PTN Palatin Technologies Inc New

ITEM THREE: ADOPTION OF AN AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT

Reverse split amendment. On June 10, 2022, the board of directors adopted a resolution which authorizes, subject to stockholder adoption, declares advisable and recommends a series of alternative amendments to our restated certificate of incorporation to effect a reverse stock split of our Common Stock pursuant to the reclassification of our shares of Common Stock outstanding or held in treasury at a range between 10 (1:10) and twenty-five (1:25) (the “Split Range”) shares of outstanding Common Stock into one outstanding share of new Common Stock (the “New Common Stock”). Each of these 16 alternative amendments would effect the reverse stock split at a different ratio of each whole number within the Split Range (i.e., 1:10, 1:11, 1:12, through 1:25) and amend our restated certificate of incorporation in the form attached hereto as Appendix A to effect such reverse stock split at such applicable ratio. Item 3, if approved by the stockholders, would adopt each of the alternative amendments. Notwithstanding the foregoing, no such amendment or any reverse stock split will occur until a Certificate of Amendment in the form attached hereto as Appendix A is filed with the Secretary of State of the State of Delaware and becomes effective. If Item 3 is approved and the board decides to proceed with the reverse split, the board will determine the exact reverse split ratio within the Split Range. We will be able to file only one reverse split amendment and effect only one reverse split pursuant to this proposal.

Text of the reverse split amendment. The complete text of the reverse split amendment is set forth on Appendix A to this proxy statement.

Purpose and background of reverse split. A reverse split would decrease the number of shares of our Common Stock outstanding and issuable pursuant to options, warrants and shares of convertible preferred stock. We expect this to result in a higher market price for the New Common Stock than for our current Common Stock. The board believes the reverse split is important for the two reasons described in more detail below: first, to facilitate raising capital through equity financings by increasing available authorized shares, and second, to increase our share price to make holding our shares more attractive to institutional investors.

Raising Capital. We have one pharmaceutical product that is approved by the U.S. Food and Drug Administration (FDA), Vyleesi® for hypoactive sexual desire disorder (HSDD) in premenopausal women, which we are currently marketing in the United States. We are developing new melanocortin agonist products to treat inflammatory and autoimmune conditions which we believe will have substantial market potential, including PL9643 for dry eye disease and other indications and PL8177 for inflammatory bowel diseases. However, the cost is substantial to advance and complete development work, including establishing manufacturing capability, completing FDA required clinical trials, and submitting a New Drug Application to FDA for product approval. PL9643 is currently in a Phase 3 clinical trial, and if this trial is successful, an additional Phase 3 trial will be required as well as a safety trial. A Phase 2 trial evaluating the safety and efficacy of an oral formulation of PL8177 is planned to initiate the first half of calendar year 2022.

We are currently authorized to issue up to 300,000,000 shares of Common Stock, and approximately 89% of our authorized Common Stock is now issued, reserved for issuance on conversion of Series A Preferred Stock, or reserved for issuance under existing options and restricted stock units and stock incentive plans. No shares of our Common Stock is reserved for conversion of our outstanding Series B Preferred Stock and Series C Preferred Stock, and there is not sufficient Common Stock to permit such conversion. The number of authorized shares of Common Stock is insufficient for future financings that will be required to continue product development, and to take certain actions designed to increase value to stockholders, including, without limitation, strategic acquisitions, or granting equity incentives to key employees or contractors, such as through options, warrants or other stock-based awards.

The reverse split would decrease the number of shares of Common Stock outstanding, but would not change the authorized number of shares of Common Stock, which would remain at 300,000,000 shares of Common Stock.

While we have approximately $47.3 million in cash and cash equivalents as of December 31, 2021, this is insufficient to complete development of our clinical-stage products, such as PL9643 and PL8177, and to establish marketing, sales, and distribution capability for Vyleesi. If the reverse stock split is not authorized, we will have difficulty raising funds through Common Stock equity offerings, and may be forced to raise funds through alternative means, which may ultimately be detrimental to existing stockholders. Such financings actions may include:

The alternative financing actions described above may not require approval of the holders of Common Stock. For example, the board may set the terms for and issue preferred stock without seeking approval from holders of Common Stock. Such preferred stock may have conversion rights to Common Stock contingent on an increase in the number of authorized shares of Common Stock and may rank senior to our Common Stock in terms of dividend priority or liquidation preference, and may be entitled to more votes per share than our Common Stock. Similarly, entering into license agreements, debt facilities and product-specific financing agreements will not, in most instances, require approval from holders of Common Stock.

