UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10 - Q
 
☑ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 20182019
 
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: 001-15543
 
PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware 95-4078884
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4B Cedar Brook Drive
Cranbury, New Jersey
 08512
(Address of principal executive offices) (Zip Code)
 
(609) 495-2200
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $.01 per sharePTNNYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended 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 ☑ No ☐
 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T  (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date (February 8, 2019)7, 2020): 203,063,429.229,240,596
 

 
 
 
PALATIN TECHNOLOGIES, INC.
Table of Contents
 
 Page
 
PART I – FINANCIAL INFORMATION
 
1
2
Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended December 31, 2018 and 20173
43
65
76
2120
2524
2524
PART II – OTHER INFORMATION
  
2625
2625
2625
2627
2627
26
Item 6. Exhibits27
Signatures
28
29
  

 
i
 
 
Special Note Regarding Forward-Looking Statements
 
In this Quarterly Report on Form 10-Q (this “Quarterly Report”) references to “we,” “our,” “us,” the “Company” or “Palatin” means Palatin Technologies, Inc. and its subsidiary.
 
Statements in this Quarterly Report, on Form 10-Q, as well as oral statements that may be made by us or by our officers, directors, or employees acting on our 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 “Exchange Act”). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements that are not strictly historical facts contained in this Quarterly Report, on Form 10-Q, including, without limitation, the following are forward looking statements:
● 
our ability, and the ability of our licensees, to successfully commercialize Vyleesi® (the trade name for bremelanotide) for the treatment of premenopausal women with acquired, generalized hypoactive sexual desire disorder (“HSDD”) or obtain approvals in countries other than the United States;
● 
our expectations regarding performance of our exclusive licensees of Vyleesi for the treatment of premenopausal women with HSDD, which is a type of female sexual dysfunction (“FSD”), including:
AMAG Pharmaceuticals, Inc. (“AMAG”) for North America,
Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun”), a subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., for the territories of the People’s Republic of China, Taiwan, Hong Kong S.A.R. and Macau S.A.R. (collectively, “China”), and
Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) for the Republic of Korea (“Korea”);
● 
the impact of and our expectations regarding AMAG’s announcement of its intent to divest Vyleesi and its other woman’s healthcare product, Intrarosa® (prasterone);
● 
our expectation regarding the timing of regulatory submissions and approvals of Vyleesi for HSDD in jurisdictions outside the United States;
 
● 
estimates of our expenses, future revenue and capital requirements;
 
● 
our ability to achieve revenues from the sale of our product candidates, and to achieve and maintain profitability;
● 
our ability to obtain additional financing on terms acceptable to us, or at all;
 
● 
our ability to advance product candidates into, and successfully complete, clinical trials;
 
● 
the initiation, timing, progress and results of future preclinical studies and clinical trials, and our research and development programs;
 
● 
the timing or likelihood of regulatory filings and approvals;
● 
our expectations regarding completion of required clinical trials and studies and validation of methods and controls used to manufacture Vyleesi™ (the trade name for bremelanotide) for the treatment of premenopausal women with hypoactive sexual desire disorder (“HSDD”), which is a type of female sexual dysfunction (“FSD”);
● 
our expectation regarding the timing of our regulatory submissions for approval of Vyleesi for HSDD in the United States and in certain other jurisdictions outside the United States;
● 
our expectation regarding performance of our exclusive licensees of Vyleesi, including;
AMAG Pharmaceuticals, Inc. (“AMAG”) for North America,
Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun”), a subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., for the territories of the People’s Republic of China, Taiwan, Hong Kong S.A.R. and Macau S.A.R. (collectively, the “Chinese Territories”), and
Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) for the Republic of Korea (“Korea”);
● 
the potential for commercialization of Vyleesi for HSDD in North America by AMAG and other product candidates, if approved, by us;
● 
our expectations regarding the potential market size and market acceptance for Vyleesi for HSDD and our other product candidates, if approved for commercial use;
 
● 
our expectations regarding the clinical efficacy and utility of our melanocortin agonist product candidates for treatment of inflammatory and autoimmune related diseases and disorders, including ocular indications;
● 
our ability to compete with other products and technologies treating the same or similar toindications as our product candidates;
 
● 
the ability of our third-party collaborators to timely carry out their duties under their agreements with us;
 
● 
the ability of our contract manufacturers to perform their manufacturing activities for us in compliance with applicable regulations;
 
● 
our ability to recognize the potential value of our licensing arrangements with third parties;
 
ii
● 
the potential to achieve revenues from the sale of our product candidates;
● 
our ability to obtain adequate reimbursement from Medicare, Medicaid, private insurers and other healthcare payers;
 
● 
our ability to maintain product liability insurance at a reasonable cost or in sufficient amounts, if at all;
 
ii
● 
the performance and retention of our management team, senior staff professionals, and third-party contractors and consultants;
● 
the retention of key management, employees and third-party contractors;
 
● 
the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology in the United States and throughout the world;
 
● 
our compliance with federal and state laws and regulations;
 
● 
the timing and costs associated with obtaining regulatory approval for our product candidates;
 
● 
our ability to obtain additional financing on terms acceptable to us, or to all;

● 
the impact of fluctuations in foreign exchange rates;
 
● 
the impact of legislative or regulatory healthcare reforms in the United States;
 
● 
our ability to adapt to changes in global economic conditions as well as competing products and technologies; and
 
● 
our ability to remain listed on the NYSE American stock exchange.
 
Such forward-looking statements involve risks, uncertainties and other factors that could cause our actual results to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Our future operating results are subject to risks and uncertainties and are dependent upon many factors, including, without limitation, the risks identified under Part II, Item IAthe caption “Risk Factors” and elsewhere in this Quarterly Report, our Annual Report on Form 10-K for the year ended June 30, 2018 and any of those made in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”). Except as required by law, we do not intend, and undertake no obligation, to publicly update forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
 
Palatin Technologies® is a registered trademark of Palatin Technologies, Inc. Vyleesi™Vyleesi® is a registered trademark of AMAG Pharmaceuticals, Inc. in North America and of Palatin Technologies, Inc. elsewhere in the world.
 
 
iii
 
 
PART I – FINANCIAL INFORMATION
 
ItemItem 1. Financial Statements.
 
PALATINPALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Balance Sheets
(unaudited)
 
 
 
December 31,
2018
 
 
June 30,
2018
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $24,658,024 
 $38,000,171 
Prepaid expenses and other current assets
  535,147 
  513,688 
Total current assets
  25,193,171 
  38,513,859 
 
    
    
Property and equipment, net
  136,153 
  164,035 
Other assets
  338,916 
  338,916 
Total assets
 $25,668,240 
 $39,016,810 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $619,900 
 $2,223,693 
Accrued expenses
  1,101,045 
  2,103,021 
Notes payable, net of discount
  2,321,123 
  5,948,763 
Other current liabilities
  486,474 
  487,488 
Total current liabilities
  4,528,542 
  10,762,965 
 
    
    
Notes payable, net of discount
  - 
  332,898 
Deferred revenue
  - 
  500,000 
Other non-current liabilities
  - 
  456,038 
Total liabilities
  4,528,542 
  12,051,901 
 
    
    
Stockholders’ equity:
    
    
Preferred stock of $0.01 par value – authorized 10,000,000 shares:
    
    
Series A Convertible: issued and outstanding 4,030 shares as of December 31, 2018 and June 30, 2018
  40 
  40 
Common stock of $0.01 par value – authorized 300,000,000 shares:
    
    
issued and outstanding 203,063,429 shares as of December 31, 2018 and 200,554,205 shares as of June 30, 2018
  2,030,634 
  2,005,542 
Additional paid-in capital
  361,379,336 
  357,005,233 
Accumulated deficit
  (342,270,312)
  (332,045,906)
Total stockholders’ equity
  21,139,698 
  26,964,909 
Total liabilities and stockholders’ equity
 $25,668,240 
 $39,016,810 

The accompanying notes are an integral part of these consolidated financial statements.



PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Operations
(unaudited)

 
 
Three Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
License and contract
 $- 
 $10,612,153 
 $34,505 
 $37,553,661 
 
    
    
    
    
OPERATING EXPENSES:
    
    
    
    
Research and development
  2,961,656 
  6,045,884 
  6,584,347 
  20,208,981 
General and administrative
  2,088,565 
  1,625,189 
  4,129,147 
  3,169,764 
Total operating expenses
  5,050,221 
  7,671,073 
  10,713,494 
  23,378,745 
 
    
    
    
   ��
(Loss) income from operations
  (5,050,221)
  2,941,080 
  (10,678,989)
  14,174,916 
 
    
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
    
Investment income
  100,169 
  81,356 
  253,752 
  133,082 
Interest expense
  (92,298)
  (391,363)
  (299,169)
  (848,040)
Total other income (expense), net
  7,871 
  (310,007)
  (45,417)
  (714,958)
 
    
    
    
    
(Loss) income before income taxes
  (5,042,350)
  2,631,073 
  (10,724,406)
  13,459,958 
Income tax benefit
  - 
  399,120 
  - 
  173,865 
 
    
    
    
    
NET (LOSS) INCOME
 $(5,042,350)
 $3,030,193 
 $(10,724,406)
 $13,633,823 
 
    
    
    
    
Basic net (loss) income per common share
 $(0.02)
 $0.02 
 $(0.05)
 $0.07 
 
    
    
    
    
Diluted net (loss) income per common share
 $(0.02)
 $0.01 
 $(0.05)
 $0.07 
 
    
    
    
    
Weighted average number of common shares outstanding used in computing basic net (loss) income per common share
  206,487,984 
  197,238,056 
  205,724,321 
  197,175,316 
 
    
    
    
    
Weighted average number of common shares outstanding used in computing diluted net (loss) income per common share
  206,487,984 
  202,711,616 
  205,724,321 
  200,430,824 
 
 
December 31,
2019
 
 
June 30,
2019
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $91,459,480 
 $43,510,422 
Accounts receivable
  117,989 
  60,265,970 
Prepaid expenses and other current assets
  656,599 
  637,289 
Total current assets
  92,234,068 
  104,413,681 
 
    
    
Property and equipment, net
  167,913 
  141,539 
Right-of-use assets
  173,666 
  - 
Other assets
  179,916 
  179,916 
Total assets
 $92,755,563 
 $104,735,136 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $135,171 
 $504,787 
Accrued expenses
  1,079,591 
  2,848,692 
Notes payable, net of discount
  - 
  332,896 
Other current liabilities
  160,178 
  499,517 
Total current liabilities
  1,374,940 
  4,185,892 
 
    
    
Other liabilities
  13,488 
  - 
Total liabilities
  1,388,428 
  4,185,892 
 
    
    
Stockholders’ equity:
    
    
Preferred stock of $0.01 par value – authorized 10,000,000 shares; shares issued and outstanding designated
as follows:
    
    
Series A Convertible: authorized 264,000 shares: issued and outstanding 4,030 shares as of December 31,
2019 and June 30, 2019
  40 
  40 
Common stock of $0.01 par value – authorized 300,000,000 shares:
    
    
issued and outstanding 229,174,754 shares as of December 31, 2019 and 226,815,363 shares as of June 30,
2019
  2,291,748 
  2,268,154 
Additional paid-in capital
  394,592,802 
  394,053,929 
Accumulated deficit
  (305,517,455)
  (295,772,879)
Total stockholders’ equity
  91,367,135 
  100,549,244 
Total liabilities and stockholders’ equity
 $92,755,563 
 $104,735,136 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

  
PALATINPALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Comprehensive (Loss) IncomeOperations
(unaudited)
 
 
 
Three Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 $(5,042,350)
 $3,030,193 
 $(10,724,406)
 $13,633,823 
 
    
    
    
    
Other comprehensive income :
    
    
    
    
Unrealized gain on available-for-sale investments
  - 
  153 
  - 
  590 
 
    
    
    
    
Total comprehensive (loss) income
 $(5,042,350)
 $3,030,346 
 $(10,724,406)
 $13,634,413 
 
 
Three Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
REVENUES
 
 
 
 
 
 
 
 
 
 
 
 
License and contract
 $20,610 
 $- 
 $117,989 
 $34,505 
 
    
    
    
    
OPERATING EXPENSES
    
    
    
    
Research and development
  3,257,624 
  2,961,656 
  6,385,113 
  6,584,347 
General and administrative
  2,404,093 
  2,088,565 
  4,236,535 
  4,129,147 
Total operating expenses
  5,661,717 
  5,050,221 
  10,621,648 
  10,713,494 
 
    
    
    
    
Loss from operations
  (5,641,107)
  (5,050,221)
  (10,503,659)
  (10,678,989)
 
    
    
    
    
OTHER INCOME (EXPENSE)
    
    
    
    
Investment income
  399,982 
  100,169 
  770,636 
  253,752 
Interest expense
  (2,502)
  (92,298)
  (11,553)
  (299,169)
Total other income (expense), net
  397,480 
  7,871 
  759,083 
  (45,417)
 
    
    
    
    
NET LOSS
 $(5,243,627)
 $(5,042,350)
 $(9,744,576)
 $(10,724,406)
 
    
    
    
    
Basic and diluted net loss per common share
 $(0.02)
 $(0.02)
 $(0.04)
 $(0.05)
 
    
    
    
    
Weighted average number of common shares outstanding used in computing basic and diluted net loss per common share
  234,923,592 
  206,487,984 
  234,018,417 
  205,724,321 

The accompanying notes are an integral part of these consolidated financial statements.



PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Stockholders’ Equity
(unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
Balance, September 30, 2019
  4,030 
 $40 
  227,697,257 
 $2,276,973 
 $394,119,078 
 $(300,273,828)
 $96,122,263 
Stock-based compensation
  - 
  - 
  299,775 
  2,998 
  801,938 
  - 
  804,936 
Withholding taxes related to restricted
stock units
  - 
  - 
  (87,179)
  (872)
  (103,364)
  - 
  (104,236)
Sale of common stock, net of costs
  - 
  - 
  1,238,040 
  12,380 
  989,388 
  - 
  1,001,768 
Warrant repurchases
  - 
  - 
  - 
  - 
  (1,213,969)
  - 
  (1,213,969)
Warrant exercises
  - 
  - 
  26,861 
  269 
  (269)
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  (5,243,627)
  (5,243,627)
Balance, December 31, 2019
  4,030 
 $40 
  229,174,754 
 $2,291,748 
 $394,592,802 
 $(305,517,455)
 $91,367,135 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
Balance, June 30, 2019
  4,030 
 $40 
  226,815,363 
 $2,268,154 
 $394,053,929 
 $(295,772,879)
 $100,549,244 
Stock-based compensation
  - 
  - 
  523,775 
  5,238 
  1,627,433 
  - 
  1,632,671 
Withholding taxes related to restricted
stock units
  - 
  - 
  (87,179)
  (872)
  (103,364)
  - 
  (104,236)
Sale of common stock, net of costs
  - 
  - 
  1,895,934 
  18,959 
  1,562,539 
  - 
  1,581,498 
Warrant repurchases
  - 
  - 
  - 
  - 
  (2,547,466)
  - 
  (2,547,466)
Warrant exercises
  - 
  - 
  26,861 
  269 
  (269)
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  (9,744,576)
  (9,744,576)
Balance, December 31, 2019
  4,030 
 $40 
  229,174,754 
 $2,291,748 
 $394,592,802 
 $(305,517,455)
 $91,367,135 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

  
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Stockholders’ Equity
(unaudited)
  (unaudited)

 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
Balance, September 30, 2018
  4,030 
 $40 
  203,032,129 
 $2,030,321 
 $360,370,494 
 $(337,227,962)
 $25,172,893 
  4,030 
 $40 
  203,032,129 
 $2,030,321 
 $360,370,494 
 $(337,227,962)
 $25,172,893 
Stock-based compensation
  - 
  978,794 
  - 
  978,794 
  - 
  - 
  978,794 
  - 
  978,794 
Sale of common stock , net of costs
  - 
  31,300 
  313 
  30,048 
  - 
  30,361 
Sale of common stock, net of costs
  - 
  31,300 
  313 
  30,048 
  - 
  30,361 
Net loss
  - 
  (5,042,350)
  - 
  - 
  (5,042,350)
  (5,042,350)
Balance, December 31, 2018
  4,030 
 $40 
  203,063,429 
 $2,030,634 
 $361,379,336 
 $(342,270,312)
 $21,139,698 
  4,030 
 $40 
  203,063,429 
 $2,030,634 
 $361,379,336 
 $(342,270,312)
 $21,139,698 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
Balance, June 30, 2018
  4,030 
 $40 
  200,554,205 
 $2,005,542 
 $357,005,233 
 $(332,045,906)
 $26,964,909 
  4,030 
 $40 
  200,554,205 
 $2,005,542 
 $357,005,233 
 $(332,045,906)
 $26,964,909 
Cumulative effect of accounting change
  - 
  500,000 
  - 
  - 
  500,000 
  500,000 
Stock-based compensation
  - 
  319,817 
  3,198 
  2,209,181 
  - 
  2,212,379 
  - 
  319,817 
  3,198 
  2,209,181 
  - 
  2,212,379 
Sale of common stock , net of costs
  - 
  2,256,445 
  22,564 
  2,230,244 
  - 
  2,252,808 
Withholding taxes related to restricted stock units
  - 
  (67,038)
  (670)
  (65,322)
  - 
  (65,992)
  - 
  (67,038)
  (670)
  (65,322)
  - 
  (65,992)
Sale of common stock, net of costs
  - 
  2,256,445 
  22,564 
  2,230,244 
  - 
  2,252,808 
Net loss
  - 
  (10,724,406)
  - 
  - 
  (10,724,406)
  (10,724,406)
Balance, December 31, 2018
  4,030 
 $40 
  203,063,429 
 $2,030,634 
 $361,379,336 
 $(342,270,312)
 $21,139,698 
  4,030 
 $40 
  203,063,429 
 $2,030,634 
 $361,379,336 
 $(342,270,312)
 $21,139,698 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

