Note 5 – Warrant Liability

2023 Warrants

On January 4, 2023, as part of the private placement offering, the Company issued common stock, warrants to purchase up to an aggregate of 216,667 shares of the Company’s common stock (the “Common Warrants”), and placement agent warrants to purchase up to 13,000 shares of the Company’s common stock (the “Placement Agents Warrants” see Note 6 - Stockholders’ Equity.

The Purchase Warrant provides for a value calculation for the Purchase Warrant using the Black Scholes model in the event of certain fundamental transactions. The fair value calculation provides for a floor on the volatility amount utilized in the value calculation at 100% or greater. The Company has determined this provision introduces leverage to the holders of the Purchase Warrant that could result in a value that would be greater than the settlement amount of a fixed-for-fixed option on the Company’s own equity shares. Therefore, pursuant to ASC 815, the Company has classified the Purchase Warrant as a liability in its consolidated balance sheet. The classification of the Purchase Warrant, including whether the Purchase Warrant should be recorded as liability or as equity, is evaluated at the end of each reporting period with changes in the fair value reported in other income (expense) in the consolidated statements of operations and comprehensive loss. The Purchase Warrant was initially recorded at a fair value at $5.8 million at the grant date and is re-valued at each reporting date. Upon the closing of placement, the fair value of the Purchase Warrant liability was recorded as a cost of capital.

As of March 31, 2024, the fair value of the warrant liability was reduced to $393,000.

All changes in the fair value of the warrant liabilities are recognized as a change in fair value of warrant liability in the Company’s condensed consolidated statements of operations until they are either exercised or expire.

The warrant liabilities for the Common Warrants and the Placement Agents Warrants were valued using a Binomial pricing model with the following assumptions:

Schedule of Derivative Liabilities Assumptions  

2020 Warrants

The Company issued certain warrants during the year ended December 31, 2020 that contained a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder upon occurrence of certain change in control type events. In accordance with ASC 480, the fair value of these warrants is classified as a liability in the Condensed Consolidated Balance Sheets and will be re-measured at the end of every reporting period with the change in value reported in the Condensed Consolidated Statements of Operations.

The warrant liabilities for the 2020 warrants were valued using a Binomial pricing model with the following assumptions:

Schedule of Derivative Liabilities Assumptions  

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the derivative securities was determined by the remaining contractual life of the derivative instrument. For derivative instruments that already matured, the Company used the estimated life. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

The Company recognized a gain of $658,000 and $2.9 million to account for the change in fair value of the warrant liability related to all warrants between the reporting periods for the three months ended March 31, 2024 and 2023, respectively.