Landec Corp.
Annual Report 2016

Plain-text annual report

Innovations For Healthy Living 2016 Annual Report Landec Strives to Make it Easy and Delicious for Consumers to Eat Healthy Food and Improve the Quality of Their Lives The Facts • 38% of US adults over 20 years old are obese and 71% are overweight or obese (1) • 17% of US children and adolescents are obese and 32% are overweight or obese (2) • 133 million Americans - almost 1 out of every 2 adults - have at least one chronic illness (3) • About one-fourth of people with chronic conditions have one or more daily activity limitations (3) How Landec Helps Landec’s two wholly-owned subsidiaries are dedicated to innovating products that enable people to live healthier lives. Apio™ delivers packaged, fresh vegetable products throughout North America to club stores, retail grocery stores and foodservice operators that make it convenient and delicious to eat healthy. Lifecore® is a fully integrated Contract Development and Manufacturing Organization (CDMO) that works with leading companies to bring FDA approved drugs and medical devices to market that enhance people’s ability to stay active. Apio Packaged Fresh Vegetables Apio is the leader in branded, packaged fresh vegetables in North America. Apio utilizes Landec’s BreatheWay® packaging technology to naturally extend the shelf life of fresh produce. Apio combines this technology with the capabilities of a large national food supplier to offer healthy fresh vegetable products under the Eat Smart® brand to consumers through club and retail grocery stores and under the GreenLine® brand to foodservice operators. In Apio’s Packaged Fresh Vegetables business, we work directly with growers to harvest and deliver the freshest produce all year round. We trim, wash, sort, blend and package fresh vegetables and other natural ingredients into bags, trays and salads that make it easy and delicious for consumers to eat healthy food. Lifecore Biomedical Lifecore is a fully integrated CDMO offering expertise and capabilities in fermentation, specialty formulation, aseptic filling, and final packaging of both medical devices and drugs that enable people to live a more active lifestyle. Lifecore’s unique capabilities and dedication to creating a culture of “Pharma Elegance” have made Lifecore the preferred viscoelastic supplier to global ophthalmic market leaders. Lifecore is a leader in the premium segment of the Hyaluronic Acid (or HA) market which requires medical grade, non-animal sourced HA within a highly regulated FDA environment, as well as expertise in handling highly viscous materials. Lifecore’s commitment to working closely with its partners through product formulation, technology transfer and regulatory approval has enabled it to grow its share of this market and expand into additional markets that require expertise in formulating and filling difficult-to-process pharmaceutical materials. Investing in Growth Over the last five years we have doubled our processing capacity at Apio and tripled our aseptic filling capacity at Lifecore while continuing to invest in product development at both Apio and Lifecore. During FY16, Landec invested over $48mm in growth initiatives, $40.9mm in capital equipment and $7.2mm in new product development. (1) CDC, Health, United States, 2015, Table 53 (2) CDC, Prevalence of Overweight and Obesity Among Children and Adolescence, United States 1963-1965 through 2011-2013, Table 2 (3) CDC, The Power of Prevention, 2009 Landec Corporation 2016 Annual Report LANDEC FY16 FINANCIAL OVERVIEW LANDEC GROWTH BUSINESSES Apio Salad Kit Revenue Growth (in $mm) Lifecore Revenues and EBITDA Growth (in $mm) Revenues Revenues EBITDA 180 160 140 120 100 80 60 40 20 0 81% CAGR 154.3 130.8 72.5 26.1 FY13 1 Product FY14 4 Products FY15 7 Products FY16 9 Products 60 50 40 30 20 10 0 45.7 41.3 40.4 32.5 34.3 20.3 2.8 9.9 10.9 12.0 13.7 7.9 CY09 FY11 FY12 FY13 FY14 FY15 FY16 16% CAGR 50.5 34% CAGR 16.6 Starting with the launch of the Eat Smart Sweet Kale Salad in FY13, Apio has broadened its offering to include nine vegetable salad kit products that have delivered a compound annual revenue growth rate of 81% from $26.1mm in FY13 to $154.3mm in FY16. In FY17, we are projecting salad revenues and gross profit to grow by low double digits. Lifecore had a record year in FY16, growing YOY revenues by 25% to $50.5 million and YOY EBITDA 114% to $16.6 million. Since Landec’s acquisition of Lifecore in April 2010, Lifecore has delivered a compound annual revenue growth rate of 16% and a compound annual EBITDA growth rate of 34%. We expect to grow both Lifecore’s revenues and EBITDA by low double digits in FY17. Landec revenues for FY16 increased $1.8mm to $541.1mm compared to $539.3mm in FY15. The increase in revenues in FY16 was due to a 25%, or $10.1mm, increase in revenues at Lifecore and a $2.0mm increase in licensing revenues at Landec Corporate. These increases were partially offset by a 2%, or $6.6mm, decrease in revenues in Apio’s Packaged Fresh Vegetables business and a 5%, or $3.7mm, decrease in revenues in Apio’s Food Export business, both due to the most difficult sourcing year in Apio’s 35-year history. Primarily due to the non-cash GreenLine tradename impairment charge of $34.0mm ($21.5mm net of taxes), Landec recorded a net loss in FY16 of $11.6mm, or $0.43 per share, compared to a net income of $13.5mm, or $0.50 per share, in FY15. The net loss was due to the impairment charge at Apio from the strategic decision to convert our GreenLine branded green beans to our more nationally known Eat Smart brand in retail stores. Excluding the impact from the non-cash GreenLine tradename write down, the Company generated net income of $0.35 per share during FY16. Operating income for FY16 was also impacted by: (1) $15.6mm in excess costs at Apio related to severe produce shortages due to El Niño, (2) a $6.0mm increase in operating expenses at Apio to drive the growth of existing and new salad kit products, and from additional headcount hired over the past year, and (3) a $2.7mm reduction in the increase in the fair market value of the Company’s Windset investment as a result of delays in its expansion plans. The net loss during FY16 was partially offset by: (1) a $10.0mm increase in Apio’s gross profit primarily from a favorable product mix change to higher margin salad sales, (2) an $8.0mm increase in pre-tax income at Lifecore due to higher revenues and a higher gross margin due to a favorable sales mix change compared to last year, and (3) from a $2.6mm decrease in income taxes, excluding the tax benefit from the GreenLine tradename impairment charge. Looking to FY17, we expect consolidated revenues to grow 3% to 6% with Lifecore revenues and our salad product revenues growing at low double digits, whereas we expect the revenue growth in Apio’s historical core and export businesses to be flat to slightly up. We expect consolidated net income to increase 50% to 70% in FY17 compared to FY16 based on produce sourcing returning to more historical levels and our continued shift to higher margin products. We are currently not projecting any increase in our Windset investment in FY17. We expect cash flows from operations of $34mm to $38mm and capital expenditures of approximately $25mm in FY17. Landec Corporation 2016 Annual Report 1 Building for a Healthy Apio FY16 Results Revenues: Pre-tax income: $11.5mm* $488.0mm Cash flow from Operations: $23.0mm Capital Expenditures: $26.9mm * Excludes $34mm non-cash write down of GreenLine tradename As the #1 packaged, fresh vegetable brand in North America, Eat Smart is making it easy and delicious for consumers to eat healthy Apio is the innovative leader in branded, packaged fresh vegetable products sold to retail and club stores throughout North America. Apio works closely with our culinary teams, food scientists and packaging engineers to develop unique product blends and proprietary packaging technology that deliver and preserve taste and freshness. In FY16, Apio converted its GreenLine branded green bean products to the more nationally recognized Eat Smart retail brand to create a more consistent on-shelf presence and for a more productive use of marketing dollars. In geo-targeted, consumer online marketing programs, Eat Smart products realized a 21% sales lift. By converting to the Eat Smart brand, the green bean products can also enjoy the benefits of these promotions and the growing consumer awareness of the Eat Smart brand. For FY16, Apio’s revenues declined $10.2mm, or 2.0%, from $498.2mm in FY15 to $488.0mm in FY16 as a result of the most difficult raw product sourcing challenges in Apio’s 35-year history. Abnormal weather due to El Niño resulted in lost revenues due to lack of product availability as well as $15.6mm of unanticipated raw product sourcing costs. As a result, pre-tax income, excluding the GreenLine tradename write down, declined from $25.6mm in FY15 to $11.5mm in FY16. Apio’s FY16 gross margin was 9.1% compared to FY15 gross margin of 10.1%. However, without the effects of El Niño, Apio’s FY16 gross margin would have increased to 12.3% due to our continued commitment to innovation and the shift in our product mix to higher margin salad products. Apio’s Eat Smart vegetable salad kit revenues have grown at a compound annual growth rate of 81% from $26.1mm in FY13 to $154.3mm in FY16. Our Eat Smart salad products are clearly meeting consumers’ growing desire to eat healthy, fresh and convenient vegetable products. According to North American Nielsen data for the 52-weeks ended May 28, 2016, the North American retail salad kit market category, which excludes Costco and food service, grew 28% in consumer retail dollars, while our Eat Smart salad kits grew 36% in consumer retail dollars during the same time period. Eat Smart salads are poised to continue to outpace category growth in the next several years. Landec Corporation 2016 Annual Report 2 Future at Apio Innovating for Future Growth Green outline = FY16 expansion area Since the acquisition of the GreenLine green bean business in April 2012, Apio has been diligently working to build a national infrastructure to support our growth and to better serve our North American customer base. Prior to 2012, Apio had a single manufacturing location in Guadalupe, CA. With the acquisition of GreenLine, Apio added three processing facilities, two distribution centers and a fleet of refrigerated trucks. Over the past several years, Apio has created an efficient manufacturing network by integrating systems, adding green bean processing in California and expanding the Ohio facility to process salads. During FY16, Apio further expanded the footprint of our network by more than tripling the size of our facility in Hanover, PA from 19,000 sq. ft. to 64,000 sq. ft. With these projects completed, Apio is now able to process and package salads and green beans in California, Ohio and Pennsylvania and to support our customers with next day delivery. 3 Expanding into Lifecore FY16 Results Revenues: Pre-tax income: $13.8mm $50.5mm Cash flow from Operations: $13.5mm Capital Expenditures: $13.9mm New Markets Lifecore had a tremendous FY16, delivering $50.5mm in revenues, an increase of 25% over FY15, and $14.1mm in operating income, an even more impressive 145% increase over FY15. The Lifecore business has grown significantly since Landec’s acquisition in April 2010. Lifecore’s revenues have increased at a compound annual growth rate of 16% and EBITDA has increased at a compound annual growth rate of 34%. Lifecore initially achieved this growth through a relentless pursuit to become the leader within the ophthalmic HA market, where HA is utilized in cataract and other ophthalmic surgeries. This premium segment of the HA market requires medical grade, fermented HA within a tightly regulated FDA approval process. Lifecore’s dedication to working closely with its customers and consistently delivering high quality products has enabled Lifecore to grow its share of this market and continue to build a pipeline of future new product opportunities with its customers. More recently, Lifecore’s growth has been fueled by a strategic evolution of its business model from that of an HA supplier to a fully integrated CDMO. As a fully integrated CDMO, Lifecore offers expertise and capabilities in fermentation, formulation and aseptic filling of difficult-to-process pharmaceutical materials. Lifecore’s unique capabilities and dedication to creating a culture of “Pharma Elegance” has broadened its appeal to a much wider customer base. The evolution of its business has strengthened Lifecore’s capabilities in its markets, materials, products, services and capacity to attract new customers and grow beyond the HA market. Landec Corporation 2016 Annual Report 4 Expanding into New Markets New Markets Lifecore Becomes Fully Integrated CDMO Lifecore Becomes Fully Integrated CDMO Lifecore delivers FDA approved, technically advanced Lifecore delivers FDA approved, technically advanced medical products that improve the quality of life. medical products that improve the quality of life. Lifecore has unique expertise in formulating, aseptic Lifecore has unique expertise in formulating, aseptic filling and packaging of difficult-to-process biomaterials. filling and packaging of difficult-to-process biomaterials. During FY16, Lifecore expanded its existing manufacturing and research facility in Chaska, MN by 30,000 sq. ft. to provide increased formulation, aseptic filling and automated packaging capabilities. Lifecore also leased a new 65,000 sq. ft. packaging and warehouse facility near its existing facility in Chaska to provide further packaging, warehousing and training facilities (see photo on inside back cover). During FY16, Lifecore expanded its existing manufacturing and research facility in Chaska, MN by 30,000 sq. ft. to provide increased formulation, aseptic filling and automated packaging capabilities. Lifecore also leased a new 65,000 sq. ft. packaging and warehouse facility near its existing facility in Chaska to provide further packaging, warehousing and training facilities (see photo on inside back cover). As a fully integrated CDMO, Lifecore has greatly expanded its product offerings As a fully integrated CDMO, Lifecore has greatly expanded its product offerings and scope of services to attract additional partner opportunities. Lifecore’s and scope of services to attract additional partner opportunities. Lifecore’s product development revenues over the past few years have accounted for product development revenues over the past few years have accounted for 15% - 25% of its total revenues and have resulted in several commercialized 15% - 25% of its total revenues and have resulted in several commercialized products and a strong development pipeline that could lead to future products and a strong development pipeline that could lead to future commercial opportunities. During FY16, we invested $13.9 million in new commercial opportunities. During FY16, we invested $13.9 million in new facilities and equipment to allow Lifecore to meet its ever-increasing demand for facilities and equipment to allow Lifecore to meet its ever-increasing demand for new products and services. new products and services. Blue outline = FY16 expansion area Blue outline = FY16 expansion area Lifecore adds Lifecore adds 30,000 square feet of 30,000 square feet of manufacturing capacity to manufacturing capacity to meet future projected growth meet future projected growth 4 5 5 Shareholders Letter Our intellectual curiosity drives us to tenaciously search for unique products and solutions. As we discover these new solutions, we must evolve our business to create value for consumers, customers and our shareholders. The employees of Landec are energized. Our quest for continuous innovation unleashes our creativity and team spirit. Dear Shareholders, Landec is committed to innovating new products that help people enjoy happier and fuller lives. Our intellectual curiosity drives us to understand the needs of consumers and our customers and to persistently search for ways to deliver unique solutions. As we find new solutions, we must evolve our business to create value. The employees of Landec are energized by this quest for continuous innovation, as it unleashes our creativity and team spirit. What a great year at Lifecore! During FY16 Lifecore delivered 25% revenue growth and 145% operating income growth compared to FY15. Since becoming a part of the Landec family in 2010, Lifecore revenues have grown at a CAGR of 16% while EBITDA has grown at a CAGR of 34%. To achieve these results, Lifecore dramatically evolved its business model. Originally the leading supplier of hyaluronic acid (HA) to the premium HA market, Lifecore built upon a foundation of unique capabilities to expand into new markets and add new customers, becoming a fully integrated CDMO. As a CDMO, Lifecore offers a wide range of services for FDA regulated drugs and devices. In FY16, Lifecore not only delivered stellar financial results, but significantly grew product development revenues to 25% of total revenue and, more importantly, created a pipeline of future commercial opportunities. FY16 was a difficult year at Apio due to the abnormal weather patterns from El Niño. However, the Apio team worked diligently this past year to achieve many key initiatives that further strengthened the foundation of our business to support our long term strategy. We reduced costs by approximately $18 million through productivity improvement and cost reduction initiatives. We enhanced our supply and demand processes and further diversified our procurement strategies to mitigate future raw product risks. We launched 15 new products, including the Asian Sesame Salad Kit and Southwest Salad Kit. Our Eat Smart salad revenues grew to $154 million, representing a CAGR of 81% over the last 3 years. In FY16, our retail salad business, excluding Costco and foodservice, delivered year-over-year growth of 36% in consumer retail dollars, outpacing the category. We continue to shift our product mix to higher margin products through salad innovation and managing the size of our core product line. Other parts of Landec also continue to move forward. Our investment in Windset Farms contributed $2.9 million of income in FY16. In FY17, Windset plans to aggressively expand its facilities to meet the strong demand for its products by adding ten acres of new greenhouse structures to grow strawberries and thirty acres of glass greenhouse to grow cucumbers or peppers. In FY16, Apio Tech added a new partner, Juicero, Inc., to our BreatheWay licensing portfolio. Juicero® introduced the first at-home, cold-press juicing system and leverages our shelf-life extending BreatheWay technology on each of its pouches of fresh-cut fruits and vegetable mixes. We also added new members to Landec’s executive team to lead us in the pursuit of our long-term vision. In FY16, we invested $41 million in facility expansions at Apio and at Lifecore in preparation for future growth. We plan to fill these facilities with products from our three primary growth drivers: 1) our Lifecore biomaterials business, 2) our Eat Smart salad business, and 3) healthy new food products outside of produce that we can bring to market through our existing nationwide manufacturing, distribution and selling network. Landec has a bright future ahead. We will continue to work diligently and further evolve our business to deliver value in the years to come. Molly Hemmeter Landec President & CEO Landec Corporation 2016 Annual Report 6 2016 Proxy Statement and 10-K Landec Corporation 2016 Annual Report Landec Corporation 2016 Annual Report NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 20, 2016 TO THE STOCKHOLDERS OF LANDEC CORPORATION: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Landec Corporation (the “Company”) will be held on Thursday, October 20, 2016, at 1:30 p.m., local time, at Seaport Conference Center, 459 Seaport Court, Redwood City, CA 94063 for the following purposes: 1. To elect four directors to serve for a term expiring at the Annual Meeting of Stockholders held in the second year following the year of their election and until their successors are duly elected and qualified; 2. To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending May 28, 2017; 3. To approve a non-binding advisory proposal on executive compensation; and 4. To transact such other business as may properly come before the meeting or any postponement or adjournment(s) thereof. The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. Only stockholders of record at the close of business on August 18, 2016, are entitled to notice of and to vote at the meeting and any adjournment(s) thereof. All stockholders are cordially invited to attend the meeting in person. However, to assure your representation at the meeting, you are urged to mark, sign, date, and return the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose or vote your shares by telephone or via the Internet. BY ORDER OF THE BOARD OF DIRECTORS /s/ Geoffrey P. Leonard GEOFFREY P. LEONARD Secretary Menlo Park, California August 25, 2016 IMPORTANT WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE OR VOTE YOUR SHARES BY TELEPHONE OR VIA THE INTERNET. IF A QUORUM IS NOT REACHED, THE COMPANY MAY HAVE THE ADDED EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. THANK YOU FOR ACTING PROMPTLY. Landec Corporation 2016 Annual Report PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 20, 2016 INFORMATION CONCERNING SOLICITATION AND VOTING General The enclosed proxy is solicited on behalf of the Board of Directors of Landec Corporation, a Delaware corporation (“Landec” or the “Company”), for use at the annual meeting of stockholders (the “Annual Meeting”) to be held on Thursday, October 20, 2016, at 1:30 p.m., local time, or at any postponement or adjournment thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at Seaport Conference Center, 459 Seaport Court, Redwood City, CA 94063. The telephone number at that location is (650) 482-3500. The Company’s principal executive offices are located at 3603 Haven Avenue, Menlo Park, California 94025. The Company’s telephone number at that location is (650) 306-1650. Solicitation These proxy solicitation materials are to be mailed on or about September 15, 2016 to all stockholders entitled to vote at the meeting. The costs of soliciting these proxies will be borne by the Company. These costs will include the expenses of preparing and mailing proxy materials for the Annual Meeting and the reimbursement of brokerage firms and others for their expenses incurred in forwarding solicitation material regarding the Annual Meeting to beneficial owners of the Company’s common stock, par value $0.001 per share (the “Common Stock”). The Company may conduct further solicitation personally, telephonically or by facsimile through its officers, directors and regular employees, none of whom will receive additional compensation for assisting with the solicitation. Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on October 20, 2016. This Proxy Statement and the Company’s Annual Report to Stockholders are available at http://landec.com/proxy You may also find a copy of this Proxy Statement and our Annual Report (with exhibits) on the SEC website at http://www.sec.gov. We will, upon written request and without charge, send you additional copies of our Annual Report (without exhibits) and this Proxy Statement. To request additional copies, please send your request by mail to Gregory S. Skinner, Chief Financial Officer, Landec Corporation, 3603 Haven Avenue, Menlo Park, CA 94025 (telephone number: (650) 306-1650). Exhibits to the Annual Report may be obtained upon written request to Mr. Skinner and payment of the Company’s reasonable expenses in furnishing such exhibits. Voting Procedure You may vote by mail. To vote by mail, please sign your proxy card and return it in the enclosed, prepaid and addressed envelope. If you mark your voting instructions on the proxy card, your shares will be voted as you instruct. You may vote in person at the Annual Meeting. We will pass out written ballots to anyone who wants to vote at the Annual Meeting. Holding shares in “street name” means your shares of stock are held in an account by your stockbroker, bank or other nominee, and the stock certificates and record ownership are not in your name. If your shares are held in “street name” and you wish to attend the Annual Meeting, you must notify your broker, bank or other nominee and obtain proper documentation to vote your shares at the Annual Meeting. You may vote by telephone or electronically. You may submit your proxy by following the Vote by Phone instructions accompanying the proxy card. Also, you may vote online by following the Vote by Internet instructions accompanying the proxy card. You may change your mind after you have returned your proxy card. If you change your mind after you return your proxy card or submit your proxy by telephone or Internet, you may revoke your proxy at any time before the polls close at the Annual Meeting. You may do this by: (cid:404) signing and returning another proxy card with a later date, or (cid:404) voting in person at the Annual Meeting. Voting Holders of Common Stock are entitled to one vote per share. Votes cast in person or by proxy at the Annual Meeting will be tabulated by the Inspector of Elections. The Inspector of Elections will also determine whether or not a quorum is present. A majority of the shares entitled to vote, represented either in person or by proxy, will constitute a quorum for the transaction of business. The Inspector of Elections will treat abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum. If a broker indicates on the enclosed proxy or its substitute that it has not received voting instructions with respect to shares held in “street name” with such broker and either (i) does not have discretionary authority as to certain shares to vote on a particular matter or (ii) has discretionary voting authority but nevertheless refrained from voting on the matter (“broker non-votes”), those shares will be counted for purposes of determining the presence of a quorum, but will not be considered as voting with respect to that matter. Proposal No. 1 – Election of directors: Each director is elected by a majority of the votes cast with respect to such director. Any votes “withheld” for a particular director are effectively votes against that director. Shares present and not voted, whether by broker non-vote, abstention or otherwise, will have no effect on this vote. Proposal No. 2 – Ratification of independent registered public accounting firm: This proposal must be approved by a majority of the shares present and voted on the proposal. Shares present and not voted, whether by broker non-vote, abstention or otherwise, will have no effect on this vote. Proposal No. 3 — Advisory (non-binding) vote on executive compensation: This advisory proposal will be approved if a majority of the shares present and voted on the proposal are voted in favor of the resolution. Shares present and not voted, whether by broker non-vote, abstention or otherwise, will have no effect on this advisory vote. 2 Any proxy which is returned using the form of proxy enclosed and which is not marked as to a particular item will be voted FOR the election of the director nominees proposed by the Board of Directors; FOR the ratification of the appointment of Ernst & Young LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending May 28, 2017; FOR the advisory vote to approve executive compensation; and as the proxy holders deem advisable on other matters that may come before the meeting or any adjournment(s) thereof, as the case may be, with respect to the item not marked. Broker non-votes will not be considered as voting with respect to these matters. Record Date and Share Ownership Only stockholders of record at the close of business on August 18, 2016, are entitled to notice of, and to vote at, the Annual Meeting. As of August 18, 2016, 27,241,273 shares of the Company’s Common Stock were issued and outstanding. Deadline for Receipt of Stockholder Proposals for the Company’s Annual Meeting of Stockholders in 2017 If any stockholder desires to present a stockholder proposal at the Company’s 2017 Annual Meeting of Stockholders, such proposal must be received by the Secretary of the Company no later than May 12, 2017, in order that they may be considered for inclusion in the proxy statement and form of proxy relating to that meeting. Householding of Proxy Materials Some companies, brokers, banks, and other nominee record holders participate in a practice commonly known as “householding,” where a single copy of our Proxy Statement and Annual Report is sent to one address for the benefit of two or more stockholders sharing that address. Householding is permitted under rules adopted by the SEC as a means of satisfying the delivery requirements for proxy statements and annual reports, potentially resulting in extra convenience for stockholders and cost savings for companies. We will promptly deliver a separate copy of either document to you if you contact our Chief Financial Officer at the address listed above or call us at (650) 306-1650. If you are receiving multiple copies of our Proxy Statement and Annual Report at your household and wish to receive only one, please notify your bank, broker, or other nominee record holder, or contact our Chief Financial Officer at the address listed above. 3 PROPOSAL NO. 1 ELECTION OF DIRECTORS Nominees The Company’s Bylaws currently provide for no fewer than six (6) and no more than ten (10) directors, and the Company’s Certificate of Incorporation provides for the classification of the Board of Directors into two classes serving staggered terms. Each Class 1 and Class 2 director is elected for a two-year term, with the Class 1 directors elected in even numbered years (e.g., 2016) and the Class 2 directors elected in odd numbered years (e.g., 2017). Accordingly, at the Annual Meeting four (4) Class 1 directors will be elected. The Board of Directors has nominated the persons named below to serve as Class 1 directors until the 2018 Annual Meeting, at which their successors will be elected and qualified. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the Company’s four (4) nominees named below. In the event that any nominee of the Company is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in such a manner as will assure the election of as many of the nominees listed below as possible, and, in such event, the specific nominees to be voted for will be determined by the proxy holders. Assuming a quorum is present, the four (4) nominees for director receiving at least a majority of votes cast at the Annual Meeting will be elected. Nominees for Class 1 Directors Name of Director Gary T. Steele........................................ 67 Retired Chief Executive Officer of the Company Frederick Frank .................................... 84 Chairman, Evolution Life Sciences Partners Steven Goldby ....................................... 76 Partner, Venrock and Chairman of the Board of Principal Occupation Age Director Since 1991 1999 2008 Catherine A. Sohn, Pharma.D. ............. 63 Retired Senior Executive, Glaxo Smith Kline 2012 Directors of the Company Except as set forth below, each of the Class 1 directors has been engaged in the principal occupation set forth next to his or her name above during the past five years. There is no family relationship between any director and executive officer of the Company. Gary T. Steele served as President and Chief Executive Officer of the Company until his retirement in October 2015. Mr. Steele has been a director since September 1991 and was Chairman of the Board of Directors from January 1996 until his retirement. Mr. Steele has over 30 years of experience in the biotechnology, instrumentation and material science fields. From 1985 to 1991, Mr. Steele was President and Chief Executive Officer of Molecular Devices Corporation, a bioanalytical instrumentation company. From 1981 to 1985, Mr. Steele was Vice President, Product Development and Business Development at Genentech, Inc., a biomedical company focusing on pharmaceutical drug development. Mr. Steele has also worked with McKinsey & Company and Shell Oil Company. Mr. Steele received a B.S. from Georgia Institute of Technology and an M.B.A. from Stanford University. Mr. Steele’s significant knowledge and understanding of the Company and its businesses together with his extensive experience in the biotechnology field provide the Board of Directors with significant insight into the Company’s businesses and operations. Frederick Frank has served as director since December 1999. Mr. Frank is Chairman of the Board of Evolution Life Sciences Partners. Prior to joining Evolution Life Science Partners, Mr. Frank was Chairman of the Board of Burrill Securities. Prior to joining Burrill Securities, Mr. Frank was Vice Chairman of Peter J. Solomon Company (“Solomon”). Before joining Solomon, Mr. Frank was Vice Chairman of Lehman Brothers, Inc. (“Lehman”) and Barclays Capital. Before joining Lehman as a Partner in October 1969, Mr. Frank was co-director of research, as well as Vice President and Director of Smith Barney & Co. Incorporated. During his over 50 years on Wall Street, Mr. Frank has been involved in numerous financings and merger and acquisition transactions. He served on the Advisory Board of PDL BioPharma, and was a director for the Institute for Systems Biology and Pharmaceutical Product Development, Inc. Mr. Frank is Chairman of the National Genetics Foundation and he serves on the Advisory Boards for Yale School of Organization and Management and the Massachusetts Institute of Technology Center of Biomedical Innovation and was formerly an Advisory Member of the Johns 4 Hopkins Bloomberg School of Public Health, and the Harvard School of Public Health. He is a graduate of Yale University, received an M.B.A. from Stanford University and is a Chartered Financial Analyst. Mr. Frank has over 50 years of capital markets experience and has been involved in numerous financings, commercial transactions and mergers and acquisitions. As such, Mr. Frank provides the Board of Directors with extensive experience and knowledge with respect to transactions and financings in the public company context and corporate governance experience based on his experience as a director of public and non-public companies. Steven Goldby has served as a director since December 2008 and Chairman of the Board of Directors in a non- executive capacity since October 2015. Mr. Goldby has been a Partner at Venrock, a venture capital firm, since 2007. Mr. Goldby was Chairman and Chief Executive Officer of Symyx Technologies, Inc. (“Symyx”) from 1998 to 2007; he became the Executive Chairman in 2008, and Chairman in 2009. Before joining Symyx, Mr. Goldby served as Chief Executive Officer for more than ten years at MDL Information Systems, Inc., the enterprise software company that pioneered scientific information management. Earlier, Mr. Goldby held various management positions at ALZA Corporation, including President of Alza Pharmaceuticals. Mr. Goldby received a B.S. degree in chemistry from the University of North Carolina and a law degree from Georgetown University Law Center. Mr. Goldby’s extensive experience with biotechnology companies provides the Board of Directors with significant understanding of the technology issues facing the Company. Catherine A. Sohn, Pharm. D. has served as a director since November 2012. Dr. Sohn is the founder of Sohn Health Strategies, where since 2010 she has consulted for pharmaceutical, biotechnology, medical device and consumer healthcare companies in the areas of business strategy, business development and strategic product development. She has been a member of the board of directors of Jazz Pharmaceuticals plc, an international biopharmaceutical company, since July 2012 and has served as a director of Neuralstem, Inc, a biotechnology company, since January 2013. From 1982 to 2010, she was with GlaxoSmithKline plc, a pharmaceutical company (and with SmithKline Beecham plc before its merger with Glaxo Wellcome plc), where she served most recently as Senior Vice President, Worldwide Business Development and Strategic Alliances in the $8 billion GSK Consumer Healthcare division, and previously was Vice President, Worldwide Strategic Product Development in the pharmaceutical division. Before that, she held a series of positions in U.S. Product Marketing, Pharmaceutical Business Development and Medical Affairs, also in the pharmaceutical division. Dr. Sohn currently holds the position of Adjunct Professor at the University of California, San Francisco. She received a Pharm.D. from the University of California, San Francisco. She also received a Certificate of Professional Development from the Wharton School at the University of Pennsylvania. Dr. Sohn was named Woman of the Year by the Healthcare Businesswomen's Association in 2003 and the UCSF Distinguished Alumnus in 2000. She is a Certified Licensing Professional and a National Association of Corporate Directors (“NACD”) Board Leadership Fellow. With over 30 years of experience in health-related sectors, Dr. Sohn provides the Board of Directors with significant expertise in business development, strategic marketing and new product development within healthcare, which has a direct benefit to Landec’s wholly-owned biomedical subsidiary, Lifecore Biomedical, Inc. (“Lifecore”). Class 2 Directors Name of Director Albert D. Bolles, Ph.D .......... Age 59 Retired Executive Vice President and Chief Technical and Principal Occupation Director Since 2014 Tonia Pankopf ....................... Robert Tobin ......................... Molly A. Hemmeter .............. Operations Officer, ConAgra Foods, Inc. 48 Managing Partner, Pareto Advisors, LLC 78 Retired Chief Executive Officer, Ahold, USA 49 President and Chief Executive Officer of the Company 2012 2004 2015 Except as set forth below, each of the Class 2 directors has been engaged in the principal occupation set forth next to his or her name above during the past five years. There is no family relationship between any director and any executive officer of the Company. 5 Albert D. Bolles, Ph.D, has served as a director since May 2014. Dr. Bolles currently serves as Chairman of OnFood, a start-up company. Dr. Bolles served as the Executive Vice President and Chief Technical and Operations Officer of ConAgra Foods, Inc. (“ConAgra”) until his retirement in August 2015. Dr. Bolles led ConAgra’s Research, Quality & Innovation and Supply Chain organizations. He joined ConAgra in 2006 as Executive Vice President, Research, Quality & Innovation. Under his leadership, the ConAgra Research, Quality & Innovation team brought to market highly successful products that have led to substantial business growth. Prior to joining ConAgra, Dr. Bolles led worldwide research and development for PepsiCo Beverages and Foods. Dr. Bolles serves on several professional advisory boards, including the Grocery Manufacturers Association (GMA) Scientific Regulatory Committee, and is currently the chairman of the Trout Council/Food Science program which is an endowed scholarship fund at Michigan State University in the Department of Food Science and Human Nutrition. He has a Ph.D. and master's degree in food science and a bachelor's degree in microbiology, all from Michigan State University. He holds several patents and has won numerous awards for his contributions to the world of food science. Dr. Bolles is a preeminent leader in food science and provides the Board of Directors with valuable areas of expertise in new product development, innovation, quality, and supply chain in the packaged consumer food business. Tonia Pankopf has served as a director since November 2012. Ms. Pankopf has been managing partner of Pareto Advisors, LLC since 2005. She is currently a member of the board of directors of TICC Capital Corp, a business development company, and has served on its Audit, Valuation, Nominating and Corporate Governance Committees and chairs its Compensation Committee. Previously, she was a senior analyst and managing director at Palladio Capital Management from January 2004 through April 2005. From 2001 to 2003, Ms. Pankopf served as an analyst and portfolio manager with P.A.W. Capital Partners, LP. Ms. Pankopf was a senior analyst and vice president at Goldman, Sachs & Co. from 1999 to 2001 and at Merrill Lynch & Co. from 1998 to 1999. Ms. Pankopf served on the Board of the University System of Maryland Foundation from 2006 to 2012. Ms. Pankopf is a member of the NACD and is an NACD Board Leadership Fellow in recognition of her ongoing involvement in director professionalism and engagement with the director community. Ms. Pankopf received a Bachelor of Arts degree summa cum laude from the University of Maryland and an M.S. degree from the London School of Economics. Ms. Pankopf’s extensive financial experience with technology and middle-market companies provides the Board of Directors with valuable insights of an experienced investment manager as well as knowledge of corporate governance issues. Robert Tobin has served as a director since December 2004. Mr. Tobin retired from his position as Chief Executive Officer of Ahold USA, a food retailer, in 2001. Mr. Tobin has over 40 years of industry experience in the food retail and food service sectors, having served as Chairman and CEO of Stop and Shop Supermarkets. An industry leader, Mr. Tobin serves on the advisory boards of the College of Agriculture and Life Sciences and the Undergraduate Business Program at Cornell University where he received his B.S. in Agricultural Economics. Mr. Tobin’s experience as the chief executive officer of food retailers and his knowledge of the food retail and food service sectors provide the Board of Directors with significant expertise with respect to issues facing the Company’s food business. In addition, Mr. Tobin’s service on advisory boards provides the Board of Directors with knowledge of the scientific issues that face Apio, Inc. (“Apio”). Molly A. Hemmeter has been the Company’s President and Chief Executive Officer since October 15, 2015. Prior to that she served as the Chief Operating Officer of the Company from January 2014 to October 2015, prior to which she served as Chief Commercial Officer of the Company from December 2010 to January 2014 and Vice President, Business Development and Global Marketing of the Company from June 2009 to December 2010. From July 2006 until joining the Company in June 2009, Ms. Hemmeter was Vice President of Global Marketing and New Business Development for the Performance Materials division of Ashland, Inc., a global specialty chemicals company. Prior to joining Ashland, Inc., Ms. Hemmeter was Vice President of Strategy and Marketing for Siterra Corporation and Chief Marketing Officer for CriticalArc Technologies in the San Francisco Bay Area, both of which were privately held software startup companies that were eventually acquired by larger entities, and she previously held various positions at Bausch & Lomb and Eli Lilly and Company. Ms. Hemmeter received a B.E.S. and M.Eng. from the University of Louisville and an M.B.A. from Harvard University. Ms. Hemmeter’s significant knowledge and understanding of the Company and its businesses, together with her extensive experience in operations, business development and marketing, has enabled Ms. Hemmeter to lead several of Landec’s significant growth initiatives. Ms. Hemmeter was an integral part of the teams that completed the acquisition of Lifecore in 2010, the financing of Windset Holdings 2010 Ltd. in 2011 and the acquisition of GreenLine Holding Company 6 in 2012. More recently, Ms. Hemmeter was instrumental in creating and developing Apio’s line of salad kit products, the fastest growing products in Landec’s long history. Director Nicholas Tompkins will retire as a Class 2 director at the time of the Annual Meeting. Board of Directors Meetings and Committees The Board of Directors held a total of five meetings during the fiscal year ended May 29, 2016. Each director attended at least 75% of all Board and applicable committee meetings during fiscal year 2016. The Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each of which operates under a written charter approved by the Board of Directors. The charter for each of the committees is available on the Company’s website (http://landec.com). It is our policy to encourage the members of the Board of Directors to attend the Company’s annual meeting of stockholders. All directors on the Board of Directors at the time attended our 2015 Annual Meeting of Stockholders. The Audit Committee currently consists of Ms. Pankopf (Chairperson), Mr. Goldby and Mr. Tobin. In the determination of the Board of Directors, each of Ms. Pankopf, Mr. Goldby, and Mr. Tobin meets the independence requirements of the Securities and Exchange Commission (the “SEC”) and The Nasdaq Stock Market, LLC (“NASDAQ”). The Audit Committee assists the Board of Directors in its oversight of Company affairs relating to the quality and integrity of the Company’s financial statements, the qualifications and independence of the Company’s independent registered public accounting firm, the performance of the Company’s internal audit function and independent registered public accounting firm, and the Company’s compliance with legal and regulatory requirements. The Audit Committee is responsible for appointing, compensating, retaining and overseeing the Company’s independent registered public accounting firm, approving the services performed by the independent registered public accounting firm and reviewing and evaluating the Company’s accounting principles and its system of internal accounting controls. Rules adopted by the SEC require us to disclose whether the Audit Committee includes at least one member who is an “audit committee financial expert,” as that phrase is defined in SEC rules and regulations. The Board of Directors has determined that Ms. Pankopf and Mr. Goldby are “audit committee financial experts” within the meaning of applicable SEC rules. The Audit Committee held four meetings during fiscal year 2016. Please see the section entitled “Audit Committee Report” for further matters related to the Audit Committee. The Board has adopted a written charter for the Audit Committee. The Audit Committee reviews the charter annually for changes, as appropriate. The Compensation Committee currently consists of Dr. Sohn (Chairperson), Mr. Frank and Dr. Bolles. In the determination of the Board of Directors, each of Dr. Sohn, Mr. Frank, and Dr. Bolles meets the current independence requirements of the SEC and NASDAQ. The function of the Compensation Committee is to review and set the compensation of the Company’s Chief Executive Officer and certain of the Company’s most highly compensated officers, including salary, bonuses and other cash incentive awards, and other forms of compensation, to administer the Company’s stock plans and approve stock equity awards, and to oversee the career development of senior management. The Compensation Committee held five meetings during fiscal year 2016. The Nominating and Corporate Governance Committee currently consists of Mr. Frank (Chairperson), Mr. Tobin, Ms. Pankopf and Dr. Bolles, each of whom, in the determination of the Board of Directors, meets the current independence requirements of the SEC and NASDAQ. The functions of the Nominating and Corporate Governance Committee are to recommend qualified candidates for election as officers and directors of the Company and oversee the Company’s corporate governance policies. The Nominating and Corporate Governance Committee held two meetings during fiscal year 2016. The Nominating and Corporate Governance Committee will consider director nominees proposed by current directors, officers, employees and stockholders. Any stockholder who wishes to recommend candidates for consideration by the Nominating and Corporate Governance Committee may do so by writing to the Secretary of the Company, Geoffrey P. Leonard of Spalding & King LLP, 101 Second Street, Suite 2300, San Francisco, CA 94105, and providing the candidate’s name, biographical data and qualifications. The Company does not have a formal policy regarding the consideration of director candidates recommended by stockholders. The Company believes this is appropriate because the Nominating and Corporate Governance Committee evaluates any such nominees based on the same criteria as all other director nominees. In selecting candidates for the Board of Directors, the Nominating and Corporate Governance Committee strives for a variety of experience and background that adds depth and breadth to the overall character of the Board of Directors. The Nominating and Corporate Governance Committee evaluates potential candidates using standards and qualifications such as the candidates’ business experience, independence, diversity, skills and expertise to collectively establish a number of areas of core competency of the Board of Directors, including business judgment, management and industry knowledge. Although the Nominating