PALATIN TECHNOLOGIES INC 10-K

Item 8. Financial Statements and Supplementary Data. Table of Contents Consolidated Financial Statements The following consolidated financial statements are filed as part of this Annual Report: Page Report of Independent Registered Public Accounting Firm 44 Consolidated Balance Sheets 46 Consolidated Statements of Operations 47 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity 48 Consolidated Statements of Cash Flows 49 Notes to Consolidated Financial Statements 50 43 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Palatin Technologies, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. and subsidiary (the Company) as of June 30, 2022 and 2021, the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred operating losses and negative cash flows from operations since inception and will need additional funding to complete planned development efforts that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 44 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of accrued external research and development expenses As discussed in Notes 2 and 13 to the consolidated financial statements, the costs of research and development activities are charged to expense as incurred, which includes accrued external research and development expenses incurred under contracts with third parties. At the end of each quarter, the Company reviews the activities performed under all contracts and accrues expenses based upon the estimated amount of work completed considering milestones achieved. Accrued external research and development expenses were comprised of accrued clinical/regulatory costs and other research related expenses of $3,944,798 and $35,172 respectively as of June 30, 2022. We identified the evaluation of the sufficiency of audit evidence over accrued external research and development expenses as a critical audit matter. Evaluating the sufficiency of audit evidence obtained over accrued external research and development expenses, including the estimated amount of work completed by third parties, required subjective auditor judgment due to the nature and extent of evidence available. The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over accrued external research and development expenses. For a sample of accrued external research and development expenses, we evaluated management’s estimate of the amount of work remaining to be completed by comparing it to relevant third-party contracts, invoices, and communications. For a selection of third-party invoices and communications received after year-end, we compared the amounts to the relevant estimate of costs incurred or estimate of the amount of work completed by third parties as determined by management. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence. /s/ KPMG LLP We have served as the Company’s auditor since 2002. Philadelphia, Pennsylvania September 22, 2022 45 Table of Contents PALATIN TECHNOLOGIES, INC . and Subsidiary Consolidated Balance Sheets June 30, 2022 June 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 29,939,154 $ 60,104,919 Accounts receivable 1,780,020 1,580,443 Inventories 944,471 1,162,000 Prepaid expenses and other current assets 1,932,454 3,059,679 Total current assets 34,596,099 65,907,041 Property and equipment, net 539,314 94,817 Right-of-use assets - operating leases 878,465 1,237,813 Other assets 56,916 56,916 Total assets $ 36,070,794 $ 67,296,587 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,157,617 $ 640,650 Accrued expenses 6,875,216 5,797,378 Short-term operating lease liabilities 371,124 351,853 Short-term finance lease liabilities 100,921 - Other current liabilities 5,754,986 3,721,907 Total current liabilities 16,259,864 10,511,788 Long-term operating lease liabilities 529,398 900,520 Long-term finance lease liabilities 152,407 - Other long-term liabilities 2,861,250 6,232,907 Total liabilities 19,802,919 17,645,215 Commitments and contingencies (Note 14) Series B and Series C Redeemable Convertible Preferred Stock of $ 0.01 par value: authorized, issued, and outstanding 9,000,000 shares as of June 30, 2022, with a liquidation preference of $ 15,000,000 15,000,000 - Escrowed proceeds ( 15,000,000 ) - Stockholders’ equity: Preferred stock of $ 0.01 par value – authorized 10,000,000 shares: (including amounts authorized for Series B and Series C Redeemable Preferred Stock) shares issued and outstanding designated as follows: Series A Convertible: authorized 4,030 as of June 30, 2022: issued and outstanding 4,030 shares as of June 30, 2022 and June 30, 2021 40 40 Common stock of $ 0.01 par value – authorized 300,000,000 shares: issued and outstanding 9,270,947 shares as of June 30, 2022 and 9,201,988 shares as of June 30, 2021 (Note 1) 92,709 92,020 Additional paid-in capital 404,168,822 401,354,709 Accumulated deficit ( 387,993,696 ) ( 351,795,397 ) Total stockholders’ equity 16,267,875 49,651,372 Total liabilities, redeemable convertible preferred stock, and stockholders’ equity $ 36,070,794 $ 67,296,587 The accompanying notes are an integral part of these consolidated financial statements 46 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Consolidated Statements of Operations Year Ended June 30, 2022 2021 REVENUES Product revenue, net $ 1,218,457 $ ( 283,286 ) License and contract 250,000 94,689 Total revenues 1,468,457 ( 188,597 ) OPERATING EXPENSES Cost of products sold 217,529 147,840 Research and development 21,327,434 12,926,559 Selling, general and administrative 16,511,942 17,336,913 Loss on license termination agreement - 2,784,192 Total operating expenses 38,056,905 33,195,504 Loss from operations ( 36,588,448 ) ( 33,384,101 ) OTHER INCOME (EXPENSE) Investment income 29,963 23,572 Foreign currency gain (loss) 389,868 ( 212,526 ) Interest expense ( 29,682 ) ( 23,440 ) Total other income (expense), net 390,149 ( 212,394 ) NET LOSS $ ( 36,198,299 ) $ ( 33,596,495 ) Basic and diluted net loss per common share $ ( 3.79 ) $ ( 3.55 ) Weighted average number of common shares outstanding used in computing basic and diluted net loss per common share (Note 1) 9,543,762 9,466,004 The accompanying notes are an integral part of these consolidated financial statements 47 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity Redeemable Convertible Preferred Stock Stockholders' Equity Series B Series C Escrowed Series A Convertible Preferred Stock Common Stock Paid-in Accumulated Shares Amount Shares Amount Proceeds Shares Amount Shares Amount Capital Deficit Total Balance June 30, 2020 - $ - - $ - $ - 4,030 $ 40 9,170,336 $ 91,704 $ 398,280,007 $ ( 318,198,902 ) $ 80,172,849 Stock-based compensation - - - - - - - 38,323 383 3,168,273 - 3,168,656 Withholding taxes related to restricted stock units - - - - - - - ( 6,671 ) ( 67 ) ( 93,571 ) - ( 93,638 ) Net loss - - - - - - - - - - ( 33,596,495 ) ( 33,596,495 ) Balance June 30, 2021 - - - - - 4,030 40 9,201,988 92,020 401,354,709 ( 351,795,397 ) 49,651,372 Stock-based compensation - - - - - - - 69,406 694 2,504,844 - 2,505,538 Issuance of Redeemable Convertible Preferred stock and warrants 8,100,000 13,500,000 900,000 1,500,000 ( 15,000,000 ) - - - - 234,443 - 234,443 Withholding taxes related to restricted stock units - - - - - - - ( 16,191 ) ( 162 ) ( 221,149 ) - ( 221,311 ) Warrant exercises - - - - - - - 14,000 140 279,860 - 280,000 Option exercises - - - - - - - 1,744 17 16,115 - 16,132 Net loss - - - - - - - - - - ( 36,198,299 ) ( 36,198,299 ) Balance, June 30, 2022 8,100,000 $ 13,500,000 900,000 $ 1,500,000 $ ( 15,000,000 ) 4,030 $ 40 9,270,947 $ 92,709 $ 404,168,822 $ ( 387,993,696 ) $ 16,267,875 The accompanying notes are an integral part of these consolidated financial statements 48 