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, 20032006
ORor
| [ ] | 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 0-22686001-15543
_____________________________
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) |
(609) 495-2200
(Registrant's telephone number, including area code: (609) 495-2000code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value $.01 per share(Title of class)
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, par value $.01 per share | American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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'sregistrant’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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [X] | Non-accelerated filer [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of September 26, 2003,State the aggregate market value of the voting and non-voting common equity held by non-affiliates, of the registrant was approximately $68,701,648, computed by reference to the price at which the common stock was last sold, on December 31, 2002.
Asor the average bid and asked price of September 26, 2003, 43,215,052 sharessuch common equity, as of the registrant'slast business day of the registrant’s most recently completed second fiscal quarter (December 31, 2005): $184,688,242
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, par value $.01 per share, were outstanding.as of the latest practicable date (September 1, 2006): 70,878,521.
Documents Incorporated by Reference
Portions of the registrant’s proxy statement relating to its Annual Meeting of Stockholders, to be filed within 120 days of its June 30, 2006 fiscal year end are incorporated by reference into Part III of this Annual Report on Form 10-K.
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PALATIN TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I
| Page | ||
| PART I | ||
| Item 1. | Business | |
| Item 1A. | Risk Factors | 9 |
| Item 1B. | Unresolved Staff Comments | 16 |
| Item 2. | Properties | |
| 16 | ||
| Item 3. | Legal Proceedings | |
| 16 | ||
| Item | Submission of Matters to a Vote of Security Holders | |
PART II
PART III
| PART III | ||||
| Item 10. | Directors and Executive Officers of the Registrant | |||
| 47 | ||||
| Item 11. | Executive Compensation | |||
| 47 | ||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||
| 47 | ||||
| Item 13. | Certain Relationships and Related Transactions | |||
| 47 | ||||
| Item 14. | Principal | |||
| PART IV | ||||
PART IV
| Item | Exhibits and Financial Statement Schedules | |
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PART I
Forward-looking statements
Statements in this annual reportAnnual Report on Form 10-K, as well as oral statements that may be made by Palatinus or by our officers, directors, or employees of Palatin acting on Palatin’sour 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 1934.1934 (the “Exchange Act”). The forward-looking statements in this annual reportAnnual Report on Form 10-K do not constitute guarantees of future performance. Investors are cautioned that statements whichthat are not strictly historical statements contained in this annual reportAnnual 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 theour strategy and plans of the company and itsour strategic partners, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause theour actual results of the Company to be materially different from theour historical results or from any results expressed or implied by such forward-looking statements. The Company’sOur 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”“Risk Factors” and elsewhere in this annual report,Annual Report, as well as in our other Securities and Exchange Commission (“SEC”) filings.
Overview
We are a development stage biopharmaceutical company primarily focused on discovering and developing targeted, receptor-specific small molecule and peptide therapeutics. Our proprietary drug development pipeline is based primarily on melanocortin (MC) based(“MC”)-based therapeutics, whichand we believe is one of the fastestwe are a leader in this fast growing areasarea of pharmaceutical research and development. TheTherapeutics affecting the activity of the MC family of receptors has been identified withmay have the potential to treat a variety of conditions and diseases, including sexual dysfunction, obesity anorexia,and related disorders, cachexia (extreme wasting, generally secondary to a chronic disease), inflammationskin pigmentation and drug abuse. Our objective is to becomeinflammation.
In August 2004, we entered into a worldwide leader in MC based therapeutics by pursuing a strategy based on commercializing our products undercollaborative development and identifying new product targets through the utilization ofmarketing agreement with King Pharmaceuticals, Inc. (“King”), a specialty pharmaceutical company, to jointly develop and commercialize bremelanotide (formerly known as PT-141), our patented drug discovery platform.
PT-141 is our lead therapeutic drug candidate and is nownasally administered MC-based peptide presently in Phase 2 clinical development for two distinct indications, treatment of male erectile dysfunction (“ED”) and treatment of female sexual dysfunction (“FSD”). Pursuant to the terms of the agreement, Palatin and King share all collaboration development costs, marketing costs and net profits derived from net sales of bremelanotide in North America based on an agreed percentage. Palatin and King currently plan to seek a commercialization partner for bremelanotide for territories outside of North America. We have the option to create, with King, a urology specialty sales force to co-promote the product in the United States if the product is successfully developed and commercialized.
We are in the process of identifying clinical candidate MC therapeutic small molecules for treatment of obesity and related disorders, with programs for both oral and non-oral drug delivery. We are also in the process of identifying natriuretic peptide receptor clinical candidate compounds for two indications, the treatment of both malechronic congestive heart failure (“CHF”) and female sexual dysfunction. We completed a Phase 2B trial with PT- 141 in male patients in September 2003acutely decompensated CHF.
In December 2005, we voluntarily suspended the sales, marketing and we anticipate announcing resultsdistribution of this trial in the fourth quarter of calendar year 2003. LeuTech®NeutroSpec®, is our proprietary radiolabledradiolabeled monoclonal antibody product for imaging and diagnosing infections. We commencedequivocal appendicitis, and recalled all existing customer inventories. NeutroSpec, which was approved for marketing by the biologics license application (BLA) amendment filings to theUnited States Food and Drug Administration (FDA)(the “FDA”) in the first half of calendar year 2003July 2004, was marketed and anticipate remitting the final BLA amendment filing to the FDA
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Table of Contentsdistributed by our strategic collaboration partner, Tyco Healthcare Mallinckrodt (“Mallinckrodt��).
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, PT-141, our lead therapeutic drug candidate for the treatment of both male and female sexual dysfunction and LeuTech, our proprietary radiolabled monoclonal antibody for imaging and diagnosing infections. 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 executivecorporate offices and research and development 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.SEC. Our website and the
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information contained therein or connected thereto shall not be deemed to be incorporated into this Annual 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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Table of Contentsdevelopment programs:
PT-141.ED and FSD — Bremelanotide. PT-141,Bremelanotide, 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). PT-141dysfunction. Bremelanotide, an MC receptor-based agonist (which promotes a biologic function response) therapeutic, 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 MED therapies. As a result, it may offer significant safety and therapeutic benefits over currently marketed products.
We have completed various Phase 1 safety studies and Phase 2A efficacy studies in male subjects and patients. 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 data on the safety and efficacy 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 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 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% 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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We completed a Phase 2B at-home dose-ranging study with PT-141 in patients with MED in September 2003 and anticipate announcing results of this trial in the fourth quarter of calendar year 2003. This studyED is designed to examine safety and efficacy of PT-141 for MED across a range of intranasally administered doses 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.
We have completed a Phase 1 safety study in female subjects and plan to initiate a Phase 2 efficacy study in female patients with FSAD in the first half of calendar year 2004.
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.
MED 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 incidence of ED increases with age. Studies show that chronic ED affects about 5% of men in their 40s and 15% to 25% of men by the age of 65. The current market size for MEDED is estimated to be more than $2$2.5 billion per year. FSAD
FSD is a multifactorialmulti-factorial condition that has anatomical, physiological, medical, psychological and social components. Studies estimate FSADFSD 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. FSD 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.
LeuTech®. LeuTech Bremelanotide is the first compound to enter clinical trials in a new drug class, MC receptor agonists, under development to treat sexual dysfunction. Our research suggests that bremelanotide works through activation of MC receptors in the central nervous system, which is a proprietary, radiolabeled monoclonal antibody under investigation for imaging and diagnosing infections. When injected intodifferent mechanism of action from currently marketed ED therapies that act directly on the blood stream, LeuTech binds to white blood cells present at the infection site, labeling these cells with a radioactive tracer.vascular system. As a result, physicians can rapidly imageit may offer significant safety and detect an infection usingtherapeutic benefits over currently marketed products. The current ED market is primarily served by the PDE-5 inhibitors Viagra®, a gamma camera,brand of sildenafil, Levitra®, a common piecebrand of hospital equipment that records radioactivity. LeuTech offers the advantagevardenafil, and Cialis®, a brand of direct injection and in-vivo labelingtadalafil. A significant portion of white blood cells leadingED patients are contraindicated for, or non-responsive to, PDE-5 inhibitors.
We are conducting clinical trials on a nasal formulation of bremelanotide, administered as a single spray in one nostril, which results in a rapid onset of action. We have completed various Phase 1 safety studies and highly specific functional imagePhase 2A and Phase 2B efficacy studies in male subjects and patients. We are reviewing clinical trial data on two recently completed Phase 2B studies, with results anticipated in the fourth quarter of an infection in less than an hour, whereascalendar 2006. Both recently completed clinical trials evaluated the current standardsafety and efficacy of care, ex-vivo labeled 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 not available until 12-24 hours later.
In December 1999, the FDA accepted our LeuTech BLA for the diagnosis of appendicitisbremelanotide in patients suffering from mild to severe ED, with equivocal signsone trial limited to non-diabetic patients, and symptoms. In July 2000, the FDA Medical Imaging Drugs Advisory Committee (MIDAC) unanimously voted that LeuTech is safeother to diabetic patients. Both trials, conducted at clinical trial sites throughout the United States, involved an "at home" three-month treatment period and effective for useevaluated a range of bremelanotide intranasal doses, safety, treatment duration and patient populations.
We have completed Phase 1 safety studies in female subjects and a Phase 2A efficacy study in female patients with FSD. The Phase 2A study included both pre-menopausal and post-menopausal FSD patients, with a total of 44 patients studied. The study showed, in both patient populations, an increase in the diagnosislevel of appendicitissexual desire and genital arousal in subjects receiving bremelanotide compared to subjects receiving placebo. We have an ongoing Phase 2B at home clinical trial of bremelanotide in female patients with equivocal signs and symptoms and thatFSD, scheduled to conclude in the data presented support the clinical utilityfirst half of LeuTech in managing these patients. In September 2000, we received a complete response letter from thecalendar 2007.
We also have ongoing Phase 1 safety studies, designed to evaluate particular safety parameters, including 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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Table studies. We anticipate having an end of Contents
prior to final approval. We are working to resolve the outstanding issues. We commenced the BLA amendment filings toPhase 2 meeting with the FDA in the first half of calendar year 20032007, and, anticipate remitting the final BLA amendment filing todepending on results of completed trials for which data is being compiled and ongoing trials, as well as comments and determinations by 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.
We are currently conductinginitiating pivotal Phase 2 studies with LeuTech for detection of other infections, including osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging.
On April 24, 2003, we announced positive results of a Phase 2 study to evaluate the efficacy of LeuTech in diabetic patients with suspected pedal osteomyelitis (infection in bones of the foot). The results were published in the January/February 2003 issue ofThe Journal of Foot and Ankle Surgery.
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-diagnosed 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. 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.
We believe that LeuTech 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, approximately 700,000 patients were diagnosed with LeuTech’s target indications.3 trials shortly thereafter.
Strategic CollaborationCollaborative Development and Marketing Agreement with MallinckrodtKing.. On May 13, 2002, In August 2004, we entered into ana collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd.,King to amend our Strategic Collaboration Agreement dated as of August 17, 1999. Underjointly develop and commercialize bremelanotide. Pursuant to the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000we share all collaboration development 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 indicationmarketing costs 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 theall collaboration net profits derived from net sales of LeuTech.bremelanotide in North America based on an agreed percentage. Palatin and King currently plan to seek a commercialization partner for bremelanotide for territories outside of North America. However, there can be no assurance that we will be able to enter into any such arrangement on terms acceptable to us or at all.
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Under the termsagreement, King may make future potential milestone payments to us totaling up to $90.0 million for achieving certain ED and FSD development and regulatory approval targets. After regulatory approval and commercialization of the amended agreement, Mallinckrodt has committedbremelanotide, King may also pay milestone payments to us totaling up to an additional $3.2$130.0 million subject to certain conditions and attaining certain milestones, to offset aupon achieving specified annual North American net sales thresholds. A portion of the estimated expenses associatedmilestone payments may be in the form of purchases of our common stock.
Obesity. We have an active development program for MC receptor-targeted small molecule compounds for the treatment of obesity and related disorders. Obesity is a multi-factorial condition with completingsignificant biochemical components relating to satiety (feeling full) and energy utilization and homeostasis. A number of different metabolic and hormonal pathways are being evaluated by companies around the FDA review process.world in efforts to develop better treatments for obesity. Scientific research has established a role of MC receptors in feeding behavior and energy homeostasis, and that MC receptor agonists, such as alpha-MSH, decrease food intake and induce weight loss.
Obesity is a significant healthcare issue, often correlated with a variety of cardiovascular and other diseases, including diabetes. In the United States, approximately 65 percent of adult Americans are categorized as being overweight or obese. Each year, obesity causes at least 300,000 excess deaths in the United States, and healthcare costs of American adults with obesity amount to approximately $100 billion. Additionally, timingstudies in adolescents indicate that there is a trend towards increased prevalence of the original $10 milliondisease.
MC receptor agonists are also involved in milestone payments has been revised to coincideother physiological responses, including sexual response. MC receptor agonists with LeuTech’s anticipated FDA approval and achievementpotential for use in treatment of future sales goals. Of the $3.2 million, $1.2 million has been paid to date. We expect to receive the remaining $2 millionobesity generally induce a sexual response. To our knowledge, there are no reports in the fourth quarterscientific literature of MC receptor-target compounds which are effective in animal or human studies for treatment of obesity and which are also reported to not induce a sexual response.
We have developed a class of small molecule compounds targeting MC receptors which are effective in treatment of obesity in animal models but which do not induce a sexual response. These compounds have been demonstrated to be effective in normal diet-induced obese and genetically obese animal models for decreasing food intake and body weight, without an increase in sexual response in normal animals at the same or higher dose levels. Tests to date have been conducted only in animal models and in laboratory tests. We believe that we have developed approaches that allow us to differentiate MC receptor-targeted compounds useful for treating obesity and related disorders from compounds that induce a sexual response.
We have a program to develop and identify clinical candidate drugs for the treatment of obesity, including candidate drugs for oral and non-oral delivery programs. We anticipate initiating preclinical studies on at least one clinical candidate drug in the second half of calendar year 2003.2007 in preparation for human clinical trials.
We have held preliminary discussions with several major pharmaceutical companies relating to our obesity program, and depending on results in our program to develop and identify clinical candidate drugs, intend to continue discussions on partnering or other collaborative relationships.
Congestive Heart Failure. We have a development program for compounds that mimic natural peptides (“peptidomimetic”) for treatment of CHF. Heart failure is an illness in which the heart is unable to pump blood efficiently, and includes acutely decompensated CHF with dyspnea (shortness of breath) at rest or with minimal activity. Endogenous (naturally produced) natriuretic peptides have a number of beneficial results, including vasodilation (relaxation of blood vessels), natriuresis (excretion of sodium), and diuresis (excretion of fluids). One product is commercially available, Natrecor®, a brand of nesiritide, which is a recombinant (genetically made) form of human B-type natriuretic peptide. However, Natrecor® is approved only for use in acutely decompensated CHF with administration by intravenous injection, typically limiting administration to a hospital setting.
Congestive heart failure directly affects nearly five million people in the United States, with over 500,000 new cases diagnosed each year. Annual medical treatment costs for congestive heart failure, which frequently involves expensive hospitalization and therapies, are estimated at over $25 billion.
We are developing novel peptidomimetic natriuretic agonists that have demonstrated efficacy in animal models when administered by subcutaneous (under the skin) injection. These compounds remain active in animal models for longer periods than do natural or recombinant natriuretic peptides.
We are in the process of identifying two clinical candidate drugs for treatment of CHF, an intravenous form for acutely decompensated CHF, which is designed to be highly potent, fast acting and fast clearing, and a subcutaneous form for chronic CHF, designed to produce therapeutic effects over a longer period. We believe that a subcutaneous form of peptidomimetic compound could be used in a clinic or doctor’s office, and would not be limited to use in hospitals or specialized medical facilities. We anticipate initiating preclinical studies on at least one clinical candidate drug in the second half of calendar 2007 in preparation for human clinical trials.
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MIDAS Drug Development Platform. Both our obesity and CHF programs derived lead compound series by utilizing our MIDAS™ (Metal Ion-induced Distinctive Array of Structures). MIDAS is a proprietary platform technology that allows us to routinely design and synthesize novel pharmaceuticalsmolecules that mimic the activity of peptides, but which we believe offer significant advantages to conventional protein or peptide-based drugs.peptides. MIDAS uses metal ions to fix the three-dimensional shapeconfiguration 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, unlikeUnlike most other drug discovery approaches, we believe that MIDAS is unique in that it can be used to generate eitherboth receptor antagonists (drugs that(which block a particularnormal biological metabolic response) or agonists (drugs that promote a particular metabolic response).and agonists. 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 IND for at least one of these preclinical compounds and initiate clinical testing in the first half of calendar year 2004.
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.
ResearchNeutroSpec®. NeutroSpec, our trade name for technetium (99m Tc) fanolesomab, includes an anti-CD 15 monoclonal antibody which selectively binds to a type of white blood cell, neutrophils, involved in the immune response. When labeled with the radioactive tracer technetium and Development.injected into the blood stream, the antibody binds to neutrophils accumulated at the infection site, labeling these cells. As a result, physicians can rapidly image and locate an infection using a gamma camera, a common piece of hospital equipment that detects radioactivity.
In July 2004, we received approval from the FDA to market NeutroSpec for imaging of patients with equivocal signs and symptoms of appendicitis who are five years of age or older. During 2005, with Mallinckrodt, we reported to the FDA the occurrence of several serious adverse events, including two deaths, involving patients with severe underlying cardiopulmonary compromise who received NeutroSpec for off-label uses. In December 2005, the FDA informed Mallinckrodt and us that it had reconsidered the risk/benefit assessment of NeutroSpec and determined that the product should not be administered to patients, until a further understanding and review of the relationship between NeutroSpec and reported serious adverse events is complete. Together with Mallinckrodt we are reviewing data and assessing approaches for understanding the relationship between NeutroSpec use and the observed serious adverse events. All ongoing clinical trials and plans for future clinical trials and regulatory approvals of NeutroSpec have been suspended, and no final decision concerning future activities involving NeutroSpec has been made. We anticipate making a decision on whether to seek to proceed with NeutroSpec in the first half of calendar 2007.
Strategic Collaboration Agreement with Mallinckrodt. Our current researchMallinckrodt has exclusive worldwide marketing and distribution rights to NeutroSpec under our collaboration agreement. We are responsible for the manufacture of NeutroSpec and Mallinckrodt agreed to pay us a transfer price on each product unit sold to Mallinckrodt and a royalty on their net sales of NeutroSpec. If NeutroSpec is reintroduced to the market, we may receive milestone payments from Mallinckrodt on the achievement of development, efforts primarily focus on two areas: melanocortin based therapeutics and diagnostic imaging. By combining these areas, we believe our technologiesregulatory or sales objectives; however, there can be no assurance that NeutroSpec will facilitatebe reintroduced to the market or that 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:or sales objectives will be met.
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Competition
Our products under development will compete on the basis of quality, performance, cost effectiveness, and application suitability with numerous established products and technologies. AdditionalWe have many competitors, including pharmaceutical, biopharmaceutical and biotechnology companies. Many of these competitors have substantially greater financial and technological resources than we do. Furthermore, there are several well-established products in our target markets that we will have to compete against. Products using new technologies which may be competitive with our proposed products may also be introduced by others. ManyMost 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 are working to develop products similar to ours. There are currently several FDA-approved drugs for MED 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 LeuTech as to certain indications. The competing product is marketed in some European countries. Palatin is also aware of at least one other company developing a peptide-based product which may also compete with LeuTech 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 doours 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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There are currently three FDA-approved PDE-5 drugs for ED in the United States and these products are also approved in major foreign markets. We are aware of several products in clinical development for both ED and FSD. We cannot assure you that our competitors will not succeed 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 indications, if any, for which our products receive approval, and the effectiveness, cost, safety and ease of use of bremelanotide in comparison to the products of our competitors.
There are several FDA-approved drugs for treatment of obesity, and a large number of products in clinical development by others, including products which target MC receptors. Clinical trials for obesity are lengthy, time-consuming and expensive, and we may not be able to proceed beyond early stage clinical trials without entering into an alliance or partnership with a pharmaceutical company.
One natriuretic peptide product is approved by the FDA and is marketed by a major pharmaceutical company. There are a number of other FDA-approved products for treatment of CHF, and products in preclinical or clinical development by other companies.
