29, 2016,

sales to the Company’s top

five

customers accounted for approximately

45%

of total revenue with the top

two

customers from the Packaged Fresh Vegetables segment, Costco and Wal-mart accounting for approximately

20%

and

12%,

respectively, of total revenues. In addition, approximately

31%

of the Company’s total revenues were derived from product sales to international customers,

none

of which individually accounted for more than

of total revenues. As of

May 29, 2016,

the top

two

customers, Costco and Wal-mart represented approximately

13%

and

15%,

respectively, of total accounts receivable.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts

may

not

be recoverable. Recoverabili

ty of assets is measured by comparison of the carrying amount of the asset to the net undiscounted future cash flow expected to be generated from the asset. If the future undiscounted cash flows are

not

sufficient to recover the carrying value of the assets, the assets’ carrying value is adjusted to fair value. The Company regularly evaluates its long-lived assets for indicators of possible impairment.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Financial Instruments

The Company

’s financial instruments are primarily composed of commercial-term trade payables, grower advances, notes receivable, debt instruments and derivative instruments. For short-term instruments, the historical carrying amount approximates the fair value of the instrument. The fair value of long-term debt and lines of credit approximates their carrying value.

Cash Flow Hedges

The Company entered into an interest rate swap agreement to manage interest rate risk. This derivative instrument

may

offset a portion of the

changes in interest expense. The Company designates this derivative instrument as a cash flow hedge. The Company accounts for its derivative instrument as either an asset or a liability and carries it at fair value in Other assets or Other non-current liabilities. The accounting for changes in the fair value of the derivative instrument depends on the intended use of the derivative instrument and the resulting designation.

For derivative instruments that hedge the exposure to variability in expected future

cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings in the current period. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.

Comprehensive income consists of

two

components, net income and Other Comprehensive Income (“

OCI”). OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as a component of stockholders’ equity but are excluded from net income. The Company’s OCI consists of net deferred gains and losses on its interest rate swap derivative instrument accounted for a cash flow hedge. The components of OCI, net of tax, are as follows (in thousands):

	Unrealized Gains on Cash Flow Hedge
Balance as of May 29, 2016	$	—
Other comprehensive income before reclassifications, net of tax effect		432
Amounts reclassified from OCI		—
Other comprehensive income, net		432
Balance as of May 28, 2017	$	432

The Company does

not

expect any transactions or other events to occur that would result in the reclassification of any significant gains into earnings in the next

months.

Based on these assumptions, management believes the fair market values of the

Company’s financial instruments are

not

significantly different from their recorded amounts as of

May 28, 2017

and

May 29, 2016

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Accounts Receivable and Sales Returns and Allowance for Doubtful Accounts

The Company carries its accounts receivable at

their face amounts less an allowance for estimated sales returns and doubtful accounts. Sales return allowances are estimated based on historical sales return amounts. Further, on a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts and estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is determined based on review of the overall condition of accounts receivable balances and review of significant past due accounts. The allowance for doubtful accounts is based on specific identification of past due amounts and for accounts over

-days past due. The changes in the Company’s allowance for sales returns and doubtful accounts are summarized in the following table (in thousands).

	Balance at beginning of period		Adjustments charged to revenue and expenses		Write offs, net of recoveries			Balance at end of period
Year Ended May 31, 2015	$	516	$	—	$	(134	)	$	382
Year E nded May 29, 2016	$	382	$	63	$	(110	)	$	335
Year E nded May 28, 2017	$	335	$	519	$	(453	)	$	401

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

Revenue from product sales is recognized when there is persuasive evidence that an arrangement exists, title has transferred, the price is fixed and determinable, and collectability is reasonably assured. Allowances are established for estimated uncollect

ible amounts, product returns, and discounts based on specific identification and historical losses.

Apio

’s Packaged Fresh Vegetables revenues generally consist of revenues generated from the sale of specialty packaged fresh-cut and whole value-added vegetable products that are generally washed and packaged in Apio’s proprietary packaging and sold under Apio’s Eat Smart and GreenLine brands and various private labels. Revenue is generally recognized upon shipment of these products to customers. The Company takes title to all produce it trades and/or packages, and therefore, records revenues and cost of sales at gross amounts in the Consolidated Statements of Comprehensive Income (Loss).

