U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission file number 0-22686
PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-4078884 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 103 Carnegie Center - Suite 200 | |
| Princeton, New Jersey | 08540 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number: (609) 520-1911
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of February 14, 2001, 10,939,0802002, 16,161,487 shares of the registrants'sissuer's common stock, par value $.01 per share, were outstanding.
PALATIN TECHNOLOGIES, INC.
| Item 1. | Financial Statements (unaudited) | |
| CONSOLIDATED BALANCE SHEETS -- As of December 31, and June 30, | Page 3 | |
| CONSOLIDATED STATEMENTS OF OPERATIONS -- For the Three and Six Months Ended December 31, December 31, | Page 4 | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the Six Months Ended December 31, December 31, | Page 5 | |
| Notes to Consolidated Financial Statements | Page 6 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | Page |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | Page |
| Item 1. | Legal Proceedings | Page |
| Item 2. | Changes in Securities and Use of Proceeds | Page |
| Item 3. | Defaults Upon Senior Securities | Page |
| Item 4. | Submission of Matters to a Vote of Security Holders | Page |
| Item 5. | Other Information | Page 15 |
| Item 6. | Exhibits and Reports on Form 8-K | Page |
| Signatures | Page 16 |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(unaudited)
December 31, 20002001 June 30, 20002001
----------------- ------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,865,56415,023,906 $ 3,219,593
Short-term investments 1,787,001 2,155,617
Accounts receivable 1,388,080 953,16311,456,424
Prepaid expenses and other 152,510 179,792
----------------- -----------------535,493 204,731
------------ ------------
Total current assets 18,193,155 6,508,165
Fixed assets,15,559,399 11,661,155
Property and equipment, net of accumulated depreciation and amortization
of $1,051,167 and $914,846, respectively 1,470,559 1,573,1401,071,529 1,924,962
Restricted cash 263,075 263,075613,075 613,075
Other 232,797 541,017
----------------- -----------------189,479 45,017
------------ ------------
$ 20,159,58617,433,482 $ 8,885,397
================= =================14,244,209
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 884,0691,990,079 $ 1,012,0701,129,660
Accrued expenses 1,007,649 968,166
----------------- -----------------285,630 397,119
Accrued compensation 227,086 607,286
Deferred license revenue 111,110 166,666
------------ ------------
Total current liabilities 1,891,718 1,980,236
----------------- -----------------2,614,805 2,300,731
------------ ------------
Deferred license revenue - 27,778
------------ ------------
Commitments and contingencies (Note 5)4)
Stockholders' equity:
Preferred stock of $.01 par value - authorized 10,000,000 shares;
Series A Convertible; 30,667 and 31,561 shares29,317 issued and outstanding
as of December 31, 20002001 and June 30, 2000,2001, respectively; 307 316
Series B Convertible; zero and 2,000 shares issued and outstanding
as of December 31, 2000 and June 30, 2000 respectively; - 20293 293
Series C Convertible; 700,000 shares issued and outstanding
as of December 31, 20002001 and June 30, 20002001 respectively; 7,000 7,000
Common stock of $.01 par value - authorized 75,000,000 shares;
Issued and outstanding 10,886,23116,106,389 and 7,902,37211,199,658 shares as of
December 31, 20002001 and June 30, 2000,2001, respectively; 108,862 79,024161,063 111,997
Additional paid-in capital 65,704,784 50,324,60376,142,485 65,981,568
Deferred compensation (49,543) (80,119)
Unrealized loss on investments (554) -
Deficit accumulated during development stage (47,553,085) (43,505,802)
----------------- -----------------(61,442,067) (54,105,039)
------------ ------------
Total stockholders' equity 18,267,868 6,905,161
----------------- -----------------14,818,677 11,915,700
------------ ------------
$ 20,159,58617,433,482 $ 8,885,397
================= =================14,244,209
============ ============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
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Inception
(January 28,
1986)
Three Months Ended December 31, Six Months Ended December 31, through
2001 2000 19992001 2000 1999 December 31, 2000
--------------2001
------------- ------------- ------------- ------------------------------ ----------------
REVENUES:
Grants and contracts $ - $ 664,793 $ 1,009,591- $ 1,519,874 $ 2,259,591 $ 9,441,6149,543,165
License fees - - - 500,000 1,734,29641,667 41,667 83,334 83,334 1,984,297
Other - - - - 318,917
------------- ------------- ------------- ------------- -----------------------------
Total revenues 664,793 1,009,591 1,519,874 2,759,591 11,494,82741,667 706,460 83,334 1,603,208 11,846,379
------------- ------------- ------------- ------------- -----------------------------
OPERATING EXPENSES:
Research and development 3,040,151 2,249,522 2,375,6594,931,397 4,705,118 4,824,282 37,452,40647,787,685
General and administrative 1,015,263 843,473 1,536,2501,915,161 1,550,049 2,305,684 20,902,32324,292,276
Loss on impairment of assets - - 916,518 - 916,518