and Corporate Governance Committee does not have a formal policy on diversity, it believes that diversity 7 is an important consideration in the composition of the Board of Directors, and it seeks to include Board members with diverse backgrounds and experiences. Further criteria include the candidates’ integrity and values, as well as the willingness to devote sufficient time to attend meetings and participate effectively on the Board of Directors and its committees. Corporate Governance The Company provides information about its corporate governance policies, including the Company’s Code of Ethics, and charters for the Audit, Nominating and Corporate Governance, and Compensation Committees of the Board of Directors on the Corporate Governance page of its website. The website can be found at www.landec.com. The Company’s policies and practices reflect corporate governance initiatives that are compliant with the listing requirements of NASDAQ and the corporate governance requirements of the Sarbanes-Oxley Act of 2002, including: • A majority of the members of the Board of Directors are independent; • All members of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee are independent; • The independent members of the Board of Directors meet at each board meeting, and at least twice per year, in executive sessions without the presence of management. The Board of Directors will designate a lead independent director or a non-executive Chairman of the Board who, among other duties, is responsible for presiding over executive sessions of the independent directors; • The Company has an ethics hotline available to all employees, and the Audit Committee has procedures in place for the anonymous submission of employee complaints regarding accounting, internal controls, or auditing matters; and • The Company has adopted a Code of Ethics that applies to all of its employees, including its principal executive officer and all members of its finance department, including the principal financial officer and principal accounting officer, as well as the Board of Directors. Any substantive amendments to the Code of Ethics or grant of any waiver, including any implicit waiver, from a provision of the Code of Ethics to the Company’s principal executive officer, principal financial officer or principal accounting officer, will be disclosed either on the Company’s website or in a report on Form 8-K. Following a review of all relevant relationships and transactions between each director (including each director’s family members) and the Company, the Board has determined that each member of the Board or nominee for election to the Board, other than Mr. Steele and Ms. Hemmeter, is an independent director under applicable NASDAQ listing standards. Mr. Steele and Ms. Hemmeter do not meet the independence standards because Mr. Steele was an employee of the Company within the past three years and Ms. Hemmeter is currently an employee of the Company. Leadership Structure of the Board of Directors The Board of Directors believes that it is important to retain its flexibility to allocate the responsibilities of the positions of the Chairman of the Board (the “Chairman”) and Chief Executive Officer in the way that it believes is in the best interests of the Company. The Board of Directors does not have a formal policy with respect to whether the Chief Executive Officer should also serve as Chairman. Rather, the Board of Directors makes this decision based on its evaluation of current circumstances and the specific needs of the Company at any time it is considering either or both roles. With the retirement of Mr. Steele as Chief Executive Officer and the election of Ms. Hemmeter as the Company’s new Chief Executive Officer in October 2015, the Board of Directors determined that the roles of Chairman and Chief Executive Officer should be separated and Mr. Goldby therefore assumed the role of non-executive Chairman in October 2015. The Board of Directors believes that the appointment of Mr. Goldby as non-executive Chairman allows the Chief Executive Officer, who also possesses significant business and industry knowledge, to lead and speak on behalf of both the Company and the Board of Directors, while also providing for effective independent oversight by non-management directors through a non-executive Chairman. At each Board of Directors meeting, the non-executive Chairman presides over an executive session of the non- management directors without the presence of management. The non-executive Chairman also may call additional meetings of the non-management directors as he deems necessary. If the Board did not have a non-executive Chairman, the lead 8 independent director would serve as a liaison between the Chairman and the non-management directors; advise the Chairman of the informational needs of the Board of Directors and approve information sent to the Board of Directors; and would be available for consultation and communication if requested by major stockholders. The Board of Directors also adheres to sound corporate governance practices, as reflected in the Company’s corporate governance policies, which the Board of Directors believes has promoted, and continues to promote, the effective and independent exercise of Board leadership for the Company and its stockholders. Stockholder Communications Our Board of Directors welcomes communications from our stockholders. Stockholders and other interested parties may send communications to the Board of Directors, or the independent directors as a group, or to any director in particular, including the Chairman, c/o Gregory S. Skinner, Chief Financial Officer, Landec Corporation, 3603 Haven Avenue, Menlo Park, CA 94025. Any correspondence addressed to the Board of Directors or to any one of our directors in care of Mr. Skinner will be promptly forwarded to the addressee. The independent directors review and approve the stockholder communication process periodically to ensure effective communication with stockholders. Oversight of Risk Management The Board of Directors’ role in the Company’s risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic and reputational risks. Our Audit Committee oversees management of financial risk exposures, including the integrity of our accounting and financial reporting processes and controls. As part of this responsibility, the Audit Committee meets periodically with the Company’s independent registered public accounting firm, our internal auditor and our financial and accounting personnel to discuss significant financial risk exposures and the steps management has taken to monitor, control and report such exposures. Additionally, the Audit Committee reviews significant findings prepared by the Company’s independent registered public accounting firm and our internal auditor, together with management’s response. Our Nominating and Corporate Governance Committee has responsibility for matters relating to corporate governance. As such, the charter for our Nominating and Corporate Governance Committee provides for the committee to periodically review and discuss our corporate governance guidelines and policies. Our management also reviewed with our Compensation Committee the compensation policies and practices of the Company that could have a material impact on the Company. Our management review considered whether any of these policies and practices may encourage inappropriate risk-taking, whether any policy or practice may give rise to risks that are reasonably likely to have a material adverse effect on the Company, and whether it would recommend any changes to the Company’s compensation policies and practices. Management also reviewed with the Board of Directors risk-mitigating controls such as the degree of committee and senior management oversight of each compensation program and the level and design of internal controls over such programs. Based on these reviews, the Board of Directors has determined that risks arising from the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company. The Board of Directors has adopted an executive compensation clawback policy, which provides for recoupment of executive incentive compensation in the event of certain restatements of the financial results of the Company. Under the policy, in the event of a substantial restatement of the Company’s financial results due to material noncompliance with financial reporting requirements, if the Board of Directors determines in good faith that any portion of a current or former executive officer’s incentive compensation was paid as a result of such noncompliance, then the Company may recover the portion of such compensation that was based on the erroneous financial data. The Board of Directors has also evaluated privacy protection, cybersecurity and information security in an effort to mitigate the risk of cyber-attacks and to protect the Company’s information and that of its customers and suppliers. Based on this review, the Board of Directors has determined that such risks are not reasonably likely to have a material adverse effect on the Company. 9 Compensation of Directors The following table sets forth compensation information for the fiscal year ended May 29, 2016, for each member of our Board of Directors who was not an executive officer during fiscal year 2016. The Chief Executive Officer, Molly A. Hemmeter, who serves on our Board of Directors, does not receive additional compensation for serving on the Board of Directors. See “Summary Compensation Table” for disclosure related to Ms. Hemmeter. Name Fee Earned or Paid in Cash (1) Stock Awards (2) Other Total Albert D. Bolles, Ph.D. ........................................................ $ Frederick Frank ................................................................... $ Steven Goldby ...................................................................... $ Dean Hollis (3) ..................................................................... $ Tonia Pankopf ...................................................................... $ Catherine A. Sohn, Pharma.D. ............................................. $ Gary T. Steele....................................................................... $ Robert Tobin ....................................................................... $ Nicholas Tompkins .............................................................. $ 49,688 $ 57,500 $ 75,000 $ 22,917 $ 65,667 $ 56,667 $ 25,000 $ 54,167 $ 40,000 $ 60,000 $ 60,000 $ 60,000 $ — $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 25,000 $ — $ — $ — $ — $ — $ — $ — $ — $ — $ 109,688 117,500 135,000 22,917 125,667 116,667 85,000 114,167 65,000 (1) Includes amounts (if any) deferred pursuant to the Company's Nonqualified Deferred Compensation Plan, the terms of which are described under “Nonqualified Deferred Compensation Plan” below. (2) The amounts shown in the Stock Awards column do not reflect compensation actually received by a director. Instead, the amounts shown are the aggregate grant date fair value, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Options (“ASC 718”), of awards granted in fiscal year 2016. (3) Mr. Hollis retired from the Board at the end of his term as a Class 2 director on October 15, 2015. At May 29, 2016, the aggregate number of shares subject to outstanding restricted stock unit awards and option awards held by the members of the Board of Directors was: Dr. Bolles – 5,282 shares; Mr. Frank – 20,282 shares; Mr. Goldby – 20,282 shares; Ms. Pankopf – 11,949 shares; Dr. Sohn – 15,282 shares; Mr. Steele – 220,282 shares; Mr. Tobin – 20,282 shares; and Mr. Tompkins – 2,201 shares. For fiscal year 2016, each non-employee director received an annual retainer of $40,000 for service as a member of our Board of Directors. In addition, each director who served on the Audit Committee received an annual retainer of $10,000, with the Chairperson of the Audit Committee receiving an annual retainer of $20,000. Each director who served on the Compensation Committee received an annual retainer of $7,500, with the Chairperson of the Compensation Committee receiving an annual retainer of $15,000. Each director who served on the Nominating and Corporate Governance Committee received an annual retainer of $5,000, with the Chairperson of the Nominating and Corporate Governance Committee receiving an annual retainer of $10,000. The Chairperson of the Board received an annual retainer of $25,000. Consistent with the general industry trend toward fixed-value restricted stock unit (“RSU”) awards, each non-employee director currently receives an RSU award each year with a fair value of $60,000, based on the fair market value of the Company’s Common Stock on the date of the grant, vesting on the first anniversary of the date of grant. In addition to cash fees, each director is reimbursed for reasonable out-of-pocket expenses incurred by a director to attend Board meetings, committee meetings or stockholder meetings in his or her capacity as a director. Stock Ownership Requirement The Board of Directors has determined that ownership of Landec Common Stock by officers and directors promotes a focus on long-term growth and aligns the interests of the Company’s officers and directors with those of its stockholders. As a result, the Board of Directors has adopted stock ownership guidelines stating that the Company’s non-employee directors and its executive officers should maintain certain minimum ownership levels of Common Stock. Under these guidelines, each non-employee director of the Company is expected to maintain ownership of Common Stock having a value of at least three times the amount of the annual cash retainer paid to such non-employee director. For purposes of the guidelines, the value of a share of Common Stock is measured as the greater of (i) the then current market price or (ii) the closing price of a share of Common Stock on the date when the stock was acquired, or the vesting date in the case of RSUs. 10 Newly-elected directors have five years from the date they are elected to meet these guidelines. In the event a non- employee director’s cash retainer increases, he or she will have two years from the date of the increase to acquire any additional shares or RSUs needed to meet the guidelines. Until the required ownership level is reached, directors are required to retain 50% of net shares acquired upon any future vesting of RSUs and/or exercise of stock options, after deducting shares used to pay any applicable taxes and/or exercise price. Required Vote The election of each of the four (4) Class 1 director nominees requires the affirmative vote of the holders of a majority of the shares of the Company’s Common Stock present at the Annual Meeting in person or by proxy and voted with respect to such director. A “WITHHOLD” vote is effectively a vote against a director. This means that in order for a director to be elected, the number of shares voted “FOR” a director must exceed the number of votes cast against that director. THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE. 11 PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee has appointed the firm of Ernst & Young LLP as the Company’s independent registered public accounting firm to audit the financial statements of the Company for the fiscal year ending May 28, 2017, and recommends that the stockholders vote for ratification of this appointment. In the event the stockholders do not ratify such appointment, the Audit Committee may reconsider its selection. Ernst & Young LLP has audited the Company’s financial statements since the fiscal year ending October 31, 1994. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions. Fees Paid to Independent Registered Public Accounting Firm The following table presents the aggregate fees billed to the Company for professional services rendered by Ernst & Young LLP for the fiscal years ended May 29, 2016 and May 31, 2015. Fee Category Audit Fees ................................................................................................................ $ Audit-Related Fees (1) ............................................................................................. Tax Fees ................................................................................................................... All Other Fees .......................................................................................................... Total ......................................................................................................................... $ Fiscal Year 2016 Fiscal Year 2015 1,312,000 13,000 — — 1,325,000 1,417,000 $ — — — 1,417,000 $ (1) Audit-related fees were for agreed upon procedures work performed by Ernst & Young LLP related to the Company’s loans from General Electric Capital Corporation. Audit Fees were for professional services rendered for the integrated audit of the Company’s annual financial statements and internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, for the review of the Company’s interim financial statements included in the Company’s Quarterly Reports on Form 10-Q, and for assistance with and review of documents filed by the Company with the SEC. Audit Committee Pre-Approval Policies The Audit Committee pre-approves all audit and permissible non-audit services provided by the Company’s independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The Company’s independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with such pre-approval, and the fees for the services performed to date. The Audit Committee, or its designee, may also pre-approve particular services on a case-by-case basis. Required Vote The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm requires the affirmative vote of the holders of a majority of the shares of the Company’s Common Stock present at the Annual Meeting in person or by proxy and voted on this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING MAY 28, 2017. 12 PROPOSAL NO. 3 NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION The Compensation Discussion and Analysis beginning on page 20 of this Proxy Statement describes the Company’s executive compensation program and the compensation decisions that the Compensation Committee and Board of Directors made in fiscal year 2016 with respect to the compensation of our named executive officers. The Board of Directors is asking stockholders to cast a non-binding, advisory vote FOR the following resolution: “RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED on an advisory basis.” We urge stockholders to read the Compensation Discussion and Analysis beginning on page 20 of this Proxy Statement, as well as the Summary Compensation Table and related compensation tables, appearing on pages 27 through 30, which provide detailed information on the Company’s compensation policies and practices. As we describe in the Compensation Discussion and Analysis, our executive compensation program is designed to attract, reward and retain talented officers and embodies a pay-for-performance philosophy that supports Landec’s business strategy and aligns the interests of our executives with our stockholders. Specifically, executive compensation is allocated among base salaries and short- and long-term incentive compensation. The base salaries are fixed in order to provide the executives with a stable cash income, which allows them to focus on the Company’s strategies and objectives as a whole, while the short- and long-term incentive compensation are designed to both reward the named executive officers based on the Company’s overall performance and align the named executive officers’ interests with those of our stockholders. Our annual cash incentive award program is intended to encourage our named executive officers to focus on specific short-term goals important to our success. Our executive officers’ cash incentive awards are determined based on objective performance criteria. The Company’s current practice is to grant our named executive officers both stock options and restricted stock units. This mixture is designed to provide a balance between the goals of increasing the price of our Common Stock and aligning the interests of our executive officers with those of our stockholders (as stock options only have value if the stock price increases after the option is granted) and encouraging retention of our executive officers. Because grants are generally subject to vesting schedules, they help ensure that executives always have significant value tied to long-term stock price performance. For these reasons, the Board of Directors is asking stockholders to support this proposal. Although the vote we are asking you to cast is non-binding, the Compensation Committee and the Board of Directors value the views of our stockholders and will consider the outcome of the vote when determining future compensation arrangements for our named executive officers. At the 2015 annual meeting of stockholders, 97.4% of votes cast expressed support for our compensation policies and practices, and we believe our program continues to be effective. THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE ADVISORY RESOLUTION ON EXECUTIVE COMPENSATION. 13 EQUITY COMPENSATION PLAN INFORMATION The following table summarizes information with respect to options and other equity awards under Landec’s equity compensation plans as of May 29, 2016: Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (2) Number of Securities Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Plan Category Equity compensation plans approved by stockholders ................. 2,258,315 $ 11.90 465,968 (3) Total ............................................................................................. 2,258,315 $ 11.90 465,968 (1) (2) (3) Consists of stock options and restricted stock units outstanding under Landec’s equity compensation plans, as no stock warrants or other rights were outstanding as of May 29, 2016. The weighted average exercise price does not take restricted stock units into account as restricted stock units have no purchase price. Represents shares remaining for issuance pursuant to the 2013 Stock Incentive Plan. The 2013 Stock Incentive Plan The 2013 Stock Incentive Plan (the “2013 Plan”), which was approved by stockholders, authorizes the grant of equity awards, including stock options, restricted stock and restricted stock units to employees, including officers and directors, outside consultants and non-employee directors of the Company. 2,000,000 shares are authorized to be issued under this plan. The exercise price of stock options to be granted under the 2013 Plan will be the fair market value of the Company’s Common Stock on the date the options are granted. Options to be granted under the 2013 Plan will generally be exercisable upon vesting and will generally vest ratably over three years. The 2009 Stock Incentive Plan The 2009 Stock Incentive Plan (the “2009 Plan”), which was approved by stockholders and has been terminated, authorized the grant of equity awards, including stock options, restricted stock and restricted stock units to employees, including officers and directors, outside consultants and non-employee directors of the Company. 1,900,000 shares were authorized to be issued under this plan. The exercise price of stock options granted under the 2009 Plan was the fair market value of the Company’s Common Stock on the date the options were granted. Options granted under the 2009 Plan were exercisable upon vesting and generally vested ratably over three years. No further awards will be made pursuant to the 2009 Plan. AUDIT COMMITTEE REPORT The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act. Composition The Audit Committee of the Board of Directors consists of the three directors whose names appear below and operates under a written charter adopted by the Board of Directors. Each member of the Audit Committee meets the independence and financial experience requirements of NASDAQ and the SEC currently in effect. In addition, the Board of 14 Directors has determined that Mr. Goldby and Ms. Pankopf are audit committee financial experts, as defined by the rules and regulations of the SEC. Responsibilities The responsibilities of the Audit Committee include appointing an independent registered public accounting firm and assisting the Board of Director’s oversight of the preparation of the Company’s financial statements. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with generally accepted auditing standards and for issuing a report thereon. Management is responsible for the Company’s internal controls and financial reporting process. The Audit Committee’s responsibility is to oversee these processes and the Company’s internal controls. The Audit Committee members are not acting as professional accountants or auditors, and their functions are not to duplicate or to certify the activities of management and the independent registered public accounting firm. Review with Management and Independent Auditors The Audit Committee held four meetings during fiscal year 2016. The Audit Committee met and held discussions with management and representatives of the Company’s independent registered public accounting firm, Ernst & Young LLP. Management represented to the Audit Committee that the Company’s consolidated financial statements for the fiscal year ended May 29, 2016 were prepared in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the consolidated financial statements for the fiscal year ended May 29, 2016 with management and the Company’s independent registered public accounting firm. The Audit Committee met with the Company’s independent registered public accounting firm, with and without management present, to discuss the overall scope and plans for their audit, the results of their examination, their evaluation of the Company’s internal controls and the overall quality of the Company’s financial reporting. The Audit Committee discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards (“SAS”) No. 114, The Auditor’s Communication with Those Charged with Governance, as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T, which supersedes SAS No. 61, as amended, including the judgment of the independent registered public accounting firm as to the quality of the Company’s accounting principles. The Audit Committee has received the written disclosures and the letter from Ernst & Young LLP required by the PCAOB regarding the independent accountants’ communications with the Audit Committee concerning independence, and has discussed with Ernst & Young LLP its independence. Summary Based upon the Audit Committee’s discussions with management and the Company’s independent registered public accounting firm, the Audit Committee’s review of the representations of management and the report of the independent registered public accounting firm to the Audit Committee, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10- K for the fiscal year ended May 29, 2016, as filed with the SEC. This report is submitted by the Audit Committee. Tonia Pankopf (Chairperson) Steven Goldby Robert Tobin 15 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with regard to each named executive officer and each executive officer of the Company for fiscal year 2016. Ages are as of August 18, 2016. Gary T. Steele served as President and Chief Executive Officer of the Company until his retirement in October 2015. For more information regarding Mr. Steele’s business experience, see his biographical information under “Proposal No. 1 – Election of Directors.” Molly A. Hemmeter (age 49) has been the Company’s President and Chief Executive Officer since October 15, 2015. Prior to that she served as the Chief Operating Officer of the Company from January 2014 to October 2015, prior to which she served as Chief Commercial Officer of the Company from December 2010 to January 2014 and Vice President, Business Development and Global Marketing of the Company from June 2009 to December 2010. From July 2006 until joining the Company in June 2009, Ms. Hemmeter was Vice President of Global Marketing and New Business Development for the Performance Materials division of Ashland, Inc., a global specialty chemicals company. Prior to joining Ashland, Inc., Ms. Hemmeter was Vice President of Strategy and Marketing for Siterra Corporation and Chief Marketing Officer for CriticalArc Technologies in the San Francisco Bay Area, both of which were privately held software startup companies that were eventually acquired by larger entities, and she previously held various positions at Bausch & Lomb and Eli Lilly and Company. Gregory S. Skinner (age 55) has been Chief Financial Officer and Vice President of Finance of the Company since November 1999 and Vice President of Administration since November 2000. From May 1996 to October 1999, Mr. Skinner served as Controller of the Company. From 1994 to 1996, Mr. Skinner was Controller of DNA Plant Technology and from 1988 to 1994 he was with Litton Electron Devices. Prior to joining Litton Electron Devices, Mr. Skinner was with Litton Industries, Inc. and Arthur Andersen & Company. Ronald L. Midyett (age 50) has been Chief Operating Officer since October 2015. He served as President and Chief Executive Officer of Apio from January 2008 to October 2015, and a Vice President of the Company since February 2008. Mr. Midyett joined Apio in May 2005 as Chief Operating Officer. Prior to joining Apio, Mr. Midyett was Senior Vice President of Operations for Dole Fresh Vegetables. Mr. Midyett has over 20 years of technology and operations experience in the produce industry. Mr. Midyett was chairman of the board of directors of the United Fresh Fruit and Vegetable Association from April 2013 through April 2014 and is currently a member of its executive committee. Mr. Midyett is currently a director of Windset Holdings 2010 Ltd., a privately held Canadian corporation. Larry D. Hiebert (age 60) has been President of Lifecore and a Vice President of the Company since June 2013. Mr. Hiebert served as Lifecore’s Vice President and General Manager from July 2006 to June 2013. Prior to that he was Lifecore’s Vice President of Operations from March 2004 to June 2006 and Director of Operations from March 1997 to March 2004, and held various Manufacturing and Materials Management positions within Lifecore from October 1983 to March 1997. Mr. Hiebert has over 30 years of operational experience in the biomaterials industry. Steven P. Bitler, Ph.D. (age 58) has been Vice President, Corporate Technology of the Company since March 2002. From 1988 until March 2002, Dr. Bitler held various positions with the Company related to the Company’s polymer product development and thermal switch products. Prior to joining the Company, Dr. Bitler developed new high strength polymeric materials at SRI International. 16 COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of the Company’s Common Stock as of August 18, 2016 as to (i) each person who is known by the Company to beneficially own more than five percent of any class of the Company’s voting stock, (ii) each of the Company’s directors, (iii) each of the executive officers named in the Summary Compensation Table of this proxy statement (the “Named Executive Officers”), and (iv) all directors and executive officers as a group. The business address of each director and executive officer named below is c/o Landec Corporation, 3603 Haven Avenue, Menlo Park, CA 94025. Name 5% Stockholders Shares Beneficially Owned (1) Number of Shares of Common Stock Percent of Total (2) NWQ Investment Management Company, LLC ...................................................... 2049 Century Park East, 16th Floor Los Angeles, CA 90067 2,851,850(3) 10.47% Franklin Resources, Inc ........................................................................................... One Parker Plaza, Ninth Floor Fort Lee, NJ 07024 2,847,200(4) 10.45% Wynnefield Capital, Inc .......................................................................................... 450 Seventh Ave, #509 New York, NY 10123 2,682,400(5) 9.85% Dimensional Fund Advisors, L.P. ........................................................................... 6300 Bee Cave Road, Building One Austin, TX 78746 2,248,099(6) 8.25% BlackRock, Inc ......................................................................................................... 55 E. 52nd Street New York, NY 10055 1,640,325(7) 6.02% Ariel Investments LLC ............................................................................................. 200 E. Randolph Street, Suite 2700 Chicago, IL 60601 1,590,824(8) 5.84% Executive Officers and Directors Gary Steele ............................................................................................................... Retired President and Chief Executive Officer Director 211,768(9) Molly A. Hemmeter ................................................................................................. President and Chief Executive Officer 228,746(10) * * Gregory S. Skinner ................................................................................................... Chief Financial Officer and Vice President of Finance and Administration 374,870(11) 1.37% Ronald L. Midyett ................................................................................................... Chief Operating Officer and Vice President 147,802(12) Larry D. Hiebert ....................................................................................................... President of Lifecore Biomedical, Inc. and Vice President of Landec Steven P. Bitler ........................................................................................................ Vice President of Corporate Technology 42,505(13) 98,622(14) * * * 17 Name Albert D. Bolles, Ph.D., Director .......................................................................... Number of Shares of Common Stock 7,694 Percent of Total (2) Shares Beneficially Owned (1) Frederick Frank, Director ....................................................................................... 56,610(15) Steven Goldby, Director ......................................................................................... 46,191(16) Tonia Pankopf, Director ......................................................................................... 22,229(17) Catherine A. Sohn, Pharma.D., Director ............................................................... 24,523(18) Robert Tobin, Director .......................................................................................... 51,309(19) Nicholas Tompkins, Director ................................................................................ 50,713 (20) * * * * * * * All directors and executive officers as a group (13 persons) .................................. 1,363,582(21) 4.89% * Less than 1% (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of capital stock. As of August 18, 2016, 27,241,273 shares of Common Stock were issued and outstanding. Percentages are calculated with respect to a holder of options exercisable within 60 days after August 18, 2016 as if such holder had exercised his options. Options held by other holders are not included in the percentage calculation with respect to any other holder. This information is based on a Form 13F filed by NWQ Investment Management Company, LLC with the SEC showing such beneficial owner’s holdings as of June 30, 2016. This information is based on a Form 13F filed by Franklin Advisory Services, LLC with the SEC showing such beneficial owner’s holdings as of June 30, 2016. This information is based on a Form 13F filed by Wynnefield Capital, Inc with the SEC showing such beneficial owner’s holdings as of June 30, 2016. This information is based on a Form 13F filed by Dimensional Fund Advisors LP with the SEC showing such beneficial owner’s holdings as of June 30, 2016. This information is based on a Form 13F filed by seven institutions with the SEC: BlackRock Institutional Trust Company, N.A.; BlackRock Advisors, LLC; BlackRock Investment Management, LLC; BlackRock (Netherlands) B.V.; Blackrock Asset Management Schweiz AG; Blackrock Financial Management, Inc. and BlackRock Asset Management Canada Limited under the parent company BlackRock, Inc showing such beneficial owners’ holdings as of June 30, 2016. This information is based on a Form 13F filed by Ariel Investments, LLC with the SEC showing such beneficial owner’s holdings as of June 30, 2016. This number includes 146,666 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 208,333 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 125,000 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. 18 (12) (13) (14) (15) (16) (17) (18) (19) This number includes 43,333 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 32,166 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 36,666 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 15,000 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 15,000 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 6,667 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 10,000 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. This number includes 15,000 shares subject to outstanding stock options exercisable within 60 days after August 18, 2016. (20) This number includes 50,713 shares held in trust of which Mr. Tompkins is a beneficial owner. (21) This number includes an aggregate of 653,831 shares held by officers and directors that are subject to outstanding stock options exercisable within 60 days after August 18, 2016. 19 EXECUTIVE COMPENSATION AND RELATED INFORMATION Compensation Discussion and Analysis This Compensation Discussion and Analysis (“CD&A”) section discusses the compensation programs and policies for our Named Executive Officers. The CD&A also provides an overview of the Compensation Committee’s role in the design and administration of these programs and policies, and its role in making specific compensation decisions for our Named Executive Officers. Our Named Executive Officers for fiscal year 2016 were Gary T. Steele, retired President and Chief Executive Officer, Molly A. Hemmeter, President and Chief Executive Officer, Gregory S. Skinner, Vice President of Finance and Administration and Chief Financial Officer, Ronald L. Midyett, Chief Operating Officer, Larry D. Hiebert, President of Lifecore and Steven P. Bitler, Vice President of Corporate Technology. Overview of Compensation Program and Philosophy Landec’s compensation program is intended to meet three principal objectives: (1) attract, reward and retain officers and other key employees; (2) motivate these individuals to achieve the Company’s short-term and long-term corporate goals; and (3) align the interests of our executives with those of our stockholders. The compensation program is designed to balance an executive’s achievements in managing the day-to-day business and addressing shorter-term challenges facing the Company or its subsidiaries, such as the effects of weather-related disruptions and competitive pressures, with incentives to achieve our long-term vision to be the innovative leader in our food and biomaterials businesses. The above policies guide the Compensation Committee (the “Committee”) in assessing the proper allocation among long-term compensation, current cash compensation and short-term bonus compensation. Other considerations include Landec’s business objectives, its fiduciary and corporate responsibilities (including internal equity considerations and affordability), competitive practices and trends, and regulatory requirements. Establishing Executive Compensation Landec’s executive compensation program is overseen and administered by the Committee, which is comprised entirely of independent directors as determined in accordance with applicable NASDAQ, SEC and Internal Revenue Code rules. The Committee operates under a written charter adopted by our Board of Directors. A copy of the Committee’s charter is available at www.landec.com. In determining the particular elements of compensation that are used to implement Landec’s overall compensation policies, the Committee takes into consideration a number of objective factors related to Landec’s performance, such as Landec’s earnings per share, profitability, revenue growth and business-unit-specific operational and financial performance, as well as the competitive practices among our peer group. The Committee evaluates the Company’s financial and strategic performance in the context of determining compensation as well as the individual performance of each Named Executive Officer. The Committee meets regularly to review overall executive compensation. The Committee also meets with Landec’s President and Chief Executive Officer, Ms. Hemmeter, and other executives to obtain recommendations with respect to Company compensation programs, practices and packages for executives and other employees. The Chief Executive Officer makes recommendations to the Committee on the base salary, bonus targets and equity compensation for the executive team and other employees, but not for herself. The Committee, however, has the ultimate responsibility for determining executive compensation, which is recommended to the Board of Directors for its final approval. Peer Group The Committee uses peer group information to provide context for its compensation decision-making for the Named Executive Officers. The Committee monitors the peer group to assess its appropriateness as a source of competitive compensation data and reassesses the relevance of the peer group as needed. In an effort to more accurately reflect the significant portion of the Company’s business attributable to Apio’s operations, the peer group was adjusted and simplified in 2014, to allow for comparisons on how these peers address the volatility and unpredictability of financial results as well as to assess competitive pay levels in the food and life sciences industries. The Committee revised the Company’s peer group for fiscal year 2016, with Albany Molecular Research, CryoLife, Inventure Foods, Lancaster Colony, National Beverage, Snyder’s-Lance and SunOpta being added and Balchem, Diamond Foods, Hi-Tech Pharmacal, Nature’s Sunshine Products 20 and Penford being removed. Our peers are now: Albany Molecular Research, Anika Therapeutics, Calavo Growers, Cal- Maine Foods, CryoLife, Farmer Bros., Inventure Foods, J&J Snack Foods, John B Sanfilippo & Son, Lancaster Colony, Limoneira, National Beverage, Omega Protein, Seneca, Snyder’s-Lance, SunOpta and Surmodics. Peer group data is gathered with respect to base salary, bonus targets and all equity and non-equity awards (including stock options, performance shares, restricted stock and long-term, cash-based awards). Landec’s goal is to target total compensation for Named Executive Officers at a level that is competitive with the 50th percentile within the selected peer group for the Named Executive Officers. The Committee analyzes base pay, target cash compensation and target total direct compensation to determine if there are any variances between the peer group and the Company’s compensation targets. Clawback Policy In May 2014, the Board of Directors adopted an executive compensation clawback policy, which provides for recoupment of executive incentive compensation in the event of certain restatements of the financial results of the Company. Under the policy, in the event of a substantial restatement of the Company’s financial results due to material noncompliance with financial reporting requirements, if the Board of Directors determines in good faith that any portion of a current or former executive officer’s incentive compensation was paid as a result of such noncompliance, then the Company may recover that portion of such compensation that was based on the erroneous financial data. In determining whether to seek recovery of compensation, the Board of Directors or the Committee may take into account any considerations it deems appropriate, including whether the assertion of a claim may violate applicable law or adversely impact the interests of the Company in any related proceeding or investigation, the extent to which the executive officer was responsible for the error that resulted in the restatement, and the cost and likely outcome of any potential litigation in connection with the Company’s attempts to recoup such compensation. Elements of Compensation There are three major elements that comprise Landec’s compensation program: (i) base salary; (ii) annual cash incentive opportunities, including bonuses; and (iii) equity incentives in the form of stock options and/or restricted stock unit awards. Base Salaries The base salaries of executive officers are set at levels intended to be competitive with those companies in our peer group with which we compete for executive talent. In determining base salary, the Committee also considers factors such as job performance, skill set, prior experience, the executive’s time in his or her position with Landec, internal consistency regarding pay levels for similar positions or skill levels within the Company, external pressures to attract and retain talent, and market conditions generally. Base salaries are not adjusted annually but are generally adjusted when the Committee judges that a change is warranted by a change in an executive officer’s responsibilities, demonstrated performance or relevant market data. For a discussion of base salary decisions made in or for fiscal year 2016, see “Compensation of Chief Executive Officer” and “Compensation of Other Named Executive Officers” below. Annual Cash Incentive Award Plan Landec maintains an annual cash incentive award plan for senior executives to encourage and reward achievement of Landec’s business goals and to assist Landec in attracting and retaining executives by offering an opportunity to earn a competitive level of compensation. This plan is consistent with our overall “pay-for-performance” compensation objective and our goal of attracting and retaining top level executive officers in the industry. In keeping with our “pay for performance” philosophy, a portion of our Named Executive Officers’ annual compensation is “at risk” compensation, resulting in years, such as fiscal year 2016, in which most of our Named Executive Officers received no annual cash incentive award. Award targets are set as a percentage of base salary. Incentive award targets and ranges are typically set early in each fiscal year, together with specific criteria for corporate, business unit and individual objectives. The overall corporate objectives are intended to be challenging but achievable. Such objectives are based on actual performance compared to predetermined financial performance targets, which are weighted depending upon whether the employee is a member of a business unit or the corporate staff. Incentive award targets and criteria for executive officers are subject to approval by the Committee. 21 Fiscal Year 2016 Cash Incentive Award Plan At the beginning of fiscal year 2016, the Committee approved the cash incentive award plan for the year (the “2016 Incentive Award Plan”), which included financial objectives for each business unit and at the corporate level on a consolidated basis. The financial objectives were based on the internally-developed financial plan for the fiscal year. The 2016 Incentive Award Plan was based on established targets for revenues and operating income for each business unit and consolidated Landec results. For fiscal year 2016, the CEO’s target cash incentive award was 100% of her base salary, and the other Named Executive Officers’ target incentive awards ranged from 40% to 60% of base salary. For Mr. Steele, Ms. Hemmeter, Mr. Skinner and Dr. Bitler (the “Corporate Executives”), the award target for fiscal year 2016 was based on the Company’s annual consolidated financial results, and consisted of targets for the Company’s consolidated revenues of $585.3 million and consolidated operating income of $31.7 million. For Mr. Midyett, the award target was based on Apio’s annual financial results, and consisted of targets for Apio’s revenues of $531.3 million and operating income of $29.7 million. For Mr. Hiebert, the award target was based on Lifecore’s annual financial results, and consisted of targets for Lifecore’s revenues of $51.1 million and operating income of $12.6 million. Based on the metrics described above, the Named Executive Officers’ target incentive awards, maximum awards and actual amounts earned for fiscal year 2016 were as follows: Named Executive Officer Gary T. Steele..................................................................................... $ Molly A. Hemmeter ........................................................................... $ Gregory S. Skinner ............................................................................. $ Ronald L. Midyett ............................................................................. $ Larry D. Hiebert ................................................................................ $ Steven P. Bitler ................................................................................... $ Long-Term Incentive Compensation Target Incentive Awards Maximum Incentive Awards Earned Incentive Awards 208,333 $ 475,000 $ 228,000 $ 170,000 $ 150,000 $ 110,000 $ 208,333 $ 475,000 $ 380,000 $ 340,000 $ 300,000 $ 275,000 $ — — — — 199,119 — Landec provides long-term incentive compensation through equity-based awards, generally in the form of stock options and restricted stock units (also referred to as “restricted stock units,” “RSUs” or “stock awards”) under a broad- based equity award program (“Equity Award Plan”). Landec’s Equity Award Plan is intended to align the interests of officers with those of the stockholders by creating an incentive for officers to maximize long-term stockholder value. The Equity Award Plan also is designed to encourage officers to remain employed with Landec despite a competitive labor market in its industry. Awards to eligible employees, including Named Executive Officers, are generally made on an annual basis. Awards must be approved by the Committee or the Board of Directors. Awards typically take the form of stock options and RSUs, and are generally granted with a three-year vesting schedule. In general, the number of options/RSUs awarded to each executive officer is determined subjectively based on a number of factors, including an analysis of peer group data, the officer’s degree of responsibility, general level of performance, ability to affect future Company performance, salary level and recent noteworthy achievements, as well as prior years’ awards. All stock option grants have a per share exercise price equal to the fair market value of Landec Common Stock on the grant date. The Committee has not granted, nor does it intend in the future to grant, equity compensation awards to executives in anticipation of the release of material nonpublic information that is likely to result in changes to the price of Landec Common Stock, such as a significant positive or negative earnings announcement. Similarly, the Committee has not timed and does not intend to time the release of material nonpublic information based on equity award grant dates. Also, because equity compensation awards typically vest over a three-year period, the value to recipients of any immediate increase in the price of Landec’s stock following a grant will be attenuated. 22 The Committee regularly monitors the environment in which Landec operates and makes changes to the Equity Award Plan and the overall annual compensation paid to executives in order to help the Company meet its goals, including achieving long-term stockholder value. The Company has granted both stock options and RSUs as part of the Equity Award Plan. Landec grants stock options because they can be an effective tool for meeting Landec’s compensation goal of increasing long-term stockholder value. Employees are able to profit from stock options only if Landec’s stock price increases in value over the stock option’s exercise price. Landec believes that the options it grants provide effective incentives to option holders to achieve increases in the value of Landec’s stock. Landec grants RSUs because they provide a more predictable value to employees than stock options, and therefore are efficient tools in retaining and motivating employees, while also serving as an incentive to increase the value of Landec’s stock. RSUs also can be a more efficient means of using equity plan share reserves because fewer RSUs are needed to provide a retention and incentive value as compared to awards of stock options. During fiscal year 2016, the Committee granted awards under the Equity Award Plan to executive officers, including our Named Executive Officers, as noted on page 28 under “Grants of Plan-Based Awards”. In making this determination, the Committee considered prior awards made to our Named Executive Officers and the value of such holdings as well as the overall compensation package paid to our executive officers for fiscal year 2016. These awards are reflected in compensation paid to our Named Executive Officers for fiscal year 2016. Stock Ownership Requirement The Board of Directors has determined that ownership of Landec Common Stock by officers and directors promotes a focus on long-term growth and aligns the interests of the Company’s officers and directors with those of its stockholders. As a result, the Board of Directors has adopted stock ownership guidelines stating that the Company’s non-employee directors and its executive officers should maintain certain minimum ownership levels of Common Stock. Under these guidelines, the Company’s Chief Executive Officer is expected to maintain ownership of Common Stock having a value of at least five times his or her annual base salary, and the Company’s other executive officers are expected to maintain ownership of Common Stock having a value of at least three times their base salaries. For purposes of the guidelines, the value of a share of Common Stock is measured as the greater of (i) the then current market price or (ii) the closing price of a share of Common Stock on the date when the stock was acquired, or the vesting date in the case of RSUs. Newly-appointed executive officers have five years from the date they are appointed or promoted to meet these guidelines. In the event of an increase in base salary, the executive officer will have two years from the date of the increase to acquire any additional shares or RSUs needed to meet the guidelines. Until the required ownership level is reached, executive officers are required to retain 50% of net shares acquired upon any future vesting of RSUs and/or exercise of stock options, after deducting shares used to pay any applicable taxes and/or exercise price. Nonqualified Deferred Compensation Plan On July 25, 2013, the Board approved the Nonqualified Deferred Compensation Plan (the “Deferral Plan”) for non- employee directors and certain participating employees, including the Named Executive Officers. The Deferral Plan is administered by a committee consisting of the Chief Executive Officer and the Chief Financial Officer of the Company or persons designated by them. The Deferral Plan allows non-employee directors to defer up to 100% of the fees earned for their service as director and allows participating employees to defer up to 50% of their base salary and up to 100% of their annual cash bonus. Any amounts deferred by a participating employee are invested on behalf of the participating employee, and any investment returns earned thereon are credited to the participating employee’s account. Investment options are determined by the committee that administers the Deferral Plan. Each participating employee may designate the investment option or options for his or her account and may change those investment options at any time. A participating employee may elect to receive distributions from his or her account beginning in a specified payment year no sooner than three years after the calendar year to which the deferred compensation relates, to be paid in a lump sum or in annual installments not to exceed ten years, according to the participating employee’s election. This election is made at the time when the participating employee makes an election to defer compensation. The participating employee may subsequently elect to delay the year in which deferred compensation is paid, provided that such election must be made at least 12 months before the year in which payment was previously scheduled to occur, must specify a new payment year that is at least five years after the year in which payment was to be made and will not take effect for 12 months. A participating employee will also receive distributions upon the occurrence of certain events specified in Deferral Plan, including termination of employment. The Company has the discretion, but not the obligation, to make contributions to the Deferral Plan for the benefit of the participating employees, subject to the terms and conditions of the Deferral Plan. 23 Retirement Benefits under the 401(k) Plan, Executive Perquisites and Generally Available Benefit Programs Landec maintains a tax-qualified 401(k) plan (the “401(k) Plan”), which provides for broad-based employee participation. Under the 401(k) Plan, all Landec employees are eligible to receive matching contributions from Landec. The 401(k) Plan is a safe harbor plan (as defined in the Internal Revenue Code of 1986) with a safe harbor match of 100% on the first 3% of deferrals and 50% on the next 2% of each participant’s pretax contributions; and the match is calculated and paid to participants’ accounts on a payroll-by-payroll basis, subject to applicable federal limits. The 401(k) Plan does not have an associated vesting schedule. Landec also makes an annual “reconciling match” by recalculating the regular matching contribution as if it were paid on an annualized, instead of payroll-by-payroll, basis. If the annualized matching contribution would have been higher, Landec makes a contribution to the participant’s account in an amount equal to the difference between the two amounts. Other than the 401(k) Plan, Landec does not provide defined benefit pension plans or defined contribution retirement plans to its executives or other employees. Landec also offers a number of other benefits to the Named Executive Officers pursuant to benefit programs that provide for broad-based employee participation. These benefit programs include medical, dental and vision insurance, long- term and short-term disability insurance, life and accidental death and dismemberment insurance, health and dependent care flexible spending accounts, wellness programs, educational assistance and certain other benefits. The 401(k) Plan and other generally available benefit programs allow Landec to remain competitive with respect to employee talent, and Landec believes that the availability of the benefit programs generally enhances employee productivity and loyalty to Landec. The main objectives of Landec’s benefit programs are to give our employees access to quality healthcare, financial protection from unforeseen events, assistance in achieving retirement financial goals and enhanced health and productivity. These generally available benefits typically do not specifically factor into decisions regarding an individual executive’s total compensation or equity award package. Compensation of Chief Executive Officer On June 19, 2014, the Company entered into an executive employment agreement with Mr. Steele (the “Steele Agreement”), effective as of May 26, 2014, setting forth the terms of his employment. The Steele Agreement provided that Mr. Steele would be paid an annual base salary of $500,000 through the term of the Steele Agreement, and continue to participate in the annual cash incentive award plan. Mr. Steele was also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as determined by the Committee. See the section entitled “Employment Contracts and Potential Payments upon Termination or Change in Control” for a further discussion of the terms of the Steele Agreement. Mr. Steele retired as President and Chief Executive Officer in October 2015. On October 15, 2015 the Company entered into an executive employment agreement with Ms. Hemmeter (the “Hemmeter Agreement”), effective as of October 15, 2015, setting forth the terms of her employment. The Hemmeter Agreement expires on December 31, 2018 unless renewed or extended by both parties, and provides that Ms. Hemmeter shall be paid an annual base salary of $475,000 through the term of the Hemmeter Agreement, and continue to participate in the annual cash incentive award plan. Ms. Hemmeter is also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as determined by the Committee. See the section entitled “Employment Contracts and Potential Payments upon Termination or Change in Control” for a further discussion of the terms of the Hemmeter Agreement. In making decisions with respect to Mr Steele’s and Ms. Hemmeter’s salary, target bonus and equity compensation grant, the Committee relied on the peer group data described above and gave considerable weight to the Chief Executive Officer’s significant and direct influence over Landec’s overall performance. As discussed above under “Annual Cash Incentive Award Plan,” based on Landec’s actual financial performance for fiscal year 2016, Mr. Steele did not receive an incentive award payment under the 2016 Incentive Award Plan. As noted below under “Grants of Plan-Based Awards”, during fiscal year 2016, the Committee did not grant Mr. Steele an award under the Equity Award Plan in his capacity as Chief Executive Officer of the Company. As discussed above under “Annual Cash Incentive Award Plan,” based on Landec’s actual financial performance for fiscal year 2016, Ms. Hemmeter did not receive an incentive award payment under the 2016 Incentive Award Plan. As noted below under “Grants of Plan-Based Awards”, during fiscal year 2016, the Committee did not grant Ms. Hemmeter an award under the Equity Award Plan in her capacity as Chief Executive Officer of the Company. Ms. Hemmeter’s total compensation for fiscal year 2016 was below the 50th percentile of companies described above under “Peer Group.” 24 Compensation of Other Named Executive Officers On October 15, 2015, the Company entered into a new executive employment agreement with Mr. Skinner (the “Skinner Agreement”), effective as of October 15, 2015, setting forth the terms of his employment. The Skinner Agreement expires on December 31, 2018 unless renewed or extended by both parties, and provides that Mr. Skinner shall be paid an annual base salary of $380,000 through the term of the Skinner Agreement, and continue to participate in the annual cash incentive award plan. Mr. Skinner is also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as determined by the Committee. See the section entitled “Employment Contracts and Potential Payments upon Termination or Change in Control” for a further discussion of the terms of the Skinner Agreement. In making decisions with respect to base salary for Named Executive Officers other than the CEO, the Committee reviews peer group data as described above and takes into account the date of the most recent adjustment in the base pay of each Named Executive Officer. As indicated above under “Annual Cash Incentive Award Plan,” none of the Named Executive Officers received a cash award under the 2016 Incentive Award Plan, except for Mr. Hiebert, who received a cash award as a result of the financial performance of Lifecore, which fell slightly short of its revenue target and exceeded its operating income target for fiscal year 2016. As noted below under “Grants of Plan-Based Awards”, Mr. Hiebert received an equity award under the Equity Award Plan, but none of the other Named Executive Officers received an equity award in fiscal year 2016. The total compensation received by each Named Executive Officer during fiscal year 2016 was below the 50th percentile for his or her peer group as described above under “Peer Group.” Say on Pay Voting Results At the 2015 annual meeting of stockholders, the Company asked stockholders to cast a non-binding advisory vote to approve the compensation of the Named Executive Officers as disclosed in the 2015 proxy statement. The holders of 97.4% of the shares present and voting at the 2015 annual meeting of stockholders voted for approval of the compensation of our Named Executive Officers. The Company is pleased with this result and believes that stockholders confirmed our executive compensation philosophy, policies and programs. The Committee took these results into account by continuing to emphasize our pay-for-performance philosophy which utilizes performance measures that provide incentives to deliver value to our stockholders. Compliance with Internal Revenue Code Section 162(m) Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction to public companies for certain compensation in excess of $1 million paid to a company’s executive officers. Certain compensation, including qualified performance-based compensation, will not be subject to the deduction limit if specified requirements are met. The Committee reviews the potential effect of Section 162(m) periodically and may seek to structure the long-term incentive compensation granted to Named Executive Officers in a manner that is intended to avoid disallowance of deductions under Section 162(m). Nevertheless, there can be no assurance that compensation attributable to long-term incentive awards will be treated as qualified performance-based compensation under Section 162(m). In addition, the Committee reserves the right to authorize compensation payments that may be in excess of the limit when the Committee believes such payments are appropriate and in the best interest of Landec and its stockholders, after taking into consideration changing business conditions and the performance of its employees. Compensation Committee Interlocks and Insider Participation The Committee is composed of Dr. Sohn (Chairperson), Dr. Bolles and Mr. Frank. During fiscal year 2016, none of the Company’s executive officers served on the board of directors of any entities whose directors or officers serve on the Committee. None of the Committee’s current or former members has at any time been an officer or employee of Landec. None of Landec’s executive officers currently serve, or in the past fiscal year have served, as members of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on Landec’s Board of Directors or the Committee. Compensation Committee Report The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Landec specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act. 25 The Committee has reviewed and discussed with management the Compensation Discussion and Analysis for fiscal year 2016. Based on the review and discussions, the Committee recommended to the Board of Directors, and the Board of Directors has approved, that the Compensation Discussion and Analysis be included in Landec’s Proxy Statement for its 2016 Annual Meeting of Stockholders and incorporated into our Annual Report on Form 10-K for the fiscal year ended May 29, 2016. This report is submitted by the Committee. Catherine A. Sohn, Pharma. D. (Chairperson) Al Bolles, Ph.D. Fred Frank 26 Summary Compensation The following table shows compensation information for fiscal years 2016, 2015 and 2014 for the Named Executive Officers. Name and Principal Position Year Summary Compensation Table Salary ($) (1) Stock Awards ($) (2) Option Awards ($) (3) Non-Equity Incentive Plan Compensation ($) (4) All Other Compensation ($) (5) Total ($) Gary T. Steele (6) ...................................... 2016 204,132 2015 500,000 2014 450,000 Retired President and Chief Executive Officer — 287,800 214,500 — 205,380 198,397 Molly A. Hemmeter (6) ............................ 2016 426,000 President and Chief Executive Officer — 2015 345,000 1,439,000 1,026,900 132,265 2014 285,000 143,000 — Gregory S. Skinner.................................... 2016 380,000 2015 325,000 2014 310,000 Chief Financial Officer and Vice President of Finance and Administration — 215,850 143,000 — 154,035 132,265 Ronald L. Midyett ..................................... 2016 Chief Operating Officer and Vice President 340,000 2015 340,000 2014 330,000 — 143,900 143,000 — 102,690 132,265 Larry D. Hiebert ........................................ 2016 300,000 President of Lifecore Biomedical, Inc. 2015 300,000 2014 259,231 and Vice President of Landec 56,800 107,925 85,800 40,393 77,018 79,359 Steven P. Bitler ......................................... 2016 273,461 2015 243,750 2014 220,000 Vice President of Corporate Technology — 71,950 23,838 — 51,300 22,000 — 399,569 — — 195,079 — — 155,832 — — 192,246 — 199,119 30,000 130,110 — 75,119 13,834 217,966 17,431 1,410,180 876,845 13,948 17,320 443,320 12,906 3,018,885 571,425 11,160 18,290 12,114 11,160 398,290 862,831 596,425 26,014 27,652 26,668 366,014 806,488 631,933 12,895 14,339 22,872 609,207 529,282 577,372 11,029 10,686 14,948 284,490 452,805 280,786 (1) Includes amounts (if any) deferred at the election of the Named Executive Officer pursuant to the Deferral Plan. (2) Amounts shown do not reflect compensation actually received by the Named Executive Officer. Instead, the amounts shown are the aggregate grant date fair value of RSUs granted during fiscal year 2016 computed for financial statement reporting purposes in accordance with ASC 718. The assumptions used to calculate the value of the RSU awards are set forth under Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 29, 2016. In accordance with SEC rules, these amounts exclude estimates of forfeitures in the case of awards with service-based vesting conditions. (3) Amounts shown do not reflect compensation actually received by the Named Executive Officer. Instead, the amounts shown are the aggregate grant date fair value of stock options granted during fiscal year 2016 computed for financial statement reporting purposes in accordance with ASC 718. The assumptions used to calculate the value of stock option awards are set forth under Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 29, 2016. In accordance with SEC rules, these amounts exclude estimates of forfeitures in the case of awards with service-based vesting conditions. (4) Amounts consist of bonuses earned for meeting and/or exceeding financial performance targets in fiscal years 2016, 2015 and 2014 under the Company’s annual Incentive Award Plans. (5) Amounts consist of Company-paid life insurance and an employer 401(k) match for all Named Executive Officers. The amounts shown for Mr. Steele and Mr. Hiebert also include Company-paid disability insurance for which Mr. Steele and Mr. Heibert, respectively, are the beneficiary. For Mr. Steele, the amount shown also includes reimbursement for Medicare and a Medicare supplemental plan for Mr. Steele and his spouse of $11,369, which is provided by the Company upon Mr. Steele’s retirement in accordance with his employment agreement. For Mr. Midyett, the amount shown includes an annual car allowance of $15,000. For Ms. Hemmeter, the amount includes a car allowance expense of $5,353. (6) Mr. Steele retired and Ms. Hemmeter became President and CEO of the Company on October 15, 2015. 27 Grants of Plan-Based Awards The following table shows all plan-based awards granted to the Named Executive Officers during fiscal year 2016. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the “Outstanding Equity Awards at Fiscal 2016 Year-End” table on the following page. Grants of Plan-Based Awards All Other All Other Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) Name Grant Date Threshold Target ($) ($) Maximum ($) Option Awards: Number of Securities Stock Awards: Number of Shares of Stock Exercise or Base Price of Option Underlying Awards or Units (#) Options (#) ($/share) Grant Date Fair Value of Stock and Option Awards ($) (2) Larry D. Hiebert ... — 150,000 N/A 5/25/2016 5/25/2016 — 5,000 — — — 15,000 — — 11.36 — 56,800 40,393 (1) Amounts shown are estimated payouts for fiscal year 2016 to the Named Executive Officers under the 2016 Incentive Award Plan. The target amount is based on a percentage of the individual’s fiscal year 2016 base salary. Only Larry Hiebert received a cash incentive award for fiscal year 2016. For more information on these awards, including the amount actually paid, see “Compensation Discussion and Analysis-Annual Cash Incentive Award Plan.” (2) The value of a stock award or option award is based on the fair value as of the grant date of such award determined pursuant to ASC 718. Stock awards consist only of RSUs. The exercise price for all options granted to the Named Executive Officers is 100% of the fair market value of Landec Common Stock on the grant date. The option exercise price has not been deducted from the amounts indicated above. Regardless of the value placed on a stock option on the grant date, the actual value of the option will depend on the market value of Landec Common Stock at such date in the future when the option is exercised. The value of the option following this exercise does not include the option exercise price. All options vest at the rate of 1/36th per month and therefore all options are fully vested three years after the date of grant. RSUs vest on the third anniversary of the date of grant. 28 Equity Awards The following table shows all outstanding equity awards held by the Named Executive Officers at the end of fiscal year 2016. The awards for fiscal year 2016 identified in the table below are also reported in the “Grants of Plan-Based Awards” table on the previous page. Outstanding Equity Awards at Fiscal 2016 Year-End Option Awards Stock Awards Number of Securities Underlying Unexercised Options Number of Securities Underlying Unexercised Options Unexercisable (#) (1) Name Grant Date Exercisable Number of Shares or Units of Stock That Have Not Vested (#) (2) Market Value of Shares Or Units of Stock That Have Not Vested ($) (3) Option Exercise Price ($) Option Expiration Date Gary T. Steele............ 05/28/2015 06/07/2013 05/26/2010 20,000 43,750 75,000 40,000 1,250 — 14.39 05/28/2022 14.30 06/07/2020 5.63 05/26/2017 20,000 15,000 — 229,200 171,900 — Molly A. Hemmeter .. 05/28/2015 06/07/2013 05/26/2010 100,000 29,166 37,500 200,000 834 — 14.39 05/28/2022 14.30 06/07/2020 5.63 05/26/2017 100,000 1,146,000 114,600 — 10,000 — Gregory S. Skinner .... 05/28/2015 06/07/2013 05/26/2010 15,000 29,166 75,000 30,000 834 — 14.39 05/28/2022 14.30 06/07/2020 5.63 05/26/2017 15,000 10,000 — 171,900 114,600 — Ronald L. Midyett ..... 05/28/2015 06/07/2013 10,000 29,166 20,000 834 14.39 05/28/2022 14.30 06/07/2020 10,000 10,000 114,600 114,600 Larry D. Hiebert ........ 05/25/2016 05/28/2015 06/07/2013 05/26/2010 Steven P. Bitler .......... 05/28/2015 06/07/2013 05/26/2010 — 7,500 17,500 2,500 5,000 4,861 45,000 15,000 15,000 500 — 10,000 139 — 11.36 05/23/2023 14.39 05/28/2022 14.30 06/07/2020 5.63 05/26/2017 14.39 05/28/2022 14.30 06/07/2020 5.63 05/26/2017 5,000 7,500 6,000 — 5,000 1,667 — 57,300 85,950 68,760 — 57,300 19,104 — (1) All options vest at the rate of 1/36 per month over a three-year period from date of grant, other than the option for 300,000 shares granted to Molly Hemmeter on May 28, 2015, which vests at the rate of 1/3 on first anniversary of the date of grant and then 1/36 monthly thereafter. (2) The RSUs vest on the third anniversary of the date of grant. (3) Value is based on the closing price of the Company’s Common Stock of $11.46 on May 29, 2016 as reported on the Nasdaq Global Select Market. 29 Option Exercises and Stock Vested The following table shows all stock options exercised and the value realized upon exercise and the number of stock awards vested and the value realized upon vesting by the Named Executive Officers during fiscal year 2016. Option Exercises and Stock Vested For Fiscal 2016 Option Awards Stock Awards Number of shares withheld to cover exercise price and taxes (#) (2) Value Realized on Exercise ($) (1) Number of Shares Acquired on Exercise (#) Number of Shares Acquired on Value Realized on Vesting ($) Number of shares withheld to cover taxes (#) (2) Name Gary T. Steele ..................................... Molly A. Hemmeter ............................ Gregory S. Skinner.............................. Ronald L. Midyett .............................. Larry D. Hiebert ................................. Steven P. Bitler. .................................. 37,500 37,500 22,500 — — — 202,125 147,375 105,750 — — — 20,090 23,329 12,815 — — — Vesting (#) — — — — — — — — — — — — — — — — — — (1) The value realized equals the difference between the option exercise price and the fair market value of Landec Common Stock on the date of exercise, multiplied by the number of shares for which the option was exercised. Indicates shares withheld at the election of the Named Executive Officer to cover the exercise price and/or the taxes owed on the exercise of the option or the vesting of the stock award. (2) Nonqualified Deferred Compensation The following table shows all compensation deferred by the Named Executive Officers, and earnings on such deferred compensation, under the Deferral Plan during fiscal year 2016. Nonqualifed Deferred Compensation Name Gary T. Steele....................................................... Molly A. Hemmeter ............................................. Gregory S. Skinner ............................................... Ronald L. Midyett ............................................... Larry D. Hiebert .................................................. Steven P. Bitler. ................................................... Executive Contributions in Fiscal Year 2016 ($) (1) Registrant Contributions in Fiscal Year 2016 ($) Aggregate Earnings in Fiscal Year 2016 ($) (2) Aggregate Withdrawals in Fiscal Year 2016 ($) Aggregate Balance at End of Fiscal Year 2016 ($) — 40,512 — — — — — — — — — — — 1,098 — — — — — — — 202,440 — — — — — — — — (1) Contributions reported in this column are reported as compensation in the Salary column of the Summary Compensation Table. (2) Amounts reported in this column represent the aggregate earnings accrued and credited to a Named Executive Officer’s account during fiscal year 2016. 30 Employment Contracts and Potential Payments upon Termination or Change in Control Employment Contracts On June 19, 2014, the Company entered into an executive employment agreement with Mr. Steele, (the “Steele Agreement”) effective as of May 26, 2014, setting forth the terms of his employment. The Steele Agreement expired on May 29, 2016 and provided that Mr. Steele shall be paid an annual base salary of $500,000 through the term of the Steele Agreement, and continue to participate in the annual cash incentive award plan. Mr. Steele was also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as determined by the Compensation Committee. Mr. Steele retired as President and Chief Executive Officer in October 2015, and Ms. Hemmeter was elected by the Board of Directors to replace Mr. Steele as President and Chief Executive Officer. Mr. Steele agreed, as part of the Steele Agreement, not to solicit, induce, recruit, encourage or take away employees or consultants of the Company for a period of two years following his termination. In addition, Mr. Steele agreed not to solicit any licensor to or customer of the Company for a period of two years following his termination. On October 15, 2015, the Company entered into an executive employment agreement with Ms. Hemmeter, (the “Hemmeter Agreement”) effective as of October 15, 2015, setting forth the terms of her employment. The Hemmeter Agreement expires on December 31, 2018 unless renewed or extended by both parties, and provides that Ms. Hemmeter shall be paid an annual base salary of $475,000 through the term of the Hemmeter Agreement (unless modified by the Compensation Committee), and continue to participate in the annual cash incentive award plan. Ms. Hemmeter is also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as determined by the Compensation Committee. The Hemmeter Agreement provides that upon Ms. Hemmeter’s death or disability, the Company shall pay Ms. Hemmeter or her estate her unpaid base salary and the pro rata portion of her annual cash incentive award through the date of termination. Ms. Hemmeter agreed, as part of the Hemmeter Agreement, not to solicit, induce, recruit, encourage or take away employees or consultants of the Company for a period of two years following her termination. In addition, Ms. Hemmeter agreed not to solicit any licensor to or customer of the Company for a period of two years following her termination. On October 15, 2015, the Company entered into a new executive employment agreement with Mr. Skinner (the “Skinner Agreement”), effective as of October 15, 2015, setting forth the terms of his employment. The Skinner Agreement expires on December 31, 2018 unless renewed or extended by both parties, and provides that Mr. Skinner shall be paid an annual base salary of $380,000 through the term of the Skinner Agreement (unless modified by the Compensation Committee), and continue to participate in the annual cash incentive award plan. Mr. Skinner is also eligible for grants of equity interests under the Equity Award Plan at such times and in such amounts as determined by the Compensation Committee. The Skinner Agreement provides that upon Mr. Skinner’s death or disability, the Company shall pay Mr. Skinner or his estate his unpaid base salary and the pro rata portion of his annual cash incentive award through the date of termination. Mr. Skinner agreed, as part of the Skinner Agreement, not to solicit, induce, recruit, encourage or take away employees or consultants of the Company for a period of two years following his termination. In addition, Mr. Skinner agreed not to solicit any licensor to or customer of the Company for a period of two years following his termination. Potential Payments upon Termination or Change in Control The Steele Agreement provides that if Mr. Steele retires, the Company will pay or reimburse Mr. Steele for the monthly premiums for Medicare and a Medicare supplemental plan for the remainder of the lives of Mr. Steele and his spouse; provided that this benefit shall cease to be available at such time as Mr. Steele commences receiving substantially equivalent health insurance coverage in connection with new employment. Mr. Steele retired as President and Chief Executive Officer in October 2015, and he received reimbursement by the Company of $11,369 for the monthly premiums for Medicare and a Medicare supplemental plan for Mr. Steele and his spouse. 31 If Ms. Hemmeter is terminated without cause or if she terminates her employment for good reason (generally, any relocation of Ms. Hemmeter’s place of employment, reduction in salary, reduction in her target bonus amount or material reduction of her duties or authority), Ms. Hemmeter will receive a severance payment equal to 100% of her annual base salary over a twelve month period, a pro-rated portion of any annual cash incentive award to which she is entitled and a one- year acceleration of her unvested stock options and other equity awards, and the Company will pay the monthly premiums for health insurance coverage for Ms. Hemmeter (and her spouse and eligible dependents) for the maximum period permitted under COBRA or at such earlier time as Ms. Hemmeter receives substantially equivalent health insurance coverage in connection with new employment. In addition, the Hemmeter Agreement provides that if Ms.Hemmeter is terminated without cause or terminates her employment for good reason within two (2) years following a “change of control,” Ms. Hemmeter will receive a severance payment equal to 150% of her annual base salary over a twelve month period, a pro-rated portion of any annual cash incentive award to which she is entitled and the Company will pay the monthly premiums for health insurance coverage for Ms. Hemmeter (and her spouse and eligible dependents) for the maximum period permitted under COBRA or at such earlier time as Ms. Hemmeter receives substantially equivalent health insurance coverage in connection with new employment. In the event of a “change of control,” all of Ms. Hemmeter’s unvested stock options and other equity awards shall immediately vest and become exercisable. If Mr. Skinner is terminated without cause or if he terminates his employment for good reason (generally, any relocation of Mr. Skinner’s place of employment, reduction in salary, reduction in his target bonus amount or material reduction of his duties or authority), Mr. Skinner will receive a severance payment equal to 100% of his annual base salary over a twelve month period, a pro-rated portion of any annual cash incentive award to which he is entitled and a one-year acceleration of his unvested stock options and other equity awards, and the Company will pay the monthly premiums for health insurance coverage for Mr. Skinner (and his spouse and eligible dependents) for the maximum period permitted under COBRA or at such earlier time as Mr. Skinner receives substantially equivalent health insurance coverage in connection with new employment. In addition, the Skinner Agreement provides that if Mr. Skinner is terminated without cause or terminates his employment for good reason within two (2) years following a “change of control,” Mr. Skinner will receive a severance payment equal to 150% of his annual base salary over a twelve month period and a pro-rated portion of any annual cash incentive award to which he is entitled and the Company will pay the monthly premiums for health insurance coverage for Mr. Skinner (and his spouse and eligible dependents) for the maximum period permitted under COBRA or at such earlier time as Mr. Skinner receives substantially equivalent health insurance coverage in connection with new employment. In the event of a “change of control,” all of Mr. Skinner’s unvested stock options and other equity awards shall immediately vest and become exercisable. If Ms. Hemmeter’s or Mr. Skinner’s employment with the Company had been terminated without cause or for good reason not in connection with a change of control of the Company on May 29, 2016, the last day of Landec’s fiscal year 2016, Ms. Hemmeter and Mr. Skinner would have received the following severance benefits under the Hemmeter Agreement and Skinner Agreement, respectively: Name Base Salary (1) Bonus Payment Accelerated Vesting of Options (2) Accelerated Vesting of RSUs (3) Post- Termination Health Insurance Premiums (4) Total Molly A. Hemmeter ........... $ Gregory S. Skinner ............. $ 475,000 $ 380,000 $ — $ — $ — $ — $ 114,600 $ 114,600 $ 13,986 $ 22,160 $ 603,586 516,760 (1) Reflects potential payments based on salaries as of May 29, 2016. (2) All unvested options for Ms. Hemmeter and Mr. Skinner are out of the money (exercise price above stock price as of May 29, 2016) and therefore there is no value to the acceleration. (3) Accelerating the vesting of the outstanding RSUs by one year would result in 10,000 of the currently outstanding RSUs vesting as of May 29, 2016 for each of Ms. Hemmeter and Mr. Skinner. (4) Represents the maximum amount of premiums that would have been paid under COBRA on behalf of Ms. Hemmeter and Mr. Skinner If Ms. Hemmeter’s or Mr. Skinner’s employment with the Company had been terminated without cause or for good reason in connection with a change of control of the Company on May 29, 2016, the last day of Landec’s fiscal year 2016, Ms. Hemmeter and Mr. Skinner would have received the severance benefits under the Hemmeter Agreement and Skinner Agreement, respectively, set forth above, except that amounts received for base salary would have been $712,500 and $570,00 for Ms. Hemmeter and Mr. Skinner, respectively, and the amounts received for the acceleration of RSUs would have been 32 $1,260,600 and $286,500 for Ms. Hemmeter and Mr. Skinner, respectively. Therefore total compensation would have been $1,987,086 and $878,660 for Ms. Hemmeter and Mr. Skinner, respectively. Policies and Procedures with Respect to Related Party Transactions The Audit Committee, all of whose members are independent directors, reviews and approves in advance all related party transactions (other than compensation transactions). In reviewing related party transactions, the Audit Committee takes into account factors it deems appropriate, such as whether the related party transaction is on terms no less favorable than terms generally available to an unrelated third party under the same or similar conditions and the extent of the related party’s interest in the transaction. To identify related party transactions, each year we require our executive officers and directors to complete a questionnaire identifying any transactions between the Company and the respective executive officer or director and their family members or affiliates. Additionally, under the Company’s Code of Ethics, directors, officers and all other employees and consultants are expected to avoid any relationship, influence or activity that would cause, or even appear to cause, a conflict of interest. Certain Relationships and Related Transactions Apio sells products to and earns license fees from Windset Holdings 2010 Ltd., a Canadian corporation (“Windset”). Apio holds a 26.9% equity interest in Windset. During fiscal year 2016, Apio recognized $666,000 of revenues from Windset. Additionally, unrelated to the revenue transactions above, Apio purchases produce from Windset for sale to third parties. During fiscal year 2016, Apio purchased $32,000 of produce from Windset. 33 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and holders of more than ten percent of the Company’s Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely upon review of the copies of such reports filed with the SEC and written representations that no other reports were required, during the fiscal year ended May 29, 2016 all Section 16(a) filing requirements applicable to the Company’s officers, directors and holders of more than ten percent of the Company’s Common Stock were satisfied, except that a Form 4 filed on behalf of Dr. Sohn and a Form 4 filed on behalf of Ms. Pankopf were each filed four days after the filing deadline. OTHER MATTERS The Board of Directors knows of no other matters to be submitted to the stockholders at the annual meeting. If any other matters properly come before the meeting, then the persons named in the enclosed form of proxy will vote the shares they represent in such manner as the Board of Directors may recommend. It is important that the proxies be returned promptly and that your shares be represented. Stockholders are urged to mark, date, execute and promptly return the accompanying proxy card in the enclosed envelope or vote their shares by telephone or via the Internet. BY ORDER OF THE BOARD OF DIRECTORS /s/ Geoffrey P. Leonard GEOFFREY P. LEONARD SECRETARY Menlo Park, California August 25, 2016 34 The graph below matches Landec Corporation's cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the S&P 500 index and the NASDAQ Industrial index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 5/29/2011 to 5/29/2016. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Landec Corporation, the S&P 500 Index and the NASDAQ Industrial Index $300 $250 $200 $150 $100 $50 $0 5/29/11 5/27/12 5/26/13 5/25/14 5/31/15 5/29/16 Landec Corporation S&P 500 NASDAQ Industrial *$100 invested on 5/29/11 in stock or 5/31/11 in index, including reinvestment of dividends. Indexes calculated on month-end basis. Copyright© 2016 S&P, a division of McGraw Hill Financial. All rights reserved. 5/29/11 5/27/12 5/26/13 5/25/14 5/31/15 5/29/16 Landec Corporation S&P 500 NASDAQ Industrial 100.00 100.00 100.00 121.27 99.59 99.25 238.08 126.75 132.19 206.00 152.67 158.95 245.11 170.69 181.45 196.57 173.62 187.68 The stock price performance included in this graph is not necessarily indicative of future stock price performance. Landec Corporation 2016 Annual Report Landec Corporation 2016 Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended May 29, 2016, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period for _________ to _________. Commission file number: 0-27446 LANDEC CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 94-3025618 (IRS Employer Identification Number) 3603 Haven Avenue Menlo Park, California 94025 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 306-1650 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock Name of each exchange on which registered The NASDAQ Global Select Stock Market Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ___ No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ___ Non Accelerated Filer ___ Accelerated Filer X Smaller Reporting Company ___ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ___ No X The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $332,039,000 as of November 29, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price on The NASDAQ Global Select Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded from such calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of July 18, 2016, there were 27,226,429 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement relating to its October 2016 Annual Meeting of Stockholders which statement will be filed not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference in Part III hereof. Landec Corporation 2016 Annual Report LANDEC CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Item No. Description Page Part I 1. Business ......................................................................................................................................................... 1 1A. Risk Factors ................................................................................................................................................... 10 1B. Unresolved Staff Comments .......................................................................................................................... 18 2. 3. 4. Part II 5. 6. 7. Properties ....................................................................................................................................................... 19 Legal Proceedings ......................................................................................................................................... 19 Mine Safety Disclosures ................................................................................................................................ 19 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ....................................................................................................................................................... 20 Selected Financial Data ................................................................................................................................. 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................ 21 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................................... 39 8. 9. Financial Statements and Supplementary Data ............................................................................................. 39 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 39 9A. Controls and Procedures ................................................................................................................................ 39 9B. Other Information .......................................................................................................................................... 41 Part III 10. Directors, Executive Officers and Corporate Governance ............................................................................ 42 11. Executive Compensation ............................................................................................................................... 42 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 42 13. Certain Relationships and Related Transactions, and Director Independence .............................................. 42 14. Principal Accountant Fees and Services ........................................................................................................ 42 Part IV 15. Exhibits and Financial Statement Schedules ................................................................................................. 43 -i- Landec Corporation 2016 Annual Report Item 1. Business PART I This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Words such as “projected,” “expects,” “believes,” “intends,” “assumes” and similar expressions are used to identify forward-looking statements. These statements are made based upon current expectations and projections about our business and assumptions made by our management and are not guarantees of future performance, nor do we assume any obligation to update such forward-looking statements after the date this report is filed. Our actual results could differ materially from those projected in the forward-looking statements for many reasons, including the risk factors listed in Item 1A. “Risk Factors” and the factors discussed below. Corporate Overview Landec Corporation and its subsidiaries (“Landec” or the “Company”) design, develop, manufacture and sell differentiated health and wellness products for food and biomaterials markets. There continues to be a dramatic shift in consumer behavior to healthier eating habits and preventive wellness to improve quality of life. In our Apio, Inc. (“Apio”) Packaged Fresh Vegetable business, we are committed to offering healthy, fresh produce products conveniently packaged to consumers. Apio also exports whole fruit and vegetables, predominantly to Asia through its subsidiary, Cal-Ex Trading Company (“Cal-Ex”). In our Lifecore Biomedical, Inc. (“Lifecore”) biomaterials business, we commercialize products that enable people to stay more active as they grow older. Landec’s Packaged Fresh Vegetables and Biomaterials businesses utilize polymer chemistry technology, a key differentiating factor. Both businesses focus on business-to-business selling such as selling directly to retail grocery store chains and club stores for Apio and directly to partners in the medical device and pharmaceutical markets, with a concentration in ophthalmology for Lifecore. Within our two core businesses, Landec has three operating segments – Packaged Fresh Vegetables, Food Export and Biomaterials, each of which is described below. Financial information concerning each of these segments for fiscal years 2016, 2015 and 2014 is summarized in Note 10 to the Consolidated Financial Statements. Apio operates the Packaged Fresh Vegetables business, which combines our proprietary BreatheWay® food packaging technology with the capabilities of a large national food supplier and value-added produce processor which sells products under the Eat Smart® brand to consumers and the GreenLine® brand to foodservice operators, as well as under private labels. In Apio’s Packaged Fresh Vegetables operations, produce is processed by trimming, washing, sorting, blending, and packaging into bags and trays that in most cases incorporate Landec’s BreatheWay membrane technology. The BreatheWay membrane increases shelf-life and reduces shrink (waste) for retailers and helps to ensure that consumers receive fresh produce by the time the product makes its way through the supply chain. Apio also generates revenue from the sale and/or use of its BreatheWay technology by partners such as Chiquita Brands International, Inc. (“Chiquita”) for packaging and distribution of bananas and berries and Windset Holding 2010 Ltd., a Canadian corporation (“Windset”), for packaging of greenhouse grown cucumbers and peppers, and to Juicero, Inc. (“Juicero”) innovator of the first in-home cold-press fruit and vegetable juicing system. Juicero is using BreatheWay membranes to extend the shelf-life of packets of fresh fruit and vegetables. Apio also operates the Food Export business. The Food Export business purchases and sells whole fruit and vegetable commodities predominantly to Asian markets. Lifecore operates our Biomaterials business and is principally involved in the development and manufacture of pharmaceutical-grade sodium hyaluronate (“HA”) products and aseptic contract manufacturing. Sodium hyaluronate is a naturally occurring polysaccharide that is widely distributed in the extracellular matrix in animals and humans. Based upon Lifecore’s expertise working with highly viscous HA, the Company specializes in fermentation and aseptic filling services, as a contract development and manufacturing organization (CDMO), for difficult to handle (viscous) medicines filled in finished dose syringes. Landec was incorporated in California on October 31, 1986 and reincorporated as a Delaware corporation on November 6, 2008. Our common stock is listed on The NASDAQ Global Select Market under the symbol “LNDC”. -1- Technology Overview The Company has two proprietary polymer technology platforms: 1) Intelimer® materials, which are the key technology behind our BreatheWay membrane technology, and 2) hyaluronan biopolymers. The Company’s materials are generally proprietary as a result of being patented or due to being specially formulated for specific customers to meet specific commercial applications and/or specific regulatory requirements. The Company’s polymer technologies, customer relationships, trade names and strong channels of distribution are the foundation and key differentiating advantages on which Landec has built its business. A) Intelimer Polymers Intelimer polymers are crystalline, hydrophobic polymers that use a temperature switch to control and modulate properties such as viscosity, permeability and adhesion when varying the materials’ temperature above and below the temperature switch. The sharp temperature switch is adjustable at relatively low temperatures (0°C to 100°C) and the changes resulting from the temperature switch are relatively easy to maintain in industrial and commercial environments. For instance, Intelimer polymers can change within the range of one or two degrees Celsius from a non-adhesive state to a highly tacky, adhesive state; from an impermeable state to a highly permeable state; or from a solid state to a viscous liquid state. Landec's proprietary polymer technology is based on the structure and phase behavior of Intelimer materials. The abrupt thermal transitions of specific Intelimer materials are achieved through the controlled use of hydrocarbon side chains that are attached to a polymer backbone. Below a pre-determined switch temperature, the polymer's side chains align through weak hydrophobic interactions resulting in a crystalline structure. When this side chain crystallizable polymer is heated to, or above, this switch temperature, these interactions are disrupted and the polymer is transformed into an amorphous, viscous state. Because this transformation involves a physical and not a chemical change, this process can be repeatedly reversible. Landec can set the polymer switch temperature anywhere between 0°C to 100°C by varying the average length of the side chains. Landec's Intelimer materials are readily available and are generally synthesized from long side-chain acrylic monomers that are derived primarily from natural materials such as coconut and palm oils that are highly purified and designed to be manufactured economically through known synthetic processes. These acrylic-monomer raw materials are then polymerized by Landec leading to many different side-chain crystallizable polymers whose properties vary depending upon the initial materials and the synthetic process. Intelimer materials can be made into many different forms, including films, coatings, microcapsules and discrete forms. Intelimer polymers are the coatings on the substrate used to form our BreatheWay membranes. BreatheWay Membrane Packaging Certain types of fresh-cut and whole produce can spoil or discolor rapidly when packaged in conventional packaging materials and, therefore, are limited in their ability to be distributed broadly to markets. The Company’s proprietary BreatheWay packaging technology utilizes Landec’s Intelimer polymer technology to naturally extend the shelf-life and quality of fresh-cut and whole produce. After harvesting, vegetables and fruit continue to respire, consuming oxygen and releasing carbon dioxide. Too much or too little oxygen can result in premature spoilage and decay. The respiration rate of produce varies for each fruit and vegetable. Conventional packaging films used today, such as polyethylene and polypropylene, can be made with modest permeability to oxygen and carbon dioxide, but often do not provide the optimal atmosphere for the packaged produce. To achieve optimal product performance, each fruit or vegetable requires its own unique package atmosphere conditions. The challenge facing the industry is to develop packaging that meets the highly variable needs that each product requires in order to achieve value-creating performance. The Company believes that its BreatheWay packaging technology possesses all of the critical functionalities required to serve this diverse market. In creating a product package, a BreatheWay membrane is applied over a small cutout section or an aperture of a flexible film bag or plastic tray. This highly permeable “window” acts as the mechanism to provide the majority of the gas transmission requirements for the entire package. These membranes are designed to provide three principal benefits: -2- High Permeability. Landec's BreatheWay packaging technology is designed to permit transmission of oxygen and carbon dioxide at 300 to 1,000 times the rate of conventional packaging films. The Company believes that these higher permeability levels will facilitate the packaging diversity required to market many types of fresh-cut and whole produce in many package sizes and configurations. Ability to Adjust Oxygen and Carbon Dioxide Ratios. BreatheWay packaging can be tailored with carbon dioxide to oxygen transfer ratios ranging from 1.0 to 12.0 to selectively transmit oxygen and carbon dioxide at optimum rates to sustain the quality and shelf-life of packaged produce. Other high permeability packaging materials, such as micro-perforated films cannot differentially control carbon dioxide permeability, resulting in sub-optimal package atmosphere conditions for many produce products. Temperature Responsiveness. Landec has developed breathable membranes that can be designed to increase or decrease permeability in response to environmental temperature changes. The Company has developed packaging that responds to higher oxygen requirements at elevated temperatures, but is also reversible, and returns to its original state as temperatures decline. As the respiration rate of fresh produce also increases with temperature, the BreatheWay membrane’s temperature responsiveness allows packages to compensate for the change in produce respiration by automatically adjusting gas permeation rates. By doing so, detrimental package atmosphere conditions are avoided and improved quality is maintained through the distribution chain. B) Sodium Hyaluronate (HA) Sodium hyaluronate is a non-crystalline, hydrophilic polymer that exists naturally as part of the extracellular matrix in many tissues within the human body, most notably within the aqueous humor of the eye, synovial fluid, skin and umbilical cord. The viscoelastic properties and water solubility of HA make it ideal for medical applications where space maintenance, lubricity or tissue protection are critical. Because of its widespread presence in tissues, its critical role in normal physiology, and its high degree of biocompatibility, the Company believes that hyaluronan will continue to be used in existing applications and for an increasing variety of other medical applications. Sodium hyaluronate can primarily be produced in two ways, either through bacterial fermentation or through extraction from rooster combs. Lifecore produces HA only from fermentation, using an extremely efficient microbial fermentation process and a highly effective purification operation. Sodium hyaluronate was first demonstrated to have commercial medical utility as a viscoelastic solution in cataract surgery. In this application, it is used for maintaining the space in the anterior chamber and protecting corneal tissue during the removal and implantation of intraocular lenses. The first ophthalmic HA product, produced by extraction from rooster comb tissue, became commercially available in the United States in 1981. In 1985, Lifecore introduced the bacterial fermentation process to manufacture premium HA and received patent protection until 2002. HA-based products, produced either by rooster comb extraction or by fermentation processes such as Lifecore’s, have since gained widespread acceptance in ophthalmology and are currently used in the majority of cataract extraction procedures in the world. HA has also become a significant component in several products used in orthopedics. Lifecore’s HA is used as a viscous carrier for allogeneic freeze-dried demineralized bone used in spinal surgery, and as the active component of devices to treat the symptoms of osteoarthritis, and as a component to provide increased lubricity to medical devices. Lifecore’s HA has also been utilized in veterinary drug applications to treat traumatic arthritis. Description of Business Segments In this Description of Business Segments section, “Apio” and the “Packaged Fresh Vegetables business” will be used interchangeably; however, when describing Apio’s export business it will be referred to as the “Food Export business”. -3- A) Packaged Fresh Vegetables Business The Packaged Fresh Vegetables business had revenues of $424 million for the fiscal year ended May 29, 2016, $430 million for the fiscal year ended May 31, 2015 and $361 million for the fiscal year ended May 25, 2014. Based in Guadalupe, California, Apio’s primary business is fresh-cut and whole vegetable products typically packaged in our proprietary BreatheWay packaging. Apio’s Packaged Fresh Vegetables business markets a variety of fresh- cut and whole vegetables and salad kit products to retail grocery chains, club stores and food service operators. During the fiscal year ended May 29, 2016, Apio shipped approximately 30 million cartons of produce to its customers throughout North America, primarily in the United States. Most vegetable products packaged in our BreatheWay packaging have approximately a 17 day shelf-life. In addition to packaging innovation, Apio has developed innovative blends and combinations of vegetables that are sold in flexible film bags or rigid trays. More recently, Apio has launched a family of salad kits that are comprised of “superfood” mixtures of vegetables with healthy toppings and dressings. The first salad kit to launch under our Eat Smart® brand was Sweet Kale Salad, which now has wide distribution throughout club and retail stores in North America. Additionally, we have launched under our Eat Smart brand several other superfood salad kits including Ginger Bok Choy, Wild Greens and Quinoa, Beets and Greens, Southwest Salad and Asian Sesame. The Company’s expertise includes accessing leading culinary experts and nutritionists nationally to help in the new product development process. We believe that our new products are “on trend” and strong market acceptance supports this belief. Recent statistics show that more than two-thirds of adults are considered to be overweight or obese and more than one-third of adults are considered to be obese. More and more consumers are beginning to make better food choices in their schools, homes and in restaurants and that is where our superfood products can fit into consumers’ daily healthy food choices. In addition to proprietary packaging technology and a strong new product development pipeline, the Company has strong channels of distribution throughout North America with retail grocery store chains and club stores. Landec has one or more of its products in approximately 60% of all retail and club store sites in North America giving us a strong platform for introducing new products. The Company sells its products under its nationally-known brand Eat Smart to retail and club and its GreenLine® brand to foodservice operators. The Company also periodically licenses its BreatheWay packaging technology to partners such as Chiquita for packaging bananas and berries and Windset for packaging peppers and cucumbers that are grown hydroponically in greenhouses. The Company also licenses its BreatheWay technology to Juicero to extend the shelf-life of packets of fresh produce for use in a countertop juicing system. These packaging license relationships generate revenues either from product sales or royalties once commercialized. The Company is engaged in the testing and development of other BreatheWay products. Landec manufactures its BreatheWay packaging through selected qualified contract manufacturers. Apio Business Model -4- Apio delivers its products to leading club stores, retail grocery chains and food service operators throughout North America. The Company believes it will have growth opportunities for the next several years through new customers, the introduction of innovative products and expansion of its existing customer relationships. There are four major distinguishing characteristics of Apio that provide competitive advantages in the Packaged Fresh Vegetables market: Packaged Vegetables Supplier: Apio has structured its business as a marketer and seller of branded and private label blended, fresh-cut and whole vegetable products. It is focused on selling products primarily under its Eat Smart brand, with some sales under its GreenLine brand and private label brands. As retail grocery chains, club stores and food service operators consolidate, Apio is well positioned as a single source of a broad range of products. Nationwide Processing and Distribution: Apio has strategically invested in its Packaged Fresh Vegetables business. Apio’s largest processing plant is in Guadalupe, CA, and is automated with state-of-the-art vegetable processing equipment in one of the lowest cost, growing regions in California, the Santa Maria Valley. With the acquisition of GreenLine in 2012, Apio added three East Coast processing facilities and five East Coast distribution centers for nationwide delivery of all of its packaged vegetable products in order to meet the next-day delivery needs of customers. Expanded Product Line Using Technology and Unique Blends: Apio, through the use of its BreatheWay packaging technology, is introducing new packaged vegetable products each year. These new product offerings range from various sizes of fresh-cut bagged products, to vegetable trays, to whole produce, to vegetable salads and to snack packs. During the last twelve months, Apio has introduced nine new unique products. Products Currently in Approximately 60% of U.S. Retail Grocery Stores: Apio has products in approximately 60% of all North American retail grocery stores. This gives Apio the opportunity to sell new products to existing customers and to increase distribution of its approximately 120 unique products within those customers. Windset The Company believes that hydroponically-grown produce using Windset’s (see Note 2 to the Consolidated Financial Statements for a description of the Company’s investment in Windset) know-how and growing practices will result in higher yields with competitive growing costs that will provide dependable year-round supply to Windset’s customers. In addition, the produce grown in Windset’s greenhouses uses significantly less water than field grown crops and has a very high safety profile as no soil is used in the growing process. Windset owns and operates greenhouses in British Columbia, Canada and in Nevada and California. In addition to growing produce in its own greenhouses, Windset has numerous marketing arrangements with other greenhouse growers and utilizes buy/sell arrangements to meet fluctuation in demand from their customers. B) Food Export Business Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity fruit and vegetable products to Asia through Apio’s export business, Cal-Ex. The Food Export business is a commission-based buy/sell business that typically realizes a gross margin in the 5-10% range. The Food Export business had revenues of $64 million for the fiscal year ended May 29, 2016, $68 million for the fiscal year ended May 31, 2015 and $70 million for the fiscal year ended May 25, 2014. Apio is strategically positioned with Cal-Ex to benefit from the growing population and wealth in Asia and other parts of the world over the next decade. Through Cal-Ex, Apio is currently one of the largest U.S. exporters of broccoli to Asia. Other large export items include apples, grapes, stonefruit and citrus. -5- C) Biomaterials Business Our Biomaterials business operates through our Lifecore subsidiary. Lifecore had revenues of $50 million for the fiscal year ended May 29, 2016, $40 million for the fiscal year ended May 31, 2015 and $46 million for the fiscal year ended May 24, 2014. Lifecore is principally involved in the manufacture of pharmaceutical-grade sodium hyaluronate in the form of injectable products for ophthalmologic and orthopedic applications. There is now a greater percentage of Americans age 65 and older than at any other time in U.S. history and currently over 46 million Americans are 65 years of age or older and this trend is expected to accelerate dramatically in the upcoming years. As our population ages, eye surgeries, such as cataract surgeries, will increase, and other patients will increasingly seek joint therapy as cartilage and soft tissue deteriorates. HA injections are a primary course of treatment for such conditions and Lifecore has built a leadership position in the markets it serves. The World Health Organization estimates that by 2020, 32 million cataract operations will be performed worldwide, up from 12 million in 2000. Lifecore’s expertise includes its ability to ferment, separate, purify, and aseptically fill HA for injectable product use. In addition to ophthalmic and orthopedic uses, veterinary medicine is another application for Lifecore’s HA. Lifecore leverages its fermentation process to manufacture premium, pharmaceutical-grade HA and uses its aseptic filling capabilities to also deliver private-labeled HA finished products to its customers. Lifecore sells its products through partners in the U.S., Europe and South America. Lifecore has built its reputation as a premium supplier of HA and more recently as a specialty contract development and manufacturing organization (“CDMO”). Lifecore’s products are primarily sold to strategic marketing partners for use in three medical areas: (1) Ophthalmic, (2) Orthopedic and (3) Other/Non-HA products. In addition, Lifecore provides product development services to its partners for HA-based, as well as non-HA based, aseptically formulated products. These services include activities such as technology transfer, material component changes, analytical method development, pilot studies, stability studies, process validation, and clinical production of materials for clinical studies. By leveraging its fermentation process and aseptic formulation and filling expertise, Lifecore has become a leader in the supply of HA-based products for multiple applications, and has taken advantage of non-HA device and drug opportunities by leveraging its expertise in manufacturing and aseptic syringe filling capabilities. Elements of Lifecore’s strategy include the following: • Establish strategic relationships with market leaders. Lifecore will continue to develop applications for products with partners who have strong marketing, sales and distribution capabilities to end-user markets. Through its strong reputation and history of providing pharmaceutical grade HA products, Lifecore has been able to establish long-term relationships with the market leading ophthalmic surgical companies, and leverages those partnerships to attract new relationships in other medical markets. • Expand medical applications for HA. Due to the growing knowledge of the unique characteristics of HA, and the role it plays in normal physiology, Lifecore continues to identify and pursue opportunities for the use of HA in other medical applications, such as wound care, aesthetic surgery, drug delivery, device coatings and through pharmaceutical sales to academic and corporate research customers. Further applications may involve expanding process development activity and/or additional licensing of technology. • Utilize manufacturing infrastructure to pursue contract aseptic filling and fermentation opportunities. Lifecore has made strategic capital investments in its contract manufacturing and development business focusing on extending its aseptic filling capacity and capabilities. It is investing in this segment to meet increasing partner demand and attract new contract filling opportunities outside of HA markets. Lifecore is using its manufacturing capabilities to provide contract manufacturing and development services to its partners in the area of sterile pre-filled syringes, as well as, fermentation and purification requirements. • Maintain flexibility in product development and supply relationships. Lifecore’s vertically integrated development and manufacturing capabilities allow it to establish a variety of contractual relationships with global corporate partners. Lifecore’s role in these relationships extends from supplying HA raw materials to providing technology transfer and development services to manufacturing aseptically-packaged, finished sterile products and to assuming full supply chain responsibilities. -6- Trademarks/Trade names Intelimer®, Landec®, Apio™, Eat Smart®, BreatheWay®, GreenLine®, Clearly Fresh™, Lifecore®, LUROCOAT® and Ortholure™ are some of the trademarks or registered trademarks and trade names of the Company in the United States and other countries. This Annual Report on Form 10-K also refers to the trademarks of other companies. Sales and Marketing Apio is supported by dedicated sales and marketing resources. Apio has 41 sales and marketing employees, located in central California and throughout the U.S., supporting the Packaged Fresh Vegetables business and the Food Export businesses. During fiscal years 2016, 2015 and 2014, sales to the Company’s top five customers accounted for approximately 45%, 46% and 42%, respectively, of its revenues. The Company’s top two customers, both from the Packaged Fresh Vegetables segment, were Costco Wholesale Corporation (“Costco”) which accounted for approximately 20%, 21%, and 21%, respectively, and Wal-mart, Inc. (“Wal-mart”) which accounted for approximately 12%, 11%, and 11%, respectively, of the Company’s revenues. A loss of either of these customers would have a material adverse effect on the Company’s business. Lifecore sells products to partners under supply agreements and also through distribution agreements. Excluding research sales, Lifecore does not sell to end users and, therefore, does not have the traditional infrastructure of a dedicated sales force and marketing employees. It is Lifecore’s name recognition that allows it to attract new customers and offer its services with a minimal marketing and sales infrastructure. Seasonality Apio’s sales are seasonal. The Packaged Fresh Vegetables business can be affected by seasonal weather factors, such as the high cost of sourcing product due to a shortage of essential produce items, which had a severe impact on the Company’s results during fiscal year 2016. The Food Export business also typically recognizes a much higher percentage of its revenues and profit during the first half of Landec’s fiscal year compared to the second half. The Biomaterial’s business is not significantly affected by seasonality. Manufacturing and Processing Packaged Fresh Vegetables Business The manufacturing process for the Company's proprietary BreatheWay packaging products is comprised of polymer manufacturing, membrane manufacturing and label package conversion. A third-party toll manufacturer currently makes virtually all of the polymers for the BreatheWay packaging system. Select outside contractors currently manufacture the breathable membranes, and Apio performs the label package conversion in its various processing facilities. Apio processes a large majority of its packaged fresh vegetable products in its processing facility located in Guadalupe, California. Cooling of produce is done through third parties and Apio Cooling, LP, a separate consolidated subsidiary in which Apio has a 60% ownership interest and is the general partner. Apio processes its fresh-cut, packaged green bean products in four processing plants located in Guadalupe, California; Bowling Green, Ohio; Hanover, Pennsylvania; and Vero Beach, Florida. Biomaterials Business The commercial production of HA by Lifecore requires fermentation, separation and purification and aseptic processing capabilities. Products are supplied in a variety of bulk and single dose configurations. -7- Lifecore produces its HA through a bacterial fermentation process. Medical grade HA was initially commercially available only through an extraction process from rooster combs. Lifecore believes that the fermentation manufacturing approach is superior to rooster comb extraction because of negativity surrounding animal-sourced materials, greater efficiency and flexibility, a more favorable long-term regulatory environment, and better economies of scale in producing large commercial quantities. Today’s HA competitors are primarily utilizing a fermentation process. Lifecore’s facilities in Chaska, Minnesota are used primarily for the HA manufacturing process, formulation, aseptic syringe and bulk filling, secondary packaging, and warehousing raw materials and finished goods. The Company considers that the current inventory on-hand, together with its manufacturing capacity, will be sufficient to allow it to meet the needs of its current customers for the foreseeable future. Lifecore provides versatility in the manufacturing of various types of finished products. It supplies several different forms of HA in a variety of molecular weight fractions as powders, solutions and gels, and in a variety of bulk and single- use finished packages. Lifecore continues to conduct development work designed to improve production efficiencies and expand its capabilities to achieve a wider range of HA product specifications in order to address the broadening opportunities for using HA in medical applications. The FDA inspects the Company’s manufacturing systems periodically and requires compliance with the FDA’s Quality System Regulation (“QSR”) and its current Good Manufacturing Practices (“GMP”) regulations, as applicable. In addition, Lifecore’s customers conduct intensive quality audits of the facility and its operations. Lifecore also periodically contracts with independent regulatory consultants to conduct audits of its operations. Similar to other manufacturers subject to regulatory and customer specific requirements, Lifecore’s facility was designed to meet applicable regulatory requirements and has been cleared for the manufacturing of both device and pharmaceutical products. The Company maintains a Quality System which complies with applicable standards and regulations: FDA Medical Device Quality System requirements (21 CFR 820); FDA Drug Good Manufacturing Practices (21 CFR 210-211); European Union Good Manufacturing Practices (EudraLex Volume 4); Medical Device Quality Management System (ISO 13485); European Medical Device Directive; Canadian Medical Device Regulations; International Guide for Active Pharmaceutical Ingredients (ICH Q7), and Australian Therapeutic Goods Regulations). Compliance with these international standards of quality greatly assists in the marketing of Lifecore’s products globally. General Several of the raw materials used in manufacturing certain of the Company’s products are currently purchased from a single source. Although to date the Company has not experienced difficulty acquiring materials for the manufacture of its products, no assurance can be given that interruptions in supplies will not occur in the future, that the Company will be able to obtain substitute vendors, or that the Company will be able to procure comparable materials at similar prices and terms within a reasonable time. Any such interruption of supply could have a material adverse effect on the Company’s ability to manufacture and distribute its products and, consequently, could materially and adversely affect the Company’s business, operating results and financial condition. Research and Development Landec is focusing its research and development resources on both existing and new product applications. Expenditures for research and development for the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014 were $7.2 million, $7.0 million and $7.2 million, respectively. Research and development expenditures funded by corporate or governmental partners were zero during fiscal years 2016, 2015 and 2014. The Company may seek funds for applied materials research programs from U.S. government agencies as well as from commercial entities. The Company anticipates that it will continue to incur significant research and development expenditures in order to maintain its competitive position with a continuing flow of innovative, high-quality products and services. As of May 29, 2016, Landec had 67 employees engaged in research and development with experience in polymer and analytical chemistry, product application, product formulation, and mechanical and chemical engineering. -8- Competition The Company operates in highly competitive and rapidly evolving segments, and new developments are expected to continue at a rapid pace. Competition from large food processors, packaging companies, and medical and pharmaceutical companies is intense. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company, and many have substantially greater experience in conducting field trials, obtaining regulatory approvals and manufacturing and marketing commercial products. There can be no assurance that these competitors will not succeed in developing alternative technologies and products that are more effective, easier to use or less expensive than those which have been or are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive. Patents and Proprietary Rights The Company's success depends in large part on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. The Company has had 50 U.S. patents issued of which 33 remain active as of May 29, 2016 with expiration dates ranging from 2016 to 2031. There can be no assurance that any of the pending patent applications will be approved, that the Company will develop additional proprietary products that are patentable, that any patents issued to the Company will provide the Company with competitive advantages, will not be challenged by any third parties or that the patents of others will not prevent the commercialization of products incorporating the Company's technology. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of the Company's products or design around the Company's patents. Any of the foregoing results could have a material adverse effect on the Company's business, operating results and financial condition. The commercial success of the Company will also depend, in part, on its ability to avoid infringing patents issued to others. If the Company were determined to be infringing any third-party patent, the Company could be required to pay damages, alter its products or processes, obtain licenses or cease certain activities. In addition, if patents are issued to others which contain claims that compete or conflict with those of the Company and such competing or conflicting claims are ultimately determined to be valid, the Company may be required to pay damages, to obtain licenses to these patents, to develop or obtain alternative technology or to cease using such technology. If the Company is required to obtain any licenses, there can be no assurance that the Company will be able to do so on commercially favorable terms, if at all. The Company's failure to obtain a license to any technology that it may require to commercialize its products could have a material adverse impact on the Company's business, operating results and financial condition. Government Regulation Government regulation in the United States and other countries is a significant factor in the marketing of certain of the Company’s products in the Company’s ongoing research and development activities and contract manufacturing activities. Under the Federal Food, Drug, and Cosmetic Act (“FDC Act”) the FDA regulates the clinical trials, manufacturing, labeling, distribution, sale and promotion of medical devices and drug products in the United States. Some of the Company’s and customers’ products are subject to extensive and rigorous regulation by the FDA, which regulates some of the products as medical devices and drug products, which in some cases, requires Pre-Market Approval (“PMA”), or New Drug Applications (“NDA”) and by foreign countries, which regulate some of the products as medical devices or drug products. Other regulatory requirements are placed on the manufacture, processing, packaging, labeling, distribution, recordkeeping and reporting of a medical device or drug products and on the quality control procedures. For example, medical device manufacturing facilities are subject to periodic inspections by the FDA to assure compliance with device QSR requirements, along with pre-approval inspection (PAI) for PMA and NDA product introduction. Lifecore’s facility is subject to inspections as both a device and a drug manufacturing operation. For PMA devices and NDA drug products, the company that owns the product submission is required to submit an annual report and also to obtain approval for modifications to the device, drug product or its labeling. Other applicable FDA requirements include the medical device reporting (“MDR”) regulation, which requires certain companies to provide information to the FDA regarding deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. -9- The Company’s food products and operations are also subject to regulation by various federal, state, and local agencies. Food products are regulated by the FDA under the FDC Act and the rules and regulations promulgated thereunder. The FDA has the authority to inspect the Company’s food facilities, and regulates, among other things, food manufacturing (pursuant to food-related current good manufacturing practices, or cGMPs), food packing and holding, food safety, the growing and harvesting of produce intended for human consumption, food labeling, and food packaging. The FDA is in the process of implementing the FDA Food Safety Modernization Act and has recently published a number of final rules related to, among other things, hazard analysis and preventive controls, produce safety, foreign supplier verification programs, sanitary transportation of food, and food defense. The compliance dates for these rules vary and start as early as September, 2016. The FDA also requires companies to report to the FDA via the Reportable Food Registry when there is a reasonable probability that the use of, or exposure to, an article of food will cause serious adverse health consequences or death to humans or animals. In addition, the Federal Trade Commission (“FTC”) and other state authorities regulate how the Company may promote and advertise its food products. Employees As of May 29, 2016, Landec had 552 full-time employees, of whom 434 were dedicated to research, development, manufacturing, quality control and regulatory affairs, and 118 were dedicated to sales, marketing and administrative activities. Landec intends to recruit additional personnel in connection with the development, manufacturing and marketing of its products. None of Landec's employees are represented by a union, and Landec considers its relationship with its employees to be good. Available Information Landec’s website is http://www.landec.com. Landec makes available free of charge its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on our website is not part of this Report. Item 1A. Risk Factors Landec desires to take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, Landec wishes to alert readers that the following important factors could in the future affect, and in the past have affected, Landec’s actual results and could cause Landec’s results for future periods to differ materially from those expressed in any forward-looking statements made by, or on behalf, of Landec. Landec assumes no obligation to update such forward-looking statements. Adverse Weather Conditions and Other Acts of God May Cause Substantial Decreases in Our Sales and/or Increases in Our Costs Our Packaged Fresh Vegetables business is subject to weather conditions that affect commodity prices, crop quality and yields, and crop varieties to be planted. Crop diseases and severe conditions, particularly weather conditions such as unexpected or excessive rain or other precipitation, unseasonable temperature fluctuations, floods, droughts, frosts, windstorms, earthquakes and hurricanes, may adversely affect the supply of vegetables and fruits used in our business, which could reduce the sales volumes and/or increase the unit production costs. The Company experienced significant product sourcing issues in fiscal year 2016 as a result of severe adverse weather conditions that materially adversely affected the Company’s financial results. Because a significant portion of the costs are fixed and contracted in advance of each operating year, volume declines reflecting production interruptions or other factors could result in increases in unit production costs which could result in substantial losses and weaken our financial condition. -10- We Depend on Our Infrastructure to Have Sufficient Capacity to Handle Our On-Going Production Needs We have an infrastructure that has sufficient capacity for our on-going production needs, but if we lose machinery or facilities due to natural disasters or mechanical failure, we may not be able to operate at a sufficient capacity to meet our production needs. This could have a material adverse effect on our business, which could impact our results of operations and our financial condition. Our Future Operating Results Are Likely to Fluctuate Which May Cause Our Stock Price to Decline In the past, our results of operations have fluctuated significantly from quarter to quarter and are expected to continue to fluctuate in the future. Apio can be affected by seasonal and weather-related factors which have impacted our financial results in the past due to shortages of essential value-added produce items. In addition, the fair market value change in our Windset investment can fluctuate substantially quarter to quarter. Lifecore can be affected by the timing of orders from its relatively small customer base and the timing of the shipment of those orders. Our earnings may also fluctuate based on our ability to collect accounts receivable from customers and notes receivable from growers and on price fluctuations in the fresh vegetable and fruit markets. Other factors that affect our operations include: our ability and our growers’ ability to obtain an adequate supply of labor, our growers’ ability to obtain an adequate supply of water, the seasonality and availability and quantity of our supplies, our ability to process produce during critical harvest periods, the timing and effects of ripening, the degree of perishability, the effectiveness of worldwide distribution systems, total worldwide industry volumes, the seasonality and timing of consumer demand, foreign currency fluctuations, and foreign importation restrictions and foreign political risks. As a result of these and other factors, we expect to continue to experience fluctuations in quarterly operating results. We May Not Be Able to Achieve Acceptance of Our New Products in the Marketplace Our success in generating significant sales of our products depends in part on our ability and that of our partners and licensees to achieve market acceptance of our new products and technology. The extent to which, and rate at which, we achieve market acceptance, including customer preferences and trends, and penetration of our current and future products is a function of many variables including, but not limited to: price, safety, efficacy, reliability, conversion costs, regulatory approvals, -11- marketing and sales efforts, and general economic conditions affecting purchasing patterns. We may not be able to develop and introduce new products and technologies in a timely manner or new products and technologies may not gain market acceptance. We or our partners/customers are in the early stage of product commercialization of certain Intelimer-based specialty packaging, HA-based products and other Intelimer polymer products. We expect that our future growth will depend in large part on our or our partners’/customers’ ability to develop and market new products in our target markets and in new markets. In particular, we expect that our ability to compete effectively with existing food products companies will depend substantially on developing, commercializing, achieving market acceptance of and reducing the cost of producing our products. In addition, commercial applications of our temperature switch polymer technology are relatively new and evolving. Our failure to develop new products or the failure of our new products to achieve market acceptance would have a material adverse effect on our business, results of operations and financial condition. We Are Subject to Increasing Competition in the Marketplace Competitors may succeed in developing alternative technologies and products that are more effective, easier to use or less expensive than those which have been or are being developed by us or that would render our technology and products obsolete and non-competitive. We operate in highly competitive and rapidly evolving fields, and new developments are expected to continue at a rapid pace. Competition from large food products, industrial, medical and pharmaceutical companies is expected to be intense. In addition, the nature of our collaborative arrangements may result in our corporate partners and licensees becoming our competitors. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than we do, and may have substantially greater experience in conducting clinical and field trials, obtaining regulatory approvals and manufacturing and marketing commercial products. We Have a Concentration of Manufacturing for Apio and Lifecore and May Have to Depend on Third Parties to Manufacture Our Products Any disruptions in our primary manufacturing operations at Apio’s facilities in Guadalupe, CA, Bowling Green, OH or Hanover, PA or Lifecore’s facilities in Chaska, MN would reduce our ability to sell our products and would have a material adverse effect on our financial results. Additionally, we may need to consider seeking collaborative arrangements with other companies to manufacture our products. If we become dependent upon third parties for the manufacture of our products, our profit margins and our ability to develop and deliver those products on a timely basis may be adversely affected. In that event, additional regulatory inspections or approvals may be required, and additional quality control measures would need to be implemented. Failures by third parties may impair our ability to deliver products on a timely basis and impair our competitive position. We may not be able to continue to successfully operate our manufacturing operations at acceptable costs, with acceptable yields, and retain adequately trained personnel. Our Dependence on Single-Source Suppliers and Service Providers May Cause Disruption in Our Operations Should Any Supplier Fail to Deliver Materials We may experience difficulty acquiring materials or services for the manufacture of our products or we may not be able to obtain substitute vendors. In addition, we may not be able to procure comparable materials at similar prices and terms within a reasonable time, if at all. Several services that are provided to Apio are obtained from a single provider. Several of the raw materials we use to manufacture our products are currently purchased from a single source, including some monomers used to synthesize Intelimer polymers, substrate materials for our breathable membrane products and raw materials for our HA products. Any interruption of our relationship with single-source suppliers or service providers could delay product shipments and materially harm our business. -12- Any New Business Acquisition Will Involve Uncertainty Relating to Integration We have acquired other businesses in the past and may make additional acquisitions in the future. The successful integration of new business acquisitions may require substantial effort from the Company's management. The diversion of the attention of management and any difficulties encountered in the transition process could have a material adverse effect on the Company's ability to realize the anticipated benefits of the acquisitions. The successful combination of new businesses also requires coordination of research and development activities, manufacturing, sales and marketing efforts. In addition, the process of combining organizations located in different geographic regions could cause the interruption of, or a loss of momentum in, the Company's activities. There can be no assurance that the Company will be able to retain key management, technical, sales and customer support personnel, or that the Company will realize the anticipated benefits of any acquisitions, and the failure to do so would have a material adverse effect on the Company's business, results of operations and financial condition. We May Be Unable to Adequately Protect Our Intellectual Property Rights or May Infringe Intellectual Property Rights of Others We may receive notices from third parties, including some of our competitors, claiming infringement by our products of their patent and other proprietary rights. Regardless of their merit, responding to any such claim could be time- consuming, result in costly litigation and require us to enter royalty and licensing agreements which may not be offered or available on terms acceptable to us. If a successful claim is made against us and we fail to develop or license a substitute technology, we could be required to alter our products or processes and our business, results of operations or financial position could be materially adversely affected. Our success depends in large part on our ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Any pending patent applications we file may not be approved and we may not be able to develop additional proprietary products that are patentable. Any patents issued to us may not provide us with competitive advantages or may be challenged by third parties. Patents held by others may prevent the commercialization of products incorporating our technology. Furthermore, others may independently develop similar products, duplicate our products or design around our patents. Our Operations Are Subject to Regulations that Directly Impact Our Business Our products and operations are subject to governmental regulation in the United States and foreign countries. The manufacture of our products is subject to detailed standards for product development, manufacturing controls, ongoing quality monitoring and analysis, and periodic inspection by regulatory authorities. We may not be able to obtain necessary regulatory approvals on a timely basis or at all. Delays in receipt of or failure to receive approvals or loss of previously received approvals would have a material adverse effect on our business, financial condition and results of operations. A significant portion of the Company’s manufacturing workforce is provided by third-party contractors. The Company relies upon these contractors to validate the worker’s immigration status and their eligibility to work in the Company’s facilities. Although we have no reason to believe that we will not be able to comply with all applicable regulations regarding the manufacture and sale of our products and polymer materials, regulations are always subject to change and depend heavily on administrative interpretations and the country in which the products are sold. Future changes in regulations or interpretations relating to matters such as safe working conditions, laboratory and manufacturing practices, environmental controls, and disposal of hazardous or potentially hazardous substances may adversely affect our business. Our food operations are subject to regulation by the FDA, FTC, and other governmental entities. Applicable laws and regulations are subject to change from time to time and could impact how we manage the production and sale of our food products. We are subject, for example, to FDA compliance and regulations concerning the safety of the food products handled and sold by Apio, and the facilities in which they are packed and processed. Failure to comply with the applicable regulatory requirements can, among other things, result in: fines, injunctions, civil penalties, and suspensions, withdrawal of regulatory approvals or registrations, product recalls and product seizures, including cessation of manufacturing and sales, operating restrictions, and criminal prosecution. -13- Compliance with federal, state, and local laws and regulations is costly and time-consuming. We may be required to incur significant costs to comply with the laws and regulations in the future which may have a material adverse effect on our business, operating results and financial condition. Our food packaging products are subject to regulation under the FDC Act. Under the FDC Act, any substance that when used as intended may reasonably be expected to become, directly or indirectly, a component or otherwise affect the characteristics of any food may be regulated as a food additive unless the substance is generally recognized as safe. Food packaging materials are generally not considered food additives by the FDA if the products are not expected to become components of food under their expected conditions of use. We consider our breathable membrane product to be a food packaging material not subject to approval by the FDA. We have not received any communication from the FDA concerning our breathable membrane product. If the FDA were to determine that our breathable membrane products are food additives, we may be required to submit a food contact substance notification or food additive petition for approval by the FDA. The food additive petition process, in particular, is lengthy, expensive and uncertain. A determination by the FDA that a food contact substance notification or food additive petition is necessary would have a material adverse effect on our business, operating results and financial condition. Our Packaged Fresh Vegetables business is subject to the Perishable Agricultural Commodities Act (“PACA”). PACA regulates fair trade standards in the fresh produce industry and governs all the products sold by Apio. Our failure to comply with the PACA requirements could among other things, result in civil penalties, suspension or revocation of a license to sell produce, and in the most egregious cases, criminal prosecution, which could have a material adverse effect on our business. In addition, the FTC and other state authorities regulate how we promote and advertise our food products, and we could be the target of claims relating to alleged false or deceptive advertising under federal, state, and local laws and regulations. Lifecore’s existing products and its products under development are considered to be medical devices or drug products, and therefore, require clearance or approval by the FDA before commercial sales can be made in the United States. The products also require the approval of foreign government agencies before sales may be made in many other countries. The process of obtaining these clearances or approvals varies according to the nature and use of the product. It can involve lengthy and detailed safety, efficacy and clinical studies, as well as extensive site inspections and lengthy regulatory agency reviews. There can be no assurance that any of the Company’s clinical studies will be authorized to proceed, or if authorized will show safety or effectiveness; that any of the Company’s products that require FDA clearance or approval will obtain such clearance or approval on a timely basis, on terms acceptable to the Company for the purpose of actually marketing the products, or at all; or that following any such clearance or approval previously unknown problems will not result in restrictions on the marketing of the products or withdrawal of clearance or approval. In addition, most of the existing products being sold by Lifecore and its customers are subject to continued regulation by the FDA, various state agencies and foreign regulatory agencies which regulate manufacturing, labeling, distribution, and record keeping procedures for such products. Aseptic processing and shared equipment manufacturing require specific quality controls. If we fail to achieve and maintain these controls, we may have to recall product, or may have to reduce or suspend production while we address any deficiencies. Marketing clearances or approvals by regulatory agencies can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval. These agencies can also limit or prevent the manufacture or distribution of Lifecore’s products. A determination that Lifecore is in violation of such regulations could lead to the issuance of adverse inspectional observations, a Warning Letter, imposition of civil penalties, including fines, product recalls or product seizures, injunctions, and, in extreme cases, criminal sanctions. Federal, state and local regulations impose various environmental controls on the use, storage, discharge or disposal of toxic, volatile or otherwise hazardous chemicals and gases used in some of our manufacturing processes. Our failure to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject us to substantial liability or could cause our manufacturing operations to be suspended and changes in environmental regulations may impose the need for additional capital equipment or other requirements. -14- We Depend on Strategic Partners and Licenses for Future Development Our strategy for development, clinical and field testing, manufacture, commercialization and marketing for some of our current and future products includes entering into various collaborations with corporate partners, licensees and others. We are dependent on our corporate partners to develop, test, manufacture and/or market some of our products. Although we believe that our partners in these collaborations have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities are not within our control. Our partners may not perform their obligations as expected or we may not derive any additional revenue from the arrangements. Our partners may not pay any additional option or license fees to us or may not develop, market or pay any royalty fees related to products under such agreements. Moreover, some of the collaborative agreements provide that they may be terminated at the discretion of the corporate partner, and some of the collaborative agreements provide for termination under other circumstances. Our partners may pursue existing or alternative technologies in preference to our technology. Furthermore, we may not be able to negotiate additional collaborative arrangements in the future on acceptable terms, if at all, and our collaborative arrangements may not be successful. Our Reputation and Business May Be Harmed if Our Computer Network Security or Any of the Databases Containing Our Trade Secrets, Proprietary Information or the Personal Information of Our Employees Are Compromised, Which Could Cause a Material Adverse Effect on Our Results of Operations Cyber-attacks or security breaches could compromise our confidential business information, cause a disruption in the Company’s operations or harm our reputation. We maintain numerous information assets, including intellectual property, trade secrets, banking information and other sensitive information critical to the operation and success of our business on computer networks, and such information may be compromised in the event that the security of such networks is breached. We also maintain confidential information regarding our employees and job applicants, including personal identification information. The protection of employee and company data in the information technology systems we utilize (including those maintained by third-party providers) is critical. Despite the efforts by us to secure computer networks utilized for our business, security could be compromised, confidential information, such as Company information assets and personally identifiable employee information, could be misappropriated or system disruptions could occur. In addition, we may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyberattacks. Attacks may be targeted at us, our customers or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect sensitive Company data being breached or compromised. Furthermore, actual or anticipated cyberattacks or data breaches may cause significant disruptions to our network operations, which may impact our ability to deliver shipments or respond to customer needs in a timely or efficient manner. Data and security breaches could also occur as a result of non-technical issues, including an intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships that result in the unauthorized release of confidential information related to our business or personal information of our employees. Any compromise or breach of our computer network security could result in a violation of applicable privacy and other laws, costly investigations and litigation and potential regulatory or other actions by governmental agencies. As a result of any of the foregoing, we could experience adverse publicity, the compromise of valuable information assets, loss of sales, the cost of remedial measures and/or significant expenditures to reimburse third parties for resulting damages, any of which could adversely impact our brand, our business and our results of operations. The Global Economy is Experiencing Continued Volatility, Which May Have an Adverse Effect on Our Business In recent years, the U.S. and international economy and financial markets experienced a significant slowdown and volatility due to uncertainties related to the availability of credit, energy prices, difficulties in the banking and financial services sectors, softness in the housing market, diminished market liquidity, geopolitical conflicts, falling consumer confidence and high unemployment rates. Ongoing volatility in the economy and financial markets could further lead to reduced demand for our products, which in turn, would reduce our revenues and adversely affect our business, financial condition and results of operations. In particular, volatility in the global markets have resulted in softer demand and more conservative purchasing decisions by customers, including a tendency toward lower-priced products, which could negatively impact our revenues, gross margins and results of operations. In addition to a reduction in sales, our profitability may decrease because we may not be able to reduce costs at the same rate as our sales decline. We cannot predict the ultimate severity or -15- length of the current period of volatility, whether the recent signs of economic recovery will prove sustainable, or the timing or severity of future economic or industry downturns. Given the current uncertain economic environment, our customers, suppliers and partners may have difficulties obtaining capital at adequate or historical levels to finance their ongoing business and operations, which could impair their ability to make timely payments to us. This may result in lower sales and/or inventory that may not be saleable or bad debt expense for Landec. In addition to the impact of the current market uncertainty on our customers, some of our vendors and growers may experience a reduction in their availability of funds and cash flows, which could negatively impact their business as well as ours. A further worsening of the economic environment or continued or increased volatility of the U.S. economy, including increased volatility in the credit markets, could adversely impact our customers’ and vendors’ ability or willingness to conduct business with us on the same terms or at the same levels as they have historically. Further, this economic volatility and uncertainty about future economic conditions makes it challenging for Landec to forecast its operating results, make business decisions, and identify the risks that may affect its business, sources and uses of cash, financial condition and results of operations. Our International Sales May Expose Our Business to Additional Risks For fiscal year 2016, approximately 31% of our consolidated net revenues were derived from product sales to international customers. A number of risks are inherent in international transactions. International sales and operations may be limited or disrupted by any of the following: regulatory approval process, government controls, export license requirements, political instability, price controls, trade restrictions, fluctuations in foreign currencies, changes in tariffs, or difficulties in staffing and managing international operations. Foreign regulatory agencies have or may establish product standards different from those in the United States, and any inability on our part to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on our international business, and our financial condition and results of operations. While our foreign sales are currently priced in dollars, fluctuations in currency exchange rates may reduce the demand for our products by increasing the price of our products in the currency of the countries in which the products are sold. Regulatory, geopolitical and other factors may adversely impact our operations in the future or require us to modify our current business practices. Cancellations or Delays of Orders by Our Customers May Adversely Affect Our Business During fiscal year 2016, sales to our top five customers accounted for approximately 45% of our revenues, with our two largest customers from our Packaged Fresh Vegetables segment, Costco and Wal-mart accounting for approximately 20% and 12%, respectively, of our revenues. We expect that, for the foreseeable future, a limited number of customers may continue to account for a substantial portion of our revenues. We may experience changes in the composition of our customer base as we have experienced in the past. The reduction, delay or cancellation of orders from one or more major customers for any reason or the loss of one or more of our major customers could materially and adversely affect our business, operating results and financial condition. In addition, since some of the products processed by Apio and Lifecore are sole sourced to customers, our operating results could be adversely affected if one or more of our major customers were to develop other sources of supply. Our current customers may not continue to place orders, orders by existing customers may be canceled or may not continue at the levels of previous periods or we may not be able to obtain orders from new customers. -16- Our Sale of Some Products May Expose Us to Product Liability Claims The testing, manufacturing, marketing, and sale of the products we develop involve an inherent risk of allegations of product liability. If any of our products were determined or alleged to be contaminated or defective or to have caused a harmful accident to an end-customer, we could incur substantial costs in responding to complaints or litigation regarding our products and our product brand image could be materially damaged. Such events may have a material adverse effect on our business, operating results and financial condition. Although we have taken and intend to continue to take what we consider to be appropriate precautions to minimize exposure to product liability claims, we may not be able to avoid significant liability. We currently maintain product liability insurance. While we think the coverage and limits are consistent with industry standards, our coverage may not be adequate or may not continue to be available at an acceptable cost, if at all. A product liability claim, product recall or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on our business, operating results and financial condition. Our Stock Price May Fluctuate in Response to Various Conditions, Many of Which Are Beyond Our Control The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the following: technological innovations applicable to our products, our attainment of (or failure to attain) milestones in the commercialization of our technology, our development of new products or the development of new products by our competitors, new patents or changes in existing patents applicable to our products, our acquisition of new businesses or the sale or disposal of a part of our businesses, development of new collaborative arrangements by us, our competitors or other parties, changes in government regulations applicable to our business, changes in investor perception of our business, fluctuations in our operating results, and changes in the general market conditions in our industry. Fluctuations in our quarterly results may, particularly if unforeseen, cause us to miss projections which might result in analysts or investors changing their valuation of our stock. Lapses in Disclosure Controls and Procedures or Internal Control Over Financial Reporting Could Materially and Adversely Affect the Company’s Operations, Profitability or Reputation We are committed to maintaining high standards of internal control over financial reporting and disclosure controls and procedures. Nevertheless, lapses or deficiencies in disclosure controls and procedures or in our internal control over financial reporting may occur from time to time. There can be no assurance that our disclosure controls and procedures will be effective in preventing a material weakness or significant deficiency in internal control over financial reporting from occurring in the future. Any such lapses or deficiencies may materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the capital markets, require us to expend resources to correct the lapses or deficiencies, which could include the restating of previously reported financial results, expose us to regulatory or legal proceedings, harm our reputation, or otherwise cause a decline in investor confidence. -17- We May Be Exposed to Employment Related Claims and Costs that Could Materially Adversely Affect Our Business We have been subject in the past, and may be in the future, to claims by employees based on allegations of discrimination, negligence, harassment and inadvertent employment of undocumented workers or unlicensed personnel, and we may be subject to payment of workers' compensation claims and other similar claims. We could incur substantial costs and our management could spend a significant amount of time responding to such complaints or litigation regarding employee claims, which may have a material adverse effect on our business, operating results and financial condition. In addition, several recent decisions by the United States NLRB have found companies which use contract employees could be found to be “joint employers” with the staffing firm. If this expanded definition of “joint employer” is upheld in the expected appeals of these decisions, it could result in our having responsibility for damages, reinstatement, back pay and penalties in connection with labor law violations by our use of workers provided by third-party staffing firms. We Are Dependent on Our Key Employees and if One or More of Them Were to Leave, We Could Experience Difficulties in Replacing Them, Efficiently or Effectively Transitioning Their Replacements and Our Operating Results Could Suffer The success of our business depends to a significant extent on the continued service and performance of a relatively small number of key senior management, technical, sales, and marketing personnel. In October 2015, Molly Hemmeter, Landec’s former Chief Operating Officer, became the new Chief Executive Officer of the Company, succeeding Gary Steele who retired and who had served as the Company’s CEO since September 1991 (Mr. Steele still serves on the Company’s Board of Directors). The loss of any of our key personnel for an extended period may cause hardship for our business. In addition, competition for senior level personnel with knowledge and experience in our different lines of business is intense. If any of our key personnel were to leave, we would need to devote substantial resources and management attention to replace them. As a result, management attention may be diverted from managing our business, and we may need to pay higher compensation to replace these employees. We May Issue Preferred Stock with Preferential Rights that Could Affect Your Rights The issuance of shares of preferred stock could have the effect of making it more difficult for a third-party to acquire a majority of our outstanding stock, and the holders of such preferred stock could have voting, dividend, liquidation and other rights superior to those of holders of our Common Stock. We Have Never Paid Any Dividends on Our Common Stock We have not paid any dividends on our Common Stock since inception and do not expect to in the foreseeable future. Any dividends may be subject to preferential dividends payable on any preferred stock we may issue. Item 1B. Unresolved Staff Comments None. -18- Item 2. Properties As of May 29, 2016, the Company owned or leased properties in Menlo Park, Arroyo Grande and Guadalupe, California; Chaska, Minnesota; Bowling Green and McClure, Ohio; Hanover, Pennsylvania; Vero Beach, Florida; Rock Hill, South Carolina and Rock Tavern, New York as described below. Facilities Acres of Land Lease Expiration Location Menlo Park, CA ....... Business Segment Ownership Corporate Leased Chaska, MN ............. Biomaterials Owned Chaska, MN ............. Biomaterials Leased Guadalupe, CA ......... Packaged Fresh Owned Bowling Green, OH . Packaged Fresh Owned Vegetables Vegetables Hanover, PA............. Packaged Fresh Owned Vero Beach, FL ........ Packaged Fresh Leased Vegetables Vegetables Rock Hill, SC ........... Packaged Fresh Owned Rock Tavern, NY ..... Packaged Fresh Leased Vegetables McClure, OH ........... Packaged Fresh Leased Vegetables Vegetables 14,600 square feet of office and laboratory space 144,000 square feet of office, laboratory and manufacturing space 65,000 square feet of office, manufacturing and warehouse space 199,000 square feet of office space, manufacturing and cold storage 55,900 square feet of office space, manufacturing and cold storage 64,000 square feet of office space, manufacturing and cold storage 9,200 square feet of office space, manufacturing and cold storage 16,400 square feet of cold storage and office space 7,700 square feet of cold storage and office space Farm land — 12/31/18 27.5 — — 12/31/22 25.2 7.7 15.3 — — — — 12/31/17 3.6 — — 8/23/23 185 2.4 12/31/17 9/30/18 Guadalupe, CA ......... Packaged Fresh Leased 105,000 square feet of parking space Vegetables Guadalupe, CA ......... Packaged Fresh Leased 5,300 square feet of office space Arroyo Grande, CA .. Vegetables Food Export Leased 1,100 square feet of office space — — 5/31/17 Month-to-Month The obligations of the Company under its credit agreement with General Electric Capital Corporation (“General Electric”) are secured by a lien on all of the land and buildings of the Packaged Fresh Vegetables segment. Item 3. Legal Proceedings In the ordinary course of business, the Company is involved in various legal proceedings and claims related to matters such as wage and hour 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 adjusted to reflect the impacts of negotiations, estimate settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s consolidated financial statements. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s future results of operations or cash flows, or both, of a particular quarter. During the twelve months ended, May 29, 2016, the Company has recorded a charge to income in the amount of $775,000 or $0.02 per diluted share after taxes, which is the Company’s best estimate of settlement charges for all legal matters currently underway. Item 4. Mine Safety Disclosures Not applicable. -19- PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information The Common Stock is traded on The NASDAQ Global Select Market under the symbol “LNDC”. The following table sets forth for each period indicated the high and low sales prices for the Common Stock. Fiscal Year Ended May 29, 2016 High Low 4th Quarter ended May 29, 2016 ........................................................................... $ 3rd Quarter ended February 28, 2016 .................................................................... $ 2nd Quarter ended November 29, 2015 ................................................................. $ 1st Quarter ended August 30, 2015 ....................................................................... $ 11.81 $ 13.10 $ 13.45 $ 14.98 $ Fiscal Year Ended May 31, 2015 High Low 4th Quarter ended May 31, 2015 ........................................................................... $ 3rd Quarter ended March 1, 2015 .......................................................................... $ 2nd Quarter ended November 30, 2014 ................................................................. $ 1st Quarter ended August 31, 2014 ....................................................................... $ 15.16 $ 14.73 $ 13.64 $ 13.26 $ 9.48 10.38 11.03 11.50 13.38 12.66 10.75 11.15 Holders There were approximately 48 holders of record of 27,226,429 shares of outstanding Common Stock as of July 18, 2016. Since certain holders are listed under their brokerage firm’s names, the actual number of stockholders is higher. Dividends The Company has not paid any dividends on the Common Stock since its inception. The Company presently intends to retain all future earnings, if any, for its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Issuer Purchases of Equity Securities There were no shares repurchased by the Company during fiscal years 2016 or 2015. The Company may still repurchase up to $3.8 million of the Company’s Common Stock under the Company’s stock repurchase plan announced on July 14, 2010. -20- Item 6. Selected Financial Data The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the information contained in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in Item 8 of this report. Year Ended May 29, 2016 Year Ended May 31, 2015 Year Ended May 25, 2014 Year Ended May 26, 2013 Year Ended May 27, 2012 Statement of (Loss) Income Data: (in thousands) Product sales ...................................................... $ 541,099 $ 539,257 $ 476,813 $ 441,708 $ 317,552 Cost of product sales .......................................... 470,142 473,850 414,249 378,948 265,414 Gross profit ........................................................ 70,957 65,407 62,564 62,760 52,138 Operating costs and expenses: Research and development ............................. Selling, general and administrative ................ Other operating expenses/(income) ................ Total operating costs and expenses .................... 7,228 49,515 34,000 90,743 6,988 39,958 — 46,946 7,204 35,170 — 42,374 9,294 32,531 (3,933 ) 37,892 9,625 26,515 1,421 37,561 Operating (loss) income ..................................... (19,786) 18,461 20,190 24,868 14,577 Dividend income ................................................ Interest income ................................................... Interest expense .................................................. Other income ..................................................... Net (loss) income before taxes ........................... Income tax benefit (expense) ............................. Consolidated net (loss) income .......................... Non-controlling interest ..................................... Net (loss) income applicable to common 1,650 71 (1,987) 1,200 (18,852) 7,404 (11,448) (193) 1,417 315 (1,829) 3,107 21,471 (7,746) 13,725 (181) 1,125 260 (1,650) 10,000 29,925 (10,583) 19,342 (197) 1,125 179 (2,008 ) 8,100 32,264 (9,452 ) 22,812 (225 ) 1,125 180 (929) 5,331 20,284 (7,185) 13,099 (403) stockholders ..................................................... $ (11,641) $ 13,544 $ 19,145 $ 22,587 $ 12,696 Basic net (loss) income per share ....................... $ Diluted net (loss) income per share .................... $ (0.43) $ (0.43) $ 0.50 $ 0.50 $ 0.72 $ 0.71 $ 0.87 $ 0.85 $ 0.49 0.49 Shares used in per share computation: Basic .................................................................. Diluted ............................................................... 27,044 27,044 26,884 27,336 26,628 27,120 25,830 26,626 25,849 26,126 May 29, 2016 May 31, 2015 May 25, 2014 May 26, 2013 May 27, 2012 Balance Sheet Data: (in thousands) Cash and cash equivalents.................................. $ Total assets ......................................................... Long-term debt .................................................. Retained earnings ............................................... Total stockholders’ equity .................................. $ 9,894 $ 343,470 54,662 73,457 210,728 $ 14,127 $ 346,465 42,519 85,098 218,432 $ 14,243 $ 313,623 34,372 71,554 203,069 $ 13,718 $ 290,942 40,305 52,409 178,693 $ 22,177 277,692 47,317 29,822 149,742 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements contained in Item 8 of this report. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward- looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and, in particular, the factors described in Item 1A. "Risk Factors.” Landec undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. -21- Overview 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: 1) Intelimer polymers, and 2) hyaluronan (“HA”) biopolymers. 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. The Company’s polymer technologies, along with its customer relationships and trade names, are the foundation, and a key differentiating advantage upon which Landec has built its business. 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 and non-HA based biomaterials through its Lifecore Biomedical, Inc. (“Lifecore”) subsidiary. Landec has three operating segments – Packaged Fresh Vegetables, Food Export, and Biomaterials. The Packaged Fresh Vegetables segment combines the Company’s BreatheWay packaging technology with Apio’s branded Eat Smart and GreenLine and private label fresh-cut and whole produce business. The Food Export business is operated through Apio’s Cal-Ex export company which purchases and sells whole fruit and vegetable products to predominantly Asian markets. The Biomaterials business sells products utilizing HA in the ophthalmic, orthopedic and veterinary segments and also supplies HA to customers pursuing other medical applications, such as aesthetic surgery, medical device coatings, tissue engineering and pharmaceuticals. In addition, Lifecore provides specialized aseptic fill and finish services in a cGMP validated manufacturing facility for supplying commercial, clinical and pre-clinical products. See "Business - Description of Business Segments". As of May 29, 2016, the Company’s retained earnings were $73.5 million. The Company may incur losses in the future. The amount of future net profits, if any, is uncertain and there can be no assurance that the Company will be able to sustain profitability in future years. Critical Accounting Policies and Use of Estimates Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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; 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; the valuation of 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 period. The actual results may differ from management’s estimates. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is based on review of the overall condition of accounts receivable balances and review of significant past due accounts. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories Inventories are stated at the lower of cost or market. If the cost of the inventories exceeds their expected market value, provisions are recorded currently for the difference between the cost and the market value. These provisions are determined based on specific identification for unusable inventory and an additional reserve, based on historical losses, for inventory currently considered to be usable. -22- 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 uncollectible 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 vegetable products that are generally washed and packaged in our 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 sells and/or packages, and therefore, records revenues and cost of sales at gross amounts in the Consolidated Statements of Comprehensive (Loss) Income. In addition, Apio’s Packaged Fresh Vegetables revenues include the revenues 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 our customers. Sales of BreatheWay packaging are recognized when shipped to our 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 by 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. Our Biomaterials business principally generates revenue through the sale of products containing HA and non-HA materials. Lifecore primarily sells products to customers in three medical areas: (1) Ophthalmic, which represented approximately 55% of Lifecore’s revenues in fiscal year 2016, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2016 and (3) Other/Non-HA products which represented approximately 25% of Lifecore’s revenues in fiscal year 2016. The vast majority of revenues from our Biomaterials business 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 no further performance obligations exist, and there is no 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 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. -23- 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 they represent separate units 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 the 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. Licensing revenue is recognized in accordance with prevailing accounting guidance. 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 type of revenue arrangement as described above is as follows (in thousands): Recorded upon shipment .................................................................... $ Recorded upon acceptance in foreign port ......................................... Revenue from multiple element arrangements ................................... Revenue from license fees, R&D contracts and royalties .................. Total ................................................................................................... $ 458,985 $ 64,181 13,400 4,533 541,099 $ 465,484 $ 67,714 4,253 1,806 539,257 $ 398,938 69,710 6,811 1,354 476,813 Year ended May 29, 2016 Year ended May 31, 2015 Year ended May 25, 2014 Goodwill and Other Intangibles The Company’s intangible assets are comprised of customer relationships with an estimated useful life of twelve to thirteen years and trademarks/trade names and goodwill with indefinite lives (collectively, “intangible assets”), which the Company recognized in accordance with accounting guidance (i) upon the acquisition of GreenLine by Apio in April 2012, (ii) upon the acquisition of Lifecore in April 2010 and (iii) 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 Lifecore was allocated to our Biomaterials reporting unit and the acquisitions of Apio and GreenLine were allocated to our Packaged Fresh Vegetables reporting unit pursuant to accounting guidance based upon the allocation of assets and liabilities acquired and consideration paid for each reporting unit. As of May 29, 2016, the Biomaterials reporting unit had $13.9 million of goodwill and the Packaged Fresh Vegetables reporting unit had $35.7 million of goodwill. The Company tests its indefinite-lived intangible assets for impairment at least annually, in accordance with accounting guidance. For all indefinite-lived assets, including goodwill, the Company performs a qualitative analysis in accordance with ASC 350-30-35. 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 and assignment of intangible assets to reporting units, which judgments are inherently uncertain. -24- During the three months ended February 28, 2016, management made the strategic decision to convert its GreenLine branded products in retail grocery stores to the Eat Smart brand. This decision resulted in an impairment of the GreenLine tradename. Management estimated the value of the remaining GreenLine branded foodservice sales using the relief from royalty valuation method, which resulted in an impairment of $34.0 million. The remaining GreenLine tradename associated with the Company’s foodservice business is valued at $2.0 million. The impairment charge is recorded in the Consolidated Statements of Comprehensive (Loss) Income under “Impairment of GreenLine Tradename” as an operating expense under the Packaged Fresh Vegetables reporting unit. The Company tested its remaining indefinite-lived intangible assets, including goodwill, for impairment as of February 29, 2016 and determined that no adjustments to the carrying values of these assets were necessary as of that date. As a result, it was not necessary to perform the two-step quantitative goodwill impairment test at the time. Subsequent to the 2016 annual impairment test, there have been no significant events or circumstances affecting the valuation of goodwill. As of May 29, 2016, there were no events or changes in circumstances that indicated that the carrying amount of intangible assets may not be recoverable or that goodwill should be tested for impairment. Therefore, there was no impairment to the carrying value of the Company's goodwill. There were no impairment losses for goodwill during fiscal years 2015 and 2014. On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of its indefinite-lived 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 first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In assessing the qualitative factors, management considers the impact of these key factors: macro-economic conditions, industry and market environment, overall financial performance of the Company, cash flow from operating activities, market capitalization 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 50 percent) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required. If a quantitative test is required, the Company compares the fair value of indefinite-lived intangible assets to its carrying value including goodwill. 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 each reporting unit. If the carrying value of the reporting unit exceeds its fair value, the Company will determine the amount of impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. 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 assets 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 29, 2016, the Company had a valuation allowance of $1.2 million against deferred tax assets. -25- In addition to valuation allowances, the Company establishes tax-contingency 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. (cid:3) 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 final 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 presented in the balance sheet within accrued liabilities. Stock-Based Compensation The Company’s stock-based awards include stock option grants and restricted stock unit awards (RSUs). The estimated fair value for stock options, which determines the Company’s calculation of compensation expense, is based on the Black-Scholes pricing model. In addition, the accounting guidance requires the estimation of the expected forfeitures of stock-based awards at the time of grant. As a result, the Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation expense only for those awards that are expected to vest and revises those estimates in subsequent periods if the actual forfeitures differ from the prior estimates. 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 2 to the Consolidated Financial Statements). 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 1 – observable inputs such as quoted prices for identical instruments in active markets. Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data. Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions. As of May 29, 2016, the only asset of the Company that was measured at fair value on a recurring basis was its minority interest investment in Windset. -26- The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value utilizes significant unobservable inputs in the discounted cash flow models, including projected cash flows, growth rates and discount rates. As a result, the Company’s investment in Windset is considered to be a Level 3 measurement investment. The change in the fair market value of the Company’s investment in Windset for the fiscal years ended May 29, 2016 and May 31, 2015 was due to the Company’s 26.9% minority interest in the change in the fair market value of Windset during those periods. In determining the fair value of the investment in Windset, the Company utilizes the following significant unobservable inputs in the discounted cash flow models: Annual consolidated revenue growth rates ..................................................... Annual consolidated expense growth rates .................................................... Consolidated income tax rates ........................................................................ Consolidated discount rates ............................................................................ At May 29, 2016 At May 31, 2015 4% 4% 15% 12.5% 4% 4% 15% 15% to 21% The revenue growth, expense growth and income tax rate assumptions, consider 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 marketability 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): 10% increase in revenue growth rates ....................................................................................................... $ 10% increase in expense growth rates ....................................................................................................... $ 10% increase in income tax rates .............................................................................................................. 10% increase in discount rates .................................................................................................................. $ Impact on value of Windset investment as of May 29, 2016 600 (600 ) — (300 ) 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 fair value of the Company’s Windset investment as of May 29, 2016 and May 31, 2015 was $62.7 million and $61.5 million, respectively. Recent Accounting Pronouncements Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a company’s contracts with customers. ASU 2014-09 will be effective beginning the first quarter of the Company's fiscal year 2019 with early application permitted in the first quarter of the Company’s fiscal year 2018. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. Management the Company's Consolidated Financial Statements and disclosures. the effect ASU 2014-09 will have on is currently evaluating -27- Debt Issuance Costs In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2017, with early adoption permitted. Management does not expect that adoption of ASU 2015-03 will have a significant impact on its Consolidated Financial Statements and disclosures. Balance Sheet Classification of Deferred Taxes In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which requires all deferred tax assets and liabilities to be presented on the consolidated balance sheets as noncurrent. Deferred taxes were previously required to be classified as current or non-current on the consolidated balance sheets. The Company early adopted ASU 2015-17 effective February 28, 2016 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company’s net current deferred tax asset to the net non-current deferred tax liability in its consolidated balance sheet as of February 28, 2016. No prior periods were retrospectively adjusted. Leases In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use-assets. ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2020 on a modified retrospective basis, with early adoption permitted. Management is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures. Stock-Based Compensation In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” which changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2018, with early adoption permitted. Management is currently evaluating the effect ASU 2016-09 will have on the Company's Consolidated Financial Statements and disclosures. Results of Operations Fiscal Year Ended May 29, 2016 Compared to Fiscal Year Ended May 31, 2015 Revenues (in thousands): Fiscal Year ended May 29, 2016 Fiscal Year ended May 31, 2015 Packaged Fresh Vegetables ............................................................ $ Food Export ................................................................................... Total Apio .................................................................................... Biomaterials .................................................................................... Corporate ......................................................................................... Total Revenues ............................................................................ $ 423,859 $ 64,181 488,040 50,470 2,589 541,099 $ 430,415 67,837 498,252 40,432 573 539,257 Change (2%) (5%) (2%) 25% 352% 0% -28- Packaged Fresh Vegetables (Apio) Apio’s Packaged Fresh Vegetables revenues consist of revenues generated from the sale of specialty packaged fresh- cut and whole processed vegetable products that are washed and packaged in our proprietary packaging and sold under Apio’s Eat Smart and GreenLine brands and various private labels. In addition, Packaged Fresh Vegetables revenues include the revenues 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. The decrease in Apio’s Packaged Fresh Vegetables revenues for the fiscal year ended May 29, 2016 compared to the same period of last year was primarily due to a 5% decrease in unit volume sales. The volume decrease was due to lower sales in Apio’s historical core packaged fresh vegetable business due to a severe shortage of produce during most of the second and third fiscal quarters of 2016, partially offset by increased sales of higher-priced salad kit products. The decrease was also due to fiscal year 2015 having an extra week compared to fiscal year 2016 as a result of the timing of the Company’s 2015 fiscal year end. Food Export (Apio) Apio’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity fruit and vegetable products to Asia by Cal-Ex. Apio records revenue equal to the sale price to third parties because it takes title to the product while in transit. The decrease in revenues in Apio’s Food Export business for the fiscal year ended May 29, 2016 compared with fiscal year 2015 was due to a 5% decrease in unit volume sales as a result of produce shortages and the high value of the U.S. dollar compared to most Asian currencies which made our export products more expensive for our foreign customers who pay Apio in U.S. dollars. Biomaterials (Lifecore) Lifecore principally generates revenue through the sale of products containing HA. Lifecore primarily sells products to customers in three medical areas: (1) Ophthalmic, which represented approximately 55% of Lifecore’s revenues in fiscal year 2016, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2016 and (3) Other/Non-HA products which represented approximately 25% of Lifecore’s revenues in fiscal year 2016. The increase in Lifecore’s revenues for the fiscal year ended May 29, 2016 compared to the same period last year was due to an increase of $9.7 million in development service revenues from existing customers, and an increase of $4.6 million in fermentation revenues due primarily to a customer that reduced its purchases last year due to an inventory adjustment resuming their historical purchase levels in fiscal year 2016. This increase was partially offset by a decrease in aseptic revenues of $4.2 million for fiscal year 2016 as a result of lower customer demand primarily due to an inventory management initiative put in place by several customers. Corporate Corporate revenues are generated from the licensing agreements with corporate partners. The increase in Corporate revenues for the fiscal year ended May 29, 2016 compared to the same period last year was due to two new licensing and R&D agreements entered into on June 1, 2015. Gross Profit (in thousands): Fiscal Year ended May 29, 2016 Fiscal Year ended May 31, 2015 Packaged Fresh Vegetables ............................................................ $ Food Export ................................................................................... Total Apio .................................................................................... Biomaterials .................................................................................... Corporate ......................................................................................... Total Gross Profit ........................................................................ $ 40,479 $ 4,176 44,655 24,081 2,221 70,957 $ 45,993 4,252 50,245 14,609 553 65,407 Change (12%) (2%) (11%) 65% 302% 8% -29- General There are numerous factors that can influence gross profit including product mix, customer mix, manufacturing costs, volume, sales discounts and charges for excess or obsolete inventory, to name a few. Many of these factors influence or are interrelated with other factors. The Company includes in cost of sales all of the costs related to the sale of products in accordance with U.S. generally accepted accounting principles. These costs include the following: 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. The following are the primary reasons for the changes in gross profit for the fiscal year ended May 29, 2016 compared to the same period last year as outlined in the table above. Packaged Fresh Vegetables (Apio) The decrease in gross profit for Apio’s Packaged Fresh Vegetables business for the fiscal year ended May 29, 2016 compared to the same period last year was primarily due to severe produce shortages resulting from unseasonably warm weather in California throughout most of the second and third quarters of this fiscal year which significantly reduced yields. The excess cost from produce shortages for fiscal year 2016 of approximately $15.6 million more than offset the gross profit generated from a favorable product mix resulting from a higher percentage of sales being generated from the higher margin salad kit products versus the lower margin historical core fresh packaged vegetable business. Food Export (Apio) Apio’s Food Export business is a buy/sell business that typically realizes a gross margin in the 5-10% range. The decrease in gross profit for Apio’s Food Export business during the fiscal year ended May 29, 2016 compared to the same period last year was due to lower revenues partially offset by a favorable product mix. The gross profit as a percent of sales during the fiscal year ended May 29, 2016 was 6.5% compared to a gross margin of 6.3% during the same period last year. Biomaterials (Lifecore) Lifecore operates in the medical devices industry and has historically realized an overall gross margin percentage of approximately 35-50%. The increase in gross profit during the fiscal year ended May 29, 2016 compared to the same period last year was due to a 25% increase in revenues and from a favorable product mix change to a higher percentage of revenues coming from the higher margin development service revenues and fermentation products than from the lower margin aseptically filled products. Corporate The increase in Corporate gross profit for the fiscal year ended May 29, 2016 compared to the same period last year was due to two new licensing and R&D agreements entered into on June 1, 2015. Operating Expenses (in thousands): Fiscal Year ended May 29, 2016 Fiscal Year ended May 31, 2015 Change Research and Development: Apio ................................................................................................. $ Lifecore ........................................................................................... Corporate ......................................................................................... Total R&D ................................................................................... $ Selling, General and Administrative: Apio ................................................................................................ $ Lifecore ........................................................................................... Corporate ......................................................................................... Total S,G&A ................................................................................ $ 987 $ 4,701 1,540 7,228 $ 33,187 $ 5,303 11,025 49,515 $ 745 4,806 1,437 6,988 27,380 4,057 8,521 39,958 32% (2%) 7% 3% 21% 31% 29% 24% -30- Research and Development (R&D) Landec’s R&D consisted primarily of product development and commercialization initiatives. R&D efforts at Apio are focused 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 efforts are focused on new products and applications for HA-based and non-HA biomaterials. For Corporate, the R&D efforts are primarily focused on supporting the development and commercialization of new products and new technologies in our food and HA businesses and on new R&D collaborations with partners. The increase in R&D expenses for the fiscal year ended May 29, 2016 compared to the same period last year was due to an increase in R&D at Apio and Corporate due primarily to supporting development partners for the Company’s BreatheWay membrane technology. Selling, General and Administrative (S,G&A) S,G&A expenses consist primarily of sales and marketing expenses associated with Landec’s product sales and services, business development expenses and staff and administrative expenses. The increase in S,G&A expenses for the fiscal year ended May 29, 2016 compared to the same period last year was due to (1) a 21% increase in S,G&A at Apio primarily to ramp up introduction, product launches, advertising and promotions of our existing and new salad kit products and from additional headcount hired over the past year, (2) a 31% increase at Lifecore primarily due to bonuses being accrued this fiscal year compared to a nominal amount last fiscal year and from headcount additions to support its growth and (3) a 29% increase at Corporate primarily due to the reversal of the $677,000 LTIP accrual last fiscal year and from an increase in stock based compensation as a result of stock option and RSU grants made in May 2015, with the predominate amount of those grants being granted to the new CEO. Non-operating income/(expense) (in thousands): Fiscal Year ended May 29, 2016 Fiscal Year ended May 31, 2015 Dividend Income ............................................................................. $ Interest Income ............................................................................... $ Interest Expense .............................................................................. $ Other Income .................................................................................. $ Income Taxes .................................................................................. $ Non-controlling Interest ................................................................. $ 1,650 $ 71 $ (1,987) $ 1,200 $ 7,404 $ (193) $ 1,417 315 (1,829 ) 3,107 (7,746 ) (181 ) Change 16% (77%) 9% (61%) N/M 7% Dividend Income Dividend income is derived from the dividends accrued on our $22.0 million preferred stock investment in Windset which yields a cash dividend of 7.5% annually. The increase in dividend income for fiscal year 2016 compared to the same period last year was due to the Company increasing its preferred stock investment in Windset by $7.0 million on October 29, 2014. -31- Interest Income The decrease in interest income in fiscal year 2016 compared to fiscal year 2015 was not significant. Interest Expense The increase in interest expense during fiscal year 2016 compared to fiscal year 2015 was not significant. Other Income The decrease in other income for fiscal year 2016 was due to the change in the increase in the fair value of our Windset investment being lower in fiscal year 2016 compared to fiscal year 2015. Income Taxes The decrease in the income tax expense for the fiscal year ended May 29, 2016 is due to the tax benefit from the GreenLine impairment charge recorded during the third quarter of fiscal year 2016 and from a decrease in net income before taxes, excluding the GreenLine impairment charge, compared to last year. Non-controlling Interest The non-controlling interest consists of the limited partners’ equity interest in the net income of Apio Cooling, LP. The decrease in non-controlling interest for fiscal year 2016 compared to the same period last year was not significant. Fiscal Year Ended May 31, 2015 Compared to Fiscal Year Ended May 25, 2014 Revenues (in thousands): Fiscal Year ended May 31, 2015 Fiscal Year ended May 25, 2014 Packaged Fresh Vegetables ............................................................ $ Food Export ................................................................................... Total Apio .................................................................................... Biomaterials .................................................................................... Corporate ......................................................................................... Total Revenues ............................................................................ $ 430,415 $ 67,837 498,252 40,432 573 539,257 $ 360,728 69,827 430,555 45,704 554 476,813 Change 19% (3%) 16% (12%) 3% 13% Packaged Fresh Vegetables (Apio) Apio’s Packaged Fresh Vegetables revenues consist of revenues generated from the sale of specialty packaged fresh- cut and whole processed vegetable products that are washed and packaged in our proprietary packaging and sold under Apio’s Eat Smart and GreenLine brands and various private labels. In addition, Packaged Fresh Vegetables revenues include the revenues 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. The increase in Apio's Packaged Fresh Vegetables revenues for the fiscal year ended May 31, 2015 compared to the same period last year was primarily due to a 12% increase in unit volume sales resulting primarily from new salad kit products which typically have a higher price per unit than historical offerings. In addition, fiscal year 2015 included an extra week compared to fiscal year 2014 as a result of the timing of the Company’s 2015 fiscal year end. -32- Food Export (Apio) Apio’s Food Export revenues consist of revenues generated from the purchase and sale of primarily whole commodity fruit and vegetable products to Asia by Cal-Ex. Apio records revenue equal to the sale price to third parties because it takes title to the product while in transit. The decrease in revenues in Apio’s Food Export business for the fiscal year ended May 31, 2015 compared with fiscal year 2014 was due to a 9% decrease in unit volume sales primarily as a result of a west coast longshoreman’s labor dispute which was partially offset by a favorable product mix to higher priced export products. Biomaterials (Lifecore) Lifecore principally generates revenue through the sale of products containing HA. Lifecore primarily sells products to customers in three medical areas: (1) Ophthalmic, which represented approximately 60% of Lifecore’s revenues in fiscal year 2015, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2015 and (3) Veterinary/Other. The decrease in Lifecore's revenues for fiscal year 2015 compared to fiscal year 2014 was primarily due to a 29% decrease in revenues in Lifecore's fermentation business for Ophthalmic products as a result of lower shipments to a major customer as it aligns its inventory levels with newly stated corporate guidelines and a 25% decrease in business development revenues due to the delay in the timing of certain development activities. These decreases were partially offset by increased aseptic filling revenues. Corporate Corporate revenues are generated from the licensing agreements with corporate partners. The increase in Corporate revenues for fiscal year 2015 compared to the same period of last year was not significant. Gross Profit (in thousands): Fiscal Year ended May 31, 2015 Fiscal Year ended May 25, 2014 Packaged Fresh Vegetables ............................................................ $ Food Export ................................................................................... Total Apio .................................................................................... Biomaterials .................................................................................... Corporate ......................................................................................... Total Gross Profit ........................................................................ $ 45,993 $ 4,252 50,245 14,609 553 65,407 $ 36,318 5,340 41,658 20,456 450 62,564 Change 27% (20%) 21% (29%) 23% 5% General There are numerous factors that can influence gross profit including product mix, customer mix, manufacturing costs, volume, sales discounts and charges for excess or obsolete inventory, to name a few. Many of these factors influence or are interrelated with other factors. The Company includes in cost of sales all of the costs related to the sale of products in accordance with U.S. generally accepted accounting principles. These costs include the following: 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. The following are the primary reasons for the changes in gross profit for the fiscal year ended May 31, 2015 compared to the same period last year as outlined in the table above. Packaged Fresh Vegetables (Apio) The increase in gross profit for Apio’s Packaged Fresh Vegetables business for fiscal year 2015 compared to the same period last year was primarily due to the gross profit generated from the 19% increase in revenues and from a favorable product mix change to a greater percentage of revenues coming from higher margin salad kit products versus the lower margin core packaged vegetable products. In addition, during fiscal year 2014, Apio’s Packaged Fresh Vegetables business experienced higher than expected raw produce sourcing costs due to a variety of factors, most importantly the heavy rains in the Midwest and along the East Coast and cooler than normal temperatures in California. -33- Food Export (Apio) Apio’s Food Export business is a buy/sell business that typically realizes a gross margin in the 5-10% range. The decrease in gross profit for Apio’s export business for fiscal year 2015 compared to the same period last year was due to a 3% decrease in revenues and from higher costs to source the higher priced export produce resulting in a lower gross profit as a percent of sales. The gross margin during fiscal year 2015 was 6.3% compared to a gross margin of 7.6% during the same period last year. Biomaterials (Lifecore) Lifecore operates in the medical devices industry and has historically realized an overall gross margin percentage of approximately 35-50%. The decrease in gross profit during fiscal year 2015 compared to the same period last year was due to the 12% decrease in revenues and from an unfavorable product mix change to a higher percentage of sales being from the lower margin aseptically filled products compared to the higher margin fermentation products and business development revenues in the prior year. Corporate The decrease in Corporate gross profit for fiscal year 2015 compared to the same period last year was not significant. Operating Expenses (in thousands): Fiscal Year ended May 31, 2015 Fiscal Year ended May 25, 2014 Research and Development: Apio ................................................................................................. $ Lifecore ........................................................................................... Corporate ......................................................................................... Total R&D ................................................................................... $ Selling, General and Administrative: Apio ................................................................................................ $ Lifecore ........................................................................................... Corporate ......................................................................................... Total S,G&A ................................................................................ $ Research and Development (R&D) 745 $ 4,806 1,437 6,988 $ 27,380 $ 4,057 8,521 39,958 $ 1,105 4,739 1,360 7,204 22,860 4,251 8,059 35,170 Change (33%) 1% 6% (3%) 20% (5%) 6% 14% Landec’s R&D consisted primarily of product development and commercialization initiatives. Research and development efforts at Apio are focused 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 research and development efforts are focused on new products and applications for HA and non-HA based biomaterials. For Corporate, the research and development efforts are primarily focused on supporting the development and commercialization of new products and new technologies in our food and HA businesses. The decrease in R&D expenses for fiscal year 2015 compared to the same period last year was primarily due to a decrease in Apio R&D as products move from the development stage to commercialization offset by slight increases in R&D at Lifecore and Corporate. -34- Selling, General and Administrative (S,G&A) S,G&A expenses consist primarily of sales and marketing expenses associated with Landec’s product sales and services, business development expenses and staff and administrative expenses. The increase in S,G&A expenses for fiscal year 2015 compared to the same period last year was primarily due to a 20% increase in sales and marketing expenses at Apio primarily to promote our new salad kit products and from the addition of incremental headcount to assist in developing and promoting future products. Non-operating income/(expense) (in thousands): Fiscal Year ended May 31, 2015 Fiscal Year ended May 25, 2014 Dividend Income ............................................................................. $ Interest Income ............................................................................... $ Interest Expense .............................................................................. $ Other Income .................................................................................. $ Income Taxes .................................................................................. $ Non-controlling Interest ................................................................. $ 1,417 $ 315 $ (1,829) $ 3,107 $ (7,746) $ (181) $ 1,125 260 (1,650 ) 10,000 (10,583 ) (197 ) Change 26% 21% 11% (69%) (27%) (8%) Dividend Income Dividend income is derived from the dividends accrued on our $22.0 million preferred stock investment in Windset which yields a cash dividend of 7.5% annually. The increase in dividend income for fiscal year 2015 compared to the same period last year was due to the Company increasing its preferred stock investment in Windset by $7.0 million on October 29, 2014. Interest Income The increase in interest income in fiscal year 2015 compared to fiscal year 2014 was not significant. Interest Expense The increase in interest expense during fiscal year 2015 compared to the same period last year was due to an $8.1 million net increase in long-term debt during fiscal year 2015. Other Income The decrease in other income for fiscal year 2015 was due to the change in the increase in the fair value of our Windset investment being lower in fiscal year 2015 compared to fiscal year 2014. In addition, other income during fiscal year 2015 included a $793,000 expense for the write off of the Company’s investment in Aesthetic Sciences, Inc. Income Taxes The decrease in the income tax expense for fiscal year 2015 was primarily due to a 28% decrease in net income before taxes compared to the same period last year. Non-controlling Interest The non-controlling interest consists of the limited partners’ equity interest in the net income of Apio Cooling, LP. The decrease in non-controlling interest for fiscal year 2015 compared to the same period last year was not significant. -35- Liquidity and Capital Resources As of May 29, 2016, the Company had cash and cash equivalents of $9.9 million, a net decrease of $4.2 million from $14.1 million at May 31, 2015. Cash Flow from Operating Activities Landec generated $21.8 million of cash from operating activities during fiscal year 2016 compared to generating $26.2 million of cash from operating activities during fiscal year 2015. The primary sources of cash from operating activities during fiscal year 2016 were from (1) $10.1 million of net income, excluding the non-cash impairment charge for the GreenLine trademark of $34.0 million and the tax benefit of $12.5 million from the GreenLine impairment charge, (2) $12.9 million of depreciation/amortization and stock based compensation expenses, and (3) a $2.7 million net increase in deferred tax liabilities, after excluding the tax benefit adjustment from the GreenLine impairment charge, partially offset by a $1.2 million increase in the investment in Windset and a net increase of $2.5 million in working capital. The primary factors which increased working capital during fiscal year 2016 were (1) a $4.1 million decrease in accounts payable due to a $5.7 million decrease at Apio due to the timing of payments and (2) a $1.3 million decrease in accrued compensation as a result of fiscal year 2015 bonuses being paid in fiscal year 2016 and no bonuses being accrued in fiscal year 2016 for Apio and Corporate executive management. These decreases were partially offset by a $2.6 million increase in other accrued liabilities due to an increase in operating expenses and inventory reserves for unusable film and packaging as a result of lost customer business. Cash Flow from Investing Activities Net cash used in investing activities for fiscal year 2016 was $41.6 million compared to $34.4 million for the same period last year. The primary uses of cash in investing activities during fiscal year 2016 were for $40.9 million of expenditures for facility expansions and the purchase of equipment primarily to support the growth of the Apio Fresh Packaged Vegetables and Lifecore businesses. Included in the use of cash from investing activities during fiscal year 2015 was an additional $18.0 million investment in Windset. Cash Flow from Financing Activities Net cash provided by financing activities for fiscal year 2016 was $15.6 million compared to $8.2 million provided by financing activities for the same period last year. The net cash provided by financing activities during fiscal year 2016 was primarily due to $26.7 million of proceeds from debt. These sources from financing activities were partially offset by $14.7 million of payments on the Company’s long-term debt. Capital Expenditures During the fiscal year ended May 29, 2016, Landec incurred expenditures for facility expansions and purchased equipment to support the growth of the Apio Fresh Packaged Fresh vegetables and Lifecore businesses. These expenditures represented the majority of the $40.9 million of capital expenditures. Debt On August 19, 2004, Lifecore issued variable rate industrial revenue bonds (“IRBs”). These IRBs were assumed by Landec in the acquisition of Lifecore. The IRBs are collateralized by a bank letter of credit which is secured by a first mortgage on Lifecore’s facility in Chaska, Minnesota. In addition, Lifecore pays an annual remarketing fee equal to 0.125% and an annual letter of credit fee of 0.75% on the outstanding principal balance. On April 23, 2012 in connection with the acquisition of GreenLine Holding Company, Apio entered into three loan agreements with General Electric Capital Corporation and/or its affiliates (“GE Capital”): (1) A five-year, $25.0 million asset-based working capital revolving line of credit, with an interest rate of LIBOR plus 2%, with availability based on the combination of the eligible accounts receivable and inventory balances of Apio and its subsidiaries. -36- (2) (3) A $12.7 million capital equipment loan which matures in seven years payable in monthly principal and interest payments of $175,356 with interest based on a fixed rate of 4.39% per annum. A $19.2 million real estate loan, $1.2 million of which was paid in April 2013, with the remaining principal balance due in ten years. The real estate loan has a fifteen year amortization period due in monthly principal and interest payments of $133,060 with interest based on a fixed rate of 4.02% per annum. The principal balance remaining at the end of the ten year term is due in one lump sum on April 23, 2022. On July 17, 2014, Apio entered into an amendment with GE Capital, which amended the revolving line of credit dated April 23, 2012 among the parties. Under the amendment, the revolving line of credit increased from $25 million to $40 million, the interest rate was reduced from LIBOR plus 2.0% to LIBOR plus 1.75%, and the term was extended to July 17, 2019, among other changes. The availability under the revolving line of credit is based on the combination of the eligible accounts receivable and eligible inventory (availability was $22.6 million at May 29, 2016). Apio’s revolving line of credit has a fee of 0.375% per annum on the unused amount. At May 29, 2016 and May 31, 2015, there was $3.5 million and zero, respectively, outstanding under Apio’s revolving line of credit. Also on July 17, 2014, Apio entered into a new equipment loan with GE Capital whereby Apio could borrow up to $25 million based on eligible equipment purchases between August 1, 2012 and August 31, 2015. Each borrowing under this new equipment loan has a five year term with a seven year amortization period. On August 28, 2014, Apio borrowed $7.1 million under the new equipment loan at a fixed rate of 3.68%. On November 24, 2014, Apio borrowed an additional $4.1 million under the new equipment loan at a fixed rate of 3.74%. This loan was terminated upon entering into the commitment letter with GE Capital on May 15, 2015. On May 15, 2015, GE Capital and Apio entered into a commitment letter, pursuant to which GE Capital committed to lend Apio up to approximately $14.7 million in equipment financing and approximately $7.7 million in real property financing. The equipment loan and the real property loan will be made pursuant to existing loan agreements dated as of April 23, 2012, as amended May 17, 2013 and July 17, 2014. The equipment loan is available to finance purchases of equipment between May 1, 2015 and June 30, 2017. The real property loan will be used to finance the expansion of Apio’s facility in Hanover, PA. On February 26, 2016, the Company borrowed $9.1 million under the equipment loan at a rate of LIBOR plus 2.25% with a term of five years and $7.7 million under the real property loan also at a rate of LIBOR plus 2.25% with a term of ten years. The GE real property, equipment and line of credit agreements (collectively the “GE Debt Agreements”) are secured by liens on all of the property of Apio and its subsidiaries. The GE Debt Agreements contain customary events of default under which obligations could be accelerated or increased. The GE Capital real estate and equipment loans are guaranteed by Landec, and Landec has pledged its equity interest in Apio as collateral under the line of credit agreement. The GE Debt Agreements contain customary covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on Apio’s assets; (2) make loans or other investments; (3) pay dividends, sell stock or repurchase stock or other securities; (4) sell assets; (5) engage in mergers; (6) enter into sale and leaseback transactions; or (7) make changes in Apio’s corporate structure. In addition, Apio must maintain a minimum fixed charge coverage ratio of 1.10 to 1.0 if the availability under its line of credit falls below $12.0 million. Apio was in compliance with all financial covenants as of May 29, 2016 and May 31, 2015. Also on May 15, 2015, Apio and Bank of America (“BofA”) entered into a commitment letter and loan agreement, pursuant to which Apio will be permitted to borrow up to $15.0 million to finance equipment purchases made between October 1, 2014 and April 30, 2016 (the “BofA Loan”). Each borrowing under the BofA Loan will have a five-year term and a fixed interest rate based on the 2.5-year swap rate at the time of borrowing. Borrowings will be secured by equipment financed with proceeds of the BofA Loan. In addition, on May 15, 2015, Landec and BofA entered into a Guaranty, pursuant to which Landec guaranteed Apio’s payment obligations under the BofA Loan. On May 29, 2015, Apio borrowed $3.8 million under the BofA Loan at a fixed rate of 2.79%. On November 27, 2015, Apio borrowed $4.2 million under the BofA Loan at a fixed rate of 2.92%. -37- During fiscal year 2016, Apio capitalized $200,000 of loan origination fees from new equipment loans and/or amendments with GE Capital and BofA. Loan origination fees of $397,000 and zero were capitalized in fiscal years 2015 and 2014, respectively. Amortization of loan origination fees for Apio recorded to interest expense for fiscal years 2016, 2015 and 2014 were $293,000, $206,000 and $187,000, respectively. Unamortized loan origination fees were $1.1 million and $1.2 million at May 29, 2016 and May 31, 2015, respectively, and are included in other assets in the Consolidated Balance Sheets. On May 23, 2012, Lifecore entered into two financing agreements with BMO Harris Bank N.A. and/or its affiliates (“BMO Harris”), collectively (the “Lifecore Loan Agreements”): (1) (2) A $12.0 million term loan which matures in four years due in monthly payments of $250,000 with interest payable monthly based on a variable interest rate of LIBOR plus 2% (the “Term Loan”). The Term Loan was paid off on May 2, 2016. A Reimbursement Agreement pursuant to which BMO Harris caused its affiliate Bank of Montreal to issue an irrevocable letter of credit in the amount of $3.5 million (the “Letter of Credit”) which is securing the IRBs described above. On May 22, 2015, Lifecore entered into a Credit and Security Agreement (the “Credit Agreement”) with BMO Harris which includes a two-year, $10.0 million asset-based working capital revolving line of credit, with an interest rate of LIBOR plus 1.85%, with availability based on the combination of Lifecore’s eligible accounts receivable and inventory balances (availability was $9.6 million at May 29, 2016) and with no unused fee. As of May 29, 2016 and May 31, 2015, no amounts were outstanding under the Credit Agreement. The obligations of Lifecore under the Lifecore Loan Agreements and Credit Agreement (collectively “Lifecore Debt Agreements”) are secured by liens on all of the property of Lifecore. The Lifecore Debt Agreements contain customary covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on Lifecore’s assets; (2) make loans or other investments; (3) pay dividends or repurchase stock or other securities; (4) sell assets; (5) engage in mergers; (6) enter into sale and leaseback transactions; (7) adopt certain benefit plans; and (8) make changes in Lifecore’s corporate structure. In addition, under the Credit Agreement, Lifecore must maintain (a) a minimum fixed charge coverage ratio of 1.10 to 1.0 if Lifecore’s unrestricted cash balance is less than 50% of total funded debt at the end of each fiscal quarter and (b) a net debt cash flow leverage ratio of less than 2.0 to 1.0 at the end of each fiscal quarter. Lifecore was in compliance with all financial covenants as of May 29, 2016 and May 31, 2015. Unamortized loan origination fees for the Lifecore Debt Agreements were zero and $48,000 at May 29, 2016 and May 31, 2015, respectively, and are included in other assets in the Consolidated Balance Sheets. The market value of the Company’s debt approximates its recorded value as the interest rates on each debt instrument approximate current market rates. Contractual Obligations The Company’s material contractual obligations for the next five years and thereafter as of May 29, 2016, are as follows (in thousands): Due in Fiscal Year Ended May Total 2017 Thereafter 2021 Obligation 8,534 $ 9,208 $ 6,395 $ 14,189 8,048 $ Debt principal payments.................... $ 54,662 $ 950 1,144 1,711 6,671 Interest payments .............................. 3,950 472 453 6,306 Capital leases ..................................... 432 1,330 Operating leases ................................ 3,353 8,550 — — Purchase commitments ...................... 23,700 23,200 Total .................................................. $ 99,889 $ 36,765 $ 13,307 $ 11,480 $ 11,126 $ 7,690 $ 19,521 8,288 $ 1,432 462 2,625 500 823 483 612 — 611 486 198 — 2020 2019 2018 -38- The interest payment amounts above include (1) all of the GE Capital and BofA fixed rate loans (see Note 6 to the Consolidated Financial Statements for a list of the Company’s fixed rate loans), (2) the estimated interest rate payment on the variable rate loans with GE Capital entered into on February 26, 2016 based on the five year historical average 30-day LIBOR plus 2.25% or 2.73% and (3) the estimated interest rate payment on the variable rate IRB based on the five year historical interest rate average for the Municipal Swap Index plus 20 basis points plus the letter of credit and remarketing fees of 0.875% resulting in an estimated rate of 1.18%. Landec is not a party to any agreements with, or commitments to, any special purpose entities that would constitute material off-balance sheet financing other than the operating lease commitments. Landec’s future capital requirements will depend on numerous factors, including the progress of its research and development programs; the continued development of marketing, sales and distribution capabilities; the ability of Landec to establish and maintain new licensing arrangements; any decision to pursue additional acquisition opportunities; weather conditions that can affect the supply and price of produce, the timing and amount, if any, of payments received under licensing and research and development agreements; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of product commercialization activities and arrangements; and other factors. If Landec’s currently available funds, together with the internally generated cash flow from operations are not sufficient to satisfy its capital needs, Landec would be required to seek additional funding through other arrangements with collaborative partners, additional bank borrowings and public or private sales of its securities. There can be no assurance that additional funds, if required, will be available to Landec on favorable terms, if at all. Landec believes that its cash from operations, along with existing cash and cash equivalents will be sufficient to finance its operational and capital requirements for at least the next twelve months. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not significant. Item 8. Financial Statements and Supplementary Data See Item 15 of Part IV of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of May 29, 2016, our management evaluated, with participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and are effective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. -39- Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of May 29, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 Framework). Our management has concluded that, as of May 29, 2016, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our internal control over financial reporting, which is included herein. Changes in Internal Controls over Financial Reporting There were no changes in our internal controls over financial reporting during the fiscal year ended May 29, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. -40- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Landec Corporation We have audited Landec Corporation and subsidiaries’ internal control over financial reporting as of May 29, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Landec Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Landec Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May 29, 2016, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landec Corporation and subsidiaries as of May 29, 2016 and May 31, 2015, and the related consolidated statements of comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended May 29, 2016 and our report dated July 29, 2016 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP San Francisco, California July 29, 2016 Item 9B. Other Information None -41- Item 10. Directors, Executive Officers and Corporate Governance PART III This information required by this item will be contained in the Registrant’s definitive proxy statement which the Registrant will file with the Commission no later than September 26, 2016 (120 days after the Registrant’s fiscal year end covered by this Report) and is incorporated herein by reference. Item 11. Executive Compensation This information required by this item will be contained in the Registrant’s definitive proxy statement which the Registrant will file with the Commission no later than September 26, 2016 (120 days after the Registrant’s fiscal year end covered by this Report) and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This information required by this item will be contained in the Registrant’s definitive proxy statement which the Registrant will file with the Commission no later than September 26, 2016 (120 days after the Registrant’s fiscal year end covered by this Report) and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions and Director Independence This information required by this item will be contained in the Registrant’s definitive proxy statement which the Registrant will file with the Commission no later than September 26, 2016 (120 days after the Registrant’s fiscal year end covered by this Report) and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services This information required by this item will be contained in the Registrant’s definitive proxy statement which the Registrant will file with the Commission no later than September 26, 2016 (120 days after the Registrant’s fiscal year end covered by this Report) and is incorporated herein by reference. -42- Item 15. Exhibits and Financial Statement Schedules (a) 1. Consolidated Financial Statements of Landec Corporation PART IV Page Report of Independent Registered Public Accounting Firm ..................................................................... Consolidated Balance Sheets at May 29, 2016 and May 31, 2015 ........................................................... Consolidated Statements of Comprehensive (Loss) Income for the Years Ended May 29, 2016, May 31, 2015 and May 25, 2014 ...................................................................................................................... Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended May 29, 2016, May 31, 2015 and May 25, 2014 ...................................................................................................................... Consolidated Statements of Cash Flows for the Years Ended May 29, 2016, May 31, 2015 and May 25, 2014 .................................................................................................................................................... Notes to Consolidated Financial Statements ............................................................................................ 44 45 46 47 48 49 2. All schedules provided for in the applicable accounting regulations of the Securities and Exchange Commission have been omitted since they pertain to items which do not appear in the financial statements of Landec Corporation and its subsidiaries or to items which are not significant or to items as to which the required disclosures have been made elsewhere in the financial statements and supplementary notes and such schedules. 3. Index of Exhibits ...................................................................................................................................... 76 The exhibits listed in the accompanying Index of Exhibits are filed or incorporated by reference as part of this report. -43- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Landec Corporation We have audited the accompanying consolidated balance sheets of Landec Corporation and subsidiaries as of May 29, 2016 and May 31, 2015, and the related consolidated statements of comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended May 29, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Landec Corporation and subsidiaries at May 29, 2016 and May 31, 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 29, 2016, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Landec Corporation’s internal control over financial reporting as of May 29, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 29, 2016 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP San Francisco, California July 29, 2016 -44- LANDEC CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) May 29, 2016 May 31, 2015 Current assets: ASSETS Cash and cash equivalents ........................................................................................... $ Accounts receivable, less allowance for doubtful accounts ......................................... Inventories ................................................................................................................... Deferred taxes ............................................................................................................. Prepaid expenses and other current assets ................................................................... Total current assets ................................................................................................... Investment in non-public company, fair value ................................................................ Property and equipment, net ............................................................................................ Goodwill, net ................................................................................................................... Trade names, net ............................................................................................................. Customer relationships, net ............................................................................................. Other assets ..................................................................................................................... Total Assets .............................................................................................................. $ LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable ......................................................................................................... $ Accrued compensation ................................................................................................. Other accrued liabilities ............................................................................................... Deferred revenue ......................................................................................................... Line of credit ............................................................................................................... Current portion of long-term debt ................................................................................ Total current liabilities ............................................................................................. Long-term debt ................................................................................................................ Capital lease obligation, less current portion ................................................................... Deferred taxes ................................................................................................................. Other non-current liabilities ............................................................................................ Total liabilities ......................................................................................................... Commitments and contingencies (Note 8) Stockholders’ equity: Common stock, $0.001 par value; 50,000,000 shares authorized; 27,148,096 and 26,990,490 shares issued and outstanding at May 29, 2016 and May 31, 2015, respectively .............................................................................................................. Additional paid-in capital ............................................................................................ Retained earnings ......................................................................................................... Total stockholders’ equity ........................................................................................ Non-controlling interest ............................................................................................... Total equity .............................................................................................................. Total Liabilities and Stockholders’ Equity ............................................................... $ See accompanying notes. 9,894 $ 46,406 25,535 — 4,643 86,478 62,700 120,880 49,620 14,428 6,968 2,396 343,470 $ 30,904 $ 5,460 7,772 832 3,500 8,048 56,516 46,614 3,804 22,442 1,744 131,120 14,127 46,479 25,027 2,111 5,458 93,202 61,500 84,465 49,620 48,428 7,835 1,415 346,465 35,009 6,742 5,212 843 — 8,353 56,159 34,166 — 34,340 1,691 126,356 27 137,244 73,457 210,728 1,622 212,350 343,470 $ 27 133,307 85,098 218,432 1,677 220,109 346,465 -45- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands, except per share amounts) Year Ended May 29, 2016 Year Ended May 31, 2015 Year Ended May 25, 2014 Product sales ....................................................................................... $ 541,099 $ 539,257 $ 476,813 Cost of product sales .......................................................................... 470,142 473,850 414,249 Gross profit ......................................................................................... 70,957 65,407 62,564 Operating costs and expenses: Research and development ............................................................. Selling, general and administrative ................................................. Impairment of GreenLine tradename .............................................. Total operating costs and expenses ............................................. 7,228 49,515 34,000 90,743 6,988 39,958 — 46,946 7,204 35,170 — 42,374 Operating (loss) income ..................................................................... (19,786) 18,461 20,190 Dividend income ................................................................................ Interest income ................................................................................... Interest expense .................................................................................. Other income ...................................................................................... Net (loss) income before taxes ........................................................... Income tax benefit (expense) ............................................................. Consolidated net (loss) income .......................................................... Non-controlling interest ..................................................................... Net (loss) income and comprehensive (loss) income applicable to common stockholders ......................................................................... $ 1,650 71 (1,987) 1,200 (18,852) 7,404 (11,448) (193) 1,417 315 (1,829) 3,107 21,471 (7,746) 13,725 (181) 1,125 260 (1,650 ) 10,000 29,925 (10,583 ) 19,342 (197 ) (11,641) $ 13,544 $ 19,145 Basic net (loss) income per share ....................................................... $ Diluted net (loss) income per share .................................................... $ (0.43) $ (0.43) $ 0.50 $ 0.50 $ 0.72 0.71 Shares used in per share computation: Basic ............................................................................................... Diluted ............................................................................................ 27,044 27,044 26,884 27,336 26,628 27,120 See accompanying notes. -46- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share and per share amounts) Balance at May 26, 2013 ..................... 26,402,247 $ 26 $ 126,258 $ 52,409 $ 178,693 $ 1,721 Common Stock Shares Amount Paid-in Capital Retained Earnings Additional Total Stockholders’ Equity Non- controlling Interest 372,852 1 2,297 — — Balance at May 25, 2014 ..................... 