In addition, Packaged Fresh Vegetables revenues include the revenues genera

ted from Apio Cooling, LP, a vegetable cooling operation in which Apio is the general partner with a

60%

ownership position, and from the sale of BreatheWay® packaging to license partners. Revenue is recognized on the vegetable cooling operations as cooling and storage services are provided to Apio’s customers. Sales of BreatheWay packaging are recognized when shipped to Apio’s customers.

Apio

’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity fruit and vegetable products to Asia through its subsidiary, Cal-Ex Trading Company (“Cal-Ex”). As most Cal-Ex customers are in countries outside of the U.S., title transfers and revenue is generally recognized upon arrival of the shipment in the foreign port. Apio records revenue equal to the sale price to

third

parties because it takes title to the product while in transit.

Lifecore

’s Biomaterials business principally generates revenue through the sale of products containing HA. Lifecore primarily sells products to customers in

three

medical areas: (

) Ophthalmic, which represented approximately

65%

of Lifecore’s revenues in fiscal year

2017,

(

) Orthopedic, which represented approximately

15%

of Lifecore’s revenues in fiscal year

2017,

and (

) Other/Non-HA products, which represented approximately

20%

of Lifecore’s revenues in fiscal year

2017.

The vast majority of Lifecore’s revenues are recognized upon shipment.

Lifecore

’s business development revenues, a portion of which are included in all

three

medical areas, are related to contract research and development (“R&D”) services and multiple element arrangement services with customers where the Company provides products and/or services in a bundled arrangement.

Contract R&D revenue is recorded as earned,

based on the performance requirements of the contract. Non-refundable contract fees for which

further performance obligations exist, and there is

continuing involvement by the Company, are recognized on the earlier of when the payment is received or collection is assured.

For sales arrangements that contain multiple elements, the Company splits the arrangement into separate units of accounting if the individually delivered elements have value to the customer on a standalone basis. The Company also e

valuates whether multiple transactions with the same customer or related party should be considered part of a multiple element arrangement, whereby the Company assesses, among other factors, whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of each other. The Company then allocates revenue to each element based on a selling price hierarchy. The relative selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available,

third

-party evidence (“TPE”), if VSOE is

not

available, or estimated selling price, if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. The Company is

not

typically able to determine VSOE or TPE, and therefore, uses the estimated selling price to allocate revenue between the elements of an arrangement.

The C

ompany limits the amount of revenue recognition for delivered elements to the amount that is

not

contingent on the future delivery of products or services or future performance obligations or subject to customer-specific cancellation rights. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value, and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by the Company. The Company considers a deliverable to have stand-alone value if the product or service is sold separately by the Company or another vendor or could be resold by the customer. Further, the revenue arrangements generally do

not

include a general right of return relative to delivered products. Where the aforementioned criteria for a separate unit of accounting are

not

met, the deliverable is combined with the undelivered element(s) and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition. The Company allocates the total arrangement consideration to each separable element of an arrangement based upon the relative selling price of each element. Allocation of the consideration is determined at arrangement inception on the basis of each unit’s relative selling price. In instances where the Company has

not

established fair value for any undelivered element, revenue for all elements is deferred until delivery of the final element is completed and all recognition criteria are met.

For licensing revenue, the

initial license fees are deferred and amortized to revenue over the period of the agreement when a contract exists, the fee is fixed and determinable, and collectability is reasonably assured. Noncancellable, nonrefundable license fees are recognized over the period of the agreement, including those governing research and development activities and any related supply agreement entered into concurrently with the license when the risk associated with commercialization of a product is non-substantive at the outset of the arrangement.

From time to time, the Company offers customers sales incentives, which include volume rebates and discounts. These amounts are estimated on a quarterly basis and recorded as a reduction of revenue.