Other imaging modalities, including computerized tomography (“CT”) and ultrasound technologies, are used for diagnosis of indications with which NeutroSpec may compete. There are FDA-approved products for attaching radiotracers to blood cells for use in imaging and locating infections. There is also at least one other company developing a technetium-labeled product for imaging infections, which is reported to be in Phase 2 clinical trials, as well as an antibody-based product marketed in some European countries which may compete with NeutroSpec for certain indications.
Patents and Proprietary Information
Patent 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,dsf in those foreign countries where protection is important to the development of our business.
We own issued United States and foreign patents covering bremelanotide, and additionally have pending United States and foreign applications. The claims of issued patents covering bremelanotide may not provide meaningful protection. In addition, third parties may challenge the validity or scope of any issued patent. We also license certain patents relating to compounds and methods of treatment for sexual dysfunction, and believe these patents have value but are not required to commercialize bremelanotide.
We have a number of United States and foreign patent applications relating to our obesity and CHF programs. However, these patent applications have not yet been examined, and we do not know the scope of patent claims that will be allowed, or whether any claims will be allowed.
We own patents relating to certain aspects of NeutroSpec, but the claims of those patents would not be effective in preventing others from developing competing products. In addition, the validity of these patents has not
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been determined. We have exclusive rights to the cell line which produces the monoclonal antibody used in NeutroSpec, but this protection is dependant on maintaining the cell line as proprietary.
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 LeuTech 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 losingthe loss of patent protection for the subject of the interference, subjecting us to significant liabilities to third parties, and requiring usthe need to obtain licenses from third parties at undetermined cost or to cease using the technology.
Future patent 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.issued. Although we are not aware of any valid U.S. patents which are infringed by PT- 141bremelanotide or LeuTechNeutroSpec or by our methods of making PT-141bremelanotide 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.
Government 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 informationinformation.. 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 and intellectual property 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. At the time of its initial approval, the FDA required specific future studies for NeutroSpec, and if we seek to reintroduce NeutroSpec, we will have to comply with this requirement. Additionally, if we seek to market NeutroSpec for new indications, we will need to successfully complete Phase 2 and 3 clinical trials prior to making an application to market NeutroSpec for those indications.
Good manufacturing 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 proposedany facility that manufactures such a product is manufactured in the United States,must comply with current good manufacturing practices (“cGMPs”). This means, among other things, that the drug manufacturing establishment must be registered with, and inspectedsubject to inspection by, the FDA. Such drug 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, foreignForeign manufacturing establishments must also comply with good manufacturing practicescGMPs 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
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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.bremelanotide. We currently have agreements in place for the commercial manufacture of LeuTech and PT-141.NeutroSpec. We anticipate that collaborators, licensees or contract manufacturing establishmentsmanufacturers will also manufacture PT-141our proposed obesity and proposed products resulting from MIDAS technology.CHF products.
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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 or our licensees 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 products 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. There is also significant uncertainty concerning third-party reimbursement for products treating ED and FSD. 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 carehealthcare 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 requirementscGMPs 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.cGMPs. 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 LeuTechfinal NeutroSpec drug product stage.product. The failure of either of these manufacturers to comply with FDA current good manufacturing practicescGMPs or to supply these key components of LeuTechperform, 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.
Proposed products resulting from PT-141 and our MIDAS technology areOur bremelanotide product is a synthetic peptides. The peptides are synthesized from readily available amino acids, andpeptide. While the production process involves well-established technology.technology, there are limited manufacturers capable of scaling up to commercial quantities at acceptable costs. Additionally, scaling up to commercial quantities may involve production, purification, formulation and other problems not present in the small-scale manufacturing done to date. We currently contract with third-party manufacturers for the production of peptides and anticipate doing sohave identified a commercial-scale manufacturer.
Our obesity program utilizes small molecules and our CHF program utilizes peptidomimetic molecules. We are in the future.
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Tableprocess of Contentsevaluating potential manufacturers, but have not yet identified commercial scale manufacturers.
If LeuTech is approved for marketing by the FDA,sales of NeutroSpec resume, we will 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.
If bremelanotide is successfully developed and approved for marketing, we will be highly dependent on King, our strategic collaboration partner, for certain marketing and sales activities.
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Product Liability and Insurance
Our business may be affected by potential product liability risks which are inherent in the testing, manufacturing, marketing and marketinguse of NeutroSpec and our other 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, 2006, we employed 5185 persons full time, of whom 4169 are engaged in research and development activities and 1016 are engaged in administration and management. NineteenTwenty-five 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 and intellectual property 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, clinical management and some aspects of regulatory approval and clinical management.approval. Our independent advisors and consultants sign agreements that provide for confidentiality of our proprietary information and rights to any intellectual property developed while working for us.
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. We expect to incur additional losses as we continue our development of bremelanotide and our other product candidates. Unless and until we receive approval from the FDA or other equivalent regulatory authorities outside the United States, we cannot sell our products and will not have product revenues from them. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from reimbursements and other contract revenue under our existing collaborative development agreements, existing cash balances and outside sources of financing, which may not be available on acceptable 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 or other regulatory authorities. In addition, we could be forced to suspend or discontinue our product development programs and forego attractive business opportunities, which would have a material adverse effect on our business.
We have a limited operating history upon which to base an investment decision.
Our operations to date have been primarily focused on organizing and staffing our Company, acquiring, developing and securing our proprietary technology, conducting pre-clinical and clinical studies and formulating and manufacturing our principal product candidates. These operations provide a limited basis for you to assess our ability to commercialize our product candidates.
We have not yet demonstrated our ability to perform the functions necessary for the successful commercialization of any of our product candidates other than NeutroSpec. The successful commercialization of our other product candidates will require us to perform a variety of functions, including:
| • | continuing to conduct pre-clinical development and clinical trials; |
| • | participating in regulatory approval processes; |
| • | formulating and manufacturing products, or having third parties formulate and manufacture product; |
| • | conducting sales and marketing activities, either alone or with a partner; and |
| • | obtaining additional capital. |
If we are unable to obtain regulatory approval of any of our product candidates, or to successfully commercialize any products for which we receive regulatory approval, we may not be able to recover our investment in our development efforts.
If any approved product does not achieve market acceptance, our business will suffer.
Regulatory approval for the marketing and sale of any of our product candidates does not assure the product’s commercial success. Any approved product will compete with other products manufactured and marketed
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by major pharmaceutical and other biotechnology companies. The degree of market acceptance of any such product will depend on a number of factors, including:
| • | perceptions by members of the healthcare community, including physicians, about its safety and effectiveness; |
| • | cost-effectiveness relative to competing products and technologies; |
| • | availability of reimbursement for our products from government or other healthcare payors; |
| • | advantages over alternative treatment methods. |
Because we voluntarily withdrew NeutroSpec from the market, it may be more difficult to gain market acceptance with NeutroSpec, assuming that the FDA permits NeutroSpec to be reintroduced to the market.
If any approved product does not achieve adequate market acceptance, our business, financial condition and results of operations will be adversely affected.
Development and commercialization of our proposed products involves a lengthy, complex and costly process and we may never successfully develop or commercialize any product.
Our product candidates are at various stages of research and development, will require regulatory approval, and may never be successfully developed or commercialized. Our products will require significant further research, development and testing before we can seek regulatory approval to market and sell them. You should evaluate us in light of the uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, including 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. |
The regulatory approval process is lengthy, expensive and uncertain, and may prevent us from obtaining the approvals we require.
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. 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 include:
| • | 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 efficacy of the drug for each proposed indication; |
| • | the submission of a new drug application, or NDA, to the FDA; and |
| • | FDA review and approval of the NDA before any commercial marketing or sale. |
The results of product development, pre-clinical studies and clinical studies are submitted to the FDA as part of a NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, the FDA generally has ten months to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA
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determines that the clinical data do not adequately establish the safety and efficacy of the drug. Upon approval, a drug candidate may be marketed only in those dosage forms and for those indications approved by the FDA. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market 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.
Satisfaction of FDA pre-market approval requirements for new drugs typically takes several years and the actual time required for approval 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.
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 FDA’s cGMP regulations. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as Warning Letters, suspension of manufacturing, seizure of product, voluntary recall of a product, injunctive action or possible civil penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval. Because we intend to contract with third parties for manufacturing of these products, our ability to control third party compliance with FDA requirements will be limited to contractual remedies and rights of inspection. Failure of third-party manufacturers to comply with cGMP or other FDA requirements may result in legal or regulatory action by the FDA.
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 may not be able to obtain regulatory approval to reintroduce NeutroSpec to the market, or may be required to conduct extensive clinical trials prior to regulatory approval.
NeutroSpec was initially approved by the FDA for imaging of patients with equivocal signs and symptoms of appendicitis. However, the reported serious adverse events were associated with off-label use (use for an indication other than diagnosis of equivocal appendicitis), and substantial sales of NeutroSpec were for off-label uses. We are conducting additional laboratory studies to understand the relationship between NeutroSpec and reported serious adverse events. We may not be able to develop a sufficient understanding of the relationship to warrant application to the FDA to conduct additional studies or remarket the product. We may also not be able to develop methods, formulations or protocols that permit NeutroSpec to be used safely. We also do not know whether the FDA will concur in our risk/benefit assessment of NeutroSpec, or permit NeutroSpec to be marketed again. Even if we seek to reintroduce NeutroSpec to the market, we may seek approval to market NeutroSpec for other indications, such as osteomyelitis (infection deep inside a bone), which will require that Phase 2 and Phase 3 clinical trials be successfully completed prior to seeking approval of the FDA.
We rely on third parties to conduct clinical trials for our product candidates and their failure to timely perform their obligations could significantly harm our product development.
We rely on outside scientific collaborators such as researchers at clinical research organizations and universities in certain areas that are particularly relevant to our research and product development plans, such as the conduct of clinical trials. The competition for these relationships is intense, and we may not be able to maintain our
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relationships with them on acceptable terms. These outside collaborators generally may terminate their engagements with us at any time. As a result, we can control their activities only within certain limits, and they will devote only a certain amount of their time to conduct research on our product candidates and develop them. If they do not successfully carry out their duties under their agreements with us, fail to inform us if these trials fail to comply with clinical trial protocols or fail to meet expected deadlines, this may adversely affect our ability to develop our product candidates and obtain regulatory approval on a timely basis if at all.
The results of our clinical trials may not support our product claims.
Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product claims. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and could delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay or eliminate our ability to commercialize our product candidates and generate product revenues.
Production and supply of bremelanotide and NeutroSpec depend on contract manufacturers over whom we have no control.
We do not have the facilities to manufacture bremelanotide, NeutroSpec or our other product candidates. Our contract manufacturers must perform these manufacturing activities in a manner that complies with FDA regulations. Failure to conduct their activities in compliance with FDA regulations could delay our development programs or negatively impact our ability to receive FDA approval of our potential products. Establishing relationships with new suppliers, who must be FDA-approved, is a time-consuming and costly process.
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.
Contamination or injury from hazardous materials used in the development of our products could result in a liability exceeding our financial resources.
Our research and development 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.
We have limited or no experience in marketing, distributing and selling products and will substantially rely on our marketing partners to provide these capabilities.
If the FDA approves bremelanotide for marketing and sale, we will depend on our arrangements with King for the marketing, distribution and sale of bremelanotide. If King fails to market bremelanotide or devote enough resources to bremelanotide, our potential revenues from the sale of bremelanotide will be adversely affected. If these arrangements fail, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities.
If we recommence sales of NeutroSpec, we will depend on Mallinckrodt, our strategic collaboration partner, to market, sell and distribute the product. If Mallinckrodt fails to market NeutroSpec or devote enough resources to NeutroSpec, our potential revenues will be adversely affected. If the arrangement with Mallinckrodt fails, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities.
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Competing products and technologies may make our proposed products noncompetitive.
We are aware of three oral FDA-approved PDE-5 inhibitor drugs for the treatment of erectile dysfunction. These products are also approved in Europe, Japan and most of the world’s pharmaceutical markets. In addition, other products are being developed for ED and FSD. In order to achieve approval and market acceptance, bremelanotide may potentially be required to demonstrate efficacy and safety equivalent or superior to these other products.
We are aware of one company developing a technetium imaging product and another company marketing an antibody-based technetium product in some European countries, both of which may compete with NeutroSpec for certain indications. In addition, other technologies may also be used to diagnose appendicitis, osteomyelitis and other infection-related diseases, including CT and ultrasound technologies.
The biopharmaceutical and diagnostic industries are highly competitive. We are likely to encounter significant competition with respect to bremelanotide, NeutroSpec 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 we may. These competitive products or technologies may be more effective and useful or less costly than bremelanotide, NeutroSpec 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 healthcare payers.
The continuing efforts of government and insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of healthcare 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 healthcare 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 healthcare 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 healthcare payers and providers are instituting and the effect of any healthcare 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.
We could lose our rights to NeutroSpec, which could adversely affect our potential revenues.
Our rights to a key antibody used in NeutroSpec are dependent upon an exclusive license agreement with The Wistar Institute of Biology and Anatomy. This agreement contains specific performance criteria and requires us to pay royalties and make other payments. Failure to meet these requirements, or any other event of default under the license agreement, could lead to termination of the license agreement. If the license agreement is terminated we will be unable to make or market NeutroSpec, in which case we may lose the value of our substantial investment in developing the product, as well as any future revenues from selling NeutroSpec.
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; |
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| • | whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; and |
| • | 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 and agreements 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 gain access to our trade secrets or technology, either of which could materially and adversely affect our competitive position.
Our collaboration agreements may fail or be terminated unexpectedly, which could result in significant delays and substantial increases in the cost of our research, development and the commercialization of our potential products.
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.
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 subject of their collaborative programs with us.
We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.
The testing and marketing of medical products entails 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.
We are highly dependent on our management team and senior research professionals.
We are a relatively small company. Our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel, including executive officers and senior members of management that oversee our development programs. In addition, certain research personnel possess significant technical expertise and experience relevant to our development programs and we will need to hire additional
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personnel to expand our research and development activities. Our success also depends on our ability to develop and maintain relationships with consultants and scientific advisors. Competition for personnel is intense. If we lose the services of existing personnel or fail to attract required new personnel, our development programs could be adversely affected.
If we acquire other products, technologies or operations, we will incur a variety of risks that could adversely affect our current business operations.
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. Any such acquisition may expose us to additional risks, including the need to devote significant resources to new activities and to raise additional funds.
Shareholders may experience dilution from the exercise of outstanding options and warrants.
As of June 30, 2006, options and warrants to purchase 15,568,859 shares of common stock were outstanding at various exercise prices ranging from $1.00 per share to $8.00 per share. The issuance or potential issuance and sale of common stock upon the exercise of these options and warrants may adversely affect the market price of our common stock or result in substantial dilution to our existing stockholders.
Our management and principal stockholders together control approximately 20% of our voting securities and such concentration of ownership could delay or prevent a change in control.
As of June 30, 2006, our executive officers and directors beneficially own approximately 5% of our voting securities and our 5% or greater stockholders beneficially own approximately 15% of our voting securities. These stockholders, acting together, may be able to significantly influence any 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.
Anti-takeover provisions of Delaware law and our charter documents may make potential acquisitions more difficult and could result in the entrenchment of management.
We are incorporated in Delaware. Anti-takeover provisions of Delaware law and our charter documents may make a change in control or efforts to remove management more difficult. Also, under Delaware law, our board of directors may adopt additional anti-takeover measures. Under Section 203 of the Delaware General Corporation Law, a corporation may not engage in a business combination with an “interested stockholder” for a period of three years after the date of the transaction in which the person first becomes an “interested stockholder,” unless the business combination is approved in a prescribed manner.
Our charter authorizes us to issue up to 10,000,000 shares of preferred stock and to determine the terms of those shares of stock without any further action by our stockholders. If we exercise this power, it could be more difficult for a third party to acquire a majority of our outstanding voting stock.
In addition, our equity incentive plans generally permit us to accelerate the vesting of options granted under these plans in the event of a change of control. If we accelerate the vesting of options, this action could make an acquisition more costly.
The application of these provisions could have the effect of delaying or preventing a change of control, which could adversely affect the market price of our common stock.
Our stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit.
The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to:
| • | publicity regarding actual or potential clinical results relating to products under development by our competitors or us; |
| • | delay or failure in initiating, completing or analyzing pre-clinical or clinical trials or unsatisfactory design or result of these trials; |
| • | achievement or rejection of regulatory approvals by our competitors or by us; |
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| • | announcements of technological innovations or new commercial products by our competitors or by us; |
| • | developments concerning proprietary rights, including patents; |
| • | developments concerning our collaborations; |
| • | regulatory developments in the U.S. and foreign countries; |
| • | economic or other crises and other external factors; |
| • | period-to-period fluctuations in our revenue and other results of operations; |
| • | changes in financial estimates by securities analysts; and |
| • | sales of our common stock. |
We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance. If our revenues, if any, in any particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our operating results to suffer further. If our operating results in any future period fall below the expectations of securities analysts or investors, our stock price may fall by a significant amount.
In addition, the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.
We expect to sell additional equity securities, which will cause dilution.
We expect to sell more equity securities in the future to obtain cash for operations. We may sell these securities at a discount to the market price. Any future sales of equity will dilute the holdings of existing stockholders, possibly reducing the value of their investment.
We do not intend to pay cash dividends in the foreseeable future.
We do not anticipate paying any cash dividends in the foreseeable future and intend to retain any future earnings for the development and expansion of our business. In addition, the terms of existing or future agreements may limit our ability to pay dividends. Therefore, our stockholders will not receive a return on their shares unless the value of their shares increases.
We have broad discretion over the use of available cash and may not realize an adequate return.
We have considerable discretion in the application of available cash and have not fixed the amounts that we will apply to various corporate purposes, including potential acquisitions. We may use cash for purposes that do not yield a significant return, if any, for our stockholders.
Item 1B. Unresolved Staff Comments
None.
Our corporate offices and research and development facilityfacilities 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, where we sublet to a third party approximately 7,300We also lease 10,000 square feet of additional office space and 12,000 square feet of laboratory space in two other buildings in the same center under a lease which expires December 15, 2004.leases that expire in 2015 and 2008, respectively. The leased properties are in good condition.
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FollowingCompetitive Technologies, Inc. (“CTI”) initiated arbitration proceedings on June 6, 2006 before the terminationAmerican Arbitration Association with us alleging breach of the terms of our proposed mergerlicense agreement for patent rights related to certain compounds and methods of treatment for sexual dysfunction and for other actions asserted to arise out of the license agreement. CTI also alleges that we committed certain tortious acts against CTI, including fraud and negligent misrepresentation relating to entering into the license agreement originally and tortious interference with San Diego-based Molecular Biosystems, Inc.business expectancy concerning termination by us and King of the sublicense of the CTI license agreement to King. CTI is seeking unspecified damages in March 2000, Molecular Biosystems commencedexcess of $500,000. In addition, CTI seeks a legal actiondeclaration that bremelanotide is covered by the license agreement. The license agreement provides for binding arbitration as the
16
remedy for dispute resolution. We have not yet been required to respond to CTI's arbitration demand. We intend to strenuously dispute CTI’s assertions, including that we materially breached the license agreement, and intend to defend ourselves vigorously. CTI also initiated litigation against us seeking damages arising fromon September 16, 2005 by suit in Connecticut Superior Court for breach of a settlement agreement of an earlier arbitration between CTI and us, asserting that we failed to timely register for resale shares of our common stock valued at approximately $300,000 issued to them in the alleged improper terminationsettlement. A motion by CTI to amend the complaint to add claims asserting fraud is still pending. We have not yet been required to answer the complaint or file counterclaims, and intend to strenuously dispute CTI’s assertions, including that we materially breached the settlement agreement and intend to defend ourselves vigorously. We cannot reasonably predict the outcome of the merger agreement. We denieddisputes or reasonably estimate the range of potential loss, if any. Although the amount of any liability that could arise with respect to these matters cannot be predicted, we do not believe that the resolution of this matter will have a material allegations. In August 2002, in order to avoid the ongoing costsadverse effect on our financial position, results 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.operations or liquidity.
There are no other material legal proceedings pending against us.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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We did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2003.
Item 5. Market for Registrant'sRegistrant’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 AMEXthe American Stock Exchange (the “AMEX”) since July 1, 2001.2004.
