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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1997
or
[X] 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
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PALATIN TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4078884
(I.R.S. Employer Identification No.)
214 Carnegie Center - Suite 100
Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (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.
[X] Yes [ ] No
As of May 14, 1997, 11,825,855 shares of the Issuer's common stock, par
value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
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PALATIN TECHNOLOGIES, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS -- As of March 31, 1997
(unaudited) and June 30, 1996 (audited) Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) --
For the Three and Nine Months Ended March 31, 1996 and
March 31, 1997 and the Period from January 28, 1986
(Commencement of Operations) through March 31, 1997 Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) --
For the Nine Months Ended March 31, 1996 and March 31,
1997 and the Period From January 28, 1986 (Commencement
of Operations) through March 31, 1997 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Page 15
Item 2. Change in Securities Page 15
Item 5. Other Information Page 16
Item 6. Exhibits and Reports on Form 8-K Page 17
Signatures Page 18
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 1997 June 30, 1996
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,863,237 $ 6,791,300
Accounts receivable 267,870 4,574
Prepaid expenses and other 59,137 66,430
------------ ------------
Total current assets 5,190,244 6,862,304
Equipment, net of accumulated depreciation of
$222,174 and $183,535 as of March 31, 1997 and
June 30, 1996, respectively 186,008 96,354
Intangibles, net of accumulated amortization of
$98,782 and $91,336 as of March 31, 1997 and
June 30, 1996, respectively 75,940 82,547
------------ ------------
$ 5,452,192 $ 7,041,205
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216,572 $ 214,424
Accrued compensation owed to employees - 78,084
Accrued expenses 311,048 655,197
Current portion of long-term financing, including
accrued interest of $352,829 and $38,912 as of
March 31, 1997 and June 30, 1996, respectively 936,950 311,695
Senior bridge notes, including related party
transaction of $110,000 as of June 30, 1996 - 1,100,000
------------ ------------
Total current liabilities 1,464,570 2,359,400
Long-term financing, including accrued interest
of $0 and $273,339 as of March 31, 1997 and
June 30, 1996, respectively 968,527 1,727,619
Deferred license revenue 550,000 -
Notes payable to stockholders, including accrued
interest of $41,979 and $35,979 as of
March 31, 1997 and June 30, 1996, respectively 121,979 115,979
------------ ------------
Total liabilities 3,105,076 4,202,998
------------ ------------
Stockholders' equity:
Preferred stock, $.01, and 2,000,000 shares
authorized, as of March 31, 1997 and June 30, 1996;
and 30,630 and no shares issued as of March 31, 1997
and June 30, 1996, respectively 2,680,591 -
Common stock, $.01, and 25,000,000 shares authorized,
as of March 31, 1997 and June 30, 1996; and
11,753,978 and 11,538,777 issued as of March 31, 1997
and June 30, 1996, respectively 117,540 115,388
Treasury stock, 1,229 shares of Common Stock (1,667) (1,667)
Additional paid-in capital 11,018,039 10,804,394
Common stock earned but not issued 279,278 53,030
Unamortized deferred compensation (88,221) -
Deficit accumulated during the development stage (11,658,444) (8,132,938)
------------ ------------
Total stockholders' equity 2,347,116 2,838,207
------------ ------------
$ 5,452,192 $ 7,041,205
============ ===========
The accompanying notes to consolidated financial statements are an integral part of these balance
sheets.
