NOTE 8 – WARRANTS AND OTHER DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS

ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

Certain financial instruments that are not carried at fair value on the consolidated balance sheets are carried at amounts that approximate fair value, due to their short-term nature and credit risk. These instruments include cash and cash equivalents and accounts payable. Accounts payable are short-term in nature and generally are due upon receipt or within 30 to 90 days.

Non-financial assets are only required to be measured at fair value when acquired as a part of business combination or when an impairment loss is recognized. All these valuations are based on Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of these assets or liabilities.

Financial Liabilities Other than Measured at Fair Value on a Recurring Basis

Fair value of financial liabilities of the Company, other than those measured at fair value on a recurring basis, is disclosed in Note 7 - Debt.

During the six months ended March 31, 2025, the Company had the following financial liabilities measured at fair value on a recurring basis:

As described in Note 7 - Debt, in connection with the issuance of the Senior convertible notes (under May 14, 2024 Securities Purchase Agreement and pursuant to subsequent financing), the investors also received 5-year warrants (the "Warrants”) exercisable for 200% of the shares of common stock underlying such Senior convertible notes at an exercise price equal to 105% of the closing sale price of the common stock on the execution date (subject to further adjustment e.g. for reverse stock splits).

The Warrants can also be exercised on a cashless basis pursuant to which the holder, without paying the exercise price, can receive number of shares of common stock determined according to the following formula:

A= The total number of shares with respect to which the Warrant is being exercised.

C= The lower of the two Closing Bid Prices of the common stock in the two days prior the time of such exercise (as such Closing Bid Price is defined therein), subject to a certain floor, see below.

For purposes of the cashless exercise, “Black Scholes Value” means the Black Scholes value of an option for one share of common stock at the date of the applicable cashless exercise. As such, the Black Scholes value is determined and calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the Exercise Price (in certain cases - adjusted to reverse stock splits, see below), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate, (iii) a strike price equal to the Exercise Price in effect at the time of the applicable cashless exercise (i.e. the same as in prong “i”), (iv) expected volatility equal to 135%, and (v) a deemed remaining term of the Warrant of five years (regardless of the actual remaining term of the Warrant).

The Warrants are convertible by a holder only to the extent that the holder or any of its affiliates would beneficially own in excess of 9.9% of the common stock.

The warrant contracts provide that if the Company issues or sells, enters into a definitive, binding agreement pursuant to which the Company is required to issue or sell or is deemed, pursuant to the provisions of the warrants, to have issued or sold, any shares of common stock for a price per share lower than the exercise price then in effect, subject to certain limited exceptions, then the exercise price of the warrants shall be reduced to such lower price per share. In addition, the exercise price and the number of shares of common stock issuable upon exercise of the warrants are subject to adjustment in connection with stock splits, dividends or distributions or other similar transactions. See also other terms and conditions of the contract described in Note 7 – Debt.

The Company will have the option to require the holders to exercise the Warrants for cash if, at any time, the following conditions are met: (i) the registration statement covering the securities has been declared effective is effective and available for the resale of the securities and no stop-order has been issued nor has the SEC suspended or withdrawn the effectiveness of the registration statement; (ii) the Company is not in violation of any of the rules, regulations or requirements of, and has no knowledge of any facts or circumstances that could reasonably lead to suspension in the foreseeable future on, the principal market; and (iii) the VWAP for each trading day during the 10 trading day period immediately preceding the date on which the Company elects to exercise this option is 250% above the exercise price.

Out of the 40 warrants (hereinafter - giving effect to the reverse stock splits, see Note 1 - Description of business and basis of presentation) issued as part of consideration for the funds provided under the $50 million senior secured Senior convertible notes contract and additional investment right, 29 warrants remained unexercised as of September 30, 2024, with a carrying value of $79.7 million.

These warrants were recognized as liabilities due to requirements of ASC 480 as the variable number of shares to be issued upon cashless exercise (deemed the predominant exercise option) is based predominantly on a fixed monetary value. The warrant liabilities were classified as derivative liabilities when requirements of ASC 815 were met. The warrant liabilities for the remaining unexercised warrants are carried forward subsequently at fair value and the gain or loss from revaluation is recorded within the line item "Gain/(loss) on warrants and derivative liability revaluation" at each warrant exercise date and each accounting period end.

Upon initial recognition, the fair value of these warrants exceeded the amount of proceeds. The resulting discount to the carrying amount of the Senior convertible notes is amortized over the life of the note and recognized as interest expense under the effective interest method. Excess of initial fair value of warrant liabilities over the cash proceeds is recognized immediately and is presented in the consolidated statement of operations as "Other financing costs - initial recognition of warrants".

During the three months ended March 31, 2025, the Company and certain investors entered into a Warrant Exchange Agreement (subsequently approved by shareholders) whereby the Company agreed to issue new warrants in exchange for the outstanding warrants. The new warrants have the same terms and conditions as the existing warrants (described above), including the number of shares issuable upon cash exercise and a term of five years from the date of original issuance, except that the exercise price floor in the formula for the cashless exercise of the new warrants is $0.01, not subject to adjustment for stock dividends, subdivisions, or combinations (including reverse stock splits). The transaction increased the fair value of warrants (calculated as number of shares issuable upon cashless exercise) and corresponding loss in amount of approximately $57.8 million was presented in the line item “Loss on exchange of warrants” of the consolidated statement of operations.

During the six months ended March 31, 2025, the Company received investments in amount of approximately $33 million, and, along with the Senior secured convertible notes (see Note 7 - Debt above), issued Warrants with a fair value of approximately $70.2 million, recording a loss of approximately $37.2 million in the statement of operations (line “Other financing costs - initial recognition of warrants”).

During the six months ended March 31, 2025, warrants with a fair value of approximately $46 million were exercised, and the Company issued 886,216 shares of common stock (giving retroactive effect to reverse stock splits, see Note 1 - Description of business and basis of presentation). Also, 208,040 shares of common stock with a fair value of approximately $2.4 million were issued after the balance sheet date although the warrant exercise notice was received before March 31, 2025. These shares are recorded as "Liability to issue shares" in the consolidated balance sheets.

Outstanding warrants in amount of 462,864.4 with carrying value of $95.7 million as of March 31, 2025, were potentially exercisable (under cashless basis) for approximately 9,114,308 shares of common stock. Exercise of remaining warrants (on a cash or cashless basis) is available to investors for a period of approximately 4.5 - 5 years.

As described above, number of shares issuable upon cashless exercise of warrants depends on closing bid price in the last 2 trading days, subject to a floor of $0.01 ( not adjusted to reverse stock splits after the Warrant exchange contract).

The table below discloses sensitivity of number of shares theoretically issuable upon exercise (on March 31, 2025) of warrants from the changes in the lowest closing bid price in the last 2 days prior to March 31, 2025 (disregarding other limitations such as the 9.9% blocker described above).

The fair value of warrants (based on observable inputs, level 2) on recognition date and on subsequent dates was estimated by the Company as current market value (on the day before transaction and on the end of the relevant period) of the number of shares the Company would be required to issue upon cashless warrant exercise (as a predominant exercise option providing higher economic benefits to investors and reflecting the pattern of the warrants exercise since the inception of the contracts) in accordance with warrant contract requirements.

Breakdown of items recorded at fair value on a recurring basis in consolidated balance sheets by levels of observable and unobservable inputs as of March 31, 2025 and on September 30, 2024 is presented below:

A summary of all changes in liabilities recorded at fair value on a recurring basis is presented below: