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Debt | 3 Months Ended
--- | ---
Aug. 27, 2023
Debt Disclosure [Abstract] |
Debt | Debt Long-term debt, net consists of the following (in thousands):
| August 27, 2023 |  | May 28, 2023
Term loan, related party | $ | 146,086 |  |  | $ | 142,503 |
Equipment sale finance liability, related party | 7,730 |  |  | 7,730 |
Total principal amount of long-term debt | 153,816 |  |  | 150,233 |
Less: unamortized debt discount | (579) |  |  | (605) |
Less: debt discount, related party | (64,407) |  |  | (64,792) |
Total long-term debt, net of discounts | 88,830 |  |  | 84,836 |
Less: current portion of long-term debt, net, related party | (773) |  |  | (580) |
Long-term debt, net | $ | 88,057 |  |  | $ | 84,256 |
The future minimum principal payments of the Company’s term loan and equipment sale finance liability for each year presented are as follows (in thousands), excluding forecasted cash and PIK interest:
Remainder of Fiscal year 2024 | $ | 580 |
Fiscal year 2025 | 773 |
Fiscal year 2026 | 773 |
Fiscal year 2027 | 773 |
Fiscal year 2028 | 773 |
Thereafter | 150,144 |
Total | $ | 153,816 |
Term Loan Credit Facility On May 22, 2023, the Company, Curation and Lifecore Biomedical Operating Company, Inc. (together with the Company and Curation, the “Borrowers”) and Alcon entered into a Credit and Guaranty Agreement (the “Term Loan Credit Facility”). The Term Loan Credit Facility refinanced in full all obligations of the Company and their subsidiaries under its prior term loan credit facility. Upon entry into the Term Loan Credit Facility, the prior term loan credit facility was terminated and all noncompliance with debt covenants were thereby cured. The Term Loan Credit Facility provides for up to $142.3 million in term loans, subject to certain adjustments based on the post-closing adjustments to the Purchase Price (as defined in the Equipment Sale and Leaseback Agreement, defined below), which were funded in full on May 22, 2023. The obligations under the Term Loan Credit Facility mature on May 22, 2029. The Term Loan Credit Facility is secured by the same collateral that secures the Revolving Credit Facility (as defined below), with relative priorities in respect thereof, as set forth in the Intercreditor Agreement (as defined below). The Company had unamortized debt discount amounting to $65.0 million and $65.4 million as of August 27, 2023 and May 28, 2023, respectively, related to the Term Loan Credit Facility, which are recorded as a reduction of the term loan liability in the Condensed Consolidated Balance Sheets. The Company identified a number of embedded derivatives that require bifurcation from the Term Loan Credit Facility that were separately accounted for in the condensed consolidated financial statements as one compound derivative liability. Certain of these embedded features include change in control provisions, events of default and contingent rate increases and were determined to qualify as an embedded derivative under ASC 815-40. The embedded derivative is classified as a Level 3 financial liability in the fair value hierarchy as of May 28, 2023. The fair value of the embedded derivative liabilities associated with the term loans was estimated using the discounted cash flow method under the income approach. This involves significant Level 3 inputs and assumptions including an estimated probability and timing of a change in control and events of default. The Company re-evaluates this assessment each reporting period and records any gains or losses in other income (expense). The initial recognition of the embedded derivative liability upon issuance of the Term Loan Credit Facility on May 22, 2023 was $64.9 million and is recorded as a debt derivative liability, related party in the condensed Consolidated Balance Sheets. The bifurcation of the embedded debt derivative fair value of $64.9 million is accounted for as a discount to the Term Loan Credit Facility. Amortization of the debt discount is based on the effective interest method over the term of the debt. At August 27, 2023 and May 28, 2023, the fair value of the embedded derivative liability approximated $64.7 million and $64.9 million, respectively. As of August 27, 2023 and May 28, 2023, the Company had $146.1 million and $142.5 million in borrowings outstanding under the Term Loan Credit Facility, at an effective annual interest rate of 10.0% and 10.0%, respectively. As of August 27, 2023 and May 28, 2023, except for the requirements to deliver certain historical financial statements, the Company was in compliance with all financial covenants under the Term Loan Credit Facility and Revolving Credit Facility (as discussed below). In December 2023, the Company entered into limited waivers and amendments to credit agreements; refer to Note 9 - Subsequent Events for additional information. Pledge and Security Agreement Also on May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as grantors (collectively, the “Grantors”), entered into a Pledge and Security Agreement (the “Term Loan Security Agreement”), dated as of May 22, 2023, with Alcon, as collateral agent. Pursuant to the Term Loan Security Agreement, the Grantors secured their obligations under the Term Loan Credit Facility by granting to Alcon a first priority security interest in certain collateral, including but not limited to equipment, fixtures, real property and intellectual property of the Company. The security interest granted by the Grantors under the Term Loan Security Agreement continues in effect until the payment in full of all of the secured obligations under the Term Loan Credit Facility. Revolving Credit Facility On May 22, 2023, the Borrowers and certain of the Company’s other subsidiaries, as guarantors, entered into a Limited Waiver, Consent and Fifth Amendment (the “Revolving