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 $1.10 YEAR 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
| FISCAL YEAR ENDED JUNE 30, 2006 | HIGH | LOW |
| Fourth Quarter | $2.88 | $1.95 |
| Third Quarter | 3.72 | 2.67 |
| Second Quarter | 4.03 | 1.96 |
| First Quarter | 2.36 | 1.85 |
| FISCAL YEAR ENDED JUNE 30, 2005 | HIGH | LOW |
| Fourth Quarter | $2.24 | $1.70 |
| Third Quarter | 2.57 | 2.03 |
| Second Quarter | 2.97 | 2.35 |
| First Quarter | 4.25 | 2.52 |
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Table of Contents Our common stock has been quoted on the AMEX under the symbol PTN since December 21, 1999. It previously traded on The Nasdaq SmallCap Market under the symbol PLTN.
Holders of common stock. On September 26, 2003,1, 2006, we had approximately XXX250 holders of record of common stock. On September 26, 20031, 2006, the closing sales price of our common stock as reported on the AMEX was $4.21$2.21 per share.
Dividends and dividend 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. Our outstanding Series A Preferred Stock, consisting of 9,997 shares on September 1, 2006, 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.
EQUITY COMPENSATION PLAN INFORMATION AS OF JUNE 30, 2003 Number of securities remaining available for future issuance under Number of securities to Weighted-average equity compensation be issued upon exercise exercise price of plans (excluding of outstanding options, outstanding options, securities reflected in Plan category warrants and rights warrants and rights column (a)) - ------------- ----------------------- ------------------- ------------------------ (a) (b) (c) Equity compensation plans approved by 4,476,876 $3.67 802,535 security holders (1) Equity compensation plans not approved by 1,852,207 $3.46 0 security holders ____________________________
|
| EQUITY COMPENSATION PLAN INFORMATION | ||||||
| AS OF JUNE 30, 2006 | ||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
| (a) | (b) | (c) | ||||
| Equity compensation plans approved by security holders | 5,636,470 | $3.11 | 3,957,881 | |||
| Equity compensation plans not approved by security holders | 1,175,678 | 2.28 | 0 | |||
| Total | 6,812,148 | 3,957,881 | ||||
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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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 10-29-06 Spring 2002 109,510 $2.75 06-13-07 Summer 2002 51,502 $1.46 07-29-07 Summer 2002 51,502 $1.37 07-29-07 Fall 2002 458,647 $1.54 11-15-07
Recent sales of unregistered securities. In closings on July 29, 2002, November 15, 2002 and March 20, 2003, 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 in a private placements of common stock and warrants to accredited investors. The aggregate of these closings yielded gross proceeds 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 per share. We paid cash placement agent fees totaling approximately $1,902,000 and issued five-year warrants to purchase a total of 561,651 shares of common stock to placement agents for the offerings. The placement agent warrant exercise price for 51,502 shares is $1.46 per share, the exercise price for 51,502 shares is $1.37 per share and the exercise price for 458,647 shares is $1.54 per share.
We made the private offerings to domestic 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 stock and warrants sold are not transferable absent registration or exemption from registration requirements, and 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.
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| • | 1997 Executive Officers Stock Option Agreement, dated June 3, 1997: provided common stock purchase options to three executive officers. Options to purchase 26,766 shares at $4.96 per share remain outstanding with an expiration date of June 3, 2007. |
| • | Richard J. Murphy Stock Option Agreement, dated December 4, 1997: provided common stock purchase options to a former director to purchase 5,000 shares at $5.44 per share and 1,066 shares at $7.50 per share, with an expiration date of December 4, 2007. These options replaced options for the same number of shares at the same prices which terminated under our 1996 Stock Option Plan. |
| • | Wistar Institute of Anatomy and Biology warrants, dated December 15, 2000: provided common stock purchase warrants to a technology licensor to purchase 15,000 shares at $4.00 per share, with an expiration date of December 15, 2010. |
| • | Cedar Brook II Corporate Center, L.P. warrants, dated December 17, 2001: provided common stock purchase warrants to the lessor of our office and laboratory facility to purchase 25,000 shares at $3.65 per share with an expiration date of December 17, 2006. |
| • | Wistar Institute of Anatomy and Biology warrants, dated May 13, 2002: provided common stock purchase warrants to a technology licensor to purchase 15,000 shares at $2.82 per share, with an expiration date of May 13, 2012. |
| • | North Coast Securities Corporation warrants, dated November 30, 2004: provided common stock purchase warrants to an advisor to purchase 50,000 shares at $2.97 per share and 25,000 shares at $3.38 per share, with an expiration date of November 30, 2007. |
| • | Placement warrants: provided common stock purchase warrants as compensation to various private offering placement agents to purchase an aggregate of 1,012,846 shares. These warrants have the following share amounts, prices (rounded to the nearest cent) and expiration dates: |
| Offering | Shares Purchasable | Exercise Price | Expiration Date | |||||
| Fall 2001 | 132,688 | $2.66 | 10-29-06 | |||||
| Fall 2001 | 221,872 | $2.70 | 10-29-06 | |||||
| June 2002 | 109,510 | $2.75 | 06-13-07 | |||||
| July 2002 | 51,502 | $1.46 | 07-29-07 | |||||
| July 2002 | 38,627 | $1.37 | 07-29-07 | |||||
| Fall 2002 | 458,647 | $1.54 | 11-15-07 |
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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.
Selected Consolidated Financial Data
(In thousands, except per share data) Year Ended June 30, -------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 ---------- ------------ ----------- ----------- ----------- Statement of Operations Data: REVENUES Grants and contracts $ 60 $ 4,617 $ 1,621 $ 81 $ 641 License fees and royalties 550 500 167 200 629 Other -- -- -- -- -- ---------- ------------ ----------- ----------- ----------- Total revenues 610 5,117 1,788 281 1,270 ---------- ------------ ----------- ----------- ----------- OPERATING EXPENSES Research and development 8,720 9,110 10,109 12,117 17,439 General and administrative 3,957 4,567 3,025 5,004 4,867 ---------- ------------ ----------- ----------- ----------- Total operating expenses 12,677 13,677 13,134 17,121 22,306 ---------- ------------ ----------- ----------- ----------- OTHER INCOME (EXPENSES) Interest income 172 405 788 312 248 Interest expense (107) (29) (5) (3) (22) ---------- ------------ ----------- ----------- ----------- Total other income 65 376 783 309 226 ---------- ------------ ----------- ----------- ----------- Loss before income taxes & cumulative effect of accounting change (12,002) (8,184) (10,563) (16,531) (20,810) Income tax benefit -- -- 325 392 245 ---------- ------------ ----------- ----------- ----------- Loss before cumulative effect of accounting change (12,002) (8,184) (10,238) (16,139) (20,565) Cumulative effect of accounting change (1) -- -- (361) -- -- ---------- ------------ ----------- ----------- ----------- NET LOSS (12,002) (8,184) (10,599) (16,139) (20,565) DEEMED DIVIDEND -- -- -- (297) (203) ---------- ------------ ----------- ----------- ----------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (12,002) $ (8,184) $ (10,599) $ (16,436) $ (20,768) ========== ============ =========== =========== =========== Basic and diluted net loss before cumulative effect of accounting change $ (2.02) $ (1.10) $ (1.01) $ (1.16) $ (0.73) Cumulative effect of accounting change (1) -- -- (0.04) -- -- ---------- ------------ ----------- ----------- ----------- Basic and diluted net loss per common share $ (2.02) $ (1.10) $ (1.05) $ (1.16) $ (0.73) ========== ============ =========== =========== =========== Weighted average common shares outstanding 5,936 7,441 10,131 14,195 28,362 ========== ============ =========== =========== =========== Pro forma amounts assuming accounting change applied retroactively: Net loss to common shareholders $ (12,002) $ (8,545) $ (10,238) ========== ============ =========== Basic and diluted net loss per common share $ (2.02) $ (1.15) $ (1.01) ========== ============ ===========
| (In thousands, except per share data) | |||||||||||
| Year Ended June 30, | |||||||||||
| 2006 (1) | 2005 (1) | 2004 | 2003 | 2002 | |||||||
| Statement of Operations Data: | |||||||||||
| REVENUES | |||||||||||
| Royalties | $ | 1,509 | $ | 1,586 | $ | - | $ | - | $ | - | |
| Product sales | - | 2,474 | - | - | - | ||||||
| Licenses, grants and contracts | 18,240 | 13,897 | 2,315 | 1,270 | 281 | ||||||
| Total revenues | 19,749 | 17,957 | 2,315 | 1,270 | 281 | ||||||
| OPERATING EXPENSES | |||||||||||
| Cost of product sales | 2,041 | 535 | - | - | - | ||||||
| Royalties | 300 | 328 | - | - | - | ||||||
| Research and development | 41,014 | 25,045 | 23,333 | 17,439 | 12,117 | ||||||
| General and administrative | 6,844 | 7,461 | 5,740 | 4,867 | 5,004 | ||||||
| Total operating expenses | 50,199 | 33,369 | 29,073 | 22,306 | 17,121 | ||||||
| OTHER INCOME (EXPENSE) | |||||||||||
| Investment income | 856 | 488 | 222 | 248 | 312 | ||||||
| Interest expense | (31 | ) | (14 | ) | (23 | ) | (22 | ) | (3 | ) | |
| Total other income, net | 825 | 474 | 199 | 226 | 309 | ||||||
| Loss before income taxes | (29,625 | ) | (14,938 | ) | (26,559 | ) | (20,810 | ) | (16,531 | ) | |
| Income tax benefit | 666 | 580 | 241 | 245 | 392 | ||||||
| NET LOSS | (28,959 | ) | (14,358 | ) | (26,318 | ) | (20,565 | ) | (16,139 | ) | |
| DEEMED DIVIDEND | - | - | - | (203 | ) | (297 | ) | ||||
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (28,959 | ) $ | (14,358 | ) $ | (26,318 | ) $ | (20,768 | ) $ | (16,436 | ) |
| Basic and diluted net loss attributable to | |||||||||||
| common stockholders per common share | $ | (0.48 | ) $ | (0.27 | ) $ | (0.55 | ) $ | (0.73 | ) $ | (1.16 | ) |
| Weighted average common shares outstanding | 60,357 | 53,861 | 47,688 | 28,362 | 14,195 | ||||||
| Balance Sheet Data (at period end): | |||||||||||
| Cash, cash equivalents and investments | $ | 30,664 | $ | 18,106 | $ | 20,412 | $ | 18,383 | $ | 9,105 | |
| Property and equipment, net | 6,348 | 6,464 | 6,356 | 7,246 | 2,416 | ||||||
| Working capital | 19,742 | 13,772 | 15,485 | 14,742 | 5,783 | ||||||
| Total assets | 40,047 | 35,166 | 27,800 | 26,568 | 12,358 | ||||||
| Long term debt, net of current portion | 230 | 19 | 30 | 76 | - | ||||||
| Stockholders' equity | 18,300 | 9,225 | 19,387 | 18,657 | 8,687 | ||||||
| (1) | In the fiscal year ended June 30, 2005, we received FDA approval to market NeutroSpec for equivocal appendicitis. We suspended sales of NeutroSpec during the fiscal year ended June 30, 2006. |
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Balance Sheet Data: Cash, cash equivalents and investments $ 2,789 $ 5,842 $ 11,456 $ 9,123 $ 18,383 Property and equipment, net 1,458 1,573 1,925 2,416 3,399 Working capital 554 4,995 9,360 6,595 15,249 Total assets 4,723 8,885 14,244 12,358 22,721 Long term debt, net of current portion 2,000 -- -- -- 76 Stockholders' equity $ 341 $ 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’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
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 that our accounting policies and estimates relating to revenue recognition, accrued expenses and stock-based compensation charges are the most critical accounting policy is revenue recognition.critical.
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. Due to the uncertainty inherent in our development programs, including the possibility that a program is terminated prior to completion, we recognize such revenue on a straight-line basis, as we believe that no other basis is more reflective of the pattern over which such revenue is earned. We estimateconsider our performance period asunder the King collaboration to be the period in which we perform development activities during the initial research term.term, which is currently estimated to be five years from the inception of the agreement. Specific performance periods are not stated in the agreement and are estimated by management based on detailed development programs agreed upon by the parties. Management monitors the progress and results of these development activities and adjusts its estimated performance period accordingly. 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 arevary based on the occurrenceresults of the related development activities, changes in development plans agreed to by the parties, regulatory requirements and other factors. Increases in the estimated performance period would result in increases in the period over which such deferred revenue is to be recognized and corresponding decreases in the amount of revenue recognized each period. As of June 30, 2006, a one-year increase in the estimated period of performance would result in a decrease in the amount of deferred revenue recognized per quarter of approximately $190,000.
Accrued Expenses
A significant portion of our development activities are performed by third parties. We review the activities performed under significant contracts each quarter and accrue expenses and the amount of any reimbursement to be received from our collaborators based upon the estimated amount of work completed. Estimating the value or stage of completion of certain services requires judgment based on available information. If we do not identify services performed for us but not billed by the service-provider, or if we underestimate or overestimate the value of services performed as of a substantive element specifiedgiven date, reported expenses will be understated or overstated.
We have estimated and accrued certain costs associated with the suspension of sales of NeutroSpec and the related recall of inventories, including our share of costs incurred by others, as determined in accordance with existing agreements. If we have underestimated the actual amount of these costs and credits, we will record additional expenses in future periods. In addition, if any product liability or related claim is asserted based on the use of NeutroSpec, the Company may incur future expenses or losses in connection with related litigation.
Stock-based Compensation
The fair value of stock options granted has been calculated using the Black-Scholes method, which requires us to make estimates of future interest rates, volatility and expected option lives. We estimate these factors at the time of grant based on our own prior experience, public sources of information and information for comparable companies. The amount of recorded compensation or pro forma disclosure related to an option grant is not adjusted for subsequent changes in these estimates or for actual experience. Effective with the adoption of SFAS 123(R) in July 2005, the amount of our recorded compensation is also dependent on our estimates of future option forfeitures. If we initially over-estimate future forfeitures, our reported expenses will be understated. Changes in estimated forfeitures will affect our reported expenses in the contract orperiod of the change.
Certain options are subject to periodic re-measurement over the vesting period as a measure of substantive progress towards completion under the contract.
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PT-141 is our lead therapeutic 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 of this trialservices are rendered, based on changes in the fourthfair value of our common stock. In addition, the vesting of certain options is dependent on future events. As a result, stock-based compensation charges may vary significantly from period to period.
Results of Operations
quarter of calendar year 2003. LeuTech®, is our proprietary radiolabled monoclonal antibody for imaging and diagnosing infections. We commenced the BLA amendment filingsYear Ended June 30, 2006 Compared to the FDA inYear Ended June 30, 2005:
Royalties – For the first halfyears ended June 30, 2006 and 2005 (“fiscal 2006” and “fiscal 2005”), we recognized royalty revenues of calendar year 2003$1.5 million and anticipate remitting the final BLA amendment filing$1.6 million, respectively, on Mallinckrodt’s sales of NeutroSpec, pursuant 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. We are currently conducting Phase 2 studies with LeuTech for detection of other infections, including osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging.
On July 24, 2003, we announced the completion of patient enrollment in a Phase 2B at-home, dose-ranging clinical study of PT-141. This study 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 added to the Russell 2000(R) Index, which is determined by objective rules, such as market capitalization rankings, which will remain in place 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 data on the safety and efficacy 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 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 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% of the time after taking a 100mg dose of Viagra).
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In March 2003,our collaboration agreement. The Company received FDA approval to market NeutroSpec in July 2004 and suspended sales in December 2005. Royalty revenues were comparable in fiscal 2006 and fiscal 2005, reflecting higher unit sales by Mallinckrodt during the shorter, six-month period of fiscal 2006 in which the product was sold. We will not earn future royalty revenues from NeutroSpec unless and until NeutroSpec sales resume.
Product sales – Prior to the suspension of sales and marketing activities, we concluded a private placementearned product sales on our shipment of our common stock and warrants,manufactured units of NeutroSpec to Mallincrodt, which yielded gross proceedswere billed upon shipment of approximately $19.1 million. Investors, consistingproduct to Mallinckrodt on standard trade terms. Revenue was recognized upon acceptance 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 productsproduct by Mallinckrodt based on conformance with product specifications. Each Mallinckrodt purchase of NeutroSpec from the Company was subject to certain minimum quantities, resulting in a limited number of our proprietary technologies.
In November 2002, we concluded a private placementproduct shipments by the Company. Accordingly, the Company’s periodic revenue from product sales was highly dependent on the timing of our common stockorders and warrants, which yielded gross proceedsshipments. There were no sales 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 purchaserNeutroSpec 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, 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. The lease will expire in July 2012.
Year Ended June 30, 2003 Compared to the Year Ended June 30, 2002Mallinckrodt during fiscal 2006
GrantsLicenses, grants and contracts – For the year ended June 30, 2003,2006, we recognized $504,000 in contract$18.2 million of revenue from licenses, grants and contracts compared to $13.9 million for the year ended June 30, 2005. In the years ended June 30, 2006 and June 30, 2005, we recognized $17.9 million and $11.5 million of revenue, respectively, related to our collaboration agreement with King related to bremelanotide, consisting of (i) $14.8 million and $8.1 million, respectively, of reimbursements for King’s share of bremelanotide development expenses and (ii) $3.1 million and $3.4 million, respectively, of license fees, which represents the shared developmentportion of King’s August 2004 up-front payment recognized as revenue during the year. The increase in reimbursement revenue from King is related to increased bremelanotide costs during the year and to the existence of LeuTech pursuantthe collaboration agreement for the full fiscal year. The agreement with King was completed in August 2004. In the years ended June 30, 2006 and June 30, 2005, we recognized $0.3 million and $2.3 million of revenue, respectively, related to our collaboration agreement with Mallinckrodt Inc.,related to NeutroSpec, consisting of (i) $0.3 million and $0.3 million, respectively, of reimbursements for Mallinckrodt’s share of NeutroSpec development expenses and (ii) $0 million and $2.0 million, respectively, of license fees. In fiscal 2005, we earned a division$2.0 million milestone payment from Mallinckrodt upon FDA approval of Tyco International, Ltd., as compared to noNeutroSpec. Future contract revenue from King and Mallinckrodt, in the form of reimbursement of shared development costs and the recognition of deferred license fees, will fluctuate based on development activities for bremelanotide and NeutroSpec. The Company may also earn contract revenue from Mallinckrodt and King based on the attainment of certain development milestones. The future amount of recorded reimbursement revenue from King is also dependent upon the apportionment of development responsibilities between us and King, as determined by a steering committee of the collaboration.
Cost of product sales and royalties – As noted above, there were no sales of NeutroSpec to Mallinckrodt in the year ended June 30, 2006. In fiscal 2006, cost of product sales represents our inventory write-off related to the suspension of sales of NeutroSpec. For the year ended June 30, 2005, we recognized $0.5 million in cost of product sales related to shipments of NeutroSpec to Mallinckrodt. Prior to the FDA approval of NeutroSpec in July 2004, all costs associated with the manufacturing of NeutroSpec were included in research and development expenses when incurred, including costs of usable raw materials and finished goods in inventory at the date of approval. As we used and sold this inventory, the cost of product sales we recognized excluded amounts previously expensed. On the date of approval, we had sufficient active drug substance to produce all of the product units sold prior to December 2005. Cost of sales for these units primarily consisted of packaging and other materials.
Royalty expense amounted to approximately $0.3 million in each of fiscal 2006 and 2005. We will not incur future royalty expenses on NeutroSpec unless and until commercial sales of NeutroSpec resume.
Research and development – Research and development expenses increased to $41.0 million for the year ended June 30, 2002. The increase in contract revenue was attributable to additional shared development costs of LeuTech 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 Services2006 compared to $80,929$25.0 million for the year ended June 30, 2002.2005. In the year ended June 30, 2006, development spending directly associated with bremelanotide increased approximately $11.2 million, as costs related to the conduct of various clinical trials, including an “at-home” efficacy study in ED patients and an “at-home” efficacy study in ED patients with diabetes mellitus. Associated costs include fees to clinicians, laboratory expenses and study monitoring and management. In the years ended June 30, 2006, 2005 and 2004 and cumulatively to date, we have incurred approximately $33.2 million, $18.3 million, $11.7 million and $85.3 million, respectively, in research and development (“R&D”) expenses on bremelanotide, including an allocated portion of general R&D expenses. Spending to date has been primarily related to formulation, manufacturing, preclinical and clinical activities. We expect to spend approximately $15 million to $20 million of additional direct costs (excluding allocated general expenses) on bremelanotide to conduct these and other clinical studies for ED and FSD and continue related process and development activities prior to initiating Phase 3 clinical trials. A majority of the additional direct costs will be reimbursed by our collaboration partner, King.