  
PALATINPALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Stockholders’ Equity
(unaudited)

 
 
 
 
 
 
 
 
Additional
 
 
Accumulated Other Comprehensive
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Income
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
(Loss)
 
 
Deficit
 
 
Total
 
Balance, September 30, 2017
  4,030 
 $40 
  184,393,007 
 $1,843,930 
 $350,276,851 
 $(153)
 $(346,144,990)
 $5,975,678 
Stock-based compensation
  - 
  - 
  - 
  - 
  620,029 
  - 
  - 
  620,029 
Warrant exercises
  - 
  - 
  10,980,232 
  109,802 
  (109,802)
  - 
  - 
  - 
Unrealized gains on investments
  - 
  - 
  - 
  - 
  - 
  153 
  - 
  153 
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  3,030,193 
  3,030,193 
Balance, December 31, 2017
  4,030 
 $40 
  195,373,239 
 $1,953,732 
 $350,787,078 
 $- 
 $(343,114,797)
 $9,626,053 

 
 
 
 
 
 
 
 
Additional
 
 
Accumulated Other Comprehensive
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Income
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
(Loss)
 
 
Deficit
 
 
Total
 
Balance, June 30, 2017
  4,030 
 $40 
  160,515,361 
 $1,605,153 
 $349,974,538 
 $(590)
 $(356,743,785)
 $(5,164,644)
Cumulative effect of accounting change
  - 
  - 
  - 
  - 
  4,835 
  - 
  (4,835)
  - 
Stock-based compensation
  - 
  - 
  75,071 
  751 
  1,041,149 
  - 
  - 
  1,041,900 
Warrant exercises
  - 
  - 
  34,782,807 
  347,828 
  (233,444)
  - 
  - 
  114,384 
Unrealized gains on investments
  - 
  -
  - 
  - 
  - 
  590 
  - 
  590 
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  13,633,823 
  13,633,823 
Balance, December 31, 2017
  4,030 
 $40 
  195,373,239 
 $1,953,732 
 $350,787,078 
  - 
 $(343,114,797)
 $9,626,053 

The accompanying notes are an integral part of these consolidated financial statements.


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
 
 
Six Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
2018
 
 
2017
 
 
2019
 
 
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net (loss) income
 $(10,724,406)
 $13,633,823 
Adjustments to reconcile net (loss) income to net cash
    
used in operating activities:
    
Net loss
 $(9,744,576)
 $(10,724,406)
Adjustments to reconcile net loss to net cash
    
provided by (used in) operating activities:
    
Depreciation and amortization
  27,882 
  28,886 
  36,506 
  27,882 
Non-cash interest expense
  39,462 
  104,108 
  438 
  39,462 
Decrease in right-of-use asset
  144,903 
  - 
Stock-based compensation
  2,212,379 
  1,041,900 
  1,632,671 
  2,212,379 
Deferred income tax benefit
  - 
  (500,000)
Changes in operating assets and liabilities:
    
    
Accounts receivable
  - 
  15,116,822 
  60,147,981 
  - 
Prepaid expenses and other assets
  (21,459)
  (277,283)
  (19,310)
  (21,459)
Accounts payable
  (1,603,793)
  (847,600)
  (369,616)
  (1,603,793)
Accrued expenses
  (1,001,976)
  (4,968,942)
  (1,769,101)
  (1,001,976)
Deferred revenue
  - 
  (25,002,344)
Operating lease liability
  (144,903)
  - 
Other liabilities
  42,948 
  112,174 
  - 
  42,948 
Net cash used in operating activities
  (11,028,963)
  (1,558,456)
Net cash provided by (used in) operating activities
  49,914,993 
  (11,028,963)
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Proceeds from maturity of investments
  - 
  250,000 
Purchases of property and equipment
  - 
  (9,500)
  (62,880)
  - 
Net cash provided by investing activities
  - 
  240,500 
Net cash used in investing activities
  (62,880)
  - 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Payments on capital lease obligations
  - 
  (14,324)
Payment of withholding taxes related to restricted
    
    
stock units
  (65,992)
  (24,380)
  (104,236)
  (65,992)
Payment on notes payable obligations
  (4,500,000)
  (4,000,000)
  (832,851)
  (4,500,000)
Proceeds from the exercise of common stock warrants
  - 
  114,384 
Warrant repurchases
  (2,547,466)
  - 
Proceeds from the sale of common stock,
    
    
net of costs
  2,252,808 
  - 
  1,581,498 
  2,252,808 
Net cash used in financing activities
  (2,313,184)
  (3,924,320)
  (1,903,055)
  (2,313,184)
    
    
NET DECREASE IN CASH AND CASH EQUIVALENTS
  (13,342,147)
  (5,242,276)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  47,949,058 
  (13,342,147)
    
    
CASH AND CASH EQUIVALENTS, beginning of period
  38,000,171 
  40,200,324 
  43,510,422 
  38,000,171 
    
    
CASH AND CASH EQUIVALENTS, end of period
 $24,658,024 
 $34,958,048 
 $91,459,480 
 $24,658,024 
    
    
SUPPLEMENTAL CASH FLOW INFORMATION:
    
    
Cash paid for interest
 $260,890 
 $632,185 
 $8,132 
 $260,890��
Cash paid for income taxes
  - 
  500,000 
 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
PALATINPALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
(1)            
ORGANIZATION
 
Nature of Business - Palatin Technologies, Inc. (“Palatin” or the “Company”) is a specialized biopharmaceutical company developing first-in-class medicines based on molecules that modulate the activity of the melanocortin and natriuretic peptide receptor systems. Palatin’sThe Company’s product candidates are targeted, receptor-specific therapeutics for the treatment of diseases with significant unmet medical need and commercial potential. The most advanced product candidate is Vyleesi™, the trade name for bremelanotide, a peptide melanocortin receptor 4 (“MC4r”) agonist, for the treatment of premenopausal women with acquired, generalized hypoactive sexual desire disorder (“HSDD”), which is a type of female sexual dysfunction (“FSD”), defined as low desire with associated distress or interpersonal difficulty.
 
A New Drug ApplicationMelanocortin Receptor System. The melanocortin receptor (“NDA”MCr”) has been submitted tosystem is hormone driven, with effects on food intake, metabolism, sexual function, inflammation and immune system responses. There are five melanocortin receptors, MC1r through MC5r. Modulation of these receptors, through use of receptor-specific agonists, which activate receptor function, or receptor-specific antagonists, which block receptor function, can have significant pharmacological effects.
The Company’s lead product, Vyleesi®, was approved by the U.S. Food and Drug Administration (“FDA”) for Vyleesiin June 2019 and is being marketed in North America by our exclusive North American licensee, AMAG Pharmaceuticals, Inc. (“AMAG”), and accepted for filing by the FDA, with an FDA decision on approval expected in the second quarter of calendar year 2019. Palatin has also licensed rights to Vyleesi to Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun”) for the territoriestreatment of the People’s Republic of China, Taiwan, Hong Kong S.A.R. and Macau S.A.R. (collectively, the “Chinese Territories”), and Kwangdong Pharmaceutical Co., Ltd.hypoactive sexual desire disorder (“Kwangdong”HSDD”) for the Republic of Korea (“Korea”).in premenopausal women.
 
