LIFECORE BIOMEDICAL, INC. \DE\

14. Fair value of financial instruments

Term Loan Credit Facility and debt derivative liability

The Term Loan Credit Facility contains various features that meet the definition of an embedded derivative and require bifurcation. These features, which were necessary for the Company to accept in order for Alcon to agree to provide the term loan financing, comprise various options for early prepayment of the term loans at stated premiums above par if certain future events were to occur, as described more fully in note 9. 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 Loan 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 reported as a non-operating item on the statement of operations.

The disclosed fair value of the term loan and the recorded fair value of the debt derivative liability are estimated using a discounted cash flow method (a level 3 measurement) that includes annually weighted probabilities that the lender exercises its option to require payment of the term loans upon a qualifying change in control, such as the proposed merger described in note 1, or that the debt is held to maturity and refinanced. As a result of the signing of the Merger Agreement, management made changes to certain key assumptions used in the fair valuation, as described below, that resulted in a loss of $31,270 for the three months ended September 30, 2026 to increase the carrying value of the debt derivative liability to its new fair value.

As of September 30, 2026, the fair value of the term loan, excluding the value of the embedded debt derivative liability, was $154,000 with a carrying value of $150,007; the fair value of the debt derivative liability was $62,192, which was the same as its carrying value. As of December 31, 2025, the fair value of the term loan, excluding the value of the embedded debt derivative liability, was $149,400 with a carrying value of $130,563; the fair value of the debt derivative liability was $26,564, which was the same as its carrying value.

The debt derivative liability is currently the only financial instrument recorded at fair value on a recurring basis in the accompanying balance sheets. The following table presents information about those measurements:

The following table presents the rollforward reconciliation of this level 3 recurring fair value 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, which can be influenced by changes in the risk-free rate, the Company's credit rating and/or changes in the overall 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. As a result of the signing of the Merger Agreement, management increased the probability of a change in control event occurring during the remaining term of the debt from 80% to 95%, and accelerated the assumed timing of a change in control event from a set of scenarios weighted throughout the remaining duration of the term loan to a heavily-weighted single scenario occurring at the end of 2026. These factors resulted in a debt derivative liability valuation of $62,192 at September 30, 2026, comprising (i) a change in control payment of approximately $30,000 that would become due at the closing of the Merger, expected to occur at the end of 2026 and (ii) a remainder representing the accounting cost of the early payment, caused by the difference between the 20.7% discount rate and the 10% stated rate of the term loan taken over the remaining term to maturity on May 22, 2029.

Key inputs used to develop the fair value measurement were as follows:

The weighted average discount rate was calculated based on the individual discount rate used for each future payment and weighted by both the present value of the future payments and the probability of each scenario.

Cash and Revolving Credit Facility

Cash and outstanding borrowings under the Company's Revolving Credit Facility, if any, are carried at cost, which approximates fair value due to their short duration and variable rates of interest (a level 2 measurement).

Leaseback liability with related party

As discussed further in note 9, the Company maintains a financial liability for an equipment sale and leaseback with Alcon for which control of the asset was deemed not to have transferred.

In accordance with U.S. GAAP, the Company presents supplemental fair value information based on market conditions of the underlying financial instrument. The fair value information does not change the stated rate or carrying value of the instrument. The fair value of the leaseback liability was estimated using a discounted cash flow method (a level 3 measurement) that assumes a weighted-average discount rate of 6.3% and 5.1% as of September 30, 2026 and December 31, 2025, respectively. As of September 30, 2026 and December 31, 2025, the fair value of the leaseback liability approximated its carrying value of $5,218 and $5,798, respectively.

Customer deposit

A significant customer of the Company agreed to provide an upfront cash deposit in order to finance working capital requirements for the duration of its commercial supply agreement with the Company. The deposit bears no interest and is to be repaid after a wind-up period following expiration or termination of the commercial supply agreement. Prior to the most recent amendment, the commercial supply agreement had automatically extended to December 31, 2027. In June 2026, it was amended and extended to December 31, 2030.

In accordance with U.S. GAAP, the Company presents supplemental fair value information based on market conditions of the underlying financial instrument. The fair value information does not change the stated rate or carrying value of the instrument. The fair value of the deposit is estimated using a discounted cash flow method (a level 3 measurement) that includes assumed discount rates of 14.3% and 6.0% as of September 30, 2026 and December 31, 2025, respectively, which increased based on the required reassessment of this instrument’s unsecured credit risk as of the date of the aforementioned amendment. The fair value assumed repayment in 4.8 years and 2.0 years as of September 30, 2026 and December 31, 2025, respectively, which was the expected contractual repayment date per the agreement as of each measurement date. As of September 30, 2026 and December 31, 2025, the fair value of the deposit approximated its carrying value of $2,644 and $4,515, respectively.