Page 3
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Inception
Three Months Ended March 31, Nine Months Ended March 31, (January 28, 1986)
____________________________ ___________________________ through
1997 1996 1997 1996 March 31, 1997
_____________ ____________ ___________ ___________ ____________________
REVENUES:
Grants and contracts $ 267,862 $ - $ 267,862 $ - $ 3,128,374
License fees and royalties 350,000 - 350,000 - 684,296
Sales - 12,240 22,184 20,971 318,917
------------ ----------- ---------- ----------- ------------
Total revenues 617,862 12,240 640,046 20,971 4,131,587
------------ ----------- ---------- ----------- ------------
EXPENSES:
Research and development 1,050,400 242,212 2,300,669 557,955 6,697,077
General and administrative 793,370 405,111 1,740,125 1,107,061 6,759,086
Restructuring charge - 24,309 - 24,309 284,000
Net intangibles write down - - - - 259,334
------------ ----------- ----------- ----------- ------------
Total operating expenses 1,843,770 671,632 4,040,794 1,689,325 13,999,497
------------ ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSES):
Other income 36,330 - 159,023 - 230,403
Interest expense (84,927) (143,465) (301,200) (348,121) (1,344,386)
Placement agent commissions
and fees on debt offering - (101,541) - (135,341) (168,970)
Merger costs 17,419 (9,611) 17,419 (9,611) (507,581)
------------ ----------- ----------- ----------- ------------
Total other income
(expenses) (31,178) (254,617) (124,758) (493,073) (1,790,534)
------------ ----------- ----------- ----------- ------------
NET LOSS (1,257,086) (914,009) (3,525,506) (2,161,427) (11,658,444)
PREFERRED STOCK DIVIDEND (540,529) - (540,529) - (540,529)
------------ ----------- ----------- ----------- ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (1,797,635) $ (914,009) $(4,066,035) $(2,161,427) $(12,198,973)
============ =========== =========== =========== ============
Weighted average number of common
shares outstanding 11,745,837 1,294,792 11,618,271 1,290,451 1,948,514
========== ========= ========== ========= =========
Net loss per common share $ (0.15) $ (0.71) $ (0.35) $ (1.67) $ (6.26)
============ =========== =========== =========== ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 4
PALATIN TECHNOLOGIES, INC
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended Inception
March 31, (January 28, 1986)
_____________________ through
1997 1996 March 31, 1997
-------------- -------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,525,506) $ (2,161,428) $ (11,658,444)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 46,085 58,788 354,659
Interest expense on related-party debt 6,000 6,000 59,387
Accrued interest on long-term financing 226,248 247,407 1,022,286
Accrued interest on short-term financing (100,000) 93,510 7,936
Intangibles and equipment write down - - 278,318
Deferred license revenue 550,000 - 550,000
Accretion of compensatory options and warrants 116,078 - 116,078
Equity and notes payable issued for expenses - - 296,047
Settlement with consultant - - (28,731)
Changes in certain operating assets and liabilities:
Accounts receivable (263,295) (2,999) (267,869)
Prepaid expenses and other 7,293 (12,761) (59,137)
Intangibles (839) (15,833) (428,177)
Accounts payable 2,148 (82,329) 215,672
Accrued compensation owed to employees (78,084) 27,126 16,548
Accrued expenses (344,149) 27,097 339,779
-------------- -------------- ---------------
Net cash used for operating activities (3,358,021) (1,815,422) (9,185,648)
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (128,293) (9,513) (463,522)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party - - 302,000
Payments on notes payable, related party - (302,000) (309,936)
Proceeds from senior bridge notes payable - 1,850,000 1,850,000
Payments on senior bridge notes (1,000,000) - (1,850,000)
Proceeds from notes payable and long-term financing - - 1,951,327
Payments on notes payable and long-term financing (133,837) (45,000) (323,898)
Proceeds from paid-in capital from common
stock warrants 9,999 - 109,999
Proceeds from common stock, stock option
issuances and preferred stock, net 2,682,089 305,617 12,784,581
Purchase of treasury stock and fractional shares - - (1,667)
-------------- -------------- ---------------
Net cash provided by financing activities 1,558,251 1,808,617 14,512,407
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH (1,928,063) (16,318) 4,863,237
CASH and cash equivalents, beginning of period 6,791,300 46,768 -
-------------- -------------- ---------------
CASH and cash equivalents, end of period $ 4,863,237 $ 30,450 $ 4,863,237
============== ============== ===============
The accompanying notes to consolidated financial statements are
an integral part of these statements.
Page 5
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
For the Nine Months Ended March 31, 1997 and 1996
(1) NATURE OF BUSINESS
Through its wholly-owned subsidiary RhoMed Incorporated ("RhoMed"),
Palatin Technologies, Inc. (the "Company") is a development-stage
biopharmaceutical company dedicated to developing and commercializing products
and technologies for diagnostic imaging, cancer therapy and ethical drug
development utilizing peptide, monoclonal antibody and radiopharmaceutical
technologies. The Company was incorporated under the laws of the State of
Delaware on November 21, 1986. Since June 25, 1996, the effective date of the
merger (the "Merger") of a wholly-owned subsidiary of the Company with and
into RhoMed, all outstanding shares of RhoMed equity securities were exchanged
for the Company's common stock, $.01 par value per share (the "Common Stock").
The business of RhoMed represents the on-going business of the Company.
