UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20022004
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission file number 0-22686
PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-4078884 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 4C Cedarbrook Drive | |
| Cranbury, New Jersey | 08512 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (609) 495-2000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
TheIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of September 13, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $102,282,865, computed by reference to the price at which the common equitystock was last sold as of September 27, 2001, was $29,595,999.on December 31, 2003.
As of September 26, 2002, 18,968,09013, 2004, 53,980,506 shares of the registrant's common stock, par value $.01 per share, were outstanding.
Documents incorporated by reference: the registrant's definitive proxy statement relating to the annual meeting of stockholders currently scheduled for December 2002, incorporated by reference in Part III of this Form 10-K.2
PART I
| Page | ||
| Item 1. | Business | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item | Submission of Matters to a Vote of Security Holders | |
PART II
| Item 5. | Market for Registrant's Common Equity, | |
| Item 6. | Selected Consolidated Financial Data | |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | 72 |
| Item 9B. | Other Information | 72 |
PART III
| Item 10. | Directors and Executive Officers | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions | |
| Item 14. | Principal Accountant Fees and Services | 72* |
*Incorporated by reference from our definitive proxy statement relating to the 20022004 Annual Meeting of Stockholders, which we will file with the Securities and Exchange Commission within 120 days after our June 30, 20022004 fiscal year end.
PART IV
| Item | Exhibits, Financial Statement Schedules and Reports on Form 8-K | Page |
| Signatures | Page | |
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PART I
Forward-looking statements
We makeStatements in this annual report on Form 10-K, as well as oral statements that may be made by Palatin or by officers, directors, or employees of Palatin acting on Palatin’s behalf, that are not historical facts constitute “forward-looking statements” which are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. The forward-looking statements in this annual report on Form 10-K do not constitute guarantees of future performance. Investors are cautioned that statements which are not strictly historical statements contained in this annual report on Form 10-K, including, without limitation, current or future financial performance, management’s plans and objectives for future operations, clinical trials and results, product plans and performance, management’s assessment of market factors, as well as statements regarding the documents we incorporate by reference. Sometimes these statements contain words such as "anticipates," "plans," "intends," "expects"strategy and similar expressions to identifyplans of the Company and its strategic partners, constitute forward-looking statements. TheseSuch forward-looking statements are not guarantees of our future performance. Our business involvesinvolve known and unknown risks, uncertainties and other factors which maythat could cause ourthe actual results performance or achievementsof the Company to be materially different from what we saythe historical results or from any results expressed or implied by such forward-looking statements. The Company’s future operating results are subject to risks and uncertainties and are dependent upon many factors, including, without limitation, the risks identified under the caption “Factors Affecting Our Business Condition” and elsewhere in this annual report, as well as in our other Securities and in the documents we incorporate by reference. 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 may 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.Exchange Commission filings.
Overview
We are primarily focused on discovering and developing melanocortin (“MC”)-based therapeutics, which we believe is one of the fastest growing areas of pharmaceutical research and development. The MC family of receptors has been identified with a development-stage bio-pharmaceuticalvariety of conditions and diseases, including sexual dysfunction, obesity, cachexia (extreme wasting, generally secondary to a chronic disease), and inflammation. Our objective is to become a worldwide leader in MC-based therapeutics by pursuing a strategy based on commercializing our products under development and identifying new product targets through the utilization of our patented drug discovery platform.
In August 2004, we entered into a collaboration agreement with King Pharmaceuticals, Inc., a specialty pharmaceutical company, committedto jointly develop and commercialize PT-141, our lead therapeutic drug candidate for the treatment of both male and female sexual dysfunction.
In July 2004, we announced the receipt of full approval from the U.S. Food and Drug Administration (“FDA”) to market NeutroSpec™, our proprietary radiolabeled monoclonal antibody product, for imaging of patients with equivocal signs and symptoms of appendicitis who are five years of age or older. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt Imaging, a business unit of Tyco Healthcare (“Mallinckrodt”).
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Our near-term business strategy focuses on the continued development of PT-141 and supporting the commercial launch of NeutroSpec. Our long-term business strategy includes the advancement of our preclinical product pipeline and identification of new product targets through the utilization of our patented drug discovery platform, moving towards the commercialization of a broad portfolio of therapeutic products. Key elements of our business strategy include:
We incorporated in Delaware in 1986 and commenced operations in the biopharmaceutical area in 1996. Our executive offices and research facility are located at 4C Cedar Brook Drive, Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We maintain an Internet site athttp://www.palatin.com, where among other things, we make available free of charge on and through this website our Forms 3, 4 and 5, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) and Section 16 of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the discovery, developmentSecurities and commercialization of novel therapeutics. We doExchange Commission. Our website and the information contained therein or connected thereto shall not currently offer any products for sale.be deemed to be incorporated into this annual report on Form 10-K.
Products and Technologies in Research and Development
We are concentrating our efforts on the following:following proposed products and indications:
4PT-141. PT-141, our lead therapeutic drug candidate, is a patented, nasally administered peptide that is in clinical development for the treatment of both male and female sexual dysfunction. PT-141 is a synthetic analog of the naturally occurring hormone alpha-MSH (melanocyte-stimulating hormone). It is an MC receptor based therapeutic. The MSH class of hormones are potent regulators of a variety of physiological and behavioral functions, including the natural physiological sexual response. Our research suggests that PT-141 works through activation of MC receptors in the central nervous system rather than acting directly on the vascular system, which is a different mechanism of action from currently marketed male Erectile Dysfunction (“ED”) therapies. As a result, it may offer significant safety and therapeutic benefits over currently marketed products.
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We have completed various Phase 1 safety studies and Phase 2A and Phase 2B efficacy studies in male subjects and patients. We plan to initiate an additional Phase 2B efficacy study in male patients with ED during the first half of calendar year 2005. We have completed a Phase 1 safety study in female subjects. We plan to initiate a Phase 2A efficacy study in female patients with Female Sexual Arousal Disorder (“FSAD”) during the second half of calendar year 2004.
We completed a Phase 2B at-home dose-ranging study with PT-141 in patients with ED in September 2003 and presented the safety and efficacy data at the 8th Annual Leadership Conference on Sexual, Cardiovascular and Metabolic Syndrome Related Therapies held on November 1, 2003 in Los Angeles. This placebo-controlled, randomized, double-blind, parallel group study enrolled 271 sildenafil-responsive men with mild/moderate and severe ED at 21 sites. Importantly, the trial included patients with co-morbidities such as diabetes, hypertension, hyperlipidemia, and smoking. Participants were confirmed by patient history to be responsive to sildenafil (Viagra®) and had a baseline International Index of Erectile Function – Erectile Function domain (IIEF-EF) score of between six and twenty-one. The IIEF-EF is a standardized sexual function questionnaire used by urologists, which includes questions on a man’s ability to achieve and maintain an erection. To evaluate PT-141‘s effect versus placebo, researchers compared baseline scores with scores reported after treatment. Enrolled patients were randomized to either placebo, 5 mg, 10 mg, 15 mg or 20 mg of PT-141 for a one month treatment period.
Results show that treatment with PT-141 improved patients’ erectile function, achieving both clinical and statistical significance for the following parameters (p < 0.05 or better):
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| • |
In order to understand the process of drug testing and approval, it is helpful to be familiar with the following terminology of clinical trial phases and FDA applications:
| • | Restoration of normal erectile function defined as a score of 26 or more points on the EF domain of the IIEF questionnaire at all four PT-141 doses relative to placebo; and | |
| Improvement in |
All doses of PT-141 demonstrated safety; importantly, there were no reports of hypotension or syncope at any PT-141 dose level. The 5 mg and 10 mg doses were well-tolerated. The most common adverse events in these doses were mild to moderate in intensity and included bad aftertaste, facial flushing, nausea, post-nasal drip, fatigue and headache. Of the 271 patients randomized into the study, approximately 12% discontinued due to adverse events. Discontinuations due to gastrointestinal adverse events were limited almost exclusively to patients taking the 15 mg and 20 mg doses. Patients who took multiple 15 mg and 20 mg doses of PT-141 tolerated the drug well.
A total of 30 patients in this Phase 2B study from five different trial locations who responded to PT-141 and were also sildenafil users were interviewed by an independent market research firm following the study to better understand their experience with PT-141. The research indicates that:
| • | Approximately 70% of patients considered PT-141 to be as or more effective than sildenafil; | |
| The quality of erection achieved with PT-141 is perceived to be comparable or | ||
| • | PT-141 has a longer duration of action and onset time was more rapid than sildenafil; and | |
| Many patients highlighted the |
In May 2004, we announced that Hunter Wessells, M.D., FACS, Associate Professor with the Urology Clinic of the University of Washington, Harborview Medical Center, presented the results of this Phase 2B study at the American Urological Association (AUA) Annual Meeting, which took place in San Francisco May 8 – 13, 2004.
In June 2004, we announced an overview of the positive results from a clinical study evaluating the co-administration of PT-141 and Viagra®. The purpose of the PT-141 and Viagra co-administration clinical study was to evaluate the potential synergistic effect of treating ED patients with both PT-141, which has a novel central nervous system mechanism of action, and Viagra, a peripheral agent which is a type V phosphodiesterase inhibitor. The results of this study indicate that the co-administration of low doses of both PT-141 and Viagra resulted in an increased degree of erectile activity relative to Viagra alone and that patients subjectively reported a better quality of erection relative to Viagra alone.
Study Design
| • | The objective of this clinical study was to evaluate the efficacy and safety of co-administration of Viagra with PT-141 to 20 patients with ED. | |
| RigiScan® (a device for impotence testing) monitoring was employed over a six hour monitoring period to evaluate the | ||
| • | The study was designed as a double-blind, randomized, placebo-controlled, three-way crossover study evaluating the following three treatment arms: |
| ” Co-administration “: 25 mg Viagra and 7.5 mg PT-141 intranasal spray; | ||
| • | ” Viagra-alone “: 25 mg Viagra and placebo intranasal spray; | |
| ” Placebo “: placebo tablet and placebo intranasal spray. |
Study Results
| • | Over the six hour RigiScan monitoring period, patients receiving the Co-administration treatment had, on average, increased erectile activity as compared to patients receiving either the Viagra-alone or | |
| • | Patients were also asked to evaluate the quality of their erection on a visual analog scale (1-10 scale). Patients receiving the Co-administration treatment rated their best erection an average score of 8.2 compared to 6.8 for |
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Collaborative Development and Marketing Agreement with King. In August 2004, we entered into a collaboration agreement with King Pharmaceuticals, Inc., a specialty pharmaceutical company, to jointly develop and commercialize PT-141. Pursuant to the terms of the agreement, Palatin has granted King a co-exclusive license with Palatin to develop and market PT-141 PT-141. PT-141 is our lead therapeutic drug candidate and it is nowdevelopment forthe study, including no significant differences in blood pressure, between any of the treatment arms. The only adverse event for patients receiving the Co-administration that was significantly different than either the Viagra-alone or Placebo treatment arms was flushing. Flushing occurred in 21% of male erectile dysfunction (MED)patients receiving the Co-administration and female sexual dysfunction (FSD)0% of the patients in the Viagra-alone and Placebo treatment arms.works through a novel mechanismin North America and an exclusive right to collaborate in the licensing or sublicensing the development and marketing of action.Our research suggests this mechanism may involve the central nervous system which is different from currently marketed MED therapies. We believe PT-141 with Palatin outside North America. Palatin has the option to create, with King, a urology specialty sales force to co-promote the product in the U.S.
King paid us $20.0 million at closing, $5.0 million of which was designated as an equity investment in Palatin. King may pay potential milestone payments to treat both malePalatin totaling up to $100.0 million for achieving certain ED and female sexual dysfunctionFemale Sexual Dysfunction (“FSD”) development and that itregulatory approval targets, a portion of which would consist of an additional equity investment in Palatin. After regulatory approval and commercialization of PT-141, King may offer significant benefits inalso pay one-time milestone payments to us totaling up to an additional $130.0 million upon achieving specified annual North American net sales thresholds.
Under the terms of safetythe agreement, King and efficacy overPalatin will share all collaboration development and marketing costs and all collaboration net profits derived from net sales of PT-141 in North America based on an agreed percentage. King and Palatin currently marketed products. We have completed various Phase 1 human safety evaluation studies,plan to seek a Phase 2A efficacy studypartner for PT-141 for territories outside of North America and will jointly share in male patientscollaboration development and a Phase 1 study in female subjects. We are currently conducting a Phase 2A efficacy study in male patientsmarketing costs and all collaboration revenues generated from those territories.
ED is defined as the consistent inability to attain and maintain an erection sufficient for sexual intercourse. The condition is correlated with increasing age, cardiovascular disease, hypertension, diabetes, hyperlipidemia and smoking. In addition, certain prescription drugs and psychogenetic issues may contribute to ED. According to the Massachusetts Male Aging Study, more severe erectile dysfunctionthan 50% of men aged 40-70 report episodes of ED and expect to complete this study later this calendar year. Our completed clinical trials in males indicate that PT-141 can induce erections and therefore may be a promising treatment for MED. We are planning to start a placebo-controlled Phase 2B "at home" efficacy study in male patients later this calendar year and a Phase 2A efficacy study in females in the beginning of next calendar year.
Studies indicate that as many asmore than 30 million men in the United States may be afflicted with some form of ED, with less than 20% seeking treatment. The current market size for ED is estimated to be more than $2 billion per year. FSAD is a multifactorial condition that has anatomical, physiological, medical, psychological and social components. Studies estimate FSAD is prevalent in approximately 50% of women over the age of 30 and that greater than 35 million women in the United States may be afflicted with some form of MED or FSD. Because of the large number of menFSAD. FSD includes disorders associated with desire, arousal, orgasm and women believed to be afflicted with some form of sexual dysfunction, we believe the total market for treatment will be several billion dollars per year.pain. There is tremendous competition to develop, market and marketsell drugs for the treatment of MEDED and FSD.
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LeuTech.NeutroSpec™. LeuTech isNeutroSpec includes a radiolabeledradioactive technetium-labeled anti-CD 15 monoclonal antibody that is intendedwhich selectively binds to image and diagnose sitesa type of infection.white blood cell, neutrophils, involved in the immune response. When injected into the blood stream, LeuTechNeutroSpec binds to white blood cells presentneutrophils accumulated at the infection site, labeling these cells with a radioactive tracer. As a result, physicians can rapidly image and detectlocate an infection using a gamma camera, a common piece of hospital equipment that records radioactivity.detects radioactivity within the body. NeutroSpec offers the advantage of direct injection and in vivo labeling of white blood cells, leading to a rapid and highly specific functional image of an infection in less than an hour, whereas the current standard of care, ex vivo radiolabeled white blood cells, requires a blood sample to be taken from the patient, processed by a nuclear pharmacy and then re-injected into the patient, with diagnostic images usually not available until 12-24 hours later.
In July 2000,2004, we announced that we received full approval from the FDA MIDAC panel unanimously recommended the approvalU.S. Food & Drug Administration (FDA) to market NeutroSpec, a novel imaging agent, indicated for imaging of LeuTech for use in diagnosing appendicitis in patients with equivocal signs and symptoms. Currently, wesymptoms of appendicitis who are responding to the FDA's request for additional manufacturingfive years of age or older. NeutroSpec is marketed and process validation information in accordance with their complete review letter dated September 23, 2000. We anticipate filing amendments to the BLA later this calendar year or in the first quarterdistributed by our strategic collaboration partner, Mallinckrodt Imaging, a business unit of calendar 2003.Tyco Healthcare (“Mallinckrodt”).
We are also conducting additional Phase 2 clinical trials with LeuTechNeutroSpec to diagnoseevaluate its market potential as an imaging agent for other infectionsindications such as bone infections (osteomyelitis)osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, and inflammatory bowel disease.disease and pulmonary imaging.
Strategic Collaboration Agreement with Mallinckrodt. On May 13, 2002, we entered into an agreement with Mallinckrodt to amend our Strategic Collaboration Agreement dated as of August 17, 1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13.0 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared NeutroSpec development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10.0 million on FDA approval of the first NeutroSpec indication and on attainment of certain sales goals following product launch. We agreed to be responsible for the manufacture of NeutroSpec and Mallinckrodt agreed to pay us a transfer price on each product unit transferred to Mallinckrodt and a royalty on the net sales of NeutroSpec.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to offset a portion of the estimated expenses associated with completing the FDA review process. Additionally, timing of the original $10.0 million in milestone payments was revised to coincide with NeutroSpec’s FDA approval and achievement of future sales goals. The $3.2 million has been paid in full as of March 31, 2004 and we received $2.0 million on August 6, 2004 upon FDA approval.
Each year, more than 250,000 Americans are diagnosed with the infection, acute appendicitis. A timely and accurate diagnosis of this infection is crucial to ensure timely treatment and to prevent complications for the patient. A delay can entail hospital observation, outpatient treatment or surgery and can lead to increased risk of peritonitis, sepsis and other complications. Conversely, a misdiagnosed patient may experience unneeded hospital observation or unneeded surgery, which is expensive, inconvenient and utilizes limited resources. Every year, more than 350,000 patients present with equivocal appendicitis — this is when a specific diagnosis is uncertain and further testing is needed. In this situation, it is not always clear if the patient has appendicitis or another medical problem; nor is it exactly clear where the site of infection is located.
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We believe that NeutroSpec may improve patient diagnosis for appendicitis and that it has the potential to improve diagnosis of other acute and chronic infections, such as osteomyelitis, fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging. In 2003, over 700,000 patients were diagnosed with NeutroSpec’s target indications.
MIDAS.MIDAS™ (Metal Ion-induced Distinctive Array of Structures). MIDAS is a proprietary platform technology that allows us to routinely design and synthesize novel pharmaceuticals that mimic the activity of peptides, but which we believe offer significant advantages to conventional protein or peptide-based drugs. MIDAS uses metal ions to fix the three-dimensional shape of peptides, forming conformationally rigid molecules that remain folded specifically in their active forms. These MIDAS molecules are simple to synthesize, stableare chemically and proteolytically stable, and have the potential to be orally bioavailable. Moreover, unlike most other drug discovery approaches, we believe that MIDAS is unique in that it can be used to generate either receptor antagonists (drugs that block a particular metabolic response) or agonists (drugs that promote a particular metabolic response). In addition, MIDAS
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molecules are information-rich and provide data on structure-activity relationships that can be used to design traditional small molecule, non-peptide drugs.
We have initiated a MIDAS program to discover and develop compounds that interact with the melanocortin (MC)MC family of receptors. MC receptors regulate a diverse array of functions such as pigmentation, adrenocortical function, immune modulation, sexual arousal and energy maintenance. Based on this effort, we have identified several MIDAS molecules that are now in preclinical development as potential treatments for sexual dysfunction, obesity, cachexia and inflammation. Additionally, we have identified molecules that interact with receptors on cancer cells; one of these molecules is now in preclinical development as a potential treatment for cancer. We expect to file INDsan Investigational New Drug Application (“IND”) for at least one of these preclinical compounds andto initiate clinical testing within the next two years.12 months.
We have recently identified a series of lead compounds that decrease food intake and body weight in normal and genetically-obese animals. In June 2004, we announced that data on this activity of our lead series of melanocortin receptor, small molecule agonists, under development for the treatment of obesity, were presented at the 8th Annual American Neuroendocrine Society (ANS) Neuroendocrine Workshop. The ANS Workshop, titled “Neuroendocrinology of Energy Balance and Obesity,” took place June 13, 2004 at the Hotel Monteleone in New Orleans, LA.
Generation of commercially viable protein and peptide drug molecules with desirable properties continues to be arduous, expensive and labor-intensive. We believe that our MIDAS technology simplifies the development process by eliminating many of the inherent limitations associated with peptides and proteins. We intend to seek to enter into strategic alliances or collaborative arrangements to provide additional financial and technical resources for MIDAS development.
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Strategic Collaboration Agreement with Mallinckrodt. On May 13, 2002, we entered into an agreement with Mallinckrodt, Inc., a divisionTable of Tyco International, Ltd., to amend our Strategic Collaboration Agreement dated as of August 17, 1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared LeuTech development expenses prior to approval equally with Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10 million on FDA approval of the first LeuTech indication and on attainment of certain sales goals following product launch. We agreed to arrange for the manufacture of LeuTech and we would receive a transfer price on each product unit and a royalty on LeuTech net sales.Contents
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestons, to cover half of our estimated expenses associated with completing the FDA review process. Additionally, timing of the $10 million in milestone payments has been revised to coincide with LeuTech's anticipated FDA approval and achievement of future sales goals.
Research and Development. Our current research and development efforts primarily focus on two areas: diagnostic imaging andmelanocortin based therapeutics. By combining these areas, weWe believe our technologies will facilitate the development of a portfolio of potential products.
A summary of our research and development programs appears below. "Research" includes the identification of novel molecular targets, development of assay systems, discovery and evaluation of prototype compounds in vitro and in vivo with animal testing. "Development" includes product formulation, toxicology and additional animal testing of a compound followed by clinical testing and manufacturing methods development.
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U.S. Commercial Program Indication Status Rights - ------- ---------- ------ ----------------- LeuTech Equivocal appendicitis Pending FDA Approval Mallinckrodt/Tyco LeuTech Osteomyelitis - prosthetic Phase 2 Mallinckrodt/Tyco joint infection LeuTech Osteomyelitis - diabetic Phase 2 Mallinckrodt/Tyco foot ulcers LeuTech Fever of unknown origin Phase 2 Mallinckrodt/Tyco LeuTech Post-surgical abscess Phase 2 Mallinckrodt/Tyco LeuTech Inflammatory bowel disease Phase 2 Mallinckrodt/Tyco PT-141 Erectile dysfunction Phase 1 and initial Phase 2A complete. Additional Phase 2A ongoing, to be completed later this calendar year. Phase 2B to begin the last quarter of this calendar year. PT-141 Female sexual arousal Phase 1 clinicalstudy disorder complete, Phase 2A to begin the first quarter of calendar year 2003. PT-15 (MIDAS Obesity Preclinical compound) PL-2299 (MIDAS Sexual dysfunction Preclinical compound) Anti-inflammatory Inflammation/Ischemia Preclinical agent (MIDAS compound)
Over the last three fiscal years, we have spent approximately the following amounts on company-sponsored research and development activities:
| • | year ended June 30, 2004: $23.3 million | |
| • | year ended June 30, 2003: $17.4 million | |
| • | year ended June 30, 2002: | |
Competition
Our products under development will compete on the basis of quality, performance, cost effectiveness, and application suitability with numerous established products and technologies. Additional products using new technologies which may be competitive with our proposed products may also be introduced by others. Many of the companies selling or developing competitive products have financial, manufacturing and distribution resources significantly greater than ours.
The pharmaceutical and biotechnology industry is characterized by extensive research efforts and rapid technological change and there are many companies that have developed or are working to develop products similar to ours. There are currently several FDA-approved drugs for ED in the United States and in certain foreign markets. We are aware of several products under clinical development for both MED and FSAD. We cannot assure you that our competitors will not succeed in the future in developing products that are more effective than any that we are developing. We believe that our ability to compete in the sexual dysfunction market depends on a number of factors including the success and timeliness with which we complete FDA trials, the breadth of applications, if any, for which our products receive approval, and the effectiveness, cost, safety and ease of use of our products in comparison to the products of our competitors.
We are aware of one company marketing an antibody-based product which may compete with NeutroSpec as to certain indications. The competing product is marketed in some European countries. We are also aware of at least one other company developing a peptide-based product which may also compete with NeutroSpec as to certain indications. In addition, other technologies may also be used to diagnose appendicitis, including computerized tomography or CT scan, and ultrasound technologies.
We have many competitors, including pharmaceutical and biotechnology companies. Many of these competitors have substantially greater capital and other resources than we do and may represent significant competition for us. Such companies may succeed in developing technologies and products that are more effective or less costly than any of those that we may develop. Such companies may be more successful than us in developing, manufacturing and marketing products. Furthermore, there are several well-established products in our target markets that we will have to compete against. We cannot guarantee that we will be able to compete successfully in the future or that developments by others will not render our proposed products under development or our future product candidates obsolete or non-competitive or that our collaborators or customers will not choose to use competing technologies or products.
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Patents and Proprietary Information
Patent protection.protection. Our success will depend in substantial part on our ability to obtain, defend and enforce patents, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and abroad. We aggressively seek patent protection for our technology and products in the United States and, selectively, in those foreign countries where protection is important to the development of our business.
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We own or have rights to United States and foreign patents and pending applications directed to radiolabeling of antibodies, antibody fragments, and peptides; MIDAS peptides; small molecules; and methods for making and using the foregoing in diagnostic and therapeutic applications.
We have exclusive rights to patents and applications relating to PT-141 for sexual dysfunction, and own an issued United States patent and pending United States and foreign applications covering PT-141. The claims of any patents that issue covering PT-141 may not provide meaningful protection. In addition, even if such patents issue they may not be valid.
We own patents covering certain aspects of the LeuTechNeutroSpec product, but the claims of those patents may not be effective to prevent others from developing competing products. In addition, the validity of these patents has not been determined.
In the event that a third party has also filed a patent application relating to an invention we claimed in a patent application, we may be required to participate in an interference proceeding adjudicated by the United States Patent and Trademark Office to determine priority of invention. The possibility of an interference proceeding could result in substantial uncertainties and cost, even if the eventual outcome is favorable to us. An adverse outcome could result in losing patent protection for the subject of the interference, subjecting us to significant liabilities to third parties and requiring us to obtain licenses from third parties at undetermined cost or to cease using the technology.
Future patent infringement. We do not know for certain that our commercial activities will not infringe upon patents or patent applications of third parties, some of which may not even have been issued yet. Although we are not aware of any valid U.S. patents which are infringed by PT-141 or LeuTechNeutroSpec or by our methods of making PT-141 and LeuTech,NeutroSpec, we cannot exclude the possibility that such patents might exist or arise in the future. We may be unable to avoid infringement of any such patents and may have to seek a license, defend an infringement action, or challenge the validity of such patents in court. Patent litigation is costly and time consuming. If we do not obtain a license under any such patents, are found liable for infringement, or if such patents are not found to be invalid, we may be liable for significant money damages, may encounter significant delays in bringing products to market, or may be precluded from participating in the manufacture, use or sale of products or methods of treatment covered by such patents.
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Government rights. Some of our patents are directed to inventions developed internally or within academic institutions from which we previously acquired rights to such patents with funds from United States government agencies. As a result of these arrangements, the United States government may have rights in certain inventions developed during the course of the performance of federally funded projects, as required by law or agreements with the funding agency. In addition, we may be required to manufacture in the United States products to be sold in the United States.
Proprietary information. We rely on proprietary information, such as trade secrets and know-how, which is not patented. We have taken steps to protect our unpatented trade secrets and know-how, in part through the use of confidentiality agreements with our employees,
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consultants and certain contractors. If our employees, scientific consultants or collaborators or licensees develop inventions or processes independently that may be applicable to our product candidates, disputes may arise about ownership of proprietary rights to those inventions and processes. Such inventions and processes will not necessarily become our property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.
If trade secrets are breached, our recourse will be solely against the person who caused the secrecy breach. This might not be an adequate remedy to us, because third parties other than the person who causes the breach will be free to use the information without accountability to us. This is an inherent limitation of the law of trade secret protection.
Governmental Regulation
The FDA, comparable agencies in foreign countries and state regulatory authorities have established regulations and guidelines which apply to, among other things, to the clinical testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, promotion and marketing of our proposed products. Noncompliance with applicable requirements can result in fines, recalls or seizures of products, total or partial suspension of production, refusal of the regulatory authorities to approve marketing applications, withdrawal of approvals and criminal prosecution.
After approving a product for marketing, the FDA may require post-marketing testing, including extensive Phase 4 studies, and surveillance to monitor the effectssafety and effectiveness of the product in general use. The FDA may withdraw product approvals if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, the FDA may impose restrictions on the use of a drug that may limit its marketing potential.
Good manufacturing practices.practices. In addition to obtaining approval of either a biologics license application or new drug application approval from the FDA for any of our proposed products, if the proposedproducts; any facility that manufactures such a product is manufactured in the United States,must comply with current good manufacturing practices. This means, among other things, that the drug manufacturing establishment must be registered with, and will be inspected by, the FDA. Such drugForeign manufacturing establishments are subject to biennial inspections by the FDA, and must comply with good manufacturing practices regulations enforced by the FDA. To supply products for use in the United States, foreign manufacturing establishments mustalso comply with good manufacturing practices and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in such other countries under reciprocal agreements with the FDA. In complying with standards established by the FDA, manufacturing establishments must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. We depend on contract manufacturing establishments, both in the United States and in foreign countries, to manufacture components of LeuTech.NeutroSpec and PT-141. We currently have agreements in place for the manufacture of NeutroSpec. We anticipate that contract manufacturing establishments will continue to manufacture PT-141 and proposed products resulting from MIDAS technology.
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Third-Party Reimbursements
Successful sales of our proposed products in the United States and other countries will depend on the availability of adequate reimbursement from third-party payors such as governmental entities, managed care organizations and private insurance plans. Reimbursement by a third-party payor may depend on a number of factors, including the payor'spayor’s determination that the product has been approved by the FDA for the indication for which the claim is being made and the use of athe product is safe and efficacious, neither experimental nor investigational, medically necessary, appropriate for the specific patient and cost effective. Since reimbursement by one payor does not guarantee reimbursement by another, we may be required to seek approval is required from each payor individually, seekingindividually. Seeking such approvals is a time-consuming and costly process. Third-party payors routinely limit reimbursement coveragethe product that they will cover and the amount of money that they will pay and in many instances are exerting significant pressure on medical suppliers to lower their prices. There is significant uncertainty concerning third-party reimbursement for the use of any pharmaceutical product incorporating new technology, and we are not sure whether third-party reimbursement will be available for our proposed products once approved, or that the reimbursement, if obtained, will be adequate. Less than full reimbursement by governmental and other third-party payors for our proposed products
would adversely affect the market acceptance of these proposed products. Further, health care reimbursement systems vary from country to country, and we are not sure whether third-party reimbursement will be made available for our proposed products under any other reimbursement system.
Manufacturing and Marketing
To be successful, our proposed products mustwill need to be manufactured in commercial quantities under current good manufacturing practices requirements prescribed by the FDA and at acceptable costs. We do not have the facilities to manufacture any of our proposed products in commercial quantities under good manufacturing practices. We intend to rely on collaborators, licensees or contract manufacturers for the commercial manufacture of our proposed products.
We are dependent on DSM N.V. of the Netherlands for the manufacture of the antibody used in LeuTech,NeutroSpec drug substance and intermediate drug product stages and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of LeuTech kits.the NeutroSpec drug product stage. The failure of either of these manufacturers to comply with FDA current good manufacturing practices or to supply these key components of LeuTechNeutroSpec on a timely basis or at all, would force us to seek alternative sources of supply and could interfere with our ability to deliver product on a timely basis or at all. Establishing relationships with new suppliers, any of whom must be FDA-approved, is a time-consuming and costly process.
If LeuTech is approved for marketing by the FDA, we will rely on our arrangement with Mallinckrodt/Tyco to market, sell and distribute LeuTech. We will have limited control over these activities.14
Proposed products resulting from PT-141 and our MIDAS technology and PT-141 are synthetic peptides. The peptides are synthesized from readily available amino acids, and the production process involves well-established technology. We currently contract with third-party manufacturers for the production of peptides and anticipate doing so in the future.
11
Table of Contents We rely on our arrangement with Mallinckrodt to market, sell and distribute NeutroSpec. We have limited control over these activities.
We intend to package and ship our radiopharmaceutical products in the form of non- radioactivenon-radioactive kits. Prior to patient administration, the product would beis radiolabeled with the specified radioisotope, generally by a specialized radiopharmacy. We do not intend to sell or distribute any radioactive substance.substances.
Product Liability and Insurance
Our business may be affected by potential product liability risks which are inherent in the testing, manufacturing and marketing of our proposed products. We have liability insurance providing up to $5,000,000$10.0 million coverage in the aggregate as to product and to certain clinical trial risks, andrisks.
Employees
As of September 1, 2004, we will seek to obtain additional product liability insurance before the commercialization of our products.
We currently employ 46employed 66 persons full time, of whom 3456 are engaged in research and development activities and 1210 are engaged in administration and management. Nineteen21 of our employees hold Ph.D. degrees and one is an M.D.degrees. We have been successful in attracting skilled and experienced scientific personnel, however, competition for personnel in our industry is intense.
None of our employees are covered by a collective bargaining agreement. All of our employees have executed confidentiality agreements. We consider relations with our employees to be good.
From time to time, we hire scientific consultants to work on specific research and development programs. We also rely on independent organizations, advisors and consultants to provide services, including most aspects of manufacturing and some aspects of regulatory approval and clinical management. Our independent advisors and consultants sign agreements that provide for confidentiality of our proprietary information.
Our corporate offices and research and development facility are located at 4C Cedar Brook Drive, Cedar Brook Corporate Center, Cranbury, New Jersey,NJ 08512, where we lease approximately 28,000 square feet under a lease which expires July 17, 2012. Our previous corporate offices were located at 103 Carnegie Center, Suite 200, Princeton, NJ 08540, whereand we continue to leasehave sublet approximately 7,300 square feet to a third party under a lease which expires December 15, 2004. The leased properties are in good condition.
15
Following the termination of our proposed merger with San Diego-based Molecular Biosystems, Inc. in March 2000, Molecular Biosystems commenced a
12
There are no material legal actionproceedings pending against us, seeking damages arising from the alleged improper termination of the merger agreement. We denied the material allegations. In August 2002, in order to avoid the ongoing costs of the litigation and consumption of our time, we settled this litigation with Molecular Biosystems for $400,000, which we have accrued as of June 30, 2002.us.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2002.2004.
PART II
Our common stock has been quoted on The American Stock Exchange (AMEX) under the symbol PTN, since December 21, 1999. It had previously traded on The Nasdaq SmallCap Market under the symbol PLTN.
The table below provides, for the fiscal quarters indicated, the reported high and low sales prices for the common stock on AMEX since July 1, 2000.2002.
YEAR ENDED JUNE 30, 20022004 HIGH LOW
------------------------ ---- ---
Fourth Quarter $3.38 $1.62$4.49 $3.35
Third Quarter $4.45 $3.05$4.24 $2.55
Second Quarter $5.92 $2.00$5.89 $2.19
First Quarter $5.22 $2.91$5.25 $2.66
YEAR ENDED JUNE 30, 20012003 HIGH LOW
------------------------ ---- ---
Fourth Quarter $6.56 $2.25$4.01 $1.62
Third Quarter $4.63 $2.00$1.93 $1.29
Second Quarter $6.13 $2.56$2.10 $1.11
First Quarter $8.19 $4.94$2.20 $1.10
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Holders of common stock.stock. On September 26, 2002,8, 2004, we had approximately 269280 holders of record of common stock. On September 26, 20028, 2004 the closing sales price of our common stock as reported on the AMEX was $2.14$2.82 per share.
13
Dividends and dividend policy. We have never declared or paid any dividends. We currently intend to retain earnings, if any, for use in our business. We do not anticipate paying dividends in the foreseeable future.
Dividend restrictions. Our two outstanding series of preferred stock, Series A and C, contain the following restrictions on our ability to pay dividends or make distributions to stockholders.
• Series A: WePreferred Stock, consisting of 11,697 shares, provides that we may not pay a dividend or make any distribution to holders of any class of stock unless we first pay a special dividend or distribution of $100 per share to the holders of the Series A preferred stock.
• Series C: We may not pay a dividend or make any distribution to holders of any class of stock while any Series C preferred stock remains outstanding.Preferred Stock.
Securities authorized for issuance under equity compensation plans.
EQUITY COMPENSATION PLAN INFORMATION
AS OF JUNE 30, 20022004
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average future issuance under equity compensation
be
issued upon exercise of exercise price of compensation plans (excluding
of
outstanding options, outstanding options, (excluding securities reflected in
Plan category warrants and rights (1) warrants and rights reflected in column (a))
- ------------- ------------------------- --------------------- ----------------------------------------------- ------------------- -----------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders (1) 3,738,359 $4.25 1,431,435(2) 4,755,684 $3.45 355,956
Equity compensation plans
not approved by security
holders 1,632,471 $4.321,456,187 $3.14 0
--------- -------
Total 6,211,871 355,956
========= =======
_______________________
| (1) | Does not include a total of 19 shares of aggregate fractions. No fractional shares will be issued on exercise of options or warrants. |
| (2) | Includes individual option and warrant agreements we assumed when we merged with RhoMed Incorporated in 1996. Options and warrants to purchase |
17
We have authorized the issuance of equity securities under the compensation plans described below, without the approval of stockholders. No additional options, warrants or rights are available for issuance under any of these plans, except for additional shares which may become purchasable under warrants with anti-dilution protection as noted below. We have either already registered or agreed to register for resale the common stock underlying all of these plans. We anticipate filingoptions and warrants.
14
| 363,636 shares of our common stock, to purchase an aggregate of 50,000 shares at $0.01 per share, with an expiration date of March 15, 2005. Warrants to purchase 15,125 shares remain outstanding. Griffin Financial Services Advisory Agreement warrants, dated June 8, 2000: provided common stock purchase warrants to Griffin Securities, Inc., a financial consultant, to purchase 5,000 shares at $7.00 per share, with an expiration date of June 8, 2005. Wistar Institute of Anatomy and Biology warrants, dated | |
15, 2000: provided common stock purchase warrants to a technology licensor to purchase 15,000 shares at $4.00 per share, with an expiration date of December 15, 2010.Shares Exercise Expiration Offering Purchasable Price Date -------- ----------- -------- ---------- Spring 1997 326,488 $4.39 11-09-02December1998 10,000 $4.38 12-31-03
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Shares Exercise Expiration
Offering Purchasable Price Date
-------- ----------- -------- ----------
Spring 1999 194,600 $4.70 02-08-04
Spring 1999 20,000 $4.48 03-09-04
Spring 1999 50,000 $4.56 03-10-04
Spring 1999 44,073 $5.57 03-12-04----- ----
Fall 2000 216,000 $6.60 10-05-05
Fall 2000 87,884 $6.53 10-27-05
Fall 2001 134,188 $2.66 10-29-06
Fall 2001 221,872 $2.70 10-29-06
Spring 2001June 2002 109,510 $2.75 06-13-07
July 2002 51,502 $1.46 07-29-07
July 2002 38,627 $1.37 07-29-07
Fall 2002 458,647 $1.54 11-15-07
Recent sales of unregistered securities. In closings on June 13 and July 29, 2002,January 2004, we sold a total of 2,640,160 shares of common stock, and five-year warrants to purchase 528,031 shares of common stock inconcluded a private placement of common stock and warrants to five accredited investors. We received gross proceedsin which we sold 6,992,500 shares of $4,212,500. The warrant exerciseour $0.01 par value common stock at an offering price for 219,019 shares is $2.75 per share, and the exercise price for 309,012 shares is $1.46of $3.25 per share. We paid cash placement agent fees totaling $294,000 and issuedThe investors also received 15% warrant coverage on the number of shares they purchased. Each five-year warrantswarrant entitles the holder to purchase a total of 212,514 sharesone share of common stock to placement agents for the offering. The placement agent warrantat an exercise price for 109,510 shares is $2.75of $4.06 per share, the exercise price for 51,502 shares is $1.46 per shareshare. The gross proceeds were approximately $22.7 million and the exercise price for 51,502 shares is $1.37 per share.
net proceeds were approximately $21.0 million. We made the private offeringplacement solely to domesticfinancial institutions and accredited investors pursuant to Regulation D and to foreign accredited investors pursuant to Regulation S, under the Securities Act of 1933. The investors represented to us that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The stock and warrants sold are not transferable absent registration or exemption from registration requirements, andcertificates representing the certificates bear a legend to that effect. We have agreed to register for resale under the Securities Act of 1933 the common stock sold and the common stock issuable on exercise of the warrants.
On April 30, 2002, under the terms of a consulting agreement, we issued five-year warrants to purchase 15,000 shares of common stock at $2.70 per share to Albert Fried, Jr. We relied onand warrants bear restrictive legends. A registration statement covering the exemption under Section 4(2)resale of the Securities Act of 1933shares by the investors was filed and subsequently declared effective by the Security and Exchange Commission in that issuance ofApril 2004. In connection with the warrants did not involve any public offering. The warrants are not transferable absent registration or an exemption from registration, and the certificates bear a legend to that effect. We have agreed to register for resale under the Securities Act of 1933 the common stock issuable on exercise of the warrants.
In April and December 2001, under the terms of the lease agreement for our Cranbury, NJ facility,private placement, we issued warrants to Cedar Brook II Corporate Center, L.P. to purchase 30,000 shares of common stock at $2.90 per share, with an expiration date of April 6, 2006, and 25,000 sharespaid placement fees totaling approximately $1.7 million.
16
at $3.65 per share, with an expiration date of December 17, 2006. We relied on the exemption under Section 4(2) of the Securities Act of 1933 in that issuance of the warrants did not involve any public offering. The warrants are not transferable absent registration or an exemption from registration, and the certificates bear a legend to that effect. We have agreed to register for resale under the Securities Act of 1933 the common stock issuable on exercise of the warrants.
The following selected consolidated financial data has been derived from the audited consolidated financial statements of Palatin Technologies, Inc. This data should be read in conjunction with our consolidated financial statements, including the notes to the consolidated financial statements, and the "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in Item 7 of this report.
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Selected Financial DataTable of Contents
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Year Ended June 30,
-------------------------------------------------------------------
1998 1999---------------------
2004 2003 2002 2001 2000
2001 2002
---------------------- ----------- ---------- ----------- ----------
Statement of Operations Data:------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
REVENUES
Grants and contracts $ 342,150 $ 60641 $ 4,61781 $ 1,621 $ 814,617
License fees and royalties -- 550165 629 200 167 500
167 200
Other -- -- -- -- --
---------------------- ----------- ---------- ----------- ---------------------- ------------ ------------
Total revenues 34 6102,315 1,270 281 1,788 5,117
1,788 281
---------------------- ----------- ---------- ----------- ---------------------- ------------ ------------
OPERATING EXPENSES
Research and development 7,111 8,72023,333 17,439 12,117 10,109 9,110 10,109 12,117
General and administrative 2,991 3,9575,740 4,867 5,004 3,025 4,567 3,025 5,004
---------- ----------- ---------- ----------- ----------
Total operating expenses 10,102 12,67729,073 22,306 17,121 13,134 13,677 13,134 17,121
---------- ----------- ---------- ----------- ----------
OTHER INCOME (EXPENSES)
Interest(EXPENSE)
Investment income, 409 172net of realized loss 222 248 312 788 405 788 312
Interest expense (227) (107)(23) (22) (3) (5) (29)
(5) (3)
---------------------- ----------- ---------- ----------- ---------------------- ------------ ------------
Total other income/(expense) 182 65income 199 226 309 783 376
783 309
---------------------- ----------- ---------- ----------- ---------------------- ------------ ------------
Loss before income taxes and cumulative
effect of accounting change (9,886) (12,002)(26,559) (20,810) (16,531) (10,563) (8,184) (10,563) (16,531)
Income tax benefit 241 245 392 325 --
-- -- 325 392------------ ----------- ------------ ------------ ------------
Loss before cumulative effect of
accounting change (9,886) (12,002)(26,318) (20,565) (16,139) (10,238) (8,184) (10,238) (16,139)
Cumulative effect of accounting change (1) -- -- -- (361) --
---------------------- ----------- ---------- ----------- ---------------------- ------------ ------------
NET LOSS (9,886) (12,002)(26,318) (20,565) (16,139) (10,599) (8,184)
(10,599) (16,139)
PREFERRED STOCKDEEMED DIVIDEND (233)-- (203) (297) -- --
-- (297)
---------------------- ----------- ---------- ----------- ---------------------- ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ (10,119)(26,318) $ (12,002)(20,768) $ (8,184)(16,436) $ (10,599) $ (16,436)
==========(8,184)
============ =========== ========== =========== ==========
17
(In thousands, except per share data) Year Ended June 30, ------------------------------------------------------------------- 1998 1999 2000 2001 2002 ---------- ----------- ---------- ----------- ----------============ ============ ============ Basic and diluted net loss attributable to common stockholders before cumulative effect of accounting change $(3.15)(0.55) $(2.02)(0.73) $(1.10)(1.16) $ (1.01) $(1.16)(1.10) Cumulative effect of accounting change (1) -- -- -- (0.04) ------------------------ --------------------- ----------- ---------------------- ------------ ------------ Basic and diluted net loss attributable to common stockholders per common share $(3.15)(0.55) $(2.02)(0.73) $(1.10)(1.16) $ (1.05) $(1.16) ==========(1.10) ============ ===================== =========== ====================== ============ ============ Weighted average common shares outstanding3,211 5,93647,688 28,362 14,195 10,131 7,44110,131 14,195 ====================== ===================== =========== ====================== ============ ============
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Pro forma amounts assuming accounting change applied retroactively: Net loss attributable to commonshareholdersstockholders $(10,119) $ (12,002)(10,238) $ (8,545)$ (10,238) ========== =========== ========== ======================= ============ Basic and diluted net loss attributable to common stockholders per common share $(3.15) $ (2.02)(1.01) $ (1.15)$ (1.01) ========== =========== ========== =========== Balance Sheet Data:============ ============ BALANCE SHEET DATA (AT PERIOD END): Cash, cash equivalents and investments $4,32620,412 $2,78918,383 $5,8429,105 $ 11,456 $9,1235,375 Property and equipment, net1,610 1,4582,935 3,399 2,416 1,925 1,5731,925 2,416Working capital2,069 554 4,99515,879 14,742 5,783 9,3606,5954,528 Total assets6,475 4,72324,379 22,721 12,358 14,244 8,88514,244 12,358Long term debt, net of current portion-- 2,00030 76 -- -- -- Stockholders' equity$ 3,390 $ 341 $19,387 18,657 8,687 11,916 6,905$ 11,916 $ 8,687 ---------- ----------- ---------- ----------- ----------- -------------------------------------------------------------------------------------------------------------------------------
(1) In fiscal 2001, we recorded a non-cash charge for the cumulative effect related to the adoption of SEC Staff Accounting Bulletin No. 101. See Note 2 to the Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements filed as part of this report.annual report on Form 10-K.
Critical Accounting Policies.
Our significant accounting policies are described in Note 2 to the consolidated financial statements included in this Annual Report.annual report on Form 10-K. We believe our most critical accounting policy is revenue recognition. Revenue from corporate collaborations and licensing agreements consists of up-front fees, research and development funding, and milestone payments. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate our performance period as the initial research term. The actual performance period may vary. We will adjust the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.
1821
agreements is recognized when we have adequate evidence that the milestone is deemed to be substantive.
In November 2001August 2004, we entered into a collaboration agreement with King Pharmaceuticals, Inc., a specialty pharmaceutical company, to jointly develop and June 2002,commercialize PT-141, our lead therapeutic drug candidate for the treatment of both male and female sexual dysfunction.
In July 2004, we received aggregateannounced the receipt of full approval from the FDA to market NeutroSpec, our proprietary radiolabeled monoclonal antibody product, for imaging of patients with equivocal signs and symptoms of appendicitis who are five years of age or older. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt.
In January 2004, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of $13.4 million in private placements of common stock and warrants.approximately $22.7 million. Investors, consisting of domestic and European financial institutions and other accredited investors, purchased approximately 6 million6,992,500 shares of common stock: 4,902,481stock and 1,048,875 warrants, which equates to 15% warrant coverage on the number of shares they purchased, at $2.25 per share and 1,095,097 shares at $2.20an offering price of $3.25 per share. For every four shares purchased inEach warrant entitles the November 2001 offering and for every five shares purchased in the June 2002 offering, the investors also received a five-year warrantpurchaser to purchase one share of common stock at an exercise price of $2.70 for the November 2001 offering and $2.75 for the June 2002 offering. The net proceeds of approximately $12.5 million continue to be used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
In July 2002, we received additional gross proceeds of $1.8 million pursuant to the second closing of the Spring 2002 private placement of common stock and warrants. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased approximately 1.5 million shares of common stock shares at $1.17$4.06 per share. For every five shares purchased, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of $1.46 per share. The net proceeds of approximately $1.7 million will be used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
On May 13, 2002, we entered into an agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., to amend the strategic collaboration agreement dated as of August 17, 1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared LeuTech development expenses prior to approval equally with Mallinckrodt up to a cap. Mallinckrodt agreed to pay us milestone payments of an additional $10 million on FDA approval of the first LeuTech indication and on attainment of certain sales goals following product launch. We agreed to arrange for the manufacture of LeuTech and would receive a transfer price on each product unit and a royalty on LeuTech net sales.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to cover half of our estimated expenses associated with completing the FDA review process. Additionally, timing of the $10 million in milestone payments has been revised to coincide with LeuTech's anticipated FDA approval and achievement of future sales goals.
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Year Ended June 30, 20022004 Compared to the Year Ended June 30, 20012003
Grants and contracts -– For the year ended June 30, 2002,2004, we did not recognize anyrecognized $2.0 million in contract revenue related to the shared development costs of LeuTechNeutroSpec pursuant to our collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., as compared to $1,410,356 recognized$504,000 in contract revenue for the year ended June 30, 2001.2003. The decreaseincrease in contract revenue was attributable to the cap onadditional shared development costs of LeuTechNeutroSpec pursuant to the originalamended collaboration agreement, which was reached duringagreement. For the year ended June 30, 2001. In May 20022004, we entered into an agreement with Mallinckrodtrecorded $149,738 in grant revenue pursuant to amend this agreement. Under the terms of this amended agreement, Mallinckrodt has committed, among other things, up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to cover half of the estimated expenses associated with completing the FDA review process of LeuTech. Grant revenue under the Small Business Innovation Research and the Small
Business Technology Transfer programs of the Department of Health and Human Services decreasedcompared to $80,929$137,417 for the year ended June 30, 2002 compared the $211,069 reported for the year ended June 30, 2001.2003.
License Fees and Royalties -– During the year ended June 30, 2001, we adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 "Revenue“Revenue Recognition in Financial Statements" ("SAB 101")Statements” (SAB 101), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share in fiscal 2001, which reflectsreflected the deferral of an up-front license fee received from Mallinckrodt, Inc. related to licensing of LeuTechNeutroSpec recognized in the year ended June 30, 2000. Previously, we had recognized up-front license fees when they were received and we had no obligations to return the fees under any circumstances. Under SAB 101, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreements. For the year ended June 30, 2002,2004, we recorded $200,426$165,420 of license revenue $138,888compared to $628,598 of whichlicense revenue recorded for the year ended June 30, 2003. Of the license revenue recorded for the year ended June 30, 2004, $11,569 was included in the cumulative effect adjustment as of July 1, 2000 and $61,538$153,851 was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. We recorded $166,667 ofOf the license revenue recorded for the year ended June 30, 2001 that2003, $43,987 was included in the cumulative effect adjustment as of July 1, 2000.2000 and $584,611 was recorded as a result of the initial $800,000 payment received from Mallinckrodt.
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Research and development -– Research and development (R&D) expenses increased to $12,117,026$23.3 million for the year ended June 30, 20022004 compared to $10,108,999$17.4 million for the year ended June 30, 2001.2003. The increase in R&D was primarily related to our increased development efforts and expanding clinical trials of PT-141 and LeuTech, and increased research on our MIDAS technology. Additionally, depreciation expense increased due to a change in the remaining estimated useful lives of certain leasehold improvements at our Edison, New Jersey facility which we moved out of in July 2002.NeutroSpec. Our R&D efforts, and their respective allocated costs, are currently concentrated on the following:
20General and administrative – General and administrative (G&A) expenses increased to $5.7 million for the year ended June 30, 2004 compared to $4.9 million for the year ended June 30, 2003. The increase in G&A expenses is primarily attributable to the increases in marketing and business development expenses, salaries and other stock based compensation and related personnel expenses.
Investment income – Interest income increased to $350,999 for the year ended June 30, 2004 compared to $247,552 for the year ended June 30, 2003. The increase in interest income is attributable to higher amounts of cash, cash equivalents and investments available for investment purposes. Realized losses on the sale of investments were $129,355 for the year ended June 30, 2004 compared to no realized gains or losses for the year ended June 30, 2003.
23
GeneralIncome tax benefit — During 2004 and administrative2003, the Company sold New Jersey State net operating loss carryforwards and research and development credits, which resulted in the recognition of $240,836 and $245,093 of income tax benefits, respectively. Assuming the State of New Jersey continues to fund this program, which is uncertain, the actual amount of net operating losses and tax credits we may sell will also depend upon the allocation among qualifying companies of an annual pool established by the State of New Jersey.
Deemed dividend - General and administrative (G& A) expenses increased to $5,004,143— Based on the sales price of the common stock in private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with their existing terms. As a result, a deemed dividend of $203,138 has been reflected in the Company’s consolidated statement of operations for the year ended June 30, 2002 compared to $3,024,8412003. There was no deemed divided reflected in the Company’s consolidated statement of operations for the year ended June 30, 2001. The increase in G&A2004 since there was primarily attributable to an increase in professional fees mainly related to legal fees, increase in salaries and related personnel expenses andno downward adjustment of the accrualexercise prices of our settlement of litigation with Molecular Biosystems, Inc. Since our settlement with Molecular Biosystems, Inc., we expect a decrease in professional fees beginning later this calendar year.certain outstanding warrants.
Interest income - Interest income decreased to $312,015 for the year ended June 30, 2002 compared to $787,574 for the year ended June 30, 2001. The decrease in interest income was due to lower level of funds available for investment purposes and lower rates of return experienced throughout the fiscal year ended June 30, 2002.
Net Loss - Increased to $16,138,577 for the year ended June 30, 2002 compared to $10,599,237 for the year ended June 30, 2001. The increase was due to the reduction in grant and contract revenue and the increase in expenses explained above.
Year Ended June 30, 20012003 Compared to the Year Ended June 30, 20002002
Grants and contracts - Contract– For the year ended June 30, 2003, we recognized $504,000 in contract revenue related to the shared development costs of LeuTechNeutroSpec pursuant to our collaboration agreement with Mallinckrodt, Inc. decreased to$1,410,356as compared to no recognition of contract revenue for the year ended June 30, 2001 as compared2002. The increase in contract revenue was attributable to $4,141,480 reported foradditional shared development costs of NeutroSpec pursuant to the amended collaboration agreement. For the year ended June 30, 2000. The decrease was attributable to the cap on shared development costs of LeuTech2003, we recorded $137,417 in grant revenue pursuant to the agreement. Grant revenue under the Small Business Innovation Research and the Small Business Technology Transfer programs of the Department of Health and Human Services decreasedcompared to $211,069$80,929 for the year ended June 30, 2001 compared the $475,631 reported for the year ended June 30, 2000.2002.
License Fees and Royalties -– During the year ended June 30, 2001, we adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 "Revenue“Revenue Recognition in Financial Statements" ("SAB 101")Statements” (SAB 101), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share in fiscal 2001, which reflectsreflected the deferral of an up-front license fee received from Mallinckrodt Inc. related to licensing of
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LeuTech NeutroSpec recognized in the year ended June 30, 2000. Previously, we had recognized up-front license fees when they were received and we had no obligations to return the fees under any circumstances. Under SAB 101, these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreements. For the year ended June 30, 2001,2003, we recorded $166,667$628,598 of license revenue thatcompared to $200,426 of license revenue recorded for the year ended June 30, 2002. Of the license revenue recorded for the year ended June 30, 2003, $43,987 was included in the cumulative effect adjustment as of July 1, 2000. Our2000 and $584,611 was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. Of the license revenue recorded for the year ended June 30, 2002, $138,888 was included in the cumulative effect adjustment as of July 1, 2000 and 1999 results have not been restated to apply SAB 101 retroactively.$61,538 was recorded as a result of the initial $800,000 payment received from Mallinckrodt.
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Research and development -– Research and development (R&D) expenses increased to $10,108,999$17.4 million for the year ended June 30, 20012003 compared to $9,109,619$12.1 million for the year ended June 30, 2000.2002. The increase in R&D iswas primarily related to our increased development efforts and expanding clinical trials of PT-141 and research on our MIDAS Technology. R&DNeutroSpec.
General and administrative – General and administrative (G&A) expenses allocateddecreased to LeuTech amounted to $4,750,189$4.9 million for the year ended June 30, 20012003 compared to $5,912,629$5.0 million for the year ended June 30, 2000. R&D2002. The decrease in G&A expenses allocatedis primarily attributable to PT-141 and MIDAS were $3,761,741 and $1,597,069, respectively,the reduction in legal expenses since the settlement with Molecular Biosystems in August 2002, which was accrued as of June 30, 2002.
Interest income – Interest income decreased to $247,552 for the year ended June 30, 20012003 compared to $1,858,637 and $1,338,353, respectively,$312,015 for the year ended June 30, 2000.
General and administrative - General and administrative (G& A) expenses decreased to $3,024,841 for the year ended June 30, 2001 compared to $4,567,273 for the year ended June 30, 2000.2002. The decrease in G&A is mainly attributable to the decrease in administrative salaries and payments made in fiscal 2000 related to a terminated merger and significant non-cash, stock based compensation expense recorded in fiscal 2000.
Interest income - Interest income increased to $787,574 for the year ended June 30, 2001 compared to $405,590 for the year ended June 30, 2000. The increase in interest income is dueattributable to higher levellower average amounts of fundscash, cash equivalents and investments available for investment due to our financingpurposes throughout the year and the decrease in September and October of 2000.interest rates these investments earn.
Interest expenseIncome tax benefit - Interest expense decreased— During 2003 and 2002, the Company sold New Jersey State net operating loss carryforwards and research and development credits, which resulted in the recognition of $245,093 and $392,410 of income tax benefits, respectively. Assuming the State of New Jersey continues to $5,104fund this program, which is uncertain, the actual amount of net operating losses and tax credits we may sell will also depend upon the allocation among qualifying companies of an annual pool established by the State of New Jersey.
Deemed dividend — Based on the sales price of the common stock in private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with their existing terms. As a result, a deemed dividend of $203,138 and $297,603 has been reflected in the Company’s consolidated statement of operations for the yearyears ended June 30, 2001 compared to $29,247 for the year ended June 30, 2000.2003 and 2002, respectively. The decrease in interest expense was duedeemed dividend between years is primarily the result of the difference in the sales price of the common stock in the private placements and the changes to the repayment of debt that occurredtotal securities outstanding during the three months ended September 30, 1999.
Net Loss - Increased to $10,599,237 for the year ended June 30, 20012003 compared to $8,183,438 for the year ended June 30, 2000. The increase is due to the reduction in grant and contract revenue and the increase in research and development expenses explained above.2002.
Liquidity and Capital Resources
Since inception, we have incurred net operating losses. As of June 30, 2002,2004, we had a deficit accumulated during the development stage of $70,243,616.$117.1 million. We have financed our net operating losses through June 30, 20022004 by a series of debt and equity financings. AtAs of June 30, 2002,2004, we had cash and cash equivalents of $7,944,264$17.9 million and investments of $1,178,717.$2.5 million. On January 28, 2004, we completed a private placement of our common stock and warrants, which yielded gross proceeds of approximately $22.7 million. Pursuant to the private placement, investors purchased approximately 7 million shares of common stock at $3.25 per share and received five year warrants to purchase approximately 1 million shares of common stock at an exercise price of $4.06 per share. The net proceeds of approximately $21.0 million are being used for the continued development of PT-141, NeutroSpec, drug discovery efforts and general corporate purposes. On August 17, 2004, we received $20.0 million upon the closing of the collaborative agreement with King Pharmaceuticals, Inc.
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Our product candidates are at various stages of research and development and may never be successfully developed or commercialized. We willreceived regulatory approval to market and sell NeutroSpec for diagnosis of appendicitis, and we need regulatory approval to market LeuTechand sell PT-141, MIDAS products and NeutroSpec for diagnosis of appendicitis.other indications. PT-141, MIDAS products and MIDASNeutroSpec for other indications will require significant further
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research, development and testing. We may experience uncertainties, delays, difficulties and expenses commonly experienced by early stage bio-pharmaceuticalbiopharmaceutical companies, which may include unanticipated problems and additional costs relating to:
| • | the development and testing of products in animals and humans; | |
| • | product approval or clearance; | |
| • | regulatory compliance; | |
| • | good manufacturing practices; | |
| • | intellectual property rights; | |
| • | product introduction; and | |
| • | marketing, sales and competition. |
Failure to obtain regulatory approval of LeuTech, or delays in obtaining regulatory approval of LeuTech, would eliminate or delay our potential revenues from sales of LeuTech. This could make it more difficult to attract investment capital for funding our other research and development projects. Any of these possibilities could materially and adversely affect our operations.
For During the year ended June 30, 2002, the net decrease in cash and cash equivalents amounted to $3,512,160. Net cash used for2004, our operating activities was $13,146,347,used net cash of $23.7 million and during the year ended June 30, 2003 our operating activities used fornet cash of $19.9 million. The increase resulted primarily from increased R&D spending on both PT-141 and NeutroSpec.
During the year ended June 30, 2004, cash provided by investing activities was $2,806,516,$1.2 million, consisting of $198,000 used for the purchase of capital expenditures and $1.4 million provided by the sale of investment securities. During the year ended June 30, 2003, we used cash in investing activities of $4.1 million, consisting of $1.1 million of capital expenditures and $3.0 million for investment securities.
During the year ended June 30, 2004, net cash provided by financing activities was $12,440,703.$26.2 million, consisting of $26.4 million in proceeds from the issuance of common stock and warrants in private placements and the exercise of options and warrants, partially offset by $200,753 for payments on capital lease obligations. During the year ended June 30, 2003, net cash provided by financing activities was $30.3 million, consisting of $30.5 million in proceeds from the issuance of common stock and warrants in private placements, partially offset by $153,473 of payments on capital lease obligations.
In January 2004, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of $22.7 million. Investors, consisting of domestic financial institutions and other accredited investors, purchased 7.0 million shares of common stock and 1.0 million warrants, which equates to 15% warrant coverage on the number of shares they purchased, at an offering price of $3.25 per share. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of $4.06 per share. The net proceeds were $21.0, which continue to be used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
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In November 20012002 and June of 2002,March 2003, we received aggregate gross proceeds of $13.44$30.6 million in private placements of common stock and warrants. Investors, consisting of domestic and European financial institutions and other accredited investors, purchased approximately 622.8 million shares of common stock: 4,902,4819,373,940 shares at $2.25$1.23 per share and 1,095,097 shares13,433,096 at $2.20$1.42 per share. For every five shares purchased in the November 2002 offering and for every four shares purchased in the November 2001 offering and for every five shares purchased in the June 2002March 2003 offering, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of $2.70$1.54 for the November 20012002 offering and $2.75$1.77 for the June 2002March 2003 offering. The net proceeds of approximately $12.5$28.8 million continue to bewere used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
In July 2002, we received additional gross proceeds of $1.8 million pursuant to the second tranche of the Spring 2002 private placement of common stock and warrants. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased approximately 1.5 million shares of common stock shares at $1.17 per share. For every five shares purchased, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of $1.46 per share. The net proceeds of approximately $1.7 million will bewere used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
On May 13, 2002, we entered into an agreement with Mallinckrodt Inc., a division of Tyco International, Ltd., to amend the strategic collaboration agreementour Strategic Collaboration Agreement dated as of August 17,
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1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13$13.0 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared LeuTechNeutroSpec development expenses prior to FDA approval equally with Mallinckrodt up to a cap.Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10$10.0 million on FDA approval of the first LeuTechNeutroSpec indication and on attainment of certain sales goals following product launch. We agreed to arrange for the manufacture of LeuTechNeutroSpec and we would receive a transfer price on each product unit and a royalty on LeuTechNeutroSpec net sales.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to cover halfoffset a portion of ourthe estimated expenses associated with completing the FDA review process. Additionally, timing of the $10$10.0 million in milestone payments has been revised to coincide with LeuTech's anticipatedNeutroSpec’s FDA approval and achievement of future sales goals.
In September and October All of 2000, we received approximately $14 million in net proceeds from a private offering consisting of common stock and warrants. Investors, consisting of financial institutions based in Europe, purchased approximately 1.8the $3.2 million and 732,000 shares at $6.00 and $5.94 per share, which represented$2.0 million, upon FDA approval, of the closing market price of Palatin shares on the American Stock Exchange on September 7, 2000 and October 2, 2000, respectively. For every five shares purchased, the investors also received a five-year warrantmilestone payments has been paid to purchase one share of common stock at a 25% premium to the closing price. The net proceeds of approximately $14 million were used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.date.
