U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 Cedar Brook Drive | |
| Cranbury, New Jersey | 08512 |
| (Address of principal executive offices) | (Zip Code) |
Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 15,November 12, 2003, 41,816,65144,667,718 shares of the issuer's common stock, par value $.01 per share, were outstanding.
PALATIN TECHNOLOGIES, INC.
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements (unaudited) | |
| CONSOLIDATED BALANCE SHEETS -- As of and June 30, 2002 | Page 3 | |
| CONSOLIDATED STATEMENTS OF OPERATIONS -- For the Three (inception) through | Page 4 | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the Nine Months Ended March 31, 2003 and March 31, 2002 and the Period from January 28, 1986 (inception) through March 31, 2003 | Page 5 | |
| Notes to Consolidated Financial Statements | Page 6 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | Page |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | Page |
| Item 4. | Controls and Procedures | Page |
PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings | Page |
| Item 2. | Changes in Securities and Use of Proceeds | Page |
| Item 3. | Defaults Upon Senior Securities | Page |
| Item 4. | Submission of Matters to a Vote of Security Holders | Page |
| Item 5. | Other Information | Page |
| Item 6. | Exhibits and Reports on Form 8-K | Page |
| Signatures | Page | |
2
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(unaudited)
March 31,September 30, 2003 June 30, 2002
---------------2003
------------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,391,8399,793,033 $ 7,944,26414,294,603
Available for sale investments 3,108,902 1,160,7734,023,486 4,088,384
Contracts receivable 1,762,247 -
Prepaid expenses and other 649,939 349,883335,896 447,510
-------------- --------------
Total current assets 26,150,680 9,454,92015,914,662 18,830,497
Property and equipment, net 3,426,713 2,416,4993,276,840 3,399,181
Restricted cash 428,075 433,844428,075
Other 59,577 52,95367,339 63,381
-------------- --------------
$ 30,065,04519,686,916 $ 12,358,21622,721,134
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt, including capital leases $ 145,382173,093 $ -188,015
Accounts payable 1,385,495 1,579,3364,607,219 1,344,789
Accrued expenses 2,933,446 661,8831,062,412 1,619,382
Accrued compensation - 236,200
Accrued litigation settlement - 400,000140,000 428,500
Deferred revenue 490,131 794,018324,709 407,420
-------------- --------------
Total current liabilities 4,954,454 3,671,4376,307,433 3,988,106
-------------- --------------
Long term debt, 114,097 -including capital leases 38,010 76,432
-------------- --------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock of $.01 par value - authorized 10,000,000 shares;
Series A Convertible; Issued13,447 and outstanding 24,867 and 26,192
shares as of March 31, 2003 and June 30, 2002, respectively; 249 262
Series C Convertible; 700,00014,867 shares issued and outstanding
as of March 31,September 30, 2003 and June 30, 2002 respectively; 7,000 7,0002003, respectively 134 149
Common stock of $.01 par value - authorized 75,000,000 shares;
Issuedissued and outstanding 41,816,65343,341,275 and 17,423,07642,994,050 shares as of
March 31,September 30, 2003 and June 30, 2002,2003, respectively 418,167 174,231433,413 429,941
Additional paid-in capital 108,943,698 78,792,240110,567,026 109,085,115
Deferred compensation (35,070) (53,942)(54,173) (37,977)
Accumulated other comprehensive income 8,700 10,604(76,746) (11,805)
Deficit accumulated during development stage (84,346,250) (70,243,616)(97,528,181) (90,808,827)
-------------- --------------
Total stockholders' equity 24,996,494 8,686,77913,341,473 18,656,596
-------------- --------------
$ 30,065,04519,686,916 $ 12,358,21622,721,134
============== ==============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
3
Inception
Three Months Ended September 30, (January 28, 1986)
Three Months Ended March 31, Nine Months Ended March 31,-------------------------------- through
2003 2002 September 30, 2003
2002 March 31, 2003
------------- ------------- -------------- -------------- -------------------------- ------------ ------------------
REVENUES:
Grants and contracts $ 181,4171,750,000 $ 57,772425,000 $ 641,417 $ 57,772 $ 10,265,51112,015,511
License fees 148,878 41,667 545,887 125,001 2,647,276and royalties 82,711 198,505 2,812,698
Other - - - - 318,917
------------- ------------- -------------- -------------------------- ------------ --------------
Total revenues 330,295 99,439 1,187,304 182,773 13,231,704
------------- ------------- -------------- --------------1,832,711 623,505 15,147,126
------------ ------------ --------------
OPERATING EXPENSES:
Research and development 4,744,379 3,537,765 12,015,910 8,889,591 66,989,2237,018,362 3,588,525 79,430,865
General and administrative 1,280,305 1,123,885 3,651,738 3,039,047 31,032,9961,614,672 1,179,627 33,862,572
Net intangibles write down - - - - 259,334
------------- ------------- -------------- -------------------------- ------------ --------------
Total operating expenses 6,024,684 4,661,650 15,667,648 11,928,638 98,281,553
------------- ------------- -------------- --------------8,633,034 4,768,152 113,552,771
------------ ------------ --------------
OTHER INCOME (EXPENSES):
Interest income 50,120 64,527 147,079 246,587 2,600,65886,518 46,504 2,787,650
Interest expense (7,310) (1,018) (14,462) (2,374) (1,973,603)(5,551) (963) (1,986,730)
Merger costs - - - - (525,000)
------------- ------------- -------------- -------------------------- ------------ --------------
Total other income (expenses) 42,810 63,509 132,617 244,213 102,055
------------- ------------- -------------- --------------80,967 45,541 275,920
------------ ------------ --------------
Loss before income taxes and cumulative