As a result of the Merger, RhoMed became a wholly-owned subsidiary of the
Company, with the holders of RhoMed preferred stock and RhoMed common stock
(including the holders of "RhoMed Derivative Securities" as hereafter defined)
receiving an aggregate of approximately 96% interest in the equity securities
of the Company on a fully-diluted basis. Additionally, all warrants and
options to purchase common stock of RhoMed outstanding immediately prior to
the Merger (the "RhoMed Derivative Securities"), including without limitation,
any rights underlying RhoMed's qualified or nonqualified stock option plans,
were automatically converted into rights upon exercise to receive the
Company's Common Stock in the same manner in which the shares of RhoMed common
stock were converted. Since the former stockholders of RhoMed retained more
than a 50% controlling interest in the surviving company (Palatin
Technologies, Inc.), the Merger was accounted for as a reverse merger. The
historical financial statements prior to June 25, 1996, are those of RhoMed,
except that the net loss per common share has been stated on an as if
converted basis.
Since its inception, RhoMed has devoted substantially all of its efforts
and resources to the research and development of its technology. RhoMed has
experienced operating losses in each year since its inception and, as of March
31, 1997, the Company, including its wholly-owned subsidiary RhoMed, had a
deficit accumulated during the development stage of $11,658,444. The Company
expects to incur additional operating losses over the next several years and
expects cumulative losses to increase as the Company's research and
development and clinical testing efforts continue and expand. The ultimate
completion of the Company's development projects is contingent upon a number
of factors, including the successful completion of technology and product
development, obtaining required regulatory approvals and additional financing
and, ultimately, successfully commercializing its products and achieving
profitable operations.
Page 6
(2) BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosure normally included in the Company's audited annual financial
statements has been condensed or omitted in the Company's interim financial
statements. In the opinion of the Company, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 1997 and
June 30, 1996, and the results of operations for the three and nine month
periods ended March 31, 1997 and 1996 and cash flows for the nine months ended
March 31, 1997 and 1996, and for the period from inception (January 28, 1986)
to March 31, 1997. The results of operations for the interim period 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, 1997.
The accompanying financial statements and the related notes should be
read in conjunction with the Company's audited financial statements for the
ten months ended June 30, 1996 and the fiscal years ended August 31, 1995 and
1994 filed with the Company's Form 10-KSB for the transition period from
September 1, 1995 to June 30, 1996.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Research and Development Costs -- The costs of research and development
activities are expensed as incurred.
Net Loss per Common Share -- Net loss per common share is calculated
based upon the weighted average number of shares of Common Stock, on an as if
converted basis, outstanding during each period. All options and warrants
were excluded in the calculation of weighted average shares outstanding since
their inclusion would have had, in the aggregate, an anti-dilutive effect.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings per
Share." The statement is effective for financial statements for periods
ending after December 15, 1997, and changes the method in which earnings per
share will be determined. Adoption of this statement by the Company will not
have a material impact on earnings per share.
Revenue Recognition -- The Company recognizes revenue as follows: grants
and contracts - at the time such related expenses are incurred in compliance
with contractual terms; license fees and royalties - ratably over the term of
the license or royalty agreement; and sales - upon shipment of the product.
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.
Page 7
(4) SENIOR BRIDGE NOTES:
On July 28, 1995, the Board of Directors of RhoMed authorized an offering
of up to 40 units at $25,000 per unit, with each unit consisting of a $25,000
face amount Senior Bridge Note and a Class A Warrant to purchase 75,000 shares
of RhoMed common stock (equivalent to 13,285 shares of Common Stock) at an
exercise price of $.01 per share (the "Class A Note and Warrant Offering").
The Senior Bridge Notes sold in the Class A Note and Warrant Offering (the
"Senior Bridge Notes") bore interest at 1% per month, and were payable, with
accrued interest, one year from the date of issuance. All of the 40 Class A
Note and Warrant Offering units were purchased with proceeds prior to
commissions and expenses of $1,000,000. In August and September of 1996, the
Senior Bridge Notes sold in the Class A Note and Warrant Offering were repaid
in full, totaling $1,000,000 of principal and $120,000 of accrued interest.
(5) SERIES A PREFERRED STOCK:
On December 2, 1996, the Company commenced an offering of units of Series
A Preferred Stock (the "Series A Offering") at a price of $100,000 per unit,
with each unit consisting of 1,000 shares of Series A Preferred Stock. As of
March 31, 1997, the Company had sold 30.63 units, representing 30,630 shares
of Series A Preferred Stock, for net proceeds to the Company of $2,680,591,
after deducting commission and other expenses of the Series A Preferred Stock
offering. The final closing on the Series A Offering was effective as of May
9, 1997, with the Company having sold an aggregate total of 137.78 units,
representing 137,780 shares of Series A Preferred Stock, for gross proceeds of
$13,778,000 and net proceeds to the Company of approximately $11,800,000,
after deducting commission and other expenses of the Series A Offering.