26,815,253 Issuance of common stock at $5.63 to $13.32 per share, net of taxes paid by Landec on behalf of employees ....................................... Issuance of common stock for vested restricted stock units ............. Taxes paid by Company for stock swaps and RSUs .............................. Stock-based compensation .............. Tax benefit from stock-based compensation expense ..................... Non-controlling interest .................. Payments to non-controlling interest ............................................. Net and comprehensive income ...... Issuance of common stock at $5.63 to $8.19 per share, net of taxes paid by Landec on behalf of employees .. Issuance of common stock for vested restricted stock units ............. Taxes paid by Company for stock swaps and RSUs .............................. Stock-based compensation .............. Tax benefit from stock-based compensation expense ..................... Non-controlling interest .................. Payments to non-controlling interest ............................................. Net and comprehensive income ...... Issuance of common stock at $5.63 to $9.01 per share, net of taxes paid by Landec on behalf of employees .. Issuance of common stock for vested restricted stock units ............. Stock-based compensation .............. Tax benefit from stock-based compensation expense ..................... Non-controlling interest .................. Payments to non-controlling interest ............................................. Net and comprehensive loss ............ 40,154 — — — — 102,745 72,492 — — — — 125,167 32,439 — — — — — Balance at May 31, 2015 ..................... 26,990,490 — (345) 1,356 1,922 — — — — — — — 2,298 — (345) 1,356 1,922 — — — 131,488 — 19,145 71,554 — 19,145 203,069 122 — (343) 1,577 463 — — — — — — — 122 — (343) 1,577 463 — — — 133,307 — 13,544 85,098 — 13,544 218,432 322 — 3,465 150 — — — — — — 322 — 3,465 150 — — — — — — — — 27 — — — — — — — — 27 — — — — — — — — — — 197 (226) — 1,692 — — — — — 181 (196) — 1,677 — — — — 193 — — Balance at May 29, 2016 ..................... 27,148,096 $ — — 27 $ — — 137,244 $ — (11,641) 73,457 $ — (11,641) 210,728 $ (248) — 1,622 See accompanying notes. -47- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended Year Ended Year Ended May 29, 2016 May 31, 2015 May 25, 2014 Cash flows from operating activities: Consolidated net (loss) income .................................................................. $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................................... Stock-based compensation expense ....................................................... Deferred taxes ........................................................................................ Change in investment in non-public company , fair value ..................... Tax benefit from stock based compensation .......................................... Impairment of non-public company, non-fair value investment ............. Net loss (gain) on disposal of property and equipment .......................... Impairment of GreenLine tradename ..................................................... Changes in assets and liabilities: Accounts receivable, net..................................................................... Inventories, net ................................................................................... Prepaid expenses and other current assets .......................................... Accounts payable ............................................................................... Accrued compensation ....................................................................... Other accrued liabilities ..................................................................... Restricted cash collateral .................................................................... Deferred revenue ................................................................................ Net cash provided by operating activities ...................................................... Cash flows from investing activities: Purchases of property and equipment ......................................................... Deposit on capital lease .............................................................................. Investment in non-public company, fair value ........................................... Proceeds from sales of fixed assets ............................................................ Purchases of marketable securities ............................................................. Proceeds from maturities of marketable securities ..................................... Net cash used in investing activities ............................................................... Cash flows from financing activities: Proceeds from sale of common stock ......................................................... Taxes paid by Company for stock swaps and RSUs .................................. Tax benefit from stock-based compensation expense ................................ Net change in other assets/liabilities .......................................................... Proceeds from long term debt .................................................................... Payments on long term debt ....................................................................... Proceeds from lines of credit ...................................................................... Payments on lines of credit ........................................................................ Payments to non-controlling interest. ......................................................... Net cash provided by (used in) financing activities ....................................... Net (decrease) increase in cash and cash equivalents ..................................... Cash and cash equivalents at beginning of year ............................................. Cash and cash equivalents at end of year ....................................................... $ (11,448) $ 13,725 $ 19,342 9,395 3,465 (9,787) (1,200) (150) — 46 34,000 73 (508) 965 (4,105) (1,282) 2,556 (225) (11) 21,784 (40,867) (850) — 127 — — (41,590) 322 — 150 (247) 26,748 (14,652) 26,100 (22,600) (248) 15,573 (4,233) 14,127 9,894 $ 7,090 1,577 4,152 (3,900 ) (463 ) 793 (90 ) — (1,754 ) (292 ) 177 2,894 2,646 11 — (411 ) 26,155 (17,511 ) — (18,000 ) 1,071 — — (34,440 ) 122 (343 ) 463 (24 ) 15,014 (6,867 ) 30,417 (30,417 ) (196 ) 8,169 (116 ) 14,243 14,127 $ 7,114 1,356 5,605 (10,000 ) (1,922 ) — 329 — (7,982 ) (622 ) 4,711 (141 ) 38 3,211 — 6 21,045 (14,886 ) — — — (1,417 ) 2,962 (13,341 ) 2,298 (1,271 ) 1,922 31 — (5,933 ) 9,500 (13,500 ) (226 ) (7,179 ) 525 13,718 14,243 Supplemental disclosure of cash flow information: Cash paid during the period for interest ..................................................... $ Cash paid during the period for income taxes, net of refunds received ...... $ 2,017 $ 2,625 $ 1,994 $ 150 $ 1,504 50 Supplemental disclosure of non-cash investing and financing activities: Facility and equipment acquired under a capital lease ............................... $ 3,908 $ — $ — See accompanying notes. -48- LANDEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: 1) Intelimer® polymers, and 2) 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. The Company’s technologies, along with its customer relationships and tradenames, are the foundation, and a key differentiating advantage upon which Landec has built its business. Basis of Presentation Basis of Consolidation The consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles 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 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 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. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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; 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; the valuation of 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 period. The actual results may differ from management’s estimates. -49- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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 things, 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, 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 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 Wholesale Corporation (“Costco”) and Wal-mart, Inc. (“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 5% 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. During the fiscal year ended May 31, 2015, sales to the Company’s top five customers accounted for approximately 46% of total revenue with the top two customers from the Packaged Fresh Vegetables segment, Costco and Wal-mart, accounting for approximately 21% and 11%, 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 5% of total revenues. As of May 31, 2015, the top two customers, Costco and Wal-mart represented approximately 15% and 13%, respectively, of total accounts receivable. 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. Recoverability 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. Financial Instruments The Company’s financial instruments are primarily composed of marketable securities, 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 and lines of credit approximates their carrying value. Fair values for long-term financial instruments not readily marketable are estimated based upon discounted future cash flows at prevailing market interest rates. 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 29, 2016 and May 31, 2015. -50- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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 90-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 25, 2014 .................................................... $ Year ended May 31, 2015 .................................................... $ Year ended May 29, 2016 .................................................... $ 583 $ 516 $ 382 $ 143 $ — $ 63 $ (210) $ (134) $ (110) $ 516 382 335 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 uncollectible 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 processed vegetable products that are generally washed and packaged in our 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 (Loss) Income. In addition, Packaged Fresh Vegetables value-added revenues include the revenues 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 our customers. Sales of BreatheWay packaging are recognized when shipped to our 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 by 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. Our Biomaterials business principally generates revenue through the sale of products containing HA. Lifecore primarily sells products to customers in three medical areas: (1) Ophthalmic, which represented approximately 55% of Lifecore’s revenues in fiscal year 2016, (2) Orthopedic, which represented approximately 20% of Lifecore’s revenues in fiscal year 2016 and (3) Other/Non-HA products represented approximately 25% of Lifecore’s revenues in fiscal year 2016. The vast majority of revenues from our Biomaterials business are recognized upon shipment. -51- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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 no further performance obligations exist, and there is no 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 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 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. -52- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) A summary of revenues by type of revenue arrangement as described above is as follows (in thousands): Recorded upon shipment Recorded upon acceptance in foreign port Revenue from multiple element arrangements Revenue from license fees, R&D contracts and royalties Total Shipping and Handling Costs Year ended May 29, 2016 Year ended May 31, 2015 Year ended May 25, 2014 $ $ 458,985 $ 64,181 13,400 4,533 541,099 $ 465,484 $ 67,714 4,253 1,806 539,257 $ 398,938 69,710 6,811 1,354 476,813 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 sourcing locations to the end consumer markets. Other Accounting Policies and Disclosures 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 equivalents consist mainly of money market funds. The market value of cash equivalents approximates their historical cost given their short-term nature. Inventories Inventories are stated at the lower of cost (using the first-in, first-out method) or net realizable value. As of May 29, 2016 and May 31, 2015 inventories consisted of (in thousands): May 29, May 31, 2016 2015 Finished goods ............................................................................................................ $ Raw materials ............................................................................................................... Work in progress .......................................................................................................... Total inventories ...................................................................................................... $ 12,165 $ 9,855 3,515 25,535 $ 13,271 9,879 1,877 25,027 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 provides a provision for slow moving and obsolete inventories based on the estimate of demand for its products. Advertising Expense Advertising expenditures for the Company are expensed as incurred. Advertising expense for the Company for fiscal years 2016, 2015 and 2014 was $2.1 million, $1.3 million and $447,000, respectively. 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 to 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. There were no notes or advances outstanding at May 29, 2016. -53- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) Related Party Transactions The Company sold products to and earned license fees from Windset Holdings 2010 Ltd., a Canadian corporation (“Windset”) during the last three fiscal years. During fiscal years 2016, 2015 and 2014, the Company recognized revenues of $666,000, $537,000, and $365,000, respectively. These amounts have been included in product sales in the accompanying Consolidated Statements of Comprehensive (Loss) Income, from the sale of products to and license fees from Windset. The related receivable balances of $523,000 and $306,000 from Windset are included in accounts receivable in the accompanying Consolidated Balance Sheets as of May 29, 2016 and May 31, 2015, respectively. Additionally, unrelated to the revenue transactions above, the Company purchases produce from Windset for sale to third parties. During fiscal years 2016, 2015 and 2014, the Company recognized cost of product sales of $32,000, $1.6 million, and $1.6 million, respectively, in the accompanying Consolidated Statements of Comprehensive (Loss) Income, from the sale of products purchased from Windset. The related accounts payable of zero and $244,000 to Windset are included in accounts payable in the accompanying Consolidated Balance Sheets as of May 29, 2016 and May 31, 2015, respectively. All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors. Property and Equipment Property and equipment are stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense. Depreciation is expensed on a straight-line basis over the estimated useful lives of the respective assets, generally three to forty years for buildings and leasehold improvements and three to twenty years for furniture and fixtures, computers, capitalized software, capitalized leases, machinery, equipment and autos. 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 using the straight-line basis over estimated useful lives of three to seven years. During fiscal years 2016, 2015 and 2014, the Company capitalized $174,000, $509,000 and $913,000 in software development costs, respectively. 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 twelve to 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 GreenLine Holding Company (“GreenLine”) by Apio in April 2012, (ii) upon the acquisition of Lifecore in April 2010 and (iii) 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 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 29, 2016, the Biomaterials reporting unit had $13.9 million of goodwill and the Packaged Fresh Vegetables reporting unit had $35.7 million of goodwill. -54- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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 amount 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 indefinite-lived assets, including goodwill, the Company performs a qualitative analysis in accordance with ASC 350-30-35. 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 the three months ended February 28, 2016, management made the strategic decision to convert its GreenLine branded products in retail grocery stores to the Eat Smart brand over the following six month period. This decision resulted in an impairment of the GreenLine tradename. Management estimated the value of the remaining GreenLine branded foodservice sales using the relief from royalty valuation method, which resulted in an impairment of $34.0 million. The remaining GreenLine tradename associated with the Company’s foodservice business is valued at $2.0 million. The impairment charge is recorded in the Consolidated Statements of Comprehensive (Loss) Income as “Impairment of GreenLine tradename” as an operating expense under the Packaged Fresh Vegetables reporting unit. Subsequent to the write down of the GreenLine tradename during the third quarter of fiscal year 2016, the Company tested its indefinite-lived intangible assets for impairment as of February 29, 2016 and determined that no additional adjustments to the carrying values of these assets were necessary as of that date. Subsequent to the 2016 annual impairment test, there have been no significant events or circumstances affecting the valuation of indefinite-lived intangible assets. As of May 29, 2016, there were no events or changes in circumstances that indicated that the carrying amount of intangible assets may not be recoverable. Therefore, there was no impairment to the carrying value of the Company's indefinite-lived intangible assets. On a quarterly basis, the Company considers the need to update its most recent annual tests for possible impairment of its indefinite-lived 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 first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In assessing the qualitative factors, management considers the impact of these key factors: macro-economic conditions, industry and market environment, overall financial performance of the Company, cash flow from operating activities, market capitalization 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 50 percent) that the fair value of a reporting unit is less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required. -55- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) In a quantitative test, the Company compares the fair value of indefinite-lived intangible assets to its carrying value including goodwill. 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. If the carrying value of the Company exceeds its fair value, the Company will determine the amount of impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. As of February 29, 2016, the Company tested its goodwill for impairment and determined that no indication of impairment existed as of that date. As a result, it was not necessary to perform the two-step quantitative goodwill impairment test at that time. Subsequent to the 2016 annual impairment test, there have been no significant events or circumstances affecting the valuation of goodwill that indicate a need for goodwill to be further tested for impairment. There were no impairment losses for goodwill during fiscal years 2016, 2015 and 2014. Investment in Non-Public Company On 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 29, 2016 and May 31, 2015. The Company has elected to account for its investment in Windset under the fair value option (see Note 2). Partial Self-Insurance on Employee Health and Workers Compensation Plans The Company provides health insurance benefits to eligible employees under a 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 and represents management's best estimate of the amounts that have not been paid as of May 29, 2016. It is reasonably possible that the expense the Company ultimately incurs could differ and adjustments to future reserves may be necessary. Deferred Revenue Cash received in advance of services performed are recorded as deferred revenue. At May 29, 2016, $832,000 was recognized as advances from customers. At May 31, 2015, $843,000 was recognized as advances from customers. 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 (Loss) Income, following the consolidated net income (loss) caption. In connection with the acquisition of Apio, 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 of $1.6 million at May 29, 2016 and $1.7 million at May 31, 2015 was comprised of the non-controlling limited partners’ interest in Apio Cooling. -56- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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 assets 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 29, 2016, the Company had a $1.2 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. (cid:3) 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 final 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. Per Share Information Accounting guidance requires the presentation of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects 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 (loss) income per share (in thousands, except per share amounts): Fiscal Year Fiscal Year Fiscal Year Ended May 29, 2016 Ended May 31, 2015 Ended May 25, 2014 Numerator: Net (loss) income applicable to Common Stockholders .................... $ (11,641 ) $ 13,544 $ 19,145 Denominator: Weighted average shares for basic net (loss) income per share ...... 27,044 26,884 26,628 Effect of dilutive securities: Stock options and restricted stock units .......................................... Weighted average shares for diluted net (loss) income per share ....... — 27,044 452 27,336 492 27,120 Diluted net (loss) income per share ................................................... $ (0.43 ) $ 0.50 $ 0.71 -57- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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. Options to purchase 371,115 and 333,993 shares of Common Stock at a weighted average exercise price of $14.02 and $14.15 per share were outstanding during fiscal years ended May 31, 2015 and May 25, 2014, 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. Cost of Sales The Company includes in cost of sales all the costs related to the sale of products. 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 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 and related benefits, supplies, travel expenses, consulting expenses and corporate allocations. Accounting for Stock-Based Compensation 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). For nonstatutory options, the cash flows resulting from the tax benefit due to tax deductions in excess of the compensation expense recognized for those options (excess tax benefit) are classified as financing activities within the statement of cash flows. The Company’s stock-based awards include stock option grants and restricted stock unit awards (“RSUs”). The following table summarizes the stock-based compensation for options and RSUs (in thousands): Fiscal Year Ended May 29, 2016 Fiscal Year Ended May 31, 2015 Fiscal Year Ended May 25, 2014 Options ................................................................................... $ RSUs ...................................................................................... Total stock-based compensation expense ........................... $ 1,352 $ 2,113 3,465 $ 561 $ 1,016 1,577 $ 558 798 1,356 The following table summarizes the stock-based compensation by income statement line item (in thousands): Fiscal Year Ended May 29, 2016 Fiscal Year Ended May 31, 2015 Fiscal Year Ended May 25, 2014 Research and development ..................................................... $ Sales, general and administrative ........................................... Total stock-based compensation expense ........................... $ 241 $ 3,224 3,465 $ 38 $ 1,539 1,577 $ 39 1,317 1,356 The estimated fair value for stock options, which determines the Company’s calculation of 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. In addition, the Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation expense only for those awards that are expected to vest and revises those estimates in subsequent periods if the actual forfeitures differ from the prior estimates. -58- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) 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 impact on the fair value estimates. As of May 29, 2016, May 31, 2015 and May 25, 2014, the fair value of stock option grants was estimated using the following weighted average assumptions: Fiscal Year Fiscal Year Fiscal Year Ended May 29, 2016 Ended May 31, 2015 Ended May 25, 2014 Expected life (in years) .......................................................... Risk-free interest rate ............................................................. Volatility ................................................................................ Dividend yield ........................................................................ 3.38 1.09% 31% 0% 3.25 1.00% 32% 0% 3.50 0.71% 41% 0% The weighted average estimated fair value of Landec employee stock options granted at grant date market prices during the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014 was $2.85, $3.42 and $4.41 per share, respectively. No stock options were granted above or below grant date market prices during the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014. 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 2 to the Consolidated Financial Statements). 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 1 – observable inputs such as quoted prices for identical instruments in active markets. Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data. Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions. As of May 29, 2016 and May 31, 2015, the only asset of the Company that was measured at fair value on a recurring basis was its minority interest investment in Windset. The Company has elected the fair value option of accounting for its investment in Windset. The calculation of fair value utilizes significant unobservable inputs, including projected cash flows, growth rates and discount rates. As a result, the Company’s investment in Windset is considered to be a Level 3 measurement investment. The change in the fair market value of the Company’s investment in Windset for the fiscal years ended May 29, 2016 and May 31, 2015 was due to the Company’s 26.9% minority interest in the change in the fair market value of Windset during those periods. In determining the fair value of the investment in Windset, the Company utilizes the following significant unobservable inputs in the discounted cash flow models: Annual consolidated revenue growth rates ......................................................... Annual consolidated expense growth rates ........................................................ Consolidated income tax rates ............................................................................ Consolidated discount rates ................................................................................ 4% 4% 15% 12.5% 4% 4% 15% 15% to 21% At May 29, 2016 At May 31, 2015 -59- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) The revenue growth, expense growth and income tax rate assumptions, consider 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 marketability 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 Windset investment as of 10% increase in revenue growth rates ................................................................................................... $ 10% increase in expense growth rates ................................................................................................... $ 10% increase in income tax rates ......................................................................................................... $ 10% increase in discount rates ............................................................................................................. $ May 29, 2016 600 (600) - (300) 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 fair value of the Company’s Windset investment as of May 29, 2016 and May 31, 2015 was $62.7 million and $61.5 million, respectively. Recent Accounting Pronouncements Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a company’s contracts with customers. ASU 2014-09 will be effective beginning the first quarter of the Company's fiscal year 2019 with early application permitted in the first quarter of the Company’s fiscal year 2018. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. Management the Company's Consolidated Financial Statements and disclosures. the effect ASU 2014-09 will have on is currently evaluating Debt Issuance Costs In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2017, with early adoption permitted. Management does not expect that adoption of ASU 2015-03 will have a significant impact on its Consolidated Financial Statements and disclosures. Balance Sheet Classification of Deferred Taxes In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assets and liabilities to be presented on the consolidated balance sheets as noncurrent. Deferred Taxes were previously required to be classified as current or non-current on the consolidated balance sheets. The Company early adopted ASU 2015-17 effective February 28, 2016 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company’s net current deferred tax asset to the net non-current deferred tax liability in its consolidated balance sheet as of February 28, 2016. No prior periods were retrospectively adjusted. -60- 1. Organization, Basis of Presentation, and Summary of Significant Accounting Policies (continued) Leases In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use-assets. ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2020 on a modified retrospective basis, with early adoption permitted. Management is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures. Stock-Based Compensation In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” which changes how companies account for certain aspects of stock-based awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for the Company beginning in the first quarter of fiscal year 2018, with early adoption permitted. Management is currently evaluating the effect ASU 2016-09 will have on the Company's Consolidated Financial Statements and disclosures. 2. Investments in non-public companies Aesthetic Sciences In December 2005, Landec entered into a licensing agreement with Aesthetic Sciences for the exclusive rights to use Landec's Intelimer® materials technology for the development of dermal fillers worldwide under the agreement. The Company received shares of preferred stock in exchange for the license. Aesthetic Sciences sold the rights to its Smartfil Injector System on July 16, 2010. The royalty period from the sale of the Smartfil Injector System began November 1, 2014 and as a result the Company obtained for the first time during the third quarter of fiscal year 2015 financial information for the products for which a royalty is due Aesthetic Sciences. Based on the review of this historical financial information and discussions with the acquirer, the Company concluded that its investment in Aesthetic Sciences was other than temporarily impaired, and therefore wrote off its remaining $793,000 investment in Aesthetic Sciences as of March 1, 2015. This impairment is included in other income in the Consolidated Statements of Comprehensive (Loss) Income. Windset On February 15, 2011, Apio entered into a share purchase agreement (the “Windset Purchase Agreement”) with Windset. Pursuant to the Windset Purchase Agreement, Apio purchased from Windset 150,000 Senior A preferred shares for $15.0 million and 201 common shares for $201. On July 15, 2014, Apio increased its investment in Windset by purchasing from the Newell Capital Corporation an additional 68 shares of common stock and 51,211 shares of junior preferred stock of Windset for $11.0 million. After this purchase, the Company’s common shares represent a 26.9% ownership interest in Windset. The non-voting Senior A preferred shares yield a cash dividend of 7.5% annually. The dividend is payable within 90 days of each anniversary of the execution of the Windset Purchase Agreement. The non-voting junior preferred stock does not yield a dividend unless declared by the Board of Directors of Windset and no such dividend has been declared. The Windset Purchase Agreement includes a put and call option, which can be exercised on, or after, the sixth anniversary of the Windset Purchase Agreement whereby Apio can exercise the put to sell its common, Senior A preferred shares and junior preferred shares to Windset, or Windset can exercise the call to purchase those shares from Apio, in either case, at a price equal to 26.9% of the fair market value of Windset’s common shares from the date of the Company’s investment through the put and call date, plus the liquidation value of the preferred shares of $20.1 million ($15.0 million for the Senior A preferred shares and $5.1 million for the junior preferred shares). Under the terms of the arrangement with Windset, the Company is entitled to designate one of five members on the Board of Directors of Windset. -61- 2. Investments in non-public companies (continued) On October 29, 2014, Apio further increased its investment in Windset by purchasing 70,000 shares of Senior B preferred shares for $7.0 million. The Senior B preferred shares pays an annual dividend of 7.5% on the amount outstanding at each anniversary date of the Windset Purchase Agreement. The Senior B preferred shares purchased by Apio have a put feature whereby Apio can sell back to Windset $1.5 million of shares on the first anniversary, an additional $2.75 million of shares on the second anniversary and the remaining $2.75 million on the third anniversary. After the third anniversary, Apio may at any time put any or all of the shares not previously sold back to Windset. At any time on or after February 15, 2017, Windset has the right to call any or all of the outstanding common shares and at such time must also call the same proportion of Senior A preferred shares, Senior B preferred shares and junior preferred shares owned by Apio. Windset’s partial call provision is restricted such that a partial call cannot result in Apio holding less than 10% of Windset’s common shares outstanding. The investment in Windset does not qualify for equity method accounting as the investment does not meet the criteria of in-substance common stock due to returns through the annual dividend on the non-voting senior preferred shares that are not available to the common stock holders. As the put and call options require the Purchased Shares to be put or called in equal proportions, the Company has deemed that the investment, in substance, should be treated as a single security for purposes of accounting. The Company has adopted fair value option in the accounting for its investment in Windset effective on the acquisition date. The fair value of the Company’s investment in Windset utilizes significant unobservable inputs in the discounted cash flow models, including projected cash flows, growth rates and the discount rate, and is therefore considered a Level 3 for fair value measurement purposes (see Note 1). The Company believes that reporting its investment at fair value provides its investors with useful information on the performance of the Company’s investment and the anticipated appreciation in value as Windset expands its business. The fair value of the Company’s investment in Windset was determined utilizing the Windset Purchase Agreement’s put/call calculation for value and a discounted cash flow model based on projections developed by Windset, and considers the put and call conversion options. These features impact the duration of the cash flows utilized to derive the estimated fair values of the investment. These two discounted cash flow models’ estimate for fair value, which generally approximate a similar result, is then weighted. Assumptions included in these discounted cash flow models will be evaluated quarterly based on Windset’s actual and projected operating results to determine the change in fair value. The Company recorded $1.7 million, $1.4 million and $1.1 million in dividends for fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014, respectively. In addition, the Company recorded $1.2 million, $3.9 million and $10.0 million of income for fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014, respectively, which is included in other income in the Consolidated Statements of Comprehensive (Loss) Income, from the increase in the fair market value of the Company’s investment in Windset. The Company also entered into an exclusive license agreement with Windset, which was executed in June 2010, prior to contemplation of Apio’s investment in Windset. -62- 3. Property and Equipment Property and equipment consists of the following (in thousands): Land and buildings ................................................................................. 15 - 40 3 - 20 Leasehold improvements ........................................................................ 3 - 20 Computers, capitalized software, machinery, equipment and autos ....... Furniture and fixtures ............................................................................. 3 - 7 Construction in process .......................................................................... Gross property and equipment ............................................................ Less accumulated depreciation and amortization ................................... Net property and equipment ............................................................... $ Years of Useful Life May 29, 2016 May 31, 2015 57,426 1,360 68,260 804 6,837 134,687 (50,222) 84,465 67,192 $ 1,620 87,464 901 17,677 174,854 (53,974) 120,880 $ $ Depreciation and amortization expense for property and equipment for the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014 was $8.2 million, $6.2 million and $6.2 million, respectively. Amortization related to capitalized leases, which is included in depreciation expense, was $49,000 for fiscal year ended May 29, 2016 and zero for the fiscal years ended May 31, 2015 and May 25, 2014. Amortization related to capitalized software was $269,000, $158,000 and $189,000 for fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014, respectively. The unamortized computer software costs as of May 29, 2016 and May 31, 2015 was $865,000 and $1.1 million, respectively. 4. Intangible Assets The carrying amount of goodwill as of May 29, 2016, May 31, 2015 and May 25, 2014 was $35.7 million for the Packaged Fresh Vegetables segment and $13.9 million for the Biomaterials segment. Information regarding Landec’s other intangible assets is as follows (in thousands): Trademarks & Trade names Customer Relationships Total Balance as of May 26, 2013 ......................................................... $ Amortization expense ............................................................... Balance as of May 25, 2014 ......................................................... Amortization expense ............................................................... Balance as of May 31, 2015 ......................................................... Impaired during the period ....................................................... Amortization expense ............................................................... Balance as of May 29, 2016 ......................................................... $ 48,428 $ — 48,428 — 48,428 (34,000) — 14,428 $ 9,606 $ (886) 8,720 (885) 7,835 — (867) 6,968 $ 58,034 (886) 57,148 (885) 56,263 (34,000) (867) 21,396 Accumulated amortization of Trademarks and Trade names was $872,000 as of May 29, 2016 and May 31, 2015. Accumulated amortization of Customer Relationships as of May 29, 2016 and May 31, 2015 was $4.2 million and $3.4 million, respectively. Accumulated impairment losses as of May 29, 2016 and May 31, 2015 were $38.8 million and $4.8 million, respectively. Lifecore’s Customer Relationships amount of $3.7 million is being amortized over 12 years and Apio’s Customer Relationships amount of $7.5 million is being amortized over 13 years. The amortization expense for the next five fiscal years is estimated to be $885,000 per year. -63- 5. Stockholders’ Equity Holders of Common Stock are entitled to one vote per share. Convertible Preferred Stock The Company has authorized two million shares of preferred stock, and as of May 29, 2016 has no outstanding preferred stock. Common Stock and Stock Option Plans At May 29, 2016, the Company had 2.7 million common shares reserved for future issuance under Landec equity incentive plans. On October 10, 2013, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2013 Stock Incentive Plan (the “Plan”) became effective and replaced the Company’s 2009 Stock Incentive Plan. Employees (including officers), consultants and directors of the Company and its subsidiaries and affiliates are eligible to participate in the Plan. The Plan provides for the grant of stock options (both nonstatutory and incentive stock options), stock grants, stock units and stock appreciation rights. Awards under the Plan will be evidenced by an agreement with the Plan participants and 2.0 million shares of the Company’s Common Stock (“Shares”) were initially available for award under the Plan. Under the Plan, no recipient may receive awards during any fiscal year that exceeds the following amounts: (i) stock options covering in excess of 500,000 Shares; (ii) stock grants and stock units covering in excess of 250,000 Shares in the aggregate; or (iii) stock appreciation rights covering more than 500,000 Shares. In addition, awards to non-employee directors are discretionary. However, a non-employee director may not be granted awards in excess of 30,000 Shares in the aggregate during any fiscal year. The exercise price of the options is the fair market value of the Company’s Common Stock on the date the options are granted. As of May 29, 2016, 1,474,507 options to purchase shares and restricted stock units (“RSUs”) were outstanding. On October 15, 2009, following stockholder approval at the Annual Meeting of Stockholders of the Company, the 2009 Stock Incentive Plan (the “2009 Plan”) became effective and replaced the Company’s 2005 Stock Incentive Plan. Employees (including officers), consultants and directors of the Company and its subsidiaries and affiliates were eligible to participate in the 2009 Plan. The 2009 Plan provided for the grant of stock options (both nonstatutory and incentive stock options), stock grants, stock units and stock appreciation rights. Under the 2009 Plan, 1.9 million Shares were initially available for awards and as of May 29, 2016, 783,808 options to purchase shares and RSUs were outstanding. -64- 5. Stockholders’ Equity (continued) Stock-Based Compensation Activity Activity under all Landec equity incentive plans is as follows: Restricted Stock Outstanding Stock Options Outstanding RSUs and Options Available for Grant Number of Restricted Shares Weighted Average Grant Date Fair Value Number of Stock Options Weighted Average Exercise Price Balance at May 26, 2013 ............................ 422,977 Additional shares reserved ......................... 2,000,000 (420,131) Granted ....................................................... — Awarded/Exercised .................................... — Forfeited ..................................................... (2,846) Plan shares expired .................................... Balance at May 25, 2014 ............................ 2,000,000 Granted ....................................................... (1,118,857) — Awarded/Exercised .................................... — Forfeited ..................................................... — Plan shares expired .................................... 881,143 Balance at May 31, 2015 ............................ (443,175) Granted ....................................................... — Awarded/Exercised .................................... 28,000 Forfeited ..................................................... — Plan shares expired .................................... 465,968 Balance at May 29, 2016 ............................ 95,330 $ — 128,631 $ (62,499) $ (12,162) $ — 149,300 $ 324,357 $ (79,219) $ (1,667) $ — 392,771 $ 177,675 $ (32,439) $ (11,166) $ — 526,841 $ — 14.30 6.18 8.86 — 6.52 1,339,892 $ — 291,500 $ (398,080) $ (12,452) $ (5,000) $ 13.17 1,215,860 $ 794,500 $ 13.97 (205,419) $ 11.57 (2,223) $ 14.30 (66,000) $ — 14.15 1,736,718 $ 265,500 $ 12.10 (220,717) $ 13.28 (24,473) $ 14.36 (25,554) $ — 13.51 1,731,474 $ 6.58 — 14.30 6.45 6.66 13.32 8.45 14.20 6.55 14.30 11.32 11.19 12.04 6.44 14.38 9.86 11.90 Upon vesting of certain RSUs and the exercise of certain options during fiscal years 2016, 2015 and 2014, certain RSUs and exercised options were net share-settled to cover the required exercise price and withholding tax and the remaining amounts were converted into an equivalent number of shares of Common Stock. The Company withheld shares with value equivalent to the exercise price for options and the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld for fiscal years 2016, 2015 and 2014 were 95,550, 112,443 and 47,573 RSUs and options, respectively, which was based on the value of the option and/or RSUs on their exercise or vesting date as determined by the Company's closing stock price. Total payments for the employees' tax obligations to the taxing authorities during fiscal years 2016, 2015 and 2014 were approximately zero, $343,000 and $1.3 million, respectively. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise have been issued as a result of the vesting and did not represent an expense to the Company. The following table summarizes information concerning stock options outstanding and exercisable at May 29, 2016: Range of Exercise Prices Number of Shares Outstanding 401,807 $5.00 - $9.00 312,167 $9.01 - $13.50 364,000 $13.51 - $14.30 $14.31 - $14.39 653,500 $5.00 - $14.39 1,731,474 Options Outstanding Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price Options Exercisable Aggregate Intrinsic Value Number of Shares Exercisable Weighted Average Exercise Price Aggregate Intrinsic Value 1.23 $ 6.35 $ 4.41 $ 6.00 $ 4.62 $ 5.86 $ 2,249,268 54,784 11.86 $ — 14.13 $ — 14.39 $ 11.90 $ 2,304,052 401,807 $ 36,617 $ 308,722 $ 216,687 $ 963,833 $ 5.86 $ 2,249,268 40,834 10.56 $ — 14.20 $ 14.39 $ — 10.63 $ 2,290,102 -65- 5. Stockholders’ Equity (continued) At May 29, 2016 and May 31, 2015 options to purchase 963,833 and 849,464 shares of Landec’s Common Stock were vested, respectively, and 767,641 and 887,254 were unvested, respectively. No options have been exercised prior to being vested. The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $11.46 on May 27, 2016, which would have been received by holders of stock options had all holders of stock options exercised their stock options that were in-the-money as of that date. The total number of in-the- money stock options exercisable as of May 29, 2016, was 418,474 shares. The aggregate intrinsic value of stock options exercised during the fiscal year 2016 was $1.1 million. Option Awards Outstanding Options Weighted Average Exercise Price Weighted Average Remaining Contract Term (in years) Vested........................................................................... Expected to vest ........................................................... Total .......................................................................... 963,833 $ 750,704 $ 1,714,537 $ 10.63 13.51 11.89 3.38 $ 6.17 4.60 $ Aggregate Intrinsic Value 2,290,102 13,517 2,303,619 As of May 29, 2016, there was $6.8 million of total unrecognized compensation expense related to unvested equity compensation awards granted under the Company’s incentive stock plans. Total expense is expected to be recognized over the weighted-average period of 2.1 years for both stock options and restricted stock awards. Stock Repurchase Plan On July 14, 2010, the Board of Directors of the Company approved the establishment of a stock repurchase plan which allows for the repurchase of up to $10.0 million of the Company’s Common Stock. The Company may repurchase its Common Stock from time to time in open market purchases or in privately negotiated transactions. The timing and actual number of shares repurchased is at the discretion of management of the Company and will depend on a variety of factors, including stock price, corporate and regulatory requirements, market conditions, the relative attractiveness of other capital deployment opportunities and other corporate priorities. The stock repurchase program does not obligate Landec to acquire any amount of its Common Stock and the program may be modified, suspended or terminated at any time at the Company's discretion without prior notice. During fiscal years 2016, 2015 and 2014, the Company did not purchase any shares on the open market. -66- 6. Debt Long-term debt consists of the following (in thousands): May 29, 2016 May 31, 2015 Real property loan agreement with General Electric Capital Corporation (“GE Capital”); due in monthly principal and interest payments of $133,060 through May 1, 2022 with interest based on a fixed rate of 4.02% per annum ...................... $ Capital equipment loan with GE Capital; due in monthly principal and interest payments of $175,356 through May 1, 2019 with interest based on a fixed rate of 4.39% per annum ...................................................................................................... Capital equipment loan with GE Capital; due in monthly principal and interest payments of $95,120 through July 17, 2019 with interest based on a fixed rate of 3.68% per annum ...................................................................................................... Capital equipment loan with GE Capital; due in monthly principal and interest payments of $55,828 through December 1, 2019 with interest based on a fixed rate of 3.74% per annum ........................................................................................... Capital equipment loan with Bank of America (“BofA”); due in monthly principal and interest payments of $68,274 through June 28, 2020 with interest based on a fixed rate of 2.79% per annum.................................................................................. Real property loan agreement with GE Capital ; due in monthly principal payments of $46,000 through March 1, 2026, plus interest payable monthly at LIBOR plus 2.25% per annum ...................................................................................................... Capital equipment loan with GE Capital; due in monthly principal payments of $122,000 through March 1, 2021, plus interest payable monthly at LIBOR plus 2.25% per annum ...................................................................................................... Capital equipment loan with BofA; due in monthly principal and interest payments of $75,000 through November 27, 2020 with interest based on a fixed rate of 2.92% per annum ...................................................................................................... Term note with BMO Harris Bank N.A. (“BMO Harris”); due in monthly principal payments of $250,000 through May 23, 2016, plus interest payable monthly at LIBOR plus 2% per annum ...................................................................................... Industrial revenue bonds (“IRBs”) issued by Lifecore; due in annual payments through 2020 with interest at a variable rate set weekly by the bond remarketing agent (0.59% and 0.31% at May 29, 2016 and May 31, 2015, respectively) ............ Total ............................................................................................................................. Less current portion ...................................................................................................... Long-term portion ........................................................................................................ $ 14,167 $ 15,172 5,904 7,705 5,558 6,476 3,375 3,907 3,158 3,819 7,622 8,873 3,940 — — — — 3,000 2,065 54,662 (8,048) 46,614 $ 2,440 42,519 (8,353) 34,166 The future minimum principal payments of the Company’s debt for each year presented are as follows (in thousands): GE RE Loans GE M&E Loans BofA Loans FY 2017 ...................................................... FY 2018 ...................................................... FY 2019 ...................................................... FY 2020 ...................................................... FY 2021 ...................................................... Thereafter ................................................... Total ........................................................ $ 1,431 1,474 1,518 1,564 1,613 14,189 21,789 $ 4,686 4,829 4,975 5,541 3,679 — 23,710 $ 1,541 1,585 1,631 1,678 663 — 7,098 $ IRB Total 390 400 410 425 440 — 2,065 $ 8,048 8,288 8,534 9,208 6,395 14,189 54,662 -67- 6. Debt (continued) On July 17, 2014, Apio entered into an amendment with GE Capital, which amended the revolving line of credit dated April 23, 2012 among the parties. Under the amendment, the revolving line of credit increased from $25.0 million to $40.0 million, the interest rate was reduced from LIBOR plus 2.0% to LIBOR plus 1.75%, and the term was extended to July 17, 2019, among other changes. The availability under the revolving line of credit is based on the combination of the eligible accounts receivable and eligible inventory (availability was $22.6 million at May 29, 2016). Apio’s revolving line of credit has a fee of 0.375% per annum on the unused amount. At May 29, 2016, Apio had $3.5 million outstanding under its revolving line of credit. As of May 31, 2015, there was no outstanding balance under Apio’s revolving line of credit. Also on July 17, 2014, Apio entered into a new equipment loan with GE Capital whereby Apio can borrow up to $25.0 million based on eligible equipment purchases between August 1, 2012 and August 31, 2015. Each borrowing under this new equipment loan has a five year term with a seven year amortization period. On August 28, 2014, Apio borrowed $7.1 million under the new equipment loan at a fixed rate of 3.68%. On November 24, 2014, Apio borrowed an additional $4.1 million under the new equipment loan at a fixed rate of 3.74%. This loan was terminated upon entering into the commitment letter with GE Capital on May 15, 2015. On May 15, 2015, GE Capital and Apio entered into a commitment letter, pursuant to which GE Capital committed to lend Apio up to approximately $14.7 million in equipment financing and approximately $7.7 million in real property financing. The equipment loan and the real property loan will be made pursuant to existing loan agreements dated as of April 23, 2012, as amended May 17, 2013 and July 17, 2014. The equipment loan is available to finance purchases of equipment between May 1, 2015 and June 30, 2017. The real property loan will be used to finance the expansion of Apio’s facility in Hanover, PA. On February 26, 2016, the Company borrowed $9.1 million under the equipment loan at a rate of LIBOR plus 2.25% with a term of five years and $7.7 million under the real property loan also at a rate of LIBOR plus 2.25% with a term of ten years. The GE real estate, equipment and line of credit agreements (collectively the “GE Debt Agreements”) are secured by liens on all of the property of Apio and its subsidiaries. The GE Debt Agreements contain customary events of default under which obligations could be accelerated or increased. The GE Capital real estate and equipment loans are guaranteed by Landec, and Landec has pledged its equity interest in Apio as collateral under the line of credit agreement. The GE Debt Agreements contain customary covenants, such as limitations on the ability to (1) incur indebtedness or grant liens or negative pledges on Apio’s assets; (2) make loans or other investments; (3) pay dividends, sell stock or repurchase stock or other securities; (4) sell assets; (5) engage in mergers; (6) enter into sale and leaseback transactions; or (7) make changes in Apio’s corporate structure. In addition, Apio must maintain a minimum fixed charge coverage ratio of 1.10 to 1.0 if the availability under its line of credit falls below $12.0 million. Apio was in compliance with all financial covenants as of May 29, 2016 and May 31, 2015. On May 15, 2015, Apio and BofA entered into a commitment letter and loan agreement, pursuant to which Apio will be permitted to borrow up to $15.0 million to finance equipment purchases made between October 1, 2014 and April 30, 2016 (the “BofA Loan”). Each borrowing under the BofA Loan will have a five-year term and a fixed interest rate based on the 2.5-year swap rate at the time of borrowing. Borrowings will be secured by equipment financed with proceeds of the BofA Loan. In addition, on May 15, 2015, Landec and BofA entered into a Guaranty, pursuant to which Landec guaranteed Apio’s payment obligations under the BofA Loan. On May 29, 2015, Apio borrowed $3.8 million under this equipment loan at a fixed rate of 2.79%. On November 27, 2015, Apio borrowed $4.2 million under this equipment loan at a fixed rate of 2.92%. -68- 6. Debt (continued) During fiscal year 2016, Apio capitalized $200,000 of loan origination fees from new real property and equipment loans and/or amendments with GE Capital and BofA. During fiscal year 2015, Apio capitalized $397,000 of loan origination fees from new real property and equipment loans and/or amendments with GE Capital and BofA. No loan origination fees were capitalized in fiscal year 2014. Amortization of loan origination fees for Apio recorded to interest expense for fiscal years 2016, 2015 and 2014 were $293,000, $206,000 and $187,000, respectively. Unamortized loan origination fees were $1.1 million and $1.2 million at May 29, 2016 and May 31, 2015, respectively, and are included in other assets in the Consolidated Balance Sheets. On May 23, 2012, Lifecore entered into two financing agreements with BMO Harris Bank N.A. and/or its affiliates (“BMO Harris”): (1) (2) A $12.0 million term loan which matures in four years due in monthly payments of $250,000 with interest payable monthly based on a variable interest rate of LIBOR plus 2% (the “Term Loan”). The Term Loan was paid off on May 2, 2016. A Reimbursement Agreement pursuant to which BMO Harris caused its affiliate Bank of Montreal to issue an irrevocable letter of credit in the amount of $3.5 million (the “Letter of Credit”) which is securing the IRBs described above. On May 22, 2015, Lifecore entered into a Credit and Security Agreement (the “Credit Agreement”) with BMO Harris which includes (a) a two-year, $10.0 million asset-based working capital revolving line of credit, with an interest rate of LIBOR plus 1.85%, with availability based on the combination of Lifecore’s eligible accounts receivable and inventory balances (availability was $9.6 million at May 29, 2016) and with no unused fee and as of May 29, 2016 no amounts were outstanding under the line of credit. On August 19, 2004, Lifecore issued variable rate industrial revenue bonds (“IRBs”). These IRBs were assumed by Landec in the acquisition of Lifecore. The IRBs are collateralized by a bank letter of credit which is secured by a first mortgage on the Company’s facility in Chaska, Minnesota. In addition, the Company pays an annual remarketing fee equal to 0.125% and an annual letter of credit fee of 0.75%. The maturities on the IRBs are held in a sinking fund account, recorded in Other Current Assets in the accompanying Consolidated Balance Sheets, and are paid out each year on September 1st. 7. Income Taxes The provision for income taxes consisted of the following (in thousands): Current: Federal .................................................................... $ State ........................................................................ Foreign .................................................................... Total ........................................................................... Deferred: Federal .................................................................... State ........................................................................ Total ........................................................................... Income tax (benefit)/expense ..................................... $ Year ended May 29, 2016 Year ended May 31, 2015 Year ended May 25, 2014 2,382 $ (82) 83 2,383 (9,177) (610) (9,787) (7,404) $ 3,480 $ 43 71 3,594 3,789 363 4,152 7,746 $ 4,785 157 56 4,998 5,059 526 5,585 10,583 -69- 7. Income Taxes (continued) The actual provision for income taxes differs from the statutory U.S. federal income tax rate of 35% for all year presented as follows (in thousands): Year Ended May 29, 2016 Year Ended May 31, 2015 Year Ended May 25, 2014 Provision at U.S. statutory rate of 35% .................................... $ State income taxes, net of federal benefit ................................. Change in valuation allowance ................................................. Tax credits ................................................................................ Domestic manufacturing deduction .......................................... Stock-based compensation ....................................................... Other ........................................................................................ Total ...................................................................................... $ (6,666) $ (504) 6 (156) (307) 173 50 (7,404) $ 7,451 $ 566 353 (375) (369) 142 (22) 7,746 $ 10,405 711 99 (378) (406) (47) 199 10,583 The Company is in an income tax benefit position in fiscal year 2016 primarily due to the Company's $34.0 million impairment of its GreenLine tradename (see Note 1), which resulted in an overall net loss before taxes for fiscal year 2016. Whereas in fiscal years 2015 and 2014, the Company was in an overall net income before tax position and thus in an income tax expense position. The effective tax rate for fiscal year 2016 increased from 36% to 39% in comparison to fiscal year 2015 primarily due to the effect of the impairment of GreenLine tradename. The decrease in income tax expense in fiscal year 2015 compared to fiscal year 2014 was primarily due to a 28% decrease in net income before taxes. Significant components of deferred tax assets and liabilities consisted of the following (in thousands): May 29, 2016 May 31, 2015 Deferred tax assets: Net operating loss carryforwards ........................................................................... $ Accruals and reserves ............................................................................................ Stock-based compensation ..................................................................................... Research and AMT credit carryforwards ............................................................... Other ...................................................................................................................... Gross deferred tax assets ........................................................................................... Valuation allowance .................................................................................................. Net deferred tax assets ............................................................................................... 3,030 $ 1,836 1,436 468 926 7,696 (1,240) 6,456 Deferred tax liabilities: Basis difference in investment in non-public company ......................................... Depreciation and amortization ............................................................................... Goodwill and other indefinite life intangibles ....................................................... Deferred tax liabilities ............................................................................................... (11,125) (9,758) (8,015) (28,898) 3,415 1,964 662 515 966 7,522 (1,234 ) 6,288 (10,753 ) (7,186 ) (20,578 ) (38,517 ) Net deferred tax liabilities ......................................................................................... $ (22,442) $ (32,229 ) As of May 29, 2016, the Company had federal, California, Indiana, and other state net operating loss carryforwards of approximately $7.3 million, $413,000, $6.5 million, and $13.0 million respectively. These losses expire in different periods through 2032 if not utilized. Such net operating losses consist of excess tax benefits from employee stock option exercises and have not been recorded in the Company’s deferred tax assets. The Company will record approximately $413,000 of the gross California net operating loss to additional paid in capital as and when such excess tax benefits are ultimately realized. The Company acquired additional net operating losses through the acquisition of GreenLine. Utilization of these acquired net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of 1986 and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation. -70- 7. Income Taxes (continued) The Company has California research and development tax credits carryforwards of approximately $1.3 million. The research and development tax credit carryforwards have an unlimited carryforward period for California purposes. Certain tax credit carryovers are attributable to excess tax benefits from employee stock option exercises and have not been recorded in the Company’s deferred tax assets. The Company will record $1.1 million of the gross California research and development credit to additional paid in capital as and when such excess tax benefits are ultimately realized. Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, the Company determined that a valuation allowance of $1.2 million should be recorded as a result of uncertainty around the utilization of certain state net operating losses as it is more likely than not that a portion of the deferred tax asset will not be realized in the foreseeable future. The valuation allowance increased by an insignificant amount in fiscal year 2016. The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Unrecognized tax benefits – beginning of the period ................... $ Gross increases – tax positions in prior period ............................. Gross decreases – tax positions in prior period ............................ Gross increases – current-period tax positions ............................. Unrecognized tax benefits – end of the period ............................. $ As of May 29, 2016 May 31, 2015 May 25, 2014 998 7 (48) 78 1,035 1,035 $ 17 (141) 76 987 $ 987 $ 1 (223) 77 842 $ As of May 29, 2016, the total amount of net unrecognized tax benefits was $842,000, of which, $715,000, if recognized, would affect the effective tax rate. As of May 31, 2015, the total amount of net unrecognized tax benefits was $987,000, of which, $800,000, if recognized, would affect the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest was not material as of May 29, 2016, May 31, 2015 and May 25, 2014. In the twelve months succeeding May 29, 2016, it is reasonably possible that approximately $300,000 of other unrecognized tax benefits may be recognized. Due to tax attribute carryforwards, the Company is subject to examination for tax years 1997 forward for U.S. tax purposes. The Company is also subject to examination in various state jurisdictions for tax years 1998 forward, none of which were individually material. 8. Commitments and Contingencies Operating Leases Landec leases land, facilities, and equipment under operating lease agreements with various terms and conditions, which expire at various dates through fiscal year 2023. Certain of these leases have renewal options. -71- 8. Commitments and Contingencies (continued) The approximate future minimum lease payments under these operating leases at May 29, 2016 are as follows (in thousands): FY 2017 ................................................................................................................................................... $ FY 2018 ................................................................................................................................................... FY 2019 ................................................................................................................................................... FY 2020 ................................................................................................................................................... FY 2021 ................................................................................................................................................... Thereafter ................................................................................................................................................. Total ..................................................................................................................................................... $ Amount 3,353 2,625 1,330 612 198 432 8,550 Rent expense for operating leases, including month to month arrangements was $4.5 million, $5.0 million and $4.4 million for the fiscal years 2016, 2015 and 2014, respectively. Capital Leases On September 3, 2015, Lifecore leased a 65,000 square foot building in Chaska, MN, two miles from its current facility. The initial term of the lease is seven years with two five-year renewal options. The lease contains a buyout option at any time after year seven with the purchase price equal to then mortgage balance on the lessor’s loan secured by the building. The lease is a capital lease. Included in property, plant and equipment as of May 29, 2016 is $3.8 million associated with this capital lease. The monthly lease payment is initially $34,000 and increases by 2.4% per year. Lifecore and the lessor made capital improvements prior to occupancy and thus the lease did not become effective until January 1, 2016. Lifecore initially will use the building for warehousing and final packaging. Apio entered into a capital lease for office equipment for which the value of $133,000 is included in property, plant and equipment as of May 29, 2016. Future minimum lease payments under capital leases for each year presented as are follows (in thousands): FY 2017 ..................................................................................................................................................... $ FY 2018 ..................................................................................................................................................... FY 2019 ..................................................................................................................................................... FY 2020 ..................................................................................................................................................... FY 2021 ..................................................................................................................................................... Thereafter .................................................................................................................................................. Total minimum lease payment .................................................................................................................. Less: amounts representing interest and taxes ........................................................................................... Total .......................................................................................................................................................... Less current portion included in other accrued liabilities ......................................................................... Long-term capital lease obligation ........................................................................................................... $ 453 462 472 483 486 3,950 6,306 (2,445 ) 3,861 (57 ) 3,804 Purchase Commitments At May 29, 2016, the Company was committed to purchase $23.7 million of produce during fiscal year 2017 in accordance with contractual terms at market rates. Payments of $30.5 million, $16.8 million, and $7.1 million were made in fiscal years 2016, 2015, and 2014, respectively, under similar arrangements. -72- 8. Commitments and Contingencies (continued) Legal Contingencies In the ordinary course of business, the Company is involved in various legal proceedings and claims related to matters such as wage and hour 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 adjusted to reflect the impacts of negotiations, estimate settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the Company’s consolidated financial statements. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s future results of operations or cash flows, or both, of a particular quarter. During the twelve months ended, May 29, 2016, the Company has recorded a charge to income in the amount of $775,000 or $0.02 per diluted share after taxes, which is the Company’s best estimate of settlement charges for all legal matters currently underway. 9. Employee Savings and Investment Plans The Company sponsors a 401(k) plan which is available to all Landec employees (“Landec Plan”), allows participants to contribute from 1% to 50% of their salaries, up to the Internal Revenue Service limitation into designated investment funds. The Company matches 67% on the first 6% contributed by an employee. Employee and Company contributions are fully vested at the time of the contributions. The Company retains the right, by action of the Board of Directors, to amend, modify, or terminate the plan. For fiscal years 2016, 2015 and 2014, the Company contributed $1.3 million, $1.2 million and $1.1 million, respectively, to the Landec Plan. 10. Business Segment Reporting The Company manages its business operations through three strategic business units. Based upon the information reported to the chief operating decision maker, who is the Chief Executive Officer, the Company has the following reportable segments: the Packaged Fresh Vegetables segment, the Food Export segment and the Biomaterials segment. The Packaged Fresh Vegetables segment markets and packs specialty packaged whole and fresh-cut fruit and vegetables, the majority of which incorporate the BreatheWay specialty packaging for the retail grocery, club store and food services industry. In addition, the Packaged Fresh Vegetables segment sells BreatheWay packaging to partners for fruit and vegetable products. The Food Export segment consists of revenues generated from the purchase and sale of primarily whole commodity fruit and vegetable products primarily to Asia. The Biomaterials segment sells products utilizing hyaluronan, a naturally occurring polysaccharide that is widely distributed in the extracellular matrix of connective tissues in both animals and humans, and non-HA products for medical use primarily in the Ophthalmic, Orthopedic and other markets. Corporate licenses Landec’s Intelimer polymers for agricultural products, personal care products and other industrial products. The Corporate segment also includes general and administrative expenses, non-Packaged Fresh Vegetables and non-Biomaterials interest income and income tax expenses. All of the assets of the Company are located within the United States of America. -73- 10. Business Segment Reporting (continued) The Company’s international sales by geography are based on the billing address of the customer and were as follows (in millions): May 29, 2016 May 31, 2015 May 25, 2014 Canada .................................................................................... $ Taiwan .................................................................................... $ Belgium .................................................................................. $ Indonesia ................................................................................ $ China ...................................................................................... $ Japan....................................................................................... $ All Other Countries ................................................................ $ 80.6 $ 32.3 $ 13.4 $ 9.4 $ 8.3 $ 6.4 $ 17.0 $ 79.7 $ 32.1 $ 6.8 $ 9.0 $ 9.0 $ 8.5 $ 18.4 $ 46.6 30.7 13.1 9.6 8.2 9.9 19.1 Operations by segment consisted of the following (in thousands): Fiscal Year Ended May 29, 2016 Net sales ..................................................... $ International sales ....................................... $ Gross profit ................................................. $ Net income (loss) ....................................... $ Identifiable assets ....................................... $ Depreciation and amortization ................... $ Capital expenditures ................................... $ Dividend income ........................................ $ Interest income ........................................... $ Interest expense .......................................... $ Income tax expense (benefit) .................... $ Fiscal Year Ended May 31, 2015 Net sales ..................................................... $ International sales ....................................... $ Gross profit ................................................. $ Net income (loss) ....................................... $ Identifiable assets ....................................... $ Depreciation and amortization ................... $ Capital expenditures ................................... $ Dividend income ........................................ $ Interest income ........................................... $ Interest expense .......................................... $ Income tax expense ................................... $ Fiscal Year Ended May 25, 2014 Net sales ..................................................... $ International sales ....................................... $ Gross profit ................................................. $ Net income (loss) ....................................... $ Identifiable assets ....................................... $ Depreciation and amortization ................... $ Capital expenditures ................................... $ Dividend income ........................................ $ Interest income ........................................... $ Interest expense .......................................... $ Income tax expense ................................... $ Packaged Fresh Vegetables Food Export Biomaterials Corporate TOTAL 423,859 $ 81,242 $ 40,479 $ (31,975) $ 213,341 $ 6,648 $ 26,892 $ 1,650 $ 46 $ 1,721 $ 415 $ 430,415 $ 80,500 $ 45,993 $ 17,145 $ 228,672 $ 4,766 $ 12,895 $ 1,417 $ 32 $ 1,655 $ 792 $ 360,728 $ 47,224 $ 36,318 $ 19,041 $ 196,257 $ 4,751 $ 10,950 $ 1,125 $ 12 $ 1,402 $ 33 $ 64,181 $ 64,181 $ 4,176 $ 699 $ 29,124 $ 1 $ — $ — $ — $ — $ 143 $ 67,837 $ 67,714 $ 4,252 $ 1,041 $ 27,746 $ 6 $ — $ — $ — $ — $ 48 $ 69,827 $ 69,710 $ 5,340 $ 1,973 $ 25,391 $ 6 $ — $ — $ — $ — $ 3 $ 50,470 $ 21,993 $ 24,081 $ 9,499 $ 98,986 $ 2,606 $ 13,975 $ — $ 25 $ 266 $ 1,946 $ 40,432 $ 15,246 $ 14,609 $ 3,838 $ 85,779 $ 2,184 $ 4,499 $ — $ 254 $ 174 $ 177 $ 45,704 $ 20,312 $ 20,456 $ 9,695 $ 85,858 $ 2,221 $ 3,877 $ — $ 242 $ 248 $ 17 $ 2,589 $ — $ 2,221 $ 10,136 $ 2,019 $ 140 $ — $ — $ — $ — $ (9,908) $ 573 $ — $ 553 $ (8,480) $ 4,268 $ 134 $ 117 $ — $ 29 $ — $ 6,729 $ 554 $ — $ 450 $ (11,564) $ 6,117 $ 136 $ 59 $ — $ 6 $ — $ 10,530 $ 541,099 167,416 70,957 (11,641) 343,470 9,395 40,867 1,650 71 1,987 (7,404) 539,257 163,460 65,407 13,544 346,465 7,090 17,511 1,417 315 1,829 7,746 476,813 137,246 62,564 19,145 313,623 7,114 14,886 1,125 260 1,650 10,583 -74- 11. Quarterly Consolidated Financial Information (unaudited) The following is a summary of the unaudited quarterly results of operations for fiscal years 2016, 2015 and 2014 (in thousands, except for per share amounts): FY 2016 Revenues .................................................... $ Gross profit ................................................. $ Net income (loss) ....................................... $ Net income (loss) per basic share ............... $ Net income (loss) per diluted share ............ $ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 135,355 $ 17,977 $ 2,952 $ 0.11 $ 0.11 $ 140,441 $ 17,265 $ 1,868 $ 0.07 $ 0.07 $ 129,990 $ 12,931 $ (21,190) $ (0.78) $ (0.78) $ 135,313 $ 22,784 $ 4,729 $ 0.17 $ 0.17 $ FY 2015 Revenues .................................................... $ Gross profit ................................................. $ Net income ................................................ $ Net income per basic share ......................... $ Net income per diluted share ...................... $ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 133,614 $ 14,188 $ 2,353 $ 0.09 $ 0.09 $ 132,665 $ 15,666 $ 3,223 $ 0.12 $ 0.12 $ 138,530 $ 16,885 $ 3,772 $ 0.14 $ 0.14 $ 134,448 $ 18,668 $ 4,196 $ 0.16 $ 0.15 $ FY 2014 Revenues .................................................... $ Gross profit ................................................. $ Net income ................................................ $ Net income per basic share ......................... $ Net income per diluted share ...................... $ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 109,479 $ 12,532 $ 4,752 $ 0.18 $ 0.18 $ 120,026 $ 13,734 $ 3,451 $ 0.13 $ 0.13 $ 126,379 $ 20,155 $ 6,400 $ 0.24 $ 0.24 $ 120,929 $ 16,143 $ 4,542 $ 0.17 $ 0.17 $ FY 2016 541,099 70,957 (11,641) (0.43) (0.43) FY 2015 539,257 65,407 13,544 0.50 0.50 FY 2014 476,813 62,564 19,145 0.72 0.71 -75-  (b) Index of Exhibits. Exhibit Number Exhibit Title 3.1 Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated November 7, 2008. 3.2 Amended and Restated Bylaws of Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated October 18, 2011. 10.1 Form of Indemnification Agreement, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 29, 2005. 10.2 Industrial Real Estate Lease dated March 1, 1993 between the Registrant and Wayne R. Brown & Bibbits Brown, Trustees of the Wayne R. Brown & Bibbits Brown Living Trust dated December 30, 1987, incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (File No. 33- 80723) declared effective on February 12, 1996. 10.3# License and research and development agreement between the Registrant and Air Products and Chemicals, Inc. dated March 14, 2006, incorporated herein by reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 28, 2006. 10.4 Agreement and Plan of Merger between Landec Corporation, a California corporation, and the Registrant, dated as of November 6, 2008, incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated November 7, 2008. 10.5* 2009 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated October 19, 2009. 10.6* Form of Stock Grant Agreement for 2009 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated October 19, 2009. 10.7* Form of Notice of Stock Option Grant and Stock Option Agreement for 2009 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated October 19, 2009. 10.8* Form of Stock Unit Agreement for 2009 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated October 19, 2009. 10.9* Form of Stock Appreciation Right Agreement for 2009 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated October 19, 2009. 10.10 Stock Purchase Agreement by and among the Registrant, Lifecore Biomedical, Inc., Lifecore Biomedical, LLC and Warburg Pincus Private Equity IX, L.P., dated April 30, 2010, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 5, 2010. -76- Exhibit Number 10.11 10.12 10.13 10.14 Exhibit Title Share Purchase Agreement, dated February 15, 2011, by and between Apio, Inc. and Windset Holdings 2010 Ltd., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 18, 2011. Stock Purchase Agreement by and among Apio, Inc., GreenLine Holding Company and 2003 Riverside Capital Appreciation Fund, L.P., dated April 23, 2012, incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated April 27, 2012. Loan agreements by and between the Registrant, Apio, Inc. and General Electric Capital Corporation dated April 23, 2012, incorporated herein by reference to Exhibits 10.1 through 10.9 to the Registrant’s Current Report on Form 8-K dated May 27, 2012. Credit Agreement and Reimbursement Agreement by and between Lifecore Biomedical, LLC and BMO Harris Bank N.A. dated May 23, 2012, incorporated herein by reference to Exhibits 10.1 and 10.2 to the Registrant’s Current Report on Form 8-K dated May 29, 2012. 10.15* Nonqualified Deferred Compensation Plan, incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated July 31, 2013. 10.16* 2013 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated October 11, 2013. 10.17* Form of Stock Grant Agreement for 2013 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated October 11, 2013. 10.18* Form of Notice of Stock Option Grant and Stock Option Agreement for 2013 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated October 11, 2013. 10.19* Form of Stock Unit Agreement for 2013 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated October 11, 2013. 10.20* Form of Stock Appreciation Right Agreement for 2013 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated October 11, 2013. 10.21* Employment Agreement between the Registrant and Gary T. Steele effective as of May 26, 2014, incorporated herein by reference to Exhibit 10.35 to the Registrant’s Current Report on Form 8-K dated June 23, 2014. 10.22 10.23 Stock Transfer Agreement dated July 15, 2014 among Apio, Inc., Newell Capital Corporation and Windset Holdings 2010 Ltd., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 21, 2014. Second Amendment to Credit Agreement dated July 17, 2014 among Apio, Inc., Cal-Ex Trading Company, GreenLine Logistics, Inc. and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 21, 2014. -77- Exhibit Number 10.24 Exhibit Title First Amendment to Loan Agreement dated as of August 28, 2014 among Apio, Inc., Apio Cooling LP and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 2, 2014. 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 Promissory Note dated as of August 28, 2014 by Apio, Inc., payable to GE Capital Commercial, Inc., incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated September 2, 2014. Third Amendment to Credit Agreement dated as of August 28, 2014 among Apio, Inc., Cal-Ex Trading Company, GreenLine Logistics, Inc. and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated September 2, 2014. Senior B Preferred Share Purchase Agreement dated October 29. 2014 among Apio, Inc. and Windset Holdings 2010 Ltd., incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 4, 2014. Second Amendment to Loan Agreement dated as of November 24, 2014 among Apio, Inc., Apio Cooling LP and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 3, 2014. Promissory Note dated as of November 24, 2014 by Apio, Inc., payable to GE Capital Commercial, Inc., incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated December 3, 2014. Proposal Letter dated April 2, 2015 between Banc of America Leasing & Capital, LLC, Apio, Inc. and Landec Corporation, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 21, 2015. Master Loan and Security Agreement dated as of May 7, 2015 between Apio, Inc. and Banc of America Leasing & Capital, LLC, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated May 21, 2015. Form of Equipment Security Note between Apio, Inc. and Banc of America Leasing & Capital, LLC, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated May 21, 2015. Guaranty dated as of May 7, 2015 between Landec Corporation and Banc of America Leasing & Capital, LLC, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated May 21, 2015. Commitment Letter dated May 15, 2015 between General Electric Capital Corporation and Apio, Inc., incorporated herein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated May 21, 2015. 10.35* 2016 Cash Bonus Plan, incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated May 28, 2015. -78- Exhibit Number 10.36 10.37 10.38 Exhibit Title Equipment Security Note dated May 29, 2015 by Apio, Inc., payable to Banc of America Leasing & Capital, LLC incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 3, 2015. Fourth Amendment to Credit Agreement dated as of May 27, 2015 among Apio, Inc., Cal-Ex Trading Company, GreenLine Logistics, Inc. and General Electric Capital Corporation, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated June 3, 2015. Progress Payment Agreement dated as of September 28, 2015 between Apio, Inc. and GE Capital Corporation, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 2, 2015. 10.39* Employment Agreement between the Registrant and Gregory S. Skinner effective as of October 15, 2015, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated October 21, 2015. 10.40* Employment Agreements between the Registrant and Molly A. Hemmeter effective as of October 15, 2015, incorporated herein by reference to Exhibits 10.1 and 10.2 to the Registrant’s Current Report on Form 8-K dated October 21, 2015. 10.41 10.42 Press Release dated February 26, 2016 describing the material impairment of the Registrant’s GreenLine trademark incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated February 26, 2016. Loan Agreement dated February 26, 2016 between the Registrant, Apio, Inc., Apio Cooling LP and CF Equipment Loans LLC (successor-in-interest to General Electric Capital Corporation) incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated March 3, 2016. 10.43 Promissory Note dated February 26, 2016 issued by Apio to CF Equipment Loans, LLC, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated March 3, 2016. 10.44 Promissory Note dated February 26, 2016 issued by Apio to CF Equipment Loans, LLC, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated March 3, 2016. 10.45 Guaranty dated February 26, 2016 between the Registrant and CF Equipment Loans, LLC, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated March 3, 2016. 21.1 Subsidiaries of the Registrant at May 29, 2016 Apio, Inc. Lifecore Biomedical, Inc. State of Incorporation Delaware Delaware 23.1+ Consent of Independent Registered Public Accounting Firm 24.1+ Power of Attorney – See signature page 31.1+ CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2+ CFO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 32.1+ CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2+ CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 -79- Exhibit Number 101.INS** XBRL Instance Exhibit Title 101.SCH** XBRL Taxonomy Extension Schema 101.CAL** XBRL Taxonomy Extension Calculation 101.DEF** XBRL Taxonomy Extension Definition 101.LAB** XBRL Taxonomy Extension Labels 101.PRE** XBRL Taxonomy Extension Presentation * Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 15(b) of Form 10-K. ** + # Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. Filed herewith. Confidential treatment requested as to certain portions. The term “confidential treatment” and the mark “*” as used throughout the indicated Exhibit means that material has been omitted. -80- SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on July 29, 2016. LANDEC CORPORATION By: /s/ Gregory S. Skinner Gregory S. Skinner Vice President of Finance and Administration and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Molly A. Hemmeter and Gregory S. Skinner, and each of them, as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated: Signature /s/ Molly A. Hemmeter Molly A. Hemmeter /s/ Gregory S. Skinner Gregory S. Skinner /s/ Nicholas Tompkins Nicholas Tompkins Title Date President and Chief Executive Officer and Director (Principal Executive Officer) July 29, 2016 Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) July 29, 2016 Chairman of the Board of Apio, Inc. and Director /s/ Robert Tobin Robert Tobin Director /s/ Albert D. Bolles, Ph.D Albert D. Bolles, Ph.D Director /s/ Frederick Frank Frederick Frank /s/ Steven Goldby Steven Goldby /s/ Gary T. Steele Gary T. Steele Director Director Director /s/ Catherine A. Sohn Catherine A. Sohn Director /s/ Tonia Pankopf Tonia Pankopf Director -81- July 29, 2016 July 29, 2016 July 29, 2016 July 29, 2016 July 29, 2016 July 29, 2016 July 29, 2016 July 29, 2016 EXHIBIT INDEX Exhibit Number 23.1 Consent of Independent Registered Public Accounting Firm Exhibit Title 24.1 Power of Attorney. See signature page. 31.1 CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 31.2 CFO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 32.1 CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.2 CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. -82- Landec Corporation 2016 Annual Report Corporate Directory BOARD OF DIRECTORS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (cid:36)(cid:79)(cid:69)(cid:72)(cid:85)(cid:87)(cid:3)(cid:39)(cid:17)(cid:3)(cid:37)(cid:82)(cid:79)(cid:79)(cid:72)(cid:86)(cid:15)(cid:3)(cid:51)(cid:75)(cid:17)(cid:39)(cid:17) Retired Executive Vice President, Chief Technical and Operations Officer, ConAgra Foods, Inc. Frederick Frank Chairman of the Board, Evolution Life Sciences Partners (cid:54)(cid:87)(cid:72)(cid:89)(cid:72)(cid:81)(cid:3)(cid:42)(cid:82)(cid:79)(cid:71)(cid:69)(cid:92) Partner, Venrock Molly A. Hemmeter President and Chief Executive Officer, Landec Corporation Tonia Pankopf Managing Partner, Pareto Advisors, LLC (cid:38)(cid:68)(cid:87)(cid:75)(cid:72)(cid:85)(cid:76)(cid:81)(cid:72)(cid:3)(cid:36)(cid:17)(cid:3)(cid:54)(cid:82)(cid:75)(cid:81)(cid:15)(cid:3)(cid:51)(cid:75)(cid:68)(cid:85)(cid:80)(cid:68)(cid:17)(cid:39)(cid:17) Retired Senior Executive, (cid:42)(cid:79)(cid:68)(cid:91)(cid:82)(cid:54)(cid:80)(cid:76)(cid:87)(cid:75)(cid:46)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:11)(cid:42)(cid:54)(cid:46)(cid:12) (cid:42)(cid:68)(cid:85)(cid:92)(cid:3)(cid:55)(cid:17)(cid:3)(cid:54)(cid:87)(cid:72)(cid:72)(cid:79)(cid:72) Retired CEO, Landec Corporation (cid:53)(cid:82)(cid:69)(cid:72)(cid:85)(cid:87)(cid:3)(cid:55)(cid:82)(cid:69)(cid:76)(cid:81) Retired CEO, (cid:36)(cid:43)(cid:50)(cid:47)(cid:39)(cid:3)(cid:56)(cid:54)(cid:36) Nicholas Tompkins Chairman of the Board, Apio, Inc. CORPORATE MANAGEMENT Molly A. Hemmeter President and Chief Executive Officer (cid:42)(cid:85)(cid:72)(cid:74)(cid:82)(cid:85)(cid:92)(cid:3)(cid:54)(cid:17)(cid:3)(cid:54)(cid:78)(cid:76)(cid:81)(cid:81)(cid:72)(cid:85) Vice President of Finance and Administration and Chief Financial Officer Ronald L. Midyett Chief Operating Officer (cid:47)(cid:68)(cid:85)(cid:85)(cid:92)(cid:3)(cid:39)(cid:17)(cid:3)(cid:43)(cid:76)(cid:72)(cid:69)(cid:72)(cid:85)(cid:87) President, Lifecore Biomedical, Inc. (cid:54)(cid:87)(cid:72)(cid:89)(cid:72)(cid:81)(cid:3)(cid:51)(cid:17)(cid:3)(cid:37)(cid:76)(cid:87)(cid:79)(cid:72)(cid:85)(cid:15)(cid:3)(cid:51)(cid:75)(cid:17)(cid:39)(cid:17) Vice President, Corporate Technology Landec Corporation 2016 Annual Report Ernst & Young LLP San Francisco, CA CORPORATE COUNSEL Spalding & King LLP San Francisco, CA (cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:183)(cid:3)(cid:44)(cid:49)(cid:41)(cid:50)(cid:53)(cid:48)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49) Transfer Agent and Registrar The stock transfer agent and registrar for Landec Corporation is Broadridge. Shareholders who wish to transfer their stock, or change the name in which the shares are registered, should contact: Broadridge Corporate Issuer Solutions, Inc. PO Box 1342 Brentwood, NY 11717 800-733-1121 CORPORATE HEADQUARTERS Landec Corporation 3603 Haven Avenue Menlo Park, CA 94025-1010 650-306-1650 STOCK LISTING (cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:183)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:68)(cid:86)(cid:71)(cid:68)(cid:84)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3) (cid:54)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:47)(cid:49)(cid:39)(cid:38)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:3) an annual report on Form 10-K with the Securities and Exchange (cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:82)(cid:69)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:83)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:20)(cid:19)(cid:16)(cid:46)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:82)(cid:88)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:68)(cid:87)(cid:29) 3603 Haven Avenue Menlo Park, CA 94025 Attn: Investor Relations Except for the historical information contained here, the matters discussed in the enclosed materials are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially including risks detailed (cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:183)(cid:86)(cid:3)(cid:73)(cid:76)(cid:79)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) Exchange Commission. TRADEMARKS The following are some of the official trademarks and service marks (cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:47)(cid:68)(cid:81)(cid:71)(cid:72)(cid:70)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:29) Landec® Intelimer® Apio™ Lifecore® Clearly Fresh® BreatheWay® Eat Smart® Cal Ex® (cid:42)(cid:85)(cid:72)(cid:72)(cid:81)(cid:47)(cid:76)(cid:81)e® Revitalure™ Corgel® BioHydrogel Lurocoat® Ophthalmic Viscoelastic Ortholure™ Orthopedic Viscosupplement Smart Polymers to Fuel Innovation™ Windset Farms®(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:72)(cid:80)(cid:68)(cid:85)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:85)(cid:72)(cid:72)(cid:81)(cid:75)(cid:82)(cid:88)(cid:86)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:90)(cid:81)(cid:3) Foods Inc. Lifecore’s new packaging and warehouse facility Lifecore has leased a new facility just a few miles from its manufacturing and research facility in Chaska, MN. This building will provide new and essential final packaging and warehousing capabilities for drugs and medical devices. Landec Corporation 2016 Annual Report Landec Corporation 3603 Haven Avenue, Menlo Park, CA 94025 650.306.1650 Landec.com Photo taken in the Central Valley of California near Apio, Inc. Headquarters 

Continue reading text version or see original annual report in PDF format above