REDEEMABLE CONVERTIBLE PREFERRED STOCK ESCROWED PROCEEDS AND STOCKHOLDERS EQUITY

12 Months Ended

Jun. 30, 2024

REDEEMABLE CONVERTIBLE PREFERRED STOCK ESCROWED PROCEEDS AND STOCKHOLDERS EQUITY

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

(15) 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 an escrow account. The escrowed proceeds were presented as a deduction to the Series B Preferred Stock and Series C Preferred Stock on the Company’s consolidated balance sheet. In November 2022, the investors provided the Company with Notices of Redemption, electing to have the Series B and Series C Preferred Stock redeemed in cash. Accordingly, the Company and investors directed the escrow agent for the escrow account to release $15,750,000 to the investors, comprising the total gross proceeds from the offering of $15,000,000 and a fee of $750,000.

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 $750,000 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.

Series A Convertible Preferred Stock – As of June 30, 2024, 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 June 30, 2024, the Series A Conversion Price was $75.45, and each share of Series A Convertible Preferred Stock is convertible into approximately 1.33 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, 2024. 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 January 29, 2024, the Company entered into a securities purchase agreement (the “January 2024 Purchase Agreement”) to sell in a registered direct offering (the “January 2024 RD Offering”), an aggregate of 1,831,503 shares of common stock, of the Company. Pursuant to the January 2024 Purchase Agreement, the Company issued to the investors in the January 2024 RD Offering unregistered warrants (the “January 2024 Private Warrants”) to purchase up to 1,831,503 shares of the Company’s common stock (the “January 2024 Private Warrant Shares”) in a concurrent private placement (the “January 2024 Private Offering” and together with the January 2024 RD Offering, the “January 2024 Offering”). The shares of common stock and accompanying January 2024 Private Warrants were offered at a combined offering price of $5.46.

The January 2024 Private Warrants are exercisable on the six-month anniversary of the issuance date for a period of four years from the issuance date, at an exercise price equal to $5.46 per January 2024 Private Warrant Share. The January 2024 Private Warrants are exercisable for cash, or, solely during any period when a registration statement for the issuance or resale of the January 2024 Private Warrant Shares issuable upon exercise of the January 2024 Private Warrants to or by the holder of such January 2024 Private Warrants is not in effect, on a cashless basis.

The Company paid the placement agent a cash fee equal to 7.0% of the aggregate gross proceeds of the January 2024 Offering and for certain expenses and legal fees in connection with the January 2024 Offering. In addition, the Company also issued to the placement agent or its designees warrants (the “January 2024 Placement Agent Warrants”) to purchase up to 91,575 shares of the Company’s common stock (the “January 2024 Placement Agent Warrant Shares”) as part of the compensation payable to the placement agent. The January 2024 Placement Agent Warrants have substantially the same terms as the January 2024 Private Warrants, except that the January 2024 Placement Agent Warrants have an exercise price of $6.825 per share.

On March 14, 2024, the Company filed a registration statement on Form S-1 to register the January 2024 Private Warrants and the January 2024 Placement Agent Warrants, which registration statement was declared effective on March 28, 2024 and a prospectus was filed on the same date.

The gross proceeds from the January 2024 Offering totaled $10,000,006, with net proceeds from the January 2024 Offering, after deducting the placement agent fees and offering expenses, amounting to $9,224,056. The Company intends to use the net proceeds received from the January 2024 Offering for general working capital purposes.

On October 20, 2023, the Company entered into a securities purchase agreement (the “October 2023 Purchase Agreement”) with a certain institutional investor, to sell in a registered direct offering (the “October 2023 RD Offering”), an aggregate of (i) 1,325,000 shares of common stock (the “October 2023 Shares”), of the Company and (ii) pre-funded warrants (the “October 2023 Pre-Funded Warrants”) to purchase up to 1,033,491 shares of the Company’s common stock (the “October 2023 Pre-Funded Warrant Shares”). Pursuant to the October 2023 Purchase Agreement the Company also issued unregistered warrants (the “October 2023 Private Warrants”) to purchase up to 2,358,491 shares of the Company’s common stock (the “October 2023 Private Warrant Shares”) in a concurrent private placement (the “October 2023 Private Offering” and together with the October 2023 RD Offering, the “October 2023 Offering”). The October 2023 Shares and accompanying October 2023 Private Warrants were offered at a combined offering price of $2.12. The October 2023 Pre-Funded Warrants and accompanying October 2023 Private Warrants were offered at a combined offering price of $2.1199. The October 2023 Offering closed on October 24, 2023.

The October 2023 Private Warrants are exercisable on the six-month anniversary of issuance for a period of five and one-half years from the issuance date, at an exercise price equal to $2.12 per October 2023 Private Warrant Share. The October 2023 Private Warrants will be exercisable for cash, or, solely during any period when a registration statement for the issuance or resale of the October 2023 Private Warrant Shares issuable upon exercise of the October 2023 Private Warrants to or by the holder of such October 2023 Private Warrants is not in effect, on a cashless basis.

The October 2023 Pre-Funded Warrants had an exercise price of $0.0001 per October 2023 Pre-Funded Warrant Share and were exercisable upon issuance. During the three months ended December 31, 2023, the institutional investor exercised the outstanding October 2023 Pre-Funded Warrants to purchase 1,033,491 shares of the Company’s common stock.

The net proceeds from the October 2023 Offering, after deducting the placement agent fees and offering expenses, were $4,573,948.

On October 31, 2022, the Company entered into a securities purchase agreement with a certain institutional investor to sell, in a registered direct offering (the “October 2022 RD Offering”), an aggregate of (i) 1,020,000 shares of the Company’s common stock, (ii) prefunded warrants (the “October 2022 Pre-Funded Warrants”) to purchase up to 798,182 shares of the Company’s common stock, and (iii) common stock warrants (the “October 2022 Common Warrants”) to purchase up to 1,818,182 shares of the Company’s common stock. Each share of common stock was offered with one accompanying October 2022 Common Warrant with a combined offering price of $5.50. Each October 2022 Pre-Funded Warrant was offered with one accompanying October 2022 Common Warrant with a combined offering price of $5.4999. The October 2022 RD Offering was completed on November 2, 2022.

The October 2022 Common Warrants have an exercise price of $5.83 per share, are exercisable beginning six months after the date of issuance and will expire five and one-half years from the date of issuance. The October 2022 Pre-Funded Warrants had an exercise price of $0.0001 per share and were exercisable upon issuance. During the year ended June 30, 2023, the institutional investor exercised the outstanding October 2022 Pre-Funded Warrants to purchase 798,182 shares of the Company’s common stock. The October 2022 Common Warrants will be exercisable for cash, or, solely during any period when a registration statement for the issuance or resale of the shares of common stock issuable upon exercise of the October 2022 Common Warrants to or by the holder of such October 2022 Common Warrants is not in effect, on a cashless basis.

The proceeds from the October RD 2022 Offering, after deducting the placement agent fees and expenses and other estimated offering expenses, were $9,109,117.

The private warrants and common warrants related to the October 2022 and October 2023 financings met the definition of a derivative instrument under ASC Subtopic 815-40 and were reported as liabilities as of June 30, 2023 since the warrants did not meet the criteria for equity classification. The Company recorded the warrants at fair value on its balance sheet with changes in the fair value of the warrants recorded as a non-cash charge or gain in the consolidated statements of operations.

The January 2024 Placement Agent Warrants were issued to non-employees in exchange for services related to the offering are accounting for in accordance ASC 718 which requires the fair value of the warrants to be recognized as an offering expense. The placement agent warrants contain certain contingent cash settlement features that are not probable of occurring and not within the control of Company, therefore the placement agent warrants are classified out of permanent equity.

On January 24, 2024, the Company and warrant holders amended the terms of warrants related to the October 2022 and October 2023 financings. As a result, all liability classified warrants were reclassified to additional paid-in capital.

On April 12, 2023, the Company entered into a new equity distribution agreement (the “2023 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 2023 Equity Distribution Agreement and related prospectus is limited to sales of up to an aggregate maximum $50.0 million of shares of the Company’s common stock. The Company pays Canaccord 3.0% of the gross proceeds as a commission.

Proceeds raised under the 2023 Equity Distribution Agreement are as follows:

	Year Ended June 30, 2024					Year Ended June 30, 2023
	Shares		Proceeds			Shares		Proceeds
Gross proceeds		217,027	$	547,803			504,034	$	1,196,739
Fees		-		(16,434	)		-		(35,902	)
Expenses		-		-			-		(126,800	)
Net proceeds		217,027	$	531,369			504,034	$	1,034,037

Stock Warrants - On June 20, 2024, the Company entered into a letter agreement (the “Inducement Letter”) with a holder (the “Exercising Holder”) of outstanding common stock purchase warrants that the Company issued on November 2, 2022, and October 24, 2023 (the “Existing Warrants”). Pursuant to the Inducement Letter, the Exercising Holder agreed to exercise, for cash, Existing Warrants to purchase, in the aggregate, 3,233,277 shares of common stock in exchange for the Company’s agreement to (i) lower the exercise price to $1.88 per share for the 3,233,277 Existing Warrants being exercised pursuant to the Inducement Letter and (ii) issue to the Exercising Holder an aggregate of 4,849,915 warrants to purchase shares of common stock, comprised of Series A common stock purchase warrants to purchase 2,727,273 shares of common stock (the “Series A Warrants”) and Series B common stock purchase warrants to purchase 2,122,642 (of which 1,624,201 shares of common stock are subject to stockholder approval) shares of common stock (the “Series B Warrants” and together with the Series A Warrants, the “Inducement Warrants”). The Company received aggregate gross proceeds of $6,078,561 from the exercise of the Existing Warrants by the Exercising Holder (the “Warrant Inducement”). As part of the agreement, 1,443,277 shares were held in abeyance on behalf of the Exercising Holder. The Company intends to use the net proceeds for working capital and general corporate purposes. The incremental value of the Warrant Inducement was recorded as an offering expense against the proceeds received in additional paid-in capital.

As of June 30, 2024, the Company had outstanding warrants for shares of common stock as follows:

	Shares of Common		Exercise Price per		Latest Expiration
Description	Stock		Share		Date
May 2022 Warrants		66,666	$	12.50	May 11, 2026
October 2022 Placement Agent Warrants		90,909	$	6.88	October 31, 2027
October 2023 Private Warrants		943,396	$	2.12	April 24, 2029
October 2023 Placement Agent Warrants		117,925	$	2.65	October 20, 2028
January 2024 Private Warrants		1,831,503	$	5.46	February 1, 2028
January 2024 Placement Agent Warrants		91,575	$	6.83	February 1, 2028
June 2024 Series A Warrants		2,727,273	$	1.88	June 24, 2029
June 2024 Series B Warrants		2,122,642	$	1.88	June24, 2029	*
* 1,624,201 shares expire on the five year anniversary following stockholder approval

Stock Plan – The Company’s 2011 Stock Incentive Plan (“2011 Stock Incentive Plan”) was approved by the Company’s stockholders at the annual meeting of stockholders held in May 2011 and amended at the annual meeting of stockholders held on June 8, 2017, June 26, 2018, June 25, 2020, June 24, 2022, June 20, 2023 and again at the annual meeting of stockholders held on June 27, 2024. The 2011 Stock Incentive Plan, as amended, provides for incentive and nonqualified stock option grants, restricted stock unit awards and other stock-based awards to employees, non-employee directors and consultants for up to 4,300,000 shares of common stock. The 2011 Stock Incentive Plan is administered under the direction of the Company’s board of directors, which may specify grant terms and recipients. Options granted by the Company generally expire ten years from the date of grant and generally vest over three to four years. The Company’s former 2005 Stock Plan was terminated and replaced by the 2011 Stock Incentive Plan, and shares of common stock that were available for grant under the 2005 Stock Plan became available for grant under the 2011 Stock Incentive Plan. No new awards can be granted under the 2005 Stock Plan, but awards granted under the 2005 Stock Plan remained outstanding in accordance with their terms. As of June 30, 2024, 206,474 shares were available for grant under the 2011 Stock Incentive Plan. The Company expects to settle option exercises under any of its plans with authorized but currently unissued shares.