Each share of Series A Preferred Stock is convertible, at the option of
the holder thereof, into shares of Common Stock at a conversion price of
$1.24. The $1.24 represents a discount of 15% to the average closing bid
price of the Common Stock for the twenty (20) consecutive trading days
immediately preceding the final closing. The 15% discount has been reflected
in the Company's consolidated statement of operations as a dividend to Series
A Preferred Stock of $540,529. The Series A Preferred Stock also contains a
reset mechanism (see Part II, Item 2, "Change in Securities"). The Series A
Preferred Stock may be mandatorily converted by the Company, if, commencing
May 9, 1998, the closing bid price of the Common Stock exceeds 200% of the
then applicable conversion price for at least twenty (20) trading days in any
thirty (30) consecutive trading day period ending three (3) days prior to the
date of conversion.
In the event that the Company does not, by February 3, 1998, increase its
authorized capital to at least that number of shares of Common Stock necessary
for issuance upon exercise of all Series A Preferred Stock sold in the Series
A Offering, the Company has agreed that the holders of Series A Preferred
Stock shall be entitled, at the option of each holder to either: (i) require
the Company to repurchase all shares of Series A Preferred Stock then held by
such holder at $100.00 per share of Series A Preferred Stock, or (ii) require
the Company to purchase at fair market value that portion of the shares which
would have been issuable to the holder upon conversion but which the Company
was unable to issue due to the lack of authorized and reserved shares of
Common Stock. The fair market value per share of Common Stock shall be paid
in cash, or, if the Company does not have sufficient cash, then with secured
demand notes, the fair market value shall mean the closing bid price per share
of the Common Stock as quoted on the OTC Bulletin Board for the trading day
immediately preceding the conversion.
Page 8
As of March 31, 1997, the Company had sufficient Common Stock to convert
all Series A Preferred Stock outstanding. If the Company does not have a
sufficient number of authorized shares of Common Stock available for
conversion of all outstanding Series A Preferred Stock prior to the issuance
of the Company's financial statements for the fiscal year ending June 30,
1997, the Company will, as appropriate, classify the amount of Series A
Preferred Stock in excess of Common Stock available for conversion outside of
stockholders' equity.
The securities offered in the Series A Offering have not been registered
under the Securities Act of 1933, as amended, and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration requirements. The Company agreed to file, no later than July 8,
1997, a registration statement under the Securities Act to permit resales
of the Common Stock issuable upon conversion of the Series A Preferred Stock.
The Company is in the process of preparing such registration statement and
intends to file it as soon as practicable.
(6) EQUIPMENT:
Equipment consists of the following at March 31, 1997 and June 30, 1996:
March 31, June 30,
1997 1996
---------- --------
Office equipment $ 257,470 $ 202,960
Laboratory equipment 83,285 76,929
Leasehold improvements (not placed
in service) 67,427 -
---------- ---------
Equipment at cost 408,182 279,889
Less: Accumulated depreciation 222,174 183,535
---------- ---------
$ 186,008 $ 96,354
=========== ==========
(7) COMMITMENTS AND CONTINGENCIES:
Leases -- The Company leases certain of its facilities and equipment
under noncancellable operating leases. In October 1996, the lease on the
facility in Albuquerque, New Mexico was extended from March 31, 1997 until
August 31, 1997, and in March 1997, the lease was amended to provide for
optional extensions through December 31, 1997. In March 1997, the Company
entered into a ten-year lease on research and development facilities in
Edison, New Jersey, with the lease term expected to commence in July 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.
Page 9
Merger Costs -- In conjunction with the Merger which occurred on June 25,
1996, costs of $525,000 were charged to operations for the ten months ended
June 30, 1996. With no additional Merger costs anticipated, the remaining
accrual of $17,419 was written off as of March 31, 1997.
Restructuring Charge -- In conjunction with the Company's decision to
consolidate and relocate its research and development facilities and executive
offices in the New Jersey area, the Company established a restructuring charge
of $284,000. The restructuring charge to date represents severance costs of
$115,000 and facility closing expenses of $169,000. Through March 31, 1997,
eight research and development and administration and management employees had
been severed. Facility closing expenses consist primarily of costs related to
lease termination and fixed asset disposals. Included in accrued expenses at
March 31, 1997, is $142,736 of remaining restructuring charge.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto filed as part of this
Form 10-QSB. Unless otherwise indicated herein, all references to the Company
include Palatin Technologies, Inc. and its wholly owned subsidiary, RhoMed.
Certain statements in the Company's Form 10-QSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
express or implied by such forward looking statement.
