REDEEMABLE CONVERTIBLE PREFERRED STOCK, ESCROWED PROCEEDS, AND STOCKHOLDERS EQUITY

3 Months Ended

Sep. 30, 2022

Stockholders' equity:

REDEEMABLE CONVERTIBLE PREFERRED STOCK, ESCROWED PROCEEDS, AND STOCKHOLDERS' EQUITY

(13) REDEEMABLE CONVERTIBLE PREFERRED STOCK, ESCROWED PROCEEDS, AND STOCKHOLDERS’ EQUITY

Series B and C Redeemable Convertible Preferred Stock – On May 11, 2022, Palatin entered into a securities purchase agreement with institutional investors, and on May 12, 2022, Palatin issued and sold 8,100,000 shares of Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”) and 900,000 shares of Series C Redeemable Convertible Preferred Stock (“Series C Preferred Stock”). Each share of Series B Preferred Stock and Series C Preferred Stock had a purchase price of $1.67.  The investors in the Series B Preferred Stock and Series C Preferred Stock also received warrants to purchase up to 66,666 shares of common stock at an exercise price of $12.50 per share, which expire 48 months following issuance. Total gross proceeds from the offering, before expenses, was $15,000,000 which was deposited in and is being held in an escrow account as of September 30, 2022, pending the investors’ election to redeem the shares for cash or in notes, or convert the shares to common stock as discussed below. The escrowed proceeds have been presented as a deduction to the Series B Preferred Stock and Series C Preferred Stock on the Company’s consolidated balance sheets at September 30, 2022.

The Series B Preferred Stock and Series C Preferred Stock are convertible, at the option of the holder from the date of the Company’s reverse stock split on August 30, 2022 for a mutually agreed period, which has been extended by the parties through November 30, 2022, into 1,333,333 shares of common stock, computed by dividing the aggregate stated value of the preferred stock of $15,000,000 by the conversion price of $11.25. Alternatively, during the period from the date of stockholder approval of the Company’s reverse stock split (see below) for a mutually agreed period, which has been extended through November 30, 2022, the holders of Series B Preferred Stock and Series C Preferred Stock can elect to redeem for cash in an amount equal to the stated value or convert to notes, having an aggregate principal amount equal to the stated value. The investors will also receive a fee of $750,000, which was paid into the escrow account by the Company. The Series B Preferred Stock and Series C Preferred Stock are presented outside of stockholders’ equity at their aggregate redemption value of $15,000,000 since their redemption is outside control of the Company. Given that the fee and other costs were not refundable to the Company as of June 30, 2022, regardless of the election selected by the investors, the fee, the fair value of the warrants ($234,443), and other costs of $150,995 were recorded as expenses within selling, general and administrative expenses during the year ended June 30, 2022.

The Company called a meeting of stockholders on June 24, 2022 to seek approval of, among other things, an amendment to its certificate of incorporation authorizing a reverse stock split. Except as otherwise required by law, holders of the Series B Preferred Stock and Series C Preferred Stock were entitled to vote only on the reverse stock split and any adjournment of the meeting relating to the reverse stock split. The Company’s common stock, outstanding Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock voted as a single class on an as-if converted basis. The holders of Series B Preferred Stock had votes equal to the number of shares of common stock into which the Series B Preferred Stock is convertible. The holders of Series C Preferred Stock were entitled to 20,000 votes per share of common stock into which the Series C Preferred Stock is convertible but could only vote in the same proportion as the shares of common stock, Series A preferred stock, and Series B preferred stock were voted on the reverse stock split or any adjournment of the stockholder meeting relating thereto. The holders of the Series B Preferred Stock agreed to vote in favor of the reverse stock split, which was approved and ultimately became effective on August 30, 2022. Subsequent to the reverse stock split, the Series B Preferred Stock and Series C Preferred Stock is also convertible into common stock at the option of the Company subject to the holders having the ability to resell the Company stock, the stock being traded on a national stock exchange or automated inter-dealer quotation system, and other conditions, as defined in the respective purchase agreement. 

To the extent any shares of Series B Preferred Stock or Series C Preferred Stock are converted to common shares or converted to debt, the Company will use such net proceeds from this offering for working capital and general corporate purposes.

The holders of the Series B Preferred Stock and Series C Preferred Stock are entitled to certain registration rights, rights for approval of increases in authorized shares of the respective series, rights to limitation on the Company’s ability to incur indebtedness, and dividends paid on common stock on an as-if converted basis. In addition, in the event of any liquidation, dissolution, or winding-up of the Company, the holders of the Series B Preferred Stock and Series C Preferred Stock are entitled to receive the preferred stock’s stated value plus any declared but unpaid dividends before any payment is made to holders of common stock or any other class or series of stock ranking junior to the respective Series B Preferred Stock and Series C Preferred Stock.

