Note 7 – Common Stock Warrant Liabilities

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On December 16, 2022, the Company closed on an offering for the sale of shares of its common stock and Pre-Funded Warrants as part of the December 2022 Registered Direct Offering. The common stock and the Pre-Funded Warrants were sold together with December 2022 Common Stock Warrants and Placement Agent Warrants. The Company also issued the placement agent warrants to purchase shares.  Net proceeds from the December 2022 Registered Direct Offering were $6.7 million after deducting commissions and other transaction costs. (See Note 6)

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The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity and ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity. For warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter.

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The Company deemed the December 2022 Common Stock Warrants and Placement Agent Warrants to be classified as liabilities on the balance sheet as they contain terms for redemption of the underlying security that are outside its control. The Common Warrants and Placement Agent Warrants were recorded at the time of closing at a fair value of $7.9 million, determined by using the Black-Scholes Model. As the total fair value of the Common Stock Warrant Liability exceeded the total net proceeds of $6.7 million, the Company recorded a loss of $1.2 million to loss on common stock warrant liabilities in the Statements of Operations. Accordingly, there were no proceeds allocated to the common stock and Pre-Funded Warrants issued as part of this transaction.

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The Company revalued the December 2022 Common Stock Warrants and Placement Agent at December 31, 2022 using the Black-Scholes Model.  This resulted in an increase in common stock warrant liability of $3.3 million, with an offsetting loss recorded to loss on common stock warrant liabilities in the Statements of Operations.

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The Company used the Black-Scholes Model for determining the estimated fair value of the common stock warrant liabilities. A summary of the weighted average (in aggregate) significant unobservable inputs used in measuring the warrant liability that are categorized within Level 3 of the fair value hierarchy was as follows:

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