UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20032004
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission file number 0-22686
PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-4078884 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4C Cedarbrook Drive | |
Cranbury, New Jersey | 08512 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (609) 495-2000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ][X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] No [X]
As of September 26, 2003,13, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $68,701,648,$102,282,865, computed by reference to the price at which the common stock was last sold on December 31, 2002.2003.
As of September 26, 2003, 43,215,05213, 2004, 53,980,506 shares of the registrant's common stock, par value $.01 per share, were outstanding.
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PART I
Page | ||
Item 1. | Business | 4 |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item | Submission of Matters to a Vote of Security Holders | |
PART II
PART III
Item 10. | Directors and Executive Officers of the Registrant | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions | |
Item 14. | Principal | |
72* |
*Incorporated by reference from our definitive proxy statement relating to the 2004 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days after our June 30, 2004 fiscal year end.
PART IV
Item | Exhibits, Financial Statement Schedules and Reports on Form 8-K | Page |
Signatures | Page |
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PART I
Forward-looking statements
Statements in this annual report on Form 10-K, as well as oral statements that may be made by Palatin or by officers, directors, or employees of Palatin acting on Palatin’s behalf, that are not historical facts constitute “forward-looking statements” which are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. The forward-looking statements in this annual report on Form 10-K do not constitute guarantees of future performance. Investors are cautioned that statements which are not strictly historical statements contained in this annual report on Form 10-K, including, without limitation, current or future financial performance, management’s plans and objectives for future operations, clinical trials and results, product plans and performance, management’s assessment of market factors, as well as statements regarding the strategy and plans of the companyCompany and its strategic partners, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any results expressed or implied by such forward-looking statements. The Company’s future operating results are subject to risks and uncertainties and are dependent upon many factors, including, without limitation, the risks identified under the caption “Factors Affecting Our Business Condition” and elsewhere in this annual report, as well as in our other Securities and Exchange Commission filings.
Overview
We are a development stage biopharmaceutical company primarily focused on discovering and developing melanocortin (MC) based(“MC”)-based therapeutics, which we believe is one of the fastest growing areas of pharmaceutical research and development. The MC family of receptors has been identified with a variety of conditions and diseases, including sexual dysfunction, obesity, anorexia, cachexia (extreme wasting, generally secondary to a chronic disease), inflammation and drug abuse.inflammation. Our objective is to become a worldwide leader in MC basedMC-based therapeutics by pursuing a strategy based on commercializing our products under development and identifying new product targets through the utilization of our patented drug discovery platform.
PT-141 is our lead therapeutic drug candidateIn August 2004, we entered into a collaboration agreement with King Pharmaceuticals, Inc., a specialty pharmaceutical company, to jointly develop and is now in clinical development for the treatment of both male and female sexual dysfunction. We completed a Phase 2B trial with PT- 141 in male patients in September 2003 and we anticipate announcing results of this trial in the fourth quarter of calendar year 2003. LeuTech®, is our proprietary radiolabled monoclonal antibody for imaging and diagnosing infections. We commenced the biologics license application (BLA) amendment filings to the Food and Drug Administration (FDA) in the first half of calendar year 2003 and anticipate remitting the final BLA amendment filing to the FDA
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in the fourth quarter of calendar year 2003. We expect to receive a complete response from the FDA regarding our BLA amendment filings in the first half of calendar year 2004. We are also conducting additional clinical trials of LeuTech to expand its market potential as a imaging agent for other indications such as osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging. In addition, we have several preclinical drug candidates under investigation for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation utilizing our patented drug discovery platform.
Our near-term business strategy focuses on the continued advancement of our two late-stage products under development,commercialize PT-141, our lead therapeutic drug candidate for the treatment of both male and female sexual dysfunctiondysfunction.
In July 2004, we announced the receipt of full approval from the U.S. Food and LeuTech,Drug Administration (“FDA”) to market NeutroSpec™, our proprietary radiolabledradiolabeled monoclonal antibody product, for imaging of patients with equivocal signs and diagnosing infections.symptoms of appendicitis who are five years of age or older. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt Imaging, a business unit of Tyco Healthcare (“Mallinckrodt”).
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Our near-term business strategy focuses on the continued development of PT-141 and supporting the commercial launch of NeutroSpec. Our long-term business strategy includes the advancement of our preclinical product pipeline and identification of new product targets through the utilization of our patented drug discovery platform, moving towards the commercialization of a broad portfolio of therapeutic products. Key elements of our business strategy include:
We incorporated in Delaware in 1986 and commenced operations in the biopharmaceutical area in 1996. Our executive offices and research facility are located at 4C Cedar Brook Drive, Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We maintain an Internet site athttp://www.palatin.com, where among other things, we make available free of charge on and through this website our Forms 3‘s, 4‘s3, 4 and 5‘s,5, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) and Section 16 of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Annual Reportannual report on Form 10-K.
Products and Technologies in Research and Development
We do not currently offer any products for sale. We are concentrating our efforts on the following proposed products and indications:
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PT-141. PT-141, our lead therapeutic drug candidate, is a novel, patented, nasally administered peptide that is under investigationin clinical development for the treatment of both male erectile dysfunction (MED) and female sexual arousal disorders (FSAD).dysfunction. PT-141 is a synthetic analog of the naturally occurring hormone alpha-MSH (melanocyte-stimulating hormone). It is an MC receptor based therapeutic. The MSH class of hormones are potent regulators of a variety of physiological and behavioral functions, including the natural physiological sexual response. Our research suggests that PT-141 works through activation of MC receptors in the central nervous system rather than acting directly on the vascular system, which is a different mechanism of action from currently marketed MEDmale Erectile Dysfunction (“ED”) therapies. As a result, it may offer significant safety and therapeutic benefits over currently marketed products.
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We have completed various Phase 1 safety studies and Phase 2A and Phase 2B efficacy studies in male subjects and patients. On April 27, 2003, we announced and presented positive resultsWe plan to initiate an additional Phase 2B efficacy study in male patients with ED during the first half of our PT- 141calendar year 2005. We have completed a Phase 1 safety study in female subjects. We plan to initiate a Phase 2A studies at the Sexual Medicine Society of North America meeting at the American Urological Association (AUA) Annual Meeting. Hunter Wessells, M.D., Associate Professor of Urology at the University of Washington — Seattle, presented clinical data on the safety and efficacy of PT-141. The data demonstrate that PT-141 produced a statistically significant improvementstudy in erectile function across a wide range of erectile dysfunctionfemale patients with no clinically significant adverse effects. These Phase 2A studies were conducted in men with mild, moderate and severe MED, including patients with hypertension, hyperlipidemia, diabetes and depression. The Phase 2A studies consistedFemale Sexual Arousal Disorder (“FSAD”) during the second half of one study of 24 patients responsive to Viagra and a second study of 24 patients with an inadequate response to Viagra (patients able to complete sexual intercourse less than 25% of the time after taking a 100mg dose of Viagra). Several analyses were conducted of the data from these Phase 2A clinical trials in 48 men. The data demonstrated that:
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Table of Contentscalendar year 2004.
We completed a Phase 2B at-home dose-ranging study with PT-141 in patients with MEDED in September 2003 and anticipate announcingpresented the safety and efficacy data at the 8th Annual Leadership Conference on Sexual, Cardiovascular and Metabolic Syndrome Related Therapies held on November 1, 2003 in Los Angeles. This placebo-controlled, randomized, double-blind, parallel group study enrolled 271 sildenafil-responsive men with mild/moderate and severe ED at 21 sites. Importantly, the trial included patients with co-morbidities such as diabetes, hypertension, hyperlipidemia, and smoking. Participants were confirmed by patient history to be responsive to sildenafil (Viagra®) and had a baseline International Index of Erectile Function – Erectile Function domain (IIEF-EF) score of between six and twenty-one. The IIEF-EF is a standardized sexual function questionnaire used by urologists, which includes questions on a man’s ability to achieve and maintain an erection. To evaluate PT-141‘s effect versus placebo, researchers compared baseline scores with scores reported after treatment. Enrolled patients were randomized to either placebo, 5 mg, 10 mg, 15 mg or 20 mg of PT-141 for a one month treatment period.
Results show that treatment with PT-141 improved patients’ erectile function, achieving both clinical and statistical significance for the following parameters (p < 0.05 or better):
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• | IIEF-EF domain scores, the primary efficacy endpoint for the study, at the 10 mg and higher doses relative to placebo; | |
• | Restoration of normal erectile function defined as a score of 26 or more points on the EF domain of the IIEF questionnaire at all four PT-141 doses relative to placebo; and | |
• | Improvement in the quality of erections as assessed by the Global Assessment Questionnaire score was highly significant for all four doses of PT-141 relative to placebo. |
All doses of PT-141 demonstrated safety; importantly, there were no reports of hypotension or syncope at any PT-141 dose level. The 5 mg and 10 mg doses were well-tolerated. The most common adverse events in these doses were mild to moderate in intensity and included bad aftertaste, facial flushing, nausea, post-nasal drip, fatigue and headache. Of the 271 patients randomized into the study, approximately 12% discontinued due to adverse events. Discontinuations due to gastrointestinal adverse events were limited almost exclusively to patients taking the 15 mg and 20 mg doses. Patients who took multiple 15 mg and 20 mg doses of PT-141 tolerated the drug well.
A total of 30 patients in this Phase 2B study from five different trial locations who responded to PT-141 and were also sildenafil users were interviewed by an independent market research firm following the study to better understand their experience with PT-141. The research indicates that:
• | Approximately 70% of patients considered PT-141 to be as or more effective than sildenafil; | |
• | The quality of erection achieved with PT-141 is perceived to be comparable or superior to sildenafil in 83% of patients; | |
• | PT-141 has a longer duration of action and onset time was more rapid than sildenafil; and | |
• | Many patients highlighted the “initiating” aspect (could feel the drug working) of PT-141 as a positive differentiator to sildenafil. |
In May 2004, we announced that Hunter Wessells, M.D., FACS, Associate Professor with the Urology Clinic of the University of Washington, Harborview Medical Center, presented the results of this trialPhase 2B study at the American Urological Association (AUA) Annual Meeting, which took place in San Francisco May 8 – 13, 2004.
In June 2004, we announced an overview of the positive results from a clinical study evaluating the co-administration of PT-141 and Viagra®. The purpose of the PT-141 and Viagra co-administration clinical study was to evaluate the potential synergistic effect of treating ED patients with both PT-141, which has a novel central nervous system mechanism of action, and Viagra, a peripheral agent which is a type V phosphodiesterase inhibitor. The results of this study indicate that the co-administration of low doses of both PT-141 and Viagra resulted in an increased degree of erectile activity relative to Viagra alone and that patients subjectively reported a better quality of erection relative to Viagra alone.
Study Design
• | The objective of this clinical study was to evaluate the efficacy and safety of co-administration of Viagra with PT-141 to 20 patients with ED. | |
• | RigiScan® (a device for impotence testing) monitoring was employed over a six hour monitoring period to evaluate the duration and magnitude of each patient’s erectile response. Two 30-minute episodes of visual sexual stimulation (VSS) were included in the six hour RigiScan monitoring period. | |
• | The study was designed as a double-blind, randomized, placebo-controlled, three-way crossover study evaluating the following three treatment arms: |
• | ” Co-administration “: 25 mg Viagra and 7.5 mg PT-141 intranasal spray; | |
• | ” Viagra-alone “: 25 mg Viagra and placebo intranasal spray; | |
• | ” Placebo “: placebo tablet and placebo intranasal spray. |
Study Results
• | Over the six hour RigiScan monitoring period, patients receiving the Co-administration treatment had, on average, increased erectile activity as compared to patients receiving either the Viagra-alone or Placebo treatment. The differences were statistically significant. | |
• | Patients were also asked to evaluate the quality of their erection on a visual analog scale (1-10 scale). Patients receiving the Co-administration treatment rated their best erection an average score of 8.2 compared to 6.8 for the Viagra-alone treatment and 5.7 for the Placebo treatment. This difference between Co-administration and Viagra-alone quality-of-erection scores was also statistically significant. |
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Collaborative Development and Marketing Agreement with King. In August 2004, we entered into a collaboration agreement with King Pharmaceuticals, Inc., a specialty pharmaceutical company, to examine safetyjointly develop and efficacycommercialize PT-141. Pursuant to the terms of the agreement, Palatin has granted King a co-exclusive license with Palatin to develop and market PT-141 in North America and an exclusive right to collaborate in the licensing or sublicensing the development and marketing of PT-141 for MED acrosswith Palatin outside North America. Palatin has the option to create, with King, a range of intranasally administered dosesurology specialty sales force to co-promote the product in an at-home environment. A total of 270 patients were enrolled, ranging in age from 21-70 years, all suffering from moderate to severe MED and having a history of responsiveness to Viagra® therapy.the U.S.
We have completedKing paid us $20.0 million at closing, $5.0 million of which was designated as an equity investment in Palatin. King may pay potential milestone payments to Palatin totaling up to $100.0 million for achieving certain ED and Female Sexual Dysfunction (“FSD”) development and regulatory approval targets, a Phase 1 safety studyportion of which would consist of an additional equity investment in female subjectsPalatin. After regulatory approval and commercialization of PT-141, King may also pay one-time milestone payments to us totaling up to an additional $130.0 million upon achieving specified annual North American net sales thresholds.
Under the terms of the agreement, King and Palatin will share all collaboration development and marketing costs and all collaboration net profits derived from net sales of PT-141 in North America based on an agreed percentage. King and Palatin currently plan to initiateseek a Phase 2 efficacy studypartner for PT-141 for territories outside of North America and will jointly share in female patients with FSAD in the first half of calendar year 2004.collaboration development and marketing costs and all collaboration revenues generated from those territories.
On June 24, 2003, we announced that the U.S. Patent and Trademark Office had issued U.S. patent No. 6,579,968, entitled “Compositions and Methods for Treatment of Sexual Dysfunction,” relating to PT-141. The patent covers both the specific peptide used in PT-141 and a pharmaceutical composition including the peptide for treating sexual dysfunction.
MEDED is defined as the consistent inability to attain and maintain an erection sufficient for sexual intercourse. The condition is correlated with increasing age, cardiovascular disease, hypertension, diabetes, hyperlipidemia and smoking. In addition, certain prescription drugs and psychogenetic issues may contribute to MED.ED. According to the Massachusetts Male Aging Study, more than 50% of men aged 40-70 report episodes of MEDED and more than 30 million men in the United States may be afflicted with some form of MED,ED, with less than 20% seeking treatment. The current market size for MEDED is estimated to be more than $2 billion per year. FSAD is a multifactorial condition that has anatomical, physiological, medical, psychological and social components. Studies estimate FSAD is prevalent in approximately 50% of women over the age of 30 and that greater than 35 million women in the United States may be afflicted with some form of FSAD. Female sexual dysfunctionFSD includes disorders associated with desire, arousal, orgasm and pain. There is tremendous competition to develop, market and sell drugs for the treatment of MEDED and FSAD.FSD.
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LeuTech®NeutroSpec™. LeuTech isNeutroSpec includes a proprietary, radiolabeledradioactive technetium-labeled anti-CD 15 monoclonal antibody under investigation for imaging and diagnosing infections.which selectively binds to a type of white blood cell, neutrophils, involved in the immune response. When injected into the blood stream, LeuTechNeutroSpec binds to white blood cells presentneutrophils accumulated at the infection site, labeling these cells with a radioactive tracer. As a result, physicians can rapidly image and detectlocate an infection using a gamma camera, a common piece of hospital equipment that records radioactivity. LeuTechdetects radioactivity within the body. NeutroSpec offers the advantage of direct injection and in-vivoin vivo labeling of white blood cells, leading to a rapid and highly specific functional image of an infection in less than an hour, whereas the current standard of care, ex-vivo labeledex vivo radiolabeled white blood cells, requires a blood sample to be taken from the patient, processed by a nuclear pharmacy and then re-injected into the patient, with diagnostic images usually not available until 12-24 hours later.
In December 1999,July 2004, we announced that we received full approval from the FDA accepted our LeuTech BLAU.S. Food & Drug Administration (FDA) to market NeutroSpec, a novel imaging agent, indicated for the diagnosisimaging of appendicitis in patients with equivocal signs and symptoms. In July 2000, the FDA Medical Imaging Drugs Advisory Committee (MIDAC) unanimously voted that LeuTech is safe and effective for use in the diagnosis of appendicitis in patients with equivocal signs and symptoms of appendicitis who are five years of age or older. NeutroSpec is marketed and that the data presented support the clinical utilitydistributed by our strategic collaboration partner, Mallinckrodt Imaging, a business unit of LeuTech in managing these patients. In September 2000, we received a complete response letter from the FDA where they determined that the efficacy and safety data were complete, yet additional manufacturing and process validation data were required
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prior to final approval. We are working to resolve the outstanding issues. We commenced the BLA amendment filings to the FDA in the first half of calendar year 2003 and anticipate remitting the final BLA amendment filing to the FDA in the fourth quarter of calendar year 2003. We expect to receive a complete response from the FDA regarding our BLA amendment filings in the first half of calendar year 2004.Tyco Healthcare (“Mallinckrodt”).
We are currentlyalso conducting Phase 2 studiesadditional clinical trials with LeuTechNeutroSpec to evaluate its market potential as an imaging agent for detection of other infections, includingindications such as osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging.
Strategic Collaboration Agreement with Mallinckrodt. On April 24, 2003,May 13, 2002, we announced positive resultsentered into an agreement with Mallinckrodt to amend our Strategic Collaboration Agreement dated as of a Phase 2 study to evaluateAugust 17, 1999. Under the efficacy of LeuTech in diabetic patients with suspected pedal osteomyelitis (infection in bonesterms of the foot).original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13.0 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared NeutroSpec development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10.0 million on FDA approval of the first NeutroSpec indication and on attainment of certain sales goals following product launch. We agreed to be responsible for the manufacture of NeutroSpec and Mallinckrodt agreed to pay us a transfer price on each product unit transferred to Mallinckrodt and a royalty on the net sales of NeutroSpec.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to offset a portion of the estimated expenses associated with completing the FDA review process. Additionally, timing of the original $10.0 million in milestone payments was revised to coincide with NeutroSpec’s FDA approval and achievement of future sales goals. The results were published$3.2 million has been paid in the January/February 2003 issuefull as ofThe Journal of Foot March 31, 2004 and Ankle Surgery.we received $2.0 million on August 6, 2004 upon FDA approval.
Each year, more than 250,000 Americans are diagnosed with the infection, acute appendicitis. A timely and accurate diagnosis of this infection is crucial to ensure timely treatment and to prevent complications for the patient. A delay can entail hospital observation, outpatient treatment or surgery and can lead to increased risk of peritonitis, sepsis and other complications. Conversely, a mis-diagnosedmisdiagnosed patient may experience unneeded hospital observation or unneeded surgery, which is expensive, inconvenient and utilizes limited resources. Every year, more than 350,000 patients present with equivocal appendicitis. Thisappendicitis — this is when a specific diagnosis is uncertain and further testing is needed. In this situation, it is not always clear if the patient has appendicitis or another medical problem; nor is it exactly clear where the site of infection is located.
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We believe that LeuTechNeutroSpec may improve patient diagnosis for appendicitis and that it has the potential to improve diagnosis of other acute and chronic infections, such as osteomyelitis, (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging. The existing market for nuclear medicine diagnostics is approximately $3.6 billion. In 2002, approximately2003, over 700,000 patients were diagnosed with LeuTech’sNeutroSpec’s target indications.
Strategic Collaboration Agreement with Mallinckrodt. On May 13, 2002, we entered into an agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., to amend our Strategic Collaboration Agreement dated as of August 17, 1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared LeuTech development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10 million on FDA approval of the first LeuTech indication and on attainment of certain sales goals following product launch. We agreed to be responsible for the manufacture of LeuTech and Mallinckrodt agreed to pay us a transfer price on each product unit transferred to Mallinckrodt and a royalty on the net sales of LeuTech.
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Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to offset a portion of the estimated expenses associated with completing the FDA review process. Additionally, timing of the original $10 million in milestone payments has been revised to coincide with LeuTech’s anticipated FDA approval and achievement of future sales goals. Of the $3.2 million, $1.2 million has been paid to date. We expect to receive the remaining $2 million in the fourth quarter of calendar year 2003.
MIDAS™ (Metal Ion-induced Distinctive Array of Structures).. MIDAS is a proprietary platform technology that allows us to routinely design and synthesize novel pharmaceuticals that mimic the activity of peptides, but which we believe offer significant advantages to conventional protein or peptide-based drugs. MIDAS uses metal ions to fix the three-dimensional shape of peptides, forming conformationally rigid molecules that remain folded specifically in their active forms. These MIDAS molecules are simple to synthesize, are chemically and proteolytically stable, and have the potential to be orally bioavailable. Moreover, unlike most other drug discovery approaches, we believe that MIDAS is unique in that it can be used to generate either receptor antagonists (drugs that block a particular metabolic response) or agonists (drugs that promote a particular metabolic response). In addition, MIDAS molecules are information-rich and provide data on structure-activity relationships that can be used to design traditional small molecule, non-peptide drugs.
We have initiated a MIDAS program to discover and develop compounds that interact with the MC family of receptors. MC receptors regulate a diverse array of functions such as pigmentation, adrenocortical function, immune modulation, sexual arousal and energy maintenance. Based on this effort, we have identified several MIDAS molecules that are now in preclinical development as potential treatments for sexual dysfunction, obesity, cachexia and inflammation. We expect to file an INDInvestigational New Drug Application (“IND”) for at least one of these preclinical compounds andto initiate clinical testing within the next 12 months.
We have recently identified a series of lead compounds that decrease food intake and body weight in normal and genetically-obese animals. In June 2004, we announced that data on this activity of our lead series of melanocortin receptor, small molecule agonists, under development for the first halftreatment of calendar year 2004.obesity, were presented at the 8th Annual American Neuroendocrine Society (ANS) Neuroendocrine Workshop. The ANS Workshop, titled “Neuroendocrinology of Energy Balance and Obesity,” took place June 13, 2004 at the Hotel Monteleone in New Orleans, LA.
Generation of commercially viable protein and peptide drug molecules with desirable properties continues to be arduous, expensive and labor-intensive. We believe that our MIDAS technology simplifies the development process by eliminating many of the inherent limitations associated with peptides and proteins. We intend to seek to enter into strategic alliances or collaborative arrangements to provide additional financial and technical resources for MIDAS development.
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Research and Development.Development. Our current research and development efforts primarily focus on two areas: melanocortin based therapeutics and diagnostic imaging. By combining these areas, wetherapeutics. We believe our technologies will facilitate the development of a portfolio of potential products. Over the last three fiscal years, we have spent approximately the following amounts on company-sponsored research and development activities:
• | year ended June 30, 2004: $23.3 million | |
• | year ended June 30, 2003: $17.4 million | |
• | year ended June 30, 2002: $12.1 million |
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Our products under development will compete on the basis of quality, performance, cost effectiveness, and application suitability with numerous established products and technologies. Additional products using new technologies which may be competitive with our proposed products may also be introduced by others. Many of the companies selling or developing competitive products have financial, manufacturing and distribution resources significantly greater than ours.