Net intangibles write down - - - - 259,334
------------- ------------- ------------- ------------- -----------------------------
Total operating expenses 4,055,414 3,092,995 3,911,9097,763,076 6,255,167 7,129,966 58,614,06373,255,813
------------- ------------- ------------- ------------- -----------------------------
OTHER INCOME (EXPENSES):
Interest income 79,974 279,195 115,074182,060 366,487 186,389 1,720,4772,323,624
Interest expense (678) (1,349) (625)(1,356) (3,629) (25,861) (1,954,478)(1,957,309)
Merger costs - - - - (525,000)
------------- ------------- ------------- ------------- -----------------------------
Total other income (expenses) 79,296 277,846 114,449180,704 362,858 160,528 (759,001)(158,684)
------------- ------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (2,150,356) (2,787,869) (4,372,435) (4,209,847) (47,878,237)----------------
Loss before income taxes and cumulative
effect of accounting change (3,934,451) (2,108,689) (7,499,038) (4,289,101) (61,568,118)
Income tax benefit 162,010 325,152 -162,010 325,152 - 325,152487,162
------------- ------------- ------------- ------------- -------------
NET LOSS (1,825,204) (2,787,869) (4,047,283) (4,209,847) (47,553,085)
PREFERRED STOCK DIVIDEND----------------
Loss before cumulative effect of
accounting change (3,772,441) (1,783,537) (7,337,028) (3,963,949) (61,080,956)
Cumulative effect of accounting change - - - - (3,121,525)(361,111) (361,111)
------------- ------------- ------------- ------------- ----------------
NET LOSS (3,772,441) (1,783,537) (7,337,028) (4,325,060) (61,442,067)
PREFERRED STOCK DIVIDEND (285,725) - (285,725) - (3,407,250)
------------- ------------- ------------- ------------- ----------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (1,825,204)(4,058,166) $ (2,787,869)(1,783,537) $ (4,047,283)(7,622,753) $ (4,209,847) $(50,674,610)(4,325,060) $ (64,849,312)
============= ============= ============= ============= =============================
Basic and diluted net loss per common shareshare:
Basic and diluted net loss before cumulative
effect of accounting change $ (0.18)(0.31) $ (0.38)(0.17) $ (0.44)(0.63) $ (0.58)(0.43)
Cumulative effect of accounting change $ (24.65)
=============(0.00) $ (0.00) $ (0.00) $ (0.04)
------------- ------------- ------------- -------------
Basic and diluted net loss $ (0.31) $ (0.17) $ (0.63) $ (0.47)
============= ============= ============= =============
Weighted average number of common shares
outstanding used in computing basic and
diluted net loss per common share 13,013,547 10,366,170 7,242,54412,106,579 9,210,971 7,223,073 2,055,549
=============
============= ============= ============= =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
-4-4
Inception
(January 28, 1986)
Six Months Ended December 31, Through
2001 2000 1999 December 31, 20002001
------------- ------------- ----------------- ------------------ --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,047,283) $ (4,209,847) $ (47,553,085) $$(7,337,028) $(4,325,060) $(61,442,067)
Adjustments to reconcile net loss to net cash
used for operating activities:
Cumulative effect of accounting change - 361,111 361,111
Depreciation and amortization 155,316 141,326 118,340 1,227,0961,529,172
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
expenses -
Settlement with consultant - - (28,731)
Change in termsLoss on impairment of assets 916,518 - 916,518
Acceleration of options previously granted - 335,315 - 1,505,315
Amortization of stockStock based compensation 30,576 109,375 1,095,058 3,554,3013,641,492
Deferred compensation (83,334) (83,334) (250,001)
Changes in certain operating assets and
liabilities:
Accounts receivable - (434,917) (2,141,900) (1,388,080)-
Prepaid expenses and other (480,228) 330,498 (370,815) (965,987)(1,665,660)
Accounts payable 861,319 (128,001) 230,226 884,0691,990,979
Accrued expenses and other (491,688) 39,483 (129,303) 546,482
----------------- ------------------ --------------------51,550
----------- ----------- ------------
Net cash used for operating activities (6,428,549) (3,654,204) (5,408,241) (39,812,599)
----------------- ------------------ --------------------(50,984,301)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity/Sales/(Purchases) of short-term investments, net - 368,616 (1,679,416) (1,787,001)-
Purchases of property and equipment (212,845) (33,741) (105,177) (2,577,068)
----------------- ------------------ --------------------(3,386,071)
----------- ----------- ------------
Net cash provided/(used) for investing
activities (212,845) 334,875 (1,784,593) (4,364,069)
----------------- ------------------ --------------------(3,386,071)
----------- ----------- ------------
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)
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 10,208,876 14,965,300 5,608 32,833,57343,185,619
Proceeds from Preferred stock, net - 11,000,000- 24,210,326
Purchase of treasury stock - - (1,667)
----------------- ------------------ ------------------------------- ----------- ------------
Net cash provided by financing
activities 10,208,876 14,965,300 11,005,608 59,042,232
----------------- ------------------ --------------------69,394,278