Research and development expenses directly related to our obesity, CHF and other MIDAS programs increased from $1.3 million to $2.6 million from fiscal 2005 to fiscal 2006, primarily as a result of additional
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License Fees and Royalties – Forcontract services for assistance with the yearoptimization of lead compounds. In the years 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, 20002006, 2005 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, 20002004 and $61,538 was recorded as a result of the initial $800,000 payment received from Mallinckrodt.
Research and development – Research and development (R&D) expenses increased to $17,439,191 for the year ended June 30, 2003 compared to $12,117,026 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:
In the year ended June 30, 2003, approximately $9.02006, research and development spending directly related to NeutroSpec decreased slightly from $1.2 million of R&D expense was allocated to PT-141$1.1 million compared to approximately $6.0 million for the year ended June 30, 2002.2005, primarily as a result of lower costs related to clinical trials. We anticipate incurring approximately $4.0 million of expenses over the next 12 months as we progress with ourhave suspended ongoing clinical trials and product development programs.
Total general R&D expenses, allocated among the programs above, increased $3.6 million in fiscal 2006, primarily due to increased personnel costs, including the recognition of compensation costs for at least onestock option grants, the expansion of these preclinical compoundsfacilities and initiate clinical testing in the first half of calendar year 2004. We anticipate incurring approximately $2.0 million of expenses over the next 12 months.
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Table of Contentsassociated support costs.
General and administrative – General and administrative (G&A) expenses decreased from $7.5 million in fiscal 2005 to $4,866,642$6.8 million in fiscal 2006. Increased personnel costs in fiscal 2006 were more than offset by lower legal and consulting expenses. Legal expenses related to collaborative agreements and arbitration proceedings, recruiting fees and expenses related to compliance with new regulatory requirements were all higher in fiscal 2005.
Investment income – Investment income increased to $0.9 million for the year ended June 30, 2003 compared to $5,004,1432006 from $0.5 million for the year ended June 30, 2002. The decrease in G&A expenses is2005, primarily attributable toreflecting income on greater invested cash balances maintained during the reduction in legal expenses since the settlement with Molecular Biosystems in August 2002, which was accruedperiod as a result 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 amountsour sales of cash, cash equivalentscommon stock and investments available for investment purposes throughout the year and the decrease in interest rates these investments earn.warrants.
Income tax benefit — During 2003the years ended June 30, 2006 and 2002,2005, the Company sold New Jersey Statestate net operating loss carryforwards and research and development credits, which resulted in the recognition of $245,093$0.7 million and $392,410$0.6 million of income tax benefit,benefits, respectively. Assuming the Statestate 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 Statestate 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 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, 20022005 Compared to the Year Ended June 30, 20012004:
GrantsRoyalties and product sales – For the year ended June 30, 2005, we recognized product sales of $2.5 million and royalty revenues of $1.6 million, related to NeutroSpec, from Mallinckrodt pursuant to our collaboration agreement. The Company received FDA approval to market NeutroSpec in July 2004. Accordingly, there was no product revenue or royalty revenue recognized for the year ended June 30, 2004 (“fiscal 2004”).
Licenses, grants and contracts – For the year ended June 30, 2002,2005, we did not recognize any contractrecognized $13.9 million of revenue related to the shared development costs of LeuTech pursuant to our collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., asfrom licenses, grants and contracts compared to $1,410,356 recognized$2.3 million for the year ended June 30, 2001. The decrease was attributable2004. In the year ended June 30, 2005, we recognized $11.5 million of revenue related to the cap on shared development costs of LeuTech pursuant to the originalour collaboration agreement with King related to bremelanotide, which commenced in August 2004. The revenue consisted of $8.1 million of reimbursements for King’s share of bremelanotide development expenses and $3.4 million of license fees, representing a portion of King’s August 2004 up-front payment recognized as revenue during the year. There was reachedno revenue from King during the year ended June 30, 2001.2004. 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 reported2005, we recognized approximately $2.3 million of revenue under collaboration agreements with Mallinckrodt 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 effectdevelopment 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 recognizedNeutroSpec compared with $2.2 million in the year ended June 30, 2000. Previously, we had recognized up-front license fees when they were received2004. Revenue in fiscal 2005 included a $2.0 million milestone payment upon obtaining FDA approval for equivocal appendicitis 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$0.3 million of the related agreements. For the year ended June 30, 2002, we recorded $200,426reimbursements for Mallinckrodt’s share of license revenue, $138,888development expenses for other indications of which was includedNeutroSpec. Revenue in the cumulative effect adjustment asfiscal 2004 consisted 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.$2.0 million
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milestone payment and $0.2 million of deferred license fee revenue from up-front payments received in 1999 and 2002. In addition, in fiscal 2004, the Company recognized approximately $0.1 million in grant revenue from the Department of Health and Human Services.
Cost of product sales and royalties – For the year ended June 30, 2005, we recognized $0.5 million and $0.3 million, respectively, in cost of product sales and royalties related to NeutroSpec, which was approved by the FDA in July 2004. There was no corresponding cost of product sales or royalties for the year ended June 30, 2004.
Research and development – Research and development (R&D) expenses increased to $12,117,026$25.0 million for the year ended June 30, 20022005 compared to $10,108,999$23.3 million for the year ended June 30, 2001.2004. In the year ended June 30, 2005, development spending directly associated with bremelanotide increased approximately $4.4 million, as costs related to processing drug product, including manufacturing, analytical and process development and equipment costs, were partially offset by lower spending on clinical studies. Increased spending on the development of bremelanotide was largely offset by a $4.2 million decrease in spending on NeutroSpec development. The increaseyear ended June 30, 2004 included greater nonclinical spending on NeutroSpec prior to FDA approval in R&D wasJuly 2004, primarily related to ourprocesses for the manufacturing of drug product. In the year ended June 30, 2005, development expenses of the MIDAS program were comparable to the prior year. Indirect research and development costs, including personnel costs and certain license fees, 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$1.5 million in the remaining estimated useful lives of certain leasehold improvements at our Edison, New Jersey facility which we moved out of in July 2002.year ended June 30, 2005.
General and administrative – General and administrative (G& A) expenses increased to $5,004,143$7.5 million for the year ended June 30, 20022005 compared to $3,024,841$5.7 million for the year ended June 30, 2001. The increase in G&A was primarily attributable to an increase in professional fees mainly related to2004. Personnel, consulting, legal fees, increase in salaries and related personnelinsurance expenses increased, reflecting the general expansion of the Company’s business activities, its licensing activities, the July 2004 approval of NeutroSpec and the accrual of our settlement of litigation with Molecular Biosystems, Inc.additional accounting and regulatory requirements.
InterestInvestment income – InterestInvestment income decreasedincreased to $312,015$0.5 million for the year ended June 30, 2002 compared to $787,5742005 from $0.2 million for the year ended June 30, 2001. The decrease in interest2004, primarily reflecting income on greater invested cash balances maintained during the period, which 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.partially offset by recognized losses on securities.
Income tax benefit — During 2002the years ended June 30, 2005 and 2001,2004, the Company sold New Jersey Statestate net operating loss carryforwards and research and development credits, which resulted in the recognition of $392,410$0.6 million and $325,152$0.2 million 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 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, we had a deficit accumulated during thelosses, primarily related to spending on our research and development stage of $90,808,827.programs. We have financed our net operating losses primarily through June 30, 2003 by a series of debtequity financings and equity financings. At June 30, 2003, we had cash and cash equivalents of $14,294,603 and investments of $4,088,384.
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Table of Contentsrevenue received under collaborative agreements.
Our product candidates are at various stages of research and development and some may never be successfully developed or commercialized. We will need regulatory approval to market and sell LeuTech for diagnosisbremelanotide and obesity and CHF products. In addition, in December 2005, we voluntarily suspended the sales, marketing and distribution of appendicitis, as well as for PT-141, MIDASNeutroSpec and LeuTech for other indications. PT-141, MIDAS and LeuTech for other indicationsrecalled all existing customer inventories. Our product candidates under development 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:
| • | 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. |
Failure to obtain timely regulatory approval of LeuTech, or delays in obtaining regulatory approval of LeuTech for the diagnosis of appendicitis,our other product candidates and indications would eliminate or delayimpact our potentialability to increase revenues from sales of LeuTech. Thisand could make it more difficult to attract investment capital for funding our other research and development projects.operations. Any of these possibilities could materially and adversely affect our operations.
During the year ended June 30, 2003,fiscal 2006, we used $23.4 million of cash for our operating activities, usedcompared to $5.1 million in fiscal 2005 and $23.7 million in fiscal 2004. Lower net cash outflows from operations in fiscal 2005 resulted from amounts received from King under our collaboration agreement, which was completed in August 2004. In fiscal
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2006, our accounts receivable balance decreased $5.4 million and duringdue primarily to the year ended June 30, 2002 our operating activities used net cashtiming of $13.1 million. The increase resulted primarilythe receipt of reimbursements from increased R&D spendingKing for bremelanotide costs. Our periodic accounts receivable balances will continue to be highly dependent on both PT-141 and LeuTech.the timing of such receipts.
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 used cash in investing activities of $2.8 million, consisting of $1.6 million of capital expenditures and $1.2 million for investment securities.
During the year ended June 30, 2003,fiscal 2006, net cash provided by financing activities was approximately $30.3$36.9 million consistingreflecting proceeds from the sale to common stock and warrants to King in September 2005 and the sale of approximately $30.5common stock and warrants in our April 2006 offering. Net cash provided by financing activities in fiscal 2005 of $3.8 million in grossrepresents primarily proceeds from the issuance of common stock and warrants to King in private placements, partially offset by $153,473 for payments on capital lease obligations. Duringconnection with the year ended June 30, 2002,August 2004 collaboration agreement. In fiscal 2004, net cash provided by financing activities was $12.4of $26.2 million all of which resulted from our January 2004 private placement, in which we raised $21.0 million, and the issuanceexercise of common stock and warrants in private placements.
In November 2002 and March 2003, we received aggregate gross proceeds of $30.6 million in private placements of common stockoutstanding options 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 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 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 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 arrange for the manufacture of LeuTech and we would receive a transfer price on each product unit and a royalty on LeuTech 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 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
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 per year in 2007. The lease will expire in July 2012.
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We have three licenseincurred cumulative 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 capital resources will be adequate to fund our projected operations through at least the next twelve months, based on current and projected expenditure levels, which include receiving certain milestone payments from collaborative partners. No assurance can be given that we will earn future milestone payments that are contingent on specified events or that we will not consume a significant amount of our available resources before that time. We intend to continually monitor the progress of our development programs and the timing and amount of related expenditures and potential milestone receipts and may seek additional financing. 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 that require minimum yearly payments. Future minimum payments under the license agreements are: 2004 — $250,000, 2005 — $200,000, 2006 — $200,000, 2007 — $200,000 and 2008 — $200,000.or other resources.
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 resourcesor whether we will be adequateable to fund our projected operations into 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 untilobtain additional funding if such time as appropriate financing was available.an acquisition is located.
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.
CommitmentsContractual Obligations
As outlined in Note 5 of the Notes to our Consolidated Financial Statements, weWe have entered into various contractual obligations and commercial commitments. The following table summarizes our most significant contractual obligations as of June 30, 2003:2006:
| Payments due by Period | |||||||||||
| Total | Less than 1 Year | 1 - 3 Years | 4 - 5 Years | After 5 Years | |||||||
| Facility operating leases | $11,322,844 | $2,386,899 | $3,584,017 | $3,054,494 | $2,297,434 | ||||||
| Capital lease obligations | 365,292 | 109,819 | 199,315 | 56,158 | - | ||||||
| License agreements | 1,400,000 | 175,000 | 350,000 | 350,000 | 525,000 | ||||||
| Total contractual obligations | $13,088,136 | $2,671,718 | $4,133,332 | $3,460,652 | $2,822,434 | ||||||
28 The Company’s license agreements also include royalty and other contingent payment obligations and may be terminated by the Company under certain conditions.
Payments dueup to $2.25 million contingent on the achievement of specified cumulative net margins on sales byPeriod ---------------------- 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 — TransitionMallinckrodt. No contingent amounts will be payable related to NeutroSpec unless we recommence sales and Disclosure, an amendmentmarketing 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, the following factors should be considered in evaluating our business and future prospects:
We have never been profitablea license agreement for patent rights related to certain compounds and we may never become profitable. Asmethods of June 30, 2003, we had a deficit accumulated during development stage of $90,808,827 and a losstreatment for the year then ended of $20,565,211. We anticipate substantial losses over the next few years associated with the manufacturing and marketing of LeuTech for diagnosis of appendicitis, and continued research and development of PT-141, MIDAS and LeuTech for other indications. We cannot besexual dysfunction. The license agreement requires contingent payments based on 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 will 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 untilupfront fees we receive approval from the U.S. Federal Drug Administration and other regulatory authorities for our product candidates, we cannot sell our products and will not have product revenues. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from net proceeds of future offerings and cash 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 will have a material adverse effect on our business.
We are a development-stage company and have not demonstrated our ability to perform the functions necessary for the successful commercialization of any of our product candidates. The successful commercialization of our product candidates will require us to perform a variety of functions, including:
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.
Our 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 LeuTech for other indications. PT-141 and MIDAS will require significant further research, development and testing. You should evaluate Palatin 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:as
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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. 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:
Pre-clinical tests include laboratory evaluation of product chemistry formulation and stability, as well as studies to evaluate toxicity. The results of pre-clinical testing together with manufacturing information and analytical data are submitted to the FDA as part of an IND application. The FDA requires a 30-day waiting period after the filing of each IND application before clinical trials may begin, in order to ensure that human research subjects will not be exposed to unreasonable health risks. At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, or may authorize trials only on specified terms. The IND application process may become extremely costly and substantially delay development of our products. Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in clinical trials.
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Clinical trials to support new drug applications are typically conducted in three sequential phases that may overlap. These phases generally include the following:
Clinical testing must meet requirements for Institutional Review Board, or IRB, oversight, informed consent and good clinical practices. The FDA, and the IRB at each institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical studies are submitted to the FDA as partresult of a new drug application, or NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, the FDA has 180 days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA determines that the clinical data do not adequately establish the safety and efficacy of the drug. Upon approval, a drug candidate may be marketed only in those dosage forms and for those indications approved in the NDA. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase IV studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market 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.
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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.
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 FDA’s cGMP regulations. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as Warning Letters, suspension of manufacturing, seizure of product, voluntary recall of a product injunctive action or possible civil penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval. Because we intend to contract with third parties for manufacturing of these products, our ability to control third party compliance with FDA requirements will be limited to contractual remedies and rights of inspection. Failure of third-party manufacturers to comply with cGMP or other FDA requirements applicable to our products may result in legal or regulatory action by the FDA.
With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote pharmaceuticals, which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. The FDA has very broad enforcement authority under the Federal Food Drug and Cosmetic Act, and failure to abide by these regulations can result in penalties including the issuance of a warning letter directing us to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.
We are also 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 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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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.
Our rights to a key antibody used in LeuTech are dependent upon an exclusive license agreement with The Wistar Institute of Biology and Anatomy. Our rights to technology related to PT-141 are dependent upon an exclusive field-of-use license agreement with Competitive Technologies, Inc. These agreements contain specific performance criteria and require us to pay royalties and make milestone payments. Failure to meet these requirements, or any other event of default under the license agreements, could lead to termination of the license agreements. If a license agreement is terminated we may be unable to make or market the covered product, in which case we may lose the value of our substantial investment in developing the product, as well as any future revenues from selling the product.
We completed clinical trials of LeuTech for the diagnosis of equivocal appendicitis in the spring of 1999. In December 1999, the FDA accepted our LeuTech BLA for the diagnosis 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 and that the data presented support the clinical utility 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 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. FDA review of the application amendments can be a long and uncertain process. The amendments must demonstrate that we have satisfactorily addressed all of the issues contained in the complete review letter, before the FDA can approve LeuTech for commercial use. We will need to rely on our contract manufacturers to obtain a substantial part of the requested information. We cannot know for certain whether we can provide the requested information, how long it will take, or whether the data we provide will be satisfactory to the FDA. Failure to obtain regulatory approval of LeuTech, or delays in obtaining regulatory approval of LeuTech, 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.
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Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product claims. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and could delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay or eliminate our ability to commercialize our product candidates and generate product revenues.
sublicense. We do not have the facilitiesreasonably expect to manufacture LeuTech. We depend on DSM N.V. of the Netherlands for the manufacture of the antibody used in LeuTech, and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of LeuTech kits. Our contract manufacturers must perform LeuTech manufacturing activities in a manner that complies with FDA regulations. Failure to conduct their activities in compliance with FDA regulations could negatively impact our ability to receive FDA approval of LeuTech. The failure of either of these manufacturers to supply these key components of LeuTech, or their inability to comply with FDA manufacturing regulations, could force us to seek other manufacturers and could interfere with our ability to deliver product. Establishing relationships with new suppliers, any of whom must be FDA-approved, is a time-consuming and costly process.
If the FDA approves LeuTech for marketing and sale, we will depend on our arrangement with Tyco Healthcare (formerly Mallinckrodt, Inc.), a division of Tyco International, Ltd., to market, sell and distribute LeuTech. Tyco Healthcare is our worldwide (excluding Europe) marketing, sale and distribution partner for LeuTech. If Tyco Healthcare fails to market LeuTech or devote enough resources to LeuTech, our potential revenues from the sale of LeuTech will be adversely affected. If the arrangement with Tyco Healthcare fails, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities.
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Approval of LeuTech for marketing and sale does not assure the product’s commercial success. LeuTech, if successfully developed, will compete with drugs manufactured and marketed by major pharmaceutical and other biotechnology companies. Imaging agentssublicense such as LeuTech generally take longer to achieve market acceptance following marketing approval than other drugs. The degree of market acceptance of LeuTech will depend on a number of factors, including:
If LeuTech does not achieve adequate market acceptance, our business, financial condition and results of operations will be adversely affected.
We are aware of one company marketing an antibody-based product which may compete with LeuTech as to certain indications. The competing product is marketed in some European countries. Palatin is also aware of at least one other company developing a peptide-based product which may also compete with LeuTech 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 are aware that there are two oral FDA-approved drugs for the treatment of erectile dysfunction. Both of these 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, in 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, 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. These competitive products or technologies may be more effective and useful and less costly than LeuTech, 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.
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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:next twelve months.
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:
Our research and development of LeuTech, 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.
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The testing and marketing of medical products entail 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.
The average daily trading volume in our common stock for the 12 month period ended September 26, 2003 was approximately 90,000 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 executive officers and directors beneficially own approximately 5% of our voting securities and our 5% or greater stockholders beneficially own approximately 52% 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.
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Recently enacted 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 Nasdaq Stock Market, could result in increased costs to us as we 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 tofrom 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, 2003,2006, our cash and cash equivalents were $14,294,603$28.3 million and investments, which consisted of commercial paper,mutual funds, were $4,088,384.$2.3 million. As of June 30, 2005, our cash and cash equivalents were $15.7 million and investments, which consisted primarily of mutual funds, were $2.4 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.
Foreign Currency Risk. A significant portion of the cost of manufacturing NeutroSpec is denominated in Euros. Therefore, if manufacturing of NeutroSpec resumes, a fluctuation in exchange rates between the Euro and the U.S. dollar would affect the Company’s future cost of product revenues. The impact on the Company’s future results of operations of any such fluctuation will be dependent on the volume and timing of the Company’s future purchases. In addition, the Company incurs certain research and development costs denominated in foreign currency, which fluctuate from period to period.
As of June 30, 2006 and 2005, the amount of accounts payable and accrued expenses denominated in Euros was approximately $0.2 million and $0.8 million, respectively. Percentage increases in the U.S. dollar cost of Euros would result in corresponding increases in such liabilities. The Company has not hedged its exposures to foreign exchange fluctuations. However, the Company monitors its foreign-currency denominated liabilities and commitments on an ongoing basis and may enter into hedging transactions in the future.
39
Item 8. Financial Statements and Supplementary DataData.