effect of accounting change (5,651,579) (4,498,702) (14,347,727) (11,501,652) (84,947,794)(6,719,356) (4,099,106) (98,129,725)
Income tax benefit - 230,400 245,093 392,410- 962,655
------------- ------------- -------------- -------------------------- ------------ --------------
Loss before cumulative effect of
accounting change (5,651,579) (4,268,302) (14,102,634) (11,109,242) (83,985,139)(6,719,356) (4,099,106) (97,167,070)
Cumulative effect of accounting change - - - - (361,111)
------------- ------------- -------------- -------------------------- ------------ --------------
NET LOSS (5,651,579) (4,268,302) (14,102,634) (11,109,242) (84,346,250)(6,719,356) (4,099,106) (97,528,181)
PREFERRED STOCK DIVIDEND (87,339) - (203,138) (285,725)(17,459) (3,511,765)
------------- ------------- -------------- -------------------------- ------------ --------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (5,738,918) $ (4,268,302) $ (14,305,772) $ (11,394,967) $ (87,858,015)
============= ============= ============== ==============$(6,719,356) $(4,116,565) $(101,039,946)
============ ============ ==============
Basic and diluted net loss per common share $ (0.19)(0.16) $ (0.26) $ (0.58) $ (0.85)
============= ============= ============== ==============(0.22)
============ ============
Weighted average number of common shares
outstanding used in computing basic
and diluted net loss per common share 30,162,510 16,140,790 24,532,567 13,431,685
============= ============= ============== ==============43,161,281 18,497,853
============ ============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
4
Inception
Three Months Ended September 30, (January 28, 1986)
Nine Months Ended March 31,-------------------------------- Through
2003 2002 March 31,September 30, 2003
-------------------------- ------------ ------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,102,634) $(11,109,242) $(84,346,250)$(6,719,356) $(4,099,106) $(97,528,181) $
Adjustments to reconcile net loss to net cash
used for operating activities:
Cumulative effect of accounting change - - 361,111
Depreciation and amortization 434,502 865,754 2,965,232157,988 154,564 3,267,976
License fee - - 500,000
Interest expense on note payable - - 72,691
Accrued interest on long-term financing - - 796,038
Accrued interest on short-term financing - - 7,936
Intangibles and equipment write down - - 278,318
Common stock and notes payable issued for expenses - - 751,038
Settlement with consultant - - (28,731)
Acceleration of options previously granted - - 1,505,315
Stock based compensation 18,872 40,431 4,416,653560,406 (3,889) 5,015,780
Deferred revenue (303,887) (125,001) 129,020(82,711) 122,496 (36,402)
Changes in certain operating assets and
liabilities:
Accounts receivable (1,762,247) (346,000) (1,762,247)
Prepaid expenses and other (308,418) (160,448) (1,459,771)107,656 107,933 (1,135,556)
Accounts payable (193,841) 412,603 1,385,4953,262,430 487,219 4,607,219
Accrued expenses and other 665,114 23,657 1,502,030
-------------- ------------------ ---------------------(845,470) (700,132) 741,245
------------ ------------ -------------
Net cash used for operating activities (13,790,292) (10,052,246) (71,163,875)
-------------- ------------------ ---------------------(5,321,304) (4,276,915) (82,586,450)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales/(Purchases)Purchases of short-term investments net (1,950,034) - (3,122,041)(43) (5,288) (4,142,503)
Purchases of property and equipment (1,019,289) (956,814) (5,827,024)
-------------- ------------------ ---------------------(35,647) (907,577) (5,977,397)
------------ ------------ -------------
Net cash provided/(used)used for investing activities (2,969,323) (956,814) (8,949,065)
-------------- ------------------ ---------------------(35,690) (912,865) (10,119,900)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party - - 302,000
Payments on notes payable, related party - - (302,000)
Proceeds from senior bridge notes payable - - 1,850,000
Payments on senior bridge notes payable - - (1,850,000)
Payments on capital lease obligations (158,441) - (158,441)(53,344) (91,394) (206,817)
Proceeds from notes payable and long-term debt - - 3,951,327
Payments on notes payable and long-term debt - - (1,951,327)
Proceeds from commonCommon stock, stock option
and warrant issuances, net 31,365,631 10,204,608 76,454,561908,768 1,666,181 76,497,541
Proceeds from preferredPreferred stock, net - - 24,210,326
Purchase of treasury stock - - (1,667)
-------------- ------------------ --------------------------------- ------------ -------------
Net cash provided by financing activities 31,207,190 10,204,608 102,504,779
-------------- ------------------ ---------------------855,424 1,574,787 102,499,383
------------ ------------ -------------
NET INCREASE/INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 14,447,575 (804,452) 22,391,839(4,501,570) (3,614,993) 9,793,033
CASH AND CASH EQUIVALENTS, beginning
of period 14,294,603 7,944,264 11,456,424 -
-------------- ------------------ --------------------------------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ 22,391,8399,793,033 $ 10,651,9724,329,271 $ 22,391,8399,793,033 $
============== ================== ================================= ============ =============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
5
(1) Organization Activities:
Nature of Business —– Palatin Technologies, Inc. (“Palatin” or the “Company”) is a development-stage biopharmaceutical company. The Company does not currently offer any products for sale. The Company is currently conductingprimarily focused on 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, anorexia, cachexia, inflammation and drug abuse. The Company’s objective is to become a worldwide leader in melanocortin-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.
