Note 6 Warrants and Derivatives

The Company’s warrants and derivatives consist of freestanding financial instruments and embedded derivatives requiring bifurcation issued in connection with the Company’s debt and equity financing transactions. The Company does not have any derivatives designated as hedging instruments.

The Company evaluates whether each warrant or derivative represents a liability-classified financial instrument within the scope of ASC 480, or either a liability-classified or equity-classified financial instrument within the scope of ASC 815, Derivatives and Hedging.

Warrants and derivatives classified as liabilities are recognized at fair value in the consolidated balance sheets and are remeasured at fair value as of each reporting period with changes in fair value recorded in the consolidated statements of operations and comprehensive loss. Warrants and derivatives classified as equity are recognized at fair value, or relative fair value if issued with other financial instruments, in additional paid-in capital in the consolidated balance sheets and are not subsequently remeasured.

Liability-classified Warrants and Derivatives

Inducement Warrants

In connection with the issuance of the Senior Secured Notes due 2026, the Company issued warrants to the note holders to purchase 0.34744% of Legacy Terran Orbital's common stock for $0.01 per share (prior to the reverse recapitalization) or to receive a cash payment of approximately $7 million if the warrants were not exercised prior to maturity or repayment of the Senior Secured Notes due 2026 (the “Inducement Warrants”).

In connection with the Tailwind Two Merger, holders of the Inducement Warrants were entitled to receive an additional 0.18708% of Legacy Terran Orbital’s common stock immediately prior to the Tailwind Two Merger in exchange for waiving their cash redemption rights. Accordingly, all of the Inducement Warrants were net settled into 695 thousand shares of the Company’s common stock as part of the Tailwind Two Merger. As a result of the net settlement of the Inducement Warrants, the Company reclassified the $7.6 million fair value of the Inducement Warrants as of the date of the Tailwind Two Merger to additional paid-in capital.

The Company recorded a loss on change in fair value of the Inducement Warrants of $2.0 million during 2022.

Francisco Partners Warrants and Derivatives

As part of the Francisco Partners Facility, the Company issued warrants to Francisco Partners to purchase 1.5% of the fully diluted shares of Legacy Terran Orbital’s common stock for $0.01 per share (prior to the reverse recapitalization) exercisable in the event the Tailwind Two Merger did not occur (the “FP Pre-Combination Warrants”). The FP Pre-Combination Warrants terminated unexercised upon consummation of the Tailwind Two Merger pursuant to their contractual provisions. The Company recorded a gain on change in fair value of the FP Pre-Combination Warrants of $2.5 million in 2022.

As additional consideration for the Francisco Partners Facility, the Company committed to the issuance of (i) an equity grant package equal to 1.5% of the fully diluted shares of the Company’s common stock outstanding as of immediately following the closing of the Tailwind Two Merger, plus an additional 1.0 million shares of common stock (the “FP Combination Equity”), and (ii) warrants to purchase 5.0% of the Company's common stock on a fully diluted basis as of immediately following the closing of the Tailwind Two Merger at a strike price of $10.00 per share, redeemable at the option of Francisco Partners for $25 million on the third anniversary of the closing of the Tailwind Two Merger (the “FP Combination Warrants”). The FP Combination Equity and the FP Combination Warrants were contingently issuable upon closing of the Tailwind Two Merger.

Upon consummation of the Tailwind Two Merger, approximately 3.3 million shares of the Company's common stock were issued related to the FP Combination Equity, which resulted in the reclassification of the fair value of the FP Combination Equity as of the Tailwind Two Merger of $36.4 million to additional paid-in capital. The Company recorded a loss on change in fair value of the FP Combination Equity of $12.3 million in 2022.

In addition, upon consummation of the Tailwind Two Merger, approximately 8.3 million warrants were issued related to the FP Combination Warrants, resulting in the reclassification of the FP Combination Warrants to warrant and derivative liabilities on the consolidated balance sheets. The Company recorded a loss on change in fair value of the FP Combination Warrants of $2.9 million and a gain of $9.1 million in 2023 and 2022, respectively.