The following table summarizes option activity and related information for the years ended June 30, 2024 and 2023:

	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		712,310			2.30
Forfeited		(274,440	)		12.00
Exercised		-			-
Expired		(51,232	)		17.45
Outstanding - June 30, 2023		1,550,600		$	8.27		8.4
Granted		742,800			1.83
Forfeited		(18,988	)		3.79
Exercised		-			-
Expired		(10,972	)		20.98
Outstanding - June 30, 2024		2,263,440		$	6.11		8.2	$	-
Exercisable at June 30, 2024		940,161		$	10.81		6.6	$	89,136
Expected to vest at June 30, 2024		1,323,279		$	2.84		9.4	$	89,136

On December 16, 2022, Carl Spana, President and CEO of the Company, and Stephen T. Wills, CFO, COO and Executive Vice President of the Company, voluntarily contributed stock options previously issued to them to purchase 143,360 and 124,220 shares, respectively, of the Company’s common stock to the 2011 Stock Incentive Plan. The stock options were forfeited and cancelled without payment of any consideration by the Company.

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 418,945 and 88,911 unvested performance-based stock options granted to executive officers and other employees, respectively, which were granted in June 2020, 2021, 2022 and 2023. Grants in June 2021, 2022, 2023 and 2024 were 95,167, 60,566, 238,838 and 264,945, respectively. The performance-based stock options vest on annual performance criteria through the fiscal years ending June 30, 2028 relating to advancement of MC1r programs, including initiation of clinical trials and licensing of Vyleesi in additional countries or regions.

For the years ended June 30, 2024 and 2023, the fair value of option grants was estimated at the grant date using the Black-Scholes model. The Company’s weighted average assumptions for the years ended June 30, 2024 and 2023 were as follows:

	Year Ended June 30,			Year Ended June 30,
	2024			2023
Risk-free interest rate		4.3	%		3.9	%
Volatility factor		75.8	%		65.6	%
Dividend yield		0	%		0	%
Expected option life (years)		6.1			6.1
Weighted average grant date fair value	$	0.82		$	0.99

Expected volatilities are based on the Company’s historical volatility. The expected term of options is based upon the simplified method, which represents the average of the vesting term and the contractual term. The risk-free interest rate is based on U.S. Treasury yields for securities with terms approximating the expected term of the option.

For the years ended June 30, 2024 and 2023, the Company recorded stock-based compensation related to stock options of $873,633 and $794,735, respectively. As of June 30, 2024, there was $1,409,506 of unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of 2.7 years.

Restricted Stock Units –The following table summarizes restricted stock award activity for the years ended June 30, 2024 and 2023.

	Year Ended June 30,			Year Ended June 30,
	2024			2023
Outstanding at beginning of year		987,521			649,149
Granted		517,800			425,750
Forfeited		(11,667	)		(3,312	)
Vested		(98,372	)		(84,062	)
Expirations		(20,302	)		-
Fractional shares		-			(4	)
Outstanding at end of year		1,374,980			987,521

For the years ended June 30, 2024 and 2023, the Company recorded stock-based compensation related to restricted stock units of $839,335 and $616,182, respectively.

Included in outstanding restricted stock units in the table above are 508,011 vested shares that have not been issued as of June 30, 2024 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 274,549 and 59,842 unvested performance-based restricted stock units granted to executive officers and other employees, respectively, which were granted in June 2021, 2022, 2023, and 2024. Grants in June 2021, 2022, 2023 and 2024 were 22,343, 40,707, 152,432 and 184,443 restricted stock units, 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 connection with the vesting of restricted share units during the years ended June 30, 2024 and 2023, the Company withheld 25,467 and 20,468, shares, respectively, with aggregate values of $56,401 and $146,062, respectively, in satisfaction of minimum tax withholding obligations.