Warrants and embedded derivatives (ASC 815)

Warrants issued with a financing or a debt facility are classified as equity if they are indexed to the company's own stock and could be settled in shares, and as liabilities otherwise. Features that break equity classification include cash settlement at the holder's option, exercise prices that adjust for events other than standard anti-dilution, and, for private companies, settlement in preferred stock that is itself classified as a liability or mezzanine.

Liability-classified warrants are remeasured at fair value every reporting period, and the change is recognized in earnings. A successful clinical readout that lifts the stock price produces a large non-cash loss from warrant revaluation, which confuses readers and is the reason non-GAAP measures exclude it.

The same framework applies to conversion features in notes and to certain rights in collaboration agreements. The analysis is documented in a memo at issuance and revisited when terms are modified.