Pre-Combination and Combination Warrants and Derivatives

Upon funding of the Pre-Combination Notes, and in connection with the amendment to the Senior Secured Notes due 2026 note purchase agreement, the Company issued warrants to each of Lockheed Martin and Beach Point to purchase 0.25% of the fully diluted shares of Legacy Terran Orbital’s common stock for $0.01 per share (prior to the reverse recapitalization) on the same valuation and terms and conditions as the FP Pre-Combination Warrants (the “Pre-Combination Warrants”). The Pre-Combination Warrants terminated unexercised upon consummation of the Tailwind Two Merger pursuant to contractual provisions. The Company recorded a gain on change in fair value of the Pre-Combination Warrants of $849 thousand in 2022.

In connection with the amendment to the Senior Secured Notes due 2026 in 2021, the Company committed to issue to each of Lockheed Martin and Beach Point (i) an equity grant package equal to 0.25% of the fully diluted shares of the Company’s common stock outstanding as of immediately following the closing of the Tailwind Two Merger (the “Combination Equity”), and (ii) warrants to purchase 0.83333% of the Company's common stock on a fully diluted basis as of immediately following the closing of the Tailwind Two Merger at a strike price of $10.00 per share with a term of 5 years (the “Combination Warrants”). The Combination Equity and the Combination Warrants were contingently issuable upon closing of the Tailwind Two Merger.

Upon consummation of the Tailwind Two Merger, approximately 774 thousand shares of the Company's common stock were issued related to the Combination Equity, which resulted in the reclassification of the fair value of the Combination Equity as of the Tailwind Two Merger of $8.5 million to additional paid-in capital. The Company recorded a loss on change in fair value of the Combination Equity of $2.8 million in 2022.

In addition, upon consummation of the Tailwind Two Merger, approximately 2.8 million warrants were issued related to the Combination Warrants, resulting in the reclassification of the fair value of the Combination Warrants as of the Tailwind Two Merger of $11 million to additional paid-in capital as the Combination Warrants now represent equity-classified financial instruments. The Company recorded a loss on change in fair value of the Combination Warrants of $3.4 million in 2022.

Public Warrants and Private Placement Warrants

As part of the Tailwind Two Merger, the Company assumed outstanding warrants giving the holders the right to purchase an aggregate of 11.5 million shares of the Company's common stock for $11.50 per share (the “Public Warrants”). The Public Warrants became

exercisable on April 24, 2022, 30 days after the completion of the Tailwind Two Merger, and will expire five years from the completion of the Tailwind Two Merger.

The Company may redeem the outstanding Public Warrants when the price per share of the Company’s common stock equals or exceeds $18.00 as follows:

In addition, the Company may redeem the outstanding Public Warrants when the price per share of the Company’s common stock equals or exceeds $10.00 as follows:

In addition, as part of the Tailwind Two Merger, the Company assumed outstanding warrants that were previously issued in a private placement and that give their holders the right to purchase an aggregate of 7.8 million shares of the Company's common stock for $11.50 per share (the “Private Placement Warrants”). The Private Placement Warrants are substantially similar to the Public Warrants, except that the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial purchasers or their permitted transferees. Private Placement Warrants that are held by someone other than the initial purchasers or their permitted transferees will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

During 2022, the initial purchasers of 7,722,000 Private Placement Warrants transferred their Private Placement Warrants to other than permitted transferees. Accordingly, the transferred Private Placement Warrants became identical to and are considered to be Public Warrants at the time of transfer.

The Company recorded gains on change in fair value of the Public Warrants and Private Placement Warrants of $579 thousand and $11.2 million in 2023 and 2022, respectively.

2027 Warrants

In connection with the Convertible Note and Warrant Purchase Agreement, the Company issued warrants to Lockheed Martin to purchase 17.3 million shares of the Company’s common stock at an exercise price of $2.898 per share, representing the average of the closing price of the Company’s common stock from October 24, 2022 through October 28, 2022 plus a 15% premium, and expiring five years after the issuance date (the “2027 Warrants”). The 2027 Warrants were recognized at a fair value of $28.0 million as a discount on debt in the consolidated balance sheets.

The issuance costs related to the 2027 Warrants totaled approximately $801 thousand and were recorded in other expense in the consolidated statements of operations and comprehensive loss and as operating cash flows in the consolidated statements of cash flows. The Company recorded a gain on change in fair value of the 2027 Warrants of $3.9 million and $14.3 million in 2023 and 2022, respectively.

