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 47 Consolidated Balance Sheets 48 Consolidated Statements of Operations 49 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ (Deficiency) Equity 50 Consolidated Statements of Cash Flows 51 Notes to Consolidated Financial Statements 52 46 Table of Contents Report of Independent Registered Public Accounting Firm To the 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, 2024 and 2023, the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders’ (deficiency) equity, and cash flows forthe 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, 2024 and 2023, 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 hasincurred operating losses and negative cash flows from operations since inception and will need additional funding to complete planned product 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. 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 $1,509,797 and $65,972, respectively as of June 30, 2024. 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 judgement 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 30, 2024 47 Table of Contents PALATIN TECHNOLOGIES, INC . and Subsidiary Consolidated Balance Sheets June 30, 2024 June 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 9,527,396 $ 7,989,582 Marketable securities - 2,992,890 Accounts receivable - 2,915,760 Inventories - 526,000 Prepaid expenses and other current assets 242,272 1,897,281 Total current assets 9,769,668 16,321,513 Property and equipment, net 388,361 684,910 Right-of-use assets - operating leases 527,321 876,101 Other assets 56,916 56,916 Total assets $ 10,742,266 $ 17,939,440 LIABILITIES AND STOCKHOLDERS’ DEFICIENCY Current liabilities: Accounts payable $ 4,101,929 $ 4,303,527 Accrued expenses 4,185,046 6,511,059 Short-term operating lease liabilities 380,542 354,052 Short-term finance lease liabilities 46,014 106,392 Other current liabilities 944,150 3,856,800 Total current liabilities 9,657,681 15,131,830 Long-term operating lease liabilities 163,782 544,323 Long-term finance lease liabilities - 46,014 Other long-term liabilities 1,032,300 2,083,200 Warrant liabilities - 1,850,544 Total liabilities 10,853,763 19,655,911 Commitments and contingencies (Note 14) Contingently redeemable warrants - 263,400 Stockholders’ deficiency: Preferred stock of $ 0.01 par value – authorized 10,000,000 shares: shares issued and outstanding designated as follows: Series A Convertible: authorized 4,030 shares as of June 30, 2024: issued and outstanding 4,030 shares as of June 30, 2024 and June 30, 2023 40 40 Common stock of $ 0.01 par value – authorized 300,000,000 shares: issued and outstanding 17,926,640 shares as of June 30, 2024 and 11,656,714 shares as of June 30, 2023 179,266 116,567 Additional paid-in capital 441,475,747 409,933,959 Accumulated deficit ( 441,766,550 ) ( 412,030,437 ) Total stockholders’ deficiency ( 111,497 ) ( 1,979,871 ) Total liabilities and stockholders’ deficiency $ 10,742,266 $ 17,939,440 The accompanying notes are an integral part of these consolidated financial statements 48 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Consolidated Statements of Operations Year Ended June 30, 2024 2023 REVENUES Product revenue, net $ 4,490,090 $ 4,850,678 License and contract - 3,000 Total revenues 4,490,090 4,853,678 OPERATING EXPENSES Cost of products sold 97,637 418,470 Research and development 22,400,372 22,630,577 Selling, general and administrative 12,270,046 15,290,836 Gain on sale of Vyleesi ( 7,781,844 ) - Gain on purchase commitment - ( 1,027,322 ) Total operating expenses 26,986,211 37,312,561 Loss from operations ( 22,496,121 ) ( 32,458,883 ) OTHER INCOME (EXPENSE) Investment income 376,843 691,981 Foreign currency gain (loss) 59,753 ( 429,971 ) Interest expense ( 17,114 ) ( 20,013 ) Offering expenses ( 696,912 ) ( 1,115,765 ) Change in fair value of warrant liabilities ( 6,962,562 ) 4,620,911 Total other income (expense), net ( 7,239,992 ) 3,747,143 Loss before income taxes ( 29,736,113 ) ( 28,711,740 ) Income tax benefit - 4,674,999 NET LOSS $ ( 29,736,113 ) $ ( 24,036,741 ) Basic and diluted net loss per common share $ ( 2.02 ) $ ( 2.21 ) Weighted average number of common shares outstanding used in computing basic and diluted net loss per common share 14,697,096 10,890,159 The accompanying notes are an integral part of these consolidated financial statements 49 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ (Deficiency) Equity Redeemable Convertible Preferred Stock Stockholders' Equity Contigently redeemable Series B Series C Escrowed Series A Convertible Preferred Stock Common Stock Additional paid-in Accumulated warrants Shares Amount Shares Amount Proceeds Shares Amount Shares Amount Capital Deficit Total 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 Stock-based compensation - - - - - - - - 84,062 841 1,673,496 1,674,337 Withholding taxes related to restricted stock units - - - - - - - - ( 20,468 ) ( 205 ) ( 145,857 ) - ( 146,062 ) Redemption of convertible