A summary of revenues by typ

e of arrangement as described above is as follows (in thousands):

	Year E nded
	May 28, 2017		May 29, 2016		May 31, 2015
Recorded upon shipment	$	456,512	$	458,985	$	465,848
Recorded upon acceptance in foreign port		62,481		64,181		67,714
Revenue from multiple element arrangements		8,431		13,400		4,253
Revenue from license fees, R&D contracts and royalties /profit sharing		4,833		4,533		1,806
Total	$	532,257	$	541,099	$	539,257

Shipping and Handling Cost, Policy [Policy Text Block]

Shipping and Handling Costs

Amounts billed to

third

-party customers for shipping and handling are included as a component of revenues. Shipping and handling costs incurred are included as a component of cost of products sold and represent costs incurred to ship product from the processing facility or distribution center

to the end consumer markets.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

The Company records all highly liquid securities with

three

months or less from date of purchase to maturity as cash equivalents. Cash equ

ivalents consist mainly of money market funds. The market value of cash equivalents approximates their historical cost given their short-term nature.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost (using the

first

-in,

first

-out method) or net

realizable value. As of

May 28, 2017

and

May 29, 2016

inventories consisted of (in thousands):

	Year Ended
	May 28 , 2017		May 29, 2016
Finished goods	$	11,685	$	12,165
Raw materials		10,158		9,855
Work in progress		3,447		3,515
Total inventories	$	25,290	$	25,535

If the cost of the inventories exceeds their net realizable value, provisions are recorded currently to reduce them to net realizable value. The Company also records a provision for

slow moving and obsolete inventories based on the estimate of demand for its products.

Advertising Costs, Policy [Policy Text Block]

Advertising Expense

Advertising expenditures for the Company are expensed as incurred. Advertising expense for the Company for fiscal years

2017,

2016,

and

2015

was

$1.9

million,

$2.1

million and

$1.3

million, respectively.

Receivables, Policy [Policy Text Block]

Notes and Advances Receivable

Apio issues notes and makes advances to produce growers for their crop and harvesting costs primarily for the purpose of sourcing crops for Apio's business

. Notes and advances receivable are generally recovered during the growing season (less than

one

year) using proceeds from the crops sold to Apio. Notes are interest bearing obligations, evidenced by contracts and notes receivable. These notes and advances receivable are secured by perfected liens on crops, have terms that range from

three

nine

months, and are reviewed at least quarterly for collectability. A reserve is established for any note or advance deemed to

not

be fully collectible based upon an estimate of the crop value or the fair value of the security for the note or advance. Notes or advances outstanding at

May 28, 2017

and

May 29, 2016

were

$1.0

million and

$2.3

million, respectively and are recorded in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets

Related Party Transactions

The Company sold products to and

earned license fees from Windset during the last

three

fiscal years. During fiscal years

2017,

2016,

and

2015,

the Company recognized revenues of

$514,000,

$666,000,

and

$537,000,

respectively. These amounts have been included in product sales in the accompanying Consolidated Statements of Comprehensive Income (Loss), from the sale of products to and license fees from Windset. The related receivable balances of

$388,000

and

$523,000

from Windset are included in accounts receivable in the accompanying Consolidated Balance Sheets as of

May 28, 2017

and

May 29, 2016,

respectively.

Additionally, unrelated to the revenue transactions above, the Company purchases produce from Win

dset for sale to

third

parties. During fiscal years

2017,

2016,

and

2015,

the Company recognized cost of product sales of

$22,000,

$32,000,

and

$1.6

million, respectively, in the accompanying Consolidated Statements of Comprehensive Income (Loss), from the sale of products purchased from Windset. The related accounts payable of

$22,000

and

zero

to Windset are included in accounts payable in the accompanying Consolidated Balance Sheets as of

May 28, 2017

and

May 29, 2016,

respectively.

All related party t

ransactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment are stated at cost. Expenditures for major improvements are capitalized while repairs and ma

intenance are charged to expense. Depreciation is expensed on a straight-line basis over the estimated useful lives of the respective assets, generally

three

forty

years for buildings and leasehold improvements and

three

twenty

years for furniture and fixtures, computers, capitalized software, capitalized leases, machinery, equipment and vehicles. Leasehold improvements are amortized on a straight-line basis over the lesser of the economic life of the improvement or the life of the lease.