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Consolidated Statements of Cash Flows Year Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 36,198,299 ) $ ( 33,596,495 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 126,668 51,121 Cash received in excess of loss on termination agreement - 19,084,192 Decrease in right-of-use asset 359,348 330,839 Unrealized foreign currency transaction (gain) loss ( 389,868 ) 212,526 Non-cash warrant expense 234,443 - Stock-based compensation 2,505,538 3,168,656 Changes in operating assets and liabilities: Accounts receivable ( 199,577 ) ( 1,580,443 ) Prepaid expenses and other assets 1,127,225 ( 1,938,130 ) Inventories 217,529 ( 987,237 ) Accounts payable 2,572,657 ( 75,022 ) Accrued expenses 1,077,838 558,281 Operating lease liabilities ( 351,851 ) ( 316,279 ) Other liabilities ( 1,004,400 ) ( 7,560,000 ) Net cash used in operating activities ( 29,922,749 ) ( 22,647,991 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 261,374 ) ( 5,722 ) Net cash used in investing activities ( 261,374 ) ( 5,722 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of withholding taxes related to restricted stock units ( 221,311 ) ( 93,638 ) Payment of finance lease obligations ( 56,463 ) - Proceeds from exercise of warrants 280,000 - Proceeds from exercise of stock options 16,132 - Net cash provided by (used in) financing activities 18,358 ( 93,638 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 30,165,765 ) ( 22,747,351 ) CASH AND CASH EQUIVALENTS, beginning of year 60,104,919 82,852,270 CASH AND CASH EQUIVALENTS, end of year $ 29,939,154 $ 60,104,919 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 29,682 $ 23,440 The accompanying notes are an integral part of these consolidated financial statements 49 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements (1) ORGANIZATION Nature of Business - Palatin Technologies, Inc. (“Palatin” or the “Company”) is a biopharmaceutical company developing first-in-class medicines based on molecules that modulate the activity of the melanocortin receptor system. The Company’s product candidates are targeted, receptor-specific therapeutics for the treatment of diseases with significant unmet medical need and commercial potential. Melanocortin Receptor System. The melanocortin receptor (“MCr”) system has effects on food intake, metabolism, sexual function, inflammation, and immune system responses. There are five melanocortin receptors, MC1r through MC5r. Modulation of these receptors, through use of receptor-specific agonists, which activate receptor function, or receptor-specific antagonists, which block receptor function, can have significant pharmacological effects. The Company’s commercial product, Vyleesi®, was approved by the U.S. Food and Drug Administration (“FDA”) in June 2019 and was being marketed in the United States by AMAG Pharmaceuticals, Inc. (“AMAG”) for the treatment of hypoactive sexual desire disorder (“HSDD”) in premenopausal women pursuant to a license agreement between them for Vyleesi for North America, which was entered into on January 8, 2017 (the “AMAG License Agreement”). As disclosed in Note 4, the AMAG License Agreement was terminated effective July 24, 2020, and the Company is now marketing Vyleesi in North America. The Company’s new product development activities focus primarily on MC1r agonists, with potential to treat inflammatory and autoimmune diseases such as dry eye disease, which is also known as keratoconjunctivitis sicca, uveitis, diabetic retinopathy, and inflammatory bowel disease. The Company believes that the MC1r agonist peptides in development have broad anti-inflammatory effects and appear to utilize mechanisms engaged by the endogenous melanocortin system in regulation of the immune system and resolution of inflammatory responses. The Company is also developing peptides that are active at more than one melanocortin receptor, and MC4r peptide and small molecule agonists with potential utility in obesity and metabolic-related disorders, including rare disease and orphan indications. Reverse Stock Split - On August 30, 2022, a reverse stock split of 1-for-25 of issued and outstanding common stock was made effective by the Company. Retroactive effect for the reverse stock split were made to the Company’s outstanding common stock, stock options, common stock warrants, and preferred stock conversion features, including all share and per-share data, for all periods presented in the consolidated financial statements. Business Risks and Liquidity – The Company has incurred operating losses and negative cash flows from operations since inception and will need additional funding to complete its planned product development efforts. As shown in the accompanying consolidated financial statements, the Company had an accumulated deficit as of June 30, 2022 of $ 387,993,696 and a net loss for the year ended June 30, 2022 of $ 36,198,299 , and the Company anticipates incurring significant expenses in the future as a result of spending on developing marketing and distribution capabilities for Vyleesi in the United States and spending on its development programs and will require substantial additional financing or revenues to continue to fund its planned activities. To achieve sustained profitability, if ever, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct successful preclinical studies and clinical trials, obtain required regulatory approvals, and successfully manufacture and market such technologies and proposed products. The time required to reach sustained profitability is highly uncertain, and the Company may never be able to achieve profitability on a sustained basis, if at all. As of June 30, 2022, the Company’s cash and cash equivalents were $ 29,939,154 and current liabilities were $ 16,259,864 . Management intends to utilize existing capital resources for general corporate purposes and working capital, including establishing marketing and distribution capabilities for Vyleesi in the United States and preclinical and clinical development of the Company’s MC1r and MC4r programs, and development of other portfolio products. The Company follows the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 205-40, Presentation of Financial Statements — Going Concern, which requires management to assess the Company's ability to continue as a going concern for one year after the date the consolidated financial statements are issued. While the Company has raised funding in the past, the ability to raise funding in future periods is not considered probable, as defined under the accounting standards. As such, under the requirements of ASC 205-40, management may not consider the potential for future funding in their assessment of the Company's ability to meet its obligations for the next year. 50 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Based on the Company’s available cash and cash equivalents, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for one year from the date these consolidated financial statements are issued. The Company is evaluating strategies to obtain additional funding for future operations which include but are not limited to obtaining equity financing, issuing debt, or reducing planned expenses. A failure to raise additional funding or to effectively implement cost reductions could harm the Company’s business, results of operations, and future prospects. If the Company is not able to secure adequate additional funding in future periods, the Company would be forced to make additional reductions in certain expenditures. This may include liquidating assets and suspending or curtailing planned programs. The Company may also have to