Palatin’sThe Company’s new product development activities focus primarily focus on melanocortin receptor 1 (“MC1r”)MC1r agonists, with potential to treat a number of inflammatory and autoimmune diseases such as dry eye disease, which is also known as keratoconjunctivitis sicca, uveitis, diabetic retinopathy and inflammatory bowel disease. PalatinThe Company believes that the MC1r agonist peptides in development have broad anti-inflammatory effects and appear to utilize mechanisms engaged by the endogenous melanocortin system in regulation of the immune system and resolution of inflammatory responses. The Company is also developing peptides that are active at more than one melanocortin receptor, and MC4r peptide and small molecule agonists with potential utility in obesity and metabolic-related disorders, including rare disease and orphan indications.
Natriuretic Peptide Receptor System. The natriuretic peptide receptor (“NPR”) system regulates cardiovascular functions, and therapeutic agents modulating this system have potential to treat cardiovascular and fibrotic diseases. The Company has also designed and is developing potential natriuretic peptide receptor (“NPR”)NPR candidate drugs that are selective for one or more different natriuretic peptide receptors, including natriuretic peptide receptor-A (“NPR-A”), natriuretic peptide receptor B (“NPR-B”), and natriuretic peptide receptor C (“NPR-C”), which may be useful in the treatment of cardiovascular diseases, including reducing cardiac hypertrophy and fibrosis, heart failure, acute asthma, other pulmonary diseases and hypertension..
 
Business Risk and Liquidity – Since inception, the Company has incurred negative cash flows from operations, and has expended, and expects to continue to expend, substantial funds to complete its planned product development efforts. As shown in the accompanying consolidated financial statements, the Company had an accumulated deficit as of December 31, 20182019 of $342,270,312$305,517,455 and a net loss for the three and six months ended December 31, 20182019 of $5,042,350$5,243,627 and $10,724,406,$9,744,576, respectively, and the Company anticipates incurring significant expenses in the future as a result of spending on its development programs and will require substantial additional financing or revenues to continue to fund its planned developmental activities. To achieve sustained profitability, if ever, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct successful preclinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach sustained profitability is highly uncertain, and the Company may never be able to achieve profitability on a sustained basis, if at all.
 
As of December 31, 2018,2019, the Company’s cash and cash equivalents were $24,658,024$91,459,480 and current liabilities were $4,528,542. The Company$1,374,940. Management intends to utilize existing capital resources for general corporate purposes and working capital, including preclinical and clinical development of ourthe Company’s MC1r and MC4r peptide programs and natriuretic peptide program, and development of other portfolio products.
 
Management believes that the Company’s existing capital resources together with proceeds received from sales of common stock in the Company’s “at-the-market” program (if any), will be adequate to fund the Company’s planned operations through at least March 31, 2020.calendar year 2021. The Company will need additional funding to complete required clinical trials for its other product candidates and, assuming those clinical trials are successful, as to which there can be no assurance, to complete submission of required applications to the FDA. If the Company is unable to obtain approval or otherwise advance in the FDA approval process, the Company’s ability to sustain its operations wouldcould be materially adversely affected.
 

 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
The Company may seek the additional capital necessary to fund its operations through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements. Additional capital that is required by the Company may not be available on reasonable terms, or at all.
 
Concentrations – Concentrations in the Company’s assets and operations subject it to certain related risks. Financial instruments that subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents. The Company’s cash and cash equivalents are primarily invested in one money market account sponsored by a large financial institution. For the three and six months ended December 31, 2018,2019, the Company reported $34,505$20,610 and $117,989 in license and contract revenue, respectively, solely related to a license agreement with AMAG for Vyleesi for North America (“AMAG License Agreement”) (Note 5)(Notes 5 and 14). For the three and six months ended December 31, 2017, the Company reported $10,612,153 and $32,553,661, respectively, in contract revenue related to the AMAG License Agreement. In addition, for the six months ended December 31, 2017,2018, the Company reported $5,000,000$34,505 in license revenue solely related to a license agreement with Fosun (the “Fosunthe AMAG License Agreement”) (Note 6).Agreement.
Trading – The Company’s common stock is listed on the NYSE American under the symbol “PTN”.
 
(2)            
BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation. The results of operations for the three and six months ended December 31, 20182019 may not necessarily be indicative of the results of operations expected for the full year.
 
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018,2019, filed with the SEC,Securities and Exchange Commission (“SEC”), which includes consolidated financial statements as of June 30, 20182019 and 20172018 and for each of the fiscal years in the three-year period ended June 30, 2018.2019.
 
(3)            
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation – The consolidated financial statements include the accounts of Palatin and its wholly-owned inactive subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates – The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents – 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. Cash equivalents consist of $24,466,104$91,257,600 and $37,808,099$43,381,556 in a money market account at December 31, 20182019 and June 30, 2018,2019, respectively.
 
Fair Value of Financial Instruments – The Company’s financial instruments consist primarily of cash equivalents, accounts payablereceivable and notesaccounts payable. Management believes that the carrying values of cash equivalents, accounts receivable and accounts payable are representative of their respective fair values based on the short-term nature of these instruments. Management believes that the carrying amount of its notes payable approximates fair value based on the terms of the notes.
 
Credit Risk – Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. Total cash and cash equivalent balances have exceeded balances insured balances by the Federal Depository Insurance Company (“FDIC”).
 
Property and Equipment – Property and equipment consists of office and laboratory equipment, office furniture and leasehold improvements and includes assets acquired under capital leases. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets, generally five years for laboratory and computer equipment, seven years for office furniture and equipment and the lesser of the term of the lease or the useful life for leasehold improvements. Amortization of assets acquired under capital leases is included in depreciation expense. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized. Accumulated depreciation and amortization was $2,366,440$2,425,149 and $2,338,558$2,388,644 as of December 31, 20182019 and June 30, 2018,2019, respectively.
 

 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
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 a long-lived asset, management evaluates whether the estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, 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 cash flows based on reasonable and supportable assumptions.
 
Revenue RecognitionIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), which, along with amendments from 2015 and 2016 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC Topic 606 replaced most existing revenue recognition guidance in U.S. GAAP when it became effective.
 
On July 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective approach, a practical expedient permitted under ASC Topic 606, and applied this approach only to contracts that were not completed as of July 1, 2018. The Company calculated a one-time cumulative transition adjustment of $500,000 which was recorded on July 1, 2018 to the opening balance of accumulated deficit related to its license agreement with Kwangdong (the “Kwangdong License Agreement”) as the Company determined a significant revenue reversal would not occur in a future period. The one-time adjustment consisted of the recognition of $500,000 of deferred revenue.
Revenue recognition for periods prior to July 1, 2018
The Company has generated revenue solely through license and collaboration agreements. Prior to July 1, 2018, the Company recognized revenue in accordance with FASB ASC Topic 605-25, Revenue Recognition for Arrangements with Multiple Elements, which addressed the determination of whether an arrangement involving multiple deliverables contained more than one unit of accounting. A delivered item within an arrangement was considered a separate unit of accounting only if both of the following criteria were met:
the delivered item had value to the customer on a stand-alone basis; and
if the arrangement included a general right of return relative to the delivered item, delivery or performance of the undelivered item was considered probable and substantially in control of the vendor.
Under FASB ASC Topic 605-25, if both of the criteria above were not met, then separate accounting for the individual deliverables was not appropriate.
The Company determined that it was appropriate to recognize such revenue using the input-based proportional method during the period of Palatin’s development obligations as defined in the AMAG License Agreement. Refer to Note 5 for additional information.
Under the Fosun License Agreement (Note 6), the Company received consideration in the form of an upfront license fee payment and determined that it was appropriate to recognize such consideration as revenue in the first quarter of fiscal year 2018, which was the quarter in which the license was granted, since the license had stand-alone value and the upfront payment received by the Company was non-refundable.
Under the Kwangdong License Agreement (Note 7), the Company received consideration in the form of an upfront license fee payment and determined that it was appropriate to record such consideration as deferred revenue because the upfront payment received by the Company is subject to certain refund provisions.
Revenue resulting from the achievement of development milestones was recorded in accordance with the accounting guidance for the milestone method of revenue recognition. Amounts received prior to satisfying the revenue recognition criteria were recorded as deferred revenue on the Company’s consolidated balance sheet.



PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Revenue recognition for periods commencing July 1, 2018
 
For licenses of intellectual property, the Company assesses, at contract inception, whether the intellectual property is distinct from other performance obligations identified in the arrangement. If the licensing of intellectual property is determined to be distinct, revenue is recognized for nonrefundable, upfront license fees when the license is transferred to the customer and the customer can use and benefit from the license. If the licensing of intellectual property is determined not to be distinct, then the license will be bundled with other promises in the arrangement into one performance obligation. The Company needs to determine if the bundled performance obligation is satisfied over time or at a point in time. If the Company concludes that the nonrefundable, upfront license fees will be recognized over time, the Company will need to assess the appropriate method of measuring proportional performance.
 
Regulatory milestone payments are excluded from the transaction price due to the inability to estimate the probability of reversal. Revenue relating to achievement of these milestones will beis recognized in the period in which the milestone is achieved.
 
Sales-based royalty and milestone payments resulting from customer contracts solely or predominately for the license of intellectual property will only be recognized upon occurrence of the underlying sale or achievement of the sales milestone in the future and such sales-based royalties and milestone payments will beare recognized in the same period earned.
 