The Company

capitalizes software development costs for internal use in accordance with accounting guidance. Capitalization of software development costs begins in the application development stage and ends when the asset is placed into service. The Company amortizes such costs on a straight-line basis over estimated useful lives of

three

seven

years. During fiscal years

2017,

2016,

and

2015,

the Company capitalized

$2.2

million,

$174,000,

and

$509,000

in software development costs, respectively.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Long-Lived

Assets

The Company

’s Long-Lived Assets consist of property, plant and equipment, and intangible assets. Intangible assets are comprised of customer relationships with an estimated useful life of

eleven

thirteen

years (the “finite-lived intangible assets”) and trademarks/trade names and goodwill with indefinite lives (collectively, “the indefinite-lived intangible assets”), which the Company recognized in accordance with accounting guidance (i) upon the acquisition of O Olive Oil, Inc. (“O Olive”) in

March 2017, (

ii) upon the acquisition of GreenLine Holding Company (“GreenLine”) by Apio in

April 2012, (

iii) upon the acquisition of Lifecore in

April 2010

and (iv) upon the acquisition of Apio in

December 1999.

Accounting guidance defines goodwill as “the excess of the cost of an acquired entity over the net of the estimated fair values of the assets acquired and the liabilities assumed at date of acquisition.” All intangible assets, including goodwill, associated with the acquisition of O Olive was allocated to the Other reporting unit, the acquisition of Lifecore was allocated to the Biomaterials reporting unit

, and the acquisitions of Apio and GreenLine were allocated to the Packaged Fresh Vegetables reporting unit based

upon the allocation of assets and liabilities acquired and consideration paid for each reporting unit. As of

May 28, 2017,

the Other reporting unit had

$5.2

million of goodwill, the Biomaterials reporting unit had

$13.9

million of goodwill

, the Food Export reporting unit had

$269,000

of goodwill, and the Packaged Fresh Vegetables reporting unit had

$35.5

million of goodwill.

Property, plant and equipment and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amoun

t of an asset (or asset group)

may

not

be recoverable. The Company’s impairment review requires significant management judgment including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the disposal of the assets. The Company conducts quarterly reviews of idle and underutilized equipment, and reviews business plans for possible impairment indicators. Impairment is indicated when the carrying amount of the asset (or asset group) exceeds its estimated future undiscounted cash flows and the impairment is viewed as other than temporary. When impairment is indicated, an impairment charge is recorded for the difference between the asset’s book value and its estimated fair value. Depending on the asset, estimated fair value

may

be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value of assets and would increase or decrease any impairment measurement.

The Company tests its indefinite-lived intangible assets for impairment at least annually, in accordance with accounting guidance. For all in

definite-lived assets, including goodwill, the Company performs a qualitative analysis in accordance with ASC

350

35.

Application of the impairment tests for indefinite-lived intangible assets requires significant judgment by management, including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of intangible assets to reporting units, which judgments are inherently uncertain.

During fiscal year

2016,

the Company recorded an impairment charge of

$34.0

million related to discontinued use of the GreenLine trade name for non-food service customers. There were

impairments of intangible assets in fiscal year

2017.

On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of its indefinite-liv

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

In the annual impairment test, the Company assesses quali

tative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In assessing the qualitative factors, management considers the impact of these key factors: macro-economic conditions, industry and market environment, cost factors

, overall financial performance of the Company, cash flow from operating activities, market capitalization, litigation, and stock price. If management determines as a result of the qualitative assessment that it is more likely than

not

(that is, a likelihood of more than

percent) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required. Otherwise,

further testing is required.

a quantitative test is required, the Company would compare 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. 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 would expect to earn. Under the market-based approach, information regarding the Company is utilized as well as 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.

As of

February 2

2017,

the Company tested its goodwill for impairment and determined that

indication of impairment existed as of that date. As a result, it was

not

necessary to perform the quantitative goodwill impairment test at that time. Subsequent to the

2017

annual impairment test, there have been

significant events or circumstances affecting the valuation of goodwill that indicate a need for goodwill to be further tested for impairment. There were

impairment losses for goodwill during fiscal years

2017,

2016,

and

2015

Investment In Non Public Companies [Policy Text Block]

Investment in Non-Public Company

February 15, 2011,

the Company made an investment in Windset which is

reported as an investment in non-public company, fair value, in the accompanying Consolidated Balance Sheets as of