delay, reduce the scope of, suspend, or eliminate one or more research and development programs or its commercialization efforts or pursue a strategic transaction. If the Company is unable to raise capital when needed or enter into a strategic transaction, then the Company may be required to cease operations, which could cause its stockholders to lose all or part of their investment. The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Assuming no additional funding and based on its current operating and development plans, the Company expects that its existing cash and cash equivalents as of the date of this filing will be sufficient to enable the Company to fund its operations into the second half of its fiscal year ending June 30, 2023. In March 2020, the World Health Organization declared COVID-19, a disease caused by a novel strain of coronavirus, a pandemic. The Company has taken steps to ensure the safety and well-being of its employees and clinical trial patients to comply with guidance from federal, state, and local authorities, while working to ensure the sustainability of its business operations as this unprecedented situation continues to evolve. In mid-March 2020, the Company transitioned to a company-wide work from home policy. Business-critical activities continue to be subject to heightened precautions to ensure safety of employees. The Company continues to assess its policies, business continuity plans, and employee support. The Company continues to evaluate the impact of COVID-19 on the healthcare system and work with contract research organizations supporting its clinical, research, and development programs to mitigate risk to patients and its business and community partners, taking into account regulatory, institutional, and government guidance and policies. The Company will receive a royalty on sales of Vyleesi by its licensees. It has licensed third parties to sell Vyleesi in China and Korea. The COVID-19 coronavirus could adversely impact the time required to obtain regulatory approvals to sell Vyleesi in China and Korea, which would delay when the Company receives royalty income from sales in those countries. The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business, including manufacturing, distribution, sales, and marketing of Vyleesi, and it has the potential to materially adversely affect its business, financial condition, and results of operations and cashflows during the fiscal year ending June 30, 2023 (“fiscal 2023”) and beyond. Concentrations – Concentrations in the Company’s assets and operations subject it to certain related risks. Financial instruments that subject the Company to concentrations of credit risk primarily consist of cash, cash equivalents, and accounts receivable. The Company’s cash and cash equivalents are primarily invested in one money market account sponsored by a large financial institution. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned inactive subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash in banks, and all highly liquid investments with a purchased maturity of less than three months. Cash equivalents consist of $ 29,740,565 and $ 59,730,428 in a money market account at June 30, 2022 and 2021, respectively. Fair Value of Financial Instruments – The Company’s financial instruments consist primarily of cash equivalents, accounts receivable, and accounts payable. Management believes that the carrying values of cash equivalents, accounts receivable, and accounts payable are representative of their respective fair values based on the short-term nature of these instruments. Credit Risk – Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, and accounts receivable. Total cash and cash equivalent balances have exceeded balances insured by the Federal Depository Insurance Company. Currently, product revenues and related accounts receivable are generated primarily from one specialty pharmacy. 51 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Trade Accounts Receivable - Trade accounts receivable are amounts owed to the Company by its customers for product that has been delivered. The trade accounts receivable is recorded at the invoice amount, less prompt pay and other discounts, chargebacks, and an allowance for credit losses, if any. Credit losses have not been significant to date. Inventories – Inventory is stated at the lower of cost or net realizable value, with cost being determined on a first-in, first-out basis. On a quarterly basis, the Company reviews inventory levels to determine whether any obsolete, expired, or excess inventory exists. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written down through a charge to operating expenses. Inventory consisting of Vyleesi has a shelf-life of three years from the date of manufacture. Property and Equipment – Property and equipment consists of office and laboratory equipment, office furniture, and leasehold improvements and includes assets acquired under finance leases. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets, generally five years for laboratory and computer equipment, seven years for office furniture and equipment, and the lesser of the term of the lease or the useful life for leasehold improvements. Amortization of assets acquired under finance leases is included in depreciation expense. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized. Impairment of Long-Lived Assets – The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future cash flows based on reasonable and supportable assumptions. Leases - At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, short-term operating lease liabilities, and long-term operating lease liabilities in the consolidated financial statements. Finance leases are included in property and equipment for ROU assets, short-term finance lease liabilities, and long-term finance lease liabilities in the consolidated financial statements. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. ROU assets and lease liabilities are recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term. The Company uses the rate implicit in the lease if it is determinable. When the rate implicit in the lease is not determinable, the Company uses an estimate based on a hypothetical rate provided by a third party as the Company currently does not have issued debt. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause incremental costs to the Company if the option were not exercised. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to the Company or the Company is reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. Amortization of the ROU asset is recognized and presented as an operating expense separately from interest expense on the lease liability. 