1.	Organization , Basis of Presentation , and Summary of Significant Accounting Policies

Organization

Landec Corporation and its subsidiaries (“

Landec” or the “Company”) design, develop, manufacture

, and sell differentiated products for food and biomaterials markets

, and license technology applications to partners. The Company has

two

proprietary polymer technology platforms:

) Intelimer® polymers, and

) hyaluronan (“HA”) biopolymers. The Company sells specialty packaged branded Eat Smart® and GreenLine® and private label fresh-cut vegetables and whole produce to retailers, club stores

, and foodservice operators, primarily in the United States, Canada

, and Asia through its Apio, Inc. (“Apio”) subsidiary

, and sells HA-based and non-HA biomaterials through its Lifecore Biomedical, Inc. (“Lifecore”) subsidiary. The Company’s HA biopolymers and non-HA materials are proprietary in that they are specially formulated for specific customers to meet strict regulatory requirements. Through its O Olive Oil and Vinegar (“O Olive”) division, which the Company acquired on

March 1, 2017,

the Company sells premier California specialty olive oils and wine vinegars under the O brand to natural food, conventional grocery and mass retail stores, primarily in the United States and Canada.

The Company

’s technologies, along with its customer relationships and tradenames , are the foundation and key differentiating advantages upon which Landec has built its business.

Basis

of Presentation

The accompanying unaudited consolidated financial statements of Landec have been prepared in accordance with

United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form

-Q and Article

of Regulation S-

In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company at

February 25, 2018

and the results of operations and cash flows for all periods presented. Although Landec believes that the disclosures in these financial statements are adequate to make the information presented

not

misleading, certain information normally included in financial statements and related footnotes prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The accompanying financial data should be reviewed in conjunction with the audited financial statements and accompanying notes included in Landec's Annual Report on Form

-K for the fiscal year ended

May 28, 2017

The results of operations for

the

nine

months ended

February 25, 2018

are

not

necessarily indicative of the results that

may

be expected for an entire fiscal year because there is some seasonality in Apio’s food business, particularly, Apio’s export business

, and the order patterns of Lifecore’s customers which

may

lead to significant fluctuations in Landec’s quarterly results of operations.

Basis of Consolidation

The consolidated financial statements are presented on the accrual basis of accounting in accordance with

GAAP and include the accounts of Landec Corporation and its subsidiaries, Apio and Lifecore. All intercompany transactions and balances have been eliminated.

Arrangements that are

not

controlled through voting or similar rights are reviewed under the 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 by 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 party, 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 its partnership interest in Apio Cooling, LP and its equity investment in the non-public company are

not

VIEs.

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; inventories; 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; the valuation of investments; and the valuation and recognition of stock-based compensation and contingent liabilities

These estimates involve the consideration of comple

factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve and are subject to change from period to period. The actual results

may

differ from management’s estimates.

ash 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 equivalents consist mainly of money market funds. The market value of cash equivalents approxi

mates their historical cost given their short-term nature.

Inventories

Inventories are stated at the lower of cost (

first

-in,

first

-out method) or net realizable value and consist of the following (in thousands):

	February 25 , 2018		May 28, 2017
Raw materials	$	13,512	$	10,158
Work in progress		3,756		3,447
Finished goods		11,481		11,685
Total	$	28,749	$	25,290

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.

Related Party Transactions

The Company sells products to and earns license fees

from Windset Holdings

2010

Ltd. (“Windset”). During the

three

months ended

February 25, 2018

and

February 26, 2017,

the Company recognized revenues of

$104

,000

and

$72

,000,

respectively. During the

nine

months ended

February 25, 2018

and

February 26, 2017,

the Company recognized revenues of

$299

,000

and

$265

,000,

respectively. These amounts have been included in product sales in the accompanying Consolidated Statements of Comprehensive Income. The related receivable balances of

$144

,000

and

$388,000

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

February 25, 2018

and

May 28, 2017,

respectively.

All related party transactions are monitored quarterly by the

Company and approved by the Audit Committee of the Board of Directors.

Debt Issuance Costs

The Company records its line of credit debt issuance costs as an asset, and as

such,

$120,000

and

,000

were recorded as prepaid expenses and other current assets

, and other assets, respectively, as of

February 25, 2018,

and

$120,000

and

$399,000,

respectively, as of

May 28, 2017.

The Company records its term debt issuance costs as a contra-liability, and as such,

$60,000

and

$155

,000

was recorded as current portion of long-term debt

, and long-term debt, net, respectively, as of

February 25, 2018

and

$60,000

and

$201,000,

respectively, as of

May 28, 2017

. See Note

– Debt of the Notes to Consolidated Financial Statements for further information.

