5E Advanced Materials Inc

7. Debt

Long Term Debt

Long-term debt consisted of the following at the end of each period presented.

As further discussed below, on June 11, 2024, the Company issued an additional $6.0 million principal amount of June 2024 Notes. Additionally, on August 15, 2023 and February 15, 2024, the Company elected to issue additional notes as payment for $1.8 million and $2.1 million of interest accrued on the Convertible Notes during the period from February 16, 2023 through August 15, 2023, and August 16, 2023 through February 15, 2024, respectively.

Interest Expense

Interest expense consisted of the following for each period presented.

(1) The effective interest rate represents a weighted-average interest rate applicable for the respective period. Interest expense utilized in the calculation is based upon the gross interest expense in the table above, and the principal balance utilized in the calculation is based on the ending net long-term debt applicable to each interest period inclusive of unamortized debt issuance costs and discount, changes in the principal balance resulting from the issuance of the June 2024 Notes, interest paid-in-kind and any adjustments resulting from the January 2024 Amended and Restated Note Purchase Agreement.

Convertible Notes

On August 11, 2022, the Company executed a $60 million private placement of the Original Convertible Notes with Bluescape, which is secured by a security interest in substantially all of the Company’s assets, which closed on August 26, 2022 (the “Original Closing Date”). As discussed within Note 1, on January 12, 2024, at the Special Meeting, the Company’s shareholders approved certain proposals that allowed for an Out-of-Court Restructuring, and on January 18, 2024 (the “Modification Date”), the January 2024 Amended and Restated Note Purchase Agreement was executed in accordance with the Out-of-Court Restructuring which modified certain terms of the Original Convertible Notes. In connection with the execution of the January 2024 Amended and Restated Note Purchase Agreement, the maturity date of the Original Convertible Notes was extendedone year to August 15, 2028, and fifty percent (50%) of the outstanding Convertible Notes were acquired by Ascend and Meridian Investments Corporation from Bluescape. On May 28, 2024, the Company entered into a second amendment (“Amendment No. 2”) to the January 2024 Amended and Restated Note Purchase Agreement and agreed, among other things, to (i) issue and sell new senior secured convertible notes in substantially the same form and under the same terms as the Original Convertible Notes, as amended, in an aggregate principal amount of $6.0 million (the “June 2024 Notes” and, together with the Original Convertible Notes, the “Convertible Notes”) to Bluescape and Ascend, and (ii) amend and restate the January 2024 Amended and Restated Note Purchase Agreement in the form attached as Annex A to Amendment No. 2 (the “May 2024 Amended and Restated Note Purchase Agreement”). As part of the January 2024 and May 2024 Amended and Restated Note Purchase Agreements, the Company incurred approximately $2.6 million and $541 thousand of debt issuance costs.

At the Company’s election, the Convertible Notes bear interest at an annual rate of 4.50% if paid in cash, and 10.00%if paid throughthe issuance of additional notes. Interest is paid semi-annually on February 15 and August 15 of each year. The Original Convertible Notes contained a financial covenant requiring the Company to maintain a cash balance of at least $10 million which was waived during the effective periods of both the Standstill Agreement and Restructuring Support Agreement. As part of the January 2024 Amended and Restated Note Purchase Agreement, the minimum cash covenant was waived through June 28, 2024 and was reduced thereafter to $7.5 million, and then as part of Amendment No. 2 waived through December 31, 2024.

As discussed in Note 15—Subsequent Events, on August 25, 2024, the Company entered into commitment letters (the “Debt Commitment Letters”) with Bluescape and Ascend (together, the “Commitment Parties”), pursuant to which each of the Commitment Parties has agreed to purchase $3.0 million aggregate principal amount of the Company's secured convertible promissory notes (the “September 2024 Notes”) in a private placement, subject to certain terms and conditions (the “Debt Financing”). The funding of the Debt Financing pursuant to the Debt Commitment Letters is contingent on the satisfaction of certain conditions and the amendment of the Company’s existing Amended and Restated Note Purchase Agreement, which is anticipated to occur before September 17, 2024. The September 2024 Notes will be substantially identical to the Company’s outstanding Convertible Notes, and the conversion price applicable to the September 2024 Notes will be $0.9375.

Convertible Notes – Conversion Terms

The Convertible Notes, including accrued interest paid-in-kind, may be converted into shares of the Company’s Common Stock at any time before the Convertible Notes mature based upon a conversion rate of 650.4065 shares of Common Stock per $1,000 principal amount of Convertible Notes (the “Conversion Rate”), representing a conversion price of approximately $1.5375 per share. The May 2024 Amended and Restated Note Purchase Agreement modified an existing provision applicable to the Convertible Notes that provides for certain adjustments to the Conversion Rate to increase the number of shares of Common Stock issuable upon conversion of the Convertible Notes (the “Additional Shares”) in the event of certain change of control transactions or other events specified in the January 2024 Amended and Restated Note Purchase Agreement (a “Make-Whole Fundamental Change”). Accordingly, the Conversion Rate will increase by up to 325.2033 Additional Shares per $1,000 principal amount of Convertible Notes, based on the timing of a Make-Whole Fundamental Change and the trading price of the Common Stock at such time or the cash received by holders of the Common Stock in connection with such Make-Whole Fundamental Change.