Risks of Non-Approval. If we are unable to issue Common Stock to raise the additional capital required to complete the development of our clinical-stage products, such as PL9643 and PL8177, and to establish effective and successful marketing, sales and distribution capability for Vyleesi, we may be required to materially and significantly curtail product development and reduce or eliminate marketing, sales and/or distribution activities and capability for Vyleesi. This will most likely adversely affect our perceived market value and stock price of our Common Stock, to the detriment of our stockholders. We believe that having the option and ability to raise additional capital through sales of our authorized but unissued shares of Common Stock is necessary to enhance value for our stockholders, including providing means for future financings required to advance our development programs and realize stockholder value.

For the reasons described above and discussed in further detail below, the board and management believe it is in the best interests of Palatin and its stockholders to authorize the amendment effecting the reverse stock split, which if implemented will have the effect of increasing the number of authorized but shares of Common Stock that are not issued or reserved for issuance.

The following table shows our Common Stock outstanding and issuable or reserved for issuance as of May [●], 2022.

The board of directors believes it is in the best interests of Palatin and its stockholders to have sufficient additional authorized but unissued shares of Common Stock available in order to provide flexibility for corporate action in the future. Management believes that the availability of additional authorized shares of Common Stock for issuance from time to time in the board’s discretion, such as in connection with stock options and rights, including our 2011 Stock Incentive Plan, future financings to ensure the advancement of our development programs, incentives for key contractors, possible acquisitions of other product assets or companies, investment opportunities or for other corporate purposes, is desirable to allow Palatin to enter into such transactions in a timely way.

We currently have no specific understandings, arrangements, agreements, or other plans to issue, in connection with future financings, acquisitions or otherwise, any of the authorized shares of Common Stock that are not issued or reserved for issuance and would be available as a result of the amendment to effect a reverse stock split of our Common Stock. However, the board believes that the currently authorized shares that have not been issued or reserved for issuance do not provide sufficient flexibility for corporate action in the future, including future financings.

No guarantee of success. We believe it is likely that the per share market price of our Common Stock will increase after a reverse split. However, we cannot guarantee that our Common Stock price will increase, and even if it does, we cannot guarantee that the price increase:

Criteria to be used in deciding to apply the reverse split. If the stockholders approve this Item 3, the board or a committee of the board will have the authority to proceed with the reverse split. In determining whether to proceed with the reverse split and setting the exact ratio of the split, if any, the board or committee may consider a number of factors, including additional funding requirements, the number of our authorized shares of Common Stock that have not been issued or reserved for issuance, market conditions, existing and expected trading prices of our Common Stock and NYSE American listing requirements. We anticipate that the reverse split, if the board or committee determines to proceed with the reverse split, will be implemented in conjunction with an equity financing or other transaction.

Range of exchange ratios. The purpose of seeking stockholder adoption of a series of alternative amendments with a split ratio at each whole number within the Split Range of one-for-ten to one-for-twenty-five (rather than a fixed split ratio) is to provide us with the flexibility to achieve the desired results of the reverse split. If the stockholders approve this proposal and the board decides to proceed with the reverse split, the board will determine the exact reverse split ratio within the Split Range. We will be able to file only one reverse split amendment and effect only one reverse split pursuant to this proposal and, as a result, each other amendment providing for the reverse stock split at each other ratio within the Split Range that the board does not decide to proceed with will be abandoned without further action by the stockholders pursuant to Section 242(c) of the Delaware General Corporation Law.

Effective date of reverse split. If the stockholders approve this proposal, and if the board then determines to proceed with the reverse split, it will become effective when we file the reverse split amendment with the Delaware Secretary of State or such other future effective time set forth therein. This could be on any date or time after this annual meeting and before June 24, 2023. If the board determines not to proceed with the reverse split, the board may abandon each reverse split amendment pursuant to Section 242(c) of the Delaware General Corporation Law.

No appraisal rights. Stockholders will not have dissenters’ or appraisal rights under the Delaware General Corporation Law or under the restated certificate of incorporation in connection with the proposed reverse stock split or any amendment to the restated certificate of incorporation in connection therewith.

Material effects of the reverse split. The following table shows the approximately numerical effect of the reverse split on shares of our Common Stock as of May [●], 2022, at the minimum split ratio of one-for-ten and at the maximum split ratio of one-for-twenty-five. The actual reverse split ratio could be one-for any whole number within the Split Range on or between those two endpoints.

The number of shares of Common Stock issuable upon exercise, vesting or conversion of all outstanding options, warrants and convertible preferred stock will automatically be reduced by a factor equal to the split ratio. The reverse stock split will also increase the exercise price of options and warrants by a factor of from ten to twenty-five, depending on the actual reverse split ratio. The reverse stock split will be effected simultaneously for all issued and outstanding shares of Common Stock and the reverse stock split ratio will be the same for all issued and outstanding shares of Common Stock. The reverse split would not affect any stockholder’s proportionate equity interest in Palatin, except for the effect on certain stockholders receiving cash in lieu of fractional shares. The reverse stock split will not otherwise affect any rights of holders of our securities.

