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Note 2 - Warrant Liability and Fair Value of Financial Instruments
 12 Months Ended
Mar. 31, 2025
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 March 31, 2025 or   March 31, 2024.

 

There were not any transfers into or out of Level 3 as of March 31, 2025 and March 31, 2024.

 

The following table summarizes the activity of the Level 3 fair value measurements during the twelve months ended March 31, 2024 (in thousands):

 

  

Warrant

Liabilities

 
     

Balance as of March 31, 2023

 $— 

Additions

  4,556 

Change in fair value measurements - warrants mark-to-market

  3,444 

Settlement and reclassification to equity

  (8,000)
     

Balance as of March 31, 2024

 $— 

 

The Company recognized the initial warrant expense as a component of operating expenses on the 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 $3.4 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 (the "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)

 

20.00%

Probability (2)

 

70% - 10% - 20%

Payment (3)

 

00 -8,000,00000

Expected term (in years)

 

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;

(2)

Scenario probability as of issuance was based on timing expectations of management that a qualified offering occurring as of December 31, 2023 was estimated at 70%, respectively; 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.

 

On January 29, 2024, the Company issued 80,000 warrant shares pursuant to the Termination Agreement.

 
The completion of the Company’s IPO fixed the number of warrant shares issuable and the Company re-classified the Warrant to additional-paid in capital as it met the requirements for equity classification. Upon reclassification, the Company valued the warrant at $8.0 million, which represented the fair value of the shares issued on that date.