Financial Instruments

The Company

’s financial instruments are primarily composed of commercial-term trade payables, grower advances, notes receivable

, and debt instruments. For short-term instruments, the historical carrying amount approximates the fair value of the instrument. The fair value of long-term debt approximates its 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.

Other Comprehensive Income

Comprehensive i

ncome 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 on its interest rate swap derivative instrument accounted for as a cash flow hedge. The components of OCI and the changes in accumulated OCI, net of tax, are as follows (in thousands):

	Unrealized Gains on Cash Flow Hedge
Accumulated OCI, net, as of May 28, 2017	$	432
Other comprehensive income before reclassifications, net of tax effect		483
Amounts reclassified from OCI		—
Accumulated OCI, net, as of February 25, 2018	$	915

The Company does

not

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

or losses into earnings in the next

months.

Investment in Non-Public Company

On Februa

15,

2011,

the Company made its initial investment in Windset which is reported as an investment in non-public company, fair value, in the accompanying Consolidated Balance Sheets as of

February 25, 2018

and

May 28, 2017.

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.

Intangible Assets

The Company

’s intangible assets are comprised of customer relationships with a finite estimated useful life of

eleven

thirteen

years

, and trademarks, tradenames and goodwill with indefinite useful lives.

Finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an a

sset (or asset group)

may

not

be recoverable. Indefinite lived intangible assets are reviewed for impairment at least annually. For goodwill and other indefinite-lived intangible assets, the Company performs a qualitative impairment analysis in accordance with Accounting Standards Codification (“ASC”)

350

35.

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 Other accrued liabilities in the accompanying Consolidated Balance Sheets and represents management's best estimate of the amounts that have

not

been paid as of

February 25, 2018

and

May 28, 2017.

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

may

be necessary.

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 it

s investment in a non-public company. See Note

– Investment in Non-public Company for further information. The Company also measures its contingent consideration at fair value. See Note

– Acquisition of O Olive 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 value 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

February 25, 2018

and

May 28, 2017,

the Company held certain assets that are 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 investment and is included in Other assets in the accompanying Consolidated Balance Sheets

The fair value of the Company

’s contingent consideration for the acquisition of O Olive utilizes significant unobservable inputs, including projected earnings before interest, taxes, depreciation and amortization (“EBITDA”) and discount rates. As a result, the Company’s contingent consideration associated with the O Olive acquisition is considered a Level

measurement liability. For the

nine

months ended

February 25, 2018,

the Company reduced its contingent consideration liability from

$5.9

million at

May 28, 2017

$5.4

million at

February 25, 2018

due to the change in projected EBITDA and discount rates during the

three

year earn out period ended

May 31, 2020.

The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value utilizes significant unobservable inputs, including projected cash flows, gro

wth 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

nine

months ended

February 25, 2018

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 February 25, 2018			At May 28, 2017
Revenue growth rates		6%			4%
Expense growth rates	5%	to	6%		4%
Income tax rates		15%			15%
Discount rates		12%			12%

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 February 25, 2018
10% increase in revenue growth rates	$	9,400
10% increase in expense growth rates	$	(8,800	)
10% increase in income tax rates	$	(500	)
10% increase in discount rates	$	(4,200	)

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 February 25, 2018							Fair Value at May 28, 2017
Assets (liabilities):	Level 1		Level 2		Level 3			Level 1		Level 2		Level 3
Interest rate swap (1)	$	—	$	1,467	$	—		$	—	$	688	$	—
Investment in non-public company		—		—		65,800			—		—		63,600
Contingent consideration liability (2)		—		—		(5,400	)		—		—		(5,900	)
Total	$	—	$	1,467	$	60,400		$	—	$	688	$	57,700

	( 1 )	Included in Other assets in the accompanying consolidated balance sheets.
	( 2 )	Included in Other non-current liabilities in the accompanying consolidated balance sheets.

Revenue Recognition

See

Note

– Business Segment Reporting, for a discussion about the Company’s

four

business segments; namely, Packaged Fresh Vegetables, Food Export, Biomaterials, and Other

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 accompanying Consolidated Statements of Comprehensive Income.

In addition, Packaged Fresh Vegetables revenues include the re

venues generated 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. On February

28,

2018,

the Company announced its plans to discontinue Cal-Ex by May

27,

2018.

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.

