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Debt | 9 Months Ended
--- | ---
Feb. 25, 2024
Debt Disclosure [Abstract] |
Debt | Debt Long-term debt, net consists of the following:
(In thousands) | February 25, 2024 |  | May 28, 2023
Term loan, related party | $ | 153,477 |  |  | $ | 142,503 |
Equipment sale finance liability, related party | 7,343 |  |  | 7,730 |
Total principal amount of long-term debt | 160,820 |  |  | 150,233 |
Less: unamortized debt discount | (529) |  |  | (605) |
Less: debt discount, related party | (63,182) |  |  | (64,792) |
Total long-term debt, net of discounts | 97,109 |  |  | 84,836 |
Less: current portion of long-term debt, net, related party | (773) |  |  | (580) |
Long-term debt, net | $ | 96,336 |  |  | $ | 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 | $ | 193 |
Fiscal year 2025 | 773 |
Fiscal year 2026 | 773 |
Fiscal year 2027 | 773 |
Fiscal year 2028 | 773 |
Thereafter | 157,535 |
Total | $ | 160,820 |
Term Loan Credit Facility On May 22, 2023, 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 $63.7 million and $65.4 million as of February 25, 2024 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 will re-evaluate 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 February 25, 2024 and May 28, 2023, the fair value of the embedded derivative liability approximated $23.0 million and $64.9 million, respectively. As of February 25, 2024 and May 28, 2023, the Company had $153.5 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 February 25, 2024 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. Amendment to 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, $1.7 million were recorded as other assets in the accompanying Condensed Consolidated Balance Sheet as of February 25, 2024. 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 February 25, 2024 and May 28, 2023, the Company had $19.9 million and $16.8 million, respectively, in borrowings outstanding under the Revolving Credit Facility, at an effective annual interest rate of 8.15% and 12.16%, respectively. As of February 25, 2024, we had approximately $5.7 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”). Amended and Restated Contract Manufacturing Agreement On December 31, 2023, the Company entered into an Amended and Restated Contract Manufacturing Agreement (the “Amended and Restated CMA”), with Alcon, which amended and restated the existing contract manufacturing agreement between the Company and Alcon related to the Company’s aseptic manufacturing of a variety of ophthalmic viscoelastic injection devices. The initial term of the Amended and Restated CMA expires December 31, 2031, subject to earlier termination by Alcon under certain circumstances or by either party for a material breach by the other party that is not cured after notice and an opportunity to cure. The Amended and Restated CMA contains terms and provisions customary for transactions of this type, including forecast and purchase order procedures, prices that are subject to annual index-based adjustments, minimum purchase obligations, on-time-in-full service level metrics and remedies, product warranties and confidentiality and indemnification obligations. In the event the Company is unable to meet specified metrics pursuant to the Amended and Restated CMA, under certain circumstances, Alcon will be entitled to certain financial concessions, as well as certain rights and documents with respect to Alcon purchase orders until applicable metrics are met. On May 2, 2024, the Company entered into an amendment to the Amended and Restated CMA, in which the lender made a prepayment in the amount of $5.5 million in cash as an advance on future purchases. Under the terms, the lender is entitled to apply the prepayment towards invoices issued by the Company within the scope of the agreement during calendar year 2026. Limited Waivers and Amendments to Credit Agreements On December 31, 2023, the Company entered into (i) a Limited Waiver and First Amendment to Credit and Guaranty Agreement (the “Alcon Amendment”), with Alcon, which amended the Term Loan Credit Facility, and (ii) the Limited Waiver and Sixth Amendment to Credit Agreement (the “BMO Amendment” and, together with the Alcon Amendment, the “Credit Agreement Amendments”) which amended the Revolving Credit Facility. The Alcon Amendment provides for, among other things, (i) a waiver of the specified defaults listed therein under the Term Loan Credit Facility as of the date of the Alcon Amendment, (ii) a waiver of the requirement to deliver certain historical financial statements, (iii) the inclusion of a requirement that the Company notify Alcon in advance of any layoff(s) by the Company and/or its subsidiaries that would result in a reduction in the overall headcount of the Company’s full-time manufacturing and support personnel by more than 20 persons in the aggregate, and (iv) an amendment to the financial reporting requirements under the Term Loan Credit Facility providing additional time for the Company’s delivery of its financials for the quarter ended November 26, 2023. The BMO Amendment provides for, among other things, (i) a waiver of the specified defaults listed therein under the Revolving Credit Facility as of the date of the BMO Amendment, (ii) a waiver of the requirement to deliver certain historical financial statements, (iii) an amendment to the definition of “Applicable Margin” with respect to loans under the Revolving Credit Facility from December 31, 2023 until the “Specified Adjustment Date” (as defined in the Revolving Credit Facility as amended by the BMO Amendment) (i.e., the date on which 2024 audited annual financial statements and certain other materials are delivered by the Company to BMO), and (iv) an amendment to the definition of “Eligible Accounts” thereunder in respect of certain accounts. The Company was not required to pay any fees in connection with the Credit Agreement Amendments. 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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