Conversion Option Derivative

The Company determined that the conversion option of the Convertible Note due 2027 represented an embedded derivative requiring bifurcation as a liability-classified derivative (the "Conversion Option Derivative"). Accordingly, the Conversion Option Derivative was bifurcated from the Convertible Notes due 2027 and recognized at a fair value of $31.5 million as a discount on debt in the consolidated balance sheets.

The issuance costs related to the Conversion Option Derivative totaled approximately $900 thousand and were recorded in other expense in the consolidated statements of operations and comprehensive loss and as operating cash flows in the consolidated statements of cash flows. The Company recorded a gain on change in fair value of the Conversion Option Derivative of $3.9 million and $25.7 million in 2023 and 2022, respectively.

Equity-classified Warrants and Derivatives

Detachable Warrants

In March 2021, Legacy Terran Orbital issued warrants in connection with the extinguishment of certain convertible notes (the “Detachable Warrants”). As part of the Tailwind Two Merger, all of the Detachable Warrants were ultimately net settled into approximately 22.3 million shares of the Company’s common stock.

Registered Direct Offering

On May 30, 2023, the Company completed a registered direct offering (the “Registered Direct Offering”) with an institutional investor in which the Company received proceeds of approximately $37.1 million for the sale and issuance of (i) 16 million shares of the Company’s common stock, (ii) 13 million warrants to purchase shares of the Company’s common stock at an exercise price of $0.0001 (the “Pre-Funded Warrants”), and (iii) 29 million warrants to purchase shares of the Company’s common stock at an exercise price of $1.43 (the “RDO Warrants”). In connection with the Registered Direct Offering, the Company incurred third-party issuance costs of $4.5 million, inclusive of the $1.5 million fair value recognized associated with 2 million warrants issued to purchase shares of the Company’s common stock at an exercise price of $1.60 (the “Placement Agent Warrants”). The Company allocated the $37.1 million proceeds received and the $4.5 million of third-party issuance costs between the issued common stock, the Pre-Funded Warrants, and the RDO Warrants based on relative fair value. Accordingly, the Company allocated proceeds of $12.2 million and issuance costs of $1.5 million to common stock and proceeds of $24.9 million and issuance costs of $3.0 million to equity-classified warrants and derivatives. The proceeds and issuance costs were recognized as additional paid-in capital in the consolidated balance sheet and as financing cash flows in the consolidated statement of cash flows.

The fair values of the common stock and Pre-Funded Warrants were estimated based on the market price of the Company’s common stock while the fair values of the RDO Warrants and Placement Agent Warrants were estimated using the Black-Scholes option-pricing model.

During 2023, all of the Pre-Funded Warrants were exercised.

Confidentially Marketed Public Offering

On September 21, 2023, the Company completed a confidentially marketed public offering (the “CMPO”) in which the Company received proceeds of approximately $32.5 million for the sale and issuance of approximately (i) 11.7 million shares of the Company’s common stock, (ii) 11.5 million warrants to purchase shares of the Company’s common stock at an exercise price of $0.0001 (the “CMPO Pre-Funded Warrants”), and (iii) 23.2 million warrants to purchase shares of the Company’s common stock at an exercise price of $1.50 per share (the “CMPO Warrants”). In connection with the CMPO, the Company incurred third-party issuance costs of $4 million, inclusive of the $1.1 million fair value recognized associated with 1.6 million warrants issued to purchase shares of the Company’s common stock at an exercise price of $1.75 (the “CMPO Placement Agent Warrants”). The Company allocated the $32.5 million proceeds received and the $4.0 million of third-party issuance costs between the issued common stock, the CMPO Pre-Funded Warrants, and the CMPO Warrants based on relative fair value. Accordingly, the Company allocated proceeds of $10.0 million and issuance costs of $1.2 million to common stock and proceeds of $22.5 million and issuance costs of $2.8 million to equity-classified warrants and derivatives. The proceeds and issuance costs were recognized as additional paid-in capital in the consolidated balance sheet and as financing cash flows in the consolidated statement of cash flows.

The fair values of the common stock and CMPO Pre-Funded Warrants were estimated based on the market price of the Company’s common stock while the fair values of the CMPO Warrants and CMPO Placement Agent Warrants were estimated using the Black-Scholes option-pricing model.

During 2023, all of the CMPO Pre-Funded Warrants were exercised.