May 28, 2017

and

May 29, 2016

. The Company has elected to account for its investment in Windset under the fair value option. See Note

– Investment in Non-public Company for further information

Self Insurance Reserve [Policy Text Block]

Partial Self-Insurance on Employee Health and Workers Compensation Plans

The Company

provides health insurance benefits to eligible employees under self-insured plans whereby the Company pays actual medical claims subject to certain stop loss limits and self-insures its workers compensation claims. The Company records self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but

not

reported. Any projection of losses concerning the Company's liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as inflation rates, changes in severity, benefit level changes, medical costs, and claims settlement patterns. This self-insurance liability is included in accrued liabilities in the accompanying Consolidated Balance Sheets and represents management's best estimate of the amounts that have

not

been paid as of

May 28, 2017.

It is reasonably possible that the expense the Company ultimately incurs could differ and adjustments to future reserves

may

be necessary.

Revenue Recognition, Deferred Revenue [Policy Text Block]

Deferred Revenue

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

Non-controlling Interest [Policy Text Block]

Non-Controlling Interest

The Company reports all non-controlling interests as a separate component of stockholders

’ equity. The non-controlling interest’s share of the income or loss of the consolidated subsidiary is reported as a separate line item in our Consolidated Statements of Comprehensive Income (Loss), following the consolidated net income (loss) caption.

In connection with the acquisition of Api

o, Landec acquired Apio’s

60%

general partner interest in Apio Cooling, a California limited partnership. Apio Cooling is included in the consolidated financial statements of Landec for all periods presented. The non-controlling interest balances are comprised of the non-controlling limited partners’ interest in Apio Cooling.

Income Tax, Policy [Policy Text Block]

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded a

ssets and liabilities. The Company maintains valuation allowances when it is likely that all or a portion of a deferred tax asset will

not

be realized. Changes in valuation allowances from period to period are included in the Company’s income tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. At

May 28, 2017,

the Company had a

$1.3

million valuation allowance against its deferred tax assets.

In addition to valuation allowances, the Company establishes accruals for uncertain tax positions. The tax-contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case

law and emerging legislation. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company’s effective tax rate includes the impact of tax-contingency accruals as considered appropriate by management.

A number of years

may

elapse before a particular matter, for which the Company has accrued, is audited and finally resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the fi

nal outcome or the timing of resolution of any particular tax matter, the Company believes its tax-contingency accruals are adequate to address known tax contingencies. Favorable resolution of such matters could be recognized as a reduction to the Company’s effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate. Any resolution of a tax issue

may

require the use of cash in the year of resolution. The Company’s tax-contingency accruals are recorded in other accrued liabilities in the accompanying Consolidated Balance Sheets.

Earnings Per Share, Policy [Policy Text Block]

Per Share Information

Accounting guidance requires the presentation of basic and diluted earnings per share. Basic earnings per share excludes any dilutive eff

ects of options, warrants and convertible securities and is computed using the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution as if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted common equivalent shares consist of stock options and restricted stock units, calculated using the treasury stock method.

The following table sets forth the computation of diluted net income

(loss) per share (in thousands, except per share amounts):

	Year E nded
	May 28, 2017		May 29, 2016			May 31, 2015
Numerator:
Net income (loss) applicable to Common Stockholders	$	10,590	$	(11,641	)	$	13,544

Denominator:
Weighted average shares for basic net income (loss) per share		27,276		27,044			26,884
Effect of dilutive securities:
Stock options and restricted stock units		376		—			452
Weighted average shares for diluted net income (loss) per share		27,652		27,044			27,336

Diluted net income (loss) per share	$	0.38	$	(0.43	)	$	0.50

Options to

purchase

1,428,272

and

371,115

shares of Common Stock at a weighted average exercise price of

$13.58

and

$14.02

per share were outstanding during fiscal years ended

May 28, 2017

and

May 31, 2015,

respectively, but were

not

included in the computation of diluted net income per share because the options’ exercise price were greater than the average market price of the Common Stock and, therefore, their inclusion would be antidilutive.

Due to the Company

’s net loss for fiscal year

2016,

the net loss per share includes only weighted average shares outstanding and thus excludes

1.6

million of outstanding options and RSUs as such impacts would be antidilutive for fiscal year

2016.

