Derivative Liabilities

3 Months Ended

Sep. 30, 2024

Derivative Liabilities

Derivative Liabilities

6. Derivative Liabilities

During the quarter ended September 30, 2024, the Company’s embedded conversion feature on its convertible notes and its outstanding warrants may be treated as derivative liabilities for accounting purposes under ASC 815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity,” due to insufficient authorized shares to settle these outstanding equity-linked contracts, while the terms of these instruments still allow the holders to exercise which would require the Company to net-cash settle the instrument. In such cases, the Company has adopted a sequencing approach under ASC 815-40 to determine the classification of its equity-linked financial instruments at issuance and at each subsequent reporting date. Under this sequencing policy, the Company reclassifies to liabilities those equity-linked financial instruments with the most recent issuance or modification date. The derivative liabilities are initial recorded at fair value and subsequently re-valued each reporting date, with changes in fair value reported in the condensed consolidated statements of operations. The Company utilizes the Black-Scholes option-pricing model to value the derivative liabilities at initial reclassification and subsequent valuation dates, adjusted for instrument-specific terms as applicable.

In August 2024, the Company issued common shares and warrants to purchase common shares under private placement subscription agreements. See further discussion at Note 13. As there were insufficient authorized shares available at the time of issuance, the warrants were classified as derivative liabilities, measured at fair value as of issuance, and re-measured to fair value as of September 30, 2024. Of the $1.9 million in proceeds received from the private placement, $0.6 million was received from related parties of the Company, including current employees and an immediate family member of the Chief Executive Officer. The Company recognized common shares and warrants to purchase common shares with a total fair value of $1.4 million, compensation expense of $0.7 million and a loss on private placement of $0.1 million in the condensed consolidated statements of operations. The Company recognized less than a $0.1 million loss on change in fair value of these liability-classified equity-linked financial instruments. As of September 30, 2024, derivative liabilities totaling $0.9 million relate to the warrants held by the related parties in this transaction and are included in long-term liabilities in the condensed consolidated balance sheets.

For the remaining private placement subscription agreements, the Company recognized the fair value of the warrants of $1.7 million and a loss on private placement of $0.6 million as of issuance, and a fair value of $1.7 million as of September 30, 2024, with the loss on change in fair value of less than $0.1 million recorded to change in fair value of liability-classified equity-linked contracts in the condensed consolidated statements of operations. The associated derivative liability is included in long-term liabilities in the condensed consolidated balance sheets.

In September 2024, the Company’s convertible notes were amended to increase the conversion rate of the conversion option. See further discussion at Note 11. Upon modification, the Company no longer had sufficient authorized shares to settle all equity-linked contracts including the convertible notes upon a potential conversion and accordingly, the embedded conversion feature was bifurcated from the convertible notes to be accounted for as a derivative liability. The Company calculated a fair value of the bifurcated conversion feature of $0.7 million as of the modification date and a fair value of $0.9 million as of September 30, 2024, with the loss on change in fair value of $0.2 million recorded to change in fair value of liability-classified financial instruments in the condensed consolidated statements of operations. The associated derivative liability is included in long-term liabilities in the condensed consolidated balance sheets.

AMERICAN BATTERY TECHNOLOGY COMPANY

Notes to the Condensed Consolidated Financial Statements

(unaudited)

During the quarter ended September 30, 2024, the Company issued additional common shares under its ATM and as a result of the Company’s sequencing policy did not have sufficient authorized shares to settle all of its equity-linked financial instruments. The Company reclassified warrants with a fair value of $0.2 million to liabilities and recognized a gain on change in fair value of liability-classified financial instruments of less than $0.1 million in the condensed consolidated statements of operations. The associated derivative liability is included in long-term liabilities in the condensed consolidated balance sheets

The table below sets forth the Black-Scholes inputs and assumptions for the Company’s valuation and re-valuation of its derivative liabilities for the quarter ending September 30:

	2024
Weighted average expected term (years)		0.08 – 5.00
Risk-free interest rate		3.47% - 5.47	%
Dividend yield		0	%
Volatility		29.11% - 137.84	%

A summary of the activity related to derivative liabilities for the quarter ending September 30, 2024, is as follows:

	Warrant Derivative Liabilities			Conversion Option Derivative Liability		Total Derivative Liabilities
Balance, June 30, 2024	$	-		$	-	$	-
Fair value of reclassifications during the period		502,627			689,131		1,191,758
Fair value of issuances during the period		2,632,467			-		2,632,467
Change in fair value		(17,447	)		250,304		232,857
Balance, September 30, 2024	$	3,117,647		$	939,435	$	4,057,082