The pharmaceutical and biotechnology industry is characterized by extensive research efforts and rapid technological change and there are many companies that have developed or are working to develop products similar to ours. There are currently several FDA-approved drugs for MEDED in the United States and in certain foreign markets. We are aware of several products under clinical development for both MED and FSAD. We cannot assure you that our competitors will not succeed in the future in developing products that are more effective than any that we are developing. We believe that our ability to compete in the sexual dysfunction market depends on a number of factors including the success and timeliness with which we complete FDA trials, the breadth of applications, if any, for which our products receive approval, and the effectiveness, cost, safety and ease of use of our products in comparison to the products of our competitors.
We are aware of one company marketing an antibody-based product which may compete with LeuTechNeutroSpec as to certain indications. The competing product is marketed in some European countries. Palatin isWe are also aware of at least one other company developing a peptide-based product which may also compete with LeuTechNeutroSpec as to certain indications. In addition, other technologies may also be used to diagnose appendicitis, including computerized tomography or CT scan, and ultrasound technologies.
We have many competitors, including pharmaceutical and biotechnology companies. Many of these competitors have substantially greater capital and other resources than we do and may represent significant competition for us. Such companies may succeed in developing technologies and products that are more effective or less costly than any of those that we may develop. Such companies may be more successful than us in developing, manufacturing and marketing products. Furthermore, there are several well-established products in our target markets that we will have to compete against. We cannot guarantee that we will be able to compete successfully in the future or that developments by others will not render our proposed products under development or our future product candidates obsolete or non-competitive or that our collaborators or customers will not choose to use competing technologies or products.
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Patents and Proprietary Information
Patent protection.protection. Our success will depend in substantial part on our ability to obtain, defend and enforce patents, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and abroad. We aggressively seek patent protection for our technology and products in the United States and, selectively, in those foreign countries where protection is important to the development of our business.
We own or have rights to United States and foreign patents and pending applications directed to radiolabeling of antibodies, antibody fragments, and peptides; MIDAS peptides; small molecules; and methods for making and using the foregoing in diagnostic and therapeutic applications.
We have exclusive rights to patents and applications relating to PT-141 for sexual dysfunction, and own an issued United States patent and pending United States and foreign applications covering PT-141. The claims of patents that issue covering PT-141 may not provide meaningful protection. In addition, even if such patents issue they may not be valid.
We own patents covering certain aspects of the LeuTechNeutroSpec product, but the claims of those patents may not be effective to prevent others from developing competing products. In addition, the validity of these patents has not been determined.
In the event that a third party has also filed a patent application relating to an invention we claimed in a patent application, we may be required to participate in an interference proceeding adjudicated by the United States Patent and Trademark Office to determine priority of invention. The possibility of an interference proceeding could result in substantial uncertainties and cost, even if the eventual outcome is favorable to us. An adverse outcome could result in losing patent protection for the subject of the interference, subjecting us to significant liabilities to third parties and requiring us to obtain licenses from third parties at undetermined cost or to cease using the technology.
Future patent infringement.infringement. We do not know for certain that our commercial activities will not infringe upon patents or patent applications of third parties, some of which may not even have been issued yet. Although we are not aware of any valid U.S. patents which are infringed by PT- 141PT-141 or LeuTechNeutroSpec or by our methods of making PT-141 and LeuTech,NeutroSpec, we cannot exclude the possibility that such patents might exist or arise in the future. We may be unable to avoid infringement of any such patents and may have to seek a license, defend an infringement action, or challenge the validity of such patents in court. Patent litigation is costly and time consuming. If we do not obtain a license under any such patents, are found liable for infringement, or if such patents are not found to be invalid, we may be liable for significant money damages, may encounter significant delays in bringing products to market, or may be precluded from participating in the manufacture, use or sale of products or methods of treatment covered by such patents.
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Government rights.rights. Some of our patents are directed to inventions developed internally or within academic institutions from which we previously acquired rights to such patents with funds from United States government agencies. As a result of these arrangements, the United States government may have rights in certain inventions developed during the course of the performance of federally funded projects, as required by law or agreements with the funding agency. In addition, we may be required to manufacture in the United States products to be sold in the United States.
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Proprietary information. We rely on proprietary information, such as trade secrets and know-how, which is not patented. We have taken steps to protect our unpatented trade secrets and know-how, in part through the use of confidentiality agreements with our employees, consultants and certain contractors. If our employees, scientific consultants or collaborators or licensees develop inventions or processes independently that may be applicable to our product candidates, disputes may arise about ownership of proprietary rights to those inventions and processes. Such inventions and processes will not necessarily become our property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.
If trade secrets are breached, our recourse will be solely against the person who caused the secrecy breach. This might not be an adequate remedy to us, because third parties other than the person who causes the breach will be free to use the information without accountability to us. This is an inherent limitation of the law of trade secret protection.
Governmental Regulation
The FDA, comparable agencies in foreign countries and state regulatory authorities have established regulations and guidelines which apply to, among other things, to the clinical testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, promotion and marketing of our proposed products. Noncompliance with applicable requirements can result in fines, recalls or seizures of products, total or partial suspension of production, refusal of the regulatory authorities to approve marketing applications, withdrawal of approvals and criminal prosecution.
After approving a product for marketing, the FDA may require post-marketing testing, including extensive Phase 4 studies, and surveillance to monitor the effectssafety and effectiveness of the product in general use. The FDA may withdraw product approvals if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, the FDA may impose restrictions on the use of a drug that may limit its marketing potential.
Good manufacturing practices.practices. In addition to obtaining approval of either a biologics license application or new drug application approval from the FDA for any of our proposed products, if the proposedproducts; any facility that manufactures such a product is manufactured in the United States,must comply with current good manufacturing practices. This means, among other things, that the drug manufacturing establishment must be registered with, and will be inspected by, the FDA. Such drugForeign manufacturing establishments are subject to biennial inspections by the FDA, and must comply with good manufacturing practices regulations enforced by the FDA. To supply products for use in the United States, foreign manufacturing establishments mustalso comply with good manufacturing practices and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in such other countries under reciprocal agreements with the FDA. In complying with standards established by the FDA, manufacturing establishments must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. We depend on contract manufacturing establishments, both in the United States and in foreign countries, to manufacture components of LeuTechNeutroSpec and PT-141. We currently have agreements in place for the manufacture of LeuTech and PT-141.NeutroSpec. We anticipate that contract manufacturing establishments will continue to manufacture PT-141 and proposed products resulting from MIDAS technology.
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Third-Party Reimbursements
Successful sales of our proposed products in the United States and other countries will depend on the availability of adequate reimbursement from third-party payors such as governmental entities, managed care organizations and private insurance plans. Reimbursement by a third-party payor may depend on a number of factors, including the payor’s determination that the product has been approved by the FDA for the indication for which the claim is being made and the use of athe product is safe and efficacious, neither experimental nor investigational, medically necessary, appropriate for the specific patient and cost effective. Since reimbursement by one payor does not guarantee reimbursement by another, we may be required to seek approval is required from each payor individually, seekingindividually. Seeking such approvals is a time-consuming and costly process. Third-party payors routinely limit reimbursement coveragethe product that they will cover and the amount of money that they will pay and in many instances are exerting significant pressure on medical suppliers to lower their prices. There is significant uncertainty concerning third-party reimbursement for the use of any pharmaceutical product incorporating new technology, and we are not sure whether third-party reimbursement will be available for our proposed products once approved, or that the reimbursement, if obtained, will be adequate. Less than full reimbursement by governmental and other third-party payors for our proposed products would adversely affect the market acceptance of these proposed products. Further, health care reimbursement systems vary from country to country, and we are not sure whether third-party reimbursement will be made available for our proposed products under any other reimbursement system.
Manufacturing and Marketing
To be successful, our proposed products will need to be manufactured in commercial quantities under current good manufacturing practices requirements prescribed by the FDA and at acceptable costs. We do not have the facilities to manufacture any of our proposed products in commercial quantities under good manufacturing practices. We intend to rely on collaborators, licensees or contract manufacturers for the commercial manufacture of our proposed products.
We are dependent on DSM N.V. of the Netherlands for the manufacture of the LeuTechNeutroSpec drug substance and intermediate drug product stages and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of the LeuTechNeutroSpec drug product stage. The failure of either of these manufacturers to comply with FDA current good manufacturing practices or to supply these key components of LeuTechNeutroSpec on a timely basis or at all, would force us to seek alternative sources of supply and could interfere with our ability to deliver product on a timely basis or at all. Establishing relationships with new suppliers, any of whom must be FDA-approved, is a time-consuming and costly process.
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Proposed products resulting from PT-141 and our MIDAS technology are synthetic peptides. The peptides are synthesized from readily available amino acids, and the production process involves well-established technology. We currently contract with third-party manufacturers for the production of peptides and anticipate doing so in the future.
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If LeuTech is approved for marketing by the FDA, we willWe rely on our arrangement with Mallinckrodt/TycoMallinckrodt to market, sell and distribute LeuTech.NeutroSpec. We will have limited control over these activities.
We intend to package and ship our radiopharmaceutical products in the form of non-radioactive kits. Prior to patient administration, the product would beis radiolabeled with the specified radioisotope, generally by a specialized radiopharmacy. We do not intend to sell or distribute any radioactive substances.
Product Liability and Insurance
Our business may be affected by potential product liability risks which are inherent in the testing, manufacturing and marketing of our proposed products. We have liability insurance providing up to $5,000,000$10.0 million coverage in the aggregate as to product and to certain clinical trial risks, and we will seek to obtain additional product liability insurance before the commercialization of our proposed products.risks.
Employees
As of September 15, 2003,1, 2004, we employed 5166 persons full time, of whom 4156 are engaged in research and development activities and 10 are engaged in administration and management. Nineteen21 of our employees hold Ph.D. degrees and one is an M.D.degrees. We have been successful in attracting skilled and experienced scientific personnel, however, competition for personnel in our industry is intense.
None of our employees are covered by a collective bargaining agreement. All of our employees have executed confidentiality agreements. We consider relations with our employees to be good.
From time to time, we hire scientific consultants to work on specific research and development programs. We also rely on independent organizations, advisors and consultants to provide services, including most aspects of manufacturing and some aspects of regulatory approval and clinical management. Our independent advisors and consultants sign agreements that provide for confidentiality of our proprietary information.
Our corporate offices and research and development facility are located at 4C Cedar Brook Drive, Cedar Brook Corporate Center, Cranbury, NJ 08512, where we lease approximately 28,000 square feet under a lease which expires July 17, 2012. Our previous corporate offices were located at 103 Carnegie Center, Suite 200, Princeton, NJ 08540, whereand we have sublet approximately 7,300 square feet to a third party approximately 7,300 square feet under a lease which expires December 15, 2004. The leased properties are in good condition.
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Following the termination of our proposed merger with San Diego-based Molecular Biosystems, Inc. in March 2000, Molecular Biosystems commenced a legal action against us, seeking damages arising from the alleged improper termination of the merger agreement. We denied the material allegations. In August 2002, in order to avoid the ongoing costs of the litigation and consumption of our time, we settled this litigation with Molecular Biosystems for $400,000, which we had accrued as of June 30, 2002. There are no material legal proceedings pending against us.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2003.2004.
PART II
Item 5. Market for Registrant's Common Equity, and Related Stockholder Matters.Matters and Issuer Purchases of Equity Securities.
Our common stock has been quoted on The American Stock Exchange (AMEX) under the symbol PTN, since December 21, 1999. It had previously traded on The Nasdaq SmallCap Market under the symbol PLTN.
The table below provides, for the fiscal quarters indicated, the reported high and low sales prices for the common stock on AMEX since July 1, 2001.2002.
YEAR ENDED JUNE 30, 2004 HIGH LOW Fourth Quarter $4.49 $3.35 Third Quarter $4.24 $2.55 Second Quarter $5.89 $2.19 First Quarter $5.25 $2.66 YEAR ENDED JUNE 30, 2003 HIGH LOW Fourth Quarter $4.01 $1.62 Third Quarter $1.93 $1.29 Second Quarter $2.10 $1.11 First Quarter $2.20 $1.10YEAR ENDED JUNE 30, 2002 HIGH LOW Fourth Quarter $3.38 $1.62 Third Quarter $4.45 $3.05 Second Quarter $5.92 $2.00 First Quarter $5.22 $2.91
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Holders of common stock.stock. On September 26, 2003,8, 2004, we had approximately XXX280 holders of record of common stock. On September 26, 20038, 2004 the closing sales price of our common stock as reported on the AMEX was $4.21$2.82 per share.
Dividends and dividend policy.policy. We have never declared or paid any dividends. We currently intend to retain earnings, if any, for use in our business. We do not anticipate paying dividends in the foreseeable future.
Dividend restrictions.restrictions. Our outstanding Series A Preferred Stock, consisting of 11,697 shares, provides that we may not pay a dividend or make any distribution to holders of any class of stock unless we first pay a special dividend or distribution of $100 per share to the holders of the Series A preferred stock.Preferred Stock.
Securities authorized for issuance under equity compensation plans.plans.
EQUITY COMPENSATION PLAN INFORMATION AS OF JUNE 30,20032004 Number of securities remaining available forfuture issuance underNumber of securities to be Weighted-average future issuance under equitycompensation beissued upon exercise of exercise price of compensation plans(excluding ofoutstanding options, outstanding options, (excluding securitiesreflected inPlan category warrants and rights (1) warrants and rights reflected in column (a))- ------------- ----------------------- ------------------------------------------------------------------ (a) (b) (c) Equity compensation plans approved by4,476,876 $3.67 802,535security holders(1)(2) 4,755,684 $3.45 355,956 Equity compensation plans not approved by1,852,207 $3.46 0security holders____________________________1,456,187 $3.14 0 --------- ------- Total 6,211,871 355,956 ========= =======
_______________________
(1) | Does not include a total of 19 shares of aggregate fractions. No fractional shares will be issued on exercise of options or warrants. |
(2) | Includes individual option and warrant agreements we assumed when we merged with RhoMed Incorporated in 1996. Options and warrants to purchase |
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We have authorized the issuance of equity securities under the compensation plans described below, without the approval of stockholders. No additional options, warrants or rights are available for issuance under any of these plans, except for additional shares which may become purchasable under warrants with anti-dilution protection as noted below. We have already registered for resale the common stock underlying all of these plans.
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Table of Contentsoptions and warrants.
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Shares Exercise Expiration Offering Purchasable Price Date -------- ------------------- ---------- December 1998 10,000 $4.38 12-31-03 Spring 1999 194,600 $4.70 02-08-04 Spring 1999 20,000 $4.48 03-09-04 Spring 1999 50,000 $4.56 03-10-04 Spring 1999 44,073 $5.57 03-12-04----- ---- Fall 2000 216,000 $6.60 10-05-05 Fall 2000 87,884 $6.53 10-27-05 Fall 2001 134,188 $2.66 10-29-06 Fall 2001 221,872 $2.70 10-29-06SpringJune 2002 109,510 $2.75 06-13-07SummerJuly 2002 51,502 $1.46 07-29-07SummerJuly 200251,50238,627 $1.37 07-29-07 Fall 2002 458,647 $1.54 11-15-07
Recent sales of unregistered securities.securities. In closings on July 29, 2002, November 15, 2002 and March 20, 2003,January 2004, we sold a total of 24,352,099 shares of common stock and five-year warrants to purchase 5,542,075 shares of common stock inconcluded a private placementsplacement of common stock and warrants to accredited investors. The aggregatein which we sold 6,992,500 shares of these closings yielded gross proceedsour $0.01 par value common stock at an offering price of approximately $32,414,000. The warrant exercise price for 309,012 shares is $1.46 per share, the exercise price for 1,874,788 shares is $1.54, and the exercise price for 3,358,275 shares is $1.77$3.25 per share. We paid cash placement agent fees totaling approximately $1,902,000 and issuedThe investors also received 15% warrant coverage on the number of shares they purchased. Each five-year warrantswarrant entitles the holder to purchase a total of 561,651 sharesone share of common stock to placement agents for the offerings. The placement agent warrantat an exercise price for 51,502 shares is $1.46of $4.06 per share, the exercise price for 51,502 shares is $1.37 per shareshare. The gross proceeds were approximately $22.7 million and the exercise price for 458,647 shares is $1.54 per share.
net proceeds were approximately $21.0 million. We made the private offeringsplacement solely to domesticfinancial institutions and accredited investors pursuant to Regulation D and to foreign accredited investors pursuant to Regulation S, under the Securities Act of 1933. The investors represented to us that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants sold are not transferable absentbear restrictive legends. A registration or exemption from registration requirements, andstatement covering the certificates bear a legend to that effect. We have registered for resale under the Securities Act of 1933 the common stock sold and the common stock issuable on exercise of the warrants.shares by the investors was filed and subsequently declared effective by the Security and Exchange Commission in April 2004. In connection with the private placement, we paid placement fees totaling approximately $1.7 million.
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Item 6. Selected Consolidated Financial Data.
The following selected consolidated financial data has been derived from the audited consolidated financial statements of Palatin Technologies, Inc. This data should be read in conjunction with our consolidated financial statements, including the notes to the consolidated financial statements, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report.
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Selected Consolidated Financial DataTable of Contents
SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) Year Ended June 30,-------------------------------------------------------------------------------- 1999--------------------- 2004 2003 2002 2001 20002001 2002 2003 ---------------------- ---------------------- ----------- Statement of Operations Data:------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: REVENUES Grants and contracts $602,150 $4,617641 $ 81 $ 1,621 $81 $ 6414,617 License fees and royalties550165 629 200 167 500167 200 629 Other -- -- -- -- -- ---------------------- ---------------------- ----------------------- ------------ ------------ Total revenues6102,315 1,270 281 1,788 5,1171,788 281 1,270 ---------------------- ---------------------- ----------------------- ------------ ------------ OPERATING EXPENSES Research and development8,72023,333 17,439 12,117 10,109 9,11010,109 12,117 17,439General and administrative3,9575,740 4,867 5,004 3,025 4,5673,025 5,004 4,867 ---------- ------------ ----------- ----------- -----------Total operating expenses12,67729,073 22,306 17,121 13,134 13,67713,134 17,121 22,306 ----------OTHER INCOME (EXPENSE) Investment income, net of realized loss 222 248 312 788 405 Interest expense (23) (22) (3) (5) (29) ------------ ---------------------- ----------- OTHER INCOME (EXPENSES) Interest income 172 405 788 312 248 Interest expense (107) (29) (5) (3) (22) --------------------------------- ----------- ----------------------- ------------ Total other income65199 226 309 783 376783 309 226 ---------------------- ---------------------- ----------------------- ------------ ------------ Loss before income taxes&and cumulative effect of accounting change(12,002)(26,559) (20,810) (16,531) (10,563) (8,184)(10,563) (16,531) (20,810)Income tax benefit-- --241 245 392 325392 245 ------------ ------------ ---------------------- ----------------------- ------------ ------------ Loss before cumulative effect of accounting change(12,002)(26,318) (20,565) (16,139) (10,238) (8,184)(10,238) (16,139) (20,565)Cumulative effect of accounting change (1) -- -- -- (361) ---- ---------------------- ---------------------- ----------------------- ------------ ------------ NET LOSS(12,002)(26,318) (20,565) (16,139) (10,599) (8,184)(10,599) (16,139) (20,565)DEEMED DIVIDEND -- (203) (297) -- --(297) (203) ---------------------- ---------------------- ----------------------- ------------ ------------ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(12,002)(26,318) $(8,184)(20,768) $ (16,436) $ (10,599) $(16,436) $ (20,768) ==========(8,184) ============ ====================== ======================= ============ ============ Basic and diluted net loss attributable to common stockholders before cumulative effect of accounting change $(2.02)(0.55) $(1.10)(0.73) $ (1.16) $ (1.01) $(1.16) $ (0.73)(1.10) Cumulative effect of accounting change (1) -- -- -- (0.04) ---- ---------------------- ---------------------- ----------------------- ------------ ------------ Basic and diluted net loss attributable to common stockholders per common share $(2.02)(0.55) $(1.10)(0.73) $ (1.16) $ (1.05) $(1.16) $ (0.73) ==========(1.10) ============ ====================== ======================= ============ ============ Weighted average common shares outstanding5,93647,688 28,362 14,195 10,131 7,44110,131 14,195 28,362 ====================== ====================== ======================= ============ ============
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Pro forma amounts assuming accounting change applied retroactively: Net loss attributable to commonshareholdersstockholders $(12,002)(10,238) $ (8,545)$ (10,238) ============================================= Basic and diluted net loss attributable to common stockholders per common share $(2.02)(1.01) $ (1.15)$ (1.01) =================================
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Balance Sheet Data:============ BALANCE SHEET DATA (AT PERIOD END): Cash, cash equivalents and investments $2,78920,412 $5,84218,383 $ 9,105 $ 11,456 $9,123 $ 18,3835,375 Property and equipment, net1,4582,935 3,399 2,416 1,925 1,5731,925 2,416 3,399Working capital554 4,99515,879 14,742 5,783 9,3606,595 15,2494,528 Total assets4,72324,379 22,721 12,358 14,244 8,88514,244 12,358 22,721Long term debt, net of current portion2,00030 76 -- -- --76Stockholders' equity$ 341 $19,387 18,657 8,687 11,916 6,905$ 11,916 $ 8,687 $ 18,657-------------------------------------------- ------------- ---------------- -------------- --------------- --------------------------------------------------------------------------------------------------------------------------------------------
(1) In fiscal 2001, we recorded a non-cash charge for the cumulative effect related to the adoption of SEC Staff Accounting Bulletin No. 101. See Note 2 to the Consolidated Financial Statements.
Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements filed as part of this Annual Report.annual report on Form 10-K.
Critical Accounting Policies.
Our significant accounting policies are described in Note 2 to the consolidated financial statements included in this Annual Report.annual report on Form 10-K. We believe our most critical accounting policy is revenue recognition. Revenue from corporate collaborations and licensing agreements consists of up-front fees, research and development funding, and milestone payments. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate our performance period as the initial research term. The actual performance period may vary. We will adjust the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.
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Certain Recent Significant Events in Fiscal Year 2003
In August 2004, we entered into a collaboration agreement with King Pharmaceuticals, Inc., a specialty pharmaceutical company, to jointly develop and commercialize PT-141, is our lead therapeutic drug candidate and is now in clinical development for the treatment of both male and female sexual dysfunction. We completed a Phase 2B trial with PT- 141 in male patients in September 2003 and anticipate announcing results
In July 2004, we announced the receipt of this trial in the fourth
quarter of calendar year 2003. LeuTech®, is our proprietary radiolabled monoclonal antibody for imaging and diagnosing infections. We commenced the BLA amendment filings to the FDA in the first half of calendar year 2003 and anticipate remitting the final BLA amendment filing to the FDA in the fourth quarter of calendar year 2003. We expect to receive a complete responsefull approval from the FDA regardingto market NeutroSpec, our BLA amendment filingsproprietary radiolabeled monoclonal antibody product, for imaging of patients with equivocal signs and symptoms of appendicitis who are five years of age or older. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt.