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. (a development stage company) and subsidiariessubsidiary as of June 30, 20032006 and 2002,2005, and the related consolidated statements of operations, cash flows, and stockholders’ equity (deficit) and cash flows for each of the years thenin the three-year period ended and for the period from January 28, 1986 (inception) through June 30, 2003.2006. 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. The consolidated financial statements of Palatin Technologies, Inc. and subsidiaries for the year ended June 30, 2001 and for the period from January 28, 1986 (inception) through June 30, 2003, to the extent related to the period from January 28, 1986 (inception) through June 30, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified 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.audits.
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. (a development stage company) and subsidiaries as of June 30, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, and for the period from January 28, 1986 (inception) through June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Philadelphia, PennsylvaniaSeptember 19, 2003
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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 year ended June 30, 2000, 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 subsidiariessubsidiary as of June 30, 20012006 and 20002005, and the results of their operations and their cash flows for each of the three years in the three-year period ended June 30, 2001 and the period from January 28, 1986 (inception) through June 30, 2001,2006, in conformity with accounting principlesU.S. generally accepted accounting principles.
As discussed in Note 2, the United States.Company adopted SFAS No. 123(R), “Share-Based Payment,” effective July 1, 2005 using the modified prospective method.
ARTHUR ANDERSEN We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Palatin Technologies, Inc.‘s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 12, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
September 10, 200112, 2006
42Consolidated Balance Sheets
| June 30, 2006 | June 30, 2005 | ||||
| ASSETS | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ 28,333,211 | $ 15,720,364 | |||
| Available-for-sale investments | 2,330,834 | 2,385,570 | |||
| Accounts receivable | 69,591 | 5,441,425 | |||
| Inventories | - | 1,382,160 | |||
| Prepaid expenses and other current assets | 1,453,650 | 1,889,269 | |||
| Total current assets | 32,187,286 | 26,818,788 | |||
| Property and equipment, net | 6,347,705 | 6,464,324 | |||
| Restricted cash | 475,000 | 475,000 | |||
| Other assets | 1,037,296 | 1,408,158 | |||
| Total assets | $ 40,047,287 | $ 35,166,270 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
| Current liabilities: | |||||
| Capital lease obligations, current portion | $ 86,564 | $ 11,269 | |||
| Accounts payable | 3,092,962 | 4,773,297 | |||
| Accrued expenses | 4,466,428 | 3,925,406 | |||
| Accrued compensation | 803,900 | 545,870 | |||
| Deferred revenue, current portion | 3,995,575 | 3,790,828 | |||
| Total current liabilities | 12,445,429 | 13,046,670 | |||
| Capital lease obligations, net of current portion | 229,585 | 18,934 | |||
| Deferred rent, net of current portion | 2,358,550 | 3,001,980 | |||
| Deferred revenue, net of current portion | 6,713,942 | 9,873,438 | |||
| Total liabilities | 21,747,506 | 25,941,022 | |||
| Commitments and contingencies (Note 8) | |||||
| Stockholders' equity: | |||||
| Preferred stock of $.01 par value - authorized 10,000,000 shares; | |||||
| Series A Convertible; issued and outstanding 9,997 and 11,447 shares | |||||
| as of June 30, 2006 and 2005, respectively | 100 | 114 | |||
| Common stock of $.01 par value - authorized 150,000,000 shares; | |||||
| issued and outstanding 70,878,521 and 54,236,544 shares as of | |||||
| June 30, 2006 and 2005, respectively | 708,785 | 542,365 | |||
| Additional paid-in capital | 178,089,176 | 140,167,431 | |||
| Accumulated other comprehensive loss | (54,736 | ) | - | ||
| Accumulated deficit | (160,443,544 | ) | (131,484,662 | ) | |
| Total stockholders' equity | 18,299,781 | 9,225,248 | |||
| Total liabilities and stockholders' equity | $ 40,047,287 | $ 35,166,270 | |||
The accompanying notes are an integral part of these consolidated financial statements.
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)
Consolidated Balance Sheets
OperationsJune 30, 2003 June 30, 2002 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 14,294,603 $ 7,944,264 Available for sale investments 4,088,384 1,160,773 Prepaid expenses and other 447,510 349,883 ------------ ------------ Total current assets 18,830,497 9,454,920 Property and equipment, net 3,399,181 2,416,499 Restricted cash 428,075 433,844 Other 63,381 52,953 ------------ ------------ $ 22,721,134 $ 12,358,216 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portionStatements oflong term debt $ 188,015 $ - Accounts payable 1,344,789 1,579,336 Accrued expenses 1,619,382 661,883 Accrued compensation 428,500 236,200 Accrued litigation settlement - 400,000 Deferred revenue 407,420 794,018 Total current liabilities 3,988,106 3,671,437 ------------ ------------ Long term debt 76,432 - ------------ ------------ Commitments and Contingencies (Note 5) Stockholders' equity: Preferred stock of $.01 par value - authorized 10,000,000 shares; Series A Convertible; 14,867 and 26,192 shares issued and outstanding as of June 30, 2003 and 2002, respectively; 149 262 Series C Convertible; 700,000 shares issued and outstanding as of June 30, 2002; - 7,000 Common stock of $.01 par value - authorized 75,000,000 shares; Issued and outstanding 42,994,050 and 17,423,076 shares as of June 30, 2003 and 2002 respectively; 429,941 174,231 Additional paid-in capital 109,085,115 78,792,240 Deferred compensation (37,977) (53,942) Accumulated other comprehensive income (11,805) 10,604 Deficit accumulated during development stage (90,808,827) $(70,243,616) ------------ ------------ 18,656,596 8,686,779 ------------ ------------ $ 22,721,134 $ 12,358,216 ============ ============
| Year Ended June 30, | |||||||
| 2006 | 2005 | 2004 | |||||
| REVENUES: | |||||||
| Royalties | $ 1,508,862 | $ 1,586,050 | $ - | ||||
| Product sales | - | 2,474,325 | - | ||||
| Licenses, grants and contracts | 18,239,783 | 13,896,818 | 2,315,158 | ||||
| Total revenues | 19,748,645 | 17,957,193 | 2,315,158 | ||||
| OPERATING EXPENSES: | |||||||
| Cost of product sales | 2,041,175 | 534,932 | - | ||||
| Royalties | 299,995 | 328,401 | - | ||||
| Research and development | 41,013,894 | 25,045,279 | 23,333,329 | ||||
| General and administrative | 6,843,817 | 7,460,607 | 5,739,519 | ||||
| Total operating expenses | 50,198,881 | 33,369,219 | 29,072,848 | ||||
| Loss from operations | (30,450,236 | ) | (15,412,026 | ) | (26,757,690 | ) | |
| OTHER INCOME (EXPENSE): | |||||||
| Investment income | 855,601 | 488,262 | 221,644 | ||||
| Interest expense | (30,522 | ) | (14,487 | ) | (22,649 | ) | |
| Total other income, net | 825,079 | 473,775 | 198,995 | ||||
| Loss before income taxes | (29,625,157 | ) | (14,938,251 | ) | (26,558,695 | ) | |
| Income tax benefit | 666,275 | 580,275 | 240,836 | ||||
| NET LOSS | $ (28,958,882 | ) | $ (14,357,976 | ) | $ (26,317,859 | ) | |
| Basic and diluted net loss per common share | $ (0.48 | ) | $ (0.27 | ) | $ (0.55 | ) | |
| Weighted average number of common shares outstanding used in | |||||||
| computing basic and diluted net loss per common share | 60,356,610 | 53,861,182 | 47,687,679 | ||||
The accompanying notes to the consolidated financial statements are an integral part of these consolidated financial statements.
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PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)
Consolidated Statements of OperationsCash Flows
Inception (January 28, 1986) through Year Ended June 30, -------------------------------------------------------------- June 30, 2003 2003 2002 2001 ------------------- ------------------- ------------------- ------------------- REVENUES: Grants and contracts $ 10,265,511 $ 641,417 $ 80,929 $ 1,621,425 License fees and royalties 2,729,987 628,598 200,426 166,667 Other 318,917 - - - ------------- ------------- ------------- ------------- Total revenues 13,314,415 1,270,015 281,355 1,788,092 ------------- ------------- ------------- ------------- OPERATING EXPENSES: Research and development 72,412,504 17,439,191 12,117,026 10,108,999 General and administrative 32,247,900 4,866,642 5,004,143 3,024,841 Net intangibles write down 259,334 - - - ------------- ------------- ------------- ------------- Total operating expenses 104,919,738 22,305,833 17,121,169 13,133,840 ------------- -------------- -------------- -------------- OTHER INCOME (EXPENSES): Interest income 2,701,132 247,552 312,015 787,574 Interest expense (1,981,179) (22,038) (3,188) (5,104) Merger costs (525,000) - - - ------------- ------------- ------------- ------------- Total other income 194,953 225,514 308,827 782,470 ------------- ------------- ------------- ------------- Loss before income taxes & cumu- lative effect of accounting change (91,410,371) (20,810,304) (16,530,987) (10,563,278) Income tax benefit 962,655 245,093 392,410 325,152 ------------- ------------- ------------- ------------- Loss before cumulative effect of accounting change (90,447,716) (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) (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) $(20,768,349) $(16,436,180) $(10,599,237) ============= ============= ============= ============= Basic and diluted net loss per Common share Basic and diluted net loss before cumulative effect of accounting change $ (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 of Common shares outstanding used in computing basic and diluted net loss per Common share 28,362,121 14,195,466 10,131,195 ============= ============= =============
| Year Ended June 30, | |||||||
| 2006 | 2005 | 2004 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net loss | $ (28,958,882 | ) | $ (14,357,976 | ) | $ (26,317,859 | ) | |
| Adjustments to reconcile net loss to net cash | |||||||
| used in operating activities: | |||||||
| Depreciation and amortization | 1,263,899 | 1,075,306 | 1,097,442 | ||||
| Realized loss on investments | - | 114,551 | 129,355 | ||||
| Stock-based compensation | 1,167,177 | 983 | 748,582 | ||||
| Changes in certain operating assets and liabilities: | |||||||
| Accounts receivable | 5,371,834 | (5,441,425 | ) | - | |||
| Inventories | 1,382,160 | (1,382,160 | ) | - | |||
| Prepaid expenses and other | 805,368 | (2,422,621 | ) | (102,962 | ) | ||
| Accounts payable | (1,680,335 | ) | 2,753,327 | 675,181 | |||
| Accrued expenses and other | 155,622 | 1,174,199 | 193,448 | ||||
| Deferred revenues | (2,954,749 | ) | 13,422,266 | (165,420 | ) | ||
| Net cash used in operating activities | (23,447,906 | ) | (5,063,550 | ) | (23,742,233 | ) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Sale or maturity of investments | - | 50,000 | 1,420,712 | ||||
| Purchases of property and equipment | (819,953 | ) | (968,001 | ) | (197,541 | ) | |
| Net cash (used in) provided by investing | |||||||
| activities | (819,953 | ) | (918,001 | ) | 1,223,171 | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Payments on capital lease obligations | (40,268 | ) | (33,491 | ) | (200,753 | ) | |
| Proceeds from common stock, stock option | |||||||
| and warrant issuances, net | 36,920,974 | 3,788,330 | 26,372,288 | ||||
| Net cash provided by financing activities | 36,880,706 | 3,754,839 | 26,171,535 | ||||
| NET INCREASE (DECREASE) IN CASH | |||||||
| AND CASH EQUIVALENTS | 12,612,847 | (2,226,712 | ) | 3,652,473 | |||
| CASH AND CASH EQUIVALENTS, beginning | |||||||
| of year | 15,720,364 | 17,947,076 | 14,294,603 | ||||
| CASH AND CASH EQUIVALENTS, end of year | $ 28,333,211 | $ 15,720,364 | $ 17,947,076 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||
| Cash paid for interest | $ 30,522 | $ 14,171 | $ 22,649 | ||||
| Assets acquired by capital lease | 326,214 | - | - | ||||
| Tenant allowances recognized in deferred rent | - | 210,924 | - | ||||
| Common stock issued for license fees | - | 317,900 | - | ||||
The accompanying notes to the consolidated financial statements are an integral part of these consolidated financial statements.
44
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
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 of Preferred shares 4,000,000 4,000 - - Issuance of Common shares on $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 of Preferred shares, net of expenses 137,780 1,378 - - Net loss - - - - ----------- ------------ ----------- ----------- Balance, June 30, 1997 137,780 1,378 - - Issuance of Preferred shares, net of expenses 18,875 189 - - Conversion of Preferred shares into Common shares (49,451) (495) - - Net loss - - - - ----------- ------------ ----------- -----------
| Accumulated | |||||||||||||||||||
| Additional | Other | ||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Deferred | Comprehensive | Accumulated | ||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Compensation | Loss | Deficit | Total | |||||||||||
| Balance, July 1, 2003 | 14,867 | $ 149 | 42,994,050 | $ 429,941 | $ 109,085,115 | $ (37,977 | ) | $ (11,805 | ) | $ (90,808,827 | ) | $ 18,656,596 | |||||||
| Issuance of common shares, net of expenses | - | - | 6,992,500 | 69,925 | 20,889,594 | - | - | - | 20,959,519 | ||||||||||
| Issuance of common shares upon conversion | |||||||||||||||||||
| of preferred shares | (3,170 | ) | (32 | ) | 120,465 | 1,205 | (1,173 | ) | - | - | - | - | |||||||
| Issuance of common shares upon exercise | |||||||||||||||||||
| of options and warrants | - | - | 2,683,574 | 26,835 | 5,385,934 | - | - | - | 5,412,769 | ||||||||||
| Stock-based compensation | - | - | - | - | 789,012 | (86,157 | ) | - | - | 702,855 | |||||||||
| Amortization of deferred compensation | - | - | - | - | - | 45,727 | - | - | 45,727 | ||||||||||
| Unrealized loss on investments | - | - | - | - | - | - | (72,967 | ) | - | (72,967 | ) | ||||||||
| Net loss | - | - | - | - | - | - | - | (26,317,859 | ) | (26,317,859 | ) | ||||||||
| Balance, June 30, 2004 | 11,697 | 117 | 52,790,589 | 527,906 | 136,148,482 | (78,407 | ) | (84,772 | ) | (117,126,686 | ) | 19,386,640 | |||||||
| Issuance of common shares, net of expenses | - | - | 1,176,125 | 11,761 | 3,566,684 | - | - | - | 3,578,445 | ||||||||||
| Issuance of common shares for license fees | - | - | 170,000 | 1,700 | 316,200 | - | - | - | 317,900 | ||||||||||
| Issuance of common shares upon conversion | |||||||||||||||||||
| of preferred shares | (250 | ) | (3 | ) | 9,505 | 95 | (92 | ) | - | - | - | - | |||||||
| Issuance of common shares upon exercise of | |||||||||||||||||||
| options and warrants | - | - | 90,325 | 903 | 208,982 | - | - | - | 209,885 | ||||||||||
| Stock-based compensation | - | - | - | - | (72,825 | ) | - | - | - | (72,825 | ) | ||||||||
| Amortization of deferred compensation | - | - | - | - | - | 78,407 | - | - | 78,407 | ||||||||||
| Loss on investments | - | - | - | - | - | - | 84,772 | - | 84,772 | ||||||||||
| Net loss | - | - | - | - | - | - | - | (14,357,976 | ) | (14,357,976 | ) | ||||||||
| Balance, June 30, 2005 | 11,447 | 114 | 54,236,544 | 542,365 | 140,167,431 | - | - | (131,484,662 | ) | 9,225,248 | |||||||||
| Issuance of common shares, net of expenses | - | - | 15,478,013 | 154,780 | 34,669,275 | - | - | - | 34,824,055 | ||||||||||
| Issuance of common shares upon conversion | |||||||||||||||||||
| of preferred shares | (1,450 | ) | (14 | ) | 55,723 | 557 | (543 | ) | - | - | - | - | |||||||
| Issuance of common shares upon exercise | |||||||||||||||||||
| of options and warrants | - | - | 1,108,241 | 11,083 | 2,085,836 | - | - | - | 2,096,919 | ||||||||||
| Stock-based compensation | - | - | - | - | 1,167,177 | - | - | - | 1,167,177 | ||||||||||
| Unrealized loss on investments | - | - | - | - | - | - | (54,736 | ) | - | (54,736 | ) | ||||||||
| Net loss | - | - | - | - | - | - | - | (28,958,882 | ) | (28,958,882 | ) | ||||||||
| Balance, June 30, 2006 | 9,997 | $ 100 | 70,878,521 | $ 708,785 | $ 178,089,176 | $ - | $ (54,736 | ) | $ (160,443,544 | ) | $ 18,299,781 | ||||||||
The accompanying notes to the consolidated financial statements are an integral part of these consolidated 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 of Preferred shares into Common shares (51,145) (511) - - Net loss - - - - ----------- ------------ ----------- ----------- Balance, June 30, 1999 56,059 561 - - Issuance of Preferred shares, net of expenses 700,000 7,000 - - Conversion of Preferred shares into Common shares (22,498) (225) - - Net loss - - - - ----------- ------------ ----------- ----------- Balance, June 30, 2000 733,561 7,336 - - Conversion of Preferred shares into Common shares (4,244) (43) - - Net loss - - - - ----------- ------------ ----------- ----------- Balance, June 30, 2001 729,317 7,293 - - Conversion of Preferred shares into Common shares (3,125) (31) - - Net loss - - - - ----------- ------------ ----------- ----------- Balance, June 30, 2002 726,192 7,262 - - Conversion of Preferred shares into Common shares (711,325) (7,113) - - Net loss - - - - Balance, June 30, 2003 14,867 $ $ $ 149 - - =========== ============ =========== ===========
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) Accumulated Other Deficit Common Stock Additional Deferred Comprehen- Accumulated -------------------------- Paid-In Earned but Treasury Compensa- sive During Develop- Shares Amount Capital not Issued Stock tion Income/(loss) ment Stage Total ----------- ------------- ------------ ---------- --------- ------------ --------- ---------------- --------- Balance at inception - $ $ - $ - $ - $ - $ - $ - $ - Issuance of shares from inception 6,922,069 1,177,786 100,000 110,833 - - - - 1,388,619 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 of Preferred shares - - - - - - - - 4,000 Issuance of Common shares on $10,395,400 private placeme 41,581,600 9,139,303 - - - - - - 9,139,303 Shares earned but not issued - - - 266,743 - - - - 266,743 Issuance of Common 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 of Common 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 of Preferred shares, net of expenses - - 11,635,653 - - - - - 11,637,031 Shares earned but not issued - - - 250,141 - - - - 250,141 Issuance of Common 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) - - - 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 of Preferred shares, net of expenses - - 1,573,295 - - - - - 1,573,295 Issuance of Preferred shares expense Recapture - - 49,733 - - - - - 49,733 Issuance of Common shares 66,696 666 94,873 - - - - - 95,539 Issuance of Common shares upon conversion of Preferred 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 of Common shares 1,842,101 18,421 7,594,182 - - - - - 7,612,603 Issuance of Common shares upon conversion of Preferred shares 1,115,740 11,158 (10,655) - - - - - (9) Issuance of Common shares upon exercise of warrants 9,874 99 18,676 - - - - - 18,775 Issuance of Common shares upon exercise of options 70,257 703 13,348 - - - - - 14,051 Issuance of stock options below fair market value - - 811,054 - - (811,054) - - - 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 of Preferred shares, net of expenses - - 12,999,058 - - - - - 12,999,058 Issuance of Preferred shares - - - - - - - - 7,000 Issuance of Common shares upon conversion of Preferred shares 572,374 5,724 (5,462) - - - - - 37 Issuance of Common shares upon exercise of warrants 111,551 1,115 451,097 - - - - - 452,212 Issuance of Common shares upon exercise of options 80,852 809 99,667 - - - - - 100,476 Acceleration of options previously granted - - 1,170,000 - - - - - 1,170,000 Amortization of stock based 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 of Common shares, net of expenses 2,532,369 25,324 13,954,928 - - - - - 13,980,252 Issuance of Common shares upon conversion of Preferred shares 104,886 1,049 (1,006) - - - - - -
48
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)(continued)
Issuance of Common shares upon exercise of warrants 173,015 1,730 486,736 - - - - - 488,466 Issuance of Common 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 of stock based 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 of Common shares, net of expenses 5,997,578 59,976 12,380,727 - - - - - 12,440,703 Issuance of Common shares upon conversion of Preferred shares 76,590 766 (735) - - - - - - Issuance of Common shares upon exercise of options 149,250 1,492 339,098 - - - - - 340,590 Stock based compensation - - 91,582 - - (21,147) - - 70,435 Amortization of stock based 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 of Common shares, net of expenses 24,352,099 243,521 30,127,905 - - - - - 30,371,426 Issuance of Common shares upon 1,121,576 conversion of Preferred shares 11,216 (4,103) - - - - - - Issuance of Common shares upon exercise of options and warrants 97,299 973 127,445 - - - - - 128,418 Stock based compensation - - 41,628 - - (13,153) - - 28,475 Amortization of stock based compensation - - - - - 29,118 - - 29,118 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 ============ ============= ============ ========== ======== ============= ========= ============= =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
49
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)Consolidated Statements of Cash Flows
Inception (January 28, 1986) Year Ended June 30, through ----------------------------------------------- June 30, 2003 2003 2002 2001 ------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(90,808,827) $(20,565,211) $(16,138,577) $(10,599,237) Adjustments to reconcile net loss to net cash used for operating activities: Cumulative effect of accounting change 361,111 - - 361,111 Depreciation and amortization 3,109,988 579,258 1,156,874 288,086 License fee 500,000 - - - Interest expense on note payable 72,691 - - - Accrued interest on long-term financing 796,038 - - - Accrued interest on short-term financing 7,936 - - - 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 compensation 4,455,374 57,593 458,349 165,990 Changes in certain operating assets and liabilities: Accounts receivable - - - 953,163 Prepaid expenses and other (1,243,211) (91,858) 34,079 111,053 Accounts payable 1,344,789 (234,547) 449,676 117,590 Accrued expenses and other 1,586,715 749,799 293,678 36,239 ------------- ------------- ------------- ------------- Net cash used for operating activities (77,265,147) (19,891,564) (13,146,347) (8,397,357) ------------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale/(Purchases) of investments, net (4,142,460) (2,970,453) (1,172,007) 2,155,617 Purchases of property and equipment (5,941,750) (1,134,015) (1,634,509) (629,899) ------------- ------------- ------------- ------------- Net cash provided/(used) for investing activites (10,084,210) (4,104,468) (2,806,516) 1,525,718 ------------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable, related party 302,000 - - - Payments on notes payable, related party (302,000) - - - Proceeds from senior bridge notes payable 1,850,000 - - - Payments on senior bridge notes payable (1,850,000) - - - Payments on capital lease obligations (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, net 75,588,774 30,499,844 12,440,703 15,108,470 Proceeds from preferred stock, net 24,210,326 - - - Purchase of treasury stock (1,667) - - - ------------- ------------- ------------- ------------- Net cash provided by financing activities 101,643,960 30,346,371 12,440,703 15,108,470 ------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,294,603 6,350,339 (3,512,160) 8,236,831 CASH AND CASH EQUIVALENTS, beginning of period - 7,944,264 11,456,424 3,219,593 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 14,294,603 $ 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.