On July 17, 2002, we moved into our new leased facility of approximately 28,000 square feet in Cranbury, New Jersey that combines both the research and development facility formerly located in Edison, New Jersey and the corporate offices formerly located in Princeton, New Jersey. Our initial cash outlay related to the move was approximately $1.6 million. Minimum annual future lease payments escalate currently from approximately $920,000$925,000 per year to $1,550,000$1.6 million per year.year in 2007. The lease will expire in July 2012.
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We have three license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2003 - $300,000, 2004 -2005 — $500,000, 2006 — $200,000, 2005 -2007 — $200,000, 2006 -2008 — $200,000 and 2007 -2009 — $200,000.
We are and expect to continue actively searching for certain products and technologies to license or acquire, now or in the future. If we are successful in identifying a product or technology for acquisition, we may require substantial funds for such an acquisition and subsequent development or commercialization. We do not know whether any acquisition will be consummated in the future.
We have incurred negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. We expect that our existing capital resources, including the funds received pursuant to the June and July 2002 private placement,from King in August 2004, will be adequate to fund
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our the Company’s projected operations through December 2002,the fiscal year ending June 30, 2005, based on current and projected expenditure levels. No assurance can be given that we will not consume a significant amount of our available resources before that time. We plan to continue to refine our operations, control expenses, evaluate alternative methods to conduct our business and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Based on our historical ability to raise capital, we believe that through one or a combination of such factors, we will obtain adequate financing to fund our operations through fiscal year 2003, based on current expenditure levels. Should appropriate sources of financing not be available, we would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that our financing efforts will be successful. If adequate funds are not available, our financial condition and results of operations will be materially and adversely affected, and we may be forced to cease operations.
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-141 and our MIDAS technology.few years. To achieve profitability, we, alone or with others, must successfully develop and commercialize our technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and we do not know whether we will be able to achieve profitability on a sustained basis, if at all.
Commitments
As outlined in Note 45 of the Notes to our Consolidated Financial Statements, we have entered into various contractual obligations and commercial commitments. The following table summarizes our most significant contractual obligations as of June 30, 2002:2004:
PAYMENTS DUE BY PERIOD
LESS THAN 1 toAFTER 5
TOTAL YEAR 1 - 3 YEARS 4 to- 5 After 5
Contractual Obligation years years yearsYEARS YEARS
Facility operating leases $10,719,000 $1,515,000 $2,651,000 $2,585,000 $3,968,000
Capital lease obligations 64,000 34,000 24,000 6,000 -
License agreements 1,300,000 500,000 400,000 400,000 -
------------------------------------------------------------------------
Total - ---------------------- ----- ----- ----- -----
Facility leases $3,875,000 $2,540,000 $6,079,000 $12,494,000contractual obligations $12,083,000 $2,049,000 $3,075,000 $2,991,000 $3,968,000
========================================================================
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Factors Affecting our Business Condition
In addition to the other information included in this annual report on Form 10-K, the following factors should be considered in evaluating our business and future prospects:
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We expect to continue to incur substantial losses over the next severalfew years and we may never become profitable.
We have never been profitable and we may never become profitable. As of June 30, 2002,2004, we had a deficit accumulated during development stage of $70,243,616$117.1 million and a loss for the year then ended of $16,138,577.$26.3 million. We anticipate substantial losses over the next few years associated with the manufacturing and marketing of LeuTech,NeutroSpec for diagnosis of appendicitis, and continued research and development of PT-141, MIDAS and MIDAS. If we do not obtain additional funding, our losses will continue to accumulate.NeutroSpec for other indications. We cannot be certain whether additional funds will be available when needed, or on acceptable terms. If we are unable to obtain additional financing as needed, we may reduce the scope of our operations, or cease operations, which willwould have a material adverse effect on our business.
We currently have no revenues from product revenuessales and will need to raise additional capital to operate our business.
To date, we have generated no product revenues.revenues from the sale of any approved products. Unless and until we receive approval from the U.S. Federal Drug Administration and other regulatory authorities for our other product candidates, we cannot sell our other products and will not have product revenues.revenues from them. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from net proceeds from the sale of future offeringsNeutroSpec products and from cash, cash equivalents and investments on hand. We will need to seek additional sources of financing, which may not be available on favorable terms, if at all. If we do not succeed in raising additional funds on acceptable terms, we may be unable to complete planned pre-clinical and clinical trials or obtain approval of our product candidates from the FDA and other regulatory authorities. In addition, we could be forced to discontinue product development, reduce or forego sales and marketing efforts and forego attractive business opportunities, or cease operations.which would have a material adverse effect on our business.
We have a limited operating history upon which to base an investment decision.
We are a development-stagean emerging company and have not yet demonstrated our ability to perform the functions necessary for the continued success of the commercialization of NeutroSpec or the successful commercialization of any of our other product candidates. The successful commercialization of our other product candidates will require us to perform a variety of functions, including:
| • | continuing to undertake pre-clinical development and clinical trials; | |
| • | participating in regulatory approval processes; |
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| • | formulating and manufacturing products; | |
| • | conducting sales and marketing | |
| • | obtain additional capital. |
Our operations have been limited to organizing and staffing our company,Company, acquiring, developing and securing our proprietary technology and undertaking pre-clinical trials and clinical trials of our principal product candidates. These operations provide a limited basis for you to assess our
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ability to commercialize our product candidates and the advisability of investing in our common stock.
Development and commercialization of our proposed product and technologies involves a lengthy, complex and costly process and we may never develop or commercialize any other products other than NeutroSpec.
Our other product candidates are at various stages of research and development, will require regulatory approval, and may never be successfully developed or commercialized. We are still conducting clinical trials on the use of NeutroSpec for other indications. PT-141 and MIDAS products will require significant further research, development and testing. You should evaluate us in light of the uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to:
| • | the research, development and testing of products in animals and humans; | |
| • | product approval or clearance; | |
| • | regulatory compliance; | |
| • | good manufacturing practices; | |
| • | intellectual property rights; | |
| • | product introduction; and | |
| • | marketing and competition. |
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The regulatory approval process is lengthy, expensive and uncertain, and may prevent us from obtaining the approval we require.
Government authorities in the United States and other countries extensively regulate the advertising, labeling, storage, record-keeping, safety, efficacy, research, development, testing, manufacture, promotion, marketing and distribution of drug products. Drugs are subject to rigorous regulation by the FDA in the United States and similar regulatory bodies in other countries. The steps ordinarily required by the FDA before a new drug may be marketed in the United States:
| • | completion of pre-clinical laboratory tests, pre-clinical trial and formulation studies; | |
| • | submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical trials may begin; | |
| • | performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each proposed indication; | |
| • | the submission of a new drug application, or NDA, to the FDA; and | |
| • | FDA review and approval of the NDA before any commercial marketing or sale. |
The results of product development, pre-clinical studies and clinical studies are submitted to the FDA as part of a NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, the FDA generally has 180 days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA determines that the clinical data do not adequately establish the safety and efficacy of the drug. Upon approval, a drug candidate may be marketed only in those dosage forms and for those indications approved in the NDA. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals.
Satisfaction of FDA pre-market approval requirements for new drugs typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.
The FDA has required specific post-marketing studies for NeutroSpec, including additional clinical studies with pediatric patients and patients with specified conditions, and additional testing and development of assays. These post-marketing studies must be completed by various deadlines over the next two years.
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If regulatory approval of any of our products is granted, it will be limited to certain disease states or conditions. The manufacturers of approved products and their manufacturing facilities will be subject to continual review and periodic inspections by the FDA and other authorities where applicable, and must comply with ongoing regulatory requirements, including the FDA=s current Good Manufacturing Practices ("cGMP") regulations. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as Warning Letters, suspension of manufacturing, seizure of product, voluntary recall of a product, injunctive action or possible civil penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval. Because we intend to contract with third parties for manufacturing of these products, our ability to control third party compliance with FDA requirements will be limited to contractual remedies and rights of inspection. Failure of third-party manufacturers to comply with cGMP or other FDA requirements may result in legal or regulatory action by the FDA.
Outside the United States our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all of the risks associated with FDA approval described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Community, or EC, registration procedures are available to companies wishing to market a product to more than one EC member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficiency has been presented, a marketing authorization will be granted.
We could lose our rights to LeuTechNeutroSpec and PT-141, which would adversely affect our potential revenues.
Our rights to a key antibody used in LeuTechNeutroSpec are dependent upon an exclusive license agreement with The Wistar Institute of Biology and Anatomy. Our rights to technology related to PT-141 are dependent upon an exclusive field-of-use license agreement with Competitive Technologies, Inc. These agreements contain specific performance criteria and require us to pay royalties and make milestone payments. Failure to meet these requirements, or any other event of default under the license agreements, could lead to termination of the license agreements. If a license agreement is terminated we may be unable to make or market the covered product, in which case we may lose the value of our substantial investment in developing the product, as well as any future revenues from selling the product.
The FDA may not approve the marketing of LeuTech, which would adversely affect our potential revenues.
We completed clinical trials of LeuTech for the diagnosis of equivocal appendicitis in the spring of 1999. In November 1999, we filed an application with the FDA for approval to market LeuTech for that indication. The FDA has done a complete review of our LeuTech application and on September 23, 2000 sent us a complete review letter requesting additional data on LeuTech manufacturing, product development and process validation. The FDA will not take any further action on our application until we provide the requested information. We are currently in the process of obtaining the data requested by the FDA. This process is uncertain, costly and could require substantial time. If we are able to obtain the requested manufacturing, product development and validation data, we will provide it to the FDA as an amendment to our marketing application. FDA review of the application amendment can be a long and uncertain process. The amendment must demonstrate that we have satisfactorily addressed all of the issues contained in the complete review letter, before the FDA can approve LeuTech for commercial use. We will need to rely on our contract manufacturers to obtain a substantial part of the requested information. We cannot know for certain whether we can provide the requested information, how long it will take, or whether the data we provide will be satisfactory to the FDA. Failure to obtain regulatory approval of LeuTech, or delays in obtaining regulatory approval of LeuTech, would eliminate or delay our potential revenues from sales of LeuTech. This could make it more difficult to attract investment capital for funding our other research and development projects.
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We rely on third parties to conduct clinical trials for our product candidates and their failure to timely perform their obligations could significantly harm our product development.
We rely on outside scientific collaborators such as researchers at clinical research organizations and universities in certain areas that are particularly relevant to our research and product development plans, such as the conduct of clinical trials. The competition for these relationships is intense, and we may not be able to maintain our relationships with them on acceptable terms. These outside collaborators generally may terminate their engagements with us at any time. As a result, we can control their activities only within certain limits, and they will devote only a certain amount of their time to conduct research on our product candidates and develop them. If they do not successfully carry out their duties under their agreements with us, fail to inform us if these trials fail to comply with clinical trial protocols or fail to meet expected deadlines, this may adversely affect our ability to develop our product candidates and obtain regulatory approval.
The results of our clinical trials may not support our product claims.
Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product claims. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and could delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay or eliminate our ability to commercialize our product candidates and generate product revenues.
Production and supply of LeuTech dependsNeutroSpec and PT-141 depend on contract manufacturers over whom we have no control.
We do not have the facilities to manufacture LeuTech.NeutroSpec or PT-141. We depend on DSM N.V. of the Netherlands for the manufacture of the antibody used in LeuTech, andNeutroSpec, on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of LeuTech kits.NeutroSpec kits, and on UCB Bioproducts, SA in Belgium for the manufacture of PT-141. Our contract manufacturers must perform LeuTechthese manufacturing activities in a manner that complies with FDA regulations. Failure to conduct their activities in compliance with FDA regulations could negatively impact our ability to receive continued FDA approval of LeuTech.NeutroSpec or receive FDA approval of our other potential products. The failure of either of these manufacturers to supply these key components of LeuTech,NeutroSpec, or their inability to comply with FDA manufacturing regulations, could force us to seek other manufacturers and could interfere with our ability to deliver product. Establishing relationships with new suppliers, any of whom must be FDA-approved, is a time-consuming and costly process.
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We have limited or no experience in marketing, distributing and selling diagnostic imaging products and will rely on our marketing partner to provide these capabilities.
If the FDA approves LeuTech for marketing and sale, we willWe depend on our arrangement with Tyco Healthcare (formerly Mallinckrodt Inc.), a division of Tyco International, Ltd., to market, sell and distribute LeuTech.NeutroSpec. Tyco Healthcare is our worldwide (excluding Europe) marketing, saledistribution and distributionsale partner for LeuTech.NeutroSpec. If Tyco Healthcare fails to market LeuTech,NeutroSpec or devote enough resources to NeutroSpec, our potential revenues from the sale of LeuTechNeutroSpec will be adversely affected. If the arrangement with Tyco Healthcare fails, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities. In addition, if the FDA approves PT-141 for marketing and sale, we will depend on our arrangements with potential partners for the potential marketing, distribution and sale of PT-141. If these potential partners fail to market PT-141 or devote enough resources to PT-141, our potential revenues from the sale of PT-141 will be adversely affected. If the arrangements with these potential partners fail, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities.
If LeuTechNeutroSpec does not achieve market acceptance, our business will suffer.
Approval of LeuTechNeutroSpec for marketing and sale does not assure the product'sproduct’s commercial success. LeuTech, if successfully developed,NeutroSpec will compete with other diagnostic imaging modalities and drugs manufactured and marketed by major pharmaceutical and other biotechnology companies. Imaging agents such as LeuTechNeutroSpec generally take longer to achieve market acceptance following marketing approval than
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other drugs. The degree of market acceptance of LeuTechNeutroSpec will depend on a number of factors, including:
| • | perceptions by members of the health care community, including physicians, about the safety and effectiveness of | |
| • | cost-effectiveness of | |
| • | availability of reimbursement for our products from government or other healthcare | |
| • | the establishment and demonstration of the clinical efficacy and safety; and | |
| • | potential advantage over alternative treatment | |
If LeuTechNeutroSpec does not achieve adequate market acceptance, our business, financial condition and results of operations will be adversely affected.
Competing products and technologies may make LeuTechNeutroSpec and our other potential products noncompetitive.
We are aware of one company developingmarketing an antibody-based product which may compete with LeuTechNeutroSpec as to certain indications. The competing product is marketed in some European countries and regulatory approval is pending in the United States. Palatin iscountries. We are also aware of at least one other company developing a peptide-based product which may also compete with LeuTechNeutroSpec as to certain indications. In addition, other technologies may also be used to diagnose appendicitis, including computerized tomography or CT scan, and ultrasound technologies.
34
We are aware that there is already anare three oral FDA-approved drugs for the treatment forof erectile dysfunction. This product isThese products are also approved in Europe, Japan and most of the world'sworld’s pharmaceutical markets. In addition, we are aware of at least threetwo other products treating erectile dysfunction that have been submitted for approval in the United States, Europe and most of the world’s pharmaceutical markets. Potentially, inIn order to achieve approval and market acceptance, PT-141 may potentially be required to demonstrate efficacy and safety equivalent or superior to these other products.
The pharmaceuticalbiopharmaceutical and diagnostic industries are highly competitive. We are likely to encounter significant competition with respect to LeuTech,NeutroSpec, PT-141 and our other potential products. Many of our competitors have substantially greater financial and technological resources than we do. Many of them also have significantly greater experience in research and development, marketing, distribution and sales than we do. Accordingly, our competitors may succeed in developing, marketing, distributing and selling products and underlying technologies more rapidly than us.we may. These competitive products or technologies may be more effective and useful and less costly than LeuTech,NeutroSpec, PT-141 or our other potential products. In addition, academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and may develop competing products or technologies on their own or through strategic alliances or collaborative arrangements.
29Our ability to achieve significant revenues from the sale of our future products will depend, in part, on the ability of healthcare providers to obtain adequate reimbursement from Medicare, Medicaid, private insurers and other health care payers.
The continuing efforts of government and insurance companies, health maintenance organizations and other payers of health care costs to contain or reduce costs of health care may adversely affect our future revenues and ability to achieve profitability. Our ability to successfully commercialize our future products will depend, in significant part, on the extent to which health care providers can obtain appropriate reimbursement levels for the cost of our products and related treatment. Third-party payers are increasingly challenging the prices charged for diagnostic and therapeutic products and related services. Also, the trend towards managed health care in the U.S. and the concurrent growth of organizations such as HMOs, could control or significantly influence the purchase of health care services and products. In addition, legislative proposals to reform health care or reduce government insurance programs may result in lower prices or the actual inability of prospective customers to purchase our future products. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to operate profitably. Furthermore, even if reimbursement is available, it may not be available at price levels sufficient for us to realize a positive return on our investment
35
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.
Our success, competitive position and future revenues will depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. We cannot predict:
| • | the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our | |
| • | if and when patents will | |
| • | whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; | |
| • | whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose. |
Our product candidates could infringe the proprietary rights of other parties.
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to:
| • | obtain licenses, which may not be available on commercially reasonable terms, if at all; | |
| • | redesign our products or processes to avoid infringement; | |
| • | stop using the subject matter claimed in the patents held by others; | |
| • | pay damages; or | |
| • | defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our management resources. |
If we are unable to keep our trade secrets confidential, our technologies and other proprietary information may be used by others to compete against us.
In addition to our reliance on patents, we attempt to protect our proprietary technologies and processes by relying on trade secret laws, nondisclosure and confidentiality agreements, and licensing arrangements with our employees and other persons who have access to our proprietary information. These agreements and arrangements may not provide meaningful protection for our proprietary technologies and processes in the event of unauthorized use or disclosure of such information. In addition, our competitors may independently develop substantially equivalent technologies and processes or otherwise gain access to our trade secrets or technology, either of which could materially and adversely affect our competitive position.
36
Our collaboration agreements may fail or be terminated unexpectedly, which could result in significant delays and substantial increases in the cost of our research, development and the commercialization of our potential products.
We are party to various arrangements with academic, governmental and corporate partners. The successful development and commercialization of the potential products covered by these arrangements will depend upon the ability of these third parties to fully perform their contractual responsibilities. If any of these parties breaches or unexpectedly terminates their agreement with us, or otherwise fails to conduct their activities in a timely manner, the development or commercialization of our potential products may be delayed. For example, we have an agreement with Mallinckrodt under which they have agreed to sell NeutroSpec. If Mallinckrodt were to become unwilling or unable to provide these services, we would have to quickly make alternative arrangements with third parties, which could significantly delay and increase the expenses associated with the commercialization of NeutroSpec.
We intend to continue to enter into additional collaborations to develop and commercialize our potential products in the future. We may not be able to negotiate these arrangements on favorable terms, if at all, and these relationships may not be successful. In addition, our collaborative partners may pursue alternative technologies or develop alternative compounds designed to treat the same diseases that are the target of their collaborative programs with us.
We are subject to extensive regulation in connection with the laboratory practices and the hazardous materials we use.
We are subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with our research. In each of these areas, as noted above, the FDA and other regulatory authorities have broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products and withdraw approvals, any one or more of which could have a material adverse effect upon us. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.
37
Contamination or injury from hazardous materials used in the development of LeuTech,NeutroSpec, PT-141 and MIDAS could result in a liability exceeding our financial resources.
Our research and development of LeuTech,NeutroSpec, PT-141 and MIDAS involves the use of hazardous materials and chemicals, including radioactive compounds. We cannot completely eliminate the risk of contamination or injury from these materials. In the event of contamination or injury, we may be responsible for any resulting damages. Damages could be significant and could exceed our financial resources, including the limits of our insurance.
30
We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.
The testing and marketing of medical products entailentails an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products.products, or cease clinical trials. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with corporate collaborators. We currently carry product/medical professional liability insurance, which includes liability insurance for our clinical trials. We, or any corporate collaborators, may not be able to obtain insurance at a reasonable cost or in sufficient amounts, if at all. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
Trading in our stock over the last 12 months has been limited, so investors may not be able to sell as much stock as they want at prevailing prices.
The average daily trading volume in our common stock for the 12 month period ended September 26, 20028, 2004 was approximately 26,500 shares and the average daily number of transactions was approximately 23 for the same period.440,000 shares. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices.
Our directors, officersmanagement and principal stockholders together control approximately 58%30% of our voting securities, a concentration of ownership which could delay or prevent a change in control.
OurAs of June 30, 2004, our executive officers and directors beneficially own approximately 9%5% of our voting securities and our 5% or greater stockholders beneficially own approximately 49%25% of our voting securities. These stockholders, acting together, will be able to influence and possibly control most matters submitted for approval by our stockholders, including the election of directors, delaying or preventing a change of control, and the consideration of transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.
38
We will face increased costs as a result of changes to the regulations governing public companies, including the Sarbanes-Oxley Act of 2002.
Enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and Exchange Commission and by the American Stock Exchange, could result in increased costs to us to evaluate the implications of any new rules and respond to their requirements. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate RiskRisk.. 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.
31
As of June 30, 2002,2004, our cash and cash equivalents was $7,944,264were $17.9 million and investments, which consisted of commercial papercorporate debt securities and government bonds, was $1,178,717.mutual funds, were $2.5 million. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short term fluctuations in interest rates would materially affect the value of our securities.
