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WARRANT LIABILITIES

3 Months Ended

Mar. 31, 2023

NOTE 10 – WARRANT LIABILITIES

In 2004, the Company issued warrants to various investors and brokers for the purchase of Series C preferred stock in connection with a private placement (the “Series C Warrants”). The Series C Warrants were subsequently extended and, upon closing of the reverse recapitalization transaction with Ritter, exchanged for warrants to purchase common stock of the Company, pursuant to the Series C Warrant terms as adjusted.

In exchange for the Series C Warrants, upon closing of the merger with Ritter, the holders received warrants to purchase shares of the Company’s common stock at $7.195 per share, subject to adjustment. As of March 31, 2023, the Series C Warrants have remaining terms ranging from .65 to 1.24 years. The Series C Warrants were determined to be liability-classified pursuant to the guidance in ASC 480 and ASC 815-40, based on the inclusion of a leveraged ratchet provision for subsequent dilutive issuances. On April 25, 2022 the Series C Warrants were repriced from $7.195 to $6.00 with an additional 49,318 ratchet Warrants issued, and on May 26, 2022 the Series C Warrants were repriced from $6.00 to $5.136 with an additional 49,952 ratchet Warrants issued. On December 22, 2022, the Series C Warrants were repriced again from $5.136 to $1.32 with an additional 1,002,717 ratchet Warrants issued.

Additionally, on December 22, 2022, in conjunction with the issuance of the Debenture to Alpha Capital (see Note 11 – Convertible Debt – Related Party), the Company issued to Alpha Capital a warrant to purchase 2,500,000 shares of the Company’s common stock (the “Alpha Warrant”). The exercise price of the Alpha Warrant is $1.65 (equal to 125% of the conversion price of the Debenture on the closing date). The Alpha Warrant may be exercised by Alpha Capital, in whole or in part, at any time on or after June 22, 2023 and before June 22, 2028, subject to certain terms and conditions described in the Alpha Warrant, including the Company’s receipt of the necessary stockholder approvals.

The following table summarizes the activity in liability classified warrants for the three months ended March 31, 2023:

SCHEDULE OF WARRANTS ACTIVITY

	Common Stock Warrants
	Shares		Weighted– Average Exercise Price		Range of Exercise Price		Weighted– Average Remaining Life (Years)
Total outstanding – December 31, 2022		3,849,571	$	1.53	$	1.32 - $ 1.65		3.9
Exercised		—		—		—		—
Forfeited		—		—		—		—
Expired		—		—		—		—
Granted		—		—		—		—
Total outstanding – March 31, 2023		3,849,571	$	1.53	$	1.32 - $1.65		3.66
Exercisable		1,349,571	$	1.32	$	1.32		0.76

The following table summarizes the activity in liability classified warrants for the three months ended March 31, 2022:

	Common Stock Warrants
	Shares			Weighted– Average Exercise Price		Range of Exercise Price		Weighted– Average Remaining Life (Years)
Total outstanding –December 31, 2021		248,161		$	7.20				2.00
Exercised		(536	)		7.20
Forfeited		—			—
Expired		—			—
Granted		—			—
Total outstanding – March 31, 2022		247,625		$	7.20
Exercisable		247,625		$	7.20	$	7.20		1.76

The following table presents the Company’s fair value hierarchy for its liabilities measured at fair value on a recurring basis as of March 31, 2023:

	Quoted
	Market		Significant
	Prices for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
Common Stock Warrant liabilities	(Level 1)		(Level 2)		(Level 3)			Total
Balance as of December 31, 2022	$	—	$	—	$	3,622,647		$	3,622,647
Exercises		—		—		—			—
Gain on change in fair value of warrant liabilities		—		—		(1,038,673	)		(1,038,673	)
Balance as of March 31, 2023	$	—	$	—	$	2,583,974		$	2,583,974

There were no transfers of financial assets or liabilities between category levels for the three months ended March 31, 2023.

The value of the warrant liabilities was based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation. For volatility, the Company considers comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants and transitions to its own volatility as the Company develops sufficient appropriate history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. Any significant changes in the inputs may result in significantly higher or lower fair value measurements.

The following are the weighted average and the range of assumptions used in estimating the fair value of warrant liabilities (weighted average calculated based on the number of outstanding warrants on each issuance) as of March 31, 2023 and March 31, 2022:

	March 31, 2023						March 31, 2022
	Range			Weighted Average			Range			Weighted Average
Risk-free interest rate		3.531% — 4.743	%		3.93	%		2.03% — 2.29	%		2.08	%
Expected volatility (peer group)		70.3% — 132	%		110.9	%		88% — 101	%		90.4	%
Term of warrants (in years)		.64 — 5.23			3.66			1.65 — 2.24			1.76
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%