50
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)Consolidated Statements of Cash Flows(continued)
Inception (January 28, 1986) Year Ended June 30, through ----------------------------------------------- June 30, 2003 2003 2002 2001 ------------- ------------- ------------- ------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 657,920 $ 22,038 $ 3,188 $ 5,104 ============= ============= ============= ============= NON-CASH TRANSACTION: Settlement of accounts payable with Equipment $ 900 $ - $ - $ - ============= ============= ============= ============= NON-CASH STOCK ACTIVITY: Conversion of loans from employees to Common stock $ 74,187 $ - $ - $ - ============= ============= ============= ============= Conversion of note payable to Common stock $ 16,000 $ - $ - $ - ============= ============= ============= ============= Common stock issued for equipment $ 2,32 $ $ - $ - ============= ============= ============= ============= 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 interest payable in Common stock $ 679,097 $ - $ - $ - ============= ============= ============= =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
51
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION ACTIVITIES:ORGANIZATION:
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 iscompany primarily focused on discovering and developing targeted, receptor-specific small molecule and peptide therapeutics, including melanocortin (MC) based therapeutics, which(“MC”)-based therapeutics. Therapeutics affecting the Company believes is oneactivity of the fastest growing areas of pharmaceutical research and development. The MC family of receptors has been identified withmay have the potential to treat a variety of conditions and diseases, including sexual dysfunction, obesity anorexia,and related disorders, cachexia inflammation(extreme wasting, generally secondary to a chronic disease), skin pigmentation and drug abuse.inflammation. The Company’s objectiveCompany is to become a worldwide leader in melanocortin-basedexploring other receptor-specific 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’susing its patented drug discovery platform.platform, including a congestive heart failure therapy.
Bremelanotide, formerly known as PT-141, isan MC receptor agonist and 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.dysfunction, under a collaborative development and marketing agreement with King Pharmaceuticals, Inc. (“King”), a specialty pharmaceutical company.
The Company recently completedhas preclinical development programs for the treatment of obesity and congestive heart failure resulting from its MIDAS™ technology, the Company’s proprietary platform technology to design and synthesize compounds that mimic the activity of peptides.
NeutroSpec is a Phase 2B trial 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 radiolabledradiolabeled monoclonal antibody product for imaging and diagnosing infections.infection and is the subject of a strategic collaboration agreement with Tyco Healthcare Mallinckrodt (“Mallinckrodt”). In July 2004, the Company received approval from the U.S. Food and Drug Administration (“FDA”) to market NeutroSpec for imaging and diagnosing equivocal appendicitis. In December 2005, the Company and Mallinckrodt voluntarily suspended the sales, marketing and distribution of NeutroSpec and recalled all existing customer inventories. The Company commenced the biologics license application (BLA) amendment filingsand Mallinckrodt reported to the FDA in the first halfoccurrence of calendar year 2003several serious adverse events, including two deaths, involving patients who received NeutroSpec. All ongoing clinical trials and anticipates remitting the final BLA amendment filing to the FDA in the fourth quarterregulatory approvals of calendar year 2003.NeutroSpec have been suspended. 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. In addition, the Company has several preclinical drug candidates under investigation for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation.Mallinckrodt are evaluating future development and marketing activities involving NeutroSpec.
Key elements of the Company’s business strategy include: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,development, 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 LeuTech collaboration agreement.agreements.
Business Risk and Liquidity –— The Company has incurred negative cash flows from operations since its inception, and has expended, and expects to continue to expend in the future, substantial funds to complete its planned product development efforts. As shown in the accompanying consolidated financial statements, the Company has an accumulated deficit as of June 30, 2006 and incurred a substantial net loss of $20,565,211 for the year ended June 30, 2003 and has a deficit accumulated in the development stage of $90,808,827, cash and cash equivalents of $14,294,603 and investments of $4,088,384 as of June 30, 2003.2006. The Company anticipates incurring additional losses in the future as it continuesa result of spending on its development of LeuTech for diagnosis of appendicitis and expands clinical trials for other indications of LeuTech and continues research and development of PT-141 and its MIDAS technology.programs. To achieve profitability, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct successful 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 Company 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 resourcescash, cash equivalents and available-for-sale investments as of June 30, 2006 will be adequate to fund the Company’s projected operations into fiscal year ending June 30, 2005, based on current and projected expenditure levels.for at least the next twelve months. 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
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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.
Concentrations – Concentrations in the Company’s assets and operations subject it to certain related risks. Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents, available-for-sale investments and accounts receivable. The Company’s cash and cash equivalents are primarily invested in one money market fund sponsored by a large financial institution. The Company’s periodic accounts receivable balances primarily consist of amounts due from its collaboration partners, King and Mallinckrodt.
Revenues from King and Mallinckrodt as a percentage of total revenues were as follows:
| Year Ended June 30, | |||||||
| 2006 | 2005 | 2004 | |||||
| King | 91% | 64% | 0% | ||||
| Mallinckrodt | 9% | 36% | 94% | ||||
(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.
Cash and 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, 2003 and 2002, approximately $428,000 and $434,000, respectively, ofRestricted cash was restricted to securesecures letters of credit for security deposits on leases.
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 suchits investments as available for saleavailable-for-sale investments and asall 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. Unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in accumulated other comprehensive income and as a separate component of stockholders’ equityloss until realized. Interest and dividends on securities classified as available for sale isavailable-for-sale are included in interestinvestment income. Realized gainsGains and losses are recorded in the statement of operations in the periodwhen realized or when unrealized holding losses are determined to be other than temporary, on a specific-identification basis.
Fair Value of Financial Instruments – The Company’s financial instruments consist primarily of cash and cash equivalents, available-for-sale investments, accounts receivable, accounts payable and capital lease obligations. Management believes that the transaction occurs.carrying value of these assets and liabilities are representative of their respective fair values.
Inventories – The following isCompany’s inventories, which all relate to NeutroSpec, are valued at the lower of cost or market using the first-in, first-out method and exclude certain costs incurred prior to the FDA approval of NeutroSpec in July 2004, which were charged directly to research and development expense. Inventory costs consist primarily of costs to third-party vendors for work-in-progress materials and do not include general and administrative costs. As of December 31, 2005, the Company wrote off existing inventories upon suspension of NeutroSpec sales and marketing activities with a summarycharge of available for sale investments as$2,041,175 to cost of June 30, 2003:
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Table of Contentsproduct sales.
Gross Gross Unrealized Unrealized Cost Gains Losses Fair Value Corporate debt securities $ 100,000 $ 2,243 $ - $ 102,243 Mutual Funds $ 4,000,189 $ - $ 14,048 $ 3,986,141 ------------- --------- ---------- ------------- Total $ 4,100,189 $ 2,243 $ 14,048 $ 4,088,384 ============= ========= ========== =============
The following is a summary of available for sale investments as of June 30, 2002:
Gross Gross Unrealized Unrealized Cost Gains Losses Fair Value Government securities $ 50,000 $ 672 $ - $ 50,672 Corporate debt securities 100,000 860 - 100,860 Mutual funds 1,000,169 9,072 - 1,009,241 ------------- --------- ---------- ------------- Total $ 1,150,169 $ 10,604 $ - $ 1,160,773 ============= ========= ========== =============
Property and Equipment – Property and equipment consists of office and laboratory equipment, office furniture and leasehold improvements.improvements and includes assets acquired under capital leases. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets, generally five years for laboratory equipment, seven years for office furniture and overequipment and the lesser of the term of the lease or the useful life for leasehold
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improvements. The Company’s leasehold improvements primarily relate to a lease that expires in July 2012. Amortization of assets acquired under capital leases is included in depreciation. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized.
Impairment of Long-Lived Assets – The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of itsa long-lived assets,asset, management evaluates whether the probability thatestimated future undiscounted net cash flows from the asset, without interest charges, will beare less than its carrying amount. If impairment is indicated, the carrying amount of the assets. Impairment is measured atlong-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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TableOther Assets – Other assets and other current assets include certain payments the Company made to licensors in cash and stock as their share of Contentsup-front payments received from collaboration partners in connection with the Company’s collaboration agreements. The Company has treated these payments as incremental direct costs of the up-front payments, to be charged over the same period as the related deferred revenue, in accordance with guidance contained in the SEC’s Staff Accounting Bulletin No. 104 and, by analogy, to paragraph 4 of FASB Technical Bulletin 90-1.
Deferred Rent — The Company’s operating leases provide for rent increases over the terms of the leases. Deferred rent consists of the difference between periodic rent payments and the amount recognized as rent expense on a straight-line basis for the buildings the Company occupies, as well as the value of tenant allowances for leasehold improvements. Rent expense is being recognized ratably over the life of the leases.
Revenue Recognition – Grant and contract revenues are recognized as— Product sales represent the sale of NeutroSpec by the Company providesto Mallinckrodt, pursuant to the services stipulatedcollaboration agreement. Product sales are billed upon shipment of product to Mallinckrodt. Revenue is recognized upon acceptance of the product by Mallinckrodt based on conformance with product specifications. Upon acceptance of the product, Mallinckrodt does not have the right of return or right to cancel or terminate the sale.
Royalty revenues represent amounts due from Mallinckrodt and are earned based on a contractual percentage of Mallinckrodt’s net sales to customers. Revenue is recognized by the Company in the underlying grants and/or contracts basedperiod in which Mallinckrodt’s net sales occur, as reported by Mallinckrodt to the Company on the time and materials incurred.a quarterly basis.
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. Due to the uncertainty inherent in its development programs, including the possibility that a program is terminated prior to completion, the Company recognizes such revenue on a straight-line basis, as it believes that no other basis is more reflective of the pattern over which such revenue is earned. The Company estimates theconsiders its performance period asunder the King collaboration to be the period in which it performs development activities during the initial research term.term, which is currently estimated to be five years from the inception of the agreement. Specific performance periods are not stated in the agreement and are estimated by management based on detailed development programs agreed upon by the parties. Management monitors the progress and results of these development activities and adjusts its estimated performance period accordingly. The actual performance period may vary. The Company 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 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 arevary based on the occurrenceresults of a substantive element specifiedthe related development activities, changes in development plans agreed by the parties, regulatory requirements and other factors. Increases in the contract or as a measureestimated performance period would result in increases in the period over which such deferred revenue is to be recognized and corresponding decreases in the amount of substantive progress towards completion underrevenue recognized each period. In the contract.
The Company recognized $137,417, $80,929 and $211,069, respectively, in grant revenue pursuant to the Small Business Technology Transfer programsfourth quarter of the Department of Health and Human Services for the years ended June 30, 2003, 2002 and 2001.
The Company recognized $504,000 for the year ended June 30, 2003 in contract revenue related to the attainment of certain milestones and other shared development costs of LeuTech pursuant to our collaboration agreement, as amended, with Mallinckrodt, Inc. a division of Tyco International, Ltd. described below. The Company did not recognize any contract revenue related to the shared development costs of LeuTech for the year ended June 30, 2002, as compared to $1,410,356 recognized for the year ended June 30, 2001.
In August 1999,2005, the Company entered into a strategicincreased its estimate for its period of performance under the King collaboration agreement with Mallinckrodt, Inc. to jointly develop and, market oneaccordingly, reduced the amount 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 been recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2003, 2002 and 2001, the Company recognized $43,987, $138,888 and $166,667, 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, 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. Pursuant to this amendment, $800,000 was received upon execution of this agreement. Under SAB 101, this payment has been recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2003 and 2002, the Company recognized $584,611 and $61,538, respectively, in license revenue under this agreement.quarter by approximately $235,000.
Research and Development Costs –— The costs of research and development activities are charged to expense as incurred.incurred, including the cost of equipment for which there is no alternative future use.
Stock Options – The— Effective July 1, 2005, the Company appliesadopted Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based Payment,” using the modified prospective method. SFAS
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123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, measured by the fair value of the equity or liability instruments issued, adjusted for estimated forfeitures.
Prior to the adoption of SFAS 123(R), the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),Employees,” and related interpretations, to account for its fixed-plan stock options.options to employees. Under this method, compensation expense iscost was recorded on the date of grant only if the current market price of the underlying stock on the date of grant exceeded the exercise price. Statement of Financial Accounting Standards No.SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”),Compensation,” 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. 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 prescribedfair-value-based method used to determine historical pro forma amounts under SFAS 123 was similar in most respects to the method used to determine stock-based compensation expense under SFAS 123(R). However, in its pro forma disclosures below, the Company accounted for option forfeitures as amended by SFAS 148,they occurred, rather than based on estimates of future forfeitures.
The pro forma impact on the Company’s net loss attributable to common stockholders and net loss per common share would have been reduced tousing the following pro forma amounts:
Forfair-value-based method of accounting for stock-based compensation under SFAS 123 for theyearyears ended June 30,----------------------------------------------- 2003 2002 2001 ----------------------------------------------- Net loss attributable2005 and 2004 is as follows:
Year Ended June 30 2005 2004 As reported $ (14,357,976 ) $ (26,317,859 ) Stock-based employee compensation expense included in the determination of net loss as reported (15,879 ) 626,639 Impact of total stock-based compensation expense determined under fair-value-based method (1,067,519 ) (1,801,218 ) Pro forma $ (15,441,374 ) $ (27,492,438 ) Basic and diluted net loss per common share: As reported $ (0.27 ) $ (0.55 ) Pro forma $ (0.29 ) $ (0.58 ) Weighted average valuation assumptions: Expected life of options in years 7 7 Risk-free interest rate 3.9% 3.7% Expected volatility 87% 91% Expected dividend yield 0% 0% The Company accounts for options granted to
common stockholders: As reported $(20,737,349) $(16,436,180) $(10,599,237) Impactconsultants in accordance with Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The Company determines the value oftotal stock-based compensation expense determined under fair-value-based method (1,297,069) (1,660,290) (1,609,113) ------------- ------------- ------------- Pro forma $(22,034,418) $(18,096,470) $(12,208,350) ============= ============= ============= Basic and diluted net loss per common share: As reported $ (0.73) $ (1.16) $ (1.05) ============= ============= ============= Impact of stock-based compensation, net of tax (0.05) (0.11) (0.16) ============= ============= ============= Pro forma $ (0.78) $ (1.27) $ (1.21) ============= ============= =============
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The assumptions used instock options utilizing the Black-Scholes option-pricing modelmodel.
Compensation costs for fixed awards with pro rata vesting are as follows: dividend yield of 0%, weighted average risk-free interest rate of 3.54% in 2003, 4.5% in 2002, and 5.78% in 2001, expected volatility of 101% in 2003 and 60% in 2002 and 2001, and an expected option life of 7 years.allocated to periods on the straight-line basis.
Income Taxes –— The Company and its subsidiariessubsidiary file consolidated federal and combinedseparate-company state income tax returns. The Company accountsIncome taxes are accounted for income taxes in accordance with Statementunder the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of 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 incomeassets and expense items (primarily relating to depreciation, amortizationliabilities and certain leases) for financialtheir respective tax bases and operating loss and tax reporting purposes. Such amountscredit carryforwards. Deferred tax assets and liabilities are measured using currentenacted tax lawsrates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and regulationsliabilities of a change in accordance withtax rates is recognized in the provisions of SFAS 109.period that includes the enactment date.
In accordance with SFAS 109 “Accounting for Income Taxes,” the Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management’s
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estimates and analysis, which includes provisions of tax laws whichthat may limit the Company’s ability to utilize its taxnet operating 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 requires dual presentation of basic and diluted— Basic 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)net loss 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, 2003, 20022006, 2005 and 2001,2004 there were no dilutive effects of stock options or warrants as the Company incurred a net loss in each period. OptionsCommon shares issuable upon conversion of Series A Convertible Preferred Stock and the exercise of outstanding options and warrants amounted to an aggregate of 15,954,843, 13,384,915, and 12,837,094 as of June 30, 2006, 2005 and 2004, respectively.
(3) AGREEMENT WITH KING PHARMACEUTICALS, INC.
In August 2004, the Company entered into a Collaborative Development and Marketing Agreement with King, a specialty pharmaceutical company, to jointly develop and commercialize bremelanotide. Pursuant to 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 bremelanotide in North America based on an agreed percentage. King and Palatin currently plan to seek a partner for bremelanotide for territories outside of North America and will jointly share in collaboration development and marketing costs and all collaboration revenues generated from those territories. Palatin has the option to create, with King, a urology specialty sales force to co-promote the product in the U.S. if the product is successfully developed and commercialized.
In August 2004, King paid the Company $20,000,000 at the closing of the agreement, purchased Company common stock and warrants for an aggregate of $10,000,000 in September 2005, as describe in note 9, and may make future milestone payments to the Company totaling up to $90,000,000 for achieving certain male erectile dysfunction (“ED”) and female sexual dysfunction (“FSD”) development and regulatory approval targets. After regulatory approval and commercialization of bremelanotide, King may also make milestone payments to the Company totaling up to an additional $130,000,000 upon achieving specified annual North American net sales thresholds. A portion of the above milestones may be in the form of purchases of the Company's common stock.
Of the $20,000,000 payment received at closing, $3,606,672 was recorded as equity, based on the estimated fair value of 1,176,125 shares of common stock and three-year warrants to purchase 15,140,115235,225 shares of Common Stockcommon stock at prices ranging from $0.01 to $21.70$4.25 per share which were outstanding atissued to King, and $16,393,328 was recorded as deferred revenue to be recognized as revenue over the period of the Company’s performance during the initial development term of this agreement. For the years ended June 30, 2003 (See Note 6).2006 and 2005, the Company recognized $3,159,496 and $3,360,394, respectively, of the deferred revenue.
