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If a company says they lost $2M in Q1 because of:

"non-cash mark-to-market increase in warrant liabilities"

As I understand warrants, they allow the holder to purchase the shares at the strike price before expiry. The only way I can see this as a loss, asides from their dilutive property, is if a companies shares are trading at $10 but the warrants are exercised at $4. Since these are newly issued shares, if 1M shares are issued at $4, the company nets $4M but could've issued shares at-the-market of $10 (probably $9 bought deal discounted) and net $10M (or $9M) and thus this is viewed as a "loss" of $6M.

Is my understanding correct? If not, why is this recorded as part of the net loss?

2 Answers 2

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Yes, the loss ultimately arises from the scenario you describe, where the warrant becomes "in the money" and requires issuing shares below market value. However, whether or not the warrant is currently in the money, it has value (and constitutes a liability to the company) based on the probability that it will go in the money and by how much. This is what "mark-to-market" means, and is similar to exchange-traded call options. The loss corresponds to an increase in value of the warrants from one quarter to the next, generally due to either a rise in the market price of the stock or a rise in its expected volatility.

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Is this a SPAC? The below article says that companies must calculate the probability of being forced to make a cash tender offer. As this probability changes, the liability changes; and the liability change creates a non-cash profit or loss in every reporting period.

The switch to classify the warrants as a liability stems from the cash outlay companies could face if they’re forced to extend a tender offer to shareholders.

https://www.cfodive.com/news/spac-warrants-liability-change-SEC-CFO-accounting-antoniades/598655/

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  • No, not a SPAC, NYSE listed company.
    – pstatix
    May 18, 2021 at 19:14

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