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,567,482 11,645,971 3,812,774 14,865,56415,023,906
CASH AND CASH EQUIVALENTS, beginning
of period 11,456,424 3,219,593 2,788,628 -
----------------- ------------------ ------------------------------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $15,023,906 $14,865,564 $ 14,865,56415,023,906 $
6,601,402 $ 14,865,564 $
================= ================== =============================== =========== ============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
-5-5
Nature of Business – Palatin Technologies, Inc., headquartered in Princeton, NJ with its research facility in Edison, NJ, (“Palatin” or the “Company”) is a development-stage pharmaceutical company dedicated to developing and commercializing products and technologies for diagnostic imaging and ethicalbiopharmaceutical company. The Company is currently conducting clinical investigations with its lead drug, development utilizing peptide, monoclonal antibody, and radiopharmaceutical technologies. We are in the early stages of developing pharmaceutical products and technologies. We are concentrating our efforts on the following:
Business Risk and Liquidity – As shown in the accompanying financial statements, we havethe Company incurred substantial net losses of $4,047,283$7,337,028 for the six months ended December 31, 20002001 and havehas a deficit accumulated during development stage of $47,553,085. We anticipate$61,442,067 as of December 31, 2001. The Company anticipates incurring additional losses over at leastin the next several years,future as it continues development of LeuTech for equivocal appendicitis and such losses are expected to increase as we expand ourexpands clinical trials for other indications of LeuTech and for PT-141, and continues research and development activities relating to various technologies.of PT-141 and its MIDAS technology. To achieve profitability, we must,the Company, alone or with others, must successfully develop and commercialize ourits technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and there can be no assurance that wethe Company will be able to achieve profitability on a sustained basis, if at all.
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In September and October of 2000, we received gross proceeds of $15.15 million inNovember 2001, the Company concluded a private placement of its common stock and warrants.warrants, which yielded gross proceeds of $11 million (see Note 5).
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. There can be no assurance that the Company’s efforts will be successful.costs through strategic collaboration agreements or other resources. Management believes that adequate financing has been obtainedit will be able to fund the Company’s operations through December 31, 2001,calendar year 2002, based on current expenditure levels.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted accounting principlesin the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.10-Q. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principlesto be presented for complete financial statements. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position as of December 31, 20002001 and the results of operations and cash flows for the three and six month periods ended December 31, 20002001 and 19992000 and for the period from inception (January 28, 1986) to December 31, 2000 and cash flows for the six months ended December 31, 2000 and 1999, and for the period from inception (January 28, 1986) to December 31, 2000.2001. The results of operations for the six month period ended December 31, 20002001 may not necessarily be indicative of the results of operations expected for the full year, except that the Company expects to incur a significant loss for the fiscal year ended June 30, 2001.2002.
6
The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K, filed with the Securities and Exchange Commission, which includes financial statements as of June 30, 20002001 and 19992000 and for each of the three fiscal years in the period ended June 30, 2000.2001.
In March 2000, the FASB issued interpretation No. 44, (“FIN 44”), “Accounting for certain transactions Involving Stock Compensation – an Interpretation of APB 25.” This Interpretation clarifies the definition of employee for purposes of applying APB 25 and provides the accounting consequences of various modifications to the terms of a previously fixed stock option or award. This Interpretation became effective July 1, 2000. The adoption of FIN 44 did not have a material impact on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”) which is effective for fiscal years beginning after December 15, 1999. SAB 101 draws on existing accounting rules and provides specific guidance on how those accounting rules should be applied, and specifically addresses revenue recognition for non-refundable technology access fees in the biotechnology industry. We expect that we will be required to defer non-refundable technology fees recorded in 1999 and recognize the related revenue over future periods. The SEC has extended the implementation date of SAB 101 until the fourth quarter of fiscal years beginning after December 15, 1999.