The reverse split will have no effect on the number of our authorized shares of Common Stock or preferred stock or on the par value of the stock. The shares of New Common Stock issued in the reverse split will be fully paid and non-assessable. The reverse split will not affect the voting and other rights of Common Stock or preferred stock. The reverse stock split will not result in any change in Palatin’s business, management, assets, liabilities or net worth.

The reverse stock split will result in some stockholders holding odd lots of the New Common Stock (blocks of less than 100 shares). Because broker/dealers typically charge a higher commission to complete trades in odd lots of securities, the transaction costs may increase for those stockholders who will hold odd lots after the reverse stock split.

No fractional shares. We will not issue any fractional shares that would result from the reverse split. Instead, we will pay to each holder who would otherwise be entitled to receive a fractional share of New Common Stock pursuant to the reverse split the cash value of such fraction of a share of New Common Stock determined by (ii) the average closing price of the Common Stock for the five trading days immediately preceding the effective date of the reverse split, multiplied by (ii) the number of shares of Common Stock outstanding immediately prior the effectiveness of the reverse split that were reclassified into such fractional share pursuant to the reverse split.

Mechanics of the reverse split. Assuming the reverse stock split is implemented following approval of Item 3 by our stockholders, this is how it will work:

Whether your shares are held in street name or directly, we will not issue fractional shares of Common Stock to you as described above under the heading “No fractional shares”. If your shares are held in street name, payment for the fractional shares will be deposited directly into your account with the organization holding your shares.

Federal income tax consequences. The following is a summary of the material anticipated Federal income tax consequences of the reverse split to our stockholders. This summary is based on the Federal income tax laws as now in effect and as currently interpreted; it does not take into account possible changes in the tax laws or interpretations, including amendments to applicable statutes, regulations and proposed regulations or changes in judicial or administrative rulings, some of which may have retroactive effect. This summary does not purport to address all aspects of the possible Federal income tax consequences of the reverse split and is not intended as tax advice to any person. In particular, and without limiting the foregoing, this summary does not consider the Federal income tax consequences to stockholders in light of their individual investment circumstances or to holders subject to special treatment under the Federal income tax laws (for example, life insurance companies, financial institutions, tax-exempt organizations, regulated investment companies and foreign taxpayers).

The summary does not address any consequence of the reverse split under any state, local or foreign tax laws.

We will not obtain a ruling from the Internal Revenue Service regarding the Federal income tax consequences to our stockholders as a result of the reverse split. Accordingly, WE ENCOURAGE EACH STOCKHOLDER TO CONSULT THEIR TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE POTENTIAL REVERSE SPLIT, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

The reverse split is intended to qualify as a “recapitalization” as described in Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”). Consequently, neither we nor any stockholder will recognize any gain or loss. For exchanging stockholders, the aggregate basis of the shares of New Common Stock received in the reverse split (excluding any fractional share for which cash is received) will be the same as the aggregate basis of the shares of Common Stock reclassified into such shares of New Common Stock in the reverse split. Similarly, the holding period for New Common Stock received as a result of the reverse stock split will include the holding period of the shares of Common Stock surrendered in exchange thereof.

RECOMMENDATION OF THE BOARD

THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ADOPTION OF THE AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT OF OUR COMMON STOCK AT A RATIO WITHIN THE SPLIT RANGE TO BE DETERMINED BY OUR BOARD OF DIRECTORS.

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ITEM FOUR: APPROVAL OF AN INCREASE IN COMMON STOCK AVAILABLE FOR ISSUANCE UNDER OUR 2011 STOCK INCENTIVE PLAN

The Company is asking stockholders to approve an amendment to its 2011 Stock Incentive Plan, as amended and restated (the “2011 Plan”) in order to increase the number of shares available for equity awards under the 2011 Plan by 15,000,000 shares, from 42,500,000 shares to 57,500,000 shares and to extend the term of the 2011 Plan from March 10, 2025 to March 10, 2030.