series B & series C preferred stock - ( 8,100,000 ) ( 13,500,000 ) ( 900,000 ) ( 1,500,000 ) 15,000,000 - - - - - - - Sale of common stock and warrants, net of costs - - - - - - - - 1,524,034 15,240 1,184,149 - 1,199,389 Conversion of liability classified warrants - 3,324,653 3,324,653 Warrant exercises - - - - - - - - 798,182 7,982 ( 7,904 ) - 78 Reverse stock split fractional shares - - - - - - - - ( 43 ) - - - - Reclassification of contingently redeemable warrants 263,400 - - - - - - - - - ( 263,400 ) - ( 263,400 ) Net loss - - - - - - - - - - ( 24,036,741 ) ( 24,036,741 ) Balance, June 30, 2023 263,400 - - - - - 4,030 40 11,656,714 116,567 409,933,959 ( 412,030,437 ) ( 1,979,871 ) Stock-based compensation - - - - - - - - 98,372 984 1,871,714 - 1,872,698 Withholding taxes related to restricted stock units - - - - - - - - ( 25,467 ) ( 255 ) ( 56,146 ) - ( 56,401 ) Sale of common stock, net of costs - - - - - - - - 2,048,530 20,485 9,642,990 - 9,663,475 Conversion of liability classified warrants - - - - - - - - - - 11,423,203 - 11,423,203 Conversion of liability classified warrants upon warrant exercise - - - - - - - - 2,358,491 23,585 2,366,318 - 2,389,903 Warrant exercises - - - - - - - 3,233,277 32,333 6,015,876 - 6,048,209 Shares held in abeyance - - - - - - - - ( 1,443,277 ) ( 14,433 ) 14,433 - - Reclassification of contingently redeemable warrants ( 263,400 ) - - - - - - - - - 263,400 - 263,400 Net loss - - - - - - - - - - - ( 29,736,113 ) ( 29,736,113 ) Balance June 30, 2024 - - - - - - - 4,030 $ 40 17,926,460 $ 179,266 $ 441,475,747 $ ( 441,766,550 ) $ ( 111,497 ) The accompanying notes are an integral part of these consolidated financial statements 50 Table of Contents PALATIN TECHNOLOGIES, INC. and Subsidiary Consolidated Statements of Cash Flows Year Ended June 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 29,736,113 ) $ ( 24,036,741 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 339,075 288,331 Decrease in right-of-use asset 348,780 371,339 Unrealized foreign currency transaction gain (loss) ( 59,753 ) 429,971 Stock-based compensation 1,872,698 1,674,337 Change in fair value of liability classified warrants 6,962,562 ( 4,620,911 ) Gain on sale of Vyleesi ( 7,781,844 ) - Gain on purchase commitment - ( 1,027,322 ) Changes in operating assets and liabilities: Accounts receivable 2,915,760 ( 1,135,740 ) Prepaid expenses and other assets 1,218,846 35,173 Inventories ( 1,154,355 ) 418,471 Accounts payable ( 201,598 ) 1,109,541 Accrued expenses ( 2,367,651 ) ( 364,157 ) Operating lease liabilities ( 354,051 ) ( 371,122 ) Other liabilities ( 3,463,797 ) ( 2,042,516 ) Net cash used in operating activities ( 31,461,441 ) ( 29,271,346 ) CASH FLOWS FROM INVESTING ACTIVITIES: Maturity of marketable securities 2,992,890 - Purchase of marketable securities ( 2,992,890 ) Proceeds from sale of Vyleesi 9,500,000 - Purchases of property and equipment ( 42,526 ) ( 433,927 ) Net cash provided by (used in) investing activities 12,450,364 ( 3,426,817 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of withholding taxes related to restricted stock units ( 56,401 ) ( 146,062 ) Proceeds from the sale of common stock and warrants, net 14,666,042 10,995,497 Payment of finance lease obligations ( 106,392 ) ( 100,922 ) Proceeds from exercise of warrants 6,045,642 78 Net cash provided by financing activities 20,548,891 10,748,591 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,537,814 ( 21,949,572 ) CASH AND CASH EQUIVALENTS, beginning of period 7,989,582 29,939,154 CASH AND CASH EQUIVALENTS, end of period $ 9,527,396 $ 7,989,582 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 17,114 $ 20,013 Conversion of liability classified warrants 11,423,203 - Conversion of liability classified warrants upon warrant exercise 2,389,903 - The accompanying notes are an integral part of these consolidated financial statements 51 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 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 prior commercial product, Vyleesi®, was approved by the U.S. Food and Drug Administration (“FDA”) in June 2019 for the treatment of hypoactive sexual desire disorder (“HSDD”) in premenopausal women. As disclosed in Note 4, this product was acquired by Cosette Pharmaceuticals, Inc. (“Cosette”) on December 19, 2023. Our new product development activities focus primarily on use of bremelanotide, or other MC4r agonists, with tirzepatide, a GLP-1 agonist for treatment of obesity, which entered Phase 2 in the second quarter of calendar year 2024, and a co-formulation of bremelanotide with a PDE5i for treatment of erectile dysfunction in patients that do not respond to PDE5i monotherapy. The Company is also developing, dependent on resources for development activities, MC1r agonist products, 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. 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, 2024 of $ 441,766,550 and a net loss for the year ended June 30, 2024 of $ 29,736,113 . The Company anticipates incurring significant expenses in the future as a result of 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, 2024, the Company’s cash and cash equivalents were $ 9,527,396 and current liabilities were $ 9,657,681 . Management intends to utilize existing capital resources for general corporate purposes and working capital, including 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. 52 Table of Contents Based on our available cash and cash equivalents as of June 30, 2024, 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 existing cash and cash equivalents as of the date of this filing will be sufficient to fund currently anticipated operating expenses through the second half of calendar year 2024. The Company may receive contingent, sales-based milestone payments of up to $159,000,000 on sales of Vyleesi by Cosette Pharmaceuticals, Inc. (“Cosette”) and its licensees . 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 investment 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. Revision of Previously Issued Financial Statements - The Company has revised certain prior period amounts on the consolidated financial statements to correct a misstatement with respect to improperly classifying warrants as equity instead of as a warrant liability that is adjusted to the income statement each quarter to reflect changes in the fair value of the warrants, under the guidance of ASC 815-40, Contracts in Entity’s Own Equity . The Company recorded an adjustment to record a liability for the warrants of $ 1,850,544 million as of June 30, 2023, and adjusted contingently redeemable warrants for $ 263,400 , decreased additional paid-in capital for $ 5,619,090 and increased accumulated deficit for $ 3,505,146 . The Company also recorded a gain of $ 4,620,911 as a result in the change in fair value of the warrant liabilities for the year ended June 30, 2023. The Company recorded $ 1,115,765 of offering expenses for the year ended June 30, 2023. As a result of these adjustments, the cash flow from operations decreased by $ 852,345 and cash flows from financing activities increased by $ 852,345 for the year ended June 30, 2023. 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, 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 $ 9,089,113 in a money market accounts and $ 5,789,218 in money market and treasury bills at June 30, 2024 and 2023, respectively. Marketable Securities - The Company’s marketable securities consist of debt securities with original maturities of greater than 90 days that are classified as available for sale securities. Fair Value of Financial Instruments – The Company’s financial instruments consist primarily of cash equivalents, marketable securities, 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. 53 Table of Contents 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. 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. 54 Table of Contents 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. Prior to selling the Vyleesi product to Cosette in December 2023, the Company sold 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 years ended June 30, 2024 and 2023 are as follows: Year Ended June 30, 2024 2023 Gross product sales 8,875,153 $ 12,460,140 Product sales allowances and accruals ( 4,385,063 ) ( 7,609,462 ) Net sales $ 4,490,090 $ 4,850,678 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. 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. 55 Table of Contents 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 . For the years ended June 30, 2024 and 2023, 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, 2024 and June 30, 2023 was 11,127,632 and 4,161,377 respectively. Included in the weighted average common shares used in computing basic and diluted net loss per common share are 508,011 and 356,003 vested restricted stock units that had not been issued as of June 30, 2024 and 2023, 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 November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures. This ASU requires that a public entity provide additional segment disclosures on an interim and annual basis. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements, unless impracticable. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. 56 Table of Contents 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 guidance was applicable to the Company beginning July 1, 2023. The adoption of this standard did not have an impact on the Company’s consolidated financial statements. (4) ASSET PURCHASE AGREEMENT On December 19, 2023, the Company entered into an asset purchase agreement (the “Cosette Purchase Agreement”) with Cosette pursuant to which Cosette acquired from the Company worldwide rights to Vyleesi®. Under the terms of the Cosette Purchase Agreement, the Company sold certain assets (the “Purchased Assets”) to Cosette, comprising the exclusive right to market and sell Vyleesi for treatment of hypoactive sexual desire disorder in women, and contracts relating manufacturing and distribution of