The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses as the Company is the principal in the research and development activities based upon its control of such activities, which is considered part of its ordinary activities.
 
Development milestone payments are generally due 30 business days after the milestone is achieved. Sales milestone payments are generally due 45 business days after the calendar year in which the sales milestone is achieved. Royalty payments are generally due on a quarterly basis 20 business days after being invoiced.
The cumulative effect of applying ASC Topic 606 to the Company’s consolidated balance sheet was as follows:

 
 
Balance at
June 30,
2018
 
 
Net Adjustment
 
 
Balance at
July 1,
2018
 
Deferred revenue
 $500,000 
 $(500,000)
 $- 
Accumulated deficit
  (332,045,906)
  500,000 
  (331,545,906)



PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

The impact of adoption of ASC Topic 606 on the Company’s consolidated balance sheet as of December 31, 2018 is as follows:

PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Balance Sheets
(unaudited)

 
 
Impact of change in accounting policies
 
 
 
As reported
December 31,
2018
 
 
Adjustments
 
 
As reported without adoption of ASC Topic 606
 
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $24,658,024 
 $- 
 $24,658,024 
Prepaid expenses and other current assets
  535,147 
  - 
  535,147 
Total current assets
  25,193,171 
  - 
  25,193,171 
 
    
    
  - 
Property and equipment, net
  136,153 
  - 
  136,153 
Other assets
  338,916 
  - 
  338,916 
Total assets
 $25,668,240 
 $- 
 $25,668,240 
 
    
    
  - 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
    
Current liabilities:
    
    
    
Accounts payable
 $619,900 
 $- 
 $619,900 
Accrued expenses
  1,101,045 
  - 
  1,101,045 
Notes payable, net of discount
  2,321,123 
  - 
  2,321,123 
Other current liabilities
  486,474 
  - 
  486,474 
Total current liabilities
  4,528,542 
  - 
  4,528,542 
 
    
    
  - 
Notes payable, net of discount
  - 
  - 
  - 
Deferred revenue
  - 
  500,000 
  500,000 
Other non-current liabilities
  - 
  - 
  - 
Total liabilities
  4,528,542 
  500,000 
  5,028,542 
 
    
    
    
Stockholders’ equity:
    
    
    
Preferred stock
  40 
  - 
  40 
Common stock
  2,030,634 
  - 
  2,030,634 
Additional paid-in capital
  361,379,336 
  - 
  361,379,336 
Accumulated deficit
  (342,270,312)
  (500,000)
  (342,770,312)
Total stockholders’ equity
  21,139,698 
  (500,000)
  20,639,698 
Total liabilities and stockholders’ equity
 $25,668,240 
 $- 
 $25,668,240 



PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

ASC Topic 606 did not have an impact on the Company’s consolidated statements of operations or cash flows.
 
Research and Development Costs – The costs of research and development activities are charged to expense as incurred, including the cost of equipment for which there is no alternative future use.
 
Accrued Expenses – Third parties perform a significant portion of the Company’s development activities. The Company reviews the activities performed under all contracts each quarter and accrues expenses and the amount of any reimbursement to be received from its collaborators based upon the estimated amount of work completed. Estimating the value or stage of completion of certain services requires judgment based on available information. If the Company does not identify services performed for it but not billed by the service-provider, or if it underestimates or overestimates the value of services performed as of a given date, reported expenses will be understated or overstated.
 


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Stock-Based Compensation – The Company charges to expense the fair value of stock options and other equity awards granted. Compensation costs for stock-based awards with time-based vesting are determined using the quoted market price of the Company’s common stock on the date of grant or for stock options, the value determined utilizing the Black-Scholes option pricing model, and are recognized on a straight-line basis, while awards containing a market condition are valued using multifactor Monte Carlo simulations. Compensation costs for awards containing a performance condition are determined using the quoted price of the Company’s common stock on the date of grant or for stock options, the value is determined utilizing the Black Scholes option pricing model, and are recognized based on the probability of achievement of the performance condition over the service period. Forfeitures are recognized as they occur.
 
Income Taxes – The Company and its subsidiary file consolidated federal and separate-company state income tax returns. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences or operating loss and tax credit carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company has recorded and continues to maintain a full valuation allowance against its deferred tax assets based on the history of losses incurred.
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cutsincurred and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act significantly revises U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory corporate income tax rate from 35% to 21%, (b) eliminating or reducing certain income tax deductions, such as deductions for interest expense, executive compensation expenseslack of experience projecting future sales-based royalty and certain employee expenses, and (c) repealing the federal alternative minimum tax (“AMT”) and providing for the refund of existing AMT credits.
Other provisions enacted include a new provision designed to tax low-taxed income of foreign subsidiaries (i.e., “GILTI”) and a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) from controlled foreign corporations (“CFC”). The Company does not have any foreign subsidiaries, and thus these provisions do not apply.
During the year ended June 30, 2018, the Company recorded income tax expense of $82,500, which consisted of $500,000 that was withheld in accordance with tax withholding requirements in the Chinese Territories related to the Fosun License Agreement (Note 6) and $82,500, which was withheld in accordance with tax withholding requirements in Korea related to the Kwangdong License Agreement (Note 7). The total income tax expense related to withholding requirements of $582,500 was offset by an income tax benefit of $500,000, which resulted from the 2017 Tax Act, under which AMT credits became refundable, and therefore a $500,000 benefit related to the release of a valuation allowance against an AMT credit was recorded during the three and six months ended December 2017. The Company’s June 30, 2017 tax return was filed during the three months ended March 31, 2018 and the Company did not incur an AMT liability. As a result, as of December 31, 2018 and June 30, 2018, the Company has a current income tax receivable of $218,000 and a long-term income tax receivable of $282,000 from estimated AMT that can be refunded in the future.


milestone payments.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
 
Net Income (Loss)Loss per Common Share - Basic and diluted earningsloss per common share (“EPS”) are calculated in accordance with the provisions of FASB ASCAccounting Standards Codification (“ASC”) Topic 260, Earnings per Share, which includes guidance pertaining to the warrants issued in connection with the July 3, 2012, December 23, 2014, and July 2, 2015 private placement offerings and the August 4, 2016 underwritten offering, that were exercisable for nominal consideration and, therefore, to the extent not yet exercised were considered in the computation of basic and diluted net income (loss) per common share. As of November 21, 2017, all warrants exercisable for nominal value had been converted into common stock..
 
The following table is a reconciliation of net (loss) income and the shares used in calculating basic and diluted net (loss) income per common share forFor the three and six months ended December 31, 20182019 and 2017:

 
 
Three Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 $(5,042,350)
 $3,030,193 
 $(10,724,406)
 $13,633,823 
 
    
    
    
    
Denominator:
    
    
    
    
Weighted average common shares - Basic
  206,487,984 
  197,238,056 
  205,724,321 
  197,175,316 
 
    
    
    
    
Effect of dilutive shares:
    
    
    
    
Common stock equivalents arising from stock options,
    
    
    
    
warrants and conversion of preferred stock
  - 
  3,525,013 
  - 
  1,792,803 
Restriced stock units
  - 
  1,948,547 
  - 
  1,462,705 
Weighted average common shares - Diluted
  206,487,984 
  202,711,616 
  205,724,321 
  200,430,824 
 
    
    
    
    
Net (loss) income per common share:
    
    
    
    
Basic
 $(0.02)
 $0.02 
 $(0.05)
 $0.07 
Diluted
 $(0.02)
 $0.01 
 $(0.05)
 $0.07 

As of December 31, 2017, common shares issuable upon the exercise of outstanding options and warrants, excluding outstanding warrants exercisable for nominal consideration, and the vesting of restricted stock units in an aggregate amount of 1,146,250 shares were excluded from the weighted average number of common shares used in computing diluted net income per common share because they were anti-dilutive during the period or the minimum performance requirements or market conditions had not been met. For the three and six months ended December 31, 2018, no additional common shares were added to the computation of diluted EPS because to do so would have been anti-dilutive. The potential number of common shares excluded from diluted EPS during the three and six months ended December 31, 2019 and 2018 was 40,850,175.33,143,857 and 40,850,175 respectively.
 
Included in the weighted average common shares used in computing basic and diluted net income (loss)loss per common share are 6,167,750 and 3,952,875 and 2,121,113 vested RSUsrestricted stock units that havehad not been issued as of December 31, 20182019 and 2017,2018, respectively, due to a provision in the RSUrestricted stock unit agreements to delay delivery.
 


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

(4)            
NEW AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2019, the FASB issued ASU No. 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for public entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The guidance is applicable to the Company beginning July 1, 2021. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.
 