The Company's business is subject to significant risks, including the
uncertainties associated with product development of pharmaceutical products,
problems or delays with clinical trials, failure to receive or delays in
receiving regulatory approval, lack of enforceability of patents and
proprietary rights, industry capacity, industry trends, competition, material
costs and availability, changes in business strategy or development plans,
quality of management, availability of capital, availability of qualified
personnel, the effect of government regulation and other risks detailed in the
Company's Commission filings, including the Company's Form 10-KSB for the
transition period from September 1, 1995 to June 30, 1996. The Company
expects to incur substantial operating losses over the next several years due
to continuing expenses associated with its research and development programs,
including pre-clinical testing, clinical trials and manufacturing. Operating
losses may also fluctuate from quarter to quarter as a result of differences
in the timing of expenses incurred.
PAGE 10
RESULTS OF OPERATIONS
Three and Nine Month Periods Ended March 31, 1997 Compared to Three and
Nine Month Periods Ended March 31, 1996. During the three month period ended
March 31, 1997, the Company discontinued the manufacture and sale of RhoChek,
the sole product sold by the Company, due to insufficient sales. There were
no revenues from the sale of products in the three month period ended March
31, 1997, compared to $12,240 in the three month period ended March 31, 1996.
Revenues in the nine month period ended March 31, 1997 were $22,184 compared
to $20,971 in the nine month period ended March 31, 1996. The Company
anticipates no additional revenues from the sale of products in the current
fiscal year.
In December 1996, the Company entered into a License Option Agreement
("Option Agreement") with Nihon Medi-Physics Ltd. ("Nihon"), pursuant to which
the Company received, in January 1997, an initial payment of $900,000 net of
Japanese withholding taxes of $100,000 (the "Initial Payment"). The Company
has accounted for the Initial Payment in the period ended March 31, 1997 by
recognizing license fee revenue of $350,000 and deferred license fee revenue
of $550,000. The deferred license fee revenue will be recognized if a license
agreement is consummated with Nihon or eliminated if the Company is required
to repay certain monies to Nihon under the Option Agreement. There were no
revenues from license fees or royalties in the three and nine month periods
ended March 31, 1996.
During the three month period ended March 31, 1997, the Company had four
Phase I grants under the Small Business Innovative Research program active
with the National Institutes of Health of the Department of Health and Human
Services. Grant revenue from these grants was $267,862 in the three month
period ended March 31, 1997, compared to no revenues in the three month period
ended March 31, 1996. Grant revenue in the nine month period ended March 31,
1997 was $267,862, compared to no revenues in the nine month period ended
March 31, 1996. The Company has approximately $100,000 in additional grant
revenue which can be drawn under the four Phase I grants.
Research and development expenses increased to $1,050,400 for the three
month period ended March 31, 1997 from $242,212 for the three month period
ended March 31, 1996, with expenses of $2,300,669 for the nine month period
ended March 31, 1997 compared to $557,955 for the nine month period ended
March 31, 1996. The increase in expenses for both the current three and nine
month periods is attributable to expansion in the scale of the Company's
research and development operations, which expanded following completion of a
Common Stock offering in June 1996. The Company substantially increased
research and development spending, primarily relating to development of the
LeuTech product for diagnostic imaging of infections, including increased
expenses for manufacturing scale-up, consulting and clinical trials, and also
relating to research expenses on the Company's MIDAS metallopeptide
technology. The Company expects research and development expenses to continue
to increase in future quarters as the Company expands manufacturing efforts
and initiates clinical trials on the LeuTech product and significantly expands
its efforts to develop the MIDAS metallopeptide technology including the
hiring of scientists and the acquisition of equipment and supplies in
conjunction with completion of the new research and development facility in
Edison, New Jersey.
Page 11
General and administrative expenses increased to $793,370 for the three
month period ended March 31, 1997 from $405,111 for the three month period
ended March 31, 1996, and increased to $1,740,125 for the nine month period
ended March 31, 1997 from $1,017,061 for the nine month period ended March 31,
1996. The increase is attributable primarily to the hiring of certain key
executives, the leasing of executive offices in New Jersey, and increased
travel and consulting expenses. General and administrative expenses were also
affected by the amortization of the value of options and warrants issued to
consultants. General and administrative expenses are expected to remain
approximately at current levels through the remainder of fiscal year 1997.
Interest income was $36,330 and $159,023 for the three and nine month
periods ended March 31, 1997, compared with no interest income for the three
and nine month periods ended March 31, 1996. The interest income is primarily
the result of interest on net proceeds from a Common Stock offering of
approximately $8,400,000 completed in June 1996. Interest income is expected
to increase in coming quarters as a result increased cash balances from the
proceeds of the Series A Offering.