52 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements The Company has elected not to recognize an ROU asset and obligation for leases with an initial term of twelve months or less. The expense associated with short term leases is included in selling, general and administrative expense in the statements of operations. To the extent a lease arrangement includes both lease and non-lease components, the Company has elected to account for the components as a single lease component. Revenue Recognition – The Company recognizes product revenues in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers . The provisions of ASC Topic 606 require the following steps to determine revenue recognition: (1) Identify the contract(s) with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; and (5) Recognize revenue when (or as) the entity satisfies a performance obligation. In accordance with ASC Topic 606, the Company recognizes product revenue when its performance obligation is satisfied by transferring control of the product to a customer. Per the Company’s contracts with customers, control of the product is transferred upon the conveyance of title, which occurs when the product is sold to and received by a customer. Trade accounts receivable due to the Company from contracts with its customers are stated separately in the consolidated balance sheet, net of various allowances as described in the Trade Accounts Receivable policy above. Product revenues consist of sales of Vyleesi in the United States. The Company sells Vyleesi to specialty pharmacies at the wholesale acquisition cost and payment is currently made within approximately 30 days. In addition to distribution agreements with customers, the Company enters into arrangements with healthcare payers that provide for privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. The Company records product revenues net of allowances for direct and indirect fees, discounts, co-pay assistance programs, estimated chargebacks and rebates. Product sales are also subject to return rights, which have not been significant to date. Gross product sales offset by product sales allowances for the year ended June 30, 2022 and 2021 are as follows: Year Ended June 30, 2022 2021 Gross product sales $ 5,816,530 $ 4,745,066 Provision for product sales allowances and accruals ( 4,598,073 ) ( 5,028,352 ) Net sales $ 1,218,457 $ ( 283,286 ) For licenses of intellectual property, the Company assesses at contract inception whether the intellectual property is distinct from other performance obligations identified in the arrangement. If the licensing of intellectual property is determined to be distinct, revenue is recognized for nonrefundable, upfront license fees when the license is transferred to the customer and the customer can use and benefit from the license. If the licensing of intellectual property is determined not to be distinct, then the license is bundled with other promises in the arrangement into one performance obligation. The Company needs to determine if the bundled performance obligation is satisfied over time or at a point in time. If the Company concludes that the nonrefundable, upfront license fees will be recognized over time, the Company will need to assess the appropriate method of measuring proportional performance. Regulatory milestone payments are excluded from the transaction price due to the inability to estimate the probability of reversal. Revenue relating to achievement of these milestones is recognized in the period in which the milestone is achieved. 53 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Sales-based royalty and milestone payments resulting from customer contracts solely or predominately for the license of intellectual property will only be recognized upon occurrence of the underlying sale or achievement of the sales milestone in the future and such sales-based royalties and milestone payments will be recognized in the same period earned. The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses as the Company is the principal in the research and development activities based upon its control of such activities, which is considered part of its ordinary activities. Development milestone payments are generally due 30 business days after the milestone is achieved. Sales milestone payments are generally due 45 business days after the calendar year in which the sales milestone is achieved. Royalty payments are generally due on a quarterly basis 20 business days after being invoiced. Research and Development Costs – The costs of research and development activities are charged to expense as incurred, including the cost of equipment for which there is no alternative future use. Accrued Expenses – Third parties perform a significant portion of the Company’s development activities. The Company reviews the activities performed under all contracts each quarter and accrues expenses and the amount of any reimbursement to be received from its collaborators based upon the estimated amount of work completed considering milestones achieved. Estimating the value or stage of completion of certain services requires judgment based on available information. If the Company does not identify services performed for it but not billed by the service-provider, or if it underestimates or overestimates the value of services performed as of a given date, reported expenses will be understated or overstated. Stock-Based Compensation – The Company charges to expense the fair value of stock options and other equity awards granted to employees and nonemployees for services. Compensation costs for stock-based awards with time-based vesting are determined using the quoted market price of the Company’s common stock on the grant date or for stock options, the value determined utilizing the Black-Scholes option pricing model, and are recognized on a straight-line basis, while awards containing a market condition are valued using multifactor Monte Carlo simulations and are recognized over the derived service period. Compensation costs for awards containing a performance condition are determined using the quoted price of the Company’s common stock on the grant date or for stock options, the value determined utilizing the Black Scholes option pricing model and are recognized based on the probability of achievement of the performance condition over the service period. Forfeitures are recognized as they occur. Income Taxes – The Company and its subsidiary file consolidated federal and separate-company state income tax returns. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences or operating loss and tax credit carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company has recorded and continues to maintain a full valuation allowance against its deferred tax assets based on the history of losses incurred and lack of experience projecting future product revenue and sales-based royalty and milestone payments. Net Loss per Common Share – Basic and diluted loss per common share (“EPS”) are calculated in accordance with the provisions of FASB ASC Topic 260, Earnings per Share . The Company’s Series B and Series C Redeemable Convertible Preferred Stock and warrants issued during the year ended June 30, 2022 met the definition of a participating security given their rights to participate in dividends if declared on common stock, which requires the Company to apply the two-class method to compute both basic and diluted net income or loss per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders. In addition, as these securities are participating securities, the Company is required to calculate diluted net income or loss per share under the if-converted and treasury stock method in addition to the two-class method and utilize the most dilutive result. In periods where there is a net loss, no allocation of undistributed net loss to the Redeemable Convertible Preferred stockholders or warrant holders is performed as the holders of these securities are not contractually obligated to participate in the Company’s losses. 