39
Item 8. Financial Statements and Supplementary Data
Table of Contents
Consolidated Financial Statements
The following consolidated financial statements of the Company are filed as part of this Report:
3240
REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Palatin Technologies, Inc.:
We have audited the accompanying consolidated balance sheetsheets of Palatin Technologies, Inc. and subsidiary (a development stage company) and subsidiariesenterprise) as of June 30, 2002,2004 and 2003, and the related consolidated statements of operations, stockholders'stockholders’ equity (deficit), and cash flows for each of the year thenyears in the three-year period ended June 30, 2004 and for the period from January 28, 1986 (inception) throughto June 30, 2002.2004. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits. The consolidated financialcumulative statements of Palatin Technologies, Inc.operations, stockholders’ equity (deficit), and subsidiaries as ofcash flows for the period January 28, 1986 (inception) to June 30, 2004 include amounts for the period from January 28, 1986 (inception) to June 30, 2001 and for each of the years in the two-yearthree-year period endedending June 30, 2001, and for the period from January 28, 1986 (inception) through June 30, 2002, to the extent related to the period from January 28, 1986 (inception) through June 30, 2001,which were audited by other auditors who have ceased operations. Those auditors expressed an unqualifiedoperations and whose report has been furnished to us, and our opinion, on those financial statements in their report dated September 10, 2001. Our opinion on the consolidated statements of operations, stockholders' equity (deficit) and cash flows, insofar as it relates to the amounts included for the period from January 28, 1986 (inception) through June 30, 2001 is based solely on the report of the other auditors.
We conducted our auditaudits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, based on our auditaudits and the report of other of other auditors, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiary (a development stage company) and subsidiariesenterprise) as of June 30, 2002,2004 and 2003, and the results of their operations and their cash flows for each of the year thenyears in the three-year period ended June 30, 2004 and for the period from January 28, 1986 (inception) throughto June 30, 2002,2004, in conformity with accounting principlesU.S. generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit and has limited liquid resources that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.accounting principles.
/s/ KPMG LLP
Philadelphia, PennsylvaniaSeptember 20, 2002August 13, 2004
3341
The following report is a copy of a previously issued Arthur Andersen LLP (“Andersen”) report and the report has not been reissued by Andersen. The Andersen report refers to financial statements as of June 30, 2001 and 2000 and for the year thenyears ended June 30, 2001, 2000 and 1999, which are no longer included in the accompanying financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palatin Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. (a Delaware corporation in the development stage) and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, stockholders'stockholders’ equity (deficit) and cash flows for each of the three years in the period ended June 30, 2001 and the period from January 28, 1986 (inception) through June 30, 2001. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiaries as of June 30, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 and the period from January 28, 1986 (inception) through June 30, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
September 10, 2001
3442
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
June 30, 20022004 June 30, 2001
------------- -------------2003
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,944,26417,947,076 $ 11,456,42414,294,603
Available for sale investments 2,465,350 4,088,384
Prepaid expenses and other 349,883 204,731
------------- -------------428,917 347,510
---------------- ---------------
Total current assets 8,294,147 11,661,15520,841,343 18,730,497
Property and equipment, net 2,416,499 1,924,9622,934,739 3,399,181
Restricted cash 433,844 613,075
Investments 1,178,717 -428,075 428,075
Other 35,009 45,017
------------- -------------174,930 163,381
---------------- ---------------
Total assets $ 12,358,21624,379,087 $ 14,244,209
============= =============22,721,134
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 33,491 $ 188,015
Accounts payable $ 1,579,336 $ 1,129,6602,019,970 1,344,789
Accrued expenses 661,883 397,1192,067,183 1,619,382
Accrued compensation 236,200 607,286
Accrued litigation settlement 400,000 -599,600 428,500
Deferred license revenue 794,018 166,666242,000 407,420
---------------- ---------------
Total current liabilities 3,671,437 2,300,731
------------- -------------
Deferred license revenue - 27,778
------------- -------------4,962,244 3,988,106
---------------- ---------------
Capital lease obligations 30,203 76,432
---------------- ---------------
Commitments and Contingenciescontingencies (Note 4)5)
Stockholders' equity:
Preferred stock of $.01 par value - authorized 10,000,000 shares;
Series A Convertible; 26,192 and 29,317 shares issued and outstanding 11,697 and 14,867
shares as of June 30, 20022004 and 2001,2003, respectively; 262 293
Series C Convertible; 700,000 shares issued and outstanding
as of June 30, 2002 and 2001, respectively; 7,000 7,000117 149
Common stock of $.01 par value - authorized 75,000,000 shares;
Issued and outstanding 17,423,07652,790,589 and 11,199,65842,994,050 shares as of
June 30, 20022004 and 20012003, respectively; 174,231 111,997527,906 429,941
Additional paid-in capital 78,792,240 65,981,568136,148,482 109,085,115
Deferred compensation (53,942) (80,119)(78,407) (37,977)
Accumulated other comprehensive income 10,604 -(loss) (84,772) (11,805)
Deficit accumulated during development stage (70,243,616) (54,105,039)
------------- -------------
8,686,779 11,915,700
------------- -------------(117,126,686) (90,808,827)
---------------- ---------------
Total stockholders' equity 19,386,640 18,656,596
---------------- ---------------
Total liabilities and stockholders' equity $ 12,358,21624,379,087 $ 14,244,209
============= =============22,721,134
================ ===============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
3543
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
Inception
(January 28,
1986) Year Ended June 30,
through
-------------------------------------------
June 30, 2004 2004 2003 2002
2002 2001 2000-------------- ------------- ------------- ------------ ---------------------------
REVENUES:
Grants and contracts $ 9,624,09412,415,249 $ 80,922,149,738 $ 1,621,425641,417 $ 4,617,11180,929
License fees and royalties 2,101,3892,895,407 165,420 628,598 200,426 166,667 500,000
Other 318,917 - - -
--------------------------- ------------- ------------- -------------
Total revenues 12,044,40015,629,573 2,315,158 1,270,015 281,355
1,788,092 5,117,111
--------------------------- ------------- ------------- -------------
OPERATING EXPENSES:
Research and development 54,973,31395,745,833 23,333,329 17,439,191 12,117,026 10,108,999 9,109,619
General and administrative 27,381,25837,987,420 5,739,519 4,866,642 5,004,143 3,024,841 4,567,273
Net intangibles write down 259,334 - - -
--------------------------- ------------- ------------- -------------
Total operating expenses 82,613,905133,992,587 29,072,848 22,305,833 17,121,169
13,133,840 13,676,892
--------------------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)(EXPENSE):
InterestInvestment income, 2,453,579net of realized losses 2,922,776 221,644 247,552 312,015 787,574 405,590
Interest expense (1,959,141)(2,003,828) (22,649) (22,038) (3,188) (5,104) (29,247)
Merger costs (525,000) - - -
--------------------------- ------------- ------------- -------------
Total other income/(expenses) (30,562)income, net 393,948 198,995 225,514 308,827
782,470 376,343
--------------------------- ------------- ------------- -------------
Loss before income taxes and cumu-
lativecumulative
effect of accounting change (70,600,067)(117,969,066) (26,558,695) (20,810,304) (16,530,987) (10,563,278) (8,183,438)
Income tax benefit 717,5621,203,491 240,836 245,093 392,410
325,152 -
--------------------------- ------------- ------------- -------------
Loss before cumulative effect of
accounting change (69,882,505)(116,765,575) (26,317,859) (20,565,211) (16,138,577) (10,238,126) (8,183,438)
Cumulative effect of accounting change (Note 2) (361,111) - (361,111) - --------------
-------------- ------------- ------------- -------------
NET LOSS (70,243,616)(117,126,686) (26,317,859) (20,565,211) (16,138,577)
(10,599,237) (8,183,438)
PREFERRED STOCKDEEMED DIVIDEND (3,308,627)(3,511,765) - (203,138) (297,603)
- -
--------------------------- ------------- ------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
$(73,552,243)$(120,638,451) $(26,317,859) $(20,768,349) $(16,436,180)
$(10,599,237) $(8,183,438)
=========================== ============= ============= =============
Basic and diluted net loss attributable to common stockholders
per Commoncommon share Basic and diluted net loss before cumulative effect
of accounting change$ (0.55) $ (0.73) $ (1.16) $ $(1.01) $ (1.10)
Cumulative effect of accounting change - (0.04) -
------------- ------------- -------------
Basic and diluted net loss $ (1.16) $ (1.05) $ (1.10)
============= ============= =============
Weighted average number of Commoncommon shares outstanding used in
computing basic and diluted net loss attributable to common
stockholders per Commoncommon share 47,687,679 28,362,121 14,195,466 10,131,195 7,441,082
============= ============= =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
3644
Preferred Stock
----------------------------------------------------------------------------------------------------------
Subscrip-
Shares Amount Subscriptionstions Receivable
----------- -------- --------------------- ----------
Balance at inception - $ - $ - $ -
Preferred stock subscriptions - - 4,000 (4,000)
Net loss from inception - - - -
----------- -------- -------- --------
Balance, August 31, 1995 - - 4,000 (4,000)
Preferred stock subscriptions - - (4,000) 4,000
Issuance of Preferredpreferred shares 4,000,000 4,000 - -
Issuance of Commoncommon shares onin
$10,395,400 private placement - - - -
Shares earned but not issued - - - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 25, 1996 4,000,000 4,000 - -
Conversion to Palatin Technologies, Inc. (4,000,000) (4,000) - -
Adjusted balance, June 25, 1996 - - - -
Shares outstanding of Palatin Technologies, Inc. - - - -
Purchase of treasury stock - - - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 1996 - - - -
Issuance of Preferredpreferred shares, net of expenses 137,780 1,378 - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 1997 137,780 1,378 - -
Issuance of Preferredpreferred shares, net of expenses 18,875 189 - -
Conversion of Preferredpreferred shares into Commoncommon shares (49,451) (495) - -
Net loss - - - -
----------- -------- -------- --------
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
3745
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Preferred Stock
----------------------------------------------------------------------------------------------------------
Subscrip-
Shares Amount Subscriptionstions Receivable
----------- -------- ------------- ------------------- ----------
Balance, June 30, 1998 107,204 $ 1,072 $ - $ -
Conversion of Preferredpreferred shares into Commoncommon shares (51,145) (511) - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 1999 56,059 561 - -
Issuance of Preferredpreferred shares, net of expenses 700,000 7,000 - -
Conversion of Preferredpreferred shares into Commoncommon shares (22,498) (225) - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 2000 733,561 7,336 - -
Conversion of Preferredpreferred shares into Commoncommon shares (4,244) (43) - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 2001 729,317 7,293 - -
Conversion of Preferredpreferred shares into Commoncommon shares (3,125) (31) - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 2002 726,192 7,262 - -
Conversion of preferred shares into common shares (711,325) (7,113) - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 2003 14,867 149 - -
Conversion of preferred shares into common shares (3,170) (32) - -
Net loss - - - -
----------- -------- -------- --------
Balance, June 30, 2004 11,697 $ 7,262117 $ - $ -
=========== ======== ======== ========
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
3846
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumu-
latedPALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit
Other Accumulated
Common Stock Additional Deferred Compre- During
---------------------------Other Com- Accumulated
----------------------------- Paid-In Earned butBut Treasury Compensa- hensiveprehensive During Develop-
Shares Amount Capital notNot Issued Stock tion Income (Loss) ment Stage Total
-------------------------- -------------- --------------- ------------- ------------ ---------- -------- ------------ ------------------ ------------- ----------------------- --------------- ----------------
Balance at inception - $ $ -$ $ $ $ $ $ $
- $ $ - $ - $- - - - -
Issuance of shares from
inception 6,922,069 1,177,786 100,000 110,833 - - - - 1,388,619
inception
Net loss from inception - - - - - - - (4,235,059) (4,235,059)
---------- ------------ ------------- ---------- -------- ------------ ---------- ------- ------------ ------- ------------- --------------------- -------------- --------------
Balance, August 31, 1995 6,922,069 1,177,786 100,000 110,833 - - - (4,235,059) (2,846,440)
Issuance of Preferredpreferred shares - - - - - - - - 4,000
Issuance of Commoncommon shares onin
$10,395,400 private placement 41,581,600 9,139,303 - - - - - - 9,139,303
Shares earned but not issued - - - 266,743 - - - - 266,743
Issuance of Commoncommon shares 1,054,548 458,977 (100,000) (324,546) - - - - 34,431
Net loss - - - - - - - (3,897,879) (3,897,879)
---------- ------------ ------------- ---------- -------- ------------ ---------- ------- ------------ ------- ------------- --------------------- -------------- --------------
Balance, June 25, 1996 49,558,217 10,776,066 - 53,030 - - - (8,132,938) 2,700,158
Conversion to Palatin
Technologies, Inc. (46,807,465) (10,748,558) 10,752,558 - - - - - -
---------- ------------ ------------- ---------- -------- ------------ --------- -------------- --------------
Adjusted balance, June 25, 1996 2,750,752 27,508 10,752,558 53,030 - - - (8,132,938) 2,700,158
Shares outstanding of Palatin
Technologies, Inc. 108,188 1,082 (1,082) - - - - - -
Issuance of Commoncommon shares 25,754 257 139,459 - - - - - 139,716
Purchase of treasury stock - - - - (1,667) - - - (1,667)
---------- ------------ ------------- ------------ ---------- -------- ------------ ---------------- -------------- ---------------------------
Balance, June 30, 1996 2,884,694 28,847 10,890,935 53,030 (1,667) - - (8,132,938) 2,838,207
Issuance of Preferredpreferred shares,
net of expenses - - 11,635,653 - - - - - 11,637,031
Shares earned but not issued - - - 250,141 - - - - 250,141
Issuance of Commoncommon shares 135,987 1,360 316,761 (303,171) - - - - 14,950
Retirement of treasury shares (308) (3) (1,664) - 1,667 - - - -
Issuance of stock options below
fair market value - - 1,472,716 - - (1,472,716) - - -
47
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit
Common Stock Additional Deferred Other Com- Accumulated
----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop-
Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total
-------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
Amortization of deferred
compensation - - - - - 394,383 - - 394,383
Net loss - - - - - - - (5,300,164) (5,300,164)
---------- ------------ ------------- ------------ ---------- -------- ------------ ---------------- -------------- ---------------------------
Balance, June 30, 1997 3,020,373 30,204 24,314,401 - - (1,078,333) - (13,433,102) 9,834,548
Issuance of Preferredpreferred shares,
net of expenses - - 1,573,295 - - - - - 1,573,295
Issuance of Preferredpreferred shares
expense Recapturerecapture - - 49,733 - - - - - 49,733
Issuance of Commoncommon shares 66,696 666 94,873 - - - - - 95,539
Issuance of Commoncommon shares upon
conversion of Preferredpreferred shares 1,012,554 10,126 (9,820) - - - - - -39
PALATIN TECHNOLOGIES, INC.(A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)(continued)
Accumu- lated Deficit Other Accumulated Common Stock Additional Deferred Compre- During --------------------------- Paid-In Earned but Treasury Compensa- hensive Develop- Shares Amount Capital not Issued Stock tion Income ment Stage Total ------------ ------------- ------------ ---------- -------- ------------ ------- ------------- ------------Issuance of stock options below fair market value - - 1,161,156 - - (1,161,156) - - - Amortization of deferred compensation - - - - - 1,723,310 - - 1,723,310 Net loss - - - - - - - (9,886,878) (9,886,878) ---------- ------------ ----------------------------------- -------- ---------------------------- ----------------------------------------- Balance, June 30, 1998 4,099,623 40,995 27,183,638 - - (516,179) - (23,319,980) 3,389,547 Issuance ofCommoncommon shares 1,842,101 18,421 7,594,182 - - - - - 7,612,603 Issuance ofCommoncommon shares upon conversion ofPreferredpreferred shares 1,115,740 11,158 (10,655) - - - - - (9) Issuance ofCommoncommon shares upon exercise of warrants 9,874 99 18,676 - - - - - 18,775 Issuance ofCommoncommon shares upon exercise of options 70,257 703 13,348 - - - - - 14,051 Issuance of stock options below fair market value - - 811,054 - - (811,054) - - -
48
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit
Common Stock Additional Deferred Other Com- Accumulated
----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop-
Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total
-------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
Amortization of deferred
compensation - - - - - 1,308,675 - - 1,308,675
Net loss - - - - - - - (12,002,384) (12,002,384)
---------- ------------ ------------- ---------- -------- ------------ ---------- ------- ------------ ---------------- -------------- ---------------------------
Balance, June 30, 1999 7,137,595 71,376 35,610,243 - - (18,558) - (35,322,364) 341,258
Issuance of Preferredpreferred shares,
net of expenses - - 12,999,058 - - - - - 12,999,058
Issuance of Preferredpreferred shares - - - - - - - - 7,000
Issuance of Commoncommon shares upon
conversion of Preferred sharespreferred 572,374 5,724 (5,462) - - - - - 37
shares
Issuance of Commoncommon shares upon
exercise of warrants 111,551 1,115 451,097 - - - - - 452,212
Issuance of Commoncommon shares upon
exercise of options 80,852 809 99,667 - - - - - 100,476
Acceleration of options
previously granted - - 1,170,000 - - - - - 1,170,000
Amortization of stock baseddeferred
compensation - - - - - 18,558 - - 18,558
Net loss - - - - - - - (8,183,438) (8,183,438)
---------- ------------ ------------- ------------ ---------- -------- ------------ ---------------- -------------- ---------------------------
Balance, June 30, 2000 7,902,372 79,024 50,324,603 - - - - (43,505,802) 6,905,161
Issuance of Commoncommon shares, net
of expenses 2,532,369 25,324 13,954,928 - - - - - 13,980,252
Issuance of Commoncommon shares upon
conversion of Preferred shares 104,886 1,049 (1,006) - - - - - -
Issuance of Commoncommon shares upon
exercise of warrants 173,015 1,730 486,736 - - - - - 488,466
Issuance of Common shares upon
exercise of options 487,016 4,870 634,883 - - - - - 639,753
4049
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumu-
latedAccumulated Deficit
Other Accumulated
Common Stock Additional Deferred Compre- During
---------------------------Other Com- Accumulated
----------------------------- Paid-In Earned butBut Treasury Compensa- hensiveprehensive During Develop-
Shares Amount Capital notNot Issued Stock tion Income (Loss) ment Stage Total
-------------------------- -------------- --------------- ------------- ------------ ---------- -------- ------------ ------------------ ------------- ----------------------- --------------- ----------------
Issuance of common shares upon
exercise of options 487,016 4,870 634,883 - - - - - 639,753
Stock based compensation - - 246,109 - - (105,534) - - 140,575
Acceleration of options
previously granted - - 335,315 - - - - - 335,315
Amortization of stock baseddeferred
compensation - - - - - 25,415 - - 25,415
Net loss - - - - - - - (10,599,237) (10,599,237)
---------- ------------ ------------- ------------ ---------- -------- ------------ ---------------- -------------- ---------------------------
Balance, June 30, 2001 11,199,658 111,997 65,981,568 - - (80,119) - (54,105,039) 11,915,700
Issuance of Commoncommon shares, net
of expenses 5,997,578 59,976 12,380,727 - - - - - 12,440,703
Issuance of Commoncommon shares upon
conversion of Preferredpreferred shares 76,590 766 (735) - - - - - -
Issuance of Commoncommon shares upon
exercise of options 149,250 1,492 339,098 - - - - - 340,590
Stock based compensation - - 91,582 - - (21,147) - - 70,435
Amortization of stock baseddeferred
compensation - - - - - 47,324 - - 47,324
Unrealized Gain On Investmentsgain on investments - - - - - - 10,604 - 10,604
Net loss - - - - - - - (16,138,577) (16,138,577)
---------- ------------ ------------- ------------ ---------- -------- ------------ ------- ------------- --------------------- -------------- --------------
Balance, June 30, 2002 17,423,076 174,231 78,792,240 - - (53,942) 10,604 (70,243,616) 8,686,779
Issuance of common shares, net 24,352,099 243,521 30,127,905 - - - - - 30,371,426
of expenses
Issuance of common shares upon 1,121,576 11,216 (4,103) - - - - - -
conversion of preferred shares
Issuance of common shares upon
exercise of options and 97,299 973 127,445 - - - - - 128,418
warrants
Stock based compensation - - 41,628 - - (13,153) - - 28,475
50
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
Accumulated Deficit
Common Stock Additional Deferred Other Com- Accumulated
----------------------------- Paid-In Earned But Treasury Compensa- prehensive During Develop-
Shares Amount Capital Not Issued Stock tion Income (Loss) ment Stage Total
-------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
Amortization of deferred - - - - - 29,118 - - 29,118
compensation
Unrealized loss on investments - - - - - - (22,409) - (22,409)
Net loss - - - - - - - (20,565,211) (20,565,211)
---------- ------------ ------------- ---------- -------- ------------ --------- -------------- --------------
Balance, June 30, 2003 42,994,050 429,941 109,085,115 (37,977) (11,805) (90,808,827) 18,656,596
Issuance of common shares, net 6,992,500 69,925 20,889,594 - - - - - 20,959,519
of expenses
Issuance of common shares upon 120,465 1,205 (1,173) - - - - - -
conversion of preferred shares
Issuance of common shares upon
exercise of options and 2,683,574 26,835 5,385,934 - - - - - 5,412,769
warrants
Stock based compensation - - 789,012 - - (86,157) - - 702,855
Amortization of deferred - - - - - 45,727 - - 45,727
compensation
Unrealized loss on investments - - - - - - (72,967) - (72,967)
Net loss - - - - - - - (26,317,859) (26, 317,859)
---------- ------------ ------------- ---------- -------- ------------ --------- -------------- --------------
Balance, June 30, 2004 52,790,589 $ 174,231 $78,792,240 $527,906 $136,148,482 $ - $ (53,942) $10,604 $(70,243,616)- $ 8,686,779(78,407) $(84,772) $(117,126,686) $ 19,386,640
=========== ============ ============= ============ ========== ======== ============ ======= ============ ===================== ============== ==============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
4151
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
Inception
(January 28,
1986) Year Ended June 30,
through --------------------------------------------------------------------------------------------
June 30, 2004 2004 2003 2002
2002 2001 2000-------------- ------------- ------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(70,243,616)$(117,126,686) $(26,317,859) $(20,565,211) $(16,138,577) $(10,599,237) $(8,183,438)
Adjustments to reconcile net loss to net cash used forin
operating activities:
Cumulative effect of accounting change 361,111 - 361,111- -
Depreciation and amortization 2,530,7303,781,977 671,989 579,258 1,156,874
288,086 248,491Realized loss on investments 129,355 129,355 - -
License fee 500,000 - - -
Interest expense and accrued interest on note payable
72,691 - - -
Accrued interest on long-term financing 796,038 - - -
Accrued interest on short-term financing 7,936and financings 876,665 - - -
Intangibles and equipment write down 278,318 - - -
Common stock and notes payable issued for expenses 751,038 - - -
Settlement with consultant (28,731) - - -
Deferred revenue 432,907 599,574 (166,667) -
Acceleration of options previously granted 1,505,315 - 335,315 1,170,000- -
Stock based compensation 4,397,781 458,349 165,990 18,5584,863,366 748,582 57,593 117,759
Changes in certain operating assets and liabilities:
Accounts receivable - - 953,163 (953,163)
Prepaid expenses and other (1,151,353)(1,346,173) (102,962) (91,858) 34,079 111,053 (439,004)
Accounts payable 1,579,3362,019,970 675,181 (234,547) 449,676 117,590 (104,824)
Accrued expenses and other 836,9162,205,616 618,901 749,799 293,678
36,239 (296,727)Deferred revenue (119,111) (165,420) (386,598) 599,574
-------------- ------------- ------------- -------------
------------
Net cash used forin operating activities (57,373,583) (13,146,347) (8,397,357) (8,540,107)(101,347,970) (23,742,233) (19,891,564) (13,486,937)
-------------- ------------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/(Purchases)maturities of investments net3,539,313 1,420,712 9,464 -
Purchase of investments (6,261,061) - (2,979,917) (1,172,007) (1,172,007) 2,155,617 (1,700,790)
Purchases of property and equipment (4,807,735)(6,139,291) (197,541) (1,134,015) (1,634,509)
(629,899) (354,019)-------------- ------------- ------------- -------------
------------
Net cash provided/(used) for(used in) provided by investing
activities (5,979,742)(8,861,039) 1,223,171 (4,104,468) (2,806,516)
1,525,718 (2,054,809)
------------ -------------------------- ------------- ------------------------- -------------
activities
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 other long-term debt 3,951,3276,103,327 - - -
Payments on notes payable and other long-term debt (1,951,327)(4,103,327) - - -
Payments on capital lease obligations (354,226) (200,753) (153,473) -
Proceeds from common stock, stock option and
warrant issuances, net 45,088,930 12,440,703 15,108,470 480,708102,301,652 26,372,288 30,499,844 12,781,293
Proceeds from preferred stock, net 24,210,326 - - 11,000,000-
Purchase of treasury stock (1,667) - - -
-------------- ------------- ------------- ------------- ------------
Net cash provided by financing activities 71,297,589 12,440,703 15,108,470 11,480,708128,156,085 26,171,535 30,346,371 12,781,293
-------------- ------------- ------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 7,944,26417,947,076 3,652,473 6,350,339 (3,512,160) 8,236,831 885,792
CASH AND CASH EQUIVALENTS, beginning of period - 14,294,603 7,944,264 11,456,424
3,219,593 2,333,801-------------- ------------- ------------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,944,26417,947,076 $ 17,947,076 $ 14,294,603 $ 7,944,264
$ 11,456,424 $ 3,219,593============== ============= ============= ============= ============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
4252
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(continued)
Inception
(January 28,
1986)
through Year Ended June 30,
through -----------------------------------------------
June 30, -------------------------------------
2004 2004 2003 2002
2002 2001 2000
------------- ------------- ------------- --------------------- -------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 635,882680,569 $ 22,649 $ 22,038 $ 3,188
$ 5,104 $ 29,247
============ ============ =========== ===================== ======== ======== ========
NON-CASH TRANSACTION:
Settlement of accounts payable with
Equipmentequipment $ 900 $ - $ - $ -
============ ============ =========== ===================== ======== ======== ========
NON-CASH STOCK ACTIVITY:
Conversion of loans from employees to
Commoncommon stock $ 74,187 $ - $ - $ -
============ ============ =========== ===================== ======== ======== ========
Conversion of note payable to Commoncommon stock $ 16,000 $ - $ - $ -
============ ============ =========== ===================== ======== ======== ========
Common stock issued for equipment $ 2,327 $ - $ - $ -
============ ============ =========== ===================== ======== ======== ========
Common stock and warrants issued for expenses $ 929,909960,909 $ - $ 20,000 $ 14,144
$ 31,200 $ -
============ ============ =========== ===================== ======== ======== ========
Common stock issued for accrued salaries
and bonuses $ 16,548 $ - $ - $ -
============ ============ =========== ===================== ======== ======== ========
Accrued interest payablepaid in Commoncommon stock $ 679,097 $ - $ - $ -
============ ============ =========== ===================== ======== ======== ========
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
4353
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(1) ORGANIZATION ACTIVITIES:
Nature of Business --– Palatin Technologies, Inc. ("Palatin"(“Palatin” or the "Company"“Company”) is a development-stage bio-pharmaceuticalbiopharmaceutical company. The Company is primarily focused on discovering and developing melanocortin (MC)-based therapeutics, which the Company believes is one of the fastest growing areas of pharmaceutical research and development. The MC family of receptors has been identified with a variety of conditions and diseases, including sexual dysfunction, obesity, cachexia (extreme wasting, generally secondary to a chronic disease) and inflammation. The Company’s objective is to become a worldwide leader in MC-based therapeutics by pursuing a strategy based on commercializing the Company’s products under development and identifying new product targets through the utilization of the Company’s patented drug discovery platform.