Series A Convertible Preferred Stock – As of September 30, 2022, 4,030 shares of Series A Convertible Preferred Stock were outstanding. Each share of Series A Convertible Preferred Stock is convertible at any time, at the option of the holder, into the number of shares of common stock equal to $100 divided by the Series A conversion price. As of September 30, 2022, the Series A conversion price was $152.50, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 0.66 shares of common stock. The Series A conversion price is subject to adjustment, under certain circumstances, upon the sale or issuance of common stock for consideration per share less than either (i) the Series A conversion price in effect on the date of such sale or issuance, or (ii) the market price of the common stock as of the date of such sale or issuance. The Series A conversion price is also subject to adjustment upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which will result in an increase or decrease in the number of shares of common stock outstanding. Shares of Series A Convertible Preferred Stock have a preference in liquidation, including certain merger transactions, of $100 per share, or $403,000 in the aggregate as of June 30, 2022. Additionally, the Company may not pay a dividend or make any distribution to holders of any class of stock unless the Company first pays a special dividend or distribution of $100 per share to holders of the Series A Convertible Preferred Stock.

Financing Transactions – On June 21, 2019, the Company entered into an equity distribution agreement (the “2019 Equity Distribution Agreement”) with Canaccord Genuity LLC (“Canaccord”), pursuant to which the Company may, from time to time, sell shares of the Company’s common stock at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The 2019 Equity Distribution Agreement and related prospectus is limited to sales of up to an aggregate maximum $40.0 million of shares of the Company’s common stock. The Company pays Canaccord 3.0% of the gross proceeds as a commission.

No proceeds were raised under the 2019 Equity Distribution Agreement during the three months ended September 30, 2022 and 2021.

Stock Purchase Warrants- As of September 30, 2022, the Company had outstanding warrants for shares of common stock as follows:

	Shares of Common		Exercise Price per		Latest Termination
Descripton	Stock		Share		Date
May 2022 warrants		66,666	$	12.50	May 11, 2026

Warrants for 33,333 shares of common stock are exercisable immediately and warrants for 33,333 shares of common stock will become exercisable when the holders of the Series B Preferred Stock and Series C Preferred Stock elect to redeem their shares for cash or convert to notes.

The outstanding warrants are entitled to dividends and participation in subsequent equity offerings as if they were exercised for common shares.

Stock Options – For the three  months ended September 30, 2022 and 2021, the Company recorded stock-based compensation related to stock options of $260,957 and $398,812, respectively.

A summary of stock option activity is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding - June 30, 2022		1,163,962		$	15.98		7.1	$	-
Granted		1,660			6.36
Forfeited		(4,768	)		12.17
Exercised		-			-
Expired		(17,056	)		18.00
Outstanding - September 30, 2022		1,143,798			15.95		6.9	$	875
Exercisable at September 30, 2022		685,855		$	18.34		5.7	$	-
Expected to vest at September 30, 2022		457,943		$	12.38		8.8	$	875

Stock options granted to the Company’s executive officers and employees generally vest over a 48-month period, while stock options granted to its non-employee directors vest over a 12-month period.

Included in the outstanding options in the table above are 166,233 and 18,921 unvested performance-based stock options granted to executive officers and other employees, respectively, which were granted in June 2020, 2021 and 2022. Grants in June 2020, 2021, and 2022 were 87,303, 95,167, and 60,566 respectively. The performance-based stock options vest on annual performance criteria through the fiscal years ending June 30, 2026 relating to advancement of MC1r programs, including initiation of clinical trials and licensing of Vyleesi in additional countries or regions.

Restricted Stock Units – For the three months ended September 30, 2022 and 2021, the Company recorded stock-based compensation related to restricted stock units of $175,920 and $233,915, respectively.

A summary of restricted stock unit activity is as follows:

Outstanding at June 30, 2022	649,149
Granted	-
Forfeited	(2,608	)
Vested	(19,600	)
Fractional shares	(6	)
Outstanding at September 30, 2022	626,935

Included in outstanding restricted stock units in the table above are 344,180 vested shares that have not been issued as of September 30, 2022 due to a provision in the restricted stock unit agreements to delay delivery.

Time-based restricted stock units granted to the Company’s executive officers, employees and non-employee directors generally vest over 48 months, 48 months, and 12 months, respectively.

Included in the outstanding restricted stock units in the table above are 61,556 and 13,751 unvested performance-based restricted stock units granted to executive officers and other employees, respectively, which were granted in June 2019, 2020, 2021, and 2022. Grants in June 2019, 2020, 2021 and 2022 were 24,829, 52,679, 22,343, and 40,707 respectively. The performance-based restricted stock units vest on annual performance criteria through the fiscal years ending June 30, 2026 relating to advancement of MC1r programs, including initiation of clinical trials and licensing of Vyleesi in additional countries or regions.

In June 2021, the Company granted 18,000 performance-based restricted stock units to its executive officers which vest if, prior to June 22, 2023, the price per share of the Company’s common stock, as traded on the NYSE American, was at least $50.00 for at least twenty consecutive trading days.