(4) OTHER COMPREHENSIVE LOSS
Other comprehensive loss consists of the following:
| Year Ended June 30, | |||||||
| 2006 | 2005 | 2004 | |||||
| Net loss | $ (28,958,882 | ) | $ (14,357,976 | ) | $ (26,317,859 | ) | |
| Unrealized loss on investments | (54,736 | ) | (29,779 | ) | (72,967 | ) | |
| Reclassification adjustment for | |||||||
| realized losses included in net loss | - | 114,551 | - | ||||
| Comprehensive loss | $ (29,013,618 | ) | $ (14,273,204 | ) | $ (26,390,826 | ) | |
(5) INVESTMENTS
The following is a summary of available-for-sale investments, which consist of mutual funds that invest primarily in debt instruments:
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| June 30, 2006 | June 30, 2005 | ||||
| Cost | $ 2,385,570 | $ 2,385,570 | |||
| Gross unrealized losses | (54,736 | ) | - | ||
| Fair value | $ 2,330,834 | $ 2,385,570 | |||
The Company determined that certain unrealized losses as of June 30, 2005 were other than temporary. Accordingly, the Company reduced the cost basis of the underlying security and recorded a realized loss of $114,551 in its statement of operations for the year ended June 30, 2005. The unrealized loss as of June 30, 2006 pertains to investments that have been in a continuous loss position since June 30, 2005.
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
| June 30, 2006 | June 30, 2005 | ||||
| Office equipment | $ 1,758,232 | $ 1,508,402 | |||
| Laboratory equipment | 3,041,209 | 2,393,236 | |||
| Leasehold improvements | 6,766,782 | 6,518,418 | |||
| 11,566,223 | 10,420,056 | ||||
| Less: Accumulated depreciation and amortization | (5,218,518 | ) | (3,955,732 | ) | |
| $ 6,347,705 | $ 6,464,324 | ||||
The cost of assets acquired under capital leases amounted to $438,250 and $54,292 as of June 30, 2006 and 2005, respectively, with accumulated amortization of $79,115 and $29,861 as of June 30, 2006 and 2005, respectively.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
| June 30, 2006 | June 30, 2005 | ||||
| Product development costs | $3,039,676 | $2,035,670 | |||
| Deferred rent, current portion | 852,546 | 437,053 | |||
| Inventory production costs | - | 653,656 | |||
| Other | 574,206 | 799,027 | |||
| $4,466,428 | $3,925,406 | ||||
(8) COMMITMENTS AND CONTINGENCIES
Fair Value of Financial InstrumentsLeases – Statement of Financial Accounting Standards No. 107 “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”), requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market pricesThe Company currently leases facilities under three non-cancelable operating leases. Future minimum lease payments under these leases 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 underlying value of the Company.as follows:
| Year Ending June 30, | ||||
| 2007 | $ 2,386,899 | |||
| 2008 | 2,072,281 | |||
| 2009 | 1,511,736 | |||
| 2010 | 1,514,346 | |||
| 2011 | 1,540,148 | |||
| Thereafter | 2,297,434 | |||
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Recent Accounting Pronouncements — 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.
Property and equipment consists of the following:
June 30, --------------------------- 2003 2002 ------------ ------------- Office equipment $ 1,063,610 $ 876,893 Laboratory equipment 2,153,787 1,071,461 Leasehold improvements 3,086,932 2,804,040 ------------ ------------- 6,304,329 4,752,394 Less: Accumulated depreciation and amortization (2,905,148) (2,335,895) ------------ ------------- $ 3,399,181 $ 2,416,499 ============ =============
For the years ended June 30, 2003, 20022006, 2005 and 2001, depreciation expense was $569,253, $1,146,566 and $278,078, respectively.
Accrued expenses consist of the following:
June 30, ---------------------------- 2003 2002 ----------- ------------- Product development costs $ 784,007 $ 208,000 Accrued rent 397,872 100,000 Other 437,503 353,883 ----------- ------------- $1,619,382 $ 661,883 =========== =============
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Leases – The Company currently leases two facilities in New Jersey under non-cancelable operating leases and is in the process of terminating the lease for the Company’s former Corporate 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, ---------------------------2004,$ 1,366,582 2005 1,482,153 2006 1,046,956 2007 1,604,370 2008 1,283,848 2009 and thereafter 5,270,494 ------------- $ 12,054,403
The Company has accrued approximately $100,000 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, 2003, 2002 and 2001, rent expense was $1,554,838, $656,850$1,630,165, $897,856 and $560,476,$906,989, respectively.
Capital Leases — In September 2002, theThe Company acquired $417,920leases certain of its laboratory equipment under agreements classified as capital leases. The term of theseScheduled future payments related to capital leases range from 24 to 60 months. As ofat June 30, 2003, $264,447 remains outstanding pursuant to these lease obligations.2006 are as follows:
| Year Ending June 30, | |||||
| 2007 | $ 109,819 | ||||
| 2008 | 103,045 | ||||
| 2009 | 96,270 | ||||
| 2010 | 56,158 | ||||
| Total | 365,292 | ||||
| Amount representing interest | (49,143 | ) | |||
| Net | $ 316,149 | ||||
Employment Agreements – Dr. Spana, Mr. WillsThe Company has employment agreements with four executives, which provide a stated annual compensation amount, subject to annual increases, and Dr. Molinoff 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. 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:
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Directors. Each agreement allows the Company or the employee to terminate the agreement upon written notice, and contains other provisions forin certain circumstances. In some circumstances, early termination by the company for “cause,” or byCompany may result in severance pay to the employee for “good reason” or duea period of 18 to a “change in control” (as these terms are defined in the employment agreements). Early termination may, in some circumstances, result in severance pay24 months 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, terminationeffect. Termination following a change in control will result in a lump sum payment of two times (Spana) or one and one-half to two 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 threea license agreement for patent rights related to certain compounds and methods of treatment for sexual dysfunction that requires minimum payments of $150,000 per year. The license agreement requires contingent payments based on certain upfront fees the Company receives as a result of a sublicense. The Company does not reasonably expect to sublicense such rights or make any material contingent payments during the next twelve months.
The Company has license agreements related to NeutroSpec that require minimum annual payments. Future minimum payments underof $25,000, royalty payments on commercial net sales and payments of up to $2,250,000 contingent on the license agreements are:achievement of specified cumulative net margins on sales by Mallinckrodt. No contingent amounts will be payable related to NeutroSpec unless the Company recommences sales and marketing of NeutroSpec. The Company does not reasonably expect to make any such contingent payments during the next twelve months.
Retirement Savings Plan – The Company maintains a defined contribution 401(k) plan for the benefit of its employees. The Company currently matches a portion of employee contributions to the plan. In the years ended June 30, 2006, 2005 and 2004, — $250,000, 2005 — $200,000, 2006 — $200,000, 2007 — $200,000Company contributions amounted to $180,248, $149,236 and 2008 — $200,000.$109,015, respectively.
Legal ProceedingsContingencies – Following–The Company accounts for litigation losses in accordance with SFAS 5, “Accounting for Contingencies.” Under SFAS 5, loss contingency provisions are recorded for probable losses when management is able to reasonably estimate the termination ofloss. Any outcome upon settlement that deviates from the Company’s proposed merger with San Diego-based Molecular Biosystems, Inc.best estimate may result in March 2000, Molecular Biosystems commencedadditional expense or in reduction in expense in 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 asfuture accounting period. As of June 30, 2002.2006, the Company is not aware of any claims for which a loss is probable and, accordingly, has not accrued any loss provisions. The Company records legal expenses associated with such contingencies as incurred.
The Company is subject to an inherent risk of product liability claims as a result of testing and marketing its products. In December 2005, as a result of safety concerns raised in connection with the use of NeutroSpec, the Company and Mallinckrodt suspended NeutroSpec sales and marketing activities. If any claim is asserted based on the use of NeutroSpec, the Company may incur future expenses or losses in connection with related litigation.
(6)Competitive Technologies, Inc. (“CTI”) has initiated arbitration proceedings with the Company for breach of the terms of its license agreement for patent rights related to certain compounds and methods
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of treatment for sexual dysfunction and for other actions asserted to arise out of the license agreement. CTI also alleges that the Company committed certain tortious acts against CTI, including fraud and negligent misrepresentation relating to entering into the license agreement originally and tortious interference with business expectancy concerning termination by the Company and King of the sublicense of the CTI license agreement to King. CTI is seeking unspecified damages in excess of $500,000. In addition, CTI seeks a declaration that bremelanotide is covered by the license agreement. The license agreement provides for binding arbitration as the remedy for dispute resolution. The Company has not yet been required to respond to CTI’s arbitration demand. The Company intends to strenuously dispute CTI’s assertions, including that the Company materially breached the license agreement, and intends to defend itself vigorously. The Company cannot reasonably predict the outcome of the dispute or reasonably estimate the range of potential loss, if any. Although the amount of any liability that could arise with respect to this matter cannot be predicted, the Company does not believe that the resolution of this matter will have a material adverse effect on its financial position, results of operations or liquidity.
(9) STOCKHOLDERS’ EQUITY (DEFICIT):
Series A Convertible Preferred OfferingStock – On December 2, 1996, the Company commenced the Series A Preferred OfferingAs 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 137,780June 30, 2006, 9,997 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.
were outstanding. Each share of Series A Convertible Preferred Stock is convertible at any time, at the option of the holder, into the number of shares of Common Stockcommon stock equal to $100 divided by the “Series A Conversion Price”. The currentPrice.” As of June 30, 2006, the Series A Conversion Price is $2.63,$2.59, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 3839 shares of Common Stock.common 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 Series A 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, 11,325 shares of the Series A Convertible Preferred Stock was converted into 421,575 shares of Common Stock. As of June 30, 2003, 14,867 sharesShares of Series A Convertible Preferred Stock currently convertible into 565,285 shareshave a preference in liquidation, including certain merger transactions, of Common Stock, are oustanding.
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Table$100 per share, or $999,700 in the aggregate as of Contents
Series C Preferred Offering – As of August 16, 1999, pursuant to the strategic collaboration agreement with Mallinckrodt (see Note 8), the Company sold 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. During June 2003, the Series C Convertible Preferred Stock was converted into 700,000 shares of Common Stock.30, 2006.
Common Stock Transactions – In January 2004, the Company concluded a private placementsplacement of Common Stockcommon stock and warrants in July 2002, November 2002 and March 20, 2003,which the Company sold an aggregate of 24,352,0996,992,500 shares of its Common Stock$.01 par value common stock and 1,048,875 warrants, which equates to investors consisting15% warrant coverage on the number of domestic and European financial institutions and other accredited investors: 1,545,063 shares were sold, at a market valuean offering price of approximately $1.17$3.25 per share inshare. Each five-year warrant entitles 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 year warrantholder to purchase one share of common stock at an exercise price of $1.46 for$4.06 per share. The gross proceeds were approximately $22,700,000 and the July offering, $1.54 fornet proceeds were approximately $21,000,000.
In August 2004, upon the November offering,signing of the Company’s collaborative development and $1.77 formarketing agreement with King, the March offering. Based onCompany issued to King 1,176,125 shares of common stock and warrants to purchase 235,225 shares of common stock at $4.25 per share, which expire in August 2007.
In September 2005, the sales priceCompany sold 4,499,336 shares of theits common stock and warrants to purchase 719,894 shares of its common stock in thesea private placements, the exercise pricesplacement to King for a total purchase price of certain outstanding$10,000,000. The warrants were adjusted downward in accordance with the existing terms of those warrants. Asare exercisable for a result, a deemed dividend of $203,138 has been reflected in the Company’s consolidated statement of operations for year 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 Stock at prices ranging from $1.37 to $1.46 per share pursuant to the July offering, and (ii) 458,647 shares of Common Stock at $1.54 per share pursuant to the November offering.
In private placements of Common Stock and warrants in November 2001 and June 2002, the Company sold an aggregate of 5,997,578 shares of its Common 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 year warrant to purchase one share of common stockthree-year period commencing September 26, 2005, at an exercise price of $2.70 for$2.22 per share. The sale of the November offeringstock and $2.75 forwarrants was made pursuant to the June offering. Based onCompany’s collaborative development and marketing agreement with King.
In April 2006, the sales priceCompany sold 10,978,677 units, each consisting of theone share of its common stock and warrants to purchase 0.30 shares of its common stock, in these private placements, the exercise pricesa registered direct offering for a total purchase price 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.
In connection with these private placements,$26,800,000. Net proceeds to the Company, paid placement agent’s feesafter offering costs, amounted to approximately $24,900,000. The warrants are exercisable beginning in October 2006, at an exercise price of $771,879 for the November offering and $168,000 for the June offering and issued five year warrants to purchase (i) 356,060 shares of Common Stock at prices ranging from $2.66 to $2.70$2.88 per share, pursuant to the November offering and (ii) 109,510 shares of Common Stock at $2.75 per share pursuant to the June offering.expire in April 2011.
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In a private placement of Common Stock and warrants in September and October 2000, the Company sold 2,532,368 shares of its Common 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. For every five shares purchased, the investors received an immediately exercisable five-year warrant to purchase one share of Common 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 year warrants to the placement agent to purchase 216,000 shares of Common Stock at $6.60 per share and 87,884 shares of Common Stock at $6.53 per share.
Outstanding Stock Purchase Warrants – AtAs of June 30, 2003,2006, 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 03/15/05 32,487 0.22 09/13/05 51,502 1.37 07/29/07 360,514 1.46 06/13/07 2,325,312 1.54 11/29/07 3,358,275 1.77 03/21/08 32,654 1.78 02/15/06 404,263 2.36 06/25/06 134,188 2.66 10/29/06 1,429,984 2.70 04/30/07 328,529 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 15,000 4.00 12/15/10 170,000 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 03/12/04 87,884 6.53 10/27/05 5,000 7.00 06/06/05 146,475 7.42 10/27/05 360,000 7.50 10/05/05 ---------- ----- Total 11,031,744 $0.01 - 7.50 ========== ============
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| Common | Exercise | Latest | |||
| Stock | Price | Termination | |||
| Shares | per Share | Date | |||
| 38,627 | $1.37 | 07/29/07 | |||
| 51,502 | 1.46 | 06/13/07 | |||
| 823,758 | 1.54 | 11/29/07 | |||
| 2,464,789 | 1.77 | 03/21/08 | |||
| 719,894 | 2.22 | 09/26/08 | |||
| 132,688 | 2.66 | 10/29/06 | |||
| 685,518 | 2.70 | 04/30/07 | |||
| 292,215 | 2.75 | 06/13/07 | |||
| 15,000 | 2.82 | 05/13/12 | |||
| 3,293,591 | 2.88 | 04/17/11 | |||
| 50,000 | 2.97 | 11/30/07 | |||
| 25,000 | 3.38 | 11/30/07 | |||
| 25,000 | 3.65 | 12/17/06 | |||
| 15,000 | 4.00 | 12/15/10 | |||
| 1,041,750 | 4.06 | 01/28/09 | |||
| 235,225 | 4.25 | 08/18/07 | |||
| 9,909,557 |
In December 2002,November 2004, the Company issued warrants to purchase 15,00075,000 shares of its Common Stock at $2.82prices between $2.97 and $3.375 per share to the Wistar Institute of Anatomy and Biology, as part of thepartial consideration for a second agreement with Wistar to amend a technology license which Wistar previously granted tofinancial advisory services rendered during the Company.year ended June 30, 2005. The warrants expire on May 13, 2012.in November 2007. The fair value of these warrants of approximately $20,000$101,000, as calculated by the Black-Scholes option pricing model, has been charged to expenseincluded in general and administrative expenses in the statementyear ended June 30, 2005.
Stock Option Plan – The Company’s 2005 Stock Plan was approved by the Company’s stockholders in June 2005 and provides for incentive and nonqualified stock option grants for up to 5,000,000 shares of operations.
In April 2002,common stock to employees, non-employee directors and consultants. The 2005 Stock Plan is administered under the direction of the Board of Directors, which may specify grant terms and recipients. Options granted by the Company issued warrants to purchase 15,000 shares of its Common Stock at $2.70 per share to Albert Fried, Jr. in consideration for a consulting agreement. The warrantsgenerally 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.
In April and December 2001, the Company issued warrants to purchase 30,000 shares of its Common 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 5ten years from the date of issuance. The fair valuegrant and generally vest over three to four years. As of these warrants,June 30, 2006, 3,791,787 shares were available for grant under the 2005 Stock Plan.
As 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 10 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 considerationJune 30, 2006, there were 166,094 options available 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 Plans – The Company has one stock option plan currently in effectgrant under which future grants may be issued, the 1996 Stock Option Plan, as amended, approvedwhich expired in August 2006. The 1996 Stock Option Plan is administered under the direction of the Board of Directors, which may specify grant terms and recipients. Options granted by the Company’s stockholders on November 15, 2000, for which 5,000,000 sharesCompany generally expire ten years from the date of Common Stock are reserved.grant and generally vest over three to four years.
The Company also has alsooutstanding options that were granted options under agreements with individuals, and notprevious plans. The Company expects to settle option exercises under any plan.of its plans with authorized but currently unissued shares.
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The status offollowing table summarizes option activity for the plans and individual agreements during the three years ended June 30, 2003,2006, 2005 and 2004:
| 2006 | 2005 | 2004 | |||||||||||
| Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||
| Outstanding at | |||||||||||||
| beginning of | |||||||||||||
| year | 4,688,152 | $3.41 | 4,365,601 | $3.58 | 4,136,237 | $3.79 | |||||||
| Granted | 1,276,297 | 2.10 | 661,933 | 2.45 | 957,500 | 3.34 | |||||||
| Forfeited | (149,527 | ) | 2.33 | (69,134 | ) | 3.50 | (257,983 | ) | 3.03 | ||||
| Exercised | (21,162 | ) | 1.64 | (35,000 | ) | 1.69 | (140,432 | ) | 2.77 | ||||
| Expired | (134,458 | ) | 4.23 | (235,248 | ) | 4.15 | (329,730 | ) | 6.32 | ||||
| Outstanding at | |||||||||||||
| end of year | 5,659,302 | 3.12 | 4,688,152 | 3.41 | 4,365,601 | 3.58 | |||||||
| Exercisable at | |||||||||||||
| end of year | 4,267,879 | 3.41 | 3,830,910 | 3.61 | 3,353,207 | 3.76 | |||||||
| Weighted average | |||||||||||||
| fair value of | |||||||||||||
| options granted | |||||||||||||
| during the year | $1.38 | $1.92 | $2.68 | ||||||||||
The following table summarizes options outstanding as of June 30, 2006:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Term | Aggregate Intrinsic Value | ||||||
| Options outstanding at end of | |||||||||
| year | 5,659,302 | $3.12 | 6.0 | $448,051 | |||||
| Options vested and exercisable | |||||||||
| at end of year | 4,267,879 | 3.41 | 5.1 | 298,249 | |||||
| Unvested options expected to | |||||||||
| vest | 1,057,097 | 2.31 | 8.8 | 122,142 |
The intrinsic value of options exercised in the years ended June 30, 2006, 2005 and 2004 was as follows:$21,368, $32,384 and $72,903, respectively.
NumberThe fair value of
shares Rangeoption grants is estimated at the grant date using the Black-Scholes model. For grants during the year ended June 30, 2006, the Company’s weighted average assumptions for expected volatility, dividends, term and risk-free interest rate were 85%, 0%, 6.6 years and 4.0%, respectively. Expected volatilities are based primarily on the Company’s historical volatility. The expected term ofprices Weighted average subject tooptions is estimated based on the Company’s historical exercise and employment termination experience determined separately for certain employee groups. The risk-free interest rate is based on U.S. Treasury yields for securities with terms approximating the expected term of the option.In the year ended June 30, 2006, the Company recorded share-based compensation of $1,167,177 representing approximately $0.02 per share,
Prices per share ------------------ --------------- ---------------- Outstanding atnet of a provision for estimated forfeitures of $109,991, which is included in the Company’s net loss for the period. The Company did not record a tax benefit related to share-based compensation expense. As of June 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, 2001 3,385,175 $0.22 - $360.00 $4.14 ========== ============== ===== Granted 695,000 $2.86 - $6.063 Expired or canceled (411,832) $3.50 - $6.00 Exercised (149,275) $0.20 - $3.875 ---------- --------------- Outstanding at June 30, 2002 3,519,068 $0.22 - $21.70 $4.30 ========== ============== ===== Granted 799,900 $1.16 - $3.53 Expired or canceled (177,554) $1.36 - $21.70 Exercised (5,184) $.22 - $2.50 ---------- --------------- Outstanding at June 30, 2003 4,136,230 $1.00 - $21.70 $3.79 ========== ============== ===== Exercisable at June 30, 2003 2,678,859 $1.00 - $21.70 $4.252006, there was $1,137,184 of total unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of 1.2 years.