In January 2004, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of approximately $22.7 million. Investors, consisting of domestic financial institutions and other accredited investors, purchased 6,992,500 shares of common stock and 1,048,875 warrants, which equates to 15% warrant coverage on the number of shares they purchased, at an offering price of $3.25 per share. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of $4.06 per share.
Results of Operations
Year Ended June 30, 2004 Compared to the Year Ended June 30, 2003
Grants and contracts – For the year ended June 30, 2004, we recognized $2.0 million in contract revenue related to the shared development costs of NeutroSpec pursuant to our collaboration agreement with Mallinckrodt, as compared to $504,000 in contract revenue for the year ended June 30, 2003. The increase in contract revenue was attributable to additional shared development costs of NeutroSpec pursuant to the amended collaboration agreement. For the year ended June 30, 2004, we recorded $149,738 in grant revenue pursuant to the Small Business Technology Transfer programs of the Department of Health and Human Services compared to $137,417 for the year ended June 30, 2003.
License Fees and Royalties – During the year ended June 30, 2001, we adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (SAB 101), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share in fiscal 2001, which reflected the deferral of an up-front license fee received from Mallinckrodt, Inc. related to licensing of NeutroSpec recognized in the first halfyear ended June 30, 2000. Previously, we had recognized up-front license fees when they were received and we had no obligations to return the fees under any circumstances. Under SAB 101, these payments are recorded as deferred revenue to be recognized over the remaining term of calendarthe related agreements. For the year 2004. Weended June 30, 2004, we recorded $165,420 of license revenue compared to $628,598 of license revenue recorded for the year ended June 30, 2003. Of the license revenue recorded for the year ended June 30, 2004, $11,569 was included in the cumulative effect adjustment as of July 1, 2000 and $153,851 was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. Of the license revenue recorded for the year ended June 30, 2003, $43,987 was included in the cumulative effect adjustment as of July 1, 2000 and $584,611 was recorded as a result of the initial $800,000 payment received from Mallinckrodt.
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Research and development – Research and development (R&D) expenses increased to $23.3 million for the year ended June 30, 2004 compared to $17.4 million for the year ended June 30, 2003. The increase in R&D was primarily related to our increased development efforts and expanding clinical trials of PT-141 and NeutroSpec. Our R&D efforts, and their respective allocated costs, are currently conducting Phase 2 studiesconcentrated on the following:
On July 24, 2003,
General and administrative – General and administrative (G&A) expenses increased to $5.7 million for the year ended June 30, 2004 compared to $4.9 million for the year ended June 30, 2003. The increase in G&A expenses is designed to examine safety and efficacy for MED across a range of intranasally administered doses of PT-141 in an at-home environment. A total of 270 patients were enrolled, ranging in age from 21-70 years, all suffering from moderate to severe MED and having a history of responsiveness to Viagra® therapy.
On June 24, 2003, we announced that the U.S. Patent and Trademark Office has issued U.S. patent No. 6,579,968, entitled “Compositions and Methods for Treatment of Sexual Dysfunction.” The approved patent covers the specific formula in PT-141. The patent covers both the specific peptide used in PT-141 and the pharmaceutical composition for treating sexual dysfunction.
In June 2003, Palatin was addedprimarily attributable to the Russell 2000(R) Index, whichincreases in marketing and business development expenses, salaries and other stock based compensation and related personnel expenses.
Investment income – Interest income increased to $350,999 for the year ended June 30, 2004 compared to $247,552 for the year ended June 30, 2003. The increase in interest income is determined by objective rules, such as market capitalization rankings, which will remain in placeattributable to higher amounts of cash, cash equivalents and investments available for a year. Russell indexes are used by investment managers for index funds and as benchmarks for both passive and active strategies. About $220 billion is invested in index funds based on Russell's indexes and an additional $850 billion is benchmarked to them. Investment managers who oversee these funds purchase shares of member stocks according to that company's weighting in the particular index.
On April 27, 2003, we announced and presented positive results of our PT-141 Phase 2A studies at the Sexual Medicine Society of North America meeting at the American Urological Association (AUA) Annual Meeting. Hunter Wessells, M.D., Associate Professor of Urology at the University of Washington — Seattle, presented clinical datapurposes. Realized losses on the safety and efficacysale of PT- 141. The data demonstrate that PT-141 produced a statistically significant improvement in erectile function across a wide range of erectile dysfunction patients withinvestments were $129,355 for the year ended June 30, 2004 compared to no clinically significant adverse effects. These Phase 2A studies were conducted in men with mild, moderate and severe MED, including patients with hypertension, hyperlipidemia, diabetes and depression. The Phase 2A studies consisted of one study of 24 patients responsive to Viagra and a second study of 24 patients with an inadequate response to Viagra (patients able to complete sexual intercourse less than 25% ofrealized gains or losses for the time after taking a 100mg dose of Viagra).year ended June 30, 2003.
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In MarchIncome tax benefit — During 2004 and 2003, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of approximately $19.1 million. Investors, consisting of domestic financial institutions and other accredited investors, purchased 13,433,096 shares of common stock and 3,358,275 warrants at a market value of approximately $1.42 per share. For every four shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.77 per share. The net proceeds of approximately $18.1 million are being used primarily for general corporate purposes, including the development and clinical trials of new products based on certain of our proprietary technologies.
In November 2002, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of approximately $11.5 million. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased 9,373,940 shares of common stock and 1,874,788 warrants at a market value of approximately $1.23
per share. For every five shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.54 per share. The net proceeds of approximately $10.7 million were used primarily for general corporate purposes, including the development and clinical trials of new products based on certain of our proprietary technologies.
In July 2002, we received gross proceeds of $1.8 million pursuant to the second closing of the Spring 2002 private placement of common stock and warrants. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased 1,545,063 shares of common stock and 309,012 warrants at a market value of approximately $1.17 per share. For every five shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.46 per share. The net proceeds of approximately $1.7 million were used primarily for general corporate purposes, including the development and clinical trials of new products based on certain of our proprietary technologies.
On July 17, 2002, we moved into our new leased facility of approximately 28,000 square feet in Cranbury,Company sold New Jersey that combines both theState net operating loss carryforwards and research and development facility formerly locatedcredits, which resulted in Edison,the recognition of $240,836 and $245,093 of income tax benefits, respectively. Assuming the State of New Jersey continues to fund this program, which is uncertain, the actual amount of net operating losses and tax credits we may sell will also depend upon the corporate offices formerly located in Princeton,allocation among qualifying companies of an annual pool established by the State of New Jersey. The lease will expire
Deemed dividend — Based on the sales price of the common stock in July 2012.private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with their existing terms. As a result, a deemed dividend of $203,138 has been reflected in the Company’s consolidated statement of operations for the year ended June 30, 2003. There was no deemed divided reflected in the Company’s consolidated statement of operations for the year ended June 30, 2004 since there was no downward adjustment of the exercise prices of certain outstanding warrants.
Year Ended June 30, 2003 Compared to the Year Ended June 30, 2002
Grants and contracts – For the year ended June 30, 2003, we recognized $504,000 in contract revenue related to the shared development costs of LeuTechNeutroSpec pursuant to our collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., as compared to no recognition of contract revenue for the year ended June 30, 2002. The increase in contract revenue was attributable to additional shared development costs of LeuTechNeutroSpec pursuant to the amended collaboration agreement. For the year ended June 30, 2003, we recorded $137,417 in grant revenue pursuant to the Small Business Technology Transfer programs of the Department of Health and Human Services compared to $80,929 for the year ended June 30, 2002.
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License Fees and Royalties – During the year ended June 30, 2001, we adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (SAB 101), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share in fiscal 2001, which reflected the deferral of an up-front license fee received from Mallinckrodt related to licensing of NeutroSpec recognized in the year ended June 30, 2000. Previously, we had recognized up-front license fees when they were received and we had no obligations to return the fees under any circumstances. Under SAB 101, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreements. For the year ended June 30, 2003, we recorded $628,598 of license revenue compared to $200,426 of license revenue recorded for the year ended
June 30, 2002. Of the license revenue recorded for the year ended June 30, 2003, $43,987 was included in the cumulative effect adjustment as of July 1, 2000 and $584,611 was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. Of the license revenue recorded for the year ended June 30, 2002, $138,888 was included in the cumulative effect adjustment as of July 1, 2000 and $61,538 was recorded as a result of the initial $800,000 payment received from Mallinckrodt.
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Research and development – Research and development (R&D) expenses increased to $17,439,191$17.4 million for the year ended June 30, 2003 compared to $12,117,026$12.1 million for the year ended June 30, 2002. The increase in R&D was primarily related to our increased development efforts and expanding clinical trials of PT-141 and LeuTech. Our R&D efforts, and their respective allocated costs, are currently concentrated on the following:
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Table of ContentsNeutroSpec.
General and administrative – General and administrative (G&A) expenses decreased to $4,866,642$4.9 million for the year ended June 30, 2003 compared to $5,004,143$5.0 million for the year ended June 30, 2002. The decrease in G&A expenses is primarily attributable to the reduction in legal expenses since the settlement with Molecular Biosystems in August 2002, which was accrued as of June 30, 2002.
Interest income – Interest income decreased to $247,552 for the year ended June 30, 2003 compared to $312,015 for the year ended June 30, 2002. The decrease in interest income is attributable to lower average amounts of cash, cash equivalents and investments available for investment purposes throughout the year and the decrease in interest rates these investments earn.
Income tax benefit — During 2003 and 2002, the Company sold New Jersey State net operating loss carryforwards and research and development credits, which resulted in the recognition of $245,093 and $392,410 of income tax benefit,benefits, respectively. Assuming the State of New Jersey continues to fund this program, which is uncertain, the actual amount of net operating losses and tax credits we may sell will also depend upon the allocation among qualifying companies of an annual pool established by the State of New Jersey.
Deemed dividend — Based on the sales price of the common stock in private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with their existing terms. As a result, a deemed dividend of $203,138 and $297,603 has been reflected in the Company’s consolidated statement of operations for the years ended June 30, 2003 and 2002, respectively. The decrease in deemed dividend between years is primarily the result of the difference in the sales price of the common stock in the private placements and the changes to the total securities outstanding during 2003 compared to 2002.
Year Ended June 30, 2002 Compared to the Year Ended June 30, 2001
Grants and contracts – For the year ended June 30, 2002, we did not recognize any contract revenue related to the shared development costs of LeuTech pursuant to our collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., as compared to $1,410,356 recognized for the year ended June 30, 2001. The decrease was attributable to the cap on shared development costs of LeuTech pursuant to the original collaboration agreement, which was reached during the year ended June 30, 2001. In May 2002 we entered into an agreement with Mallinckrodt to amend this agreement. Under the terms of this amended agreement, Mallinckrodt has committed, among other things, up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to cover half of the estimated expenses associated with completing the FDA review process of LeuTech. Grant revenue under the Small Business Innovation Research and the Small Business Technology Transfer programs of the Department of Health and Human Services decreased to $80,929 for the year ended June 30, 2002 compared the $211,069 reported for the year ended June 30, 2001.
License Fees and Royalties – During the year ended June 30, 2001, we adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share in fiscal 2001, which reflects the deferral of an up-front license fee received from Mallinckrodt, Inc. related to licensing of LeuTech recognized in the year ended June 30, 2000. Previously, we had recognized up-front license fees when they were received and we had no obligations to return the fees under any circumstances. Under SAB 101 these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreements. For the year ended June 30, 2002, we recorded $200,426 of license revenue, $138,888 of which was included in the cumulative effect adjustment as of July 1, 2000 and $61,538 was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. We recorded $166,667 of license revenue for the year ended June 30, 2001 that was included in the cumulative effect adjustment as of July 1, 2000.
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Research and development – Research and development (R&D) expenses increased to $12,117,026 for the year ended June 30, 2002 compared to $10,108,999 for the year ended June 30, 2001. The increase in R&D was primarily related to our increased development efforts and expanding clinical trials of PT-141 and LeuTech, and increased research on our MIDAS technology. Additionally, depreciation expense increased due to a change in the remaining estimated useful lives of certain leasehold improvements at our Edison, New Jersey facility which we moved out of in July 2002.
General and administrative – General and administrative (G& A) expenses increased to $5,004,143 for the year ended June 30, 2002 compared to $3,024,841 for the year ended June 30, 2001. The increase in G&A was primarily attributable to an increase in professional fees mainly related to legal fees, increase in salaries and related personnel expenses and the accrual of our settlement of litigation with Molecular Biosystems, Inc.
Interest income – Interest income decreased to $312,015 for the year ended June 30, 2002 compared to $787,574 for the year ended June 30, 2001. The decrease in interest income was due to lower level of funds available for investment purposes and lower rates of return experienced throughout the fiscal year ended June 30, 2002.
Income tax benefit — During 2002 and 2001, the Company sold New Jersey State net operating loss carryforwards and research and development credits, which resulted in the recognition of $392,410 and $325,152 income tax benefit, respectively. Assuming the State of New Jersey continues to fund this program, which is uncertain, the actual amount of net operating losses and tax credits we may sell will also depend upon the allocation among qualifying companies of an annual pool established by the State of New Jersey.
Deemed dividend — Based on the sales price of the common stock in private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $297,603 has been reflected in the Company’s consolidated statement of operations for year ended June 30, 2002. There was no dividend recorded during 2001 as the sales price of common stock issued exceeded the terms of these warrants.
Since inception, we have incurred net operating losses. As of June 30, 2003,2004, we had a deficit accumulated during the development stage of $90,808,827.$117.1 million. We have financed our net operating losses through June 30, 20032004 by a series of debt and equity financings. AtAs of June 30, 2003,2004, we had cash and cash equivalents of $14,294,603$17.9 million and investments of $4,088,384.$2.5 million. On January 28, 2004, we completed a private placement of our common stock and warrants, which yielded gross proceeds of approximately $22.7 million. Pursuant to the private placement, investors purchased approximately 7 million shares of common stock at $3.25 per share and received five year warrants to purchase approximately 1 million shares of common stock at an exercise price of $4.06 per share. The net proceeds of approximately $21.0 million are being used for the continued development of PT-141, NeutroSpec, drug discovery efforts and general corporate purposes. On August 17, 2004, we received $20.0 million upon the closing of the collaborative agreement with King Pharmaceuticals, Inc.
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Our product candidates are at various stages of research and development and may never be successfully developed or commercialized. We willreceived regulatory approval to market and sell NeutroSpec for diagnosis of appendicitis, and we need regulatory approval to market and sell LeuTech for diagnosis of appendicitis, as well as for PT-141, MIDAS products and LeuTechNeutroSpec for other indications. PT-141, MIDAS products and LeuTechNeutroSpec for other indications will require significant further research, development and testing. We may experience uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to:
Failure to obtain regulatory approval of LeuTech, or delays in obtaining regulatory approval of LeuTech for the diagnosis of appendicitis, would eliminate or delay our potential revenues from sales of LeuTech. This could make it more difficult to attract investment capital for funding our other research and development projects. Any of these possibilities could materially and adversely affect our operations.
• | the development and testing of products in animals and humans; | |
• | product approval or clearance; | |
• | regulatory compliance; | |
• | good manufacturing practices; | |
• | intellectual property rights; | |
• | product introduction; and | |
• | marketing, sales and competition. |
During the year ended June 30, 2004, our operating activities used net cash of $23.7 million and during the year ended June 30, 2003 our operating activities used net cash of $19.9 million and during the year ended June 30, 2002 our operating activities used net cash of $13.1 million. The increase resulted primarily from increased R&D spending on both PT-141 and LeuTech.NeutroSpec.
During the year ended June 30, 2004, cash provided by investing activities was $1.2 million, consisting of $198,000 used for the purchase of capital expenditures and $1.4 million provided by the sale of investment securities. During the year ended June 30, 2003, we used cash in investing activities of $4.1 million, consisting of $1.1 million of capital expenditures and $3.0 million for net purchases of investment securities.
During the year ended June 30, 2002, we used2004, net cash in investingprovided by financing activities of $2.8was $26.2 million, consisting of $1.6$26.4 million in proceeds from the issuance of common stock and warrants in private placements and the exercise of options and warrants, partially offset by $200,753 for payments on capital expenditures and $1.2 million for investment securities.
lease obligations. During the year ended June 30, 2003, net cash provided by financing activities was approximately $30.3 million, consisting of approximately $30.5 million in gross proceeds from the issuance of common stock and warrants in private placements, partially offset by $153,473 forof payments on capital lease obligations. During the year ended June 30, 2002, net cash provided by financing activities was $12.4
In January 2004, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of $22.7 million. Investors, consisting of domestic financial institutions and other accredited investors, purchased 7.0 million all of which resulted from the issuanceshares of common stock and 1.0 million warrants, in private placements.which equates to 15% warrant coverage on the number of shares they purchased, at an offering price of $3.25 per share. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of $4.06 per share. The net proceeds were $21.0, which continue to be used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
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In November 2002 and March 2003, we received aggregate gross proceeds of $30.6 million in private placements of common stock and warrants. Investors, consisting of domestic and European financial institutions and other accredited investors, purchased approximately 22.8 million shares of common stock: 9,373,940 shares at $1.23 per share and 13,433,096 at $1.42 per share. For every five shares purchased in the November 2002 offering and for every four shares purchased in the March 2003 offering, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of $1.54 for the November 2002 offering and $1.77 for the March 2003 offering. The net proceeds of approximately $28.8 million continue to bewere used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
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In July 2002, we received additional gross proceeds of $1.8 million pursuant to the second tranche of the Spring 2002 private placement of common stock and warrants. Investors, consisting of domestic and European financial institutions and other accredited investors, purchased approximately 1.5 million shares of common stock shares at $1.17 per share. For every five shares purchased, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of $1.46 per share. The net proceeds of approximately $1.7 million were used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
In November 2001 and June of 2002, we received aggregate gross proceeds of $13.44 million in private placements of common stock and warrants. Investors, consisting of domestic and European financial institutions and other accredited investors, purchased approximately 6.0 million shares of common stock: 4,902,481 shares at $2.25 per share and 1,095,097 shares at $2.20 per share. For every four shares purchased in the November 2001 offering and for every five shares purchased in the June 2002 offering, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of $2.70 for the November 2001 offering and $2.75 for the June 2002 offering. The net proceeds of approximately $12.5 million were used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
On May 13, 2002, we entered into an agreement with Mallinckrodt Inc., a division of Tyco International, Ltd., to amend our Strategic Collaboration Agreement dated as of August 17, 1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13$13.0 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared LeuTechNeutroSpec development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10$10.0 million on FDA approval of the first LeuTechNeutroSpec indication and on attainment of certain sales goals following product launch. We agreed to arrange for the manufacture of LeuTechNeutroSpec and we would receive a transfer price on each product unit and a royalty on LeuTechNeutroSpec net sales.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to offset a portion of the estimated expenses associated with completing the FDA review process. Additionally, timing of the $10$10.0 million in milestone payments has been revised to coincide with LeuTech’s anticipatedNeutroSpec’s FDA approval and achievement of future sales goals. OfAll of the $3.2 million $1.2and $2.0 million, upon FDA approval, of the milestone payments has been paid to date. We expect to receive the remaining $2 million in the fourth quarter of calendar year 2003
On July 17, 2002, we moved into our new leased facility of approximately 28,000 square feet in Cranbury, New Jersey that combines both the research and development facility formerly located in Edison, New Jersey and the corporate offices formerly located in Princeton, New Jersey. Our initial cash outlay related to the move was approximately $1.6 million. Minimum annual lease payments escalate currently from approximately $925,000 per year to $1,605,000$1.6 million per year in 2007. The lease will expire in July 2012.
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We have three license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2004 — $250,000, 2005 — $200,000,$500,000, 2006 — $200,000, 2007 — $200,000, 2008 — $200,000 and 20082009 — $200,000.
We are and expect to continue actively searching for certain products and technologies to license or acquire, now or in the future. If we are successful in identifying a product or technology for acquisition, we may require substantial funds for such an acquisition and subsequent development or commercialization. We do not know whether any acquisition will be consummated in the future.
We have incurred negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. We expect that our existing capital resources, including the funds received from King in August 2004, will be adequate to fund ourthe Company’s projected operations intothrough the fiscal year ending June 30, 2005, based on current and projected expenditure levels. No assurance can be given that we will not consume a significant amount of our available resources before that time. We plan to continue to refine our operations, control expenses, evaluate alternative methods to conduct our business and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Should appropriate sources of financing not be available, we would delay certain clinical trials and research activities until such time as appropriate financing was available.
We anticipate incurring additional losses over at least the next few years. To achieve profitability, we, alone or with others, must successfully develop and commercialize our technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and we do not know whether we will be able to achieve profitability on a sustained basis, if at all.
Commitments
As outlined in Note 5 of the Notes to our Consolidated Financial Statements, we have entered into various contractual obligations and commercial commitments. The following table summarizes our most significant contractual obligations as of June 30, 2003:2004:
PAYMENTS DUE BY PERIOD LESS THAN 1 AFTER 5 TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS YEARS Facility operating leases $10,719,000 $1,515,000 $2,651,000 $2,585,000 $3,968,000 Capital lease obligations 64,000 34,000 24,000 6,000 - License agreements 1,300,000 500,000 400,000 400,000 - ------------------------------------------------------------------------ Total contractual obligations $12,083,000 $2,049,000 $3,075,000 $2,991,000 $3,968,000 ========================================================================
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Payments due by Period ---------------------- Less than After 5 Total 1 Year 1 - 3 Years 4 - 5 Years Years ----- ------ ----------- ----------- ----- Facility operating leases $12,054,000 $1,367,000 $2,529,000 $2,888,000 $5,270,000 Capital lease obligations 283,000 199,000 64,000 20,000 - License agreements 1,050,000 250,000 400,000 400,000 - ------------------------------------------------------------------------ Total conractual obligations $13,387,000 $1,816,000 $2,993,000 $5,270,000 $5,270,000 ========================================================================
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends FASB Statement No. 123, “Accounting for Stock -Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.
In addition to the other information included in this Annual Report,annual report on Form 10-K, the following factors should be considered in evaluating our business and future prospects:
We expect to continue to incur substantial losses over the next few years and we may never become profitable.
We have never been profitable and we may never become profitable. As of June 30, 2003,2004, we had a deficit accumulated during development stage of $90,808,827$117.1 million and a loss for the year then ended of $20,565,211.$26.3 million. We anticipate substantial losses over the next few years associated with the manufacturing and marketing of LeuTechNeutroSpec for diagnosis of appendicitis, and continued research and development of PT-141, MIDAS and LeuTechNeutroSpec for other indications. We cannot be certain whether additional funds will be available when needed, or on acceptable terms. If we are unable to obtain additional financing as needed, we may reduce the scope of our operations, which willwould have a material adverse effect on our business.