The Conversion Rate applicable to the June 2024 Notes is subject to adjustment if, on or prior to December 31, 2024, the Company sells Common Stock or any other equity-linked securities in one or more transactions at an effective price per share that is less than the conversion price then in effect, subject to certain exemptions (a “Degressive Issuance”). In the event of a Degressive Issuance, the Conversion Rate applicable to the June 2024 Notes will be adjusted based on the weighted average issuance price of the securities sold in such Degressive Issuance, as set forth in the May 2024 Amended and Restated Note Purchase Agreement. Pursuant to the terms of the May 2024 Amended and Restated Note Purchase Agreement, the Company will not be permitted to effect any Degressive Issuance that would result in an adjustment to the Conversion Rate that requires the approval of the Company’s stockholders pursuant to the listing standards of The Nasdaq Global Select Market, unless the Company has obtained such stockholder approval before such Degressive Issuance.

As part of the August 2024 Offering (as further described and defined in Note 15—Subsequent Events), the Degressive Issuance provision applicable to the June 2024 Notes resulted in an adjustment to the conversion rate from 650.4065 shares of Common Stock per $1,000 principal amount of June 2024 Notes to 692.7990 shares of Common Stock per $1,000 principal amount of June 2024 Notes (the “Adjusted Conversion Rate”). As a result of the Adjusted Conversion Rate, the June 2024 Notes are convertible into an aggregate of up to 6,252,366 shares of Common Stock, assuming all accrued interest is paid-in-kind through maturity.

Prior to entering into the January 2024 Amended and Restated Note Purchase Agreement, the Company had the right to convert the Convertible Notes into shares of the Company’s Common Stock based upon the Company’s Common Stock trading above certain threshold prices at certain dates. However, in connection with the January 2024 Amended and Restated Note Purchase Agreement, the Company’s ability to convert the Convertible Notes and force conversion into Common Stock was eliminated.

Amendment No. 2 also requires the Company to maintain the effectiveness of registration statements filed with the SEC relating to shares of the Company’s Common Stock which may be received by the holders of the Convertible Notes if such Convertible Notes are converted into Common Stock. If the Company fails to maintain the effectiveness of such registration statements through the period in which the Convertible Notes may be converted, the interest rate applicable to the Convertible Notes may be increased by 0.5% per annum for each 90-day period where such registration statements are not effective, up to a maximum of 2.0% per annum.

Convertible Notes – Derivatives

The terms of the Original Convertible Notes permitted a change in the then applicable 56.82 shares of Common Stock per $1,000 principal amount conversion rate upon a digressive issuance by the Company within three months of the Original Closing Date, as specified in the Note Purchase Agreement. As a result, this conversion feature was deemed to be an embedded derivative requiring bifurcation and separate accounting as a stand-alone derivative instrument (the "Original Convertible Note Derivative"). The Original Convertible Notes were initially recorded at their face amount of $60 million less debt issuance costs of $4.2 million and the fair value of the Original Convertible Note Derivative, which was determined to be $24.9 million. The provision that resulted in separate accounting for the Original Convertible Note Derivative expired November 26, 2022, and accordingly, the fair value of the Original Convertible Note Derivative at expiration of the provision was transferred to additional paid-in capital.

As part of the May 2024 Amended and Restated Note Purchase Agreement, the Conversion Rate applicable to the June 2024 Notes is permitted to change upon a Digressive Issuance by the Company on or before December 31, 2024. As a result, this conversion feature was deemed to be an embedded derivative requiring bifurcation and separate accounting as a stand-alone derivative instrument (the "June 2024 Convertible Note Derivative"). The June 2024 Notes were initially recorded at their face amount of $6 million less debt issuance costs of $541 thousand and the fair value of the June 2024 Convertible Note Derivative, which was determined to be $4.1 million. The provision that results in separate accounting for the June 2024 Convertible Note Derivative will expire on December 31, 2024, and accordingly, the fair value of the June 2024 Convertible Note Derivative, if any, on such date will be transferred to additional paid-in capital. Refer to Note 8—Convertible Notes Derivatives and the discussion immediately below for additional details regarding the fair values of the Original Convertible Note Derivative and the June 2024 Convertible Note Derivative.

Convertible Notes – Fair Value

Fair value and carrying value information for the Convertible Notes at each period end follows.

The valuation model for the Convertible Notes and related Original Convertible Note Derivative and June 2024 Convertible Note Derivative requires the input of subjective assumptions including expected share price volatility, risk-free interest rate and debt rate. Changes in the input assumptions as well as the Company's underlying share price can materially affect the fair value estimates. Additionally, the modification of the conversion features associated with the January 2024 Amended and Restated Note Purchase Agreement resulted in a significant increase in the fair value of the Original Convertible Notes outstanding on such date, and a related loss on extinguishment of debt. Other changes in the reported fair value of the Convertible Notes between periods are not recognized in net income and therefore have no effect on reported net income (loss).

The significant assumptions used in the fair value model for the Convertible Notes and related Original Convertible Note Derivative and June 2024 Convertible Note Derivative include the following, with changes in volatility, debt rate and stock price having the most significant impact on the related fair values.

(1) A debt rate of 36.7% was utilized in the valuation of the June 2024 Notes, while a rate of 28.7% was utilized for the Original Convertible Notes.

Convertible Notes – Loss on Extinguishment

For accounting purposes, the modification of the terms of the Convertible Notes in connection with the January 2024 Amended and Restated Note Purchase Agreement was evaluated and determined to be representative of an in-substance extinguishment of the Convertible Notes outstanding at that date, and establishment of new debt, primarily due to the significance of the changes to the terms of the conversion features. As a result, the Company wrote-off the remaining principal, accrued interest, unamortized discount and debt issuance costs associated with the prior debt on the Modification Date and recognized the modified debt on the balance sheet at its fair value of $65.2 million. The fair value of the modified debt was determined utilizing a binomial lattice model, and the significant inputs to such model are described in more detail in the preceding table. The difference in value between the prior debt and the modified debt resulted in a loss on extinguishment of debt of $21.0 million, the calculation of which is summarized in the following table.