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In accordance with SAB 101, we expect to report a change in accounting principle and to record the impact of this change as a cumulative effect in our statement of operations.
Principles of Consolidation – The consolidated financial statements include the accounts of ourPalatin and its wholly-owned inactive subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates – The preparation of consolidated financial statements in conformity with generally accepted accounting 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.
Short-Term Statements of Cash Flows – Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a maturity of three months or less at the time of purchase. As of December 31, 2001 and June 30, 2001, approximately $613,000 of cash was restricted to secure letters of credit for security deposits on leases.
Investments –We account for investments in accordance with Statement of Financial Accounting Standards No. 115 “Accounting"Accounting For Certain Investments in Debt and Equity Securities.”" We classify such investments as available for sale investments and as such all investments are recorded at fair value. The investments consist of certificates of deposit.commercial paper. Unrealized gains and losses are classified as a separate component of stockholder’sstockholder's equity. As of December 31, 20002001 the unrealized gain on investments was immaterial. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs.
Fixed AssetsProperty and Equipment – Fixed assetsProperty and equipment consist of office and laboratory equipment, office furniture and leasehold improvements. Fixed assetsProperty and equipment are statedrecorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of five years for equipment, seven years for office furniture and over the term of the lease for leasehold improvements. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized.
Impairment of Long-Lived Assets – We comply withThe Company follows Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” We review ourThe 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 our long-lived assets, we evaluatethe Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at 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.
During 2001, the Company entered into an agreement to lease a new facility in Cranbury, New Jersey that will combine both the research and development facility in Edison, New Jersey
7
and the corporate offices in Princeton, New Jersey. The lease will expire 10 years from commencement. The Company anticipates occupying the new space in the second quarter of calendar year 2002. In connection with this move, certain of the Company's existing leasehold improvements at its Edison, New Jersey have been impaired, which resulted in a non-cash charge of $916,518 in the statement of operations during the six months ended December 31, 2001.
Revenue Recognition – Grant and contract revenues are recognized as the Company provides the services stipulated in the underlying grants and/or contracts are provided based on the time and materials incurred. License revenues areIn the fiscal year ended June 30, 2001, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 requires up front, non-refundable license fees to be deferred and recognized whenover the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time non-cash charge of $361,000, or $0.04 per share during the three months ended September 30, 2000. For the three and six months ended December 31, 2001 and 2000, the Company recognized $41,667 and $83,334 of deferred license fee is received and we have no further obligations.revenue respectively.
Research and Development Costs – The costs of research and development activities are expensedcharged to expense as incurred.
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Stock Options and Warrants– Warrants and the majority of common stock options issued to employees and non-employee directors have been issued at exercise prices greater than, or equal to, their fair market value at the date granted. Accordingly, no value has been assigned to these instruments.options. However, certain stock options were issued under non-plan option agreements and a non-qualified stock option plan at exercise prices below market value.granted to non-employees for services. The difference between the exercise price and the marketfair value of these securitiesoptions, pursuant to the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as calculated by the Black-Scholes option pricing model, has been recorded as deferred compensation and is being expensed over the vesting period of such options. During the option.three and six months ended December 31, 2001, the Company recognized $15,288 and $30,576 of deferred compensation respectively.
Income Taxes – We intend toThe Company and its subsidiaries file consolidated federal and combined state income tax returns. We accountThe Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, (“SFAS 109”), “Accounting for Income Taxes.”Taxes” (“SFAS 109”). SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes.
We provide The Company provides for deferred income taxes relating to timingtemporary differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109.
In accordance with SFAS 109, we havethe Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management’s estimates and analysis, which includes tax laws which may limit ourthe Company’s ability to utilize its tax loss carryforwards.carry-forwards.
Net Loss per Common Share – We apply SFASThe Company applies Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128 requires dual presentation of basic and diluted earnings per share (“EPS”) for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing the income (loss) 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.
8
For the three and six months ended December 31, 20002001 and 1999 and for the period from inception (January 28, 1986) through December 31, 2000, there were no dilutive effects of stock options or warrants as wethe Company incurred a net loss in each period. Options and warrants to purchase 6,415,9778,734,000 shares of common stockCommon Stock at prices ranging from $0.20$0.01 to $360 per share were outstanding at December 31, 2000.2001.
Fair Value of Financial Instruments – Statement of Financial Accounting Standards No. 107 (“SFAS 107”), “Disclosures about Fair Value of Financial Instruments,” 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 prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent our underlying value. Based on the above, the amount reported on the balance sheet approximates the fair value.
Reclassifications –Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
-9-
Leases - We lease three– The Company currently leases two facilities in New Jersey under non-cancelable operating leases, twoleases.