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To date, we have generated no revenues from the sale of any approved products. Unless and until we receive approval from the U.S. Federal Drug Administration and other regulatory authorities for our other product candidates, we cannot sell our other products and will not have product revenues.revenues from them. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from net proceeds from the sale of future offeringsNeutroSpec products and from cash, cash equivalents and investments on hand. We will need to seek additional sources of financing, which may not be available on favorable terms, if at all. If we do not succeed in raising additional funds on acceptable terms, we may be unable to complete planned pre-clinical and clinical trials or obtain approval of our product candidates from the FDA and other regulatory authorities. In addition, we could be forced to discontinue product development, reduce or forego sales and marketing efforts and forego attractive business opportunities, which willwould have a material adverse effect on our business.
We have a limited operating history upon which to base an investment decision.
We are a development-stagean emerging company and have not yet demonstrated our ability to perform the functions necessary for the continued success of the commercialization of NeutroSpec or the successful commercialization of any of our other product candidates. The successful commercialization of our other product candidates will require us to perform a variety of functions, including:
• | continuing to undertake pre-clinical development and clinical trials; | |
• | participating in regulatory approval processes; |
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• | formulating and manufacturing products; | |
• | conducting sales and marketing activities; and | |
• | obtain additional capital. |
Our operations have been limited to organizing and staffing our Company, acquiring, developing and securing our proprietary technology and undertaking pre-clinical trials and clinical trials of our principal product candidates. These operations provide a limited basis for you to assess our ability to commercialize our product candidates and the advisability of investing in our common stock.
Development and commercialization of our proposed product and technologies involves a lengthy, complex and costly process and we may never develop or commercialize any products.other products other than NeutroSpec.
Our other product candidates are at various stages of research and development, will require regulatory approval, and may never be successfully developed or commercialized. We will need regulatory approval to market LeuTech for diagnosis of appendicitis, and we are still conducting clinical trials on the use of LeuTechNeutroSpec for other indications. PT-141 and MIDAS products will require significant further research, development and testing. You should evaluate Palatinus in light of the uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to:
• | the research, development and testing of products in animals and humans; | |
• | product approval or clearance; | |
• | regulatory compliance; | |
• | good manufacturing practices; | |
• | intellectual property rights; | |
• | product introduction; and | |
• | marketing and competition. |
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The regulatory approval process is lengthy, expensive and uncertain, and may prevent us from obtaining the research, development and testing of products in animals and humans;
Government authorities in the United States and other countries extensively regulate the advertising, labeling, storage, record-keeping, safety, efficacy, research, development, testing, manufacture, promotion, marketing and distribution of drug products under the Federal Food, Drug and Cosmetic Act, or FFDCA, in the United States and under comparable laws in most foreign countries.products. Drugs are subject to rigorous regulation by the FDA in the United States and similar regulatory bodies in other countries. The steps ordinarily required by the FDA before a new drug may be marketed in the United States are similar to steps required in most other countries and include:States:
• | completion of pre-clinical laboratory tests, pre-clinical trial and formulation studies; | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
• | submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical trials may begin; | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
• | performance of adequate and well-controlled human clinical trials to establish the safety and
The results of product development, pre-clinical studies and clinical studies are submitted to the FDA as part of a
Satisfaction of FDA pre-market approval requirements for new drugs typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. The FDA has required specific post-marketing studies for NeutroSpec, including additional clinical studies with pediatric patients and patients with specified conditions, and additional testing and development of assays. These post-marketing studies must be completed by various deadlines over the next two years. 31 If regulatory approval of any of our products is granted, it will be limited to certain disease states or conditions. The manufacturers of approved products and their manufacturing facilities will be subject to continual review and periodic inspections by the FDA and other authorities where applicable, and must comply with ongoing regulatory requirements, including the
Outside the United States our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all of the risks associated with FDA approval described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Community, or EC, registration procedures are available to companies wishing to market a product to more than one EC member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficiency has been presented, a marketing authorization will be granted. We could lose our rights to Our rights to a key antibody used in
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• | perceptions by members of the health care community, including physicians, about the safety and effectiveness of NeutroSpec; | |
• | cost-effectiveness of NeutroSpec relative to competing products and technologies; | |
• | availability of reimbursement for our products from government or other healthcare payors; | |
• | the establishment and demonstration of the clinical efficacy and safety; and | |
• | potential advantage over alternative treatment methods. |
If LeuTechNeutroSpec does not achieve adequate market acceptance, our business, financial condition and results of operations will be adversely affected.
Competing products and technologies may make LeuTechNeutroSpec and our other potential products noncompetitive.
We are aware of one company marketing an antibody-based product which may compete with LeuTechNeutroSpec as to certain indications. The competing product is marketed in some European countries. Palatin isWe are also aware of at least one other company developing a peptide-based product which may also compete with LeuTechNeutroSpec as to certain indications. In addition, other technologies may also be used to diagnose appendicitis, including computerized tomography or CT scan, and ultrasound technologies.
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We are aware that there are twothree oral FDA-approved drugs for the treatment of erectile dysfunction. Both of theseThese products and another oral drug are also approved in Europe, Japan and most of the world’s pharmaceutical markets. In addition, we are aware of at least two other products treating erectile dysfunction that have been submitted for approval in the United States, Europe and most of the world’s pharmaceutical markets. Potentially, inIn order to achieve approval and market acceptance, PT-141 may potentially be required to demonstrate efficacy and safety equivalent or superior to these other products.
The biopharmaceutical and diagnostic industries are highly competitive. We are likely to encounter significant competition with respect to LeuTech,NeutroSpec, PT-141 and our other potential products. Many of our competitors have substantially greater financial and technological resources than we do. Many of them also have significantly greater experience in research and development, marketing, distribution and sales than we do. Accordingly, our competitors may succeed in developing, marketing, distributing and selling products and underlying technologies more rapidly than us.we may. These competitive products or technologies may be more effective and useful and less costly than LeuTech,NeutroSpec, PT-141 or our other potential products. In addition, academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and may develop competing products or technologies on their own or through strategic alliances or collaborative arrangements.
Our ability to achieve significant revenues from the sale of our future products will depend, in part, on the ability of healthcare providers to obtain adequate reimbursement from Medicare, Medicaid, private insurers and other health care payers.
The continuing efforts of government and insurance companies, health maintenance organizations and other payers of health care costs to contain or reduce costs of health care may adversely affect our future revenues and ability to achieve profitability. Our ability to successfully commercialize our future products will depend, in significant part, on the extent to which health care providers can obtain appropriate reimbursement levels for the cost of our products and related treatment. Third-party payers are increasingly challenging the prices charged for diagnostic and therapeutic products and related services. Also, the trend towards managed health care in the U.S. and the concurrent growth of organizations such as HMOs, could control or significantly influence the purchase of health care services and products. In addition, legislative proposals to reform health care or reduce government insurance programs may result in lower prices or the actual inability of prospective customers to purchase our future products. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to operate profitably. Furthermore, even if reimbursement is available, it may not be available at price levels sufficient for us to realize a positive return on our investment
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If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.
Our success, competitive position and future revenues will depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. We cannot predict:
• | the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents; | |
• | if and when patents will be issued; | |
• | whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; | |
• | whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose. |
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to:
• | obtain licenses, which may not be available on commercially reasonable terms, if at all; | |
• | redesign our products or processes to avoid infringement; | |
• | stop using the subject matter claimed in the patents held by others; | |
• | pay damages; or | |
• | defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our management resources. |
If we are unable to keep our trade secrets confidential, our technologies and other proprietary information may be used by others to compete against us.
In addition to our reliance on patents, we attempt to protect our proprietary technologies and processes by relying on trade secret laws, nondisclosure and confidentiality agreements, and licensing arrangements with our employees and other persons who have access to our proprietary information. These agreements and arrangements may not provide meaningful protection for our proprietary technologies and processes in the event of unauthorized use or disclosure of such information. In addition, our competitors may independently develop substantially equivalent technologies and processes or otherwise gain access to our trade secrets or technology, either of which could materially and adversely affect our competitive position.
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Our collaboration agreements may fail or be terminated unexpectedly, which could result in asignificant delays and substantial diversionincreases in the cost of our management resources.
We are party to various arrangements with academic, governmental and corporate partners. The successful development and commercialization of the potential products covered by these arrangements will depend upon the ability of these third parties to fully perform their contractual responsibilities. If any of these parties breaches or unexpectedly terminates their agreement with us, or otherwise fails to conduct their activities in a timely manner, the development or commercialization of our potential products may be delayed. For example, we have an agreement with Mallinckrodt under which they have agreed to sell NeutroSpec. If Mallinckrodt were to become unwilling or unable to provide these services, we would have to quickly make alternative arrangements with third parties, which could significantly delay and increase the expenses associated with the commercialization of NeutroSpec.
We intend to continue to enter into additional collaborations to develop and commercialize our potential products in the future. We may not be able to negotiate these arrangements on favorable terms, if at all, and these relationships may not be successful. In addition, our collaborative partners may pursue alternative technologies or develop alternative compounds designed to treat the same diseases that are the target of their collaborative programs with us.
We are subject to extensive regulation in connection with the laboratory practices and the hazardous materials we use.
We are subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with our research. In each of these areas, as noted above, the FDA and other regulatory authorities have broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products and withdraw approvals, any one or more of which could have a material adverse effect upon us. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.
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Contamination or injury from hazardous materials used in the development of LeuTech, PT- 141NeutroSpec, PT-141 and MIDAS could result in a liability exceeding our financial resources.
Our research and development of LeuTech,NeutroSpec, PT-141 and MIDAS involves the use of hazardous materials and chemicals, including radioactive compounds. We cannot completely eliminate the risk of contamination or injury from these materials. In the event of contamination or injury, we may be responsible for any resulting damages. Damages could be significant and could exceed our financial resources, including the limits of our insurance.
37
The testing and marketing of medical products entailentails an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products, or cease clinical trials. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with corporate collaborators. We currently carry product/medical professional liability insurance, which includes liability insurance for our clinical trials. We, or any corporate collaborators, may not be able to obtain insurance at a reasonable cost or in sufficient amounts, if at all. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
Trading in our stock over the last 12 months has been limited, so investors may not be able to sell as much stock as they want at prevailing prices.
The average daily trading volume in our common stock for the 12 month period ended September 26, 20038, 2004 was approximately 90,000440,000 shares. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices.
Our management and principal stockholders together control approximately 57%30% of our voting securities, a concentration of ownership which could delay or prevent a change in control.
OurAs of June 30, 2004, our executive officers and directors beneficially own approximately 5% of our voting securities and our 5% or greater stockholders beneficially own approximately 52%25% of our voting securities. These stockholders, acting together, will be able to influence and possibly control most matters submitted for approval by our stockholders, including the election of directors, delaying or preventing a change of control, and the consideration of transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.
38
Corporate GovernanceWe will face increased costs as a result of changes to the regulations governing public companies, including the Sarbanes-Oxley Act of 2002.
Recently enactedEnacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and Exchange Commission and by the NasdaqAmerican Stock Market,Exchange, could result in increased costs to us as weto evaluate the implications of any new rules and respond to their requirements. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk. Our exposure to market risk related to changes in interest rates relates primarily to our investment portfolio. We invest in instruments that meet high credit quality standards, and we limit the amount of credit exposure as to any one issue, issuer and type of investments.
As of June 30, 2003,2004, our cash and cash equivalents were $14,294,603$17.9 million and investments, which consisted of commercial paper,corporate debt securities and mutual funds, were $4,088,384.$2.5 million. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short term fluctuations in interest rates would materially affect the value of our securities.
39
Item 8. Financial Statements and Supplementary Data
Table of Contents
Consolidated Financial Statements
The following consolidated financial statements of the Company are filed as part of this Report:
40
REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM
The Board of DirectorsPalatinDirectors and Stockholders
Palatin Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. and subsidiary (a development stage company) and subsidiariesenterprise) as of June 30, 20032004 and 2002,2003, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years thenin the three-year period ended June 30, 2004 and for the period from January 28, 1986 (inception) throughto June 30, 2003.2004. 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 audit.audits. The consolidated financialcumulative statements of Palatin Technologies, Inc.operations, stockholders’ equity (deficit), and subsidiariescash flows for the year endedperiod January 28, 1986 (inception) to June 30, 2001 and2004 include amounts for the period from January 28, 1986 (inception) throughto June 30, 2003, to2001 and for each of the extent related toyears in the three-year period from January 28, 1986 (inception) throughending June 30, 2001, which were audited by other auditors who have ceased operations. Those auditors expressed an unqualifiedoperations and whose report has been furnished to us, and our opinion, on those financial statements in their report dated September 10, 2001. Our opinion on the consolidated statements of operations, stockholders’ equity (deficit) and cash flows, insofar as it relates to the amounts included for the period from January 28, 1986 (inception) through June 30, 2001 is based solely on the report of the other auditors.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiary (a development stage company) and subsidiariesenterprise) as of June 30, 20032004 and 2002,2003, and the results of their operations and their cash flows for each of the years thenin the three-year period ended June 30, 2004 and for the period from January 28, 1986 (inception) throughto June 30, 2003,2004, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.
/s/ KPMG LLP
Philadelphia, PennsylvaniaSeptember 19, 2003August 13, 2004
41
The following report is a copy of a previously issued Arthur Andersen LLP (“Andersen”) report and the report has not been reissued by Andersen. The Andersen report refers to financial statements as of June 30, 2001 and 2000 and for the yearyears ended June 30, 2001, 2000 and 1999, which are no longer included in the accompanying financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palatin Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. (a Delaware corporation in the development stage) and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended June 30, 2001 and the period from January 28, 1986 (inception) through June 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiaries as of June 30, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 and the period from January 28, 1986 (inception) through June 30, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
September 10, 2001
42
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
June 30,20032004 June 30,2002 ------------- -------------2003 ---------------- --------------- ASSETS Current assets: Cash and cash equivalents $14,294,60317,947,076 $7,944,26414,294,603 Available for sale investments 2,465,350 4,088,3841,160,773Prepaid expenses and other447,510 349,883 ------------ ------------428,917 347,510 ---------------- --------------- Total current assets18,830,497 9,454,92020,841,343 18,730,497 Property and equipment, net 2,934,739 3,399,1812,416,499Restricted cash 428,075433,844428,075 Other63,381 52,953 ------------ ------------174,930 163,381 ---------------- --------------- Total assets $ 24,379,087 $ 22,721,134$ 12,358,216 ============ ============================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion oflong term debtcapital lease obligations $ 33,491 $ 188,015$ -Accounts payable 2,019,970 1,344,7891,579,336Accrued expenses 2,067,183 1,619,382661,883Accrued compensation 599,600 428,500236,200 Accrued litigation settlement - 400,000Deferred revenue 242,000 407,420794,018---------------- --------------- Total current liabilities 4,962,244 3,988,1063,671,437 ------------ ------------ Long term debt---------------- --------------- Capital lease obligations 30,203 76,432- ------------ ---------------------------- --------------- Commitments andContingenciescontingencies (Note 5) Stockholders' equity: Preferred stock of $.01 par value - authorized 10,000,000 shares; Series A Convertible;14,867 and 26,192 sharesissued and outstanding 11,697 and 14,867 shares as of June 30, 2004 and 2003,and 2002,respectively; 117 149262 Series C Convertible; 700,000 shares issued and outstanding as of June 30, 2002; - 7,000Common stock of $.01 par value - authorized 75,000,000 shares; Issued and outstanding42,994,05052,790,589 and17,423,07642,994,050 shares as of June 30, 2004 and 2003,and 2002respectively; 527,906 429,941174,231Additional paid-in capital 136,148,482 109,085,11578,792,240Deferred compensation (78,407) (37,977)(53,942)Accumulated other comprehensive income (loss) (84,772) (11,805)10,604Deficit accumulated during development stage (117,126,686) (90,808,827)$(70,243,616) ------------ ---------------------------- --------------- Total stockholders' equity 19,386,640 18,656,5968,686,779 ------------ ---------------------------- --------------- Total liabilities and stockholders' equity $ 24,379,087 $ 22,721,134$ 12,358,216 ============ ============================ ===============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
43
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
Inception (January 28, 1986)throughYear Ended June 30,--------------------------------------------------------------through June 30,20032004 2004 2003 20022001 ------------------- ------------------- ------------------- --------------------------------- ------------- ------------- ------------- REVENUES: Grants and contracts $10,265,51112,415,249 $ 2,149,738 $ 641,417 $ 80,929$ 1,621,425License fees and royalties2,729,9872,895,407 165,420 628,598 200,426166,667Other 318,917 - - ---------------------------- ------------- ------------- ------------- Total revenues13,314,41515,629,573 2,315,158 1,270,015 281,3551,788,092 --------------------------- ------------- ------------- ------------- OPERATING EXPENSES: Research and development72,412,50495,745,833 23,333,329 17,439,191 12,117,02610,108,999General and administrative32,247,90037,987,420 5,739,519 4,866,642 5,004,1433,024,841Net intangibles write down 259,334 - - ---------------------------- ------------- ------------- ------------- Total operating expenses104,919,738133,992,587 29,072,848 22,305,833 17,121,16913,133,840-------------- --------------------------- -------------- --------------------------- ------------- OTHER INCOME(EXPENSES)(EXPENSE):InterestInvestment income,2,701,132net of realized losses 2,922,776 221,644 247,552 312,015787,574Interest expense(1,981,179)(2,003,828) (22,649) (22,038) (3,188)(5,104)Merger costs (525,000) - - ---------------------------- ------------- ------------- ------------- Total other income,194,953net 393,948 198,995 225,514 308,827782,470 --------------------------- ------------- ------------- ------------- Loss before income taxes& cumu- lativeand cumulative effect of accounting change(91,410,371)(117,969,066) (26,558,695) (20,810,304) (16,530,987)(10,563,278)Income tax benefit962,6551,203,491 240,836 245,093 392,410325,152 --------------------------- ------------- ------------- ------------- Loss before cumulative effect of accounting change(90,447,716)(116,765,575) (26,317,859) (20,565,211) (16,138,577)(10,238,126)Cumulative effect of accounting change (Note 2) (361,111) - -(361,111) -------------- -------------- ------------- ------------- ------------- NET LOSS(90,808,827)(117,126,686) (26,317,859) (20,565,211) (16,138,577)(10,599,237)DEEMED DIVIDEND (3,511,765) - (203,138) (297,603)- --------------------------- ------------- ------------- ------------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS$(94,320,592)$(120,638,451) $(26,317,859) $(20,768,349) $(16,436,180)$(10,599,237) =========================== ============= ============= ============= Basic and diluted net loss attributable to common stockholders perCommoncommon shareBasic and diluted net loss before cumulative effect of accounting change$ (0.55) $ (0.73) $ (1.16)$ (1.01) Cumulative effect of accounting change - - (0.04) ------------- ------------- ------------- Basic and diluted net loss $ (0.73) $ (1.16) $ (1.05)============= ============= ============= Weighted average number ofCommoncommon shares outstanding used in computing basic and diluted net loss attributable to common stockholders perCommoncommon share 47,687,679 28,362,121 14,195,46610,131,195============= ============= =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
44
Preferred Stock ------------------------------------------------------ Subscrip- Shares Amount tions Receivable ----------------------- ----------- ------------------- -------- ---------- Balance at inception - $$- $ --$ - Preferred stock subscriptions - - 4,000 (4,000) Net loss from inception - - - - ----------------------- ----------- ------------------- -------- -------- Balance, August 31, 1995 - - 4,000 (4,000) Preferred stock subscriptions - - (4,000) 4,000 Issuance ofPreferredpreferred shares 4,000,000 4,000 - - Issuance ofCommoncommon sharesonin $10,395,400 private placement - - - - Shares earned but not issued - - - - Net loss - - - - ----------------------- ----------- ------------------- -------- -------- Balance, June 25, 1996 4,000,000 4,000 - - Conversion to Palatin Technologies, Inc. (4,000,000) (4,000) - - Adjusted balance, June 25, 1996 - - - - Shares outstanding of Palatin Technologies, Inc. - - - - Purchase of treasury stock - - - - Net loss - - - - ----------------------- ----------- ------------------- -------- -------- Balance, June 30, 1996 - - - - Issuance ofPreferredpreferred shares, net of expenses 137,780 1,378 - - Net loss - - - ------------ ------------ ----------- -----------Balance, June 30, 1997 137,780 1,378 - - Issuance ofPreferredpreferred shares, net of expenses 18,875 189 - - Conversion ofPreferredpreferred shares intoCommoncommon shares (49,451) (495) - - Net loss - - - - ----------------------- ----------- ------------------- -------- --------
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
45
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Preferred Stock ------------------------------------------------------ Subscrip- Shares Amount tions Receivable ----------------------- ----------- ------------------- -------- ---------- Balance, June 30, 1998 107,204 $ 1,072 $ - $ - Conversion ofPreferredpreferred shares intoCommoncommon shares (51,145) (511) - - Net loss - - - - ----------------------- ----------- ------------------- -------- -------- Balance, June 30, 1999 56,059 561 - - Issuance ofPreferredpreferred shares, net of expenses 700,000 7,000 - - Conversion ofPreferredpreferred shares intoCommoncommon shares (22,498) (225) - - Net loss - - - - ----------------------- ----------- ------------------- -------- -------- Balance, June 30, 2000 733,561 7,336 - - Conversion ofPreferredpreferred shares intoCommoncommon shares (4,244) (43) - - Net loss - - - - ----------------------- ----------- ------------------- -------- -------- Balance, June 30, 2001 729,317 7,293 - - Conversion ofPreferredpreferred shares intoCommoncommon shares (3,125) (31) - - Net loss - - - - ----------------------- ----------- ------------------- -------- -------- Balance, June 30, 2002 726,192 7,262 - - Conversion ofPreferredpreferred shares intoCommoncommon shares (711,325) (7,113) - - Net loss - - - - ----------- -------- -------- -------- Balance, June 30, 2003 14,867$ $ $149 - - Conversion of preferred shares into common shares (3,170) (32) - - Net loss - - - - ----------- -------- -------- -------- Balance, June 30, 2004 11,697 $ 117 $ - $ - ======================= =========== =================== ======== ========