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This update provides clarification on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808), including the alignment of unit of account guidance between the two topics. The guidance is effective for public entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The guidance is applicable to the Company beginning July 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.
 
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for the annual period ending June 30, 2019 and interim periods within that annual period. Early adoption is permitted. The Company adopted this guidance during the six months ended December 31, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,, which requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. The new guidance will be effective for the Company on July 1, 2020. Early adoption will be available on July 1, 2019. The Company is currently evaluating the effect that ASU No. 2016-13 will have on its consolidated financial statements and related disclosures.
 


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

In February 2016,On July 1, 2019, the FASB issuedCompany adopted the requirements of ASU No. 2016-02,No.2016-02, Leases relating(“Topic 842”). The objective of this ASU, along with several related ASUs issued subsequently, is to increase transparency and comparability between organizations that enter into lease agreements. For lessees, the key difference of the new standard from the previous guidance (“Topic 840”) is the recognition of a right-of-use (“ROU”) asset and lease liability on the balance sheet. The most significant change is the requirement to recognize ROU assets and lease liabilities.liabilities for leases classified as operating leases. The new guidancestandard requires lesseesdisclosures to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability, other than leases that meet the definitionobjective of a short- term lease,enabling users of financial statements to assess the amount, timing, and requires expanded disclosures about leasing arrangements. The recognition, measurement, and presentationuncertainty of expenses and cash flows arising from a lease by a lessee have not significantly changed fromleases. As part of the current guidance. Lessor accounting is similartransition to the current guidance, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new guidance is effective forstandard, the Company onelected to measure and recognize leases that existed at July 1, 2019 with early adoption permitted.using a modified retrospective approach, including the option to not restate comparative periods. For leases existing at the effective date, the Company elected the package of three transition practical expedients and therefore did not reassess whether an arrangement is or contains a lease, did not reassess lease classification, and did not reassess what qualifies as an initial direct cost. Additionally, the Company elected, as practical expedients, not separating lease and non-lease components for all of its leases and the short-term lease recognition exemption for all of its leases that qualify. The Company is currently evaluatingdid not elect the impact that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.
In January 2016,use of the FASB issued ASU No. 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance relates to the recognition and measurement of financial assets and liabilities. The new guidance makes targeted improvements to GAAP impacting equity investments (other than those accounted for under the equity method or consolidated), financial liabilities accounted for under the fair value election, and presentation and disclosure requirements for financial instruments, among other changes. The Company adopted this guidance during the six months ended December 31, 2018.hindsight practical expedient. The adoption of this standardTopic 842 resulted in the recognition of an operating ROU asset and operating lease liability of $225,134 as of July 1, 2019. The adoption did not have a material impact on the Company’sconsolidated statements of operations, stockholder’s equity and cash flows for the six months ended December 31, 2019.
At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease ROU assets, current operating lease liabilities, and noncurrent operating lease liabilities in the consolidated financial statements. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. For operating leases, ROU assets and lease liabilities are recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term. The Company uses the rate implicit in the lease if it is determinable. When the rate implicit in the lease is not determinable, the Company uses an estimate based on a hypothetical rate provided by a third party as the Company currently does not have issued debt. Operating ROU assets are calculated as the present value of the remaining lease payments plus unamortized initial direct costs plus any prepayments less any unamortized lease incentives received. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause incremental costs to the Company if the option were not exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to recognize an ROU asset and obligation for leases with an initial term of twelve months or less. The expense associated with short term leases is included in general and administrative expense in the statement of operations. To the extent a lease arrangement includes both lease and non-lease components, the Company has elected to account for the components as a single lease component.
 
(5)            
AGREEMENT WITH AMAG
 
On January 8, 2017, the Company entered into the AMAG License Agreement. Under the terms of the AMAG License Agreement, the Company granted to AMAG (i) an exclusive license in all countries of North America (the “Territory”), with the right to grant sub-licenses, to research, develop and commercialize products containing Vyleesi (each a “Product”, and collectively, “Products”), (ii) a non-exclusive license in the Territory, with the right to grant sub-licenses, to manufacture the Products, and (iii) a non-exclusive license in all countries outside the Territory, with the right to grant sub-licenses, to research, develop and manufacture (but not commercialize) the Products.
 

 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
Following the satisfaction of certain conditions to closing, the license agreement became effective on February 2, 2017. On that date, AMAG paid the Company $60,000,000 as a one-time initial payment. Pursuant to the terms of and subject to the conditions in the AMAG License Agreement, AMAG was required to reimburse the Company up to an aggregate amount of $25,000,000 for reasonable, documented, direct out-of-pocket expenses incurred by the Company following February 2, 2017, in connection with the development and regulatory activities necessary to file an NDAa New Drug Application (“NDA”) for Vyleesi for HSDD in the United States related to Palatin’s development obligations.
 
The Company determined there was no stand-alone value for the license, and that the license and the reimbursable direct out-of-pocket expenses, pursuant to the terms of the License Agreement, represented a combined unit of accounting which totaled $85,000,000. The Company recognized revenue of the combined unit of accounting over the arrangement using the input-based proportional method as the Company completed its development obligations. ForDuring the three and six months ended December 31, 2017, the Company recognized $10,612,153 and $32,553,661, respectively, as2019, license and contract revenue.revenue included additional billings for AMAG related Vyleesi costs of $20,610 and $117,989, respectively. During the six months ended December 31, 2018, license and contract revenue included additional billings for AMAG related Vyleesi costs of $34,505.
 
On June 4, 2018, the FDA accepted the Vyleesi NDA for filing. The FDA’s acceptance triggered a $20,000,000 milestone payment to Palatin from AMAG. As a result, the Company recognized $20,000,000 in revenue related to regulatory milestones in fiscal 2018. On June 21, 2019, the FDA granted approval of Vyleesi for use in the United States. The FDA’s approval triggered a $60,000,000 milestone payment to Palatin from AMAG. As a result, the Company recognized $60,000,000 in revenue related to regulatory milestones in fiscal 2019. In addition, pursuant to the terms of and subject to the conditions in the AMAG License Agreement, the Company will beis eligible to receive from AMAG (i) up to $60,000,000 upon FDA approval of Vyleesi, and (ii) up to $300,000,000 in sales milestone payments based on achievement of certain annual net sales for all Products in the Territory.
 
AMAG is also obligated to pay the Company tiered royalties on annual net sales of Products, on a product-by-product basis, in the Territory ranging from the high single-digits to the low double-digits. The royalties will expire on a product-by-product and country-by-country basis untilupon the latest to occur of (i) the earliest date on which there are no valid claims of the Company’s patent rights covering such Product in such country, (ii) the expiration of the regulatory exclusivity period for such Product in such country and (iii) ten years following the first commercial sale of such Product in such country. Such royalties are subject to reductions in the event that: (a) AMAG must license additional third-party intellectual property in order to develop, manufacture or commercialize a Product, or (b) generic competition occurs with respect to a Product in a given country, subject to an aggregate cap on such deductions of royalties otherwise payable to the Company. After the expiration of the applicable royalties for any Product in a given country, the license for such Product in such country will become a fully paid-up, royalty-free, perpetual and irrevocable license. See note 14 for additional information related to AMAG.
 
The Company engaged Greenhill & Co. LLC (“Greenhill”) as the Company’s sole financial advisor in connection with a potential transaction with respect to Vyleesi. Under the engagement agreement with Greenhill, the Company was obligated to pay Greenhill a fee equal to 2% of all proceeds and consideration, as defined, paid or to be paid to the Company by AMAG in connection with the AMAG License Agreement, subject to a minimum fee of $2,500,000. The minimum fee of $2,500,000, less a credit of $50,000 for an advisory fee previously paid by the Company, was paid to Greenhill and recorded as an expense upon the closing of the licensing transaction. This amount will bewas credited toward amounts that were to become due to Greenhill, in the future, provided that the aggregate fee payable to Greenhill willwould not be less than 2% of all proceeds and consideration, as defined, paid or to be paid to the Company by AMAG in connection with the AMAG License Agreement. On November 21, 2019, the Company and Greenhill mutually agreed to terminate the engagement agreement. As a result, the Company made a final payment to Greenhill of $625,000, which was recorded in general and administrative expenses during the three and six months ended December 31, 2019. The Company will pay Greenhill an aggregate total of 2% of all proceeds and consideration paidhas no future payment obligations to the Company by AMAG in connection with the License Agreement, including future milestone and royalty payments, after crediting the $2,500,000 that was paid to Greenhill upon entering into the AMAG License Agreement. The Company also reimbursed Greenhill $7,263 for certain expenses incurred in connection with its advisory services.Greenhill.
 