INCREASE IN PLAN SHARES

On June 10, 2022, the board authorized an increase in the number of shares of Common Stock available for issuance under the 2011 Plan from 42,500,000 shares to 57,500,000 shares. 3,500,000 shares were initially available under the 2011 Plan. An increase of 3,500,000 shares, to a total of 7,000,000 shares, was authorized by the board of directors on April 25, 2013, and approved by stockholders on June 27, 2013. An increase of 3,000,000 shares, to a total of 10,000,000 shares, together with amendments to and restatement of the 2011 Plan, was authorized by the board of directors on March 3, 2015, and approved by stockholders on June 9, 2015. An increase of 2,500,000 shares, to a total of 12,500,000 shares, was authorized by the board of directors on April 1, 2016, and approved by the stockholders on June 9, 2016. An increase of 10,000,000 shares, to a total of 22,500,000, was authorized by the board of directors on March 30, 2017, and approved by the stockholders on June 8, 2017. An increase of 10,000,000 shares, to a total of 32,500,000, was authorized by the board of directors on April 5, 2018 and approved by the stockholders on June 26, 2018. An increase of 10,000,000 shares, to a total of 42,500,000, was authorized by the board of directors on March 24, 2020 and approved by the stockholders on June 25, 2020. Additionally, 988,696 shares have been available under the 2011 Plan upon reversion from its predecessor plan, our 2005 Stock Plan (the “Prior Plan”). All of the delivered shares under restricted stock units are no longer available for issuance, and shares under restricted stock units that have vested but not been delivered are no longer available for issuance unless the restricted share units are forfeited by reason of termination for cause.

Reasons for Amendment. As of May [●], 2022, the number of shares issued or potentially issuable under all options and stock awards was 34,488,287, which leaves only 1,135,034 shares available for future grants of awards under the 2011 Plan (excluding shares underlying the awards described below under “New Plan Benefits”). The board believes that it will not be able to continue carrying out the purposes of the 2011 Plan for more than one additional year unless additional stock becomes available for issuance.

By reserving an additional 15,000,000 shares for issuance under the 2011 Plan, a total of 16,135,034 shares will be available for future issuance, subject to adjustment in the event that Item 3 is approved and the reverse stock split is implemented. We expect that the shares authorized for issuance under the 2011 Plan will meet our equity compensation needs for the next several years.

The board considers equity-based compensation an essential tool to attract, motivate and retain our officers, key employees and directors and to align their interests with the interests of our stockholders. If we are unable to grant equity awards in the future, we may be required to increase the cash component of our compensation mix, which would inhibit our ability to meet our compensation objectives, including aligning our executives’ and directors’ interests with the interests of our stockholders and motivating our executives over a long-term horizon. As a result, the board believes that it is in the best interests of the Company and its stockholders for our stockholders to approve the amendment to the 2011 Plan. In determining the number of additional shares to reserve for issuance under the amended 2011 Plan, our board considered our burn rate (see below), the potential dilution resulting from the proposed increase (see below), and advice provided by the compensation committee’s independent compensation consultant.

Effect of Reverse Stock Split Proposal. If Item 3, an amendment to our restated certificate of incorporation to effect a reverse stock split of our Common Stock, is approved and the board determines that the reverse split is in the best interests of Palatin and its stockholders and implements the reverse split, the number of shares available for issuance under the 2011 Plan will be proportionately adjusted. At a one-for-ten split ratio the increase in the number of shares available for issuance under the 2011 Plan would become 1,500,000 New Common Stock shares, and at a one-for-twenty-five split ratio the increase in the number of shares available for issuance under the 2011 Plan would become 600,000 New Common Stock shares. Outstanding options, restricted stock units, vested restricted stock units with deferred delivery and other Common Stock-based awards would be similarly adjusted. The reverse stock split under Item 3 would result in a reduction in the number of shares subject to outstanding equity awards proportional to the split ratio (rounded down to the nearest whole share) and result in a proportionate increase in the exercise price of outstanding stock options (rounded up to the nearest whole cent).

Burn Rate. A key equity metric utilized by the board in determining awards under the 2011 Plan is our “burn rate,” which is generally the total number of shares we award pursuant to the 2011 Plan each year relative to our weighted average number of shares of Common Stock outstanding. As noted above, our board considered our burn rate in determining the number of additional shares to reserve for issuance under the 2011 Plan. The following table shows our use of equity under the 2011 Plan during the last three fiscal years:

Overhang. Overhang measures the dilutive impact of equity programs. Our overhang is equal to the number of shares of our Common Stock subject to outstanding equity awards plus the number of shares available to be granted, divided by the total shares of Common Stock outstanding. The 15,000,000 shares of Common Stock being requested under the 2011 Plan would bring our aggregate overhang in 2022 to approximately 21.84%.

Plan Highlights. The 2011 Plan authorizes the grant of equity-based and cash-based compensation to our key employees, consultants and non-employee directors in the form of stock options, stock appreciation rights (“SARs”), restricted shares, restricted stock units, other share-based awards and cash-based awards. Some of the key features of the 2011 Plan, assuming authorization of an increase in the number of shares of Common Stock available for issuance (and without giving effect to any reverse stock split contemplated by Item 3), are highlighted below and are more fully described under the heading “Summary of the Plan.”