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
46
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) (continued) AccumulatedOtherDeficit Common Stock Additional DeferredComprehen-Other Com- Accumulated------------------------------------------------------- Paid-In EarnedbutBut Treasury Compensa-siveprehensive During Develop- Shares Amount CapitalnotNot Issued Stock tionIncome/(loss)Income (Loss) ment Stage Total -------------- -------------- --------------- ------------- ----------- ------------------------- ---------- --------- ------------ -------------------- --------------- -------------------------Balance at inception - $ $-$ $ $ $ $ $ $ -$-$-$-$-$- - - Issuance of shares frominception6,922,069 1,177,786 100,000 110,833 - - - - 1,388,619 inception Net loss from inception - - - - - - - (4,235,059) (4,235,059) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, August 31, 1995 6,922,069 1,177,786 100,000 110,833 - - - (4,235,059) (2,846,440) Issuance ofPreferredpreferred shares - - - - - - - - 4,000 Issuance ofCommoncommon sharesonin $10,395,400 privateplacemeplacement 41,581,600 9,139,303 - - - - - - 9,139,303 Shares earned but not issued - - - 266,743 - - - - 266,743 Issuance ofCommoncommon shares 1,054,548 458,977 (100,000) (324,546) - - - - 34,431 Net loss - - - - - - - (3,897,879) (3,897,879) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 25, 1996 49,558,217 10,776,066 - 53,030 - - - (8,132,938) 2,700,158 Conversion to Palatin Technologies, Inc. (46,807,465))(10,748,558) 10,752,558 - - - - - - ---------- ------------ ------------- ---------- -------- ------------ --------- -------------- -------------- Adjusted balance, June 25, 1996 2,750,752 27,508 10,752,558 53,030 - - - (8,132,938) 2,700,158 Shares outstanding of Palatin Technologies, Inc. 108,188 1,082 (1,082) - - - - - - Issuance ofCommoncommon shares 25,754 257 139,459 - - - - - 139,716 Purchase of treasury stock - - - - (1,667) - - - (1,667) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 1996 2,884,694 28,847 10,890,935 53,030 (1,667) - - (8,132,938) 2,838,207 Issuance ofPreferredpreferred shares, net of expenses - - 11,635,653 - - - - - 11,637,031 Shares earned but not issued - - - 250,141 - - - - 250,141 Issuance ofCommoncommon shares 135,987 1,360 316,761 (303,171) - - - - 14,950 Retirement of treasury shares (308))(3) (1,664) - 1,667 - - - - Issuance of stock options below fair market value - - 1,472,716 - - (1,472,716) - - -
47
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit Common Stock Additional Deferred Other Com- Accumulated ----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop- Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ---------------- Amortization of deferred compensation - - - - - 394,383 - - 394,383 Net loss - - - - - - - (5,300,164) (5,300,164) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 1997 3,020,373 30,204 24,314,401 - - (1,078,333) - (13,433,102) 9,834,548 Issuance ofPreferredpreferred shares, net of expenses - - 1,573,295 - - - - - 1,573,295 Issuance ofPreferredpreferred shares expenseRecapturerecapture - - 49,733 - - - - - 49,733 Issuance ofCommoncommon shares 66,696 666 94,873 - - - - - 95,539 Issuance ofCommoncommon shares upon conversion ofPreferredpreferred shares 1,012,554 10,126 (9,820) - - - - - -
47
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)(continued)
Issuance of stock options below fair market value - - 1,161,156 - - (1,161,156) - - - Amortization of deferred compensation - - - - - 1,723,310 - - 1,723,310 Net loss - - - - - - - (9,886,878) (9,886,878) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 1998 4,099,623 40,995 27,183,638 - - (516,179) - (23,319,980) 3,389,547 Issuance ofCommoncommon shares 1,842,101 18,421 7,594,182 - - - - - 7,612,603 Issuance ofCommoncommon shares upon conversion ofPreferredpreferred shares 1,115,740 11,158 (10,655) - - - - - (9) Issuance ofCommoncommon shares upon exercise of warrants 9,874 99 18,676 - - - - - 18,775 Issuance ofCommoncommon shares upon exercise of options 70,257 703 13,348 - - - - - 14,051 Issuance of stock options below fair market value - - 811,054 - - (811,054) - - -
48
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit Common Stock Additional Deferred Other Com- Accumulated ----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop- Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ---------------- Amortization of deferred compensation - - - - - 1,308,675 - - 1,308,675 Net loss - - - - - - - (12,002,384) (12,002,384) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 1999 7,137,595 71,376 35,610,243 - - (18,558) - (35,322,364) 341,258 Issuance ofPreferredpreferred shares, net of expenses - - 12,999,058 - - - - - 12,999,058 Issuance ofPreferredpreferred shares - - - - - - - - 7,000 Issuance ofCommoncommon shares upon conversion ofPreferred sharespreferred 572,374 5,724 (5,462) - - - - - 37 shares Issuance ofCommoncommon shares upon exercise of warrants 111,551 1,115 451,097 - - - - - 452,212 Issuance ofCommoncommon shares upon exercise of options 80,852 809 99,667 - - - - - 100,476 Acceleration of options previously granted - - 1,170,000 - - - - - 1,170,000 Amortization ofstock baseddeferred compensation - - - - - 18,558 - - 18,558 Net loss - - - - - - - (8,183,438) (8,183,438) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 2000 7,902,372 79,024 50,324,603 - - - - (43,505,802) 6,905,161 Issuance ofCommoncommon shares, net of expenses 2,532,369 25,324 13,954,928 - - - - - 13,980,252 Issuance ofCommoncommon shares upon conversion of Preferred shares 104,886 1,049 (1,006) - - - - - - Issuance of common shares upon exercise of warrants 173,015 1,730 486,736 - - - - - 488,466
4849
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit Common Stock Additional Deferred Other Com- Accumulated ----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop- Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ---------------- Issuance ofCommon shares upon exercise of warrants 173,015 1,730 486,736 - - - - - 488,466 Issuance of Commoncommon shares upon exercise of options 487,016 4,870 634,883 - - - - - 639,753 Stock based compensation - - 246,109 - - (105,534) - - 140,575 Acceleration of options previously granted - - 335,315 - - - - - 335,315 Amortization ofstock baseddeferred compensation - - - - - 25,415 - - 25,415 Net loss - - - - - - - (10,599,237) (10,599,237) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 2001 11,199,658 111,997 65,981,568 - - (80,119) - (54,105,039) 11,915,700 Issuance ofCommoncommon shares, net of expenses 5,997,578 59,976 12,380,727 - - - - - 12,440,703 Issuance ofCommoncommon shares upon conversion ofPreferredpreferred shares 76,590 766 (735) - - - - - - Issuance ofCommoncommon shares upon exercise of options 149,250 1,492 339,098 - - - - - 340,590 Stock based compensation - - 91,582 - - (21,147) - - 70,435 Amortization ofstock baseddeferred compensation - - - - - 47,324 - - 47,324 Unrealized gain on investments - - - - - - 10,604 - 10,604 Net loss - - - - - - - (16,138,577) (16,138,577) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 2002 17,423,076 174,231 78,792,240 - - (53,942) 10,604 (70,243,616) 8,686,779 Issuance ofCommoncommon shares, netof expenses24,352,099 243,521 30,127,905 - - - - - 30,371,426 of expenses Issuance ofCommoncommon shares upon 1,121,576conversion of Preferred shares11,216 (4,103) - - - - - - conversion of preferred shares Issuance ofCommoncommon shares upon exercise of options andwarrants97,299 973 127,445 - - - - - 128,418 warrants Stock based compensation - - 41,628 - - (13,153) - - 28,475
50
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit Common Stock Additional Deferred Other Com- Accumulated ----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop- Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ---------------- Amortization ofstock based compensationdeferred - - - - - 29,118 - - 29,118 compensation Unrealized loss on investments - - - - - - (22,409) - (22,409) Net loss - - - - - - - (20,565,211) (20,565,211) ---------- ------------ ----------------------------------- -------- ------------ ---------------------- --------------------------- -------------- Balance, June 30, 2003 42,994,050 429,941 109,085,115 (37,977) (11,805) (90,808,827) 18,656,596 Issuance of common shares, net 6,992,500 69,925 20,889,594 - - - - - 20,959,519 of expenses Issuance of common shares upon 120,465 1,205 (1,173) - - - - - - conversion of preferred shares Issuance of common shares upon exercise of options and 2,683,574 26,835 5,385,934 - - - - - 5,412,769 warrants Stock based compensation - - 789,012 - - (86,157) - - 702,855 Amortization of deferred - - - - - 45,727 - - 45,727 compensation Unrealized loss on investments - - - - - - (72,967) - (72,967) Net loss - - - - - - - (26,317,859) (26, 317,859) ---------- ------------ ------------- ---------- -------- ------------ --------- -------------- -------------- Balance, June 30, 2004 52,790,589 $429,941 $109,085,115527,906 $136,148,482 $ - $ - $(37,977) (11,805) (90,808,827) 18,656,596(78,407) $(84,772) $(117,126,686) $ 19,386,640 =========== ============ =================================== ================================= ====================== =========================== ==============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
4951
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
Inception (January 28, 1986) Year Ended June 30, through-------------------------------------------------------------------------------------------- June 30,20032004 2004 2003 20022001 --------------------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss$(90,808,827)$(117,126,686) $(26,317,859) $(20,565,211) $(16,138,577)$(10,599,237)Adjustments to reconcile net loss to net cash usedforin operating activities: Cumulative effect of accounting change 361,111 - -361,111- Depreciation and amortization3,109,9883,781,977 671,989 579,258 1,156,874288,086Realized loss on investments 129,355 129,355 - - License fee 500,000 - - - Interest expense and accrued interest on note payable72,691 - - - Accrued interest on long-term financing 796,038 - - - Accrued interest on short-term financing 7,936and financings 876,665 - - - Intangibles and equipment write down 278,318 - - - Common stock and notes payable issued for expenses 751,038 - - - Settlement with consultant (28,731) - - -Deferred revenue 46,309 (386,598) 599,574 (166,667)Acceleration of options previously granted 1,505,315 - -335,315- Stock based compensation4,455,3744,863,366 748,582 57,593458,349 165,990117,759 Changes in certain operating assets and liabilities:Accounts receivable - - - 953,163Prepaid expenses and other(1,243,211)(1,346,173) (102,962) (91,858) 34,079111,053Accounts payable1,344,7892,019,970 675,181 (234,547) 449,676117,590Accrued expenses and other1,586,7152,205,616 618,901 749,799 293,67836,239 -------------Deferred revenue (119,111) (165,420) (386,598) 599,574 -------------- ------------- ------------- ------------- Net cash usedforin operating activities(77,265,147)(101,347,970) (23,742,233) (19,891,564)(13,146,347) (8,397,357) -------------(13,486,937) -------------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale/(Purchases)maturities of investmentsnet (4,142,460) (2,970,453)3,539,313 1,420,712 9,464 - Purchase of investments (6,261,061) - (2,979,917) (1,172,007)2,155,617Purchases of property and equipment(5,941,750)(6,139,291) (197,541) (1,134,015) (1,634,509)(629,899) --------------------------- ------------- ------------- ------------- Net cashprovided/(used) for(used in) provided by investingactivites (10,084,210)activities (8,861,039) 1,223,171 (4,104,468) (2,806,516)1,525,718-------------- ------------- ------------- --------------------------activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payablerelated party 302,000and other long-term debt 6,103,327 - - - Payments on notes payablerelated party (302,000) - - - Proceeds from senior bridge notes payable 1,850,000 - - - Payments on senior bridge notes payable (1,850,000)and other long-term debt (4,103,327) - - - Payments on capital lease obligations (354,226) (200,753) (153,473)(153,473) - - Proceeds from notes payable and long-term debt 3,951,327 - - - Payments on notes payable and long-term debt (1,951,327) - -- Proceeds from common stock, stock option and warrant issuances, net75,588,774102,301,652 26,372,288 30,499,84412,440,703 15,108,47012,781,293 Proceeds from preferred stock, net 24,210,326 - - - Purchase of treasury stock (1,667) - - ---------------------------- ------------- ------------- ------------- Net cash provided by financing activities101,643,960128,156,085 26,171,535 30,346,37112,440,703 15,108,470 -------------12,781,293 -------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS14,294,60317,947,076 3,652,473 6,350,339 (3,512,160)8,236,831CASH AND CASH EQUIVALENTS, beginning of period - 14,294,603 7,944,264 11,456,4243,219,593 --------------------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $14,294,60317,947,076 $ 17,947,076 $ 14,294,603 $ 7,944,264$ 11,456,424 =========================== ============= ============= =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
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PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(continued)
Inception (January 28, 1986) through Year Ended June 30,through -----------------------------------------------June 30,2003------------------------------------- 2004 2004 2003 20022001 ------------- ------------- ------------- ---------------------- -------- -------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $657,920680,569 $ 22,649 $ 22,038 $ 3,188$ 5,104 ============= ============= ============= ====================== ======== ======== ======== NON-CASH TRANSACTION: Settlement of accounts payable withEquipmentequipment $ 900 $ - $ - $ -============= ============= ============= ====================== ======== ======== ======== NON-CASH STOCK ACTIVITY: Conversion of loans from employees toCommoncommon stock $ 74,187 $ - $ - $ -============= ============= ============= ====================== ======== ======== ======== Conversion of note payable toCommoncommon stock $ 16,000 $ - $ - $ -============= ============= ============= ====================== ======== ======== ======== Common stock issued for equipment $2,32 $2,327 $ - $ -============= ============= ============= =============$ - ========= ======== ======== ======== Common stock and warrants issued for expenses $ 960,909 $ - $ 20,000 $ 14,144$ 31,200 ============= ============= ============= ====================== ======== ======== ======== Common stock issued for accrued salaries and bonuses $ 16,548 $ - $ - $ -============= ============= ============= ====================== ======== ======== ======== Accrued interestpayablepaid inCommoncommon stock $ 679,097 $ - $ - $ -============= ============= ============= ====================== ======== ======== ========
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
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PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION ACTIVITIES:
Nature of Business – Palatin Technologies, Inc. (“Palatin” or the “Company”) is a development-stage biopharmaceutical company. The Company does not currently offer any products for sale. The Company is primarily focused on discovering and developing melanocortin (MC) based-based therapeutics, which the Company believes is one of the fastest growing areas of pharmaceutical research and development. The MC family of receptors has been identified with a variety of conditions and diseases, including sexual dysfunction, obesity, anorexia, cachexia inflammation(extreme wasting, generally secondary to a chronic disease) and drug abuse.inflammation. The Company’s objective is to become a worldwide leader in melanocortin-basedMC-based therapeutics by pursuing a strategy based on commercializing the Company’s products under development and identifying new product targets through the utilization of the Company’s patented drug discovery platform.
In July 2004, the Company announced the receipt of full approval from the U.S. Food and Drug Administration (“FDA”) to market NeutroSpec™, the Company’s proprietary radiolabeled monoclonal antibody product, for imaging equivocal appendicitis in patients (see Note 11). The Company is currently conducting additional clinical trials with NeutroSpec to expand its market potential as an imaging agent for other indications such as osteomyelitis (infection deep inside a bone), fever of unknown origin, post surgical abscess, inflammatory bowel disease and pulmonary imaging.
PT-141, is the Company'sCompany’s lead therapeutic drug candidate, and is nowa patented, nasally administered peptide that is in clinical development for the treatment of both male and female sexual dysfunction. The Company recentlycompleted various Phase 1 safety studies and Phase 2A efficacy studies in male subjects and patients. The Company completed a Phase 2B trialat-home dose-ranging study with PT-141 in male patients for which it expects to announce results in the fourth quarter of calendar year 2003. LeuTech®, is the Company's proprietary radiolabled monoclonal antibody for imaging and diagnosing infections.patients. The Company commenced the biologics license application (BLA) amendment filings to the FDAalso completed a Phase 1 safety study in the first half of calendar year 2003 and anticipates remitting the final BLA amendment filing to the FDA in the fourth quarter of calendar year 2003. The Company expects to receive a complete response from the FDA regarding its BLA amendment filings in the first half of calendar year 2004. The Company is also conducting additional clinical trials for LeuTech to expand its market potential as a diagnostic agent.female subjects. In addition, the Company has several preclinical drug candidates under investigation based on the MC family of receptors for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation.
In August 2004, the Company entered into a collaborative agreement with King Pharmaceuticals, Inc. (“King”), for the purpose of developing and commercializing PT-141 (see Note 11).
Key elements of the Company’s business strategy include: entering into alliances and partnerships with pharmaceutical companies to facilitate the development, manufacture, marketing, sale and distribution of the Company’s product candidates under investigation, expansion of the Company’s pipeline through the utilization of its MC expertise and patented drug discovery platform, opportunistic acquisition of synergistic products and technologies and partial funding of the Company’s development and discovery programs with the cash flow from our LeuTechNeutroSpec and PT-141 collaboration agreement.agreements.
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Business Risk and Liquidity – As shown in the accompanying financial statements, the Company incurred a substantial net loss of $20,565,211$26,317,859, for the year ended June 30, 20032004 and has a deficit accumulated in the development stage of $90,808,827,$117,126,686, cash and cash equivalents of $14,294,603$17,947,076 and investments of $4,088,384$2,465,350 as of June 30, 2003.2004. The Company anticipates incurring additional losses in the future as it continues development of LeuTechNeutroSpec for diagnosis of appendicitis and expands clinical trials for other indications of LeuTechNeutroSpec and continues research and development of PT-141 and its MIDASMIDAS™ (Metal Ion-induced Distinctive Array of Structures) technology. To achieve profitability, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all.
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The Company has incurred negative cash flows from operations since its inception, the Companyand has expended and expects to continue to expend in the future, substantial funds to complete its planned product development efforts. The Company expects that its existing capital resources, including the funds received from King in August 2004, will be adequate to fund the Company’s projected operations intothrough its fiscal year ending June 30, 2005, based on current and projected expenditure levels. Management plans to continue to refine its operations, control expenses, evaluate alternative methods to conduct its business, and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Should appropriate sources of financing not be available, management would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that the Company’s financing efforts will be successful. If adequate funds are not available, ourthe Company’s financial condition and results of operations will be materially and adversely affected.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation – The consolidated financial statements include the accounts of Palatin and its wholly owned inactive subsidiaries.subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates – The preparation of consolidated financial statements in conformity with accounting principlesU.S. generally accepted in the United States of Americaaccounting principles requires management to make estimates and assumptions that affect the reported amount 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.
Statements of Cash Flows – 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. As of June 30, 2004 and 2003, and 2002, approximately $428,000 and $434,000, respectively,$428,075 of cash was restricted to secure letters of credit for security deposits on leases.
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Investments – The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115 “Accounting For Certain Investments in Debt and Equity Securities.” The Company classifies such investments as available for sale investments and as such all investments are recorded at fair value. The investments consist principally of corporate debt securities with a minimum credit rating of A2 and mutual funds with average durations ranging from one to three years and credit ratings of AAA.funds. Unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in other comprehensive income (loss) and as a separate component of stockholders’ equity until realized. Interest on securities classified as available for sale is included in interest income. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs.
The following is a summary of available for sale investments as of June 30, 2003:
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Table of Contents2004:
Gross Gross Unrealized Unrealized Cost Gains Losses Fair Value --------------------------------------------------------- Corporate debt securities $100,00050,000 $2,243521 $ - $102,24350,521 MutualFundsfunds $4,000,1892,500,122 $ - $14,048(85,293) $3,986,141 ------------- --------- ---------- -------------2,414,829 --------------------------------------------------------- Total $4,100,1892,550,122 $2,243521 $14,048(85,293) $4,088,384 ============= ========= ========== =============2,465,350 =========================================================
The following is a summary of available for sale investments as of June 30, 2002:2003:
Gross Gross Unrealized Unrealized Cost Gains Losses Fair ValueGovernment securities $ 50,000 $ 672 $ - $ 50,672--------------------------------------------------------- Corporate debt securities $ 100,000860$ 2,243 -100,860$ 102,243 Mutual funds1,000,169 9,072 - 1,009,241 ------------- --------- ---------- -------------$ 4,000,189 $ $ (14,048) $ 3,986,141 --------------------------------------------------------- Total $1,150,1694,100,189 $10,604$-(14,048) $1,160,773 ============= ========= ========== =============4,088,384 =========================================================
Property and Equipment – Property and equipment consists of office and laboratory equipment, office furniture and leasehold improvements. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of five years for lab equipment, seven years for office furniture and equipment and over the term of the lease for leasehold improvements. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized.
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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 its long-lived assets, management evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. ImpairmentIf impairment is measured atindicated, 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 discounted cash flows based on reasonable and supportable assumptions.
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Revenue Recognition – Grant and contract revenues are recognized as the Company provides the services stipulated in the underlying grants and/or contracts based on the time and materials incurred. Revenue from corporate collaborations and licensing agreements consists of up-front fees, research and development funding, and milestone payments. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. The Company estimates the performance period as the initial research term. The actual performance period may vary. The Company will adjustadjusts the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that the Company performs the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.
The Company recognized $149,738, $137,417 $80,929 and $211,069,$80,929, respectively, in grant revenue pursuant to the Small Business Technology Transfer (“STTR”) programs of the Department of Health and Human Services for the years ended June 30, 2004, 2003 2002 and 2001.2002.
The Company recognized $2,000,000 and $504,000, for the year ended June 30, 2003respectively, in contract revenue related to the attainment of certain milestones and other shared development costs of LeuTechNeutroSpec pursuant to our collaboration agreement, as amended, with Mallinckrodt, Inc., a division of Tyco International, Ltd. (“Mallinckrodt”), described below.below for the years ended June 30, 2004 and 2003. The Company did not recognize any contract revenue related to the shared development costs of LeuTechNeutroSpec for the year ended June 30, 2002, as compared to $1,410,356 recognized for the year ended June 30, 2001.2002.
In August 1999, the Company entered into a strategic collaboration agreement with Mallinckrodt Inc. to jointly develop and market one of its proposed products (see Note 8). Under the terms of the agreement, the Company granted a worldwide license, excluding Europe, for sales, marketing and distribution and received a non-refundable licensing fee of $500,000. The licensing fee was recognized as revenue in the period that such non-refundable fees were received.
In fiscal 2001, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”) which requires up front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share, which reflects the deferral of the $500,000 up-front license fee received from Mallinckrodt in August 1999. Under SAB 101, this payment has beenwas recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2004, 2003 2002 and 2001,2002, the Company recognized $11,569, $43,987 $138,888 and $166,667,$138,888, respectively, in license revenue that was included in the cumulative effect adjustment as of July 1, 2000. Prior year financial statements have not been restated to apply SAB 101 retroactively; however the following pro forma amounts show the net loss to common stockholders and net loss per share assuming the Company had retroactively applied SAB 101 to the prior year:
Year Ended June 30, 2001 ------------- Net loss to common stockholders, as reported $ (10,599,237) =============== Net loss per common share, as reported $ (1.05) =============== Pro forma net loss to common stockholders $ (10,238,126) =============== Pro forma net loss per common share $ (1.01) ===============
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In May 2002, the Company entered into an agreement with Mallinckrodt to amend the original agreement. Under the terms of this amended agreement, Mallinckrodt committed, among other things, up to an additional $3.2 million,$3,200,000, subject to certain conditions and attainment of certain milestones, to cover half of the Company’s estimated expenses associated with completing the FDA review process of LeuTech.NeutroSpec. Pursuant to this amendment, $800,000 was received upon execution of this agreement. Under SAB 101, this payment has beenwas recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2004, 2003 and 2002, the Company recognized $153,851, $584,611 and $61,538, respectively, in license revenue under this agreement.
