LIFECORE BIOMEDICAL INC DE

5. Fair Value Measurements

Cash and cash equivalents

Cash and cash equivalents represent cash in banks and highly liquid short-term investments that have maturities of three months or less when acquired. These highly liquid short-term investments are both readily convertible to known amounts of cash and so near to their maturity that they present insignificant risk of changes in value due to changes in interest rates.

Term Loan Credit Facility and debt derivative liability

The Term Loan Credit Facility (as defined in Note 10 – Long-term Debt) contains embedded derivatives requiring bifurcation. These embedded derivatives were initially recorded at fair value as a noncurrent liability (“debt derivative liability”) offset by a discount to the carrying value of the Term Lean Credit Facility that is being amortized to interest expense over the term of that facility. The debt derivative liability is being subsequently remeasured at fair value every reporting period with changes in fair value recognized as a component of other expense, net.

The fair value of the debt derivative liability is estimated using a discounted cash flow model that includes annually weighted probabilities that certain call and put premiums contained in the Term Loan Credit Facility are exercised upon qualifying events of default or changes in control. The Term Loan Credit Facility, including the embedded derivatives, has an aggregate fair value of $143,000 as of November 24, 2024, a Level 3 measurement.

The key inputs to the valuation model are (i) the probability and timing of a change in control event occurring over the remaining term of the debt; and (ii) the discount rate for the valuation of that scenario, which can be influenced by in changes in the risk-free rate and the credit spread, which in turn can be influenced by the Company's credit rating as well as changes in the credit market. Factors that can affect the estimate of fair value at each reporting date, and therefore the amount of gain or loss recorded for a particular period, include imprecision in estimating unobservable market inputs and the selection of particular methodologies and assumptions used to determine the fair value. During the second quarter of 2025, we adjusted certain key assumptions by increasing the probability of a 2028 change in control and lowering the discount rate due to an improvement in the Company's credit rating.

Revolving Credit Facility

Outstanding borrowings under the Company's Revolving Credit Facility are carried at cost, which approximates their fair value as of November 24, 2024 and May 26, 2024, due to their short duration and variable rates of interest.

Conversion ratio improvement provided to preferred stockholders

During the three months ended November 24, 2024, we performed a non-recurring fair value measurement to record the value of a conversion ratio improvement provided to preferred stockholders as a result of the October 3, 2024 Securities Purchase Agreement referenced in Note 13 – Convertible Preferred Stock and Common Stock. The fair value of the conversion feature was recorded as an increase to both additional paid in capital and accumulated deficit and was calculated using an as-converted method based on the contractual conversion ratio of the preferred shares and the closing price of our common stock, a level 1 measurement.

The following table summarizes the fair value of the Company’s balance sheet components that are measured at fair value on a recurring and non-recurring basis:

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Key inputs used to develop the discount rate for the fair value measurements at the balance sheet dates were as follows:

The following table reflects the roll forward reconciliation of Level 3 recurring fair value measurements:

(1)For the three and six months ended November 24, 2024 and November 26, 2023, the decreases in fair value are recorded in the “Change in fair value of debt derivative liability, related party” line within the condensed consolidated statement of operations.