Cost of Sales, Policy [Policy Text Block]

Cost of Sales

The Company includes in cost of sales all the costs related to the sale of produc

ts. These costs include the following: raw materials (including produce, packaging, syringes and fermentation and purification supplies), direct labor, overhead (including indirect labor, depreciation, and facility related costs) and shipping and shipping related costs.

Research and Development Expense, Policy [Policy Text Block]

Research and Development Expenses

Costs related to both research and development contracts and Company-funded research is included in research and development expenses. Research and development costs are primarily comprised of salaries a

nd related benefits, supplies, travel expenses, consulting expenses and corporate allocations.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Accounting for 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 following table summarizes the stock-based compensation for options and RSUs (in thousands):

	Year E nded
	May 28, 2017		May 29, 2016		May 31, 2015
Options	$	1,230	$	1,352	$	561
RSUs		2,734		2,113		1,016
Total stock-based compensation	$	3,964	$	3,465	$	1,577

The following table summarizes the stock-based compensation by income statement line item (in thousands):

	Year E nded
	May 28, 2017		May 29, 2016		May 31, 2015
Cost of sales	$	485	$	405	$	142
Research and development		83		90		16
Selling, general and administrative		3,396		2,970		1,419
Total stock-based compensation	$	3,964	$	3,465	$	1,577

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. 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.

The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected life of option awards, which have a significant i

mpact on the fair value estimates. As of

May 28, 2017,

May 29, 2016

and

May 31, 2015,

the fair value of stock option grants was estimated using the following weighted average assumptions:

	Year E nded
	May 28, 2017			May 29, 2016			May 31, 2015
Expected life (in years)		3.50			3.38			3.25
Risk-free interest rate		1.08	%		1.09	%		1.00	%
Volatility		26	%		31	%		32	%
Dividend yield		0	%		0	%		0	%

The weighted average estimated fair value of Landec employee stock options granted at grant date market prices during the fiscal years ended

May 28, 2017,

May 29, 2016

and

May 31, 2015

was

$2.37,

$2.85

and

$3.42

per share, respectively.

stock options were granted above or below grant date market prices during the fiscal years ended

May 28, 2017,

May 29, 2016

and

May 31, 2015.

Fair Value Measurement, Policy [Policy Text Block]

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.

See Note

– Investment in Non-public Company for further information. The Company has

not

elected the fair value option for any of its other eligible financial assets or liabilities.

The accounting guidance established a

three

-tier hierarchy for fair va

lue measurements, which prioritizes the inputs used in measuring fair value as follows:

Level

–

observable inputs such as quoted prices for identical instruments in active markets.

Level

–

inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

Level

–

unobservable inputs in which there is little or

market data, which would require the Company to develop its own assumptions.

As of

May 2

2017,

the Company held certain assets that were required to be measured at fair value on a recurring basis, including its interest rate swap and its minority interest investment in Windset.

The fair value of the Company

’s interest rate swap is determined based on model inputs that can be observed in a liquid market, including yield curves, and is categorized as a Level

measurement and is recorded as other assets in the accompanying Consolidated Balance Sheets.

The Company has elected the fair value option of accounting for it

s 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

measurement investment. The change in the fair value of the Company’s investment in Windset for the

twelve

months ended

May 28, 2017

was due to the Company’s

26.9%

minority interest in the change in the fair market value of Windset during the period. In determining the fair value of the investment in Windset, the Company utilizes the following significant unobservable inputs in the discounted cash flow models:

	At May 28, 2017			At May 29, 2016
Revenue growth rates		4	%		4	%
Expense growth rates		4	%		4	%
Income tax rates		15	%		15	%
Discount rates		12	%		12.5	%

The revenue growth, expense growth, and income tax rate assumptions are considered the Company's best estimate of the trends in those items over the discount period. The discount rate assumption takes into account the risk-free rate of return, the market

equity risk premium, and the company’s specific risk premium and then applies an additional discount for lack of liquidity of the underlying securities. The discounted cash flow valuation model used by the Company has the following sensitivity to changes in inputs and assumptions (in thousands):