Pursuant to the AMAG License Agreement, the Company has assigned to AMAG the Company’s manufacturing and supply agreements with Catalent Belgium S.A. to perform fill, finish and packaging of Vyleesi.
 


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

(6)            
AGREEMENT WITH FOSUN:
 
On September 6, 2017, the Company entered into the a license agreement with Fosun (“Fosun License AgreementAgreement”) for exclusive rights to commercialize Vyleesi in the Chinese Territories.China. Under the terms of the agreement, the Company received $4,500,000 in October 2017, which consisted of an upfront payment of $5,000,000 less $500,000 that was withheld in accordance with tax withholding requirements in the Chinese Territories and recorded as an expense during the year ended June 30, 2018. The Company will receive a $7,500,000 milestone payment when regulatory approval in Chinese TerritoriesChina is obtained, provided that a commercial supply agreement for Vyleesi has been entered into. Palatin has the potential to receive up to $92,500,000 in additional sales related milestone payments and high single-digit to low double-digit royalties on net sales in the licensed territory. All development, regulatory, sales, marketing, and commercial activities and associated costs in the licensed territory will be the sole responsibility of Fosun.
 


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

(7)            
AGREEMENT WITH KWANGDONG:
 
On November 21, 2017, the Company entered into the a license agreement with Kwangdong (Kwangdong License AgreementAgreement”) for exclusive rights to commercialize Vyleesi in Korea.
Under the terms of the agreement, the Company received $417,500 in December 2017, consisting of an upfront payment of $500,000, less $82,500, which was withheld in accordance with tax withholding requirements in Korea and recorded as an expense during the year ended June 30, 2018. Based upon certain refund provisions, the upfront payment was recorded as non-current deferred revenue at December 31, 2017. On July 1, 2018, in conjunction with the adoption of ASC Topic 606, a one-time transition of adjustment of $500,000 was recorded to the opening balance of accumulated deficit as the Company determined a significant revenue reversal would not occur in a future period. The Company will receive a $3,000,000 milestone payment based on the first commercial sale in Korea. Palatin has the potential to receive up to $37,500,000 in additional sales related milestone payments and mid-single-digit to low double-digit royalties on net sales in the licensed territory. All development, regulatory, sales, marketing, and commercial activities and associated costs in the licensed territory will be the sole responsibility of Kwangdong.
 
(8)            
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
Prepaid expenses and other current assets consist of the following:
 
 
December 31,
2018
 
 
June 30,
2018
 
 
December 31,
 
 
June 30,
 
Clinical study costs
 $175,915 
 $145,994 
 
2019
 
Clinical / Regulatory costs
 $88,985 
 $61,798 
Insurance premiums
  19,366 
  42,605 
  65,892 
  87,937 
Other
  339,866 
  325,089 
  501,722 
  487,554 
 $535,147 
 $513,688 
 $656,599 
 $637,289 
 
(9)            
FAIR VALUE MEASUREMENTS
 
The fair value of cash equivalents is classified using a hierarchy prioritized based on inputs. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
 

 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
The following table provides the assets carried at fair value:
 
 
 
Carrying Value
 
 
Quoted prices in
active markets
(Level 1)
 
 
Other quoted/observable inputs (Level 2)
 
 
Significant unobservable inputs
(Level 3)
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Money market account
 $24,466,104 
 $24,466,104 
 $- 
 $- 
June 30, 2018:
    
    
    
    
Money market account
 $37,808,099 
 $37,808,099 
 $- 
 $- 
 
 
Carrying Value
 
 
Quoted prices in active markets
(Level 1)
 
 
Other quoted/observable inputs (Level 2)
 
 
Significant unobservable inputs (Level 3)
 
December 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Money Market Account
 $91,257,600 
 $91,257,600 
 $- 
 $- 
June 30, 2019:
    
    
    
    
Money Market Account
 $43,381,556 
 $43,831,556 
 $- 
 $- 
 
    
    
    
    

(10)            
LEASES
The Company has operating leases of office and laboratory space, each of which expires on June 30, 2020. The Company also has operating leases of copier equipment that expire October 15, 2021.
The components of lease expense are as follows:

Lease cost
 
Three months ended
December 31,
2019
 
 
Six months ended
December 31,
2019
 
Operating lease cost
 $50,394 
 $99,258 
Variable lease cost
  17,824 
  35,649 
Short-term lease cost
  3,600 
  12,120 
Total lease cost
 $71,818 
 $147,027 

Supplemental balance sheet information related to leases was as follows:
 December 31,
2019
Operating lease ROU asset and liability
$173,666

Supplemental lease term and discount rate information related to leases was as follows:
Weighted-average remaining lease term (years)
0.7
Weighted-average discount rate
6.25%


PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Supplemental cash flow information related to leases was as follows:

 
 
Three months ended
December 31,
2019
 
 
Six months ended
December 31,
2019
 
Cash paid for the amounts included in the measurement of lease liabilities:
 
 
 
 
 
 
  Operating cash flows for operating leases
 $77,096 
 $148,935 
Supplemental non-cash information on lease liabilities arisng from obtaining right-of-use assets:
    
    
  Right-of-use assets obtained in exchange for new lease obligation
 $36,720 
 $93,435 

The following table summarizes the maturity of the Company’s operating lease liability as of December 31, 2019:
 
 
December 31,
2019
 
Year Ending June 30
 
 
 
2020
 $154,194 
2021
  18,360 
2022
  4,590 
Less imputed interest
  (3,478)
Total
 $173,666 

As of June 30, 2019, the Company had $225,120 in future lease payments for the year ending June 30, 2020 under ASC Topic 840.
 
(10)(11)            
ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
 
 
December 31,
2018
 
 
June 30,
2018
 
Clinical study costs
 $324,969 
 $983,410 
Other research related expenses
  351,025 
  590,236 
Professional services
  74,830 
  297,731 
Severance
  349,854 
  115,362 
Other
  367 
  116,282 
 
 $1,101,045 
 $2,103,021 

(11)            
NOTES PAYABLE: 
Notes payable consist of the following:
 
 
December 31,
2018
 
 
June 30,
2018
 
Notes payable under venture loan
 $2,333,333 
 $6,333,334 
Unamortized related debt discount
  (8,257)
  (33,535)
Unamortized debt issuance costs
  (3,953)
  (18,138)
Notes payable
  2,321,123 
  6,281,661 
 
    
    
 Less: current portion
  2,321,123 
  5,948,763 
 
    
    
 Long-term portion
 $- 
 $332,898 
 
 
December 31,
 
 
June 30,
 
 
 
2019
 
 
2019
 
Clinical / Regulatory costs
 $520,470 
 $943,721 
Other research related expenses
  504,337 
  1,361,414 
Professional services
  32,000 
  317,500 
Other
  22,784 
  226,057 
 
 $1,079,591 
 $2,848,692 
  

 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)

(12)            
NOTES PAYABLE: 
Notes payable consist of the following:

June 30,
2019
Notes payable under venture loan
$333,333
Unamortized related debt discount
(295)
Unamortized debt issuance costs
(142)
Notes payable
332,896
Less: current portion
332,896
Long-term portion
$-
 
On December 23, 2014, the Company closed on a $10,000,000 venture loan which was led by Horizon Technology Finance Corporation (“Horizon”). The debt facility was a four-year senior secured term loan that bore interest at a floating coupon rate of one-month LIBOR (floor of 0.50%) plus 8.50%, and provided for interest-only payments for the first eighteen months followed by monthly payments of principal of $333,333 plus accrued interest through January 1, 2019. The lenders also received five-year immediately exercisable Series D 2014 warrants to purchase 666,666 shares of common stock exercisable at an exercise price of $0.75 per share. The Company recorded a debt discount of $267,820 equal to the fair value of these warrants at issuance, which was amortized to interest expense over the term of the related debt. This debt discount was offset against the note payable balance and included in additional paid-in capital on the Company’s balance sheet. In addition, a final incremental payment of $500,000 was due on January 1, 2019, or upon early repayment of the loan. This final incremental payment was being accreted to interest expense over the term of the related debt and was included in other liabilities on the consolidated balance sheet. The Company incurred $209,367 of costs in connection with the loan. These costs were capitalized as deferred financing costs and were offset against the note payable balance. These debt issuance costs were being amortized to interest expense over the term of the related debt. During the three months ended December 31, 2018, the loan matured, and on December 31, 2018, the Company made the final incremental payment of $500,000.
 