SUMMARY OF THE 2011 PLAN

The following is a summary of the 2011 Plan and is qualified in its entirety by reference to the full text of the 2011 Plan, which is attached as Appendix A to this Proxy Statement. If our stockholders do not approve the amendment to the 2011 Plan, the share increase to the 2011 Plan will not take effect. However, the 2011 Plan will remain in full effect according to its existing terms, and we will be able to continue to make awards under the 2011 Plan subject to existing authorized share limits.

Plan Limits. Assuming stockholder approval of the amendment to the 2011 Plan, the maximum number of shares of our Common Stock that may be issued or transferred with respect to awards under the 2011 Plan will be 57,500,000, plus the number of shares available to be granted under the Prior Plan on May 11, 2011, and shares that become available under the 2011 Plan if they are forfeited or otherwise become available under the Prior Plan on or after May 11, 2011, subject to adjustment in the event that the reverse stock split is effected. Shares issued or delivered pursuant to an award under the 2011 Plan may include authorized but unissued shares, treasury shares, or a combination of the foregoing. Shares covering awards that terminate or are forfeited, or shares that are returned to the company pursuant to a compensation recovery policy, will again be available for issuance under the 2011 Plan, and upon payment in cash of the benefit provided by any award granted under the 2011 Plan, any shares that were covered by that award will be available for issue or transfer under the 2011 Plan.

Notwithstanding the foregoing, shares surrendered for the payment of the exercise price under stock options, repurchased by us with option proceeds, or withheld for taxes upon exercise or vesting of an award, are not again available for issuance under the 2011 Plan. In addition, if a stock appreciation right is exercised and settled in shares, all of the shares underlying the stock appreciation right are counted against the 2011 Plan limit regardless of the number of shares used to settle the stock appreciation right.

In order to comply with the rules applicable to incentive stock options, the 2011 Plan provides that all of the shares available may be issued as incentive stock options. In addition, the 2011 Plan provides that the maximum value of grants in any calendar year under the 2011 Plan to non-employee members of the board of directors, taken together with any cash fees paid to such person during such calendar year, shall not exceed $350,000, with the aggregate grant fair value determined as of the applicable date or dates of grant in accordance with applicable financial accounting rules.

Administration. The 2011 Plan is administered by our compensation committee or such other committee as our board selects consisting of two or more directors, each of whom is intended to be a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act, an “outside director” under regulations promulgated under Section 162(m) of the Code, and an “independent director” under the NYSE American listing standards. The compensation committee has full and final authority in its discretion to take all actions determined to be necessary in the administration of the 2011 Plan.

Our board may reserve to itself any or all of the authority and responsibility of the compensation committee under the 2011 Plan or may act as administrator of the 2011 Plan for any and all purposes. In addition, to the extent permitted by applicable laws, our board or compensation committee may expressly delegate to one or more directors or officers some or all of the compensation committee’s authority, within specified parameters, to administer the 2011 Plan.

Eligibility. The 2011 Plan provides that awards may be granted to our employees (including employees of our subsidiaries), consultants and non-employee directors who are selected by the compensation committee, in its discretion, except that incentive stock options may be granted only to employees. Six non-employee directors and 31 employees, together with consultants we utilize, would currently be eligible to participate in the 2011 Plan.

Duration and Modification. The 2011 Plan will terminate on March 10, 2030, or such earlier date as our board of directors may determine. The 2011 Plan will remain in effect for outstanding awards until no awards remain outstanding. The board may amend, suspend or terminate the 2011 Plan at any time but stockholder approval is required for any further amendment to the extent necessary to comply with the NYSE American rules or applicable laws. An amendment of the 2011 Plan or any award may not adversely affect in a material way any outstanding award without the consent of the affected participant, provided that the compensation committee may amend the plan or any award without a participant’s consent to the extent the compensation committee deems necessary to comply with applicable law.

Stock Options. Our compensation committee may, at any time and from time to time, grant stock options to participants in such number as the compensation committee determines in its discretion. Stock options may consist of incentive stock options (“ISOs”), non-qualified stock options or any combinations of the foregoing awards.

Stock options provide the right to purchase common shares at a price not less than their fair market value on the date of grant (which date may not be earlier than the date that the compensation committee takes action with respect to such grants). The fair market value of our Common Stock as reported on the NYSE American on the Record Date, May 12, 2022, was $[●] per share. No stock options may be exercised more than 10 years from the date of grant.

Each grant must specify (i) the period of continuous employment that is necessary (or the performance objectives that must be achieved) before the stock options become exercisable, and (ii) the extent to which the option holder will have the right to exercise the stock options following termination. Our compensation committee will determine the terms in its discretion, which terms need not be uniform among all option holders. No dividend equivalents may be provided with respect to any award of stock options.