	Impact on value of investment in Windset as of May 28, 2017
10% increase in revenue growth rates	$	6,900
10% increase in expense growth rates	$	(1,900	)
10% increase in income tax rates	$	(600	)
10% increase in discount rates	$	(4,500	)

Imprecision in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. The use of different methodologies or assumptions to determine the fair

value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following table summarizes the fair value of the Company

’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value at May 28, 2017						Fair Value at May 29, 2016
Assets:	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Interest rate swap (1)	$	—	$	688	$	—	$	—	$	—	$	—
Investment in non-public company		—		—		63,600		—		—		62,700
Total	$	—	$	688	$	63,600	$	—	$	—	$	62,700

(

)

Recorded in Other assets.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

Recently Adopted Pronouncements

Statement of Cash Flows

August 2016,

the Financial Accounting Standards Board (“

FASB”) issued Accounting Standards Update (“ASU”)

2016

15,

Statement of Cash Flows (Topic

230

) – Classification of Certain Cash Receipts and Cash Payments

(“ASU

2016

15”

). ASU

2016

clarifies how entities should classify certain cash receipts and cash payments in the statement of cash flows and amends certain disclosure requirements of ASC

230.

ASU

2016

is intended to reduce diversity in practice with respect to

eight

types of cash flows including debt prepayment or debt extinguishment costs; proceeds from settlement of insurance claims; classification of cash receipts and payments that have aspects of more than

one

class of cash; and contingent consideration payments made after a business combination. The guidance is effective for fiscal years beginning after

December 2017,

and interim periods within those years. Early adoption is permitted, including adoption in an interim period. The Company elected to early adopt ASU

2016

effective

November 27, 2016.

The adoption had

impact on our consolidated financial statements or related disclosures.

Debt Iss

uance Costs

April 2015,

the FASB issued ASU

2015

03,

Interest - Imputation of Interest (Subtopic

835

): Simplifying the Presentation of Debt Issuance Costs

(“ASU

2015

03”

). The new guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as an asset, except in instances where proceeds from the related debt agreement have

not

been received.

August 2015,

the FASB issued ASU

2015

15,

Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements

(“ASU

2015

15”

). ASU

2015

amends Subtopic

835

to clarify that the Securities and Exchange Commission would

not

object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement.

The Company adopted ASU

2015

and ASU

2015

during its

first

fiscal quarter ended

August 28, 2016

with retrospective application to its

May 29, 2016

consolidated balance sheet. The effect of the adoption of ASU

2015

as to reclassify total debt issuance costs of

$817,000

as of

May 29, 2016

as a deduction from the related debt liabilities. Accordingly, the

May 29, 2016

consolidated balance sheet was adjusted as follows: (

) prepaid expenses and other current assets and total current assets were reduced by

$175,000

and current portion of long-term debt and total current liabilities were reduced by the same; (

) other assets were reduced by

$642,000

and long-term debt was reduced by the same; and (

) total assets were reduced by

$817,000

and total liabilities were reduced by the same. There was

effect related to the adoption of ASU

2015

given the Company has historically presented line of credit debt issuance costs as an asset, and as such,

$120,000

and

$431,000

remain as prepaid expenses and other current assets and other assets, respectively, as of

May 28, 2017.

ASU

2015

and ASU

2015

not

impact the income statement accounting for debt issuance costs; therefore, these costs will continue to be amortized to interest expense over the term of the related debt instruments. There was

effect on net income.

Stock-Based Compensation

March 2016,

the FASB issued ASU

2016

09,

Compensation - Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accounting

(“ASU

2016

09”

). The new guidance changes the accounting for certain aspects of stock-based payments to employees and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will

longer be separately classified as a financing activity apart from other income tax cash flows. The standard also clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity in the Company’s consolidated statements of cash flows and provides an accounting policy election to account for forfeitures as they occur. Finally, the new guidance eliminates the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable. The new standard is effective for the Company beginning

May 29, 2017,

with early adoption permitted.

The Company elected to early adopt the new guidance during its

first

fiscal

quarter ended

August 28, 2016.