During 2001, the Company entered into an agreement to lease a new facility in Cranbury, New Jersey that will combine both the research and development facility in Edison, New Jersey and the corporate offices in Princeton, New Jersey. The Company anticipates occupying the new space in the second quarter of which relatecalendar year 2002. The Company’s anticipated cash outlay related to our research facilities and corporate headquarters. The third relates to our previous administrative offices, which we sublease to Derma Sciences, Inc. Under the sublease agreement, Derma reimburses us 100% of all expenses consisting of rent, utilities and property taxes.move is projected at approximately $1.6 million.
License Agreements – We currently maintain The Company has three license agreements that require minimum yearly payments. The cost to maintain these license agreements for the fiscal year ending June 30, 20012002 amounts to $250,000. There were no payments due$300,000. $250,000 was expensed during the three and six months ended December 31, 20002001 under these agreements.
In SeptemberNovember 2001, the Company concluded a private placement of its common stock and October of 2000, we receivedwarrants, which yielded gross proceeds of $15.15 million in a private placement consisting$11 million. Investors purchased 4,902,481 shares of common stock and warrants. Investors purchased 2,532,368 shares1,225,623 warrants at a market value of common stock in two tranches: 1,800,000 shares at $6.00 per share and 732,638 shares at $5.94approximately $2.25 per share. For every fivefour 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 $7.50 forapproximately $2.70 per share. Based on the first tranchesales price of the common stock and $7.42 forwarrants in this private placement, the second tranche.conversion price of the Company's outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a deemed dividend of $285,725 has been reflected in the Company's consolidated statement of operations.
In October of 2000, weDecember 2001, the Company sold New Jersey Net Operating Losses pursuant to the New Jersey Economic Development Agency's Tax Transfer Program. As a result, we received $325,152$162,010, which is reflected as an income tax benefit in the statement of operations.
9
The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes filed as part of this report.
We make forward-looking statements in this report. Sometimes these statements contain words such as “anticipates,” “plans,” “intends,” “expects”"anticipates," "plans," "intends," "expects" and similar expressions to identify forward-looking statements. These statements are not guarantees of our future performance. Our business involves known and unknown risks, uncertainties and other factors, a numberwhich may cause our actual results, performance or achievements to be materially different from what we say in this report. We describe several of which are describedthese factors in our annual report on Form 10-K for the year ended June 30, 2000.2001. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We willmay not revise these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
We expect to incur substantial operatingadditional losses overin the next several years due to continuing expenses associated with ourfuture as we continue development of LeuTech for equivocal appendicitis and expand clinical trials for other indications of LeuTech and for PT-141, and continue research and development programs, including pre-clinical testing, clinical trialsof PT-141 and manufacturing.our MIDAS technology. Operating losses may fluctuate from quarter to quarter.quarter as a result of differences in the timing of when we incur expenses.
-10- We are an emerging pharmaceutical company committed to the discovery, development and commercialization of novel therapeutics. We do not currently offer any products for sale. We are concentrating our efforts on the following:
| • | MIDAS™ (Metal Ion-induced Distinctive Array of Structures) is our proprietary technology platform for drug design. Its systematic and rational design algorithms transform peptides into rigid peptidomimetics as well as small molecule drug leads. We believe that the use of the MIDAS technology increases the productivity of the drug discovery process, thereby eliminating the need for costly and time consuming steps such as the high-throughput screening of thousands of compounds, x-ray crystallography, NMR (nuclear magnetic resonance), CADD (computer assisted drug design), or other physical andin silico tools currently used for structure-based drug design. Several MIDAS derived compounds are now in preclinical development for the treatment of sexual dysfunction, obesity and inflammation. |
| • | PT-141 is a novel, patented, nasally administered peptide analog of the neuropeptide hormone (alpha)-MSH ((alpha) - melanocyte-stimulating hormone) for the treatment of sexual dysfunction. Our research suggests that PT-141 works through a mechanism involving the central nervous system. We began human clinical testing of PT-141 for erectile dysfunction in the first quarter of calendar 2001. We have completed various Phase 1 studies and anticipate initiating Phase 2 efficacy trials in early calendar year 2002. |
| • | LeuTech® is a radiolabeled monoclonal antibody that binds to white blood cells that collect at sites of infection, thus enabling the infection to be easily and rapidly imaged and detected with a gamma camera. The FDA Medical Imaging Drugs Advisory Committee unanimously voted that LeuTech is safe and effective for the diagnosis of appendicitis. The FDA reviewed the biologics license application (BLA) and determined that the efficacy and safety |
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| data are complete, yet additional manufacturing and process validation data were required prior to final approval. We are working to resolve the outstanding issues and anticipate filing an amendment to the BLA in the latter part of calendar year 2002. We are testing LeuTech for detection of other infections, including osteomyelitis (infection deep inside a bone), which is now in Phase 2 studies. |
Three and Six Month Periods Ended December 31, 20002001 Compared to Three and Six Month Periods Ended December 31, 1999.2000.