O Olive

’s business, which the Company acquired on

March 1, 2017,

sells premier California specialty olive oils and wine vinegars under the O brand to natural food, conventional grocery and mass retail stores, primarily in the United States and Canada. The revenues of O Olive are included in the Other segment. O Olive’s revenue is generally recognized upon shipment of its products to customers. The Company takes title to all products it trades and/or packages, and therefore, records revenues and cost of sales at gross amounts in the accompanying Consolidated Statements of Comprehensive Income.

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 i

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

For sales arrangements that contain multiple elements, the Company splits the arrangement into separate uni

ts of accounting if the individually delivered elements have value to the customer on a standalone basis. The Company also evaluates 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 Company 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 R&D 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 est

imated on a quarterly basis and recorded as a reduction of revenue.

A summary of revenues by type of arrangement as described above is as follows (in thousands):

	Three Months Ended				Nine Months Ended
	February 25, 2018		February 26, 2017		February 25, 2018		February 26, 2017
Recorded upon shipment	$	141,575	$	125,765	$	373,486	$	339,917
Recorded upon acceptance in foreign port		4,414		7,276		25,982		56,316
Revenue from multiple element arrangements		1,528		2,624		5,230		5,892
Revenue from license fees, R&D contracts and royalties/profit sharing		1,806		903		4,439		2,702
Total	$	149,323	$	136,568	$	409,137	$	404,827

Legal Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings and claims.

The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least each fiscal quarter and adju

sted to reflect the impacts of negotiations, estimate settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal fees are expensed in the period in which they are incurred.

Apio

has been the target of a union organizing campaign which has included

two

unsuccessful attempts to unionize Apio's Guadalupe, California processing plant. The campaign involved a union and over

100

former and current employees of Pacific Harvest, Inc. and Rancho Harvest, Inc. (collectively "Pacific Harvest"), Apio's labor contractors at its Guadalupe, California processing facility, bringing legal actions before various state and federal agencies, the California Superior Court, and initiating over

100

individual arbitrations against Apio and Pacific Harvest.

The

legal actions consisted of

three

main types of claims: (

) Unfair Labor Practice claims ("ULPs") before the National Labor Relations Board (“NLRB”), (

) discrimination/wrongful termination claims before state and federal agencies and in individual arbitrations, and (

) wage and hour claims as part of

two

Private Attorney General Act (“PAGA”) cases in state court and in over

100

individual arbitrations.

A settlement of the ULPs among the union, Apio, and Pacific Harvest that were pending before the NLRB was approved on

December 27, 2016

for

$310,000.

Apio was responsible for half of this settlement, or

$155,000.

May 5, 2017,

the parties to the remaining actions executed a

settlement agreement concerning the discrimination/wrongful termination claims and the wage and hour claims which covers all non-exempt employees of Pacific Harvest working at Apio's Guadalupe, California processing facility from

September 2011

through the settlement date. Under the settlement agreement, the plaintiffs are to be paid

$6.0

million in

three

installments:

$2.4

million, which was paid on

July 3, 2017,

$1.8

million which was paid on

November 22, 2017

and

$1.8

million which is due in

July 2018.

The Company and Pacific Harvest have each agreed to pay

one

half of the settlement payments. The Company paid the entire

first

two

installments of

$4.2

million and will be reimbursed by Pacific Harvest for its

$2.1

million portion which is included in Other assets in the accompanying Consolidated Balance Sheets. This receivable will be repaid through monthly payments until fully paid, which the Company expects to occur by

December 2020.

The Company and Pacific Harvest are each required to make

one

half of the

third

installment in

July 2018.

The Company’s recourse against non-payment by Pacific Harvest is its security interest in assets owned by Pacific Harvest.

As of

February 25, 2018

and

May 28, 2017,

the Company had accrued

million and

$3.2

million, respectively, related to these actions, which is included in Other accrued liabilities in the accompanying Consolidated Balance Sheets

Recent Accounting Guidance

Not

Yet 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 modified retrospective method, which will be applied retrospectively only to the most current 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

and O Olive);

●

Shipping and handling (Packaged Fresh Vegetables

and O Olive);

●

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 reviewed 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 contract manufacturing arrangements for its Biomaterials 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 application of ASU

2014

will have upon its consolidate

d 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 of 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 disclosures. 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

●

Evaluating s

ystems’ readiness.

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

2016

will have a significant impact to its long-term assets and liabilities, as, at a minimum, virtually all of its leases designate

d as operating leases 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.

Income Taxes

In Fe

bruary

2018,

the FASB issued ASU

2018

02,

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

that permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in

December 2017.

The standard is effective for fiscal years beginning after

December 15, 2018.

Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.