PT-141 is the Company’s lead therapeutic drug candidate and is now in clinical investigations with its lead drug, PT-141,development for the treatment of both male and female sexual dysfunction, anddysfunction. The Company recently completed a Phase 2B trial with PT-141 in male patients. LeuTech® is developing additional therapeutic compounds, discovered using its enabling peptide platform technology, MIDAS™. Additionally, Palatin is developing a product for infection imaging, LeuTech®, based on athe Company’s proprietary radiolabeled monoclonal antibody.antibody for imaging and diagnosing infections. The Company commenced the biologics license application (BLA) amendment filings to the FDA in the first half of calendar year 2003 and anticipates remitting the final BLA amendment filing to the FDA in the first quarter of 2004. The Company expects to receive a complete response from the FDA regarding its BLA amendment filings in the first half of calendar year 2004. The Company is also conducting additional clinical trials for LeuTech to expand its market potential as a diagnostic agent. In addition, the Company has several preclinical drug candidates under investigation for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation.
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 programs with the cash flow from our LeuTech collaboration agreement.
Business Risk and Liquidity —– As shown in the accompanying financial statements, the Company incurred a substantial net loss of $14,102,634$6,719,356 for the ninethree months ended March 31,September 30, 2003 and has a deficit accumulated during development stage of $84,346,250,$97,528,181, cash and cash equivalents of $22,391,839$9,793,033 and available for sale investments of $3,108,902$4,023,486 as of March 31,September 30, 2003. The Company anticipates incurring additional losses in the future as it continues development of LeuTech for diagnosis of appendicitis and expands clinical trials for other indications of LeuTech and continues research and development of PT-141 and its 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, conductby conducting pre-clinical studies and clinical trials, obtainobtaining required regulatory approvals and successfully manufacturemanufacturing and marketmarketing 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.
In March 2003, the Company concluded a private placement6
The Company has incurred negative cash flows from operations since its inception. Theinception, the Company has expended and expects to continue to expend in the future, substantial funds to complete its planned product development efforts. The Company expects that its existing capital resources will be adequate to fund the Company’s projected operations through the fiscal year ending JuneSeptember 30, 2004, 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. Should appropriate sources of financing not be available, management would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that the Company’s financing efforts will be successful. If adequate funds are not available, ourthe Company’s financial condition and results of operations will be materially and adversely affected.
6
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnote disclosures required to be presented for complete financial statements. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position as of March 31,September 30, 2003 and the results of operations and cash flows for the three and nine month periodsperiod ended March 31,September 30, 2003 and 2002 and for the period from inception (JanuaryJanuary 28, 1986)1986 (inception) to March 31,September 30, 2003. The results of operations for the ninethree month period ended March 31,September 30, 2003 may not necessarily be indicative of the results of operations expected for the full year, except that the Company expects to incur a significant loss for the fiscal year ending June 30, 2003.2004.
The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K, filed with the Securities and Exchange Commission, which includes financial statements as of June 30, 20022003 and 20012002 and for each of the three fiscal years in the period ended June 30, 2002.2003.
(3) Summary of Significant Accounting Policies:
Principles of Consolidation —– The consolidated financial statements include the accounts of Palatin and its wholly-owned inactive subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates —– The preparation of consolidated financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of assets and contingent 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 aan original maturity of less than three months. As of March 31,September 30, 2003 and June 30, 2002,2003, approximately $428,000 and $434,000, respectively, of cash was restricted to secure letters of credit for security deposits on leases.
7
Investments — – The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115 “Accounting For Certain Investments in Debt and Equity Securities.” The Company classifies such investments as available for sale investments and as such all investments are recorded at fair value. The investments consist principally of corporate debt securities with a minimum credit rating of A2 and mutual funds with average durations ranging from one to three years and credit ratings of AAA. Unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in other comprehensive income and as a separate component of stockholders’ equity until realized. Interest on securities classified as available for sale is included in interest income. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs.
7
The following is a summary of available for sale investments as of March 31,September 30, 2003:
Cost Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
Unrealized Unrealized
Gains Losses---- ----- ------ ----------
Corporate debt
securities $ 100,000 $ 2,1011,312 $ - $ 102,101101,312
Mutual funds 3,000,202 6,599 - 3,006,801
-------------- ----------------- ----------------- ----------------
Total $ 3,100,202 $ 8,700Funds $4,000,232 $ - $ 3,108,902
============== ================= ================= ================78,058 $3,922,174
------------------------------------------------------
Total $4,100,232 $ 1,312 $ 78,058 $4,023,486
The following is a summary of available for sale investments as of June 30, 2002:2003:
CostGross Gross Unrealized Unrealized Cost Gains Losses Fair ValueUnrealized Unrealized Gains Losses Government---- ----- ------ ---------- Corporate debt securities $50,000100,000 $6722,243 $ - $50,672 Corporate debt securities 100,000 860 - 100,860102,243 Mutualfunds 1,000,169 9,072 - 1,009,241 --------------- ------------------ ----------------- ---------------- Total $ 1,150,169 $ 10,604Funds $4,000,189 $ - $1,160,773 =============== ================== ================= ================14,048 $3,986,141 ------------------------------------------------------ Total $4,100,189 $ 2,243 $ 14,048 $4,088,384
Property and Equipment— – Property and equipment consistconsists of office and laboratory equipment, office furniture and leasehold improvements. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of five years for equipment, seven years for office furniture and over the term of the lease for leasehold improvements. Maintenance and repairs are expensedcharged to expense as incurred while expenditures that extend the useful life of an asset are capitalized.
Impairment of Long-Lived Assets —– The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of 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. Impairment is measured at fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold including quoted market prices, if available, or the present value of the estimated future discounted cash flows based on reasonable and supportable assumptions.
8
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 will adjust the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that the Company performs the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the license feemilestone is received andachieved. Milestones are based on the Company has no future performance obligations.
8
Tableoccurrence of Contentsa substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.
The Company recognized $137,417 in grant revenue pursuant to the Small Business Technology Transfer programs of the Department of Health and Human Services$1,750,000 for the three and nine months ended March 31, 2003.
The Company recognized $44,000 and $504,000, respectively, for the three and nine months ended March 31,September 30, 2003 in contract revenue related to the attainment of certain milestones and other shared development costs ofrelated to LeuTech pursuant to our collaboration agreement, as amended, with Mallinckrodt, Inc. a division of Tyco International, Ltd. described below.below, compared to $425,000 for the three months ended September 30, 2003.
In August 1999, the Company entered into a strategic collaboration agreement with Mallinckrodt, Inc. to jointly develop and market one of its proposed products. Under the terms of the agreement, the Company granted a worldwide 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 Recognition in Financial Statements” (“SAB 101”) which requires up front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 or $0.04 per share, which reflects the deferral of the $500,000 up-front license fee received from Mallinckrodt in August 1999. Under SAB 101, this payment has been recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the three and nine months ended March 31,September 30, 2003 and 2002, the Company recognized $10,418$5,788 and $38,199,$13,891, respectively, in license revenue that was included in the cumulative effect adjustment as of July 1, 2000.
In May 2002, the Company entered into an agreement with Mallinckrodt to amend the original agreement. Under the terms of this amended agreement, Mallinckrodt committed, among other things, up to an additional $3.2 million, subject to certain conditions and attainment of certain milestones, to cover half of the Company’s estimated expenses associated with completing the FDA review process of LeuTech. Pursuant to this amendment, $800,000 was received upon execution of this agreement. Under SAB 101, this payment has been recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the three and nine months ended March 31,September 30, 2003 and 2002, the Company recognized $138,460$76,923 and $507,688,$184,614, respectively, in license revenue under this agreement.
9
Research and Development Costs —– The costs of research and development activities are charged to expense as incurred.
Stock Options —– The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFASStatement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, as amended in SFASStatement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation”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.
9
The Company applies APB 25 and the related interpretations in accounting for its stock option plans. Had compensation cost for the Company’s common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the Company’s net incomeloss attributable to common stockholders and net incomeloss per common share would have been reduced to the following pro forma amounts:
For the three months ended For the nine months ended
March 31, March 31,September 30,
----------------------------------------
2003 2002
2003 2002----------------------------------------
Net loss attributable to common stockholders:
As reported $ (5,738,918) $(4,268,302) $(14,305,772) $(11,394,967)$(6,719,356) $(4,116,565)
Stock based employee compensation expense included
in the determination of net loss as reported 470,400 -
Impact of total stock-basedstock based compensation expense
determined under fair-value
basedfair-value-based method (244,804) (395,667) (1,000,769) (1,198,018)
------------- ------------ ------------- -------------(766,460) (367,954)
----------------------------------------
Pro forma net loss attributable to common
stockholders $ (5,983,722) $(4,663,969) $(15,306,541) $(12,592,985)
============= ============ ============= =============$(7,015,416) $(4,484,519)
========================================
Basic and diluted net loss per common share:
As reported $ (0.19)(0.16) $ (0.26)(0.22)
----------------------------------------
Impact of stock based compensation, net of tax $ (0.58)(0.00) $ (0.85)
============= ============ ============= =============(0.02)
----------------------------------------
Pro forma $ (0.20)(0.16) $ (0.29) $ (0.62) $ (0.94)
============= ============ ============= =============(0.24)
----------------------------------------
10
The assumptions used in the Black-Scholes option-pricing model are as follows: dividend yield of 0%, weighted average risk-free interest rate of 3.54% in 2003 and 4.5 % in 2002, expected volatility of 92.5% in 2003 and 60% in 2002, and an expected option life of 7 years.
Income Taxes — The Company and its subsidiaries file consolidated federal and combined state income tax returns. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes.
The Company provides for deferred income taxes relating to temporary differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109.
In accordance with SFAS 109, the Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management’s estimates and analysis, which includes tax laws which may limit the Company’s ability to utilize its tax loss carry-forwards.
Net Loss per Common Share —– The Company applies Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128 requires dual presentation of basic and diluted earnings per share (“EPS”) for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing the income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into Common stock, such as stock options. For the three and nine months ended March 31,September 30, 2003 and 2002, there were no dilutive effects of stock options or warrants as the Company incurred a net loss in each period. Options and warrants to purchase 15,305,19014,826,080 shares of Common Stock at prices ranging from $0.01 to $21.70 per share were outstanding at March 31,September 30, 2003.
Fair Value of Financial Instruments —– Statement of Financial Accounting Standards No. 107 “Disclosure about Fair Value of Financial Instruments”, (“SFAS 107”), requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
10Recent Accounting Pronouncements – In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” This Interpretation addresses consolidation of variable interest entities where an enterprise does not have voting control over the entity but has a controlling financial interest in the entity. FIN 46 is effective for all financial statements issued after September 30, 2003. This statement will not have a material impact on our financial statements.
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In April 2003, the FASB issued SFAS No. 149, “Amendment of FASB Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an “underlying” to conform it to language used in FIN No. 45, and amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this new standard does not have any effect on our current financial statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this new standard does not have any effect on our current financial statements.
In May 2003, the FASB’s Emerging Issues Task Force reached consensus on Issue 00-21. This Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, this Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying this Issue, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. This Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The application of this Issue does not have any effect on our current financial statements.