Research and Development Costs – The costs of research and development activities are charged to expense as incurred.
Stock Options – The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, to account for its fixed-plan stock options. Under this method, compensation expensecost is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowedpermitted by SFAS 123, as amended in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”), the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123.
The Company applies APB 25 and the related interpretations in accounting for its stock option plans.options. Had compensation cost for the Company’s common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the Company’s net loss attributable to common stockholders and net loss per common share would have been reducedequal to the following pro forma amounts:
For the year ended June 30,-------------------------------------------------------------------------------------------------- 2004 2003 20022001 -------------------------------------------------------------------------------------------------- Net loss attributable to common stockholders: As reported$(20,737,349)$(26,317,859) $(20,768,349) $(16,436,180)$(10,599,237)Stock-based employee compensation expense included in the determination of net loss as reported 626,639 - - Impact of total stock-based compensation expense determined under fair-value-based method (1,801,218) (1,297,069) (1,660,290)(1,609,113) ------------- ------------- ---------------------------------------------------------------- Pro forma$(22,034,418)$(27,492,438) $(22,065,418) $(18,096,470)$(12,208,350) ============= ============= ================================================================
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Basic and diluted net loss attributable to common stockholders per common share: As reported $ (0.55) $ (0.73) $ (1.16)$ (1.05) ============= ============= ============= Impact of stock-based compensation, net of tax (0.05) (0.11) (0.16) ============= ============= ================================================================ Pro forma $ (0.58) $ (0.78) $ (1.27)$ (1.21) ============= ============= ================================================================
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The assumptions used in the Black-Scholes option-pricing model are as follows: dividend yield of 0%, weighted average risk-free interest rate of 3.72% in 2004, 3.54% in 2003, and 4.5% in 2002, and 5.78% in 2001, expected volatility of 90.5% in 2004, 101% in 2003 and 60% in 2002, and 2001, and an expected option life of 7seven years.
The Company accounts for options granted to consultants in accordance with EITF 96-18, “Accounting for Equity Instruments with Variable Terms That Are Issued for Consideration Other Than Employee Services.” The Company determines the value of consultant’s stock options utilizing the Black-Scholes option pricing model.
Income Taxes – The Company and its subsidiariessubsidiary file consolidated federal and combined state income tax returns. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes.
The Company provides for deferred income taxes relating to temporary differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109.
In accordance with SFAS 109, the Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management’s estimates and analysis, which includes tax laws which may limit the Company’s ability to utilize its tax loss carry-forwards.carryforwards.
Net Loss per Common Share – The Company applies Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128, which requires dual presentation of basic and diluted earnings per share (“EPS”) for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing the income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into Commoncommon stock, such as stock options.options and warrants. For the years ended June 30, 2004, 2003 2002 and 2001,2002, there were no dilutive effects of stock options or warrants as the Company incurred a net loss in each period. Options and warrants to purchase 15,140,11512,392,034 shares of Common Stockcommon stock at prices ranging from $0.01 to $21.70 per share were outstanding at June 30, 2003 (See2004 (see Note 6).
Fair Value of Financial Instruments – Statement of Financial Accounting Standards No. 107 “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”), requires disclosures of fair value information aboutThe Company’s financial instruments whether or not recognized inconsist primarily of cash and cash equivalents, marketable securities and accounts payable. Management believes that the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlyingcarrying value of the Company.these assets and liabilities are representative of their respective fair values.
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Recent Accounting PronouncementsOther Comprehensive Loss — In DecemberOther comprehensive loss consists of the following:
For the year ended June 30, -------------------------------------------------- 2004 2003 2002the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-------------------------------------------------- Net loss $(26,317,859) $(20,565,211) $(16,138,577) Unrealized gain (loss) on investments (72,967) (22,409) 10,604 -------------------------------------------------- Comprehensive loss $(26,390,826) $(20,587,620) $(16,127,973) ==================================================
Reclassifications — Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,”Certain prior year balances have been reclassified to provide alternative methods of transition for a voluntary changeconform to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.current year presentation.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
June 30,---------------------------------------------------------- 2004 20032002 ------------------------- -------------- Office equipment $1,063,6101,120,467 $876,8931,063,610 Laboratory equipment 2,292,039 2,153,7871,071,461Leasehold improvements 3,089,365 3,086,9322,804,040 ------------------------- -------------- 6,501,871 6,304,3294,752,394Less: Accumulated depreciation and amortization (3,567,132) (2,905,148)(2,335,895) ------------------------- -------------- $ 2,934,739 $ 3,399,181$ 2,416,499 ========================= ==============
For the years ended June 30, 2004, 2003 2002 and 2001,2002, depreciation expense was $663,208, $569,253 and $1,146,566, and $278,078, respectively.
(4) ACCRUED EXPENSES:
Accrued expenses consist of the following:
June 30,----------------------------------------------------------- 2004 20032002 ------------------------ -------------- Product development costs $784,0071,079,000 $208,000784,007 Accrued rent 464,095 397,872100,000 Other 437,503 353,883 ----------- ------------- $1,619,382 $ 661,883 =========== =============
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Other 524,088 437,503 ------------- -------------- $ 2,067,183 $ 1,619,382 ============= ==============
(5) COMMITMENTS AND CONTINGENCIES:CONTINGENCIES
Leases – The Company currently leases two facilities in New Jersey under non-cancelable operating leases and is in the processhave sublet to a third party one of terminating the leasethose leases, which is for the Company’s former Corporate Officescorporate offices located in Princeton. In July 2002, the Company moved into a new facility in Cranbury, New Jersey that combined both the research and development facility in Edison, New Jersey and the corporate offices in Princeton, New Jersey. Future minimum lease payments under these two leases are as follows:
Fiscal Year Ending June 30,--------------------------- 20042005 $1,366,582 2005 1,482,1531,515,000 20061,046,9561,047,000 20071,604,3701,604,000 20081,283,8481,284,000 2009 1,301,000 2010 and thereafter5,270,4943,968,000 ------------- $12,054,40310,719,000 =============
TheAs of June 30, 2004, the Company has accrued approximately $100,000$33,000 related to the Company’s share of estimated costs until termination of the Princeton lease, which is currently being subleased. For the years ended June 30, 2004, 2003 2002 and 2001,2002, rent expense was $1,332,442, $1,554,838 $656,850 and $560,476,$656,850, respectively.
Capital Leases — In September 2002, the Company acquired $417,920 of laboratory equipment under capital leases. The term of these leases range from 24 to 60 months. As of June 30, 2003, $264,4472004, $63,694 remains outstanding pursuant to these lease obligations. The capitalized cost and accumulated depreciation for the equipment under capital leases is $417,920 and $146,272, respectively, as of June 30, 2004.
Employment Agreements – Effective October 1, 2003, Dr. Spana, Mr. Wills and Dr. MolinoffShubh D. Sharma, Ph.D. have each entered into an employment agreement with the Company for a two-year period commencing October 1, 2001 for Dr. Spana and Mr. Wills, and commencing September 4, 2001 for Dr. Molinoff. Each agreement automatically renews for a one-year period unless terminated at least 30 days before the anniversary date.period. The agreements do not contain automatic renewal provisions. Dr. Spana is serving as chief executive officer and president at a salary of $290,000$320,000 per year. Mr. Wills is serving as chief financial officer at a salary of $225,000$265,000 per year. Dr. MolinoffSharma is serving as executivea vice president of research and developmentchief technical officer at a salary of $250,000$185,000 per year. Each agreement also provides for:
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• | annual bonus compensation, in an amount to be decided by the compensation committee and approved by the board, based on achievement of yearly objectives; and | |
• | participation in all benefit programs that the Company establish, to the extent the employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate. |
Each agreement allows the Company or the employee to terminate the agreement upon written notice, and contains other provisions for termination by the companyCompany for “cause,”“cause”, or by the employee for “good reason” or due to a “change in control” (as these terms are defined in the employment agreements). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of 24 months (Spana), 18 months (Wills) or 12nine months (Molinoff)(Sharma) plus continuation of medical and dental benefits then in effect for 18 months (Spana and Wills) or 12 months (Molinoff). For Dr. Spana and Mr. Wills, terminationmonths. Termination following a change in control will result in a lump sum payment of two times (Spana) or one and one-half times (Wills) the salary then in effect, continuation of medical and dental benefits then in effect for 18 months, and immediate vesting of all stock options. For Dr. Molinoff, termination following a change in control will result in severance payments at the salary then in effect for 12 months, continuation of medical and dental benefits then in effect for 12 months, employment search expense reimbursement up to $25,000, and immediate vesting of all stock options. Each agreement includes non-competition, non-solicitation and confidentiality covenants. Although the agreements for Dr. Spana, Mr. Wills and Dr. Molinoff were automatically extended for a one year period pursuant to their terms, we are currently negotiating amendments to the agreements, except with respect to the base annual salary, and we anticipate that the amended terms will not be materially different than the existing terms.
License Agreements – The Company has three license agreements that require minimum annual payments. Future minimum payments under the license agreements for the years ending June 30 are: 2004 — $250,000, 2005 — $200,000,$500,000, 2006 — $200,000, 2007 — $200,000, 2008 — $200,000 and 20082009 — $200,000.
Legal Proceedings – Following the termination of the Company’s proposed merger with San Diego-based Molecular Biosystems, Inc. in March 2000, Molecular Biosystems commenced a legal action against the Company, seeking damages arising from the alleged improper termination of the merger agreement. The Company denied the material allegations. In August 2002, in order to avoid the ongoing costs of the litigation and consumption of the Company’s time, the Company settled this litigation with Molecular Biosystems for $400,000, which the Company had accrued as of June 30, 2002.
Series A Preferred Offering – On December 2, 1996, the Company commenced the Series A Preferred Offering of units at a price of $100,000 per unit, each unit consisting of 1,000 shares of Series A Convertible Preferred Stock. The final closing on the Series A Preferred Offering was effective as of May 9, 1997, with the Company having sold an aggregate total of 137.78 units, representing 137,780 shares of Series A Convertible Preferred Stock, for net proceeds to the Company of approximately $11,635,000, after deducting commission and other expenses of the Series A Preferred Offering.
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 Stockcommon stock equal to $100 divided by the “Series A Conversion Price”. The current Series A Conversion Price is $2.63, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 38 shares of Commoncommon Stock. The Series A Conversion Price is subject to adjustment, under certain circumstances, upon the sale or issuance of Common Stockcommon stock for consideration per share less than either (i) the Conversion Price in effect on the date of such sale or issuance, or (ii) the market price of the Common Stockcommon 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 Stockcommon stock outstanding. During the fiscal year ended June 30, 2003, 11,3252004, 3,170 shares of the Series A Convertible Preferred Stock was converted into 421,575120,465 shares of Common Stock.common stock. As of June 30, 2003, 14,8672004, 11,697 shares of Series A Convertible Preferred Stock, currently convertible into 565,285444,752 shares of Common Stock,common stock, are oustanding.outstanding.
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Series C Preferred Offering – As of August 16, 1999, pursuant to the strategic collaboration agreement with Mallinckrodt (see Note 8)2), the Company sold 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. During June 2003, the Series C Convertible Preferred Stock was converted into 700,000 shares of Common Stock.common stock.
Common Stock Transactions – In January 2004, the Company concluded a private placement of common stock and warrants in which the Company sold 6,992,500 shares of its $.01 par value common stock and 1,048,875 warrants, which equates to 15% warrant coverage on the number of shares sold, at an offering price of $3.25 per share. Each five-year warrant entitles the holder to purchase one share of common stock at an exercise price of $4.06 per share. The gross proceeds were approximately $22,700,000 and the net proceeds were approximately $21,000,000. The Company made the private placement solely to financial institutions and accredited investors pursuant to Regulation D under the Securities Act of 1933. The investors represented that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants bear restrictive legends. A registration statement covering the resale of the shares by the investors was filed and subsequently declared effective by the Security and Exchange Commission in April 2004. In connection with the private placement, the Company paid placement fees totaling approximately $1,700,000.
In private placements of Common Stockcommon stock and warrants in July 2002, November 2002 and March 20, 2003, the Company sold an aggregate of 24,352,099 shares of its Common Stockcommon stock to investors consisting of domestic and European financial institutions and other accredited investors: 1,545,063 shares were sold at a market value of approximately $1.17 per share in the July 2002 offering, 9,373,940 shares of common stock were sold at a market value of approximately $1.23 per share in the November 2002 offering, and 13,433,096 shares of common stock were sold at a market value of approximately $1.42 per share in the March 2003 offering. For every five shares purchased in the July and the November offerings, and for every four shares purchased in the March offering, the investors received a five yearfive-year warrant to purchase one share of common stock at an exercise price of $1.46 for the July offering, $1.54 for the November offering, and $1.77 for the March offering. Based on the sales price of the common stock in these private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $203,138 has been reflected in the Company’s consolidated statement of operations for year the ended June 30, 2003.
In connection with these private placements, the Company paid cash placement agent fees of $126,000 for the July offering, $790,433 for the November offering and $985,250 for the March 2003 offering and issued five-year warrants to purchase (i) 103,004 shares of Common Stockcommon stock at prices ranging from $1.37 to $1.46 per share pursuant to the July offering, and (ii) 458,647 shares of Common Stockcommon stock at $1.54 per share pursuant to the November offering.
In private placements of Common Stockcommon stock and warrants in November 2001 and June 2002, the Company sold an aggregate of 5,997,578 shares of its Common Stockcommon stock to investors consisting of domestic and European financial institutions and other domestic accredited investors: 4,902,481 shares were sold at $2.25 per share in the November 2001 offering and 1,095,097 shares were sold at $2.20 per share in the June 2002 offering. For every four shares purchased in the November offering, and for every five shares purchased in the June offering, the investors received a five yearfive-year warrant to purchase one share of common stock at an exercise price of $2.70 for the November offering and $2.75 for the June offering. Based on the sales price of the common stock in these private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $297,603 has been reflected in the Company’s consolidated statement of operations for the year ended June 30, 2002.
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In connection with these private placements, the Company paid placement agent’s fees of $771,879 for the November offering and $168,000 for the June offering and issued five yearfive-year warrants to purchase (i) 356,060 shares of Common Stockcommon stock at prices ranging from $2.66 to $2.70 per share pursuant to the November offering and (ii) 109,510 shares of Common Stockcommon stock at $2.75 per share pursuant to the June offering.
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In a private placement of Common Stockcommon stock and warrants in September and October 2000, the Company sold 2,532,368 shares of its Common Stockcommon stock to a total of nine investors in two tranches: 1,800,000 shares at $6.00 per share and 732,368 shares at $5.94 per share for total net proceeds of approximately $14 million.$14,000,000. For every five shares purchased, the investors received an immediately exercisable five-year warrant to purchase one share of Common Stockcommon stock at 125% of the closing price. As a result, the Company issued warrants to purchase 360,000 shares at an exercise price of $7.50 per share and warrants to purchase 146,472 shares at an exercise price of $7.42 per share.
In connection with the private placement, the Company paid a placement agent’s fee of $1,060,391 and issued five yearfive-year warrants to the placement agent to purchase 216,000 shares of Common Stockcommon stock at $6.60 per share and 87,884 shares of Common Stockcommon stock at $6.53 per share.
Outstanding Stock Purchase Warrants – AtAs of June 30, 2003,2004, the Company had the following warrants outstanding (prices are rounded to the nearest cent).
Common Exercise Price Latest Stock Shares per Share Termination Date------------ --------- ----------------15,125$0.01$ 0.01 03/15/05 32,487 0.22 09/13/0551,50238,627 1.37 07/29/07360,514154,506 1.46 06/13/072,325,3121,450,473 1.54 11/29/073,358,2752,464,789 1.77 03/21/08 32,654 1.78 02/15/06 404,263 2.36 06/25/06 134,188 2.66 10/29/061,429,9841,057,864 2.70 04/30/07328,529292,215 2.75 06/13/07 15,000 2.82 05/13/12 30,000 2.90 04/06/06 25,000 3.65 12/17/06
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Common Exercise Price Latest Stock Shares per Share Termination Date 15,000 $ 4.00 12/15/10170,000 4.37 02/08/04 193,003 4.48 03/09/04 214,271 4.56 03/10/04 808,850 4.70 03/11/04 28,582 4.81 03/11/04 194,773 5.06 03/12/04 44,073 5.56 03/12/041,048,875 4.06 01/28/09 87,884 6.53 10/27/05 216,000 6.60 10/05/05 5,000 7.00 06/06/05 146,475 7.42 10/27/05 360,000 7.50 10/05/05---------- ------------ ---- Total11,031,7448,026,425 $0.01 - 7.50=================== ============
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In December 2002, the Company issued warrants to purchase 15,000 shares of its Common Stockcommon stock at $2.82 per share to the Wistar Institute of Anatomy and Biology, as part of the consideration for a second agreement with Wistar to amend a technology license which Wistar previously granted to the Company. The warrants expire on May 13, 2012. The fair value of these warrants of approximately $20,000, as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations.
In April 2002, the Company issued warrants to purchase 15,000 shares of its Common Stockcommon stock at $2.70 per share to Albert Fried, Jr. in consideration for a consulting agreement. The warrants expire on April 30, 2007. The fair value of these warrants of approximately $14,000, as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations. These options have been exercised in full as of June 30, 2004.
In April and December 2001, the Company issued warrants to purchase 30,000 shares of its Common Stockcommon stock at $2.90 per share and 25,000 shares at $3.65 per share, respectively, to the Cedar Brook Corporate Center as part of the consideration for the lease agreement for the Cranbury, NJ facility. These warrants expire 5five years from the date of issuance. The fair value of these warrants of approximately $47,000, as calculated by the Black-Scholes option pricing model, will be charged ratably to expense in the statement of operations over the lease term of 10ten years.
In December 2000, the Company issued warrants to purchase 15,000 shares of its Common Stock at $4.00 per share to the Wistar Institute of Anatomy and Biology, as part of the consideration for an agreement with Wistar to amend a technology license which Wistar previously granted to the Company. The warrants expire on December 15, 2010. The fair value of these warrants, of approximately $31,200 as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations.
Stock Option PlansPlan – The Company has one stock option plan currently in effect under which future grants may be issued, the 1996 Stock Option Plan, as amended,amended. This plan was approved by the Company’s stockholders on November 15, 2000, for which 5,000,000 shares of Common Stock arecommon stock have been reserved. The Company has also granted options under agreements with individuals, and not under any plan. The options granted by the Company generally expire ten years from the date of grant and generally vest over three to four years. As of June 30, 2004, there were 355,956 options available for grant under the 1996 Stock Option Plan.
The status of the plansplan and individual agreements during the three years ended June 30, 2003,2004 was as follows:
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Number of shares Range of prices Weighted average subject to options per share Prices per share------------------ --------------- ----------------Outstanding atJune 30, 2000 3,008,500 $.20 - $360.00 $3.92 ========== ============== ===== Granted 983,125 $2.86 - $6.063 Expired or canceled (119,434) $3.50 - $6.00 Exercised (487,016) $.20 - $3.875 ---------- --------------- Outstanding at June 30,July 1, 2001 3,385,175$0.22$.22 - $360.00 $4.14========== ============== =====Granted 695,000 $2.86 - $6.063 Expiredor canceled (411,832)(384,330) $3.50 - $6.00 Forfeitures (27,500) $3.50 - $6.00 Exercised (149,275)$0.20$.22 - $3.875---------- -------------------------- Outstanding at June 30, 20023,519,068 $0.223,519,070 $.22 - $21.70 $4.30========== ============== =====Granted 799,900 $1.16 - $3.53 Expiredor canceled (177,554)(114,216) $2.50 - $21.70 Forfeitures (63,333) $1.36 -$21.70$5.125 Exercised (5,184) $.22 - $2.50---------- -------------------------- Outstanding at June 30, 20034,136,2304,136,237 $1.00 - $21.70 $3.79========== ============== =====Granted 957,500 $1.16 - $4.70 Expired (290,021) $1.36 - $21.70 Forfeitures (297,683) $1.36 - $4.25 Exercised (140,432) $1.36 - $3.063 ----------- Outstanding at June 30, 2004 4,365,601 $1.00 - $21.70 $3.58 =========== Exercisable at June 30,2003 2,678,8592004 3,353,207 $1.00 - $21.70$4.25
63$3.76 =========== Shares Weighted Weighted Weighted Purchasable Average Option Average Shares Average Price Range of Under OptionLife Exercise ExercisableAt OfAs of of Exercisable Exercise Prices Options (Years) Price June 30,20032004 Shares-------------------------- ----------- -------- -------------- --------------------- ------- ----- ------------- ------ $1.00 - $2.49794,796 8.88732,663 7.84 $1.62236,170 $1.59485,384 $1.64 $2.50 - $3.991,677,594 7.02 $3.16 1,096,335 $3.042,215,278 7.14 $3.21 1,561,232 $3.18 $4.00 - $5.991,269,375 6.50 $4.70 955,219 $4.791,136,071 5.62 $4.72 1,025,002 $4.76 $6.00 - $8.00366,959 4.26 $6.94 363,624 $6.95281,387 3.11 $6.96 281,387 $6.96 $8.01 -$18.49 7,188 0.40 $18.34 7,188 $18.34 $18.50 -$21.7020,323 0.46 $21.70 20,323 $21.70202 0.92 $15.77 202 $15.77
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Shares Weighted Weighted Weighted Purchasable Average Option Average Shares Average Price Range of Under Life Exercise Exercisable As of of Exercisable Exercise Prices Options (Years) Price June 30, 2004 Shares --------------- ------- ------- ----- ------------- ------ all outstanding options:------------------------$1.00 - $21.704,136,2354,365,601 6.93$3.79 2,678,859 $4.25 ========= =========
During the year ended June 30, 2004, the Company made modifications to stock options held by an employee and a director. As a result of these modifications, the Company recorded an expense of $156,239 during the year ended June 30, 2004. In addition, there were stock options granted to certain officers which included vesting provisions which were contingent on achievement of certain performance objectives and one these objectives was met in September 2003. As a result, a compensation expense charge in the amount of $470,400 was recorded in connection with these performance based options.
(7) INCOME TAXES:
The Company has had no income tax expense or benefit since inception because of operating losses except for amounts recognized for sales of New Jersey State operating loss carryforwardscarry-forwards and research and development credits. Deferred tax assets and liabilities are determined based on the estimated future tax effect of differences between the financial statements and tax reporting basis of assets and liabilities, as well as for operating loss carryforwards and research and development costs, given the provisions of the tax laws. Based on the Company's historical losses, a valuation allowance for the net deferred tax assets has been recorded at June 30, 2003.2004 and has been recorded since inception.