Interest expenses decreased to $84,927 for the three month period ended
March 31, 1997 compared with $143,465 for the three month period ended March
31, 1996, and decreased to $301,200 from $348,121 for the nine month periods
ended March 31, 1997 and 1996 respectively. Interest expense for the nine
months ending March 31, 1997, is comprised of (i) interest on long-term
financing provided by Aberlyn Holding Company, the principal and accrued
interest of which totaled $1,905,477, (ii) interest on notes payable to
stockholders, the principal amount of which is $80,000, and (iii) interest on
Senior Bridge Notes which were repaid in full in the quarter ended September
30, 1996. Under an agreement with Aberlyn Holding Company, the accrued
interest as of April 30, 1997, totaling $303,171, will be converted to Common
Stock at a discounted rate, with the Company obligated to issue 255,641 shares
of Common Stock in payment of accrued interest. As a result of repayment by
the Company of the Senior Bridge Notes, the principal amount of which was
$1,000,000, interest expense is expected to remain at current levels for the
balance of the current fiscal year, and substantially below the levels for the
prior fiscal year.
Under an agreement with Aberlyn Holding Co., Inc. and its affiliates
(collectively "Aberlyn"), effective April 30, 1997 the Company will be obligated
to issue Common Stock, valued at the rate of 75% of the average per share
closing price for the twenty trading days immediately preceding April 30, 1997,
in payment of accrued interest from June 1, 1996 through April 30, 1997 of
$303,171. The 25% discount to market value of Common Stock will represent
additional interest payable. However, management does not anticipate the
additional interest will have a material impact on the financial position or
operations of the Company.
Net loss increased to $1,257,086 for the three month period ended March
31, 1997 compared with $914,009 for the three month period ended March 31,
1996, and increased to $3,525,506 for the nine month period ended March 31,
1997 compared to $2,161,427 for the nine month period ended March 31, 1996.
The net loss per share decreased in both the three and nine month period ended
March 31, 1997 compared to the prior year, a result related to the substantial
increase in the weighted average shares outstanding. There were 11,745,837
shares of Common Stock outstanding in the three month period ended March 31,
1997 compared to 1,294,792 shares outstanding in the three month period ended
March 31, 1996, and 11,618,271 shares outstanding in the nine month period
ended March 31, 1997 compared to 1,290,451 shares outstanding in the nine
month period ended March 31, 1996. The increase in the shares outstanding is
primarily the result of issuance of 7,664,844 shares of Common Stock in
connection with the sale of Common Stock completed in June 1996.
Page 12
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has incurred net operating losses and,
as of March 31, 1997, had an accumulated deficit of $11,658,444. The Company
has financed its net operating losses through March 31, 1997 by a series of
debt and equity financings.
At March 31, 1997, the Company had cash and cash equivalents of
$4,863,237. The cash is cash equivalents which are composed of: (i) the
remaining net proceeds from the Company's offering of Common Stock in June
1996 which totaled approximately $8,400,000, (ii) the receipt from Nihon of
$900,000 pursuant to the Agreement, and (iii) the net proceeds from the
Company's Series A Offering of $2,680,591 as of March 31, 1997.
For the nine months ended March 31, 1997, the net decrease in cash
amounted to $1,928,063. Cash used for operating activities was $3,358,021,
net cash used for investing activities was $128,293, and cash provided by
financing activities was $1,558,251, primarily from the proceeds from Series A
Offering less repayment of the Senior Bridge Notes.
On December 2, 1996, the Company commenced the Series A Offering at a
price of $100,000 per unit, with each unit consisting of 1,000 shares of
Series A Preferred Stock. As of March 31, 1997, the Company had sold 30.63
units, representing 30,630 shares of Series A Preferred Stock, for net
proceeds to the Company of $2,680,591, after deducting commission and other
expenses of the Series A Offering. The final closing on the Series A Offering
was effective as of May 9, 1997, with the Company having sold an aggregate
total of 137.78 units, representing 137,780 shares of Series A Preferred
Stock, for net proceeds to the Company of approximately $11,800,000, after
deducting commission and other expenses of the Series A Offering.
Pursuant to the Option Agreement, Nihon can maintain its option to
license certain products based on the Company's MIDAS metallopeptide
technology provided Nihon makes certain milestone payments based on progress
in product development. Nihon may exercise its right to negotiate a license
at any time upon notice and payment of additional monies to the Company. In
the event that the parties cannot agree on terms of a license agreement, then
the Company will be required to repay certain monies to Nihon. There can be
no assurance that the Company and Nihon will ever enter into a definitive
license agreement, that additional payments provided for in the Option
Agreement will be made, or that the strategic alliance between the Company and
Nihon will result in the development or commercialization of any product.
