NOTE 7 — SHAREHOLDERS’ EQUITY

Changes in Shareholders’ Equity for the Three Months Ended March 31, 2024 and 2023

The following table presents changes in shareholders’ equity for the three months ended March 31, 2024 and 2023:

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Exchange Agreement

On March 8, 2024 (the “Closing Date”), the Company entered into a securities exchange agreement (the “Exchange Agreement”) with certain of its stockholders (the “Exchanging Shareholders”), whereby the Company purchased 3,000,000 shares of common stock representing approximately 7% of outstanding shares with an aggregate fair value of $5,700,000 (the “Retired Shares”) from the Exchanging Shareholders. The Retired Shares were immediately cancelled whereby they will remain as authorized shares for future issuance in accordance with Nevada law. Consideration for the acquisition of the Retired Shares consisted of (i) a cash payment to the Exchanging Shareholders of $3,000, and (ii) the issuance of pre-funded warrants (the “Exchange PFWs”) to the Exchanging Shareholders with an estimated fair value of $5,697,000. The Exchange PFWs do not expire and are exercisable to purchase an aggregate of 3,000,000 shares, or approximately 7%, of the Company’s outstanding common stock (subject to adjustment in the event of stock splits, recapitalizations and other similar events) at an exercise price of $0.001 per share.

Unlike the Company’s shares of common stock, the holders of Exchange PFWs do not have voting rights except to the extent required by Nevada law. No later than six months after the Closing Date, the Company agreed to file a registration statement covering the resale of the shares issuable upon the exercise of the Exchange PFWs.

The Exchange PFWs are exercisable at any time, subject to the then effective ownership blocker percentage (the “OBP”) as elected by each of the Exchanging Shareholders. The OBP is a percentage designated by the holders whereby the Exchange PFWs cannot be exercised if, after giving effect thereto, the Exchanging Shareholders would beneficially own more than the designated OBP. The terms of the Exchange PFWs initially provide for an OBP of 9.99%. However, upon at least 61 days’ prior notice to the Company, any holder of Exchange PFWs may elect to increase or decrease the OBP to any other percentage not to exceed 19.99%. 

The Exchange PFWs required approval by the Company’s shareholders if the exercise of the Exchange PFWs resulted in aggregate beneficial ownership by the holders in excess of 19.99%.  Even though the Exchange PFWs only entitled the holders to purchase 7% of the Company’s outstanding shares of common stock, the requirement to obtain shareholder approval for ownership in excess of 19.99% resulted in the treatment of the exchange PFWs as a derivative liability of $5.7 million as of the issuance date.  The fair value of this derivative liability increased by $1,950,000 for a total of $7.6 million as of March 31, 2024.  The increase in fair value of $1,950,000 is included in non-operating loss in the accompanying unaudited condensed consolidated statement of operations for the three and nine months ended March 31, 2024. As discussed in Note 14, on May 13, 2024, the Exchange PFWs were amended to further support the equity classification, whereby the derivative liability will be reclassified to shareholders’ equity for the fiscal quarter ending June 30, 2024.   As a result of this amendment, there is no possibility that the Exchange PFWs will be settled with current assets whereby the liability is included in long-term liabilities as of March 31, 2024.  

Jefferies Open Market Sales Agreement

On November 14, 2023, the Company and Jefferies LLC (the “Agent) entered into an open market sales agreement (the “Sales Agreement”) that provides for an “at the market” offering for the sale of up to $50.0 million in shares of the Company’s common stock (the “Placement Shares”) through the Agent. The Agent is acting as sales agent and is required to use commercially reasonable efforts to sell all of the Placement Shares requested to be sold by the Company, consistent with the Agent’s normal trading and sales practices, on mutually agreed terms between the Agent and the Company. The Sales Agreement will terminate when all of the Placement Shares have been sold, or earlier upon the election of either the Company or the Agent.

The Company has no obligation to sell any of the Placement Shares under the Sales Agreement. The Company intends to use the net proceeds, if any, from amounts sold under the Sales Agreement for general corporate purposes, including working capital. Under the terms of the Sales Agreement, the Company agreed to pay the Agent a commission equal to 3.0% of the gross sales price of the Placement Shares plus certain expenses incurred by the Agent in connection with the offering.

For the nine months ended March 31, 2024, the Company sold no shares of its common stock pursuant to the Sales Agreement. Accordingly, the maximum amount remaining for sale under the Sales Agreement amounts to $50.0 million as of March 31, 2024.

2022 PFW Exercises

As discussed in Note 8, certain holders of 2022 PFWs elected to exercise 4,773,684 shares for the nine months ended March 31, 2024.  The holders elected to exercise their 2022 PFWs on a cashless basis, that resulted in the issuance of 4,770,190 shares of common stock.

2021 PFW Exercise

As discussed in Note 8, certain holders of 2021 PFWs elected to exercise an aggregate of 1,538,461 shares for the nine months ended March 31, 2024.  The holders elected to exercise their 2021 PFWs on a cashless basis that resulted in the issuance of 1,529,890 shares of common stock.

2022 Private Placement

In May 2022, the Company entered into securities purchase agreements (“SPAs”) with Handok, Inc. (“Handok”) and certain of its affiliates. Handok is an affiliate of a member of the Company’s Board of Directors. In July 2022, the Company entered into amended SPAs for a private placement of common stock (the “2022 Private Placement”). The 2022 Private Placement resulted in gross proceeds

of $12.3 million in exchange for the issuance of approximately 3.2 million shares of common stock. The Company incurred approximately $0.8 million for underwriting commissions and other offering costs, resulting in net proceeds of $11.5 million.