54 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements For the years ended June 30, 2022 and 2021, no additional common shares were added to the computation of diluted EPS because to do so would have been anti-dilutive. The potential number of common shares excluded from diluted EPS during the year ended June 30, 2022 and June 30, 2021 was 2,851,959 and 1,650,589 respectively. Included in the weighted average common shares used in computing basic and diluted net loss per common share are 363,780 and 326,563 vested restricted stock units that had not been issued as of June 30, 2022 and 2021, respectively, due to a provision in the restricted stock unit agreements to delay delivery. Translation of foreign currencies – Transactions denominated in currencies other than the Company’s functional currency (US Dollar) are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in the consolidated statements of operations as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions. (3) New and recently Adopted Accounting Pronouncements In May 2021, the FASB issued Accounting Standards Update (“ASU”) No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options . The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The guidance is applicable to the Company beginning July 1, 2022. The adoption of this standard is not expected have a material impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt (Topic 470) and Derivatives and Hedging (Topic 815): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU No. 2020-06 address issues identified as a result of the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. The guidance is effective for public entities for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years, with early adoption permitted. The Company early adopted this standard during the year ended June 30, 2022. The adoption of this standard did not have an impact on the Company’s consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for public entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The guidance was applicable to the Company beginning July 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. The new guidance will be effective for the Company on July 1, 2023 with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements. 55 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements (4) AGREEMENTS WITH AMAG On January 8, 2017, the Company entered into the AMAG License Agreement pursuant to which the Company granted AMAG (i) an exclusive license in all countries of North America (the “Territory”), with the right to grant sub-licenses, to research, develop, and commercialize products containing Vyleesi (each a “Product”, and collectively, “Products”), (ii) a non-exclusive license in the Territory, with the right to grant sub-licenses, to manufacture the Products, and (iii) a non-exclusive license in all countries outside the Territory, with the right to grant sub-licenses, to research, develop, and manufacture (but not commercialize) the Products. Following the satisfaction of certain conditions to closing, the AMAG License Agreement became effective on February 2, 2017. Under the AMAG License Agreement, in addition to certain initial and milestone payments, AMAG reimbursed the Company for certain reasonable, documented, direct out-of-pocket expenses incurred by the Company following February 2, 2017, in connection with development and regulatory activities necessary to file a New Drug Application (“NDA”) for Vyleesi for HSDD in the United States. On June 4, 2018, the FDA accepted the Vyleesi NDA for filing and on June 21, 2019, the FDA granted approval of Vyleesi for use in the United States. Effective July 24, 2020, the Company entered into a termination agreement (the “Termination Agreement”) with AMAG terminating the AMAG License Agreement. Under the terms of the Termination Agreement, the Company regained all development and commercialization rights for Vyleesi in the Territory. AMAG made a $ 12,000,000 payment to the Company at closing of the Termination Agreement and a $ 4,300,000 payment to the Company on March 31, 2021. The Company initially recorded a liability related to estimated losses on inventory purchase commitments of $ 18,194,000 as well as accrued expenses for an inventory production run obligation assumed of $ 2,300,000 . The Company assumed all Vyleesi manufacturing agreements, and AMAG transferred information, data, and assets related exclusively to Vyleesi to the Company, including existing inventory and prepaid expenses with an estimated fair value of $ 5,817,795 as of the date of the Termination Agreement. As a result, the Company initially recorded a net gain for the Termination Agreement of $ 1,623,795 . During the three months ended June 30, 2021, the Company reassessed the estimated net realizable value of the inventory, prepaid expenses and losses on the inventory purchase commitments resulting in recording of a loss on the Termination Agreement of $ 4,407,987 for the three months ended June 30, 2021 and a total loss on the Termination Agreement for the year ended June 30, 2021 of $ 2,784,192 . Under the Termination Agreement, AMAG provided certain transitional services to the Company for a period to ensure continued patient access to Vyleesi during the transition back to the Company. The Company reimbursed AMAG for the agreed upon costs of the transition services. (5) MANUFACTURING SUPPLY AGREEMENTS FOR VYLEESI Pursuant to the Termination Agreement, the Company assumed Vyleesi manufacturing contracts with Catalent Belgium S.A. (“Catalent”), a subsidiary of Catalent Pharma Solutions, Inc., to manufacture drug product and prefilled syringes and assemble prefilled syringes into an auto-injector device (the “Catalent Agreement”), Ypsomed AG (“Ypsomed”), to manufacture the auto-injector device (the “Ypsomed Agreement”), and Lonza Ltd. (“Lonza”), to manufacture the active pharmaceutical ingredient peptide (the “Lonza Agreement”). On September 29, 2020, the Company and Catalent entered into an agreement to terminate the Catalent Agreement (the “Catalent Termination Agreement”) in consideration for a one-time payment of six million euros (€6,000,000) which was paid in October 2020 and accrued as part of the estimated losses on inventory purchase commitments assumed as part of the Termination Agreement as discussed in Note 4. The Company and Catalent then entered into a new Vyleesi manufacturing agreement (the “New Catalent Agreement”) which includes reduced minimum annual purchase requirements (see Note 14) as compared to the original Catalent Agreement and modification of other financial terms. The New Catalent Agreement provides that Catalent will provide manufacturing and supply services to Palatin related to production of Vyleesi, including that Catalent will supply specified minimums of Palatin’s requirements for Vyleesi during the term of the New Catalent Agreement through August 21, 2025, unless earlier terminated in accordance with the terms of the New Catalent Agreement. The initial term of the New Catalent Agreement will be automatically extended for one 24-month period unless either party notifies the other of its desire to terminate as of the end of the initial term. The New Catalent Agreement also includes customary terms and conditions relating to forecasting and minimum commitments, ordering, delivery, inspection and acceptance, and termination, among other matters. 