Grants and Contracts – ContractThere was no contract revenue related to the shared development costs of LeuTech pursuant to our collaboration agreement decreasedwith Mallinckrodt, Inc., recorded for the three and six months ended December 31, 2001 compared to $592,999$664,793 and $1,388,080,$1,459,874, respectively, for the three and six month periods ended December 31, 20002000. The decrease in contract revenue was attributable to the cap on shared development costs of LeuTech pursuant to the agreement. We had no revenue from grants recorded for the three and six months ended December 31, 2001 compared to $891,900$60,000 for the six months ended December 31, 2000.
License Fees and $2,141,900,Royalties – During the fiscal 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. Accordingly, the cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge which reflected the deferral portion of an up-front license fee received from Mallinkrodt, Inc. related to licensing of LeuTech recognized in the fiscal year ended June 30, 2000. For the three and six months ended December 31, 2001 and 2000, we recorded $41,667 and $83,334, respectively, of license revenue that was included in the cumulative effect adjustment as of July 1, 2000.
Research and development – Research and development expenses increased to $3,040,151 and $4,931,397, respectively, for the three and six month periods ended December 31, 1999. The decrease was attributable to lower development costs of LeuTech. Grant revenue increased to $71,794 and $131,794, respectively, for the three and six month periods ended December 31, 20002001 compared to $117,691, for the three and six month periods ended December 31, 1999.
License Fees and Royalties – We did not record any revenues from license fees for the three and six month periods ended December 31, 2000. We recorded $500,000 in license fees as revenue during the six month period ended December 31, 1999. We received these fees as a one-time, non-refundable payment pursuant to our collaboration agreement with Mallinckrodt, Inc.
Research and development – Research and development expenses decreased to $2,249,522 and $4,705,118, respectively, for the three and six month periods ended December 31, 2000 compared to $2,375,659 and $4,824,282, respectively, for the three and six month periods ended December 31, 1999.2000. The decreased research and development spending is related to lower development costs of LeuTech. We expect this decreaseincrease in research and development expenses is related to be temporary as we move forward in future quarters onthe expanding clinical trials and development efforts of PT-141 and our MIDAS technology, and incurthe further development costs associated with LeuTech.
General and administrative -– General and administrative expenses decreasedincreased to $1,015,263 and $1,915,161, respectively, for the three and six month periods ended December 31, 2000 compared to $843,473 and $1,550,049, respectively, for the three and six month periods ended December 31, 2000 compared2000. The increase in general and administrative expenses is mainly attributable to $1,536,250an increase in professional fees mainly related to legal fees and $2,305,684,our new website.
Interest income – Interest income decreased to $79,974 and $279,195, respectively, for the three and six month periods ended December 31, 1999. The decrease in general and administrative expenses is mainly attributable to the decrease in administrative salaries and the decrease in amortization of stock based compensation.
Interest income - Interest income increased2001 compared to $279,185 and $366,487, respectively, for the three and six month periods ended December 31, 2000. The decrease in interest income is mainly attributable to the time the funds were received, pursuant to our recent financing, in our account and available for investment purposes as opposed to timing of the September and October 2000 comparedfinancing.
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Net loss – Net loss increased to $115,074$3,772,441 and $186,389,$7,337,028, respectively, for the three and six month periods ended December 31, 1999. The increase in interest income is due to the additional funds available for investment purposes pursuant to our recent financing.
Interest expense – We recorded interest expense of $1,349 and $3,629 for the three and six month periods ended December 31, 20002001 compared to $625$1,783,537 and $25,861,$4,325,060, respectively, for the three and six month periods ended December 31, 1999.2000. The overall decrease in interest expenseincrease was due to the repayment of debt in the three months ended September 30, 1999. The slight increase for the three months ended December 31, 2000 over the three months ended December 31, 1999, isprimarily attributable to the loss on impairment of assets of $916,518 pursuant to our anticipated move to Cranbury, New Jersey. (See Note 3) as well as the increase in finance charges.
Net loss - Net loss decreased to $1,825,204 and $4,047,283, respectively, for the three and six month periods ended December 31, 2000 compared to $2,787,869 and $4,209,847, respectively,
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for the three and six month periods ended December 31, 1999. The decrease is due to the reduction of research and development expenses explained above and the tax benefit received through the sale of New Jersey Net Operating Losses pursuant to the New Jersey Economic Development Agency’s Tax Transfer Program.above.