In July 2004, the Company announced the receipt of full approval from the U.S. Food and Drug Administration (“FDA”) to market NeutroSpec™, the Company’s proprietary radiolabeled monoclonal antibody product, for imaging equivocal appendicitis in patients (see Note 11). The Company is currently conducting additional clinical investigationstrials with NeutroSpec to expand its market potential as an imaging agent for other indications such as osteomyelitis (infection deep inside a bone), fever of unknown origin, post surgical abscess, inflammatory bowel disease and pulmonary imaging.
PT-141, the Company’s lead therapeutic drug PT-141,candidate, is a patented, nasally administered peptide that is in clinical development for the treatment of both male and female sexual dysfunction,dysfunction. The Company completed various Phase 1 safety studies and is developing additional therapeutic compounds, discovered using its enabling peptide platform technology, MIDAS(TM). Additionally, Palatin is developingPhase 2A efficacy studies in male subjects and patients. The Company completed a product for infection imaging, LeuTech(R),Phase 2B at-home dose-ranging study with PT-141 in male patients. The Company also completed a Phase 1 safety study in female subjects. In addition, the Company has several preclinical drug candidates under investigation based on the MC family of receptors for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation.
In August 2004, the Company entered into a proprietary radiolabeled monoclonal antibody.collaborative agreement with King Pharmaceuticals, Inc. (“King”), for the purpose of developing and commercializing PT-141 (see Note 11).
Key elements of the Company’s business strategy include: entering into alliances and partnerships with pharmaceutical companies to facilitate the development, manufacture, marketing, sale and distribution of the Company’s product candidates under investigation, expansion of the Company’s pipeline through the utilization of its MC expertise and patented drug discovery platform, opportunistic acquisition of synergistic products and technologies and partial funding of the Company’s development and discovery programs with the cash flow from our NeutroSpec and PT-141 collaboration agreements.
54
Business Risk and Liquidity -– As shown in the accompanying financial statements, the Company incurred a substantial net loss of $16,138,577$26,317,859, for the year ended June 30, 20022004 and has a deficit accumulated in the development stage of $70,243,616,$117,126,686, cash and cash equivalents of $7,944,264$17,947,076 and investments of $1,178,717$2,465,350 as of June 30, 2002.2004. The Company anticipates incurring additional losses in the future as it continues development of LeuTechNeutroSpec for diagnosis of appendicitis and expands clinical trials for other indications and for PT-141,of NeutroSpec and continues research and development of PT-141 and its MIDASMIDAS™ (Metal Ion-induced Distinctive Array of Structures) technology. To achieve profitability, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all.
The Company has incurred negative cash flows from operations since its inception, the Companyand has expended and expects to continue to expend in the future, substantial funds to complete its planned product development efforts. The Company expects that its existing capital resources, including the funds received pursuant to the July 2002 private placement,from King in August 2004, will be adequate to fund the Company'sCompany’s projected operations through December 2002,its fiscal year ending June 30, 2005, based on current and projected expenditure levels. No assurance can be given that the Company will not consume a significant amount of its available resources before that time. Management plans to continue to refine its operations, control expenses, evaluate alternative methods to conduct its business, and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Based on the Company's historical ability to raise capital, management believes that through one or a combination of such factors that it will obtain adequate financing to fund the Company's operations through fiscal year 2003, based on current expenditure levels. Should appropriate sources of financing not be available, management would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that the Company'sCompany’s financing efforts will be successful. If adequate funds are not available, ourthe Company’s financial condition and results of operations will be materially and adversely affected.
These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
44
Principles of Consolidation --– The consolidated financial statements include the accounts of Palatin and its wholly owned inactive subsidiaries.subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates --– The preparation of consolidated financial statements in conformity with accounting principlesU.S. generally accepted in the United States of Americaaccounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Statements of Cash Flows --– Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a purchased maturity of less than three months or less at the time of purchase.months. As of June 30, 20022004 and 2001, approximately $434,000 and $613,000, respectively,2003, $428,075 of cash was restricted to secure letters of credit for security deposits on leases.
55
Investments --– The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting“Accounting For Certain Investments in Debt and Equity Securities."” The Company classifies such investments as available for sale investments and as such all investments are recorded at fair value. The investments consist principally of commercial papercorporate debt securities and government bonds.mutual funds. Unrealized holding gains and losses, net of the related tax effect, if any, are classifiedexcluded from earnings and are reported in other comprehensive income (loss) and as a separate component of stockholders' equity.stockholders’ equity until realized. Interest on securities classified as available for sale is included in interest income. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs.
The following is a summary of available for sale investments as of June 30, 2004:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------------
Corporate debt
securities $ 50,000 $ 521 $ - $ 50,521
Mutual funds $ 2,500,122 $ - $ (85,293) $ 2,414,829
---------------------------------------------------------
Total $ 2,550,122 $ 521 $ (85,293) $ 2,465,350
=========================================================
The following is a summary of available for sale investments as of June 30, 2003:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------------
Corporate debt
securities $ 100,000 $ 2,243 - $ 102,243
Mutual funds $ 4,000,189 $ $ (14,048) $ 3,986,141
---------------------------------------------------------
Total $ 4,100,189 $ $ (14,048) $ 4,088,384
=========================================================
Property and Equipment --– Property and equipment consists of office and laboratory equipment, office furniture and leasehold improvements. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of 5five years for lab equipment, 7seven years for office furniture and equipment and over the term of the lease for leasehold improvements. Maintenance and repairs are charged to expenseexpensed as incurred while expenditures that extend the useful life of an asset are capitalized.
56
Impairment of Long-Lived Assets --– The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, management evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. ImpairmentIf impairment is measured atindicated, the long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold including quoted market prices, if available, or the present value of the estimated future discounted cash flows based on reasonable and supportable assumptions.
Revenue Recognition -– Grant and contract revenues are recognized as the Company provides the services stipulated in the underlying grants and/or contracts based on the time and materials incurred. License revenuesRevenue from corporate collaborations and licensing agreements consists of up-front fees, research and development funding, and milestone payments. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. The Company estimates the performance period as the initial research term. The actual performance period may vary. The Company adjusts the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that the Company performs the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the license feemilestone is receivedachieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.
The Company recognized $149,738, $137,417 and $80,929, respectively, in grant revenue pursuant to the Small Business Technology Transfer (“STTR”) programs of the Department of Health and Human Services for the years ended June 30, 2004, 2003 and 2002.
The Company has no future performance obligations.recognized $2,000,000 and $504,000, respectively, in contract revenue related to the attainment of certain milestones and other shared development costs of NeutroSpec pursuant to our collaboration agreement, as amended, with Mallinckrodt, Inc., a division of Tyco International, Ltd. (“Mallinckrodt”), described below for the years ended June 30, 2004 and 2003. The Company did not recognize any contract revenue related to the shared development costs of NeutroSpec for the year ended June 30, 2002.
In August 1999, the Company entered into a strategic collaboration agreement with Mallinckrodt Inc., a division of Tyco International, Ltd., to jointly develop and market one of its proposed products (see Note 7)8). Under the terms of the agreement, the Company granted a worldwide
45
license, excluding Europe, for sales, marketing and distribution and received a nonrefundablenon-refundable licensing fee of $500,000. The licensing fee was recognized as revenue in the period that such nonrefundablenon-refundable fees were received.
In fiscal 2001, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 "Revenue“Revenue Recognition in Financial Statements" ("Statements” (“SAB 101"101”) which requires up-front, nonrefundableup front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 to this license fee resulted in a one-time, non-cash charge of $361,111 or $0.04 per share, which reflects the deferral of the $500,000 up-front license fee received from Mallinckrodt in August 1999. Under SAB 101, this payment has beenwas recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 20022004, 2003 and 2001,2002, the Company recognized $138,888$11,569, $43,987 and $166,667,$138,888, respectively, in license revenue that was included in the cumulative effect adjustment as of July 1, 2000. Prior year financial statements have not been restated to apply SAB 101 retroactively; however the following pro forma amounts show the net loss to common stockholders and net loss per share assuming the Company had retroactively applied SAB 101 to the prior years:
Year Ended June 30, ----------------------- 2001 2000 ---- ---- Net loss to common stockholders, as reported $ (10,599,237) $ (8,183,438) ============ =========== Net loss per common share, as reported $ (1.05) $ (1.10) ====== ====== Pro forma net loss to common stockholders $ (10,238,126) $ (8,544,549) ============ =========== Pro forma net loss per common share $ (1.01) $ (1.15) ====== ======
57
In May 2002, the Company entered into an agreement with Mallinckrodt to amend the original agreement. Under the terms of this amended agreement, Mallinckrodt committed, among other things, up to an additional $3.2 million,$3,200,000, subject to certain conditions and attainingattainment of certain milestones, to cover half of the Company'sCompany’s estimated expenses associated with completing the FDA review process of LeuTech.NeutroSpec. Pursuant to this amendment, $800,000 was received upon execution of this agreement. Under SAB 101, this payment was recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2004, 2003 and 2002, the Company recognized $153,851, $584,611 and $61,538, respectively, in license revenue under this agreement.
Research and Development Costs --– The costs of research and development activities are charged to expense as incurred.
Stock Options --– The majorityCompany applies the intrinsic-value-based method of commonaccounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, to account for its fixed-plan stock options issued to employees and non- employee directors have been issued at exercise prices greater than, or equal to, the fair market value of the Company's common stockoptions. Under this method, compensation cost is recorded on the date granted. Accordingly, no value has been assigned to these options. In addition, duringof grant only if the current fiscal year,market price of the underlying stock options were granted to non-employees for services. The fair value of these options, pursuant toexceeded the exercise price. Statement of Financial Accounting Standards No. 123, "Accounting“Accounting for Stock-Based Compensation" ("Compensation” (“SFAS 123"123”), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by SFAS 123, as calculatedamended in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”), the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123.
The Company applies APB 25 and the related interpretations in accounting for its stock options. Had compensation cost for the Company’s common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the Company’s net loss attributable to common stockholders and net loss per common share would have been equal to the following pro forma amounts:
For the year ended June 30,
---------------------------------------------------
2004 2003 2002
---------------------------------------------------
Net loss attributable to common stockholders:
As reported $(26,317,859) $(20,768,349) $(16,436,180)
Stock-based employee compensation expense
included in the determination of net loss as
reported 626,639 - -
Impact of total stock-based compensation
expense determined under fair-value-based
method (1,801,218) (1,297,069) (1,660,290)
---------------------------------------------------
Pro forma $(27,492,438) $(22,065,418) $(18,096,470)
===================================================
58
Basic and diluted net loss attributable to common
stockholders per common share:
As reported $ (0.55) $ (0.73) $ (1.16)
===================================================
Pro forma $ (0.58) $ (0.78) $ (1.27)
===================================================
The assumptions used in the Black-Scholes option-pricing model are as follows: dividend yield of 0%, weighted average risk-free interest rate of 3.72% in 2004, 3.54% in 2003, and 4.5% in 2002, expected volatility of 90.5% in 2004, 101% in 2003 and 60% in 2002, and an expected option life of seven years.
The Company accounts for options granted to consultants in accordance with EITF 96-18, “Accounting for Equity Instruments with Variable Terms That Are Issued for Consideration Other Than Employee Services.” The Company determines the value of consultant’s stock options utilizing the Black-Scholes option pricing model, has been recorded as deferred compensation and is being expensed over the vesting period of such options.model.
Income Taxes --– The Company and its subsidiariessubsidiary file consolidated federal and combined state income tax returns. The Company accounts for income taxes in accordance with StatementofStatement of Financial Accounting Standards No. 109, "Accounting“Accounting for Income Taxes" ("Taxes” (“SFAS 109"109”).
46
SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes.
The Company provides for deferred income taxes relating to temporary differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109.
In accordance with SFAS 109, the Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management'smanagement’s estimates and analysis, which includes tax laws which may limit the Company'sCompany’s ability to utilize its tax loss carry-forwards.carryforwards.
Net Loss per Common Share --– The Company applies Statement of Financial Accounting Standards No. 128, "Earnings“Earnings per Share" ("Share” (“SFAS 128"128”). SFAS 128, which requires dual presentation of basic and diluted earnings per share ("EPS"(“EPS”) for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing the income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into Commoncommon stock, such as stock options.options and warrants. For the years ended June 30, 2002, 20012004, 2003 and 2000,2002, there were no dilutive effects of stock options or warrants as the Company incurred a net loss in each period. Options and warrants to purchase 8,694,19912,392,034 shares of Common Stockcommon stock at prices ranging from $0.01 to $21.70 per share were outstanding at June 30, 2002 (See2004 (see Note 5)6).
Fair Value of Financial Instruments -- Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosures of fair value information about– The Company’s financial instruments whether or not recognized inconsist primarily of cash and cash equivalents, marketable securities and accounts payable. Management believes that the balance sheet, for which it is practicable to estimate the value. In cases where quoted market pricescarrying value of these assets and liabilities are not available,representative of their respective 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 estimatesvalues.
59
Other Comprehensive Loss — Other comprehensive loss consists of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly,following:
For the aggregate fair value amounts presented do not representyear ended June 30,
--------------------------------------------------
2004 2003 2002
--------------------------------------------------
Net loss $(26,317,859) $(20,565,211) $(16,138,577)
Unrealized gain (loss) on investments (72,967) (22,409) 10,604
--------------------------------------------------
Comprehensive loss $(26,390,826) $(20,587,620) $(16,127,973)
==================================================
Reclassifications — Certain prior year balances have been reclassified to conform to the underlying value of the Company.current year presentation.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
June 30,
--------------------------------
2002 2001-------------------------------
2004 2003
------------- ---------------------------
Office equipment $ 876,8931,120,467 $ 570,9541,063,610
Laboratory equipment 1,071,461 959,2582,292,039 2,153,787
Leasehold improvements 2,804,040 1,587,6733,089,365 3,086,932
------------- --------------
6,501,871 6,304,329
Less: Accumulated depreciation and
amortization (3,567,132) (2,905,148)
------------- --------------
$ 2,934,739 $ 3,399,181
============= ==============
47 For the years ended June 30, 2004, 2003 and 2002, depreciation expense was $663,208, $569,253 and $1,146,566, respectively.
(4) ACCRUED EXPENSES:
Accrued expenses consist of the following:
June 30,
-------------------------------
2004 2003
------------- --------------
Product development costs $ 1,079,000 $ 784,007
Accrued rent 464,095 397,872
60
June 30,
--------------------------------
2002 2001Other 524,088 437,503
------------- -------------
4,752,394 3,117,885
Less: Accumulated depreciation and
amortization (2,335,895) (1,192,923)
------------- ---------------------------
$ 2,416,4992,067,183 $ 1,924,9621,619,382
============= ===========================
For the years ended June 30, 2002, 2001 and 2000, depreciation expense was $1,146,566, $278,078 and $238,483, respectively.
Leases -- – The Company currently leases two facilities in New Jersey under non- cancelablenon-cancelable operating leases and is in the processhave sublet to a third party one of terminating the leasethose leases, which is for the Company'sCompany’s former Corporate Officescorporate offices located in Princeton. In July 2002, the Company moved into a new facility in Cranbury, New Jersey that combined both the research and development facility in Edison, New Jersey and the corporate offices in Princeton, New Jersey. Future minimum lease payments under these two leases are as follows:
Fiscal Year Ending June 30,
---------------------------
20032005 $ 1,140,000
2004 1,315,000
2005 1,420,0001,515,000
2006 990,0001,047,000
2007 1,604,000
2008 1,284,000
2009 1,301,000
2010 and thereafter 7,629,000
--------------3,968,000
-------------
$ 12,494,000
============10,719,000
=============
The As of June 30, 2004, the Company has accrued $100,000approximately $33,000 related to the Company’s share of estimated costs to terminateuntil termination of the Princeton lease.lease, which is currently being subleased. For the years ended June 30, 2002, 20012004, 2003 and 2000,2002, rent expense was $1,332,442, $1,554,838 and $656,850, $560,476respectively.