The option price is payable at the time of exercise (i) in cash, (ii) by tendering unrestricted shares of our Common Stock that are already owned by the option holder and have a value at the time of exercise equal to the option price, (iii) by a cashless exercise (including by withholding shares deliverable upon exercise and through a broker-assisted arrangement to the extent permitted by applicable law), (iv) by any combination of the foregoing methods of payment, or (v) through any other method approved by the compensation committee.

Stock Appreciation Rights. Our compensation committee may, at any time and from time to time, grant SARs to participants in such number as the compensation committee determines in its discretion. The grant price for each SAR will be determined by the compensation committee, in its discretion, and will be at least equal to the fair market value of a share on the date of grant. No SAR may be exercised more than 10 years from the date of grant.

Upon the exercise of a SAR, the holder is entitled to receive payment in an amount determined by multiplying (i) the excess of the fair market value of a common share on the date of exercise over the grant price, by (ii) the number of shares with respect to which the SAR is exercised. Each grant will specify whether the payment will be in cash, common shares of equivalent value, or in some combination thereof.

Each grant of a SAR must specify (i) the period of continuous employment that is necessary (or the performance objectives that must be achieved) before the SAR becomes exercisable and (ii) the extent to which the holder will have the right to exercise the SAR following termination. Our compensation committee will determine these terms in its discretion, and these terms need not be uniform among all participants. No dividend equivalents may be provided with respect to any award of SARs.

Restricted Shares. Our compensation committee may, at any time and from time to time, grant or sell restricted shares to participants in such number as the compensation committee determines in its discretion.

An award of restricted shares constitutes an immediate transfer of ownership of a specified number of common shares to the recipient in consideration of the performance of services. Unless otherwise provided by the compensation committee, the participant is entitled immediately to voting, dividend and other ownership rights in the shares. However, any dividends with respect to unvested restricted shares will be accumulated or reinvested subject to the same terms and conditions as the restricted shares. The transfer may be made without additional consideration or in consideration of a payment by the recipient that is less than the fair market value per share on the date of grant.

Restricted shares must be subject to a “substantial risk of forfeiture,” within the meaning of Section 83 of the Code, based on continued service, the achievement of performance objectives, or upon the occurrence of other events as determined by our compensation committee, at its discretion. In order to enforce these forfeiture provisions, the transferability of restricted shares will be prohibited or restricted in the manner prescribed by the compensation committee on the date of grant for the period during which such forfeiture provisions are to continue.

Restricted Share Units. Our compensation committee may, at any time and from time to time, grant or sell restricted share units, which are also sometimes called “restricted stock units,” to participants in such number as the compensation committee determines in its discretion.

Restricted share units constitute an agreement to deliver common shares to the recipient in the future at the end of a restriction period and subject to the fulfillment of such conditions as the compensation committee may specify. To the extent earned, the participant will receive payment of such performance-based restricted share units at the time and in the manner determined by our compensation committee, in cash, common shares, restricted shares, or any combination thereof.

During the restriction period the participant has no right to transfer any rights under his or her award and no right to vote or receive dividends on the shares covered by the restricted share units, but the compensation committee may authorize the payment of dividend equivalents with respect to the restricted share units on a deferred basis, either accumulated or deemed reinvested until vesting of the underlying award.

Other Share-Based Awards. Our compensation committee may, at any time and from time to time, grant or sell other share-based awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of our Common Stock or factors that may influence the value of such shares. For example, the awards may include common shares granted as a stock bonus, convertible or exchangeable debt securities or other securities, purchase rights for shares, or awards with value and payment contingent upon performance of our company or our subsidiaries or other factors determined by the compensation committee.

The compensation committee will determine the terms and conditions of these other share-based awards. Common shares delivered pursuant to these types of awards will be purchased for such consideration, by such methods and in such forms as the compensation committee determines. Other share-based awards may be granted with a right to receive dividend equivalents on a deferred basis, either accumulated or deemed reinvested until vesting of the underlying award.

Cash-Based Awards. We may also grant cash-based awards under the 2011 Plan. A cash-based award gives a participant a right to receive a specified amount of cash, subject to terms and conditions established by the compensation committee, which may include continued service and/or the achievement of performance objectives.

Performance Objectives. Our compensation committee may condition the vesting, exercise or payment of any award upon the achievement of one or more performance objectives. Performance objectives may be described in terms of either company-wide objectives or objectives that are related to the performance of the individual participant or the performance of our company or one or more of its subsidiaries, divisions, departments, units, functions, partnerships, joint ventures or minority investments, product lines or products, or the performance of an individual participant. The performance objectives may be relative to the performance of a group of comparable companies, a published or special index that our compensation committee, in its discretion, deems appropriate, or we may also select performance objectives as compared to various stock market indices.