Loan Amendment”) to the credit agreement with BMO Harris Bank, N.A. (“BMO”), as lender (the “Revolving Credit Facility”). The Revolving Loan Amendment provides for, among other things, (i) a waiver of all known existing defaults under the Revolving Credit Facility as of the date of the Revolving Loan Amendment, (ii) the reduction of the maximum amount available under the Revolving Credit Facility to up to the lesser of (x) $40.0 million, less a reserve for certain secured credit products, if any, and (y) the borrowing base (which, pursuant to the Revolving Loan Amendment, was modified to include a further reduction of the borrowing base by an additional $4.0 million), (iii) the modification of the springing minimum fixed charge coverage ratio of 1.00 to 1.00, with such covenant not tested until the fiscal quarter ending on or about February 28, 2024 and, on or thereafter, upon the earlier of the occurrence of an event of default or availability being less than the greater of 10% of the maximum borrowing amount and $4.0 million, (iv) cash dominion at all times that the Revolving Credit Facility remains outstanding, and (v) certain other revisions to align with the terms of the Term Loan Credit Facility and address the relative priorities and credit for borrowings related to the Company’s commercial relationships with Alcon. The Company records its Revolving Credit Facility deferred finance costs as an asset; as such, $2.0 million were recorded as other assets in the accompanying Condensed Consolidated Balance Sheets as of August 27, 2023. As of May 28, 2023, $0.9 million and $1.4 million were recorded as other current assets and other long-term assets, respectively. As of August 27, 2023 and May 28, 2023, the Company had $19.1 million and $16.8 million, respectively, in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of 9.99% and 12.16%, respectively. As of August 27, 2023, we had approximately $6.3 million available for borrowing under our revolving credit facility. BMO and Alcon also entered into an Intercreditor agreement regarding their relative rights, as lenders, in the assets of the Company and its subsidiaries that serve as collateral for their respective credit facilities (the “Intercreditor Agreement”). Equipment Sale and Leaseback Agreements On May 22, 2023, the Company entered into an Equipment Sale and Leaseback Agreement (the “Equipment Sale and Leaseback Agreement”), with Alcon, wherein the Company sold $10.0 million (the “Purchase Price”), subject to certain post-closing adjustments of certain equipment, machinery, and other property associated with the production of sodium hyaluronate (the “Equipment”) to Alcon. The Equipment Sale Leaseback Agreement contains an option for the Company to repurchase the Equipment upon the earlier of (i) seven (7) years and (ii) the expansion of the Company’s existing production capacity with respect to sodium hyaluronate, for a purchase price equal to the Purchase Price, less the aggregate of all Paydown Payments (as defined in the Equipment Lease Agreement). The Purchase Price was subsequently reduced to $7.7 million based on the fair value of the Equipment, as required by the terms of the Equipment Sale and Leaseback Agreement. The difference of $2.3 million between the initial sales value of $10.0 million and the $7.7 million was added to the term loan agreement, which resulted in a term loan amount of $142.3 million and the proceeds to Lifecore across the two agreements did not change. Concurrently with the entry into the Equipment Sale and Leaseback Agreement, the Company entered into an Equipment Lease Agreement (the “Equipment Lease Agreement” and, together with the Equipment Sale Leaseback Agreement, the Term Loan Credit Facility, the Term Loan Security Agreement, and the Revolving Loan Amendment, collectively, the “Refinancing Transactions”), dated May 22, 2023, with Alcon, wherein Alcon leased the equipment back to the Company. The Equipment Lease Agreement expires upon the earlier of (i) May 22, 2033, and (ii) the date that the equipment is repurchased by the Company pursuant to the terms of the Equipment Lease Agreement. Upon the expiration of the Equipment Lease Agreement, the Company shall automatically repurchase the equipment for $1.00 (if not previously repurchased pursuant to the option under the Equipment Sale and Leaseback Agreement). During the lease term, the Company is obligated to make quarterly rental payments to Alcon equal to (i) 1/40th of the Purchase Price (the “Paydown Payments”), plus (ii) 1.5% times the Purchase Price less cumulative Paydown Payments made. The Company concluded that the Equipment Sale and Leaseback Agreement did not meet the requirements for sale-leaseback accounting, therefore the carrying value of the Equipment remains on the condensed consolidated balance sheets and the $7.7 million Purchase Price (as adjusted) of the equipment sale finance obligation (the “Equipment Sale Finance Liability”) was classified in Long-term debt, net. The Equipment Lease Agreement contains terms and provisions (including representations, covenants, and conditions) that are generally customary for a commercial lease of this nature, including obligations relating to the use, operation, and maintenance of the equipment. During the term of the lease, Alcon is not permitted to sell or encumber the equipment. Alcon is only entitled to cancel the Equipment Lease Agreement in the event of insolvency, liquidation or bankruptcy, and its remedies for other breaches of the Equipment Lease Agreement are otherwise limited to monetary damages.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 470 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6 -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147481544/470-10-50-6 Reference 2: 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