Note 4 - Warrants and Equity

9 Months Ended

Sep. 30, 2024

Notes to Financial Statements

Warrants and Equity [Text Block]

4. Warrants and Equity

2024 Warrant and Stock Issuances

In August 2024, the Company entered into a securities purchase agreement with an institutional investor for the sale by the Company of 283,000 shares of common stock, and 2,183,368 pre-funded warrants to purchase shares of common stock, series A warrants to purchase up to 2,466,368 shares of common stock, series B warrants to purchase up to 2,466,368 shares of common stock, and placement agent warrants. The combined purchase price for the securities was $2.23 per share of common stock (or pre-funded warrant in lieu thereof). Each pre-funded warrant is exercisable for one share of common stock at an exercise price of $0.001 per share. The pre-funded warrants are exercisable immediately and may be exercised at any time until all of the pre-funded warrants are exercised in full, subject to the beneficial ownership limitation. Each common warrant has an exercise price of $2.23 per share and will be exercisable beginning on the effective date of shareholder approval. The series A warrants expire on the earlier of (i) two years from the initial exercise date, or (ii) 60 days from the Company's public announcement that it has achieved the series A milestone event. The series B warrants expire on the earlier of (i) five years from the initial exercise date, or (ii) six months from the Company's public announcement that it has achieved the series B milestone event. The series A milestone event means the Company releases interim data for the first subject group from the MIRACLE trial whereby the complete remission rate for either dose of the Company's study drug is greater than placebo; and series B milestone event means the Company releases final topline data from the MIRACLE trial and documented a statistically significant improvement in the primary efficacy endpoint. In addition, in August 2024, the Company entered into a warrant amendment agreement, pursuant to which the Company agreed that effective upon closing of the offering, and subject to shareholder approval, to amend 895,834 existing warrants originally issued on December 26, 2023 at an exercise price of $9.60 per share and a termination date of February 14, 2029, so that the amended warrants would have a reduced exercise price of $2.23 per share and would expire five years from the date of shareholder approval. The Company calculated the valuation of the warrant amendment immediately prior to the offering, as well as the valuation of the warrant amendment with the repriced terms, and a 50% probability of obtaining shareholder approval. The loss on modification of the warrants of $0.4 million was recorded as a loss on issuance of warrant liabilities in the three and nine months ended September 30, 2024. The Company also considered a 50% probability of obtaining shareholder approval in the valuation for the August 2024 warrants in the three and nine months ended September 30, 2024. In October 2024, the Company’s shareholders approved the issuance of both the August 2024 warrants, as well as the warrant amendment.

The Company received gross proceeds of $5.5 million, before deducting the placement agent's fees and other offering expenses payable by the Company. Proceeds of offerings are allocated between common shares and warrants first by allocating to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which would include pre-funded warrants. As the fair value of the liability classified warrants in the August 2024 offering exceeded the total proceeds, no consideration was allocated to the Common Shares or Pre-Funded Warrants. The full proceeds of the August 2024 offering were recorded to warrant liabilities, with an initial liability of $6.1 million, and a loss on initial recognition of $0.8 million. Transaction costs related to the offering were correspondingly fully allocated to warrant liabilities, and $1.0 million in related transaction costs were expensed during the three and nine months ended September 30, 2024. 

Lincoln Park Equity Line

The Company did not utilize the 2021 Lincoln Park purchase agreement during the nine months ended September 30, 2024. The 2021 Lincoln Park Agreement terminated in June 2024. 

Other Components of Equity 

In March 2024, the Company issued 6,834 shares of common stock to consultants in exchange for services to be provided. In addition, during the nine months ended September 30, 2024, the Company issued 20,485 shares of common stock related to the vesting of restricted stock units.

Liability Classified Warrants

The Company uses the Black-Scholes option pricing model (BSM) to determine the fair value of its warrants at the date of issue and outstanding at each reporting date. The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds linearly interpolated to obtain a maturity period commensurate with the term of the warrants. Estimated volatility is a measure of the amount by which the Company's stock price is expected to fluctuate each year during the expected life of the warrants. Only the volatility of the Company's own stock is used in the Black-Scholes option pricing model. Certain assumptions, including the expected term, are subjective and require judgment to develop. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our warrant liability could be materially different.

The assumptions used in determining the fair value of the Company's outstanding liability classified warrants are as follows:

	September 30, 2024	December 31, 2023
Risk-free interest rate	3.6% to 4.5%	3.8% to 5.4%
Volatility	78.7% to 111.5%	79.5% to 108.7%
Expected life (years)	0.4 to 5.0	0.3 to 5.0
Dividend yield	—%	—%

A summary of the Company's liability classified warrant activity during the nine months ended September 30, 2024 and related information follows: 

	Number of Shares			Range of Warrant Exercise				Weighted Average		Weighted Average Remaining Contractual
	Under Warrant			Price per Share				Exercise Price		Life (Years)
Balance at January 1, 2024		1,082,895		$	9.60	$	157.50	$	24.32		5.1
Granted		5,056,054		$	2.23	$	2.79	$	2.24		2.9
Expired warrants		(75,909	)	$	99.00	$	99.00	$	99.00		—
Balance at September 30, 2024		6,063,040		$	2.23	$	94.50	$	12.90		3.1
Exercisable at September 30, 2024		1,006,986		$	2.23	$	94.50	$	8.75		4.1

For a summary of the changes in fair value associated with the Company's warrant liability for the nine months ended September 30, 2024, see Note 2 - Basis of presentation, principles of consolidation and significant accounting policies - Fair Value of Financial Instruments.

Equity Classified Warrants

In March 2024, the Company granted equity-classified warrants to purchase up to 3,334 shares of Company common stock with a ten-year term and an exercise price of $9.15. The warrants vest annually over four years while services are being performed.

At September 30, 2024, the Company had 2,089,105 equity classified warrants outstanding (including the remaining August 2024 pre-funded warrants) and 2,066,894 warrants were exercisable. At  December 31, 2023, the Company had 289,276 equity classified warrants outstanding and 266,350 warrants were exercisable.