56 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements The initial term of the Ypsomed Agreement is through December 31, 2025, with automatic renewal for successive one-year periods unless either party terminates the Ypsomed Agreement by ten months’ written notice prior to the expiration of the Ypsomed Agreement or any automatic renewal period. There are specified minimum purchase requirements under the Ypsomed Agreement, and under specified circumstances, termination fees may be payable upon termination of the Ypsomed Agreement by the Company (see Note 14). The term of the Lonza Agreement is through December 31, 2022, and Lonza has advised the Company that they will not renew the Lonza Agreement, but the Company remains in discussions with Lonza on extending contract peptide manufacturing services. The Company is actively evaluating potential new contract manufacturers but establishing a new contractual relationship and establishing and validating manufacturing in a manner that complies with FDA regulations is a time-consuming and costly process. There are specified minimum purchase requirements under the Lonza Agreement (see Note 14). (6) AGREEMENT WITH FOSUN On September 6, 2017, the Company entered into a license agreement with Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun”) for exclusive rights to commercialize Vyleesi in China (the “Fosun License Agreement”). Under the terms of the agreement, the Company received $ 4,500,000 in October 2017, which consisted of an upfront payment of $ 5,000,000 less $ 500,000 that was withheld in accordance with tax withholding requirements in China and recorded as an expense during the year ended June 30, 2018. The Company is entitled to receive a $ 7,500,000 milestone payment when regulatory approval in China is obtained, provided that a commercial supply agreement for Vyleesi has been entered into. The Company has the potential to receive up to $ 92,500,000 in additional sales related milestone payments and high single-digit to low double-digit royalties on net sales in the licensed territory. All development, regulatory, sales, marketing, and commercial activities and associated costs in the licensed territory will be the sole responsibility of Fosun. For the year ended June 30, 2022, the Company recorded $ 250,000 of license and contract revenue related to the Fosun License Agreement. (7) AGREEMENT WITH KWANGDONG On November 21, 2017, the Company entered into a license agreement with Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) for exclusive rights to commercialize Vyleesi in Korea (the “Kwangdong License Agreement”). Under the terms of the agreement, the Company received $ 417,500 in December 2017, consisting of an upfront payment of $ 500,000 , less $ 82,500 , which was withheld in accordance with tax withholding requirements in Korea and recorded as an expense during the year ended June 30, 2018. The Company is entitled to receive a $ 3,000,000 milestone payment based on the first commercial sale in Korea. The Company has the potential to receive up to $ 37,500,000 in additional sales related milestone payments and mid-single-digit to low double-digit royalties on net sales in the licensed territory. All development, regulatory, sales, marketing, and commercial activities and associated costs in the licensed territory will be the sole responsibility of Kwangdong. For the year ended June 30, 2021, the Company recorded $ 94,689 of license and contract revenue related to the Kwangdong License Agreement. (8) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: June 30, June 30, 2022 2021 Clinical / regulatory costs $ 310,573 $ 454,750 Insurance premiums 132,413 259,468 Vyleesi contractual advances 815,750 1,200,000 Other 673,718 1,145,461 $ 1,932,454 $ 3,059,679 57 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements (9) FAIR VALUE MEASUREMENTS The fair value of cash equivalents is classified using a hierarchy prioritized based on inputs. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the assets carried at fair value: Carrying Value Quoted prices in active markets (Level 1) Other quoted/observable inputs (Level 2) Significant unobservable inputs (Level 3) June 30, 2022: Money market account $ 29,740,565 $ 29,740,565 $ - $ - June 30, 2021: Money market account $ 59,730,428 $ 59,730,428 $ - $ - (10) INVENTORIES Inventories consist of raw materials and finished goods related to Vyleesi. The following table summarizes the components of inventories: June 30, June 30, 2022 2021 Raw materials $ 526,000 $ 526,000 Finished goods 418,471 636,000 $ 944,471 $ 1,162,000 (11) LEASES The Company has operating leases for office and laboratory space, which expire on June 30, 2025 and October 31, 2023 , respectively. The Company also has operating leases for copier equipment that expire March 31, 2023 and phone equipment that expires on June 30, 2023. The components of operating lease cost are as follows: Operating lease cost Year ended June 30, 2022 Year ended June 30, 2021 Operating lease cost $ 294,293 $ 287,440 Variable lease cost 114,418 108,023 Total operating lease cost $ 408,711 $ 395,463 The components of finance lease cost are as follows: Finance lease cost Year ended June 30, 2022 Year ended June 30, 2021 Right-of-use asset amortization $ 56,463 $ - Interest expense 8,812 - Total finance lease cost $ 65,275 $ - 58 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Supplemental lease term and discount rate information related to leases was as follows: June 30, 2022 June 30, 2021 Weighted-average remaining lease term (years) operating leases 2.6 3.5 Weighted-average remaining lease term (years) finance leases 2.4 - Weighted-average discount rate operating leases 5.50 % 5.50 % Weighted-average discount rate finance leases 5.29 % - Supplemental cash flow information related to leases was as follows: Year Ended June 30, 2022 Year Ended June 30, 2021 Cash paid for the amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 410,007 $ 394,926 Operating cash flows for finance leases 8,812 - Financing cash flows for finance leases 56,463 - $ 475,282 $ 394,926 Supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets: Right-of-use assets obtained in exchange for new operating lease obligation $ - $ 365,881 Right-of-use assets obtained in exchange for new finance lease obligations $ 309,791 $ - The following table summarizes the maturity of the Company’s lease liabilities as of June 30, 2022: Operating leases: Year Ending June 30 2023 $ 409,438 2024 323,003 2025 265,037 Less imputed interest ( 96,956 ) Total $ 900,522 Finance leases: Year Ending June 30 2023 $ 111,899 2024 111,899 2025 46,625 Less imputed interest ( 17,095 ) Total $ 253,328 59 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements (12) PROPERTY AND EQUIPMENT, NET Property and equipment, net, consists of the following: June 30, June 30, 2022 2021 Office equipment $ 1,229,300 $ 1,193,162 Laboratory equipment 1,038,610 648,673 Leasehold improvements 902,038 756,948 3,169,948 2,598,783 Less: Accumulated depreciation and amortization ( 2,630,634 ) ( 2,503,966 ) $ 539,314 $ 94,817 Included in property and equipment, net as of June 30, 2022 is $ 309,791 in equipment under finance leases and $ 56,463 related accumulated amortization. (13) ACCRUED EXPENSES Accrued expenses consist of the following: June 30, June 30, 2022 2021 Clinical / regulatory costs $ 3,944,798 $ 778,705 Other research related expenses 35,172 569,370 Professional services 351,257 84,094 Personnel costs 1,545,896 - Selling expenses 840,703 1,839,724 Inventory purchases - 2,340,000 Other 157,390 185,485 $ 6,875,216 $ 5,797,378 (14) COMMITMENTS AND CONTINGENCIES Inventory Purchases - As a result of the Termination Agreement and subsequent activity, the Company has certain supply agreements with manufacturers and suppliers, including the New Catalent Agreement, Ypsomed Agreement, and Lonza Agreement. The Company is required to make certain payments for the manufacture and supply of Vyleesi. The following table summarizes the contractual obligations under the New Catalent Agreement, Yposmed Agreement, and Lonza Agreement as of June 30, 2022: Total Current 1 - 3 Years 4 - 5 Years Inventory purchase commitments $ 9,524,486 $ 6,174,986 $ 2,373,000 $ 976,500 As of June 30, 2022, the Company has $ 5,754,986 and $ 2,861,250 accrued within other current and long-term liabilities, respectively, in the consolidated balance sheet related to estimated losses for firm commitment contractual obligations under these agreements. As of June 