6342Shares Weighted Weighted Weighted Purchasable Average Average Shares Average Price Range of Under Option Life Exercise Exercisable At Of Exercisable Exercise Prices Options (Years) PriceDuring the year ended June 30,
2003 Shares - --------------- ---------- ----------- -------- -------------- -------------- $1.00 - $2.49 794,796 8.88 $1.62 236,170 $1.59 $2.50 - $3.99 1,677,594 7.02 $3.16 1,096,335 $3.04 $4.00 - $5.99 1,269,375 6.50 $4.70 955,219 $4.79 $6.00 - $8.00 366,959 4.26 $6.94 363,624 $6.95 $8.01 - $18.49 7,188 0.40 $18.34 7,188 $18.34 $18.50 - $21.70 20,323 0.46 $21.70 20,323 $21.70 all outstanding options: ------------------------ $1.00 - $21.70 4,136,235 6.93 $3.79 2,678,859 $4.25 ========= =========
(10) 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 Statestate operating loss carryforwards and research and development credits.carryforwards. 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, given the provisions of the tax laws. Based on the Company's historical losses, a valuation allowanceas well as for the net deferred tax assets has been recorded at June 30, 2003.
The Tax Reform Act of 1986 imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes occur. As a result of past changes in majority ownership, the Company most likely will not be able to fully realize the benefit of its net operating loss carryforwards.
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Significant components of the Company's deferred tax asset for federal and state purposes 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% of the deferred tax assets as realization of such benefits is not assured.
During 2003, 2002 and 2001, the Company sold New Jersey State operating loss carryforwards and research and development credits, given the provisions of existing tax laws.
As of June 30, 2006, the Company had federal and state net operating loss carryforwards of approximately $144,000,000 and $104,000,000, respectively, which expire between 2007 and 2026 if not utilized. As of June 30, 2006 the Company had federal research and development credits of approximately $3,967,000 that will begin to expire in 2012, if not utilized.
The Tax Reform Act of 1986 (the “Act”) provides for limitation on the use of net operating loss and research and development tax credit carryforwards following certain ownership changes (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 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 may not be able to take full advantage of these carryforwards for federal income tax purposes.
The Company’s net deferred tax assets are as follows:
| June 30, 2006 | June 30, 2005 | ||||
| Net operating loss carryforwards | $ 55,199,000 | $ 44,529,000 | |||
| Research and development tax credits | 3,967,000 | 3,373,000 | |||
| Accrued expenses, deferred revenue and other | 5,091,000 | 5,094,000 | |||
| 64,257,000 | 52,996,000 | ||||
| Valuation allowances | (64,257,000 | ) | (52,996,000 | ) | |
| Net deferred tax assets | $ - | $ - | |||
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the application of loss limitation provisions related to ownership changes. Due to the Company’s history of losses, the deferred tax assets are fully offset by a valuation allowance as of June 30, 2006 and 2005. The valuation allowance for the years ended June 30, 2006, 2005 and 2004 increased by $11,261,000, $6,468,000 and $11,279,000, respectively, related primarily to additional net operating losses incurred by the Company and the tax treatment of certain deferred revenue.
During the years ended June 30, 2006, 2005 and 2004, the Company sold New Jersey state operating loss carryforwards, which resulted in the recognition of $245,093, $392,410$666,275, $580,275 and $325,152,$240,836, respectively, in tax benefits.
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 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. 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 LeuTech development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay the Company 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. The Company agreed to arrange for the manufacture of LeuTech and would receive a transfer price on each product unit and a royalty on LeuTech 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 Company’s estimated expenses associated with completing the FDA review process. Additionally, timing of the $10 million in future milestone payments has been revised to coincide with LeuTech’s anticipated FDA approval and achievement of future sales goals (see Note 2). Of the $3.2 million, $1.2 million has been paid to date. The Company expects to receive the remaining $2 million in the fourth quarter of calendar year 2003.
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During(11) RELATED PARTY TRANSACTIONS
One of the Company’s directors is the president and sole stockholder of a company that provided strategic and technology consulting services. The Company paid the consulting firm $43,125 during the year ended June 30, 2003, 2002 and 2001, the Company recognized $504,000, $0 and $1,410,356, respectively, as contract revenue related2004 for consulting services provided to the development of LeuTech.Company.
(9)(12) CONSOLIDATED QUARTERLY FINANCIAL DATA – UNAUDITED:UNAUDITED
The following tables provide quarterly data for the fiscal years ended June 30, 20032006 and 2002.2005:
Three Months Ended --------------------------------------------------------------------- September 30, December 31, March 31, June 30, 2002 2002 2003 2003 -------------- --------------- -------------- ---------------- (amounts in thousands except 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 43 93 -------------- --------------- --------------- --------------- Loss before income taxes (4,099) (4,597) (5,652) (6,463) Income tax benefit - 245 - - -------------- --------------- --------------- --------------- Net loss (4,099) (4,352) (5,652) (6,463) Deemed dividend (17) (98) (88) - -------------- --------------- --------------- --------------- Net loss attributable to common shares $ (4,116) $ (4,450) $ (5,740) $ (6,463) ============== =============== =============== =============== Basic and diluted net loss per common share $ (0.22) $ (0.18) $ (0.19) $ (0.15) ============== =============== =============== =============== Weighted average number of common shares outstanding, used in computing basic and diluted net loss 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 in thousands except per share data) Total 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 ============== =============== =============== ===============
| Three Months Ended | |||||||||
| June 30, 2006 | March 31, 2006 | December 31, 2005 | September 30, 2005 | ||||||
| (amounts in thousands, except per share data) | |||||||||
| Total revenues | $ 4,973 | $ 5,045 | $ 4,587 | $ 5,144 | |||||
| Cost of product sales | - | - | 2,041 | - | |||||
| Royalties | - | - | 117 | 183 | |||||
| Other operating expenses | 13,196 | 12,793 | 10,750 | 11,119 | |||||
| Total other income, net | 346 | 146 | 211 | 122 | |||||
| Loss before income taxes | (7,877 | ) | (7,602 | ) | (8,110 | ) | (6,036 | ) | |
| Income tax benefit | - | - | 666 | - | |||||
| Net loss | $ (7,877 | ) | $ (7,602 | ) | $ (7,444 | ) | $ (6,036 | ) | |
| Basic and diluted net loss | |||||||||
| per common share | $ (0.11 | ) | $ (0.13 | ) | $ (0.13 | ) | $ (0.11 | ) | |
| Weighted average number of | |||||||||
| common shares outstanding | |||||||||
| used in computing basic and | |||||||||
| diluted net loss per common | |||||||||
| share | 68,948,204 | 59,339,220 | 58,869,492 | 54,488,412 | |||||
| Three Months Ended | |||||||||
| June 30, 2005 | March 31, 2005 | December 31, 2004 | September 30, 2004 | ||||||
| (amounts in thousands, except per share data) | |||||||||
| Total revenues | $ 5,845 | $ 2,807 | $ 4,813 | $ 4,492 | |||||
| Cost of product sales | 308 | 6 | 133 | 88 | |||||
| Royalties | 84 | 85 | 87 | 72 | |||||
| Other operating expenses | 10,588 | 6,813 | 7,623 | 7,482 | |||||
| Total other income, net | 44 | 157 | 163 | 110 | |||||
| Loss before income taxes | (5,091 | ) | (3,940 | ) | (2,867 | ) | (3,040 | ) | |
| Income tax benefit | - | - | 580 | - | |||||
| Net loss | $ (5,091 | ) | $ (3,940 | ) | $ (2,287 | ) | $ (3,040 | ) | |
| Basic and diluted net loss | |||||||||
| per common share | $ (0.09 | ) | $ (0.07 | ) | $ (0.04 | ) | $ (0.06 | ) | |
| Weighted average number of | |||||||||
| common shares outstanding | |||||||||
| used in computing basic and | |||||||||
| diluted net loss per common | |||||||||
| share | 54,056,264 | 54,021,372 | 53,997,547 | 53,375,147 | |||||
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 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 ProceduresProcedures.
(A) Evaluation Our management carried out an evaluation, with the participation of Disclosure Controlsour Chief Executive Officer and Procedures. Our principal executive officer and principal financial officer, after evaluatingour Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) andor 15d-15(e)) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K, havereport. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, based on such evaluation,as of June 30, 2006, our disclosure controls and procedures were adequateeffective.
A control system, no matter how well designed and effective to ensureoperated, cannot provide absolute assurance that material information relating to us, including our consolidated subsidiaries, was made known to them by othersthe objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within those entities, particularly during the period in which this Annuala company have been detected.
Management’s Report on Form 10-KInternal Control Over Financial Reporting
The management of Palatin is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act. Palatin’s internal control system was being prepared.
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Tabledesigned to provide reasonable assurance to the Company’s management and board of Contentsdirectors regarding the preparation and fair presentation of published financial statements.
(B) Changes All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Palatin’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Controls.Control-Integrated Framework. Based on its assessment, management believes that, as of June 30, 2006, the Company’s internal control over financial reporting is effective based on those criteria.
There werewas no changeschange in our internal control over financial reporting identified in connection withduring the evaluationfourth quarter of such internal controlthe period covered by this Annual Report that occurred during our last fiscal quarter, that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
Palatin’s independent registered public accounting firm has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. This report appears below.
Report Of Independent Registered Public Accounting Firm
[PART III BEGINS ON THE FOLLOWING PAGE]
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We have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting presented above, that Palatin Technologies, Inc. maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Registrant
DirectorsTreadway Commission (COSO). Palatin Technologies, Inc.‘s management is responsible for maintaining effective internal control over financial reporting 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, chairmanfor its assessment of theboardeffectiveness ofdirectors 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) Memberinternal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit committee
(2) Memberin accordance with the standards of the compensation committee.
All directors hold office untilPublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the next annual meetingaudit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of stockholders or until their successors have been electedinternal control over financial reporting, evaluating management’s assessment, testing and qualified. All current directors were elected at our annual stockholders’ meeting on December 6, 2002, except for Dr. DeSouza, who was elected byevaluating the boarddesign 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.operating
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PERRY B. MOLINOFF, M.D. has been executive vice presidenteffectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for researchour opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and development since September 2001the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and a director since November 2001. Dr. Molinoff’s background includes more than 30 yearsprocedures that (1) pertain to the maintenance of experiencerecords that, in bothreasonable detail, accurately and fairly reflect the industrialtransactions and educational sectors. From 1981 to 1994 he was a professor of pharmacology and chairmandispositions of the Departmentassets of Pharmacology at the Universitycompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Pennsylvania Schoolfinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Medicinethe company are being made only in Philadelphia. From January 1995 until March 2001, he was vice presidentaccordance with authorizations of neurosciencemanagement and genitourinary drug discovery fordirectors of the Bristol-Meyers Squibb Pharmaceutical Research Institute, where he was responsible for directingcompany; and implementing(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Institute’s research efforts. Dr. Molinoff earned his medical degree from Harvard Medical School.company’s assets that could have a material effect on the financial statements.
JOHN K. A. PRENDERGAST, Ph.D.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Palatin Technologies, Inc. maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Palatin Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), co-founderthe consolidated balance sheets of Palatin has been chairmanTechnologies, Inc. and subsidiary as of June 30, 2006 and 2005, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the board sinceyears in the three-year period ended June 14, 2000,30, 2006, 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.our report dated September 12, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
September 12, 2006
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.None.
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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 CompliancePART III
The rulesinformation required by Part III of Form 10-K under
is incorporated by reference from our definitive proxy statement relating to the 2006 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 in 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.
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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 $11,628(15) technical officer _____________________________
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Option grants in last fiscal year. The following table shows options granted to our named executive officers during theJune 30, 2006 fiscal year ended June 30, 2003. All of the options listed were granted under our 1996 stock option plan, and the underlying security is common stock. All options granted in fiscal 2003 vested as to one third of the shares on the date of grant, and will vest as to the remaining two thirds of the shares only upon achievement of performance objectives. The exercise price for each option is equal to the market price of common stock on the date of grant. We have not granted any SARs.
[TABLE APPEARS ON FOLLOWING PAGE]end.
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OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS - --------------------------------------------------------------------------| | Potential Realizable | Value at Assumed Number of % of Total | Annual Rates of Securities Options | Stock Price Underlying Granted to Exercise | Appreciation for Options Employees or Base | Option Term* Granted in Fiscal Price Expiration | --------------------- Name (#) Year ($/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 and Financial Statement Schedules and Reports on Form 8-K.Schedules.
(a) Documents filed as part of the report:
1. Financial statements: theThe following consolidated financial statements are filed as a part of this report under Item 8 – Financial Statements and Supplementary Data:
— Independent Auditors’ Report
— 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
| — | Report of Independent Registered Public Accounting Firm | |
| — | Consolidated Balance Sheets | |
| — | Consolidated Statements of Operations | |
| — | Consolidated Statements of Cash Flows | |
| — | Consolidated Statements of Stockholders' Equity | |
| — | Notes to Consolidated Financial Statements | |
2. Financial statement schedules: none.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 |
| 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. |
| 10.02 | 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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| 10.06 |
| 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 |
| 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 |
48
| 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. |
| 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. |
| 10.26 | 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. Incorporated by reference to Exhibit 10.27 of our annual report on Form 10-K for the year ended June 30, 2004, filed with the SEC on September 13, 2004. 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. Incorporated by reference to Exhibit 10.28 of our annual report on Form 10-K for the year ended June 30, 2004, filed with the SEC on September 13, 2004. 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. Incorporated by reference to Exhibit 10.29 of our annual report on Form 10-K for the year ended June 30, 2004, filed with the SEC on September 13, 2004. |
| 10.30 | Employment Agreement dated as of May 1, 2005, between Palatin Technologies, Inc. and Trevor Hallam. † |
| 10.31 | 2005 Stock Plan. Incorporated by reference to Exhibit 10.01 of our report on Form 8-K, filed with the SEC on June 10, 2005. † |
| 10.32 | Amendment to Strategic Collaboration Agreement dated as of October 1, 2005, between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.32 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. 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. |
49
| 10.33 | Employment Agreement dated as of October 1, 2005 between Palatin and Carl Spana. Incorporated by reference to Exhibit 10.33 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. † |
| 10.34 | Employment Agreement dated as of October 1, 2005 between Palatin and Stephen T. Wills. Incorporated by reference to Exhibit 10.34 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. † |
| 10.35 | Employment Agreement dated as of October 1, 2005 between Palatin and Shubh D. Sharma. Incorporated by reference to Exhibit 10.35 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. † |
| 10.36 | Form of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.1 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.37 | Form of Incentive Stock Option Agreement – Standard under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.2 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.38 | Form of Option Certificate (non-qualified option) under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.3 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.39 | Form of Non-Qualified Stock Option Agreement under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.4 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.40 | Second Amendment and Agreement dated as of December 16, 2005 amending the Collaborative Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. dated August 12, 2004. Incorporated by reference to Exhibit 10.1 of our report on Form 8-K, filed with the SEC on December 23, 2005. |
| 10.41 | Form of stock purchase agreement for our April 2006 private placement. Incorporated by reference to Exhibit 10.2 of our report on Form 8-K, filed with the SEC on April 12, 2006. |
| 10.42 | Form of warrant issued to purchasers in our April 2006 private placement. Incorporated by reference to Exhibit 10.3 of our report on Form 8-K, filed with the SEC on April 12, 2006. |
| 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. or compensatory plan or arrangement.
8850
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, 200312, 2006
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/ Perry B. Molinoff | Director | September 12, 2006 |
| Perry B. Molinoff | ||
| /s/ Robert K. deVeer, Jr. | Director | September |
| Robert K. deVeer, Jr. | ||
| /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 | ||
| /s/ J. Stanley Hull | Director | September 12, 2006 |
| J. Stanley Hull |
8951
EXHIBIT LIST
| No. | Description |
| 3.01 | Restated certificate of incorporation. Incorporated by reference to Exhibit 3.01 of our quarterly report on Form 10-Q for the quarter ended March 31, 2005, filed with the SEC on May 9, 2005. |
| 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. |
| 10.02 | 1996 Stock Option Plan, as amended effective January 1, 2001. Incorporated by reference to Exhibit 4.1 of our registration statement on Form S-8, Commission File No. 333-83876, filed with the SEC on March 6, 2002. † |
| 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. † |
| 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 year ended June 30, 1999, filed with the SEC on December 28, 1999. |
| 10.07 | 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 quarter ended March 31, 2002, filed with the SEC on May 15, 2002. We have obtained confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. |
| 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. |
| 10.15 | Form of registration rights agreement for our October 2001 private placement. Incorporated by reference to Exhibit 10.2 of our quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed with the SEC on November 14, 2001. |
| 10.16 | Form of warrant issued to purchasers in our October 2001 private placement. Incorporated by reference to Exhibit 10.3 of our quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed with the SEC on November 14, 2001. |
| 10.17 | 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 year ended June 30, 2002, filed with the SEC on September 30, 2002. |
| 10.18 | 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 year ended June 30, 2002, filed with the SEC on September 30, 2002. |
| 10.19 | 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 year ended June 30, 2002, filed with the SEC on September 30, 2002. |
| 10.20 | Form of stock purchase agreement for our November 2002 private placement. 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. |
| 10.21 | Form of registration rights agreement for our November 2002 private placement. Incorporated by reference to Exhibit 10.31 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 10.22 | Form of warrant issued to purchasers in our November 2002 private placement. Incorporated by reference to Exhibit 10.32 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 10.23 | Form of stock purchase agreement for our March 2003 private placement. Incorporated by reference to Exhibit 10.33 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 10.24 | Form of warrant issued to purchasers in our March 2003 private placement. Incorporated by reference to Exhibit 10.34 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 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. |
| 10.26 | 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 this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. |
| 10.27 | Securities Purchase Agreement between Palatin and King Pharmaceuticals, Inc. Incorporated by reference to Exhibit 10.27 of our annual report on Form 10-K for the year ended June 30, 2004, filed with the SEC on September 13, 2004. 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. Incorporated by reference to Exhibit 10.28 of our annual report on Form 10-K for the year ended June 30, 2004, filed with the SEC on September 13, 2004. 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. Incorporated by reference to Exhibit 10.29 of our annual report on Form 10-K for the year ended June 30, 2004, filed with the SEC on September 13, 2004. |
| 10.30 | Employment Agreement dated as of May 1, 2005, between Palatin Technologies, Inc. and Trevor Hallam. † |
| 10.31 | 2005 Stock Plan. Incorporated by reference to Exhibit 10.01 of our report on Form 8-K, filed with the SEC on June 10, 2005. † |
| 10.32 | Amendment to Strategic Collaboration Agreement dated as of October 1, 2005, between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.32 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. 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. |
| 10.33 | Employment Agreement dated as of October 1, 2005 between Palatin and Carl Spana. Incorporated by reference to Exhibit 10.33 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. † |
| 10.34 | Employment Agreement dated as of October 1, 2005 between Palatin and Stephen T. Wills. Incorporated by reference to Exhibit 10.34 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. † |
| 10.35 | Employment Agreement dated as of October 1, 2005 between Palatin and Shubh D. Sharma. Incorporated by reference to Exhibit 10.35 of our quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8, 2005. † |
| 10.36 | Form of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.1 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.37 | Form of Incentive Stock Option Agreement – Standard under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.2 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.38 | Form of Option Certificate (non-qualified option) under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.3 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.39 | Form of Non-Qualified Stock Option Agreement under the 2005 Stock Plan. Incorporated by reference to Exhibit 10.4 of our report on Form 8-K, filed with the SEC on September 21, 2005. † |
| 10.40 | Second Amendment and Agreement dated as of December 16, 2005 amending the Collaborative Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. dated August 12, 2004. Incorporated by reference to Exhibit 10.1 of our report on Form 8-K, filed with the SEC on December 23, 2005. |
| 10.41 | Form of stock purchase agreement for our April 2006 private placement. Incorporated by reference to Exhibit 10.2 of our report on Form 8-K, filed with the SEC on April 12, 2006. |
| 10.42 | Form of warrant issued to purchasers in our April 2006 private placement. Incorporated by reference to Exhibit 10.3 of our report on Form 8-K, filed with the SEC on April 12, 2006. |
| 21 | Subsidiaries of the registrant. * |
| 23 | Consent of KPMG LLP. * |
| 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 * |
| 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 or compensatory plan or arrangement.