(4) Accrued Expenses:
Accrued expenses consist of the following:
March 31,September 30, 2003 June 30, 2002
--------------------------------2003
----------------------------------
Product development costs $ 988,800198,600 $ 208,000
Private placement offering costs 970,250 -784,007
Accrued rent
461,408 397,872
Other
974,396 453,883
------------------------------
$ 2,933,446 $ 661,883
==============================402,404 437,503
----------------------------------
$1,062,412 $1,619,382
==================================
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(5) Commitments and Contingencies:
Leases— – The Company currently leases two facilities in New Jersey under non-cancelable operating leases and is in the processseeking to terminate one of terminating the leasethose leases, for the Company’s former corporate offices located in Princeton. In July 2002, the Company moved into a new facility in Cranbury, New Jersey that combined both the research and development facility in Edison, New Jersey and the corporate offices in Princeton, New Jersey.
As of March 31,September 30, 2003, the Company hadhas accrued approximately $100,000$59,000 related to the Company’s share of estimated additional costs to terminateuntil termination of the Princeton lease.lease, which is currently being subleased.
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 March 31,September 30, 2003, $259,479$211,103 remains outstanding pursuant to these lease obligations.
License Agreements — – The Company has three license agreements that require minimum annualyearly payments. The cost to maintain these license agreements for the fiscal year ending June 30, 20032004 amounts to $250,000, of which $187,500 was expensed$250,000. There were no payments due during the ninethree months ended March 31,September 30, 2003 under these agreements.
In March 2003, the Company concluded a private placement of its common stock and warrants, which yielded gross proceeds of approximately $19.1 million. Investors, consisting of domestic financial institutions and accredited investors purchased 13,433,096 shares of common stock and 3,358,275 warrants at a market value of approximately $1.42 per share. For every four shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.77 per share. Based on the sales price of the common stock and warrants in this private placement, the conversion price of the Company’s outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a non-cash, deemed dividend of $87,339 has been reflected in the Company’s consolidated statement of operations during the three months ended March 31, 2003. Included in accrued expenses, as of March 31, 2003, are $970,250 of private placement offering costs. These accrued expenses were paid in April 2003.
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In November 2002, the Company concluded a private placement of its common stock and warrants, which yielded gross proceeds of $11.5 million. Investors, consisting of domestic and European financial institutions and other domestic accredited investors purchased approximately 9,373,940 shares of common stock and 1,874,788 warrants at a market value of approximately $1.23 per share. For every five shares of common stock purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.54 per share. Based on the sales price of the common stock and warrants in this private placement, the conversion price of the Company’s outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a deemed dividend of $98,340 has been reflected in the Company’s consolidated statement of operations.
In July 2002, the Company received 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 1,545,063 shares of common stock and 309,012 warrants at a market value of approximately $1.17 per share. For every five shares of common stock purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.46 per share. Based on the sales price of the common stock and warrants in this private placement, the conversion price of the Company’s outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a deemed dividend of $17,459 has been reflected in the Company’s consolidated statement of operations
In December 2002, the Company sold New Jersey net operating losses pursuant to the New Jersey Economic Development Authority’s Tax Transfer Program. As a result, the Company received $245,093, which is reflected as an income tax benefit in the statement of operations.
Item 2. 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 accompanying notes filed as part of this report.
We makeStatements in this quarterly report on Form 10-Q, 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 report. Sometimes thesequarterly report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements contain words suchwhich are not strictly historical statements contained in this quarterly report on Form 10-Q 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 “anticipates,” “plans,” “intends,” “expects”well as statements regarding the 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 say in this report. We describe a number of thesethe 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 in our annual report on Form 10-K for the year ended June 30, 2002. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only2003, 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.
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Table of Contentswell as in our other Securities and Exchange Commission filings.
We expect to incur additional losses in the future as we continue development of LeuTech for diagnosis of appendicitis and expand clinical trials for other indications of LeuTech and continue research and development of PT-141 and our MIDAS technology. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of when we incur expenses.
Critical Accounting Policies
Our significant accounting policies are described in Note 3 to the consolidated financial statements included in this report. 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 we have adequate evidence that the milestone is deemed to be substantive.achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.
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Overview
We are a development-stagedevelopment stage biopharmaceutical company committedprimarily focused on 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 variety of conditions and diseases, including sexual dysfunction, obesity, anorexia, cachexia (extreme wasting, generally secondary to a chronic disease), inflammation and drug abuse. 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.
PT-141 is our lead therapeutic drug candidate and is now in clinical development for the treatment of both male and female sexual dysfunction. We completed a Phase 2B trial with PT-141 in male patients in September 2003. LeuTech® is our proprietary radiolabeled monoclonal antibody for imaging and diagnosing infections. We commenced the biologics license application (BLA) amendment filings to the Food and Drug Administration (FDA) in the first half of calendar year 2003 and anticipate remitting the final BLA amendment filing to the FDA in the first quarter of 2004. We expect to receive a complete response from the FDA regarding our BLA amendment filings in the first half of calendar year 2004. We are also conducting additional clinical trials of LeuTech to expand its market potential as 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. In addition, we have several preclinical drug candidates under investigation for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation utilizing our patented drug discovery developmentplatform.
Products and commercialization of novel therapeutics.Technologies in Research and Development
We do not currently offer any products for sale. We are concentrating our efforts on the following:following proposed products and indications:
13PT-141. PT-141, our lead therapeutic drug candidate, is a novel, patented, nasally administered peptide that is under investigation for the treatment of both male erectile dysfunction (MED) and female sexual arousal disorders (FSAD). 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 MED therapies. As a result, it may offer significant safety and therapeutic benefits over currently marketed products.