Capital Leases — In September 2002, the Company acquired $417,920 of laboratory equipment under capital leases. The term of these leases range from 24 to 60 months. As of June 30, 2004, $63,694 remains outstanding pursuant to these lease obligations. The capitalized cost and $357,362, respectively.accumulated depreciation for the equipment under capital leases is $417,920 and $146,272, respectively, as of June 30, 2004.
Employment Agreements -- On July 17, 2001, the Company executed– Effective October 1, 2003, Dr. Spana, Mr. Wills and Shubh D. Sharma, Ph.D. have each entered into an employment agreement with Perry B. Molinoff, M.D. effective May 1, 2001 and commencing on September 4, 2001. The agreement expires on the second anniversary of the commencement date, provided, however, that on the second anniversary of the commencement date and on each anniversary thereafter, such period shall be automatically extended for additional one-year periods. Pursuant to the agreement, Dr. Molinoff is serving as an executive vice president of the Company in charge of research and development. Under the agreement,for a two-year period. The agreements do not contain automatic renewal provisions. Dr. Molinoff was granted options to purchase 245,000 shares of the Company's Common Stock at an exercise price of $3.39. These options vest over the next three anniversaries of the commencement date. The agreement includes specific termination pay and vesting of stock options under certain termination events.
On October 1, 2001, the Company entered into employment agreements with Carl Spana Ph.D. to serveis serving as chief executive officer and president at a salary of $320,000 per year. Mr. Wills is serving as chief financial officer at a salary of $265,000 per year. Dr. Sharma is serving as a vice president and with Stephen T. Wills to serve aschief technical officer at a salary of $185,000 per year. Each agreement also provides for:
4861
| • | annual bonus compensation, in an amount to be decided by the compensation committee and approved by the board, based on achievement of yearly objectives; and | |
| • | participation in all benefit programs that the Company establish, to the extent the employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate. |
chief financial officer. Pursuant to the agreements,Each agreement allows the Company granted Dr. Spana an optionor the employee to purchase 100,000 shares and Mr. Wills an option to purchase 70,000 share of the Company’s Common Stock at an exercise price of $3.19, the closing price of the Common Stock on October 1, 2001. These options vest over a three-year period with the first 25% vested immediately, and an additional 25% vested on each anniversary of the date ofterminate the agreement through October 1, 2004. The agreements include specifiedupon written notice, and contains other provisions for termination by the Company for “cause”, or by the employee for “good reason” or due to a “change in control” (as these terms are defined in the employment agreements). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of 24 months (Spana), 18 months (Wills) or nine months (Sharma) plus continuation of medical and dental benefits then in effect for 18 months. Termination following a change in control will result in a lump sum payment of two times (Spana) or one and one-half times (Wills) the salary then in effect, continuation of medical and dental benefits then in effect for 18 months, and immediate vesting of all stock options under certain termination events.options. Each agreement includes non-competition, non-solicitation and confidentiality covenants.
License Agreements --– The Company has three license agreements that require minimum yearlyannual payments. Future minimum payments under the license agreements for the years ending June 30 are: 2003 - $300,000, 2004 - $300,000, 2005 -— $500,000, 2006 — $200,000, 2006 -2007 — $200,000, 2008 — $200,000 and 2007 -2009 — $200,000.
Legal Proceedings -- Following the termination of the Company's proposed merger with San Diego-based Molecular Biosystems, Inc. in March 2000, Molecular Biosystems commenced a legal action against the Company, seeking damages arising from the alleged improper termination of the merger agreement. The Company denied the material allegations. In August 2002, in order to avoid the ongoing costs of the litigation and consumption of the Company's time, the Company settled this litigation with Molecular Biosystems for $400,000, which the Company has accrued as of June 30, 2002.
Series C Preferred Offering -- As of August 16, 1999, pursuant to the strategic collaboration agreement with Mallinckrodt (see Note 7), the Company sold 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. The Series C stock is convertible into 700,000 shares of Common Stock with certain registration and anti-dilution rights, upon the occurrence of the earlier of five years or the occurrence of a change in control of the Company (as defined in the agreement).
Series B Preferred Offering -- As of April 28, 1998, the Company completed a private placement of 18,875 shares of Series B Convertible Preferred Stock at a price per share of $100. The net proceeds to the Company were approximately $1,600,000, after deducting the finder's fee and other expenses of the Series B Preferred Offering. The Series B Convertible Preferred Stock has been converted into 56,818 shares of Common Stock.EQUITY:
Series A Preferred Offering --– On December 2, 1996, the Company commenced the Series A Preferred Offering of units at a price of $100,000 per unit, each unit consisting of 1,000 shares of Series A Convertible Preferred Stock. The final closing on the Series A Preferred Offering was effective as of May 9, 1997, with the Company having sold an aggregate total of 137.78 units, representing 137,780 shares of Series A Convertible Preferred Stock, for net proceeds to the Company of approximately $11,637,000,$11,635,000, after deducting commission and other expenses of the Series A Preferred Offering.
Each share of Series A Convertible Preferred Stock is convertible at any time, at the option of the holder, into the number of shares of Common Stockcommon stock equal to $100 divided by the "Series“Series A Conversion Price"Price”. The current Series A Conversion Price is $3.99,$2.63, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 25.138 shares of Commoncommon Stock. The Series A Conversion Price is subject to adjustment, under certain
49
circumstances, upon the sale or issuance of Common Stockcommon stock for consideration per share less than either (i) the Conversion Price in effect on the date of such sale or issuance, or (ii) the market price of the Common Stockcommon stock as of the date of such sale or issuance. The Series A Conversion Price is also subject to adjustment upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which will result in an increase or decrease in the number of shares of Commoncommon stock outstanding. During the fiscal year ended June 30, 2004, 3,170 shares of the Series A Convertible Preferred Stock was converted into 120,465 shares of common stock. As of June 30, 2004, 11,697 shares of Series A Convertible Preferred Stock, currently convertible into 444,752 shares of common stock, are outstanding.
62
Series C Preferred Offering – As of August 16, 1999, pursuant to the strategic collaboration agreement with Mallinckrodt (see Note 2), the Company sold 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. During June 2003, the Series C Convertible Preferred Stock was converted into 700,000 shares of common stock.
Common Stock Transactions -– In January 2004, the Company concluded a private placement of common stock and warrants in which the Company sold 6,992,500 shares of its $.01 par value common stock and 1,048,875 warrants, which equates to 15% warrant coverage on the number of shares sold, at an offering price of $3.25 per share. Each five-year warrant entitles the holder to purchase one share of common stock at an exercise price of $4.06 per share. The gross proceeds were approximately $22,700,000 and the net proceeds were approximately $21,000,000. The Company made the private placement solely to financial institutions and accredited investors pursuant to Regulation D under the Securities Act of 1933. The investors represented that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants bear restrictive legends. A registration statement covering the resale of the shares by the investors was filed and subsequently declared effective by the Security and Exchange Commission in April 2004. In connection with the private placement, the Company paid placement fees totaling approximately $1,700,000.
In private placements of Common Stockcommon stock and warrants in July 2002, November 2002 and March 2003, the Company sold an aggregate of 24,352,099 shares of its common stock to investors consisting of domestic and European financial institutions and other accredited investors: 1,545,063 shares were sold at a market value of approximately $1.17 per share in the July offering, 9,373,940 shares of common stock were sold at a market value of approximately $1.23 per share in the November offering, and 13,433,096 shares of common stock were sold at a market value of approximately $1.42 per share in the March offering. For every five shares purchased in the July and the November offerings, and for every four shares purchased in the March offering, the investors received a five-year warrant to purchase one share of common stock at an exercise price of $1.46 for the July offering, $1.54 for the November offering, and $1.77 for the March offering. Based on the sales price of the common stock in these private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $203,138 has been reflected in the Company’s consolidated statement of operations for year the ended June 30, 2003.
In connection with these private placements, the Company paid cash placement agent fees of $126,000 for the July offering, $790,433 for the November offering and $985,250 for the March offering and issued five-year warrants to purchase (i) 103,004 shares of common stock at prices ranging from $1.37 to $1.46 per share pursuant to the July offering, and (ii) 458,647 shares of common stock at $1.54 per share pursuant to the November offering.
In private placements of common stock and warrants in November 2001 and June 2002, the Company sold andan aggregate of 5,997,578 shares of its Common Stockcommon stock to investors consisting of domestic and European financial institutions and other domestic accredited investors: 4,902,481 shares were sold at $2.25 per share in the November 2001 offering and 1,095,097 shares were sold at $2.20 per share in the June 2002 offering. For every four shares purchased in the November offering, and for every five shares purchased in the June offering, the investors received a five yearfive-year warrant to purchase one share of common stock at an exercise price of $2.70 for the November offering and $2.75 for the June offering. Based on the sales price of the common stock in these private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $297,603 has been reflected in the Company'sCompany’s consolidated statement of operations for the year ended June 30, 2002.
63
In connection with these private placements, the Company paid finder'splacement agent’s fees of $771,879 for the November offering and $168,000 for the June offering and issued five yearfive-year warrants to purchase (i) 356,060 shares of Common Stockcommon stock at prices ranging from $2.66 to $2.70 per share pursuant to the November offering and (ii) 109,510 shares of Common Stockcommon stock at $2.75 per share pursuant to the June offering.
In a private placement of Common Stockcommon stock and warrants in September and October 2000, the Company sold 2,532,368 shares of its Common Stockcommon stock to a total of nine investors in two tranches: 1,800,000 shares at $6.00 per share and 732,368 shares at $5.94 per share for total net proceeds of approximately $14 million.$14,000,000. For every five shares purchased, the investors received an immediately exercisable five-year warrant to purchase one share of Common Stockcommon stock at 125% of the closing price. As a result, the Company issued warrants to purchase 360,000 shares at an exercise price of $7.50 per share and warrants to purchase 146,472 shares at an exercise price of $7.42 per share.
In connection with the private placement, the Company paid a finder'splacement agent’s fee of $1,060,391 and issued five yearfive-year warrants to the finderplacement agent to purchase 216,000 shares of Common Stockcommon stock at $6.60 per share and 87,884 shares of Common Stockcommon stock at $6.53 per share.
In March 1999, the Company sold in a private placement, an aggregate of 514,215 shares of its Common Stock and 565,629 detachable five-year non-redeemable warrants. Each Warrant is exercisable for one share of Common Stock at an exercise price equal to the per share Common Stock purchase price. The Common Stock purchase price, which was based on the average closing bid price for the five business days immediately prior to the respective closing dates, ranged from $4.48 per share to $5.06 per share. The Company received net proceeds of approximately $2,175,000, which was used for working capital and research and development programs.
In connection with the private placement, the Company paid compensation to third parties consisting of an aggregate of approximately $222,000 in cash and agreed to issue five- year warrants to purchase an aggregate of 114,073 shares of Common Stock at not less than the exercise prices of the warrants sold in the private placement.
50
In February 1999, the Company sold in a private placement 651,750 shares of its Common Stock, at $4.00 per share and 651,750 detachable five-year non-redeemable warrants. Each Warrant is exercisable for one share of Common Stock at an exercise price of $4.70. The Company received net proceeds of approximately $2,350,000, which was used for working capital and research and development programs.
In connection with the private placement, the Company paid compensation to third parties consisting of an aggregate of approximately $248,000 in cash and agreed to issue five- year warrants to purchase an aggregate of 194,600 shares of Common stock at $4.70.
On December 31, 1998, the Company sold in a private placement 287,500 shares of its Common Stock, at $4.00 per share and 287,500 detachable five-year non-redeemable warrants. Each Warrant is exercisable for one share of Common Stock at an exercise price of $4.375 per share. The Company received net proceeds of approximately $1,000,000, which was used for working capital and research and development programs.
In connection with the private placement, the Company paid compensation to third parties consisting of an aggregate of $92,000 in cash and agreed to issue five-year warrants to purchase an aggregate of 60,000 shares of Common stock at prices ranging from $3.75 to $4.375.
On July 8, 1998, the Company sold TheraTech 363,636 shares of Common stock at a sale price of $5.50 per share or $2,000,000. The net proceeds of the offering, approximately $1,964,000, were used for research and development of the dosage form of PT-141, the Company's peptide hormone product for the treatment of male erectile dysfunction.
In the fiscal year ended June 30, 1999, the Company issued 25,000 shares of Common Stock in exchange for services and recorded compensation expense for the fair market value of $5.094 per share.
Outstanding Stock Purchase Warrants - At – As of June 30, 2002,2004, the Company had the following warrants outstanding (prices are rounded to the nearest cent).
Common Exercise Price Latest Stock Shares per Share Termination Date ------------ ----------- ---------------- 22,000 $ 0.01 03/15/05 48,387 0.22 09/13/05 28,250 2.50 02/15/06 134,188 2.66 10/29/06 15,000 2.70 04/30/07 1,447,495 2.70 10/29/06 328,529 2.75 06/13/07 30,000 2.90 04/06/06 25,000 3.65 12/17/06 15,000 4.00 12/15/10 3,054 4.15 02/15/06 277,818 4.15 06/25/06 978,850 4.37 - 4.70 12/31/03
51
Common Exercise Price Latest
Stock Shares per Share Termination Date
------------ ----------- ----------------
326,499 4.3915,125 $ 0.01 03/15/05
32,487 0.22 09/13/05
38,627 1.37 07/29/07
154,506 1.46 06/13/07
1,450,473 1.54 11/09/02
679,702 4.48 - 5.5729/07
2,464,789 1.77 03/21/08
32,654 1.78 02/15/06
404,263 2.36 06/25/06
134,188 2.66 10/29/06
1,057,864 2.70 04/30/07
292,215 2.75 06/13/07
15,000 2.82 05/13/12
30,000 2.90 04/06/06
25,000 3.65 12/04
234,35917/06
64
Common Exercise Price Latest
Stock Shares per Share Termination Date
15,000 $ 4.00 12/15/10
1,048,875 4.06 01/28/09
87,884 6.53 - 7.42 11/20/10/27/05
576,000216,000 6.60 - 7.50 10/05/05
5,000 7.00 06/06/05
146,475 7.42 10/27/05
360,000 7.50 10/05/05
------- ----
Total 5,175,1318,026,425 $0.01 - 8.68
==========7.50
========= ============
In December 2002, the Company issued warrants to purchase 15,000 shares of its common stock at $2.82 per share to the Wistar Institute of Anatomy and Biology, as part of the consideration for a second agreement with Wistar to amend a technology license which Wistar previously granted to the Company. The warrants expire on May 13, 2012. The fair value of these warrants of approximately $20,000, as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations.
In April 2002, the Company issued warrants to purchase 15,000 shares of its Common Stockcommon stock at $2.70 per share to Albert Fried, Jr. in consideration for a consulting agreement. TheseThe warrants expire on April 30, 2007. Pursuant to SFAS No. 123, theThe fair value of these warrants of approximately $14,000, as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations. These options have been exercised in full as of June 30, 2004.
In April and December 2001, the Company issued warrants to purchase 30,000 shares of its Common Stockcommon stock at $2.90 per share and 25,000 shares at $3.65 per share, respectively, to the Cedar Brook Corporate Center as part of the consideration for the lease agreement for the Cranbury, NJ facility. These warrants expire 5five years from the date of issuance. Pursuant to SFAS No. 123, theThe fair value of these warrants of approximately $47,000, as calculated by the Black-Scholes option pricing model, will be charged ratably to expense in the statement of operations over the lease term of 10ten years.
In December 2000, the Company issued warrants to purchase 15,000 shares of its Common Stock at $4.00 per share to the Wistar Institute of Anatomy and Biology, as part of the consideration for an agreement with Wistar to amend a technology license which Wistar previously granted to the Company. The warrants expire on December 15, 2010. The fair value of these warrants, of approximately $31,000 pursuant to SFAS No. 123 as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations.
Stock Option Plans --Plan – The Company has one stock option plan currently in effect under which future grants may be issued, the 1996 Stock Option Plan, as amended,amended. This plan was approved by the Company'sCompany’s stockholders on November 15, 2000, for which 5,000,000 shares of Common Stock arecommon stock have been reserved. The Company has also granted options under agreements with individuals, and not under any plan.
The Company applies disclosures required by SFAS 123. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under SFAS 123, the Company's net loss and basic and diluted net loss attributable to common stockholders per share for the year ended June 30, 2002 would have been $18,096,470 and $1.27 respectively. Net loss and basic and diluted net loss attributable to common stockholders per share for the year ended June 30, 2001 would have been $12,208,350 and $1.21, respectively, while net loss and basic and diluted net loss attributable to common stockholders per share for the year ended June 30, 2000 would have been $10,438,724 and $1.40 respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to September 1, 1995,by the resulting pro forma compensation cost, and thus pro forma net loss, may not be representative of that to be expected in future years. The weighted average fair market
52
value atCompany generally expire ten years from the date of grant and generally vest over three to four years. As of June 30, 2004, there were 355,956 options available for options granted during 2002, 2001 and 2000 is estimated as $2.35, $2.93 and $2.41 per share, respectively, usinggrant under the Black-Scholes option-pricing model. The assumptions used in the Black-Scholes model are as follows: dividend yield of 0%, expected volatility of 60%, weighted average risk-free interest rate of 4.5% in 2002, 5.78% in 2001 and 6.47% in 2000, and an expected option life of 7 years.1996 Stock Option Plan.
The status of the plansplan and individual agreements during the three years ended June 30, 2002,2004 was as follows:
65
Number of shares Range of prices Weighted average
subject to options per share Prices per share
------------------ -------------- ----------------
Outstanding at June 30, 1999 1,975,408 $.20 - $360.00 $4.26
========= ============== =====
Granted 1,238,210 $.20 - $6.625
Expired or canceled (124,264) $2.50 - $10.85
Exercised (80,854) $.22 - $6.25
---------- --------------
Outstanding at June 30, 2000 3,008,500 $.20 - $360.00 $3.92
========= ============== =====
Granted 983,125 $2.86 - $6.063
Expired or canceled (119,434) $3.50 - $6.00
Exercised (487,016) $.20 - $3.875
---------- --------------
Outstanding at June 30,July 1, 2001 3,385,175 $.22 - $360.00 $4.14
========= ============== =====
Granted 695,000 $2.86 - $6.063
Expired or canceled (411,832)(384,330) $3.50 - $6.00
Forfeitures (27,500) $3.50 - $6.00
Exercised (149,250) $.20(149,275) $.22 - $3.875
Accumulated fractions (25) $.22 - $21.70
---------- -------------------------
Outstanding at June 30, 2002 3,519,0683,519,070 $.22 - $21.70 $4.30
========= ============== =====Granted 799,900 $1.16 - $3.53
Expired (114,216) $2.50 - $21.70
Forfeitures (63,333) $1.36 - $5.125
Exercised (5,184) $.22 - $2.50
-----------
Outstanding at June 30, 2003 4,136,237 $1.00 - $21.70 $3.79
Granted 957,500 $1.16 - $4.70
Expired (290,021) $1.36 - $21.70
Forfeitures (297,683) $1.36 - $4.25
Exercised (140,432) $1.36 - $3.063
-----------
Outstanding at June 30, 2004 4,365,601 $1.00 - $21.70 $3.58
===========
Exercisable at June 30, 2002 2,477,838 $.222004 3,353,207 $1.00 - $21.70 $4.47$3.76
===========
Shares Weighted Weighted Weighted
Purchasable Average Option Average Shares Average Price
Range of Under Option Life Exercise Exercisable At OfAs of of Exercisable
Exercise Prices Options (Years) Price June 30, 20022004 Shares
- --------------- ----------- ----------- -------- --------------- --------------
$0.22 - $0.99 184 3.17 $0.22 184 $0.22------- ------- ----- ------------- ------
$1.00 - $2.49 74,196 5.74 $1.00 74,196 $1.00732,663 7.84 $1.62 485,384 $1.64
$2.50 - $3.99 1,679,294 7.93 $3.15 1,065,562 $3.052,215,278 7.14 $3.21 1,561,232 $3.18
$4.00 - $5.99 1,334,375 7.52 $4.70 915,212 $4.751,136,071 5.62 $4.72 1,025,002 $4.76
$6.00 - $8.00 396,959 5.22 $6.95 388,624281,387 3.11 $6.96 281,387 $6.96
$8.01 - $18.49 12,433 1.11 $18.38 12,433 $18.38
$18.50 - $21.70 21,627 1.41 $21.70 21,627 $21.70
--------- ---- ------ --------- ------202 0.92 $15.77 202 $15.77
5366
Shares Weighted Weighted Weighted
Purchasable Average Option Average Shares Average Price
Range of Under Option Life Exercise Exercisable At OfAs of of Exercisable
Exercise Prices Options (Years) Price June 30, 20022004 Shares
- --------------- ----------- ----------- -------- --------------- --------------
ALL OUTSTANDING OPTIONS:
$0.22------- ------- ----- ------------- ------
all outstanding options:
$1.00 - $21.70 3,519,068 7.35 $4.30 2,477,838 $4.47
========= ==== ===== ========= ======4,365,601 6.93 $3.58 3,353,207 $3.76
During the year ended June 30, 2004, the Company made modifications to stock options held by an employee and a director. As a result of these modifications, the Company recorded an expense of $156,239 during the year ended June 30, 2004. In addition, there were stock options granted to certain officers which included vesting provisions which were contingent on achievement of certain performance objectives and one these objectives was met in September 2003. As a result, a compensation expense charge in the amount of $470,400 was recorded in connection with these performance based options.