Since inception, we have incurred net operating losses. As of December 31, 2000,2001, we had a deficit accumulated during development stage of $47,553,085.$61,442,067. We have financed our net operating losses through December 31, 20002001 by a series of debt and equity financings. At December 31, 2000,2001, we had cash and cash equivalents and investments of $16,835,341.$15,023,906.
For the six months ended December 31, 2000, the net increase in cash was $11,645,971.$3,567,482. Net cash used for operating activities was $3,654,204,$6,428,549, net cash providedused by investing activities was $334,875$212,845 and net cash provided by financing activities was $14,965,300.$10,208,876.
In September and October 2000,November 2001, we received gross proceeds of $15.15 million inconcluded a private placement of our common stock and warrants.warrants, which yielded gross proceeds of $11 million. Investors consisting of European financial institutions and other foreign accredited investors, purchased approximately 2.5 million4,902,481 shares of common stock in two tranches: 1,800,000 sharesand 1,225,623 warrants at $6.00 per share and 732,368 shares at $5.94a market value of approximately $2.25 per share. For every fivefour 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 $7.50 for the first tranche and $7.42 for the second tranche.approximately $2.70 per share. The net proceeds of approximately $14.1$10.2 million will be used primarily for general corporate purposes, especially forincluding the development and clinical trials of new products based on certain of our proprietary technologies.
We have three license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2001 - $250,000, 2002 - $300,000, 2003 - $300,000, 2004 - $200,000, 2005 - $200,000 and 20052006 - $200,000.
As of April 2000, During 2001, we entered into an amendmentagreement to our research facility’s lease which increased our rentable space from approximately 10,500a new facility totaling 28,000 square feet to approximately 15,800. Our aggregate future minimum lease payments escalate from approximately $203,000 until July 13, 2002 to $300,000 from July 14, 2002 through July 13, 2007.
As of December 7, 1999, we entered into a five-year lease on administrativein Cranbury, New Jersey that will combine both the research and development facility in Edison, New Jersey and the corporate offices in Princeton, New Jersey. Minimum future lease payments range from approximately $187,374 in year one to approximately $202,070 in year five. We have entered into a sublease agreement with Derma Sciences, Inc. on our previous administrative offices. Underanticipate occupying the sublease agreement Derma reimburses us 100% of all expenses consisting of rent, utilities and property taxes.
On August 16, 1999, we entered into a collaboration agreement with Mallinckrodt, a large international healthcare products company, to jointly develop and market LeuTech. In October 2000, Tyco International, Ltd. acquired Mallinckrodt. Under the terms of the agreement, Mallinckrodt:
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In March 1997, we entered into a ten-year lease on research and development facilities in Edison, New Jersey, which commenced August 1, 1997. Minimum future lease payments escalate from approximately $116,000 per year to $200,000 per year after the fifth year of the lease term. The lease will expire in fiscal year 2007.
We are and expect to continue actively searching for certain products and technologies to license or acquire, now ornew space 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 insecond quarter of calendar year 2002. Our anticipated cash outlay related to the future.move is projected at $1.6 million.
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 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. We expect our existing capital resources including the funds we received in September and October 2000, will be adequate to fund our projected operations through December 31, 2001,calendar year 2002, based on current expenditure levels.
We anticipate incurring additional losses over at least the next several years, and we expect our losses to increase as we expand our research and development activities relating to LeuTech, PT-141and our MIDAS PT-141 and LeuTech.technology. 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
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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.
Interest Rate Risk. Our exposure to market risk related to changes in interest rates relates primarily to our investment portfolio. We invest in instruments that meet high credit quality standards, and we limit the amount of credit exposure as to any one issue, issuer and type of investments.
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As of December 31, 2000,2001, our cash and cash equivalents and investments consisted of $16,835,341,$15,023,906, most of which were short term investments having aan original maturity of less than one year.three months. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short termshort-term fluctuations in interest rates would materially affect the value of our securities.
On March 14, 2000, we announced that we would not be extending the merger consummationclosing date of March 31, 2000 for our previously announced proposed merger with San Diego-based Molecular Biosystems, Inc. and wouldwill not be proceeding with the merger. Our decision not to proceed with the merger was based on management’s view that the merger was not in the best interests of our stockholders.
On or about April 28, 2000, Molecular Biosystems commenced a legal action against us and against Evergreen Merger Corporation, oura wholly-owned shell subsidiary of the Company, in the Superior Court of the State of Delaware, County of New Castle. In the complaint, Molecular Biosystems seeks damages against us and Evergreen arising from the alleged improper termination of the merger agreement dated November 11, 1999, among Molecular Biosystems, Palatin and Evergreen. Under the merger agreement, Evergreen would have merged with and into Molecular Biosystems, which would have become a wholly-owned subsidiary of ours.
