NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS AND WARRANT LIABILITIES

May 2023 Notes and May 2023 Warrants

As discussed in Note 6, the Company recognized a loss on the extinguishment of the Convertible Notes based on the fair values of the May 2023 Notes including the conversion feature, and the May 2023 Warrants. The Company determined that there was a derivative liability associated with the conversion features in the May 2023 Notes due to the conversion price being subject to stockholder approval in the conversion feature. Therefore, the Company separated the conversion features from the May 2023 Notes and recorded them at fair value and continued to adjust them to fair value until stockholder approval was received on August 3, 2023 as the conversion price is then only adjusted based on anti-dilutive provisions. The Company also determined that the May 2023 Warrants were derivative liabilities due to the potential adjustment in the exercise prices being subject to stockholder approval. Once stockholder approval was received on August 3, 2023, the exercise price of the warrants only adjusts based on anti-dilutive provisions and they are no longer derivative liabilities

The fair value of the conversion features and warrant liabilities were calculated using a Monte Carlo simulation and the following assumptions and methodologies:

In addition to the above factors, the Company also used a probability assessment for the initial and August 3, 2023 valuation to evaluate whether stockholder approval would be received to lower the conversion and exercise prices. The Company utilized a 50/50 assessment that stockholders would or would not approve the lower conversion and exercise price. Management notes that at the time of the assessment, the stockholder vote had not yet started therefore there was no data to determine whether one scenario was more likely than another. Since the stockholders approved the lower conversion and exercise price on August 3, 2023, no probability assessment was used.

Based on the above factors, the estimated fair value of the Company’s derivative liabilities carried at fair value at May 24, 2023 and August 3, 2023 as follows:

On August 3, 2023, stockholders approved the adjustment of the conversion price of the New Notes and Exchange Notes and the exercise price of the New Warrants and Exchange Warrants. The conversion and exercise prices can adjust to a floor of $0.22 per share based on certain events defined in the agreements related to these instruments. The Company concluded that as of August 3, 2023, the conversion feature of the May 2023 Notes and the May 2023 Warrants are no longer derivative liabilities and reclassified them to equity on August 3, 2023. The Company recognized a (loss) gain of $(690,290) and $2,333,417 for the change in the fair values of the conversion features of the May 2023 Notes for the three and nine months ended September, 30, 2023, respectively.

The Company calculated the fair value of May 2023 Warrants at August 3, 2023, and recognized a gain of $5,296 and $2,774,377 in the three and nine months ended September 30, 2023. The total gain recognized for the nine months ended September 30, 2023 for the May 2023 Notes conversion features and May 2023 Warrants was $5,107,794.

Series A and Series B Warrants

As discussed in Note 10 below, the Company issued Series A and Series B Warrants (the “November 2023 Warrants”) in connection with the sale of common units and pre-funded warrant units. Under the terms of the November 2023 Warrants, the number and exercise price are subject to adjustment if the Company completes certain transactions specified in these warrant agreements. In addition, the Series A Warrants have a cashless exercise provision, if approved by stockholders, that would allow holders to cashless exercise one warrant for three shares of the Company’s common stock. Such adjustments were subject to stockholder approval (which was received on January 12, 2024) and are further described in Note 10.
 

The Company has determined that these warrants should be classified as liabilities and has used a Monte Carlo simulation to estimate the fair value. The following assumptions were used in the valuations:

In addition to the above factors, the Company also used a probability assessment for the initial and December 31, 2023 valuation to evaluate whether stockholder approval would be received on January 12, 2024 to lower the conversion and exercise prices. Management notes that at the time of the assessment, the stockholder vote had not yet started but there was a requirement in the offering that the board of directors, management, and a significant stockholder vote in favor of these adjustments which included approximately 20.1% of the shares outstanding as of the transaction date. Further, significant investors in the transaction held shares acquired prior to the record date for eligible stockholders to vote. Although these same investors could not vote the shares received in the November 17, 2023 offering, they could abstain from voting those shares for the stockholder vote and such shares would count towards whether a quorum of shares was received to hold the special meeting for the stockholder approval. Finally, management notes that approval was overwhelmingly positive to adjust the conversion price for the May 2023 Notes and May 2023 Warrants and exercise prices. The Company concluded that it was 100% likely that stockholders would approve the provisions to adjust the number of warrants and exercise price.

Based on the above factors, the estimated fair value of the Series A and Series B Warrant liabilities at December 31, 2023 is as follows:

The Company allocated the gross proceeds from the issuance of the common units and pre-funded warrant units based on the relative fair values from the November 17, 2023 valuation resulting in a value of $10,990,530 and $3,345,961 being allocated to the Series A and Series B warrants, respectively. An allocation of the issuance costs from the offering was made based on the relative fair values of the common stock, pre-funded warrants, Series A and Series B warrants and issuance costs of $1,451,249 that were allocated to the Series A and Series B Warrants were expensed in the fourth quarter of 2023.

Subsequent to the approval by stockholders of the cashless exercise provision of the Series A Warrant, the fair value of each Series A Warrant is the value of three shares of the Company’s common stock. Based on the closing price of the Company’s common stock on September 30, 2024 of 8.32, the fair value of each Series A Warrant is $24.96 and based on the total number of warrants outstanding of 694, the warrant liability for Series A Warrants is $17,245 at September 30, 2024.

As discussed in Note 10 below, on May 17, 2024, certain terms of the Series B Warrants were amended, including a cashless exercise provision, which resulted in the Series B warrants no longer being liabilities. The fair value of each Series B warrant is the value of the closing stock price of the Company times 0.81, the cashless exercise exchange ratio. Based on the closing price of the Company’s common stock on May 17, 2024 of $231.20, the fair value of each Series B Warrant is $187.27. A loss of $2,174,673 was recognized in the nine months ended September 30, 2024, for the change in fair value of the Series B Warrants from December 31, 2023 to May 17, 2024. The fair value of the Series B Warrants of $ 3,405,662 as of May 17, 2024 was reclassified to equity.

As discussed in Note 10, certain holders of the Series A and Series B Warrants exercised their warrants. The Company reclassified the fair value of the Series A Warrants exercised on a cashless basis to stockholders equity. The Company recognized a gain of $165,355 from the exercise of the Series B Warrants based on the proceeds received from the exercise and the estimated fair value of the Series B Warrants on the date of exercise.

The following represents the activity associated with the Series A and Series B Warrants for the nine months ended September 30, 2024: