NOTE 6 — DERIVATIVE LIABILITIES FOR AUTHORIZED SHARE DEFICIENCIES

Deficiency Triggered by Issuance of Class B Pre-Funded Warrants

As discussed in Note 7, the Company issued pre-funded warrants (“PFWs”) pursuant to underwritten offerings completed in October 2021 and May 2022. Exercisability of 10,947,371 Class B PFWs for net proceeds of approximately $39.1 million received in May 2022 was subject to the Company’s ability to obtain shareholder approval for an increase in authorized shares. Since the ability to obtain shareholder approval was outside the Company’s control, liability classification was required beginning on the date of issuance of the Class B PFWs on May 4, 2022.

The fair value of the Class B PFWs on the date of issuance was equal to the amount paid by investors of approximately $41.6 million or $3.80 per share, which was accounted for as a derivative liability beginning on May 4, 2022. As discussed in Note 7, the Company’s shareholders approved an increase in authorized shares from 40.0 million shares to 100.0 million shares on June 16, 2022. Upon receipt of shareholder approval for the authorized share increase on June 16, 2022, fair value of the derivative liability had decreased to $35.0 million or $3.20 per share, which resulted in a gain of $6.6 million. This gain is included in non-operating income and the liability of $35.0 million was reclassified into shareholders’ equity on June 16, 2022. Underwriter discounts of approximately $2.5 million related to the Class B PFWs were expensed at the date of issuance. Fair value of the Class B PFWs was determined using the BSM option-pricing model with the following assumptions as of June 16, 2022:

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Deficiency Triggered by Charter Revision

As discussed in Note 7, the Company reduced the number of its authorized shares of common stock from 500.0 million shares to 10.0 million shares on February 17, 2021. At the time of this change, the Company had approximately 8.4 million shares of common stock issued and outstanding, plus approximately 2.4 million shares that were required to be reserved for issuance pursuant to the Company’s stock option plans and warrant agreements. Accordingly, a total of 10.8 million shares were required to be authorized, which resulted in a deficiency of approximately 0.8 million shares that were unavailable to settle outstanding stock options and warrants as of February 17, 2021. Since the Company could have been required to settle in cash for up to 0.8 million shares, liability classification for these instruments was required beginning on February 17, 2021.

The Company’s accounting policy provided for selection of the stock options and warrant agreements with the earliest issuance dates to compute the estimated fair value of the financial instruments associated with the authorized share deficiency. These stock options and warrants were generally those with the highest exercise prices that were least likely to be exercised. The fair value of such stock options and warrants amounted to $3.6 million, which was reclassified from shareholders’ equity to a derivative liability as of February 17, 2021. As a result of the expiration of stock options and

warrants for approximately 0.1 million shares from February 2021 through May 2021, the authorized share deficiency was reduced to approximately 0.7 million shares as of May 26, 2021, when the Company’s shareholders approved an increase in authorized shares from 10.0 million shares to 40.0 million shares.

Presented below is a summary of the derivative liability associated with the stock options and warrants that were subject to the Company’s accounting policy as of February 17, 2021 and May 26, 2021 (in thousands, except per share amounts):

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Due to the reduction in fair value of the derivative liability from $3.6 million as of February 17, 2021 to $1.8 million as of May 26, 2021, the Company recognized a non-cash gain from the change in fair value of approximately $1.8 million in the accompanying consolidated statements of operations for the fiscal year ended June 30, 2021. This gain is included in non-operating income and the liability of $1.8 million was reclassified into shareholders’ equity on May 26, 2021. The primary factor that resulted in this gain was a reduction in the market price in the Company’s common stock from $11.99 per share on February 17, 2021 to $7.69 per share on May 26, 2021 when the authorized share deficiency was cured. Fair value of the stock options and warrants set forth above was determined using the BSM option-pricing model with the following weighted-average assumptions as of February 17, 2021 and May 26, 2021:

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