Note 2 - Warrant Liability and Fair Value of Financial Instruments

6 Months Ended

Sep. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 2 – Warrant Liability and Fair Value of Financial Instruments

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. While the Company believes that its valuation methods are appropriate, the Company recognizes that the use of different methodologies or assumptions to determine the fair value could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values are the probability weighting of the different settlement outcomes used.

There were no outstanding instruments classified as Level 3 measurements as of September 30, 2024 or March 31, 2024.

The following table summarizes the activity of the Level 3 fair value measurements during the period end September 30, 2023 (in thousands):

Schedule of Fair Value Activity	Warrant Liabilities
Balance as of June 30, 2023	$	-
Additions		4,556
Change in fair value measurements - warrants mark-to-market		239
Balance as of September 30, 2023	$	4,795

The Company recognized the initial warrant expense as a component of operating expenses on the condensed statement of operations under warrant expense – termination agreement for $4.6 million and the changes in the fair value under warrant liability – mark-to-market for $0.2 million. There were no changes to the valuation approaches or techniques used for Level 3 measurements.

Warrant Liabilities

As more fully detailed in Note 6 – Related Party Transactions, on July 7, 2023, the Company entered into an Exclusive License Termination Agreement (the “Termination Agreement”) with a licensee in exchange for the issuance, upon the closing of the Company’s IPO within one year of the agreement’s execution, of a warrant to purchase shares of the Company for a variable number of shares.

The fair value of the warrant liability has been estimated using a discounted cash flow model under various scenarios and used the probability-weighted expected return method (“PWERM”) comparing the probabilities of different outcomes. The outcomes considered included (i) the closing of a qualified financing as part of the Company’s IPO at various points in time and (ii) the possibility of default whereby the licensee receives nothing. Key assumptions for the model were as follows for the initial measurement:

Discount rate at issuance (1)	20	%
Probability (2)	70% - 10% - 20%
Payment (3)	00 -8,000,00000
Expected term (in years) (4)	0.48 - 0.98

(1)	The initial discount rate was chosen based on private equity rates of return as described in the AICPA Practice Aid on Valuation of Privately-Held-Company Equity securities issued as compensation. For the recurring fair value measurement, the Company updated the discount rate based upon yield curves estimated to be similar in credit quality to the Company. The updated discount rate as of September 30, 2023 was 21.35%%;
(2)	Scenario probability as of issuance and September 30, 2023 was based on timing expectations of management that a qualified offering occurring as of December 31, 2023 was estimated at 70%; a qualified offering occurring as of June 30, 2024 was estimated at 10%; and no qualified offering occurring was estimated at 20%;
(3)	The warrant has a $0.02 strike price, however, the strike price is low relative to the stock price, making the warrant value close to the value of a stock unit. The agreement has a fixed payment value of $8.0 million, see Note 6 – Related Party Transactions;
(4)	For the subsequent recurring fair value measurements as of September 30, 2023, the Company updated the expected term to a range between 0.25 - 0.75 years.