Note 7 – Common Stock Warrant Liabilities

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 a registered direct offering. The common stock and the pre-funded warrants were sold together with Series A and Series B common stock warrants. The Company also issued the placement agent warrants to purchase shares (collectively, the “December 2022 Common Stock Warrants and Placement Agent Warrants”).

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.

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 December 2022 Common Warrants and Placement Agent Warrants were recorded at the time of closing at a fair value, determined by using the Black-Scholes Model. As the total fair value of the common stock warrant liability exceeded the total proceeds, no proceeds were allocated to the common stock and pre-funded warrants issued as part of the transaction. The Company revalued the December 2022 Common Stock Warrants and Placement Agent Warrants at December 31, 2022, resulting in a fair value of $11.2 million.

The Company revalued the December 2022 Common Stock Warrants and Placement Agent Warrants at September 30, 2023 using the Black-Scholes Model. This resulted in a decrease in common stock warrant liability of $9.2 million, with an offsetting gain recorded to gain on common stock warrant liabilities in the Condensed 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 is determined using Level 3 inputs as follows:

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