For example, performance objectives may be based on one or more of the following criteria: revenues, earnings from operations, operating income, earnings before or after interest and taxes, operating income before or after interest and taxes, net income, cash flow, earnings per share, return on total capital, return on invested capital, return on equity, return on assets, total return to stockholders, earnings before or after interest, or extraordinary or special items, operating income before or after interest, taxes, depreciation, amortization or extraordinary or special items, return on investment, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, cash flow in excess of cost of capital, operating margin, profit margin, contribution margin, stock price and/or strategic business criteria consisting of one or more objectives based on meeting specified product development, strategic partnering, research and development milestones, clinical trial status, product approvals in geographic regions, market penetration, geographic business expansion goals, cost targets, customer satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates and joint ventures. The performance objectives may be calculated without regard to extraordinary items or adjusted, as the compensation committee deems equitable, in recognition of unusual or non-recurring events affecting our company or its subsidiaries or changes in applicable tax laws or accounting principles.

Acceleration of Awards. Our compensation committee may in its discretion determine at any time that: (i) all or a portion of a participant’s stock options, SARs and other awards in the nature of rights that may be exercised will become fully or partially exercisable; (ii) all or a part of the time-based vesting restrictions on all or a portion of the outstanding awards will lapse; (iii) any performance-based criteria with respect to any awards will be deemed to be wholly or partially satisfied; and/or (iv) any other limitation or requirement under any such award will be waived, in each case, as of such date as the compensation committee, in its discretion, declares. Any such decisions by the compensation committee need not be uniform among all participants or awards. The compensation committee will not make any adjustment that would cause an award that is otherwise exempt from Section 409A of the Code to become subject to Section 409A or that would cause an award that is subject to Section 409A of the Code to fail to satisfy the requirements of Section 409A.

Change in Control. If we experience a change in control, the compensation committee generally has discretion to take action with respect to outstanding awards, including, without limitation, the ability to (i) accelerate the vesting, settlement or exercisability of an award; (ii) cancel an award in exchange for a cash payment; (iii) cancel a stock option or SAR without payment if the fair market value of a share on the date of the change in control does not exceed the exercise price per share of the stock option or SAR; or (iv) issue substitute awards.

A change in control generally means any of the following: (i) the acquisition of 50% or more of our outstanding voting securities; (ii) a change in the membership of our board of directors, so that the current incumbents and their approved successors no longer constitute a majority; (iii) consummation of a merger, reorganization or consolidation, unless the owners of our voting securities own 50% or more of the resulting corporation; or (iv) the sale or other disposition of all or substantially all of our assets.

Forfeiture or Repayment of Awards. If a participant has engaged in detrimental activity, then, upon notice from the compensation committee, the participant shall forfeit all outstanding awards, return any shares held by the participant that were acquired under the 2011 Plan within two years prior to the date of participant’s initial commencement of the detrimental activity, and repay the company in cash for any shares that were acquired under the 2011 Plan within two years prior to the date of participant’s initial commencement of the detrimental activity, but previously disposed of by the participant. Detrimental activity generally means violations of any non-compete, non-solicitation, confidentiality, or ownership of works covenants, each as set forth in any agreement between the participant and the company or a subsidiary, including, but not limited to, the award agreement or any severance plan maintained by the company or a subsidiary that covers the participant. Detrimental activity also includes (i) participant’s commission of any act of fraud, misappropriation or embezzlement against or in connection with the company or any of its subsidiaries, or (ii) a conviction, guilty plea or plea of nolo contendere of participant for any crime involving dishonesty or for any felony.

Awards may also be subject to forfeiture or repayment pursuant to the terms of any compensation recovery policy adopted to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act or any rules issued by the SEC or the NYSE American.

Transferability. Except as our board of directors or compensation committee otherwise determines, awards granted under the 2011 Plan will not be transferable by a participant other than by will or the laws of descent and distribution. Except as otherwise determined by our compensation committee, any stock options and SARs will be exercisable during a participant’s lifetime only by him or her or, in the event of the participant’s legal incapacity to do so, by his or her guardian or legal representative. Any award made under the 2011 Plan may provide that any common shares issued or transferred as a result of the award will be subject to further restrictions upon transfer.