Page 13
Pursuant to the terms of the notes payable to stockholders ("Notes"),
repayment of principal and interest is required 30 days after the completion
of a fiscal year when the Company has net assets of at least $5,000,000.
In March 1997, the Company entered into a ten-year lease on research and
development facilities in Edison, New Jersey, with the lease term expected to
commence in July 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. The Company
anticipates that the cost of tenant improvements, net of the landlord's
contribution, and acquisition of laboratory equipment may exceed $1,500,000.
Commencing May 1997, the Company's monthly payments on long-term
financing provided by Aberlyn Holding Company will increase to $91,695,
representing payment of current interest and principal. The final monthly
payment is scheduled to be made in April 1999.
The Company's future capital requirements depend on numerous factors
which cannot be quantified, including continued progress in its research and
development activities, progress with pre-clinical studies and clinical
trials, prosecuting and enforcing patent claims, technological and market
developments, the ability of the Company to establish product development
arrangements, the cost of manufacturing scale-up, effective marketing
activities and arrangements, and licensing or acquisition activity.
The Company has been seeking and expects to continue to seek to license
or acquire certain products and technologies. If the Company is successful in
acquiring a product or technology, substantial funds may be required for such
acquisition and subsequent development or commercialization. To date, the
Company has not completed an acquisition and there can be no assurance that
any acquisition will be consummated in the future.
The Company believes that the net proceeds from the Series A Offering of
$11,800,000 as of May 9, 1997 and the Initial Payment received under the
Option Agreement, together with its other cash, is sufficient to fund the
Company's projected debt obligations and fund projected operations through
fiscal year 1998.
The Company anticipates incurring additional losses over at least the
next several years, and such losses are expected to increase as the Company
expands its research and development activities relating to its MIDAS
metallopeptide technology and its radiolabeling technology. To achieve
profitability, the Company, alone or with others, must successfully develop
and commercialize its technologies and products, conduct pre-clinical studies
and clinical trials, obtain required regulatory approvals and successfully
manufacture, introduce and market such technologies and 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.
Page 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In Item 3 of Part I of the Company's report on Form 10-KSB for the
transition period from September 1, 1995 to June 30, 1996, the Company
disclosed a complaint filed by the Company and one of its subsidiaries,
Interfilm Technologies, Inc., in the Supreme Court of the State of New York,
County of New York, against Sony Corporation of America and certain of its
affiliates and subsidiaries (collectively, "Sony") for breach of contract and
breach of duty of good faith and fair dealing (the "IT Litigation"). The
Company has recently become aware that in November 1996, Sony asserted two
counterclaims in the IT Litigation, generally alleging that the Company's
pre-Merger executives misrepresented their qualifications and breached the
Sony-IT Agreement by not recruiting sufficient exhibitors. The complaint and
counterclaims relate solely to the business activities of the Company prior
to the Merger. The IT Litigation is under the control of and at the expense
of an unaffiliated limited liability partnership (the "Partnership"), and is
solely for the benefit of the Company's pre-Merger stockholders as of June
21, 1996. A denial of the material allegations in the counterclaims has been
filed on behalf of the Company in the IT Litigation. The Company has determined
to more closely monitor the IT Litigation. The Partnership is obligated to
indemnify the Company from certain claims, including all liabilities and
reasonable expenses and costs that the Company may incur as a result of the
IT Litigation. The Company has incurred no out-of-pocket expenses in connection
with the IT Litigation. The Company believes that the Partnership's assets
consist primarily of the IT Litigation, certain intellectual property assets
and cash assets of approximately $75,000, with liabilities (primarily
contingent on a recovery in the IT Litigation) totaling approximately
$731,500. Based upon the opinion of the Company's counsel of record in the
IT Litigation, the Company believes that the counterclaims are without merit.
However, the Company may be liable in the event that a judgment is rendered
against the Company on the counterclaims, and the assets of the Partnership
may not be sufficient to provide full indemnification.
ITEM 2. CHANGE IN SECURITIES.
COMMON STOCK. During the three months ended March 31, 1997 the Company
sold the following shares of Common Stock which were not registered under the
Securities Act:
DATE NUMBER OF SHARES SOLD TO TOTAL OFFERING PRICE
- - ---- ---------------- ------- -------------------
January 10, 1997 13,824 Warrant Holder $750
February 14, 1997 13,824 Warrant Holder $750
None of the shares of Common Stock were publicly offered or sold through
underwriters, and no underwriting discounts or commissions were paid. The
Company claimed exemption from registration pursuant to Section 4(2) of the
Securities Act because each transaction was the sale of restricted stock to
the exercising holder of a restricted warrant, not involving any public
offering.