As of June 30, 2004, the Company had Federal net operating loss carryforwards of approximately $112,000,000, which will expire in the years 2004 through 2024, if not utilized. At June 30, 2004 the Company had federal research and development credits of approximately $2,400,000 that will expire in year 2004 through 2024 if not utilized.
The Tax Reform Act of 1986 imposes limitations(the "Act") provides for limitation on the use of net operating loss and research and development tax credit carryforwards iffollowing certain stock ownership changes occur. As(as defined by the Act) that could limit the Company's ability to utilize these carryforwards. The Company may have experienced various ownership changes, as defined by the Act, as a result of past changes in majority ownership,financings. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore the Company most likely willmay not be able to fully realize the benefittake full advantage of itsthese carryforwards for federal income tax purposes.
The Company's net deferred tax assets are as follows:
June 30, --------------------------------- 2004 2003 ------------- ------------- Net operating losscarryforwards.
carryforwards ............ $ 38,097,000 $ 29,149,000 Research and development tax credits ........ 2,386,000 1,736,000 Accrued expenses ............................ 798,000 455,000 ------------- ------------- 41,281,000 31,340,000 Valuation allowances ........................ (41,281,000) (31,340,000) ------------- ------------- Net deferred tax assets...................... $ - $ - ============= =============
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Significant componentsIn assessing the realizability of the Company's deferred tax asset for federal and state purposesassets, the Company considers whether it is as follows:
June 30, ------------------------------ 2003 2002 ------------- ------------- Net operating loss carryforwards ...................... $ 29,149,000 $ 24,267,000 Research and development tax credits .................. 1,736,000 866,000 Non-deductible expenses ............................... 455,000 1,138,000 ------------- ------------- 31,340,000 26,271,000 Valuation Allowances .................................. (31,340,000) (26,271,000) ------------- ------------- Net deferred tax assets................................ - - ============= =============
A valuation allowance was established for 100%more likely than not that some portion or all of the deferred tax assets aswill not be realized. The ultimate realization of such benefitsdeferred tax assets is not assured.dependent upon the generation of future taxable income during the periods in which the temporary differences representing future deductible amounts become deductible. Due to the Company's history of losses, the deferred tax assets are fully offset by a valuation allowance as of June 30, 2004 and 2003. The valuation allowance for the years ended June 30, 2004 and 2003 increased by $9,941,000 and $5,069,000, respectively, related primarily to additional net operating losses incurred by the Company.
During the years ended June 30, 2004, 2003 2002 and 2001,2002, the Company sold New Jersey State operating loss carryforwards and research and development credits, which resulted in the recognition of $240,836, $245,093 $392,410 and $325,152,$392,410, respectively, in tax benefits.
(8) GRANTS AND CONTRACTS:
The Company applies for and has received grants and contracts under the Small Business Innovative Research (“SBIR”) program and other federally funded grant and contract programs. Since inception, approximately $3,875,000$4,025,000 of the Company’s revenues has been derived from federally or state funded grants and contracts. Under federal grants and contracts, there are no royalties or other forms of repayment; however, in certain limited circumstances the government can acquire rights to technology which is not being commercially exploited.
On May 13, 2002, the Company entered into an agreement with Mallinckrodt Inc., a division of Tyco International, Ltd., to amend the strategic collaboration agreement dated as of August 17, 1999 for the development of LeuTech.NeutroSpec. Under the terms of the original agreement, Mallinckrodt paid a licensing fee of $500,000 (see Note 2) and purchased 700,000 restricted unregistered shares of Series C Convertible Preferred Stock for $13,000,000 (see Note 6). The Company shared LeuTechNeutroSpec development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay the Company milestone payments of an additional $10 million$10,000,000 on FDA approval of the first LeuTechNeutroSpec indication and on attainment of certain sales goals following product launch. The Company agreed to arrange for the manufacture of LeuTechNeutroSpec and would receive a transfer price on each product unit and a royalty on LeuTechNeutroSpec net sales.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million,$3,200,000 subject to certain conditions and attaining certain milestones, to offset a portion of the Company’s estimated expenses associated with completing the FDA review process. Additionally, timing of the $10 million$10,000,000 in future milestone payments has been revised to coincide with LeuTech’s anticipatedNeutroSpec’s FDA approval and achievement of future sales goals (see Note 2). OfAll of the $3.2 million, $1.2 million$3,200,000 has been paid to date. The Company expects to receive the remaining $2 million in the fourth quarteras of calendar year 2003.
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Table of ContentsJune 30, 2004.
During the yearyears ended June 30, 2004, 2003 2002 and 2001,2002, the Company recognized $2,000,000, $504,000 $0 and $1,410,356,$0, respectively, as contract revenue related to the development of LeuTech.NeutroSpec.
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(9) RELATED PARTY TRANSACTIONS:
One of the Company's directors is the president and sole stockholder of a company which provides strategic and technology consulting services. The Company paid the consulting firm $43,125, $112,500 and $119,333 during the years ended June 30, 2004, 2003 and 2002, respectively, for consulting services provided to the Company.
(10) CONSOLIDATED QUARTERLY FINANCIAL DATA – UNAUDITED:
The following tables provide quarterly data for the fiscal years ended June 30, 20032004 and 2002.2003:
Three Months Ended------------------------------------------------------------------------------------------------------------------------------------- September 30, December 31, March 31, June 30, 2003 2003 2004 2004 ------------ ------------ ------------ ------------ (amounts in thousands except share and per share data) Total revenues $ 1,833 $ 291 $ 181 $ $ 10 Total operating expenses 8,633 5,203 8,292 6,945 Total other income (expense) 81 80 84 (46) ------------ ------------ ------------ ------------ Loss before income taxes (6,719) (4,832) (8,027) (6,981)
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Three Months Ended ---------------------------------------------------------------- September 30, December 31, March 31, June 30, 2002 2002 2003 2003-------------- --------------- -------------- ---------------------------- ------------ ------------ ------------ (amounts in thousands except share and per share data) Income tax benefit - 241 - - ------------ ------------ ------------ ------------ Net loss attributable to common stockholders $ (6,719) $ (4,591) $ (8,027) $ (6,981) ============ ============ ============ ============ Basic and diluted net loss attributable to common stockholders per common share $ (0.16) $ (0.10) $ (0.16) $ (0.13) ============ ============ ============ ============ Weighted average number of common shares outstanding, used in computing basic and diluted net loss attributable to common stockholders per common share 43,161,281 44,531,302 50,455,484 52,687,077 ============ ============ ============ ============ Three Months Ended ---------------------------------------------------------------- September 30, December 31, March 31, June 30, 2002 2002 2003 2003 ------------ ------------ ------------ ------------ (amounts in thousands except share and per share data) Total revenues $ 624 $ 234 $ 330 $ 82 Total operating expenses 4,768 4,875 6,025 6,638 Total other income (expense) 45 44 4393 -------------- --------------- --------------- ---------------94 ------------ ------------ ------------ ------------ Loss before income taxes (4,099) (4,597) (5,652)(6,463)(6,462) Income tax benefit - 245 - --------------- --------------- --------------- --------------------------- ------------ ------------ ------------ Net loss (4,099) (4,352) (5,652)(6,463)(6,462) Deemed dividend (17) (98) (88) --------------- --------------- --------------- --------------------------- ------------ ------------ ------------ Net loss attributable to commonsharesstockholders $ (4,116) $ (4,450) $ (5,740) $(6,463) ============== =============== =============== ===============(6,462) ============ ============ ============ ============ Basic and diluted net loss attributable to common stockholders per common share $ (0.22) $(0.18)(0.17) $ (0.19) $ (0.15)============== =============== =============== =========================== ============ ============ ============
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Three Months Ended ---------------------------------------------------------------- September 30, December 31, March 31, June 30, 2002 2002 2003 2003 ------------ ------------ ------------ ------------ (amounts in thousands except share and per share data) Weighted average number of common shares outstanding, used in computing basic and diluted net loss attributable to common stockholders per common share 18,497,853 24,871,723 30,162,510 42,039,097============== =============== =============== =============== Three Months Ended -------------------------------------------------------------------- September 30, December 31, March 31, June 30, 2001 2001 2002 2002 -------------- --------------- --------------- --------------- (amounts============ ============ ============ ============
(11) SUBSEQUENT EVENTS:
In July 2004, the Company announced the receipt of full approval from the FDA to market NeutroSpec, the Company’s proprietary radiolabeled monoclonal antibody product for imaging equivocal appendicitis. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt.
In August 2004, the Company entered into a collaboration agreement with King, a specialty pharmaceutical company, to jointly develop and commercialize PT-141. Pursuant to the terms of the agreement, Palatin has granted King a co-exclusive license with Palatin to PT-141 in thousands except perNorth America and an exclusive right to collaborate in the licensing or sublicensing of PT-141 with Palatin outside North America. Palatin has the option to create a urology specialty sales force to co-promote the product in the U.S., upon commercialization.
King paid the Company $20,000,000 at closing, $5,000,000 of which was designated as an equity investment in Palatin. Certain of he proceeds received at closing will be recorded as an equity contribution based on the fair value of the common stock and common warrants issued in connection with the collaboration agreement with the remaining balance recorded as deferred revenue. The deferred revenue will be amortized to revenue over the related performance period. King may pay potential milestone payments to Palatin totaling up to $100,000,000 for achieving certain Erectile Dysfunction and Female Sexual Dysfunction development and regulatory approval targets, a portion of which would consist of an equity investment in Palatin. After regulatory approval and commercialization of PT-141, King may also pay potential one-time milestone payments to Palatin totaling up to $130,000,000 upon achieving specified annual North American net sales thresholds.
Under the terms of the agreement, King and Palatin will share data)
Totalall collaboration development and marketing costs and all collaboration net profits derived from net sales of PT-141 in North America based on an agreed percentage. King and Palatin will seek a partner for PT-141 for territories outside of North America and will jointly share in collaboration revenues $ 41 $ 42 $ 99 $ 99
Total operating expenses 3,000 4,266 4,662 5,193
Total other income (expense) 101 79 64 65
-------------- --------------- --------------- ---------------
Loss before income taxes (2,858) (4,145) (4,499) (5,029)
Income tax benefit - 162 230 -
-------------- --------------- --------------- ---------------
Net loss (2,858) (3,983) (4,269) (5,029)
Deemed dividend - (286) - (11)
-------------- --------------- --------------- ---------------
Net loss attributable to common shares $ (2,858) $ (4,269) $ (4,269) $ (5,040)
============== =============== =============== ===============
Basic and diluted net loss per common share $ (0.26) $ (0.33) $ (0.26) $ (0.31)
============== =============== =============== ===============
Weighted average number of common shares
outstanding, used in computing basic and
diluted net loss per common share 11,199,611 13,013,547 16,140,790 16,495,204
============== =============== =============== ===============
generated from those territories.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Disclosure
On August 8, 2002, upon the recommendation and approval of our Audit Committee, we dismissed Arthur Andersen LLP (“Andersen”) as our principal independent public accountants and engaged KPMG LLP (“KPMG”) as our principal independent public accountants.
In connection with the audits for the most recent year ended June 30, 2001 and the subsequent interim period through the filing date of this Annual Report on Form 10-K, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference to the subject matter of such disagreements in connection with their reports on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.None.
The report of Andersen on our consolidated financial statements, as of and for the year ended June 30, 2001, did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles.
We provided Andersen with the foregoing disclosures and requested Andersen to furnish a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. While we have received no information from Andersen that Andersen has a basis for disagreement with such statements, we have been unable to obtain such a letter due to the fact that the personnel primarily responsible for our account (including the engagement partner and manager) have left Andersen.
During the year ended June 30, 2001 and through the filing date of this Annual Report on Form 10-K, neither we nor someone on our behalf consulted KPMG regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
Item 9A. Controls and Procedures
(A) Evaluation The Company’s management, with the participation of Disclosure Controlsthe Company’s Chief Executive Officer and Procedures. Our principal executive officer and principalChief financial officer, after evaluatingOfficer, has evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2004. Based on that evaluation, the end of the period covered by this Annual Report on Form 10-K, haveCompany’s Chief Executive Officer and Chief Financial Officer concluded that based on such evaluation, ourthe Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.
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(B) Changes in Internal Controls.June 30, 2004. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter, that have materially affected, or that are reasonably likely to materially affect ourthe Company’s internal control over financial reporting.reporting during the fourth quarter of the fiscal year ended June, 30, 2004.
None.
[PART III BEGINS ON THE FOLLOWING PAGE]
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Directors and executive officers. The following table sets forth the names, ages and positions of our directors and executive officers.
Name Age Position with Palatin - ---- --- --------------------- Carl Spana, Ph.D. 41 President, chief executive officer and director Stephen T. Wills, CPA 46 Executive vice president and chief financial officer, secretary and treasurer Perry B. Molinoff, M.D. 63 Executive vice president of research and development and director Shubh D. Sharma, Ph.D. 48 Vice president and chief technical officer John K.A. Prendergast, Ph.D. 49 Director, chairman of the board of directors Robert K. deVeer, Jr. (1) (2) 57 Director Kevin S. Flannery (1) (2) 59 Director Zola P. Horovitz, Ph.D. (2) 68 Director Robert I. Taber, Ph.D. (1) 67 Director Errol DeSouza, Ph.D. 49 Director ________________________________
(1) Member of the audit committee
(2) Member of the compensation committee.
All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. All current directors were elected at our annual stockholders’ meeting on December 6, 2002, except for Dr. DeSouza, who was elected by the board and became a director on April 1, 2003. Executive officers are appointed by the board and serve at the discretion of the board. Each officer holds his position until his successor is appointed and qualified. All of the current executive officers hold office under employment agreements.
CARL SPANA, Ph.D., co-founder of Palatin, has been our president and chief executive officer since June 14, 2000. He has been a director of Palatin since June 1996 and has been a director of our wholly-owned subsidiary, RhoMed Incorporated, since July 1995. From June 1996 through June 14, 2000, Dr. Spana served as an executive vice president and our chief technical officer. From June 1993 to June 1996, Dr. Spana was vice president of Paramount Capital Investments, LLC, a biotechnology and biopharmaceutical merchant banking firm, and of The Castle Group Ltd., a medical venture capital firm. At Paramount Capital Investments and at Castle Group, Dr. Spana was responsible for discovering, evaluating, and commercializing biotechnologies. Through his work at Paramount Capital Investments and Castle Group, Dr. Spana co-founded and acquired several private biotechnology firms. From July 1991 to June 1993, Dr. Spana was a Research Associate at Bristol-Myers Squibb, a publicly traded pharmaceutical company, where he was involved in scientific research in the field of immunology. Dr. Spana is a director of AVAX Technologies, Inc., a publicly traded medical technology company. Dr. Spana received his Ph.D. in molecular biology from The Johns Hopkins University and his B.S. in biochemistry from Rutgers University.
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PERRY B. MOLINOFF, M.D. has been executive vice president for research and development since September 2001 and a director since November 2001. Dr. Molinoff’s background includes more than 30 years of experience in both the industrial and educational sectors. From 1981 to 1994 he was a professor of pharmacology and chairman of the Department of Pharmacology at the University of Pennsylvania School of Medicine in Philadelphia. From January 1995 until March 2001, he was vice president of neuroscience and genitourinary drug discovery for the Bristol-Meyers Squibb Pharmaceutical Research Institute, where he was responsible for directing and implementing the Institute’s research efforts. Dr. Molinoff earned his medical degree from Harvard Medical School.
JOHN K. A. PRENDERGAST, Ph.D., co-founder of Palatin, has been chairman of the board since June 14, 2000, and a director since August 1996. Dr. Prendergast has been president and sole stockholder of Summercloud Bay, Inc., a biotechnology consulting firm, since 1993. He is a co-founder and/or a member of the board of Ingenex, Inc., Avigen, Inc., and AVAX Technologies, Inc. From October 1991 through December 1997, Dr. Prendergast was a managing director of The Castle Group Ltd. Dr. Prendergast received his M.Sc. and Ph.D. from the University of New South Wales, Sydney, Australia and a C.S.S. in administration and management from Harvard University.
ROBERT K. deVEER, JR. has been a director since November 1998. Since January 1997, Mr. deVeer has been the president of deVeer Capital LLC, a private investment company. From 1995 until his retirement in 1996, Mr. deVeer served as Managing Director, Head of Industrial Group at New York-based Lehman Brothers. From 1973 to 1995, he held increasingly responsible positions at New York-based CS First Boston, including Head of Project Finance, Head of Industrials and Head of Natural Resources. He was a managing director, member of the investment banking committee, and a trustee of the First Boston Foundation. He received a B.A. in economics from Yale University and an M.B.A. in finance from Stanford Graduate School of Business.
KEVIN S. FLANNERY has been a director since March 2000. Since 1992, Mr. Flannery has served as president of Whelan Financial Corp., a consulting and investment firm, and from 1994 to 1997 Mr. Flannery also served as president of Whelan Securities Corp., an NASD member brokerage firm. From 1975 to 1992, Mr. Flannery was senior managing director at Bear, Stearns & Co., Inc. where he was the head of listed equity trading. From 1974 to 1975, Mr. Flannery was first vice president at White, Weld & Co., Inc. where he was the head of the arbitrage department and co-head of the equity trading department. Prior to this, Mr. Flannery was a senior trader at Goldman, Sachs & Co. He is currently a director of three other publicly held companies: Geneva Steel Holdings Corp., Raytech Corporation and TeleSpectrum Worldwide Inc., of which he is also chairman and CEO; and of four privately held companies: Sheffield Steel Corp., Sarcom Inc., Global Technology Finance Corp. and Centis Inc. Mr. Flannery is a graduate of Columbia University.
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ZOLA P. HOROVITZ, Ph.D. has been a director since February 2001. Before he retired from Bristol-Myers Squibb in 1994, Dr. Horovitz spent 34 years in various positions, including associate director of the Squibb Institute for Medical Research, vice president of development, vice president, scientific liaison, vice president of licensing, and vice president of business development and planning, for the pharmaceutical division of Bristol-Myers Squibb. He held advisory positions at the University of Pittsburgh, Rutgers College of Pharmacy and Princeton University. He is currently a director of seven other publicly held companies: Genaera Corporation, Biocryst Pharmaceuticals, Diacrin, Avigen, Synaptic Pharmaceutical, 3-Dimensional Pharmaceuticals and Dov Pharmaceuticals; and four non-public companies: Phyton, Epigenesis, Immunicon and Nitromed. Dr. Horovitz earned his Ph.D. in Pharmacology from the University of Pittsburgh.
ROBERT I. TABER, Ph.D. has been a director since May 2001. Dr. Taber began his career in the pharmaceutical industry in 1962, holding a succession of positions within Schering Corporation’s biological research group before leaving in 1982 as director of biological research. He has also held a number of increasingly important positions with DuPont Pharmaceuticals and the DuPont Merck Pharmaceutical Company, including director of pharmaceutical research, director of pharmaceutical and biotechnology research, vice president of pharmaceutical research and vice president of extramural research and development. From 1994 to 1998, Dr. Taber held the position of senior vice president of research and development at Synaptic Pharmaceuticals Corporation before founding Message Pharmaceuticals, Inc. in 1998. He is currently a director of Message Pharmaceuticals, and serves on the scientific advisory board of Locus Discovery, Inc. Dr. Taber earned his Ph.D. in pharmacology from the Medical College of Virginia.
ERROL DE SOUZA, Ph.D. has been a director since April 2003. Dr. De Souza has nearly two decades of experience in the field of drug discovery and development. Dr. DeSouza joined Archemix Corporation, a biopharmaceutical company focused on aptamer therapeutics, on April 1, 2003. Previously, he was president and chief executive officer and a director of Synaptic Pharmaceuticals. As a result of a merger effective March 2003, Synaptic Pharmaceuticals became a wholly owned subsidiary of H. Lundbeck A/S, an international pharmaceutical company. Prior to that, Dr. DeSouza held senior management positions with Aventis, and its predecessor company Hoechst Marion Roussel Pharmaceuticals, and was co-founder of Neurocrine Biosciences, Inc. He is currently a member of the board of directors of IDEXX, and a Professor at the Center for Molecular Biology and Behavioral Neurosciences at Rutgers University. Dr. DeSouza received his B.A. (Honors) in Physiology and his Ph.D. in Neuroendocrinology from the University of Toronto, Canada and he received his postdoctoral fellowship in Neuroscience from The John Hopkins School of Medicine, Baltimore, MD.
Section 16(a) Beneficial Ownership Reporting Compliance
The rulesinformation required by Part III of Form 10-K under
is incorporated by reference from our definitive proxy statement relating to the 2004 Annual Meeting of Stockholders, which we will file with the SEC (the Securities and Exchange Commission) require us to disclose late filings of reports of stock ownership and changes in stock ownership bywithin 120 days after our directors and officers. To the best of our knowledge, all of the filings for our directors and officers were made on a timely basis inJune 30, 2004 fiscal 2003, except that Messrs. Spana, Wills, Molinoff, deVeer, Flannery, Horovitz and Taber each filed one report on Form 4 late, each relating to one option grant transaction.year end.
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Summary compensation table. The following table summarizes the compensation paid to our chief executive officer and the other named executive officers for the last three fiscal years. With respect to the persons and periods covered in the following table, we made no restricted stock awards, have no outstanding stock appreciation rights (“SARs”) and have no long-term incentive plan (“LTIP”).
SUMMARY COMPENSATION TABLE Long Term Compensation ------------ Annual Compensation Awards ----------------------------------- ------------ All other Name and Option Compen- Principal Position Year Salary Bonus Shares(1) sation - ------------------ ---- ----------- ---------- ---------- ---------- Carl Spana, Ph.D., 2003 $290,000 $50,000(2) 100,000 $3,543(3) chief executive 2002 $291,042(4) - 100,000(5) $58,305(6) officer 2001 $268,358 $60,000 140,000 $2,319(7) Stephen T. Wills, 2003 $225,000 $40,000(2) 80,000 $18,131(8) CPA, MST, chief 2002 $226,833(4) - 70,000(5) $16,472(9) financial officer 2001 $206,274 $45,000 65,000 $10,164(10) Perry B. Molinoff, 2003 $250,000 $26,667(2) 60,000 $17,665(11) M.D., executive 2002 $205,715 - - $46,192(12) vice president of 2001 N/A N/A 245,000 N/A research & development Shubh D. Sharma, 2003 $165,000 $23,333(2) 30,000 $17,081(13) Ph.D., vice 2002 $162,083 - 35,000(5) $13,091(14) president and chief 2001 $140,912 $20,000 30,000 $11,628(15) technical officer _____________________________
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Option grants in last fiscal year. The following table shows options granted to our named executive officers during the fiscal year ended June 30, 2003. All of the options listed were granted under our 1996 stock option plan, and the underlying security is common stock. All options granted in fiscal 2003 vested as to one third of the shares on the date of grant, and will vest as to the remaining two thirds of the shares only upon achievement of performance objectives. The exercise price for each option is equal to the market price of common stock on the date of grant. We have not granted any SARs.