30, 2021, $ 3,721,907 and $ 6,232,907 was accrued within other current and long-term liabilities, respectively. Losses on these firm commitment contractual obligations are recognized based upon the terms of the respective agreement and similar factors considered for the write-down of inventory, including expected sales requirements as determined by internal sales forecasts. The commitment contractual obligation amounts above are denominated in Swiss Francs and Euros and have been translated using period end exchange rates. The Company may experience a negative impact on future earnings and equity solely as a result of future foreign currency exchange rate fluctuations. Employment Agreements – The Company has employment agreements with two executive officers which provide a stated annual compensation amount, subject to annual increases, and annual bonus compensation in an amount to be approved by the Company’s Board of Directors. Each agreement allows the Company or the employee to terminate the agreement in certain circumstances. In some circumstances, early termination by the Company may result in severance pay to the employee for a period of 18 to 24 months at the salary then in effect, continuation of health insurance premiums over the severance period and immediate vesting of all stock options and restricted stock units. Termination following a change in control will result in a lump sum payment of one and one-half to two times the salary then in effect and immediate vesting of all stock options and restricted stock units. 60 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Employee Retirement Savings Plan – The Company maintains a defined contribution 401(k) plan for the benefit of its employees. The Company currently matches a portion of employee contributions to the plan. For the years ended June 30, 2022 and 2021 Company contributions were $ 220,864 and $ 168,210 , respectively. Contingencies – The Company accounts for litigation losses in accordance with ASC 450-20, Loss Contingencies . In addition, the Company is subject to other contingencies, such as product liability, arising in the ordinary course of business. Loss contingency provisions are recorded for probable losses when management is able to reasonably estimate the loss. Any outcome upon settlement that deviates from the Company’s best estimate may result in additional expense or in a reduction in expense in a future accounting period. The Company records legal expenses associated with such contingencies as incurred. The Company is involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. The Company is not currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate have a material adverse effect on its business, financial condition, or results of operations. (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 and is being held in an escrow account as of June 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 and C Redeemable Convertible Preferred Stock on the Company’s consolidated balance sheet at June 30, 2022. The Series B Preferred Stock and Series C Preferred Stock is convertible, at the option of the holder from the date of the Company's reverse stock split on August 30, 2022 until 30 days following the reverse stock split, 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) until 30 days following the reverse stock split 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 are 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. 61 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements 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 June 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 June 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 with Canaccord Genuity LLC (“Canaccord”) (the “2019 Equity Distribution Agreement”), 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 years ended June 30, 2022 and 2021. Proceeds raised under the 2019 Equity Distribution Agreement since its inception are as follows: Cumulative from inception Shares Proceeds Gross proceeds 378,420 $ 12,330,242 Fees - ( 369,908 ) Expenses - ( 90,000 ) Net proceeds 378,420 $ 11,870,334 62 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Stock Purchase Warrants – During the year ended June 30, 2022, the Company received $ 280,000 and issued 14,000 shares of common stock upon the exercise provisions of 14,000 previously issued Series J warrants at an exercise price of $ 20.00 per share. The remaining Series J warrants expired unexercised. As of June 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 holder's 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 Plan – The Company’s 2011 Stock Incentive Plan (“2011 Stock 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 and again at the annual meeting of stockholders held on June 24, 2022. 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 2,300,000 shares of common stock. The 2011 Stock Incentive Plan is administered under the direction of the 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, 2022, 211,821 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, 2022 and 2021: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Term in Years Aggregate Intrinsic Value Outstanding - June 30, 2020 796,097 $ 19.00 7.4 Granted 141,844 14.00 Forfeited ( 22,732 ) 18.75 Exercised - - Expired ( 39,910 ) 23.75 Outstanding - June 30, 2021 875,299 18.00 7.2 Granted 310,494 10.07 Forfeited ( 11,539 ) 16.67 Exercised ( 1,744 ) 9.25 Expired ( 8,548 ) 19.79 Outstanding - June 30, 2022 1,163,962 $ 15.98 7.1 $ - Exercisable at June 30, 2022 693,204 $ 18.50 5.8 $ - Expected to vest at June 30, 2022 470,758 $ 12.29 9.1 $ - 63 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements 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. Also included in the table above are 43,000 and 4,700 performance-based options granted in December 2017 to executive officers and employees, respectively, which were eligible to vest during a performance period ended on December 31, 2020, if and upon either i) as to 100% of the target number of shares upon achievement of a closing price for the Company’s common stock equal to or greater than $1.50 per share for 20 consecutive trading days, which is considered a market condition; or ii) as to thirty percent (30%) of the target number of shares, upon the acceptance for filing by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is considered a performance condition; iii) as to fifty percent (50%) of the target number of shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is also considered a performance condition; iv) as to twenty percent (20%) of the target number of shares, upon entry into a licensing agreement during the performance period for the commercialization of Vyleesi for Female Sexual Dysfunction (“FSD”) in at least two of the following geographic areas (a) four or more countries in Europe, (b) Japan, (c) two or more countries in Central and/or South America, (d) two or more countries in Asia, excluding Japan and China, and (e) Australia, which is also considered a performance condition. The fair value of these options was $ 602,760 . The Company amortized the fair value over the derived service period of 1.1 years or upon the attainment of the performance condition. Pursuant to the FDA acceptance of the NDA filing of Vyleesi, 30% of the target number of options vested in June 2018 and 50% of the target number of options vested in June 2019 upon FDA approval of Vyleesi. During the year ended June 30, 2021, the performance period ended for the remaining performance-based stock options. As a result, 9,600 unearned stock options were forfeited and added back to the 2011 Stock Plan and available for future grant. For the years ended June 30, 2022 and 2021, 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, 2022 and 2021 were as follows: Year Ended June 30, Year Ended June 30, 2022 2021 Risk-free interest rate 3.2 % 1.0 % Volatility factor 69.1 % 68.3 % Dividend yield 0 % 0 % Expected option life (years) 6.0 6.1 Weighted average grant date fair value $ 2.68 $ 8.50 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, 2022 and 2021, the Company recorded stock-based compensation related to stock options of $ 1,563,686 and $ 1,863,266 , respectively. As of June 30, 2021, there was $ 2,070,413 of unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of 2.5 years. 