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WARRANT LIABILITIES

9 Months Ended

Sep. 30, 2024

NOTE 7 — 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. 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. As of December 31, 2022 there were 26,995 Series C Warrants outstanding with an exercise price of $66.00 per share.

On December 22, 2022, in conjunction with the issuance of the Debenture to Alpha (see Note 8 – Convertible Debt), the Company issued to Alpha a warrant to purchase 50,000 shares of the Company’s common stock (the “Alpha Warrant”). The exercise price of the Alpha Warrant was $82.50 (equal to 125% of the conversion price of the Debenture on the closing date). The Alpha Warrant may be exercised by Alpha, in whole or in part, on or after June 22, 2023 and at any time before June 22, 2028, subject to certain terms and conditions described in the Alpha Warrant. The fair value of this Alpha Warrant was included in Warrant liabilities-related party on the Company’s consolidated balance sheet as of December 31, 2022. On December 5, 2023, the Company entered into an Amendment No. 1 with regard to a Securities Purchase Agreement, with Alpha. This Amendment eliminated certain adjustment provisions of the Warrant. The Company determined the event resulted in equity classification for the Warrant and, accordingly, the Company remeasured the warrant liabilities to fair value, and reclassified to noncompensatory equity classified warrants (see Note 12 - Stockholders Equity).

On November 24, 2023, 21,952 Series C Warrants expired, and on December 5, 2023 the remaining Series C Warrants were repriced from an exercise price of $66.00 per share to an exercise price of $36.50 per share, with 4,074 additional ratchet Series C Warrants issued, resulting in 9,113 of these Series C Warrants outstanding and exercisable as of December 31, 2023.

On February 27, 2024, these Series C Warrants were repriced again as a result of a down-round provision triggered by a Securities Purchase Agreement with Alpha for the purchase of the February 2024 Debenture, from an exercise price of $36.50 per share to an exercise price of $13.00 per share, with 16,473 additional ratchet Series C Warrants issued, resulting in 25,586 of these Series C Warrants outstanding and exercisable, and on June 26, 2024 these remaining 25,586 Series C Warrants expired.

On April 12, 2024, in connection with an 8% Convertible Debenture in the principal amount of $1,100,000 issued to Yi Hua Chen (“Chen”) (see Note 8 – Convertible Debt), we issued a liability classified warrant to Chen purchase 36,001 shares of our common stock, exercisable until February 27, 2029. On September 6, 2024 as a result of the down-round provision triggered by shares sold in a public offering, the above warrants were repriced from $13.00 per share exercise price to $6.50 per share exercise price. The warrant remains outstanding and exercisable and was liability classified as of September 30, 2024 due to an insufficient number of authorized shares to settle the warrant prior to the receipt of shareholder approval, which was subsequently obtained on October 25, 2024. The fair value of the warrant was $565,582 on the issuance date and $257,492 at September 30, 2024. During the three and nine months ended September 30, 2024, the Company recorded a gain on change in fair value of warrant liabilities of $2,784 and $308,090 for this warrant.

As a result of a partial voluntary conversion of the 2024 Alpha Debenture on September 9, 2024, as of September 30, 2024 the Company no longer had sufficient shares to settle the 2024 Alpha Warrant in full until shareholder approval was obtained, and a portion (2,314 warrant shares) was reclassified to liabilities (see Note 12 - Stockholders’ Equity).

The following table summarizes the activity in liability classified warrants for the nine months ended September 30, 2024:

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, 2023		9,113		$	36.50	$	36.50 - $36.50		0.49
Granted		52,474		$	10.96	$	6.50 - $13.00		4.41
Exercised		—			—		—		—
Reclassified from equity		2,314		$	6.50	$	6.50 - $6.50		4.41
Expired		(25,586	)	$	13.00	$	13.00 - $13.00		—
Forfeited		—			—		—		—
Total outstanding – September 30, 2024		38,315		$	6.50	$	6.50 - $6.50		4.41
Exercisable		38,315		$	6.50	$	6.50 - $6.50		4.41

The following table summarizes the activity in liability classified warrants for the nine months ended September 30, 2023:

	Common Stock Warrants
	Shares		Weighted– Average Exercise Price		Range of Exercise Price		Weighted– Average Remaining Life (Years)
Total outstanding –December 31, 2022		76,992	$	76.72	$	66.00 - $82.50		3.9
Granted		—		—		—		—
Exercised		—		—		—		—
Expired		—		—		—		—
Forfeited		—		—		—		—
Total outstanding – September 30, 2023		76,992	$	76.72	$	66.00 - $82.50		3.16
Exercisable		76,992	$	76.72	$	66.00 - $82.50		3.16

The following table presents the Company’s fair value hierarchy for its warrant liabilities measured at fair value on a recurring basis as of September 30, 2024:

	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, 2023	$	—	$	—	$	54,600		$	54,600
Granted		—		—		565,582			565,582
Exercised		—		—		—			—
Reclassified from equity		—		—		14,997			14,997
Gain on change in fair value of warrant liabilities		—		—		(361,137	)		(361,137	)
Balance as of September 30, 2024	$	—	$	—	$	274,042		$	274,042

During the three and nine months ended September 30, 2024, warrants for 2,314 common shares with an exercise price of $6.50 with a fair value of $14,997 as of September 30, 2024 were reclassified from equity to liabilities. There were no transfers of financial assets or liabilities between category levels for the three and nine months ended September 30, 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 September 30, 2024 and 2023:

	September 30, 2024						September 30, 2023
	Actual			Weighted Average			Range			Weighted Average
Risk-free interest rate		3.61% — 3.61	%		3.61	%		4.523% — 5.401	%		4.83	%
Expected volatility (peer group)		119.5% — 119.5	%		119.5	%		57.9% — 134.5	%		108.41	%
Term of warrants (years)		4.41 — 4.41			4.41			0.14 — 4.73			3.16
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%