MED is defined as the consistent inability to attain and maintain an erection sufficient for sexual intercourse. The condition is correlated with increasing age, cardiovascular disease, hypertension, diabetes, hyperlipidemia and smoking. In addition, certain prescription drugs and psychogenetic issues may contribute to MED. According to the Massachusetts Male Aging Study, more than 50% of men aged 40-70 report episodes of MED and more than 30 million men in the United States may be afflicted with some form of MED, with less than 20% seeking treatment. The current market size for MED is estimated to be more than $2 billion per year. FSAD is a multifactorial condition that has anatomical, physiological, medical, psychological and social components. Studies estimate FSAD is prevalent in approximately 50% of women over the age of 30 and that greater than 35 million women in the United States may be afflicted with some form of FSAD. Female sexual dysfunction includes disorders associated with desire, arousal, orgasm and pain. There is tremendous competition to develop, market and sell drugs for the treatment of MED and FSAD.
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LeuTech®. LeuTech is a proprietary, radiolabeled monoclonal antibody under investigation for imaging and diagnosing infections. When injected into the blood stream, LeuTech binds to white blood cells present at the infection site, labeling these cells with a radioactive tracer. As a result, physicians can rapidly image and detect an infection using a gamma camera, a common piece of hospital equipment that records radioactivity. LeuTech 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 labeled white blood cells, requires a blood sample to be taken from the patient, processed by a nuclear pharmacy and then re-injected into the patient, with diagnostic images not available until 12-24 hours later. In December 1999, the FDA accepted our LeuTech BLA for the diagnosis of appendicitis in patients with equivocal signs and symptoms. In July 2000, the FDA Medical Imaging Drugs Advisory Committee (MIDAC) unanimously voted that LeuTech is safe and effective for use in the diagnosis of appendicitis in patients with equivocal signs and symptoms and that the data presented support the clinical utility of LeuTech in managing these patients. In September 2000, we received a complete response letter from the FDA where they determined that the efficacy and safety data were complete, yet additional manufacturing and process validation data were required prior to final approval. We are working to resolve the outstanding issues. We commenced the BLA amendment filings to the FDA in the first half of calendar year 2003 and anticipate remitting the final BLA amendment filing to the FDA in the first quarter of 2004. We expect to receive a complete response from the FDA regarding our BLA amendment filings in the first half of calendar year 2004. We are currently conducting Phase 2 studies with LeuTech for detection of other infections, including osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging. Each year, more than 250,000 Americans are diagnosed with the infection, acute appendicitis. A timely and accurate diagnosis of this infection is crucial to ensure timely treatment and to prevent complications for the patient. A delay can entail hospital observation, outpatient treatment or surgery and can lead to increased risk of peritonitis, sepsis and other complications. Conversely, a mis-diagnosed patient may experience unneeded hospital observation or unneeded surgery, which is expensive, inconvenient and utilizes limited resources. Every year, more than 350,000 patients present with equivocal appendicitis. This is when a specific diagnosis is uncertain and further testing is needed. In this situation, it is not always clear if the patient has appendicitis or another medical problem; nor is it exactly clear where the site of infection is located. We believe that LeuTech may improve patient diagnosis for appendicitis and that it has the potential to improve diagnosis of other acute and chronic infections, such as osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease and pulmonary imaging. 16
|
Strategic Collaboration Agreement with Mallinckrodt. On May 13, 2002, we entered into an agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., to amend our Strategic Collaboration Agreement dated as of August 17, 1999. Under the terms of the original agreement, in addition to other provisions, Mallinckrodt paid us a licensing fee of $500,000 and an additional $13 million to purchase 700,000 restricted unregistered shares of our preferred stock. We shared LeuTech development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay us milestone payments of an additional $10 million on FDA approval of the first LeuTech indication and on attainment of certain sales goals following product launch. We agreed to be responsible for the manufacture of LeuTech and Mallinckrodt agreed to pay us a transfer price on each product unit transferred to Mallinckrodt and a royalty on the net sales of LeuTech.
Under the terms of the amended agreement, Mallinckrodt has committed up to an additional $3.2 million, subject to certain conditions and attaining certain milestones, to offset a portion of the estimated expenses associated with completing the FDA review process. Additionally, timing of the original $10 million in milestone payments has been revised to coincide with LeuTech’s anticipated FDA approval and achievement of future sales goals. Of the $3.2 million, $2.95 million has been paid to date. We expect to receive the remaining $0.25 million in the fourth quarter of calendar year 2003.
MIDAS™ (Metal Ion-induced Distinctive Array of Structures). MIDAS is a proprietary platform technology that allows us to routinely design and synthesize novel pharmaceuticals that mimic the activity of peptides, but which we believe offer significant advantages to conventional protein or peptide-based drugs. MIDAS uses metal ions to fix the three-dimensional shape of peptides, forming conformationally rigid molecules that remain folded specifically in their active forms. These MIDAS molecules are simple to synthesize, are chemically and proteolytically stable, and have the potential to be orally bioavailable. Moreover, unlike most other drug discovery approaches, we believe that MIDAS is unique in that it can be used to generate either receptor antagonists (drugs that block a particular metabolic response) or agonists (drugs that promote a particular metabolic response). In addition, MIDAS molecules are information-rich and provide data on structure-activity relationships that can be used to design traditional small molecule drugs.
We have initiated a MIDAS program to discover and develop compounds that interact with the MC family of receptors. MC receptors regulate a diverse array of functions such as pigmentation, adrenocortical function, immune modulation, sexual arousal and energy maintenance. Based on this effort, we have identified several MIDAS molecules that are now in preclinical development as potential treatments for sexual dysfunction, obesity, cachexia and inflammation. We expect to file an IND for at least one of these preclinical compounds and initiate clinical testing in the first half of calendar year 2004.