Vyleesi. The Purchased Assets include applicable intellectual property pertaining to the marketing and sale of Vyleesi, including patents, patent applications, trademarks and copyrights. In addition, Cosette acquired records pertaining to the historical sales and distribution of Vyleesi, as well as quality control and pharmacovigilance records and other records. The Company will receive up to $ 171,000,000 , consisting of an upfront purchase price of $ 9,500,000 , $ 2,500,000 payable upon the settlement of certain purchase commitments, and sales-based milestone payments of up to $ 159,000,000 based on annual net sales of from $ 15,000,000 to $ 20,000,000 . The closing of the transaction took place simultaneously with the signing of the Cosette Purchase Agreement. As a result of the transaction, the Company recorded gain of $ 7,781,844 on the sale of Vyleesi for the year ended June 30, 2024. The Cosette Purchase Agreement includes customary representations, warranties and covenants, as well as standard mutual indemnities covering losses arising from any material breach of the Cosette Purchase Agreement or inaccuracy of representations and warranties. The parties also entered into a transition service agreement pursuant to which the Company provided certain transition services to Cosette for a period time and the Company was reimbursed for the costs of the transition services. The Company is also eligible to receive regulatory approval milestones associated with the previous licensing of Vyleesi to Fosun for China (see Note 6) and Kwangdong for the Republic of Korea (“Korea”) (see Note 7). (5) MANUFACTURING SUPPLY AGREEMENTS FOR VYLEESI The Company has transferred to Cosette its right, title and interest in contracts and agreements to manufacture Vyleesi, including 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; 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”). (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 Fosun License 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 has agreed to assign the Fosun License Agreement to Cosette, provided that the Company retains the right to receive a $ 7,500,000 milestone payment upon regulatory approval in China. (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 Kwangdong License 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 has agreed to assign the Kwangdong License Agreement to Cosette, provided that the Company retains the right to receive a $ 3,000,000 milestone payment based on the first commercial sale in Korea. 57 Table of Contents (8) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: June 30, June 30, 2024 2023 Clinical / regulatory costs $ 23,926 $ 141,512 Insurance premiums 71,097 342,645 Vyleesi contractual advances - 816,750 Other 147,249 596,374 $ 242,272 $ 1,897,281 (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, 2024: Cash equivalents - Money market funds $ 9,089,113 $ 9,089,113 $ - $ - June 30, 2023: Cash equivalents - Money market funds $ 2,808,598 $ 2,808,598 - - Cash equivalents - Treasury bill 2,980,620 2,980,620 - - Marketable securities - Treasury bill 2,992,890 2,992,890 - - Total $ 8,782,108 $ 8,782,108 $ - $ - (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, 2024 2023 Raw materials $ - $ 526,000 Finished goods - - $ - $ 526,000 (11) LEASES The Company has operating leases for office and laboratory space, which expire on June 30, 2025 and October 31, 2026, respectively . 58 Table of Contents The components of operating lease cost are as follows: Operating lease cost Year ended June 30, 2024 Year ended June 30, 2023 Operating lease cost $ 263,859 $ 291,878 Variable lease cost 113,708 114,441 Total operating lease cost $ 377,567 $ 406,319 The components of finance lease cost are as follows: Finance lease cost Year ended June 30, 2024 Year ended June 30, 2023 Right-of-use asset amortization $ 106,390 $ 100,922 Interest expense 5,507 10,975 Total finance lease cost $ 111,897 $ 111,897 Supplemental lease term and discount rate information related to leases was as follows: June 30, 2024 June 30, 2023 Weighted-average remaining lease term (years) operating leases 1.7 2.3 Weighted-average remaining lease term (years) finance leases 0.4 1.4 Weighted-average discount rate operating leases 5.50 % 5.50 % Weighted-average discount rate finance leases 5.29 % 5.29 % Supplemental cash flow information related to leases was as follows: Year ended June 30, 2024 Year ended June 30, 2023 Cash paid for the amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 387,910 $ 406,319 Operating cash flows for finance leases 5,507 10,975 Financing cash flows for finance leases 106,392 100,922 $ 499,809 $ 518,216 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 $ - $ 368,975 The following table summarizes the maturity of the Company’s lease liabilities as of June 30, 2024: Operating leases: Year Ending June 30 2025 $ 398,196 2026 134,973 2027 33,894 Less imputed interest ( 22,741 ) Total $ 544,322 Finance leases: Year Ending June 30, 2025 46,585 Less imputed