Accordingly, the primary effects of the adoption are as follows: (

) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of

$549,000

as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same, (

) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a

$200,000

increase to additional paid-in capital, a

$126,000

reduction to retained earnings, and a

$74,000

reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance, and (

)

$150,000

and

$463,000

in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for the fiscal years ended

May 29, 2016

and

May 31, 2015,

respectively, in the Consolidated Statements of Cash Flows. See Note

– Income Taxes for further information regarding additional effects related to the prospective application of excess tax benefits and tax deficiencies related to stock-based compensation on the Company’s financial statements.

Goodwill Impairment

January 2017

, the FASB issued ASU

2017

04,

Intangibles - Goodwill and Other (Topic

350

) - Simplifying the Test for Goodwill Impairment

("ASU

2017

04"

). The new guidance simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step

two

of the goodwill impairment test. As a result, under ASU

2017

04,

an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the impairment loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. ASU

2017

is effective for annual reporting periods beginning after

December 15, 2019,

including any interim impairment tests within those annual periods, with early application for interim or annual goodwill impairment tests performed on testing dates after

January 1, 2017.

May 2017,

the Company elected to early adopt ASU

2017

04,

and the adoption had

impact on the consolidated financial statements.

Recently Issued Pronouncements to be Adopted

Revenue Recognition

May

2014,

the FASB issued ASU

2014

09,

which creates FASB ASC Topic

606

, Revenue from Contracts with Customers

and supersedes ASC Topic

605,

Revenue Recognition

(“ASU

2014

09”

). The guidance replaces industry-specific guidance and establishes a single

five

-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. Since its original issuance, the FASB has issued several additional related ASUs to address implementation concerns and to further clarify certain guidance within ASU

2014

09.

The Company will adopt these updates beginning with the

first

quarter of its fiscal year

2019

and anticipates doing so using the full retrospective method, which will require restatement of each prior reporting period presented.

Currently, the Company is in the process of evaluating the impact of the adoption of ASU

2014

09.

As a result, the Company has initially identified the following core revenue streams from its contracts with customers:

	●	Finished goods product sales (Packaged Fresh Vegetables);
	●	Shipping and handling (Packaged Fresh Vegetables);
	●	Buy-sell product sales (Food Export);
	●	Product development and contract manufacturing arrangements (Biomaterials).

The Company

’s assessment efforts to date have included reviewing current accounting policies, processes, and systems requirements, as well assigning internal resources and

third

-party consultants to assist in the process. Additionally, the Company has begun to review historical contracts and other arrangements to identify potential differences that could arise from the adoption of ASU

2014

09.

Most notably, the Company is evaluating its current conclusions with respect to gross versus net revenue reporting for its Food Export business, as well as the timing of revenue recognition for its product development contract manufacturing arrangements in its Biomaterials business, to determine whether the application of ASU

2014

necessitates changes to such reporting. Beyond its core revenue streams, and the items listed above, the Company is also evaluating the impact of ASU

2014

on certain ancillary transactions and other arrangements.

Currently, the Company cannot reasonably estimate the impact the applica

tion of ASU

2014

will have upon its consolidated financial statements. The Company continues to assess the impact of ASU

2014

09,

along with industry trends and additional interpretive guidance, on its core revenue streams, and as a result of the continued assessment, the Company

may

modify its plan to adoption accordingly.

Leases

February 2016,

the FASB issued ASU

2016

02,

Leases (Topic

842

)

(“ASU

2016

02”

), which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use-assets. ASU

2016

also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The Company will adopt ASU

2016

beginning in the

first

quarter of fiscal year

2020

on a modified retrospective basis.

The Company is currently in the process of evaluating the impact that ASU

2016

will have upon its consolidated financial statements and related discl

osures. The Company’s assessment efforts to date have included:

	●	Reviewing the provisions of ASU 2016 - 02;
	●	Gathering information to evaluate its lease population and portfolio;
	●	Evaluating the nature of its real and personal property and other arrangements that may meet the definition of a lease; and
	●	Systems ’ readiness evaluations.

As a result of these efforts, the Company currently anticipates that the adoption of ASU

2016

ill have a significant impact to its long-term assets and liabilities, as, at a minimum, virtually all of its leases designated as operating leases in Note

– Commitments and Contingencies, are expected to be reported on the consolidated balance sheets. The pattern of recognition for operating leases within the consolidated statements of comprehensive income is

not

anticipated to significantly change.