SERIES A PREFERRED STOCK. On February 21, 1997 the Company sold units
representing 30,630 shares of Series A Preferred Stock in its Series A
Offering which were not registered under the Securities Act, pursuant to a
private placement limited to accredited investors. The total offering price
for the units was $3,063,000, with the placement agent receiving a nine
percent (9%) commission, amounting to $275,670, a four percent (4%) non-
accountable expense allowance, amounting to $122,520, and warrants issuable to
the placement agent and its designees to purchase 3,063 shares of Series A
Preferred Stock at an exercise price of $110 per share. The warrants are
exercisable for five (5) years commencing November 9, 1997. The Company
claimed exemption from registration pursuant to Regulation D under the
Securities Act because the Series A Offering was the sale of restricted
securities to accredited investors, as defined in Rule 501 of Regulation D,
and not involving any public offering.
Page 15
Each share of Series A Preferred Stock is convertible, at the option of
the holder thereof, into shares of Common Stock at a conversion price of
$1.24. The $1.24 represents a discount of 15% to the average closing bid
price of the Common Stock for the twenty (20) consecutive trading days
immediately preceding the final closing. The 15% discount has been reflected
in the Company's consolidated statement of operations as a dividend to Series
A Preferred Stock of $540,529. The Series A Preferred Stock has a reset
mechanism which provides that the conversion price is subject to adjustment on
May 9, 1998 (the "Reset Date"), if the average closing bid price of the Common
Stock for the thirty (30) consecutive trading days immediately preceding the
Reset Date (the "Reset Trading Price") is less than 130% of the then
applicable conversion price (a "Reset Event"). Upon the occurrence of a Reset
Event, the then applicable conversion price will be reduced to the greater of
(i) the Reset Trading Price divided by 1.3 and (ii) 50% of the then applicable
conversion price. The conversion price is also subject to adjustment, under
certain circumstances, upon the sale or issuance of Common Stock for
consideration per share less than either (i) the conversion price in effect on
the date of sale or issuance, or (ii) the market price of the Common Stock as
of the date of the sale or issuance. 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
Stock outstanding the conversion price is subject to adjustment.
Series A Preferred Stock has a preference over Common Stock as to
dividends and distributions. In addition, holders of Series A Preferred Stock
vote on an "as if converted" basis with Common Stock as a single class (unless
separate class voting is required by law), except that approval of holders of
two-thirds of the Series A Preferred Stock then outstanding is required to
approve (i) any alteration in the Company's charter documents or by-laws that
would adversely affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series A Preferred Stock, (ii) the
declaration or payment of any dividend on any other securities or the
repurchase of any securities of the Company other than the Series A Preferred
Stock, and (iii) the authorization or issuance, or increase of the authorized
amount of, any security ranking prior to the Series A Preferred Stock as to
liquidation, payment of dividends or distributions or voting rights.
ITEM 5. OTHER INFORMATION.
Effective as of May 9, 1996, the Company held the final closing and
terminated its Series A Offering. An aggregate of 137.78 units were sold,
representing 137,780 shares of Series A Preferred Stock, for gross proceeds of
$13,778,000 and net proceeds to the Company of approximately $11,800,000,
after deducting commission and other expenses of the Series A Offering. The
issued Series A Preferred Stock is convertible to approximately 11,110,000
shares of Common Stock at the conversion price of $1.24.
Page 16
Placed with accredited investors, the securities have not been registered
under the Securities Act, and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
The Company agreed to file, no later than July 8, 1997, a registration
statement under the Securities Act to permit resales of the Common Stock
issuable upon conversion of the Series A Preferred Stock. The Company is in
the process of preparing such registration statement and intends to file it as
soon as practicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.2 Bylaws of the Company
3.6 Certificate of Designation of Series A Convertible Preferred
Stock of the Company, filed on February 21, 1997
4.6 Specimen Certificate for Series A Convertible Preferred Stock
10.26 1996 Stock Option Plan as Amended
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
Page 17
SIGNATURES
----------
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)
/s/ Edward J. Quilty
Date: July 17, 1997 ---------------------------
Edward J. Quilty
Chairman of the Board, President
and Chief Executive Officer
/s/ John J. McDonough
Date: July 17, 1997 ---------------------------
John J. McDonough
Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
Page 18