Adjustments. In the event of any equity restructuring, such as a stock dividend, stock split (including the reverse stock split under Item 3), spinoff, rights offering or recapitalization through a large, nonrecurring cash dividend, our compensation committee will adjust the number and kind of shares that may be delivered under the 2011 Plan, the individual award limits, and, with respect to outstanding awards, the number and kind of shares subject to outstanding awards, the exercise price, and the grant price or other price of shares subject to outstanding awards, to prevent dilution or enlargement of rights. In the event of any other change in corporate capitalization, such as a merger, consolidation or liquidation, the compensation committee may, in its discretion, cause there to be such equitable adjustment as described in the foregoing sentence, to prevent dilution or enlargement of rights. Any such adjustment will be made by our compensation committee, whose determination will be conclusive.

Prohibition on Re-Pricing. Subject to adjustment as described under “Adjustments” immediately above, the 2011 Plan does not permit, without the approval of our stockholders, what is commonly known as the “re-pricing” of stock options or SARs, including:

FEDERAL INCOME TAX CONSEQUENCES

The following discussion is limited to a summary of the U.S. federal income tax provisions relating to the grant, exercise and vesting of awards under the 2011 Plan. The tax consequences of awards may vary according to country of participation. Also, the tax consequences of the grant, exercise or vesting of awards vary depending upon the particular circumstances, and it should be noted that income tax laws, regulations and interpretations change frequently. Participants should rely upon their own tax advisors for advice concerning the specific tax consequences applicable to them, including the applicability and effect of state, local and foreign tax laws.

Tax Consequences to Participants

Nonqualified Stock Options. In general, (i) a participant will not recognize income at the time a nonqualified option is granted; (ii) a participant will recognize ordinary income at the time of exercise in an amount equal to the excess of the fair market value of the shares on the date of exercise over the option price paid for the shares; and (iii) at the time of sale of shares acquired pursuant to the exercise of the nonqualified option, appreciation (or depreciation) in value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held.

Incentive Stock Options. A participant will not recognize income at the time an ISO is granted or exercised. However, the excess of the fair market value of the shares on the date of exercise over the option price paid may constitute a preference item for the alternative minimum tax. If shares are issued to the optionee pursuant to the exercise of an ISO, and if no disqualifying disposition of such shares is made by such optionee within two years after the date of the grant or within one year after the issuance of such shares to the optionee, then upon sale of such shares, any amount realized in excess of the option price will be taxed to the optionee as a long-term capital gain and any loss sustained will be a long-term capital loss. If shares acquired upon the exercise of an ISO are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such shares as of the time of exercise (or, if less, the amount realized on the disposition of such shares if a sale or exchange) over the option price paid for such shares. Any further gain (or loss) realized by the participant generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period.

SARs. A participant will not recognize income upon the grant of a SAR. The participant generally will recognize ordinary income when the SAR is exercised in an amount equal to the cash and the fair market value of any unrestricted shares received on the exercise.

Restricted Shares. A participant will not be subject to tax until the shares of restricted shares are no longer subject to forfeiture or restrictions on transfer for purposes of Section 83 of the Code. At that time, the participant will be subject to tax at ordinary income rates on the fair market value of the restricted shares (reduced by any amount paid by the participant for such restricted shares). However, a participant who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of such shares over the purchase price, if any, of such restricted shares. Any appreciation (or depreciation) realized upon a later disposition of such shares will be treated as long-term or short-term capital gain depending upon how long the shares have been held.

Restricted Share Units. A participant will not recognize income upon the grant of restricted share units. Upon payment of the awards, the participant generally will recognize ordinary income in an amount equal to the cash and the fair market value of any unrestricted shares received.

Other Share-Based Awards and Cash-Based Awards. A participant generally will recognize ordinary income upon the payment of other share-based awards or cash-based awards in an amount equal to the cash and the fair market value of any unrestricted shares received.

Dividend Equivalents. Any dividend equivalents awarded with respect to awards granted under the 2011 Plan and paid in cash or unrestricted shares will be taxed to the participant at ordinary income rates when received by the participant.

Section 409A. The 2011 Plan permits the grant of various types of awards that may or may not be exempt from Section 409A of the Code. If an award is subject to Section 409A, and if the requirements of Section 409A are not met, the taxable events as described above could apply earlier than described and could result in the imposition of additional taxes and penalties. Restricted shares awards, unrestricted shares awards, stock options and SARs that comply with the terms of the 2011 Plan are designed to be exempt from the application of Section 409A. Restricted share units and dividend equivalents granted under the 2011 Plan will be subject to Section 409A unless they are designed to satisfy the short-term deferral exemption (or another applicable exception). If not exempt, those awards will be designed to meet the requirements of Section 409A in order to avoid early taxation and penalties.

Tax Consequences to Us. When a participant recognizes ordinary compensation income as a result of an award granted under the 2011 Plan, we may be permitted to claim a federal income tax deduction for such compensation, subject to various limitations that may apply under applicable law.