Generation of commercially viable protein and peptide drug molecules with desirable properties continues to be arduous, expensive and labor-intensive. We believe that our MIDAS technology simplifies the development process by eliminating many of the inherent limitations associated with peptides and proteins. We intend to seek to enter into strategic alliances or collaborative arrangements to provide additional financial and technical resources for MIDAS development.
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Results of Operations
Three and Nine Month PeriodsPeriod Ended March 31,September 30, 2003 Compared to Three and Nine Month PeriodsPeriod Ended March 31,September 30, 2002.
Grants and Contracts – For the three and nine months ended March 31,September 30, 2003, we recognized $44,000 and $504,000, respectively,$1,750,000 in contract revenue related to the shared development costs of LeuTech pursuant to our collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd., compared to nothing$425,000 for the three and nine months ended March 31,September 30, 2002. The increase in contract revenue was attributable to additional shared development coststhe achievement of LeuTech pursuant tomilestone events stipulated in the amendedcollaboration agreement. (See Notes to Consolidated Financial Statements). For the three and nine months ended March 31, 2003, we recorded $137,417 in grant revenue pursuant to the Small Business Technology Transfer programs of the Department of Health and Human Services compared to $57,772 for both the three and nine months ended March 31, 2002.
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License Fees and Royalties – During the fiscal year ended June 30, 2001, we adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 in fiscal 2001, which reflects the deferral portion of an up-front license fee received from Mallinkrodt, Inc. related to licensing of LeuTech recognized in the fiscal year ended June 30, 2000. 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 three and nine months ended March 31,September 30, 2003, we recorded $148,878 and $545,887, respectively,$82,711 of license revenue, and for the three and nine months ended March 31, 2002, we recorded $41,667 and $125,001, respectively,$5,788 of license revenue. Of the license revenue recorded for the three and nine months ended March 31, 2003, $10,418 and $38,199which was included in the cumulative effect adjustment as of July 1, 20002002 and $138,460 and $507,688, respectively,$76,923 was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. WeFor the three months ended September 30, 2002, we recorded $41,667 and $125,001, respectively,$198,505 of license revenue, for the three and nine months ended March 31, 2002 that$13,891 of which was included in the cumulative effect adjustment as of July 1, 2000.2000 and $184,614 was recorded as a result of the initial $800,000 payment received from Mallinckrodt.
Research and developmentDevelopment –Research— Research and development expenses (“R&D”) increased to $4,744,379 and $12,015,910, respectively,$7,018,362 for the three and nine months ended March 31,September 30, 2003 compared to $3,537,765 and $8,889,591, respectively,$3,588,525 for the three and nine months ended March 31,September 30, 2002. The increase in R&D is primarily related to our increased development efforts and expanding clinical trials of PT-141 and LeuTech. Our R&D efforts, and their respective allocated costs, are currently concentrated on the following:
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General and administrativeAdministrative — General and administrative expenses increased to $1,280,305 and $3,651,738, respectively,$1,614,672 for the three and nine month periodsmonths ended March 31,September 30, 2003 compared to $1,123,885 and $3,039,047, respectively,$1,179,627 for the three and nine month periodsmonths ended March 31,September 30, 2002. The increase in general and administrative expenses is primarilymainly attributable to an increase in salaries and other stock based compensation and related personnel expenses and the costs associated with the consolidation and move of our previous locations in New Jersey to Cranbury, New Jersey.expenses.
Interest incomeIncome — Interest income decreasedincreased to $50,120 and $147,079, respectively,$86,518 for the three and nine month periodsmonths ended March 31,September 30, 2003 compared to $64,527 and $246,587, respectively,$46,504 for the three and nine month periodsmonths ended March 31,September 30, 2002. The decreaseincrease in interest income is attributabledue to lowerhigher amounts of cash, cash equivalents and investments available to be invested and the decrease in interest rates these deposits earn.invested.
Net lossLoss — Net loss increased to $5,651,579 and $14,102,634, respectively,$6,719,356 for the three and nine month periodsmonths ended March 31,September 30, 2003 compared to $4,268,302 and $11,109,242, respectively,$4,099,106 for the three and nine month periodsmonths ended March 31,September 30, 2002. The increase was attributable to the increase in expenses explained above.
Liquidity and Capital Resources
Since inception, we have incurred net operating losses. As of March 31,September 30, 2003, we had a deficit accumulated during development stage of $84,346,250.$97,528,181. We have financed our net operating losses through March 31,September 30, 2003 by a series of debt and equity financings. At March 31,September 30, 2003, we had cash and cash equivalents of $22,391,839$9,793,033 and available for sale investments of $3,108,902.
For the nine months ended March 31, 2003, the net increase in cash was $14,447,575. Net cash used for operating activities was $13,790,292, net cash used by investing activities was $2,969,323 and net cash provided by financing activities was $31,207,190.$4,023,486.
Our product candidates are at various stages of research and development and may never be successfully developed or commercialized. We will need regulatory approval to market and sell LeuTech for diagnosis of appendicitis.appendicitis, as well as for PT-141, MIDAS and LeuTech for other indications. PT-141, MIDAS and LeuTech for other indications will require significant further research, development and testing. We may experience uncertainties, delays, difficulties and expenses commonly experienced by early stage bio-pharmaceutical companies, which may include unanticipated problems and additional costs relating to:
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| • | 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 and competition. |
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Failure to obtain regulatory approval of LeuTech, for diagnosis of appendicitis, or delays in obtaining regulatory approval of LeuTech for the diagnosis of appendicitis, would eliminate or delay our potential revenues from sales of LeuTech for diagnosis of appendicitis.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.