[TABLE APPEARS ON FOLLOWING PAGE]
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OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS - --------------------------------------------------------------------------| | Potential Realizable | Value at Assumed Number of % of Total | Annual Rates of Securities Options | Stock Price Underlying Granted to Exercise | Appreciation for Options Employees or Base | Option Term* Granted in Fiscal Price Expiration | --------------------- Name (#) Year ($/Sh) Date | 5%($) 10%($) - ----------------------------------- -------------- --------- -------------| ---------- --------- | Carl Spana 100,000 16.5% $2.00 12/11/2012 | $125,780 $318,750 | Stephen T. Wills 80,000 13.2% $2.00 12/11/2012 | $100,624 $255,000 | Perry B. Molinoff 60,000 9.9% $2.00 12/11/2012 | $75,468 $191,250 | Shubh D. Sharma 30,000 5.0% $2.00 12/11/2012 | $37,734 $95,625 __________________________
* "Potential realizable value" is shown in response to SEC rules which require the information, for illustration purposes only. The values shown are not representations or projections of future stock prices or the future value of our common stock.
Aggregated option exercises in last fiscal year and fiscal year-end option values. No executive officer exercised any options during the fiscal year ended June 30, 2003. We have not granted any SARs. Fiscal year-end values in the following table are based on the closing price for the common stock, as reported on AMEX on June 30, 2003, of $3.19 per share.
aggregated option exercises in last fiscal year and fiscal year-end option values Value of Shares Underlying Unexercised Unexercised In-the-Money Shares Options at Options at Acquired Fiscal Year End, Fiscal Year End, on Value ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- -------------- ----------- ------------- Carl Spana 0 $0 650,962 130,000 $216,114 $79,334 Stephen T. Wills 0 $0 457,916 113,334 $85,359 $63,466 Perry B. Molinoff 0 $0 117,500 187,500 $23,800 $47,600 Shubh D. Sharma 0 $0 82,630 63,335 $18,800 $23,800
Ten-year option repricings. We did not adjust or amend the exercise price of any stock options during the fiscal year ended June 30, 2003. We have not granted any SARs. The following table shows all option repricings for all executive officers at any time during the last 10 years, except for repricings which may have been effected before we became a publicly held company in 1993:
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TEN-YEAR OPTION REPRICINGS Number of Market Length of Securities Price of Exercise Original Underlying Stock at Price at Option Term Options Time of Time of New Remaining at Repriced or Repricing or Repricing or Exercise Date of Amended Amendment Amendment Price Repricing or Name Date (#) ($) ($) ($) Amendment - ------------------- ------- ----------- ------------ ------------ -------- ---------------- Carl Spana 3/24/98 74,196 $6.25 $4.96 $1.00 8 years 3 months Charles Putnam (1) 3/24/98 74,196 $6.25 $4.96 $1.00 8 years 3 months Edward J. Quilty (2) 3/24/98 7,803 $6.25 $4.96 $0.20 9 years 2 months Edward J. Quilty 9/27/96 70,257 $10.50 $5.42 $0.20 8 years 3 months - --------------------------
(1) Former executive vice president and chief operating officer.
(2) Former president and chief executive officer.
Compensation of Directors
Non-employee directors’ initial option grants. When a non-employee director is first elected to the board, he receives an option to purchase an amount of common stock determined by the board, up to 10,000 shares, at the market value on the date of grant. These options vest as to 25% of the option per year, starting on the date of grant. They expire 10 years from the date of grant.
Non-employee directors’ annual option grants. Each non-employee director receives annually an option to purchase 25,000 shares of common stock at the closing price on the date of the board’s annual meeting. These options vest in 12 monthly installments, starting on the last day of January. They expire 10 years from the date of grant. Messrs. deVeer, Flannery, Horovitz and Taber each received an option to purchase 25,000 shares at $1.59 per share, the closing price on December 6, 2002. Mr. DeSouza received an option to purchase 18,750 shares, representing the prorated portion of his annual option grant, at $1.70 per share, the closing price on April 1, 2003, the date he became a director.
Non-employee directors’ expenses. Non-employee directors are reimbursed for expenses incurred in performing their duties as directors, including attending all meetings of the board and any committees on which they serve.
Employee directors. Employee directors are not separately compensated for services as directors, but are reimbursed for expenses incurred in performing their duties as directors, including attending all meetings of the board and any committees on which they serve.
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Carl Spana, Ph.D., Stephen T. Wills and Perry B. Molinoff, M.D. Dr. Spana, Mr. Wills and Dr. Molinoff have each entered into an employment agreement with us for a two-year period commencing October 1, 2001 for Dr. Spana and Mr. Wills, and commencing September 4, 2001 for Dr. Molinoff. Each agreement automatically renews for a one-year period unless terminated at least 30 days before the anniversary date. Dr. Spana is serving as chief executive officer and president at a salary of $290,000 per year. Mr. Wills is serving as chief financial officer at a salary of $225,000 per year. Dr. Molinoff is serving as executive vice president of research and development at a salary of $250,000 per year. Each agreement also provides for:
Each agreement allows us or the employee to terminate the agreement upon written notice, and contains other provisions for termination by the company for “cause,” or by the employee for “good reason” or due to a “change in control” (as these terms are defined in the employment agreements). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of 24 months (Spana), 18 months (Wills) or 12 months (Molinoff) plus continuation of medical and dental benefits then in effect for 18 months (Spana and Wills) or 12 months (Molinoff). For Dr. Spana and Mr. Wills, termination following a change in control will result in a lump sum payment of two times (Spana) or one and one-half times (Wills) the salary then in effect, continuation of medical and dental benefits then in effect for 18 months, and immediate vesting of all stock options. For Dr. Molinoff, termination following a change in control will result in severance payments at the salary then in effect for 12 months, continuation of medical and dental benefits then in effect for 12 months, employment search expense reimbursement up to $25,000, and immediate vesting of all stock options. Each agreement includes non-competition, non-solicitation and confidentiality covenants. Although the agreements for Dr. Spana and Mr. Wills were automatically extended for a one year period pursuant to their terms, we are currently negotiating amendments to the agreements, except with respect to the base annual salary, and we anticipate that the amended terms will not be materially different than the existing terms.
Shubh D. Sharma, Ph.D. When we merged with RhoMed Incorporated (now our wholly-owned subsidiary) in 1996, we assumed RhoMed’s employment agreement with Dr. Sharma, which automatically renews for one-year periods, unless terminated by either party at least six months before the anniversary date. Dr. Sharma is serving as a vice president and chief technical officer at a salary of $165,000 per year. His agreement also provides for:
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The agreement allows us or the employee to terminate the agreement upon written notice, and contains other provisions for termination by the company for “cause” (as defined in the agreement). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of six months. The agreement includes non-competition and confidentiality covenants.
During the fiscal year ended June 30, 2003, Mr. Flannery, Mr. deVeer and Dr. Horovitz served on the compensation committee.
There are no compensation committee interlocks with other companies.
COMPENSATION COMMITTEE REPORT
The compensation committee of the board makes recommendations to the board about compensation of executive officers. The committee also administers the 1996 stock option plan and may grant options to non-management employees and consultants, but it is the board’s policy to have the full board review and approve all option grants which the committee recommends for executive officers and directors. The committee also reviews and makes recommendations to the board concerning proposed employment agreements with executive officers. The committee evaluates performance and determines compensation policies and levels for executive officers. The members of the compensation committee are not, and have never been, employees or executive officers of Palatin. Mr. deVeer and Mr. Flannery have served on the committee since August 2000, and Dr. Horovitz has served on the committee since February 2001.
Executive compensation policy. Competition for qualified senior management personnel in Palatin’s industry is intense. In order to attract and retain qualified personnel, Palatin must offer compensation which is both comparable to similarly situated companies in current salary and benefits, and includes the potential for substantial rewards if Palatin is successful over the long term. Palatin’s aim is to attract, retain and reward executive officers and other key employees who contribute to its long-term success and to motivate those individuals to enhance long-term stockholder value. It is Palatin’s policy to enter into employment agreements with executive officers, preferably with an initial term of two years. To establish this relationship between executive compensation and creation of stockholder value, the board has adopted a total compensation package comprised of base salary, bonus and stock option awards. Key elements of the compensation philosophy are:
Determining executive compensation. The committee usually meets twice per year to review how well management compensation is serving Palatin’s goals, to make recommendations to the board for any adjustments, and to recommend annual compensation for the coming year. Palatin’s chief financial officer and human resources manager gather and report on information about compensation levels in comparable companies. We review the performance of each executive officer and the financial condition of the company. We then consider the following major components of executive compensation:
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Fiscal year 2003 compensation. During the fiscal year ended June 30, 2003, we continued compensation under our employment agreements with Dr. Spana, Mr. Wills, Dr. Molinoff and Dr. Sharma, with no change in base salaries. The base salaries for these executive officers, as provided in their employment agreements, reflect comparable salary figures for the industry, necessary to engage and retain individuals with their skills. Stock option grants for the executive officers reflected achievement of corporate and development goals. Starting December of 2002, we have made the vesting of a majority of the options granted to our executive officers contingent on achievement of performance objectives. Due to insufficient liquidity and other factors, we did not grant cash bonuses to executive officers with respect to fiscal 2002. We have resumed the granting of cash bonuses with respect to fiscal 2003, but did not pay out these bonuses until the first quarter of fiscal 2004.
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The base salary, bonus and grants of stock options for our CEO, Carl Spana, Ph.D., were determined in accordance with the criteria described above under “Determining executive compensation.” Dr. Spana’s compensation reflects the board’s subjective assessment of (1) his performance, (2) his skills in relation to other CEOs in Palatin’s industry, and (3) the board’s assessment of Palatin’s performance. Considering these factors, the committee set Dr. Spana’s base annual salary at $290,000 when we entered into our employment agreement with him effective October 1, 2001.
Certain Tax Considerations. Section 162(m) of the Internal Revenue Code limits the company to a deduction for federal income tax purposes of not more than $1 million of compensation paid to certain executive officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of the Code.
The committee believes that at the present time it is unlikely that the compensation paid to any executive officer in a taxable year will exceed $1 million. Therefore, the board has not established a policy for determining which forms of incentive compensation awarded to executive officers will be designed to qualify as “performance based compensation.”
SUBMITTED BY THE COMPENSATION COMMITTEE:
Kevin S. Flannery, ChairmanRobert K. deVeer, Jr.Zola P. Horovitz, Ph.D.
Stock Performance Graph
The following graph compares the yearly change in the cumulative total shareholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and the Nasdaq Biotechnology Index for our last five fiscal years. The graph assumes the investment of $100 in each stock or index on June 30, 1998, and the reinvestment of any dividends (we have never paid a dividend).
[GRAPH APPEARS ON FOLLOWING PAGE]
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GRAPH OMITTED
stock or index: 6/98 6/99 6/00 6/01 6/02 6/03 - -------------- ---- ---- ---- ---- ---- ---- Palatin common $100.00 $92.41 $141.77 $87.09 $40.10 $64.61 Nasdaq composite $100.00 $141.77 $209.32 $114.07 $77.22 $85.65 Nasdaq biotech $100.00 $159.91 $383.59 $319.59 $160.79 $211.91
Securities Authorized for Issuance under Equity Compensation Plans
The information required by item 201(d) of Regulation S-K pursuant to the requirements of this Item 12 is contained in this report under the same heading of Part II, Item 5.
Security Ownership of Certain Beneficial Owners and Management
The tables below show the beneficial stock ownership and voting power, as of September 18, 2003, of:
“Beneficial ownership” here means direct or indirect voting or investment power over outstanding stock and stock which a person has the right to acquire now or within 60 days after September 18, 2003. Please see the footnotes for more detailed explanations of the holdings. Except as otherwise noted, to our knowledge, the persons named in the tables beneficially own and have sole voting and investment power over all shares listed.
The common stock has one vote per share and the Series A preferred stock has approximately 38 votes per share. Voting power is calculated on the basis of the aggregate of common stock and Series A preferred stock outstanding as of September 18, 2003. On September 18, 2003, 43,125,360 shares of common stock and 13,617 shares of Series A preferred stock were outstanding.
The address for all members of our management is c/o Palatin Technologies, Inc., 4C Cedar Brook Drive, Cranbury, NJ 08512. Addresses of other beneficial owners are in the footnotes to the table of beneficial owners.
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MANAGEMENT: Percent of Percent of Voting Class Name of Beneficial Owner Shares Class Power - --------------------------------------------------------------------------------------------- Common Carl Spana, Ph.D. 730,968(1) 2.4% * Common Stephen T. Wills 525,916(2) 1.7% * Common Perry B. Molinoff, M.D. 176,250(3) * * Common Shubh D. Sharma, Ph.D. 114,313(4) * * Common John K.A. Prendergast, Ph.D. 343,673(5) * * Common Robert K. deVeer, Jr. 180,273(6) * * Common Kevin S. Flannery 130,444(7) * * Common Zola P. Horovitz, Ph.D. 70,833(8) * * Common Robert I. Taber, Ph.D. 65,833(9) * * Common Errol DeSouza, Ph.D. 17,083(10) * * All current directors and executive 2,355,586(11) 5.2% * officers as a group (ten persons) - ------------------
*Less than one percent.
(1) Includes 714,295 shares which Dr. Spana has the right to acquire under options.
(2) Includes 517,916 shares which Mr. Wills has the right to acquire under options.
(3) Includes 166,250 shares which Dr. Molinoff has the right to acquire under options.
(4) Includes 114,298 shares which Dr. Sharma has the right to acquire under options.
(5) Includes 330,000 shares which Dr. Prendergast has the right to acquire under options.
(6) Shares which Mr. deVeer has the right to acquire under options.
(7) Includes 110,444 shares which Mr. Flannery has the right to acquire under options.
(8) Includes 65,833 shares which Dr. Horovitz has the right to acquire under options.
(9) Includes 60,833 shares which Dr. Taber has the right to acquire under options.
(10) Shares which Mr. DeSouza has the right to acquire under options.
(11) Includes 2,277,225 shares which directors and officers have the right to acquire under options.
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5% OR GREATER BENEFICIAL OWNERS: Percent of Percent of Voting Class Name of Beneficial Owner Shares Class Power - ------------------------------------------------------------------------------------------------ Common ProQuest(1) 6,161,972(2) 13.9% 11.3% Common Albert Fried, Jr.(3) 3,660,277(4) 8.3% 5.7% Common Lurie Investments(5) 3,080,984(6) 7.0% 5.6% Common Federated Kaufmann Fund(7) 2,668,982(8) 6.1% 4.1% Common BVF Inc.(9) 2,640,846(10) 6.0% 4.8% Common Credit Suisse Equity Fund Management Company S.A. on behalf of CS Equity Fund (Lux) Global Biotech(11) 2,599,489(12) 6.0% 4.9% Common Joseph Edelman(13) 2,580,458(14) 5.9% 4.0% Common Pictet & Cie.(15) 2,500,166(16) 5.7% 4.7% Series A Preferred J.F. Shea Co., Inc.(17) 5,000 36.7% *(18) - ------------------
*Less than one percent.
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John K. A. Prendergast, Ph.D. Dr. Prendergast is the president and sole stockholder of Summercloud Bay, Inc., a corporation with which we have a consulting agreement to provide strategic and technology consulting services. Under the agreement, we have agreed to pay Summercloud Bay a fee of $1,750 per diem for work which we request, and we reimburse Dr. Prendergast for direct expenses. During the fiscal year ended June 30, 2003, we paid a total of $112,500 to Summercloud Bay, Inc. for consulting services.
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Our principal accountant is KPMG LLP.
Audit Fees. For the fiscal year ended June 30, 2003, KPMG billed us a total of $69,928 for professional services rendered for the audit of our annual financial statements, review of financial statements in our Forms 10-Q and services provided in connection with regulatory filings. For the fiscal year ended June 30, 2002, the total was $47,161.
Audit-Related Fees. During the fiscal years ended June 30, 2003 and 2002, KPMG did not perform or bill us for assurance and related services related to audit or review of our financial statements, other than as stated in the preceding paragraph.
Financial Information Systems Design and Implementation Fees. During the fiscal years ended June 30, 2003 and 2002, KPMG did not perform or bill us for financial information systems design and implementation.
Tax Fees. For the fiscal year ended June 30, 2003, KPMG billed us a total of $12,000 for professional services rendered for tax compliance, tax advice and tax planning. For the fiscal year ended June 30, 2002, the total was $11,500.
All Other Fees. KPMG did not perform or bill us for any services other than those described above for the fiscal years ended June 30, 2003 and 2002.
[PART IV BEGINS ON THE FOLLOWING PAGE]
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Item 16.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of the report:
1. Financial statements: the following financial statements are filed as a part of this report under Item 8 – Financial Statements and Supplementary Data:
— Report of Registered Independent Auditors’ ReportPublic Accounting Firm
— Report of Independent Public Accountants
— Consolidated Balance Sheets
— Consolidated Statements of Operations
— Consolidated Statements of Stockholders’ Equity (Deficit)
— Consolidated Statements of Cash Flows
— Notes to Consolidated Financial Statements
2. Financial statement schedules: none.
3. Exhibits: The following exhibits are filed with this report, or incorporated by reference as noted. Exhibits filed with this report are marked with an asterisk (*). Exhibits which consist of or include a management contract or compensatory plan or arrangement are marked with an obelisk (†).
No. | Description |
3.01 | Certificate of incorporation. Incorporated by reference to Exhibit 3.01 of our annual report on Form 10-K for the year ended June 30, 2000, filed with the SEC on September 29, 2000. |
3.02 | Bylaws. Incorporated by reference to Exhibit 3.2 of our quarterly report on Form 10-QSB for the quarter ended December 31, 1997, filed with the SEC on February 13, 1998. |
10.01 | RhoMed Incorporated 1995 Employee Incentive Stock Option Plan. Incorporated by reference to Exhibit 10.04 of our annual report on Form10-KSB for the |
10.02 | 1996 Stock Option Plan, as amended effective |
10.03 | Carl Spana Stock Option Agreement. Incorporated by reference to Exhibit 4.15 of our Form S-8 filed with the SEC on June 17, 1998. |
10.04 | Executive Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our Form S-8 filed with the SEC on June 17, 1998. |
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10.05 | Form of Placement Agent Warrant for the RhoMed common stock offering. Incorporated by reference to Exhibit 10.22 of our annual report on Form 10-KSB for the |
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10.06 |
Strategic Collaboration Agreement dated as of August 17, 1999, between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.21 of our amended annual report on Form 10-KSB/A for the |
Amendment To Strategic Collaboration Agreement dated as of May 13, 2002 between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the |
Form of warrant and registration rights for the warrant issued in April 2000 with an expiration date of March 15, 2005. Incorporated by reference to Exhibit 10.22 of our annual report on Form 10-K for the year ended June 30, 2000, filed with the SEC on September 29, 2000. |
Form of warrant issued to purchasers in the September-October 2000 private placement. Incorporated by reference to Exhibit 10.3 of |
Employment Agreement dated as of July 17, 2001 between Palatin Technologies, Inc. and Perry B. Molinoff. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the |
Employment Agreement dated as of October 1, |
Employment Agreement dated as of October 1, |
Employment Agreement dated as of October 1, 2003, between Palatin Technologies, Inc. and Shubh D. Sharma. Incorporated by reference to Exhibit 10.3 of our quarterly report on Form 10-Q for the quarter ended September 30, 2003, filed with the SEC on November 14, 2003. † |
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10.14 | Form of stock purchase agreement for our October 2001 private placement. Incorporated by reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed with the SEC on November 14, 2001. |
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Form of registration rights agreement for our October 2001 private placement. Incorporated by reference to Exhibit 10.2 of |
Form of warrant issued to purchasers in our October 2001 private placement. Incorporated by reference to Exhibit 10.3 of |
Form of stock purchase agreement for our June-July 2002 private placement. Incorporated by reference to Exhibit 10.27 of our annual report on Form 10-K for the |
Form of registration rights agreement for our June-July 2002 private placement. Incorporated by reference to Exhibit 10.28 of our annual report on Form 10-K for the |
Form of warrant issued to purchasers in our June-July 2002 private placement. Incorporated by reference to Exhibit 10.29 of our annual report on Form 10-K for the |
Form of stock purchase agreement for our November 2002 private placement. |
Form of registration rights agreement for our November 2002 private placement. |
Form of warrant issued to purchasers in our November 2002 private placement. |
Form of stock purchase agreement for our March 2003 private placement. |
Form of warrant issued to purchasers in our March 2003 private placement. |
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10.25 | Form of stock purchase agreement, including warrant certificate, for our January 2004 private placement. Incorporated by reference to Exhibit 10.01 of our quarterly report on Form 10-Q for the quarter ended December 31, 2003, filed with the SEC on February 17, 2004. |
Development and Manufacturing Agreement between Palatin and DSM Biologics Company B.V. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. We have requested confidential treatment of certain provisions contained in |
10.27 | Securities Purchase Agreement between Palatin and King Pharmaceuticals, Inc. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. * |
10.28 | Collaborative Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. * |
10.29 | Form of warrant certificate issued to King Pharmaceuticals, Inc. * |
21 | Subsidiaries of the registrant. * |
Consent of KPMG |
31.1 | Certification of Chief Executive Officer * |
31.2 | Certification of Chief Financial Officer * |
32.1 | Certification of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
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32.2 | Certification of principal financial officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
_________________
* Exhibit filed with this report.
† Management contract
(b) Reports on Form 8-K:
None.
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• | On August 13, 2004, we filed a Form 8-K including the press release in which we announced an agreement between Palatin and King Pharmaceuticals, Inc. to jointly develop and, on obtaining necessary regulatory approvals, commercialize Palatin’s PT-141 for the treatment of male and female sexual dysfunction. | |
• | On August 18, 2004, we filed a Form 8-K including the press release in which we announced that we conducted the initial closing and received proceeds of $20 million from King Pharmaceuticals, Inc. pursuant to the collaborative agreement between Palatin and King, which we announced on August 13, 2004. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PALATIN TECHNOLOGIES, INC.
By:/s/ Carl Spana
Carl Spana, Ph.D.
President and Chief Executive Officer
Date: September 29, 200313, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date |
/s/ Carl Spana | President, Chief Executive Officer and Director | September |
Carl Spana | (principal executive officer) | |
/s/ Stephen T. Wills | Executive Vice President and Chief Financial Officer | September |
Stephen T. Wills | (principal financial and accounting officer) | |
/s/ John K.A. Prendergast | Chairman and Director | September |
John K.A. Prendergast | ||
/s/ | Director | September |
/s/ | Director | September |
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/s/ Zola P. Horovitz | Director | September |
Zola P. Horovitz | ||
/s/ Robert I. Taber | Director | September |
Robert I. Taber | ||
/s/ Errol DeSouza | Director | September |
Errol DeSouza |
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