As a consequence of the claims alleged in the complaint, Molecular Biosystems contends that it is entitled to an award of damages against us and Evergreen in amounts to be determined at trial, but in any event, at least equal to $1,765,305. This figure represents the amount of a “breakup fee” of $1,000,000 provided for in the merger agreement and $765,305 for the purported costs and expenses allegedly incurred by Molecular Biosystems in connection with the proposed merger. In addition, Molecular Biosystems seeks consequential damages in an unstated amount plus interest and Molecular Biosystems’ costs and expenses of the action.
In our response filed in June of 2000, we have denied the material allegations. Management believes that we have good and meritorious defenses to the action and we intend vigorously to defend the action. On January 3, 2001, Alliance Pharmaceutical Corp. (NASDAQ: ALLP) announced that it had completed its acquisition of Molecular Biosystems.
We are involved in various claims and This litigation arisingis currently in the normal coursediscovery and deposition phase.
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In a private placement of common stock and warrants, which concluded in September and October 2000,November 2001, we sold 2,532,3684,902,481 shares of our $.01 par value common stock toand 1,225,623 warrants at a totalmarket value of nine investors in two tranches: 1,800,000 shares at $6.00 per share and 732,368 shares at $5.94approximately $2.25 per share. The gross proceeds were approximately $15.15 million and the net proceeds were approximately $14.1 million. For every fivefour shares purchased, the investors also received an immediately exercisablea five-year
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warrant. Each warrant entitles the purchaser to purchase one share of common stock. The warrants for 360,000 shares issued in the first tranche havestock at an exercise price of $7.50approximately $2.70 per share,share. The gross proceeds totaled $11 million and the warrants for 146,472 shares issued in the second tranche have an exercise price of $7.42.net proceeds totaled $10.2 million. We made the private placement solely to foreign and domestic accredited investors pursuant to RegulationRegulations D and S under the Securities Act of 1933. The investors represented to us that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants bear restrictive legends.
In connection with the private placement, we paid a finder's feefinder fees to third parties in the aggregate of $1,060,391$771,879 and issued five-year warrants toin the finderaggregate to purchase 216,000356,060 shares of common stock at $6.60 per share and 87,884 shares of common stock at $6.53approximately $2.70 per share.
In December 2000 we issued warrants to purchase 15,000 shares of our $.01 par value common stock to the Wistar Institute of Anatomy and Biology, as part of the consideration for an agreement with Wistar to amend a technology license which Wistar previously granted to us. The exercise price of the warrants is $4.00 per share, and they expire on December 15, 2010. We issued these warrants pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. The issuance was part of a private agreement between Palatin and Wistar and did not involve any public offering.
None.
At our annual meeting of stockholders which convened on November 15, 2000,27, 2001, the stockholders:
| • | elected |
| • | ratified the appointment of Arthur Andersen LLP as our independent public accountants for the fiscal year ending June 30, |
Common stock and Series A convertible preferred stock voted as a single class on all matters. The following tables show the votes cast.
| Election of directors: | For | Witheld Authority | Broker Non-votes |
| Carl Spana, Ph.D. | 7,574,319 | 33,666 | 0 |
| John K.A. Prendergast, Ph.D. | 7,574,319 | 33,666 | 0 |
| Robert K. deVeer, Jr. | 7,574,319 | 33,666 | 0 |
| Kevin S. Flannery | 7,574,319 | 33,666 | 0 |
| Zola P. Horovitz, Ph.D. | 7,574,319 | 33,666 | 0 |
| Robert I. Taber, Ph.D. | 7,574,319 | 33,666 | 0 |
| Perry B. Molinoff, M.D. | 7,574,319 | 33,666 | 0 |
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ContentsWithheld Broker Election
| Item: | For | Against | Abstentions | Broker Non-votes |
| Ratification of accountants | 7,560,222 | 37,920 | 9,843 | 0 |
Abstentions and broker non-votes were counted neither for nor against approving the amendment toelection of officers or the stock option plan, but had no effect on the other matters.ratification of accountants.
None.
(a) Exhibits filed with this report:
| None. |
(b) Reports on Form 8-K
| None. |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Palatin Technologies, Inc. (Registrant) | ||
| Date: February 14, 2001 | /s/ Carl Spana Carl Spana, Ph.D. President and Chief Executive Officer | |
| Date: February 14, 2001 | /s/ Stephen T. Wills Stephen T. Wills Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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