In MarchDuring the three months ended September 30, 2003, our operating activities used net cash of approximately $5.3 million and during the three months ended September 30, 2002 our operating activities used net cash of approximately $4.3 million. The increase resulted primarily from increased R&D spending on both PT-141 and LeuTech.
During the three months ended September 30, 2003, we concluded a private placement of our common stock and warrants, which yielded gross proceedsused cash in investing activities of approximately $19.1 million. Investors,$36,000 consisting almost entirely of capital expenditures. During the three months ended September 30, 2002, we used cash in investing activities of approximately $913,000, consisting of domestic financial institutionsapproximately $5,000 for investment securities and accredited investors, purchased 13,433,096 sharesapproximately $908,000 of capital expenditures.
During the three months ended September 30, 2003, net cash provided by financing activities was approximately $855,000, consisting of approximately $908,000 from the exercise of common stock and 3,358,275 warrants at a market value of approximately $1.42 per share. For every four shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.77 per share. Included in accrued expenses, as of March 31, 2003, are $970,250 of private placement offering costs. These accrued expenses were paid in April 2003. The net proceeds of approximately $18 million will be used primarily for general corporate purposes, including the development and clinical trials of new products based on certain of our proprietary technologies.
On November 15, 2002, we concluded a private placement of our common stockoptions and warrants, which yielded gross proceeds of $11.5 million. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased 9,373,940 shares of common stock and 1,874,788 warrants at a market value ofpartially offset by approximately $1.23 per share. For every five shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.54 per share. The net proceeds of approximately $10.7 million are being used primarily$53,000 for general corporate purposes, including the development and clinical trials of new products basedpayments on certain of our proprietary technologies.
In July 2002, we received 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 approximately $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 approximately $1.46 per share. The net proceeds of approximately $1.7 million were used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
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 futurecapital lease payments escalate from approximately $920,000 per year to $1,550,000 per year. The lease will expire in July 2012.obligations.
We have three license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2003 — $250,000, 2004 — $250,000, 2005 — $200,000, 2006 — $200,000, and 2007 — $200,000 and 2008 — $200,000.
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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 will be adequate to fund our projected operations through fiscal year ending JuneSeptember 30, 2004, based on current and projected expenditure levels.levels. No assurance can be given that we will not consume a significant amount of our available resources before that time. We plan to continue to refine our operations, control expenses, evaluate alternative methods to conduct our business and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Should appropriate sources of financing not be available, we would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that our financing efforts will be successful. If adequate funds are not available, our financial condition and results
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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, obtainobtaining required regulatory approvals and successfully manufacturemanufacturing 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk. Our exposure to market risk related to changes in interest rates relates primarily to our investment portfolio. We invest in instruments that meet high credit quality standards, and we limit the amount of credit exposure as to any one issue, issuer and type of investments.
As of March 31,September 30, 2003, our cash and cash equivalents were $9,793,033 and available for sale investments, totaled $25,500,741, mostwhich consisted of whichcommercial paper, were short term investments having an original maturity of less than three months.$4,023,486. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short-term fluctuationsinshort term fluctuations in interest rates would materially affect the value of our securities.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.Procedures Within the 90 days before we filed this report, our. Our chief executive officer and chief financial officer, evaluatedafter evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)13a-15(e) and 15d-14(c)15d-15(e)). Based as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on their evaluation, they concluded that our disclosure controls and procedures were adequate and effective to ensure that other persons within Palatin and its consolidated subsidiaries informed those officers in a timely manner of material information relating to Palatin, and itsincluding our consolidated subsidiaries, was made known to them by other within those entities, particularly during the period in which we were preparing this report.
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Table of ContentsQuarterly Report on Form 10-Q was being prepared.
Changes in Internal Controls. There were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Thereevaluation, nor were nothere any significant deficiencies or material weaknesses in our internal controls.controls over our financial reporting. Accordingly, we did not require or undertake any corrective actions.
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None.
None.
Item 2. Changes in Securities and Use of Proceeds.
In March 2003, we concluded a private placement of common stock and warrants in which we sold 13,433,096 shares of our $.01 par value common stock at a market value of approximately $1.42 per unit. For every four shares purchased, the investors also received a five-year warrant which entitles the holder to purchase one share of common stock at an exercise price of approximately $1.77 per share. The gross proceeds were approximately $19.1 million and the net proceeds were approximately $18 million. We made the private placement solely to domestic financial institutions and accredited investors pursuant to Regulation D under the Securities Act of 1933. The investors represented to us that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants bear restrictive legends. In connection with the private placement, we paid placement fees totaling $985,250.None.
Item 3. Defaults Upon Senior Securities.
None.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
None.
None.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed with this report:
| Employment Agreement dated as of October 1, 2003, between Palatin Technologies, Inc. and Carl Spana. |
| 10.2 | Employment Agreement dated as of October 1, 2003, between Palatin Technologies, Inc. and Stephen T. Wills. |
| 10.3 | Employment Agreement dated as of October 1, 2003, between Palatin Technologies, Inc. and Shubh D. Sharma. |
| 31.1 | Certification of Chief Executive Officer |
| Certification of Chief Financial Officer |
| Certification of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 |
| 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 |
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(b) Reports on Form 8-K
20 None.
Table of ContentsSignatures
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Palatin Technologies, Inc. (Registrant) | ||
| Date: | /s/ Carl Spana Carl Spana, Ph.D. President and Chief Executive Officer | |
| Date: | /s/ Stephen T. Wills Stephen T. Wills Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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