(6)(7) INCOME TAXES:
The Company has had no income tax expense or benefit since inception because of operating losses.losses except for amounts recognized for sales of New Jersey State operating loss carry-forwards and research and development credits. Deferred tax assets and liabilities are determined based on the estimated future tax effect of differences between the financial statements and tax reporting basis of assets and liabilities, as well as for operating loss carryforwards and research and development costs, given the provisions of the tax laws. Based on the Company's historical losses, a valuation allowance for the net deferred tax assets has been recorded at June 30, 2002.2004 and has been recorded since inception.
As of June 30, 2004, the Company had Federal net operating loss carryforwards of approximately $112,000,000, which will expire in the years 2004 through 2024, if not utilized. At June 30, 2004 the Company had federal research and development credits of approximately $2,400,000 that will expire in year 2004 through 2024 if not utilized.
The Tax Reform Act of 1986 imposes limitations(the "Act") provides for limitation on the use of net operating loss and research and development tax credit carryforwards iffollowing certain stock ownership changes occur. As(as defined by the Act) that could limit the Company's ability to utilize these carryforwards. The Company may have experienced various ownership changes, as defined by the Act, as a result of past changes in majority ownership,financings. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore the Company most likely willmay not be able to fully realize the benefittake full advantage of itsthese carryforwards for federal income tax purposes.
The Company's net operating loss carryforwards.
Significant components of the Palatin's deferred tax asset for federal and state purposes isassets are as follows:
June 30,
-----------------------------------
2002 2001---------------------------------
2004 2003
------------- -------------
Net operating loss carryforwards .................... $ 24,267,00038,097,000 $ 17,820,00029,149,000
Research and development tax credits .... 866,000 716,000
Non-deductible........ 2,386,000 1,736,000
Accrued expenses ................. 1,138,000 780,000............................ 798,000 455,000
------------- -------------
26,271,000 19,316,00041,281,000 31,340,000
Valuation Allowances .................... (26,271,000) (19,316,000)allowances ........................ (41,281,000) (31,340,000)
------------- -------------
Net deferred tax assets..................assets...................... $ - $ -
============= =============67
A valuation allowance was established for 100%In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets aswill not be realized. The ultimate realization of such benefitsdeferred tax assets is not assured.dependent upon the generation of future taxable income during the periods in which the temporary differences representing future deductible amounts become deductible. Due to the Company's history of losses, the deferred tax assets are fully offset by a valuation allowance as of June 30, 2004 and 2003. The valuation allowance for the years ended June 30, 2004 and 2003 increased by $9,941,000 and $5,069,000, respectively, related primarily to additional net operating losses incurred by the Company.
During 2002the years ended June 30, 2004, 2003 and 2001,2002, the Company sold New Jersey State operating loss carryforwards and research and development credits, which resulted in the recognition of $392,410$240,836, $245,093 and $325,152,$392,410, respectively, in tax benefits.
(8) GRANTS AND CONTRACTS:
The Company applies for and has received grants and contracts under the Small Business Innovative Research ("SBIR"(“SBIR”) program and other federally funded grant and contract programs. Since inception, approximately $3,738,000$4,025,000 of the Company'sCompany’s revenues has been derived from federally or state funded grants and contracts. Under federal grants and contracts, there are no
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royalties or other forms of repayment; however, in certain limited circumstances the government can acquire rights to technology which is not being commercially exploited.
On May 13, 2002, the Company entered into an agreement with Mallinckrodt Inc., a division of Tyco International, Ltd., to amend the strategic collaboration agreement dated as of August 17, 1999 for the development of LeuTech.NeutroSpec. Under the terms of the original agreement, Mallinckrodt paid a licensing fee of $500,000 (see Note 2) and purchased 700,000 restricted unregistered shares of Series C Convertible Preferred Stock for $13,000,000 (see Note 5)6). The Company shared LeuTechNeutroSpec development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay the Company milestone payments of an additional $10 million$10,000,000 on FDA approval of the first LeuTechNeutroSpec indication and on attainment of certain sales goals following product launch. The Company agreed to arrange for the manufacture of LeuTechNeutroSpec and would receive a transfer price on each product unit and a royalty on LeuTechNeutroSpec net sales.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million,$3,200,000 subject to certain conditions and attaining certain milestones, to cover halfoffset a portion of the Company'sCompany’s estimated expenses associated with completing the FDA review process of LeuTech.process. Additionally, the timing of the $10 million$10,000,000 in future milestone payments has been revised to coincide with LeuTech's anticipated marketingNeutroSpec’s FDA approval and achievement of future sales goals (see Note 2). All of the $3,200,000 has been paid as of June 30, 2004.
During the years ended June 30, 20012004, 2003 and 2000,2002, the Company recognized $1,400,000$2,000,000, $504,000 and $4,150,000,$0, respectively, as contract revenue related to the development of LeuTech.NeutroSpec.
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(9) RELATED PARTY TRANSACTIONS:
One of the Company's directors is the president and sole stockholder of a company which provides strategic and technology consulting services. The Company did not recognized any contract revenuepaid the consulting firm $43,125, $112,500 and $119,333 during the yearyears ended June 30, 2002.2004, 2003 and 2002, respectively, for consulting services provided to the Company.
(8)(10) CONSOLIDATED QUARTERLY FINANCIAL DATA --– UNAUDITED:
The following tables provide quarterly data for the fiscal years ended June 30, 20022004 and 2001.2003:
Three Months Ended
-----------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2001 2001 2002 2002
----------------- ---------------- ---------------- ----------------2003 2003 2004 2004
------------ ------------ ------------ ------------
(amounts in thousands except share and per share data)
Total revenues $ 411,833 $ 42291 $ 99181 $ 99$ 10
Total operating expenses 3,000 4,266 4,662 5,1938,633 5,203 8,292 6,945
Total other income (expense) 101 79 64 65
----------------- ---------------- ---------------- ----------------81 80 84 (46)
------------ ------------ ------------ ------------
Loss before income taxes (2,858) (4,145) (4,499) (5,029)
Income tax benefit - 162 230 -
----------------- ---------------- ---------------- ----------------
Net loss (2,858) (3,983) (4,269) (5,029)
Preferred stock dividend - (286) - (11)
----------------- ---------------- ---------------- ----------------
Net loss attributable to common shares $ (2,858) $ (4,269) $ (4,269) $ (5,040)
================= ================ ================ ================
Basic and diluted net loss per common share $ (0.26) $ (0.33) $ (0.26) $ (0.31)
================= ================ ================ ================(6,719) (4,832) (8,027) (6,981)
5569
Three Months Ended
-----------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2001 2001 2002 2002 ----------------- ---------------- ---------------- ----------------2003 2003
------------ ------------ ------------ ------------
(amounts in thousands except share and per share data)
Income tax benefit - 241 - -
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (6,719) $ (4,591) $ (8,027) $ (6,981)
============ ============ ============ ============
Basic and diluted net loss attributable to
common stockholders per common share $ (0.16) $ (0.10) $ (0.16) $ (0.13)
============ ============ ============ ============
Weighted average number of common shares
outstanding, used in computing basic and
diluted net loss attributable to common
stockholders per common share 43,161,281 44,531,302 50,455,484 52,687,077
============ ============ ============ ============
Three Months Ended
----------------------------------------------------------------
September 30, December 31, March 31, June 30,
2002 2002 2003 2003
------------ ------------ ------------ ------------
(amounts in thousands except share and per share data)
Total revenues $ 624 $ 234 $ 330 $ 82
Total operating expenses 4,768 4,875 6,025 6,638
Total other income (expense) 45 44 43 94
------------ ------------ ------------ ------------
Loss before income taxes (4,099) (4,597) (5,652) (6,462)
Income tax benefit - 245 - -
------------ ------------ ------------ ------------
Net loss (4,099) (4,352) (5,652) (6,462)
Deemed dividend (17) (98) (88) -
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (4,116) $ (4,450) $ (5,740) $ (6,462)
============ ============ ============ ============
Basic and diluted net loss attributable to
common stockholders per common share $ (0.22) $ (0.17) $ (0.19) $ (0.15)
============ ============ ============ ============
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Three Months Ended
----------------------------------------------------------------
September 30, December 31, March 31, June 30,
2002 2002 2003 2003
------------ ------------ ------------ ------------
(amounts in thousands except share and per share data)
Weighted average number of common shares
outstanding, used in computing basic and
diluted net loss attributable to common
stockholders per common share 11,199,611 13,013,547 16,140,790 16,495,204
================= ================ ================ ================18,497,853 24,871,723 30,162,510 42,039,097
============ ============ ============ ============
As previously disclosed(11) SUBSEQUENT EVENTS:
In July 2004, the Company announced the receipt of full approval from the FDA to market NeutroSpec, the Company’s proprietary radiolabeled monoclonal antibody product for imaging equivocal appendicitis. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt.
In August 2004, the Company entered into a collaboration agreement with King, a specialty pharmaceutical company, to jointly develop and commercialize PT-141. Pursuant to the terms of the agreement, Palatin has granted King a co-exclusive license with Palatin to PT-141 in North America and an exclusive right to collaborate in the Company's March 31, 2002 Form 10-Q,licensing or sublicensing of PT-141 with Palatin outside North America. Palatin has the option to create a urology specialty sales force to co-promote the product in the U.S., upon commercialization.
King paid the Company had$20,000,000 at closing, $5,000,000 of which was designated as an equity investment in Palatin. Certain of he proceeds received at closing will be recorded a chargeas an equity contribution based on the fair value of $916,000the common stock and common warrants issued in connection with the quarter ended September 30, 2001 related to the impairment of leasehold improvements at the Company's Edison, New Jersey facility. Given that the Company utilized that facility through June 30, 2002, an impairment charge should not have been taken as previously reported, but rather as a change incollaboration agreement with the remaining estimated useful lifebalance recorded as deferred revenue. The deferred revenue will be amortized to revenue over the related performance period. King may pay potential milestone payments to Palatin totaling up to $100,000,000 for achieving certain Erectile Dysfunction and Female Sexual Dysfunction development and regulatory approval targets, a portion of which would consist of an equity investment in Palatin. After regulatory approval and commercialization of PT-141, King may also pay potential one-time milestone payments to Palatin totaling up to $130,000,000 upon achieving specified annual North American net sales thresholds.
Under the terms of the leasehold improvements. The Company appropriately accountedagreement, King and Palatin will share all collaboration development and marketing costs and all collaboration net profits derived from net sales of PT-141 in North America based on an agreed percentage. King and Palatin will seek a partner for the changePT-141 for territories outside of North America and will jointly share in estimated useful life in the previously reported results of operations for the three months ended March 31, 2002, but did not restate the results of operations previously filed for the three months ended December 31, 2001 and September 30, 2001. The above presented quarterly results for the three months ended September 30 and December 31, 2001 reflect the appropriate accounting for the change in estimate, and as a result, do not agree with quarterly results previously presented in the Company's September 30 and December 31, 2001 Form 10-Qs. The previously reported net loss for the three months ended September 30, 2001 was higher by $744,000 and the net loss for the three months ended December 31, 2001 was lower by $211,000.
generated from those territories.Three Months Ended ---------------------------------------------------------------------- September 30, December 31, March 31, June 30, 2000 2000 2001 2001 --------------- ---------------- --------------- --------------- (amounts in thousands except per share data) Totalcollaboration revenues$ 897 $ 706 $ 143 $ 42 Total operating expenses 3,162 3,093 3,013 3,865 Total other income (expense) 85 278 264 155 --------------- ---------------- --------------- --------------- Loss before income taxes and cumulative Effect of accounting change (2,180) (2,109) (2,606) (3,668) Income tax benefit - 325 - - --------------- ---------------- --------------- --------------- Loss before cumulative effect of Accounting change (2,180) (1,784) (2,606) (3,668) Cumulative effect of accounting change (361) - - - --------------- ---------------- --------------- --------------- Net loss $ (2,541) $ (1,784) $ (2,606) $ (3,668) =============== ================ =============== =============== Net loss per share Basic and diluted net loss before Cumulative effect of accounting change $ (0.27) $ (0,17) $ (0.24) $ (0.33) Cumulative effect of accounting change (0.04) - - - =============== ================ =============== =============== Basic and diluted net loss per common share $ (0.31) $ (0.17) $ (0.24) $ (0.33) =============== ================ =============== =============== Weighted average number of common shares outstanding, used in computing basic and diluted net loss per common share 8,080,352 10,366,170 11,000,017 11,152,819 =============== ================ =============== ===============
5671
Amounts for each of the first three quarters of fiscal 2001 have been restated to give effect for the implementation of SAB 101 in the fourth quarter retroactively to July 1, 2000. The impact of the change resulted in an increase in total revenues and corresponding decrease in loss before cumulative effect of change in accounting principle of $41,667 for each of the quarters ended March 31, December 31, and September 30 as compared to amounts previously reported in Form 10-Q filed with the SEC.
On August 8, 2002, upon the recommendation and approval of our Audit Committee, we dismissed Arthur Andersen LLP ("Andersen") as our principal independent public accountants and engaged KPMG LLP ("KPMG") as our principal independent public accountants.
In connectionNone.
Item 9A. Controls and Procedures
The Company’s management, with the audits forparticipation of the two (2) most recent yearsCompany’s Chief Executive Officer and Chief financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2004. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2004. There were no changes that materially affected, or that are reasonably likely to materially affect the Company’s internal control over financial reporting during the fourth quarter of the fiscal year ended June, 30, 2001 and 2000 and the subsequent interim period through the filing date of this Annual Report on Form 10-K, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference to the subject matter of such disagreements in connection with their reports on our consolidated financial statements for such years; and there were no reportable events as defined in 2004.
Item 304(a)(1)(v) of Regulation S-K.9B. Other Information
The reports of Andersen on our consolidated financial statements, as of and for the years ended June 30, 2001 and 2000, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.
We provided Andersen with the foregoing disclosures and requested Andersen to furnish a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. While we have received no information from Andersen that Andersen has a basis for disagreement with such statements, we have been unable to obtain such a letter due to the fact that the personnel primarily responsible for our account (including the engagement partner and manager) have left Andersen.
During the years ended June 30, 2001 and 2000 and through the filing date of this Annual Report on Form 10-K, neither we nor someone on our behalf consulted KPMG regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.None.
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The information required by Part III of Form 10-K under
is incorporated by reference from our definitive proxy statement relating to the 20022004 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our June 30, 20022004 fiscal year end.
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PART IV
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of the report:
1. Financial statements: the following financial statements are filed as a part of this report under Item 8 -– Financial Statements and Supplementary Data:
-— Report of Registered Independent Auditors' Report -Public Accounting Firm
— Report of Independent Public Accountants -
— Consolidated Balance Sheets -
— Consolidated Statements of Operations -
— Consolidated Statements of Stockholders'Stockholders’ Equity (Deficit) -
— Consolidated Statements of Cash Flows -
— Notes to Consolidated Financial Statements
2. Financial statement schedules: none.
3. Exhibits: The following exhibits are filed with this report, or incorporated by reference as noted. Exhibits filed with this report are marked with an asterisk (*). Exhibits which consist of or include a management contract or compensatory plan or arrangement are marked with an obelisk (†).
| No. | Description |
| 3.01 | |
| Certificate of incorporation. Incorporated by reference to Exhibit 3.01 of our annual report on Form 10-K for the year ended June 30, 2000, filed with the SEC on September 29, 2000. |
| 3.02 | |
| Bylaws. Incorporated by reference to Exhibit 3.2 of our quarterly report on Form 10-QSB for the quarter ended December 31, 1997, filed with the SEC on February 13, 1998. |
58
| 10.01 | RhoMed Incorporated 1995 Employee Incentive Stock Option Plan. Incorporated by reference to Exhibit 10.04 of our annual report on Form10-KSB for the |
| 10.02 | |
| 1996 Stock Option Plan, as amended effective |
| 10.03 | |
| Carl Spana Stock Option Agreement. Incorporated by reference to Exhibit 4.15 of our Form S-8 filed with the SEC on June 17, 1998. † |
| 10.04 | |
| Executive Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our Form S-8 filed with the SEC on June 17, 1998. † | |
73
| 10.05 | |
| Form of Placement Agent Warrant for the RhoMed common stock offering. Incorporated by reference to Exhibit 10.22 of our annual report on Form 10-KSB for the |
| 10.06 | |
59
| Strategic Collaboration Agreement dated as of August 17, 1999, between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.21 of our amended annual report on Form 10-KSB/A for the |
| 10.07 | |
| Amendment To Strategic Collaboration Agreement dated as of May 13, 2002 between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the |
| 10.08 | |
| Form of warrant and registration rights for the warrant issued in April 2000 with an expiration date of March 15, 2005. Incorporated by reference to Exhibit 10.22 of our annual report on Form 10-K for the year ended June 30, 2000, filed with the SEC on September 29, 2000. |
| 10.09 | |
| Form of warrant issued to purchasers in the September-October 2000 private placement. Incorporated by reference to Exhibit 10.3 of |
| 10.10 | |
| Employment Agreement dated as of July 17, 2001 between Palatin Technologies, Inc. and Perry B. Molinoff. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the |
| 10.11 | |
| Employment Agreement dated as of October 1, |
60
| Employment Agreement dated as of October 1, |
| 10.13 | Employment Agreement dated as of October 1, 2003, between Palatin Technologies, Inc. and Shubh D. Sharma. Incorporated by reference to Exhibit 10.3 of our quarterly report on Form 10-Q for the quarter ended September 30, 2003, filed with the SEC on November 14, 2003. † |
74
| Form of stock purchase agreement for our October 2001 private placement. Incorporated by reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed with the SEC on November 14, 2001. |
| 10.15 | |
| Form of registration rights agreement for our October 2001 private placement. Incorporated by reference to Exhibit 10.2 of |
| 10.16 | |
| Form of warrant issued to purchasers in our October 2001 private placement. Incorporated by reference to Exhibit 10.3 of |
| 10.17 | |
| Form of stock purchase agreement for our June-July 2002 private placement. |
| 10.18 | |
| Form of registration rights agreement for our June-July 2002 private placement. |
| 10.19 | |
| Form of warrant issued to purchasers in our June-July 2002 private placement. |
| 10.20 | Form of stock purchase agreement for our November 2002 private placement. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 10.22 | Form of warrant issued to purchasers in our November 2002 private placement. Incorporated by reference to Exhibit 10.32 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 10.23 | Form of stock purchase agreement for our March 2003 private placement. Incorporated by reference to Exhibit 10.33 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
| 10.24 | Form of warrant issued to purchasers in our March 2003 private placement. Incorporated by reference to Exhibit 10.34 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. |
___________________________________________
* Exhibit filed with this report.
† Management contract
We filed one report on Form 8-K during the last quarter of the fiscal year ended June 30, 2002. The report, dated and filed on May 29, 2002, contained an Item 9 disclosure of our announcement of clinical trial results.
6175
| 10.25 | Form of stock purchase agreement, including warrant certificate, for our January 2004 private placement. Incorporated by reference to Exhibit 10.01 of our quarterly report on Form 10-Q for the quarter ended December 31, 2003, filed with the SEC on February 17, 2004. |
| 10.26 | Development and Manufacturing Agreement between Palatin and DSM Biologics Company B.V. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. |
| 10.27 | Securities Purchase Agreement between Palatin and King Pharmaceuticals, Inc. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. * |
| 10.28 | Collaborative Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. * |
| 10.29 | Form of warrant certificate issued to King Pharmaceuticals, Inc. * |
| 21 | Subsidiaries of the registrant. * |
| 23 | Consent of KPMG LLP. * |
| 31.1 | Certification of Chief Executive Officer * |
| 31.2 | Certification of Chief Financial Officer * |
| 32.1 | Certification of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
| 32.2 | Certification of principal financial officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
* Exhibit filed with this report.
† Management contract
(b) Reports on Form 8-K:
76
| • | On August 13, 2004, we filed a Form 8-K including the press release in which we announced an agreement between Palatin and King Pharmaceuticals, Inc. to jointly develop and, on obtaining necessary regulatory approvals, commercialize Palatin’s PT-141 for the treatment of male and female sexual dysfunction. | |
| • | On August 18, 2004, we filed a Form 8-K including the press release in which we announced that we conducted the initial closing and received proceeds of $20 million from King Pharmaceuticals, Inc. pursuant to the collaborative agreement between Palatin and King, which we announced on August 13, 2004. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PALATIN TECHNOLOGIES, INC.
By:/s/ Carl Spana
Carl Spana, Ph.D.
President and Chief Executive Officer
Date: September 30, 200213, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ Carl Spana | President, Chief Executive Officer and Director | September |
| Carl Spana | (principal executive officer) | |
| /s/ Stephen T. Wills | Executive Vice President and Chief Financial Officer | September |
| Stephen T. Wills | (principal financial and accounting officer) | |
| /s/ John K.A. Prendergast | Chairman and Director | September |
| John K.A. Prendergast | ||
| /s/ | Director | September |
| /s/ | Director | September |
77
| /s/ Zola P. Horovitz | Director | September |
| Zola P. Horovitz | ||
| /s/ Robert I. Taber | Director | September |
| Robert I. Taber | ||
| /s/ Errol DeSouza | Director | September 13, 2004 |
| Errol DeSouza |
6278
I, Carl Spana, certify that:
1. I have reviewed this annual report on Form 10-K of Palatin Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
Date: September 30, 2002
/s/ Carl Spana President and Chief Executive Officer
I, Stephen T. Wills, certify that:
1. I have reviewed this annual report on Form 10-K of Palatin Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
Date: September 30, 2002
/s/ Stephen T. Wills Executive Vice President and Chief Financial Officer
63