interest ( 569 ) Total $ 46,016 59 Table of Contents (12) PROPERTY AND EQUIPMENT, NET Property and equipment, net, consists of the following: June 30, June 30, 2024 2023 Office equipment $ 1,229,300 $ 1,229,300 Laboratory equipment 1,220,395 1,177,868 Leasehold improvements 1,196,706 1,196,706 3,646,401 3,603,874 Less: Accumulated depreciation and amortization ( 3,258,040 ) ( 2,918,964 ) $ 388,361 $ 684,910 Included in property and equipment, net as of June 30, 2024 is $ 309,791 in equipment under finance leases and $ 263,777 related accumulated amortization. (13) ACCRUED EXPENSES Accrued expenses consist of the following: June 30, June 30, 2024 2023 Clinical / regulatory costs $ 1,509,797 $ 2,960,126 Other research related expenses 65,972 121,121 Professional Services 284,215 339,258 Personnel costs 1,771,694 1,563,847 Selling expenses 351,485 1,266,653 Other 201,883 260,054 $ 4,185,046 $ 6,511,059 (14) COMMITMENTS AND CONTINGENCIES Inventory Purchases –The Company had certain supply agreements with manufacturers and suppliers, including the Catalent Agreement, Ypsomed Agreement, and Lonza Agreement, all of which have been transferred to Cosette. As a result of the sale of Vyleesi to Cosette, the Company is still required to make certain payments for the manufacture and supply of Vyleesi. The following table summarizes the contractual obligations under the Catalent Agreement, Ypsomed Agreement, and Lonza Agreement as of June 30, 2024: Total Current 1 - 3 Years 4 - 5 Years Inventory purchase commitments $ 2,492,600 $ 1,460,300 $ 1,032,300 $ - As of June 30, 2024, the Company has $ 944,150 and $ 1,032,300 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, 2023, $ 3,856,800 and $ 2,083,200 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 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, 2024 and 2023, Company contributions were $336,164 and $294,431, 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 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. 61 Table of Contents 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 $ 6.82 5 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 . 62 Table of Contents 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 63 Table of Contents 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. 64 Table of Contents 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. 65 Table of Contents 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. (16) INCOME TAXES The Company has participated in the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”) sponsored by The New Jersey Economic Development Authority. The Program enables approved biotechnology companies with unused Net Operating Losses (“NOLs”) and unused research and development credits (“R&D credits”) to sell these tax benefits for at least 80 % of the value of the tax benefits to unaffiliated, profitable corporate taxpayers in the State of New Jersey. The Company received final approval in December 2022 for the sale of NOLs and R&D credits that resulted in the receipt of $ 4,674,999 in January 2023. As a result, the Company recorded an income tax benefit for the year ended June 30, 2023. For fiscal 2024 and 2023, 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, NOL carryforwards and R&D credit carryforwards, given the provisions of existing tax laws. As of June 30, 2024, the Company had state NOL carryforwards of approximately $ 181,000,000 , which will expire, if not utilized, between 2036 and 2043, federal NOL carryforwards of approximately $ 130,000,000 and federal R&D and Alternative Minimum Tax (“AMT”) credits of approximately $ 9,500,000 , which expire, if not utilized, between 2035 and 2043, and foreign tax credits of $ 582,500 , which expire, if not utilized, in 2028. 66 Table of Contents 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 deferred tax assets during the years ended June 30, 2024 and 2023. The Company’s valuation allowance increased by $ 11,193,000 and $ 5,653,000 for the years ended June 30, 2024 and 2023, 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 NOL 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 “Tax Reform Act”) provides for limitation on the use of the Company’s NOL and R&D tax credit carryforwards following certain ownership changes (as defined by the Tax Reform 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 Tax Reform 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 NOL carryforwards and R&D 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, 2024 2023 Net operating loss carryforwards $ 40,051,000 $ 40,073,000 Research and development and AMT tax credits 9,464,000 8,094,000 Foreign tax credits 583,000 583,000 Basis differences in fixed assets and other 12,611,000 2,766,000 62,709,000 51,516,000 Valuation allowance ( 62,709,000 ) ( 51,516,000 ) 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 2024 or 2023. As of June 30, 2024 and 2023, the Company had no liabilities for uncertain income tax matters. 67 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.