64 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements Restricted Stock Units – The following table summarizes restricted stock award activity for the years ended June 30, 2022 and 2021. Year Ended June 30, Year Ended June 30, 2022 2021 Outstanding at beginning of year 593,629 518,620 Granted 131,352 129,774 Forfeited ( 6,426 ) ( 16,442 ) Vested ( 69,406 ) ( 38,323 ) Outstanding at end of year 649,149 593,629 For the years ended June 30, 2022 and 2021, the Company recorded stock-based compensation related to restricted stock units of $ 941,852 and $ 1,305,390 , respectively. Included in outstanding restricted stock units in the table above are 363,780 vested shares that have not been issued as of June 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. In December 2017, the Company granted 43,000 performance-based restricted stock units to its executive officers and 26,800 performance-based restricted stock units to other employees which were eligible to vest during a performance period, ended on December 31, 2020, if and upon either i) as to 100% of the target number of shares upon achievement of a closing price for the Company’s common stock equal to or greater than $37.50 per share for 20 consecutive trading days, which is considered a market condition; or ii) as to thirty percent (30%) of the target number of shares, upon the acceptance for filing by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is considered a performance condition; iii) as to fifty percent (50%) of the target number of shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is also considered a performance condition; iv) as to twenty percent (20%) of the target number of shares, upon entry into a licensing agreement during the performance period for the commercialization of Vyleesi for FSD in at least two of the following geographic areas (a) four or more countries in Europe, (b) Japan, (c) two or more countries in Central and/or South America, (d) two or more countries in Asia, excluding Japan and China, and (e) Australia, which is also considered a performance condition. The fair value of these awards was $ 913,750 and $ 569,500 , respectively. The Company amortized the fair value over the derived service period of 1.1 years or upon the attainment of the performance condition. Pursuant to the FDA acceptance of the NDA filing for Vyleesi, 30% of the target number of shares vested in June 2018. Pursuant to the FDA approval of Vyleesi, 50 % of the target number of shares vested in June 2019. During the year ended June 30, 2021, the performance period ended for the remaining performance based restricted stock units. As a result, 12,780 unearned restricted stock units were forfeited and added back to the 2011 Stock Plan and available for future grant. In connection with the vesting of restricted share units during the years ended June 30, 2022 and 2021, the Company withheld 16,191 and 6,671 , shares, respectively, with aggregate values of $ 221,311 and $ 93,638 , respectively, in satisfaction of minimum tax withholding obligations. 65 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Notes to Consolidated Financial Statements (16) INCOME TAXES For fiscal 2022 and 2021, the Company recorded no income tax expense as a result of the generation of operating losses that were subject to a full valuation allowance. Deferred tax assets and liabilities are determined based on the estimated future tax effect of differences between the financial statement and tax reporting basis of assets and liabilities, as well as for, net operating loss carryforwards and research and development credit carryforwards, given the provisions of existing tax laws. As of June 30, 2022, the Company had state net operating loss carryforwards of approximately $ 164,000,000 , which will expire, if not utilized, between 2034 and 2042, federal net operating loss carryforwards of approximately $ 112,800,000 and federal research and development and Alternative Minimum Tax (“AMT”) credits of approximately $ 7,200,000 , which expire, if not utilized, between 2035 and 2042, and foreign tax credits of $ 582,500 , which expire, if not utilized, in 2028. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the application of loss limitation provisions related to ownership changes. The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The Company also considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax‑planning strategies in making this assessment. Based on a history of losses incurred, the Company has recognized a full valuation allowance against its net deferred tax assets during the years ended June 30, 2022 and 2021. The Company’s valuation allowance increased by $ 3,927,000 and $ 9,513,000 for the years ended June 30, 2022 and 2021, respectively. A sustained period of profitability in the Company’s operations is required before it would change its judgment regarding the need for a full valuation allowance against its net deferred tax assets. Until such time, the use of net operating loss carryforwards and tax credits to offset profits, if any, will reduce the overall level of deferred tax assets subject to valuation allowance. The Tax Reform Act of 1986 (the “Act”) provides for limitation on the use of the Company’s net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company’s ability to utilize these carryforwards. Since its inception, the Company has completed several financings and sales of common stock which has resulted in multiple ownership changes defined by Section 382 of the Act. Accordingly, the Company’s ability to utilize the aforementioned carryforwards are subject to limitation under Section 382. If the Company undergoes a future ownership change or as it completes its Section 382 limitation assessments, any unutilized carryforwards that were not previously subject to a Section 382 limitation may become subject to limitation which may result in a significant limitation and loss of net operating loss carryforwards and research and development credits. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, the Company may not be able to take full advantage of these carryforwards for federal income tax purposes. Accordingly, a portion of the carryforwards may expire unutilized. The Company’s net deferred tax assets are as follows: June 30, June 30, 2022 2021 Net operating loss carryforwards $ 35,331,000 $ 32,169,000 Research and development and AMT tax credits 7,171,000 6,461,000 Foreign tax credits 583,000 583,000 Basis differences in fixed assets and other 2,778,000 2,723,000 45,863,000 41,936,000 Valuation allowance ( 45,863,000 ) ( 41,936,000 ) Net deferred tax assets $ - $ - The Company recognizes interest expense and penalties on uncertain income tax positions as a component of interest expense. No interest expense or penalties were recorded for uncertain income tax matters in fiscal 2022 or 2021. As of June 30, 2022 and 2021, the Company had no liabilities for uncertain income tax matters. 66 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.