On July 2, 2015, the Company closed on a $10,000,000 venture loan led by Horizon. The debt facility iswas a four-year senior secured term loan that bearsbore interest at a floating coupon rate of one-month LIBOR (floor of 0.50%) plus 8.50% and providesprovided for interest-only payments for the first eighteen months followed by monthly payments of principal of $333,333 plus accrued interest through August 1, 2019. The lenders also received five-year immediately exercisable Series G warrants to purchase 549,450 shares of the Company’s common stock exercisable at an exercise price of $0.91 per share. The Company has recorded a debt discount of $305,196 equal to the fair value of these warrants at issuance, which is beingwere amortized to interest expense over the term of the related debt. This debt discount iswas offset against the note payable balance and iswas included in additional paid-in capital on the Company’s balance sheet at December 31, 2018 and June 30, 2018.sheet. In addition, a final incremental payment of $500,000 iswas due on August 1, 2019, or upon early repayment of the loan.2019. This final incremental payment is beingwas accreted to interest expense over the term of the related debt and iswas included in other current liabilities on the consolidated balance sheet as of December 31, 2018.sheet. The Company incurred $146,115 of costs in connection with the loan agreement. These costs were capitalized as deferred financing costs and arewere offset against the note payable balance. These debt issuance costs are beingwere amortized to interest expense over the term of the related debt. During the three months ended September 30, 2019, the loan matured, and on July 31, 2019, the Company made the final incremental payment of $500,000.



PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
The Company’s obligations under the 2015 amended and restated loan agreement, which includes both the 2014 venture loan and the 2015 venture loan, are secured by a first priority security interest in substantially all of its assets other than its intellectual property. The Company also has agreedNotes to specified limitations on pledging or otherwise encumbering its intellectual property assets. The 2015 amended and restated loan agreement includes customary affirmative and restrictive covenants, but does not include any covenants to attain or maintain specified financial metrics. The loan agreement includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the loan agreement. As of December 31, 2018, the Company was in compliance with all of its loan covenants.Consolidated Financial Statements
(unaudited)
 
(12) (13)            
STOCKHOLDERS’ EQUITY
 
Financing Transactions – On June 21, 2019 and April 20, 2018, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”)agreements with Canaccord Genuity LLC (“Canaccord”) (the “2019 Equity Distribution Agreement” and the “2018 Equity Distribution Agreement”, respectively), pursuant to which the Company may, from time to time, sell shares of the Company’s common stock at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The 2018 Equity Distribution Agreement and related prospectus was limited to sales of up to an aggregate maximum $25.0 million of shares of the Company’s common stock, and the 2019 Equity Distribution Agreement and related prospectus is limited to sales of up to an aggregate maximum $40.0 million of shares of the Company’s common stock. The Company will paypays Canaccord 3.0% of the gross proceeds as a commission.
For the three and six months ended December 31, 2019, respectively, 1,238,040 and 1,895,934 shares of common stock were sold through Canaccord under the 2019 Equity Distribution Agreement for net proceeds of $1,001,768 and $1,581,498 after payment of commission fees of $31,756 and $51,696 and other related expenses of $25,000 and $90,000, respectively From inception of the 2019 Equity Distribution Agreement through December 31, 2019, a total of 9,460,509 shares of common Stock were sold for net proceeds of $11,870,334 after payment of commission fees of $369,907 and other related expenses of $90,000. For the three and six months ended December 31, 2018, respectively, 31,300 and 2,256,445 shares of the Company’s common stock were sold through Canaccord under the 2018 Equity Distribution Agreement for net proceeds of $30,361 and $2,252,808, respectively, after payment of commission fees of $939 and $69,674, respectively. From inception of the 2018 Equity Distribution Agreement through June 26, 2019, a total of 18,504,993 shares of common Stock were sold for net proceeds of $24,249,997 after payment of commission fees of $750,000, and the 2018 Equity Distribution Agreement is deemed completed.
Stock Purchase Warrants – On September 13, 2019, the Company’s Board of Directors approved a plan to offer to purchase and terminate certain outstanding common stock purchase warrants through privately negotiated transactions. The purchase and termination program has no time limit and may be suspended for periods or discontinued at any time.
During the three and six months ended December 31, 2019, the Company entered into several warrant termination agreements to repurchase and cancel the following previously issued Series F, Series H and Series J warrants for the following aggregate buyback prices, plus additional consideration upon any sale of the Company within six months of the respective agreement:
 
 
 
Three months ended December 31, 2019
 
 
Six months ended December 31, 2019
 
 
 
Warrants
 
 
Buyback price
 
 
Warrants
 
 
Buyback price
 
Series F Warrants
  297,352 
 $62,712 
  297,352 
 $62,712 
Series H Warrants
  992,387 
  390,600 
  1,466,432 
  577,373 
Series J Warrants
  1,908,080 
  760,657 
  4,774,889 
  1,907,381 
 
  3,197,819 
 $1,213,969 
  6,538,673 
 $2,547,466 


 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
TheDuring the three months ended December 31, 2019, the Company has no obligation to sell anyissued 26,861 shares underof common stock upon the Equity Distribution Agreement and maycashless exercise provisions of 666,666 Series D warrants at any time suspend solicitation and offers under the Equity Distribution Agreement.an exercise price of $0.75 per share.
 
Stock Purchase WarrantsOptions – – DuringFor the three and six months ended December 31, 2017,2019, the Company issued 10,980,232recorded stock-based compensation related to stock options of $334,564 and 23,344,451 shares, respectively, of common stock pursuant to the cashless exercise provisions of warrants at an exercise price of $0.01 per share. During the six months ended December 31, 2017, the Company received $114,384 and issued 11,438,356 shares of common stock pursuant to the exercise of warrants at an exercise price of $0.01 per share.
Stock Options –$678,724, respectively. For the three and six months ended December 31, 2018, the Company recorded stock-based compensation related to stock options of $317,704 and $641,407, respectively. For the three and six months ended December 31, 2017, the Company recorded stock-based compensation related to stock options of $204,633 and $364,507, respectively.
 
In July 2018, the terms of certain options were modified to accelerate vesting and extend the option life.exercise period. As a result, the Company recorded additional stock-based compensation of $109,004 during the six months ended December 31, 2018. There were no such modifications during the six months ended December 31, 2017.
 
A summary of stock option activity is as follows:
 
 
 
Number of Shares
 
 
Weighted Average Exercise Price
 
 
Weighted Average Remaining Term in Years
 
 
Aggregate Intrinsic Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding - July 1, 2018
  12,775,462 
 $0.76 
  7.7 
 
 
 
 
    
    
    
 
 
 
Granted
  - 
  - 
    
 
 
 
Forfeited
  (133,851)
  0.53 
    
 
 
 
Expired
  (129,150)
  1.77 
    
 
 
 
 
    
    
    
 
 
 
Outstanding - December 31, 2018
  12,512,461 
 $0.75 
  7.2 
 $1,171,032 
 
    
    
    
    
Exercisable at December 31, 2018
  6,837,011 
 $0.77 
  6.0 
 $544,282 
 
    
    
    
    
Expected to vest at December 31, 2018
  5,675,450 
 $0.73 
  8.7 
 $626,750 
 
 
Number of Shares
 
 
Weighted Average Exercise Price
 
 
Weighted Average Remaining Term in Years
 
 
Aggregate Intrinsic Value
 
Outstanding - June 30, 2019
  14,435,650 
  0.85 
  7.3 
 
 
 
 
    
    
    
 
 
 
Granted
  - 
  - 
    
 
 
 
Forfeited
  - 
  - 
    
 
 
 
Exercised
  - 
  - 
    
 
 
 
Expired
  (77,100)
  2.72 
    
 
 
 
Outstanding - December 31, 2019
  14,358,550 
 $0.84 
  6.8 
 $1,503,989 
 
    
    
    
    
Exercisable at December 31, 2019
  8,934,000 
 $0.77 
  5.8 
 $990,474 
 
    
    
    
    
Expected to vest at December 31, 2019
  5,424,550 
 $0.96 
  8.5 
 $513,515 
 
Stock options granted to the Company’s executive officers and employees generally vest over a 48-month period, while stock options granted to its non-employee directors vest over a 12-month period.
 

 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(unaudited)
 
Included in the options outstanding above are 1,075,000 and 125,000117,500 performance-based options granted in December 2017 to executive officers and employees, respectively, which vest during a performance period ending on December 31, 2020, if and upon either i) as to 100% of the target number of shares upon achievement of a closing price for the Company’s common stock equal to or greater than $1.50 per share for 20 consecutive trading days, which is considered a market condition; or ii) as to thirty percent (30%) of the target number of shares, upon the acceptance for filing by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is considered a performance condition; iii) as to fifty percent (50%) of the target number of shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is also considered a performance condition; iv) as to twenty percent (20%) of the target number of shares, upon entry into a licensing agreement during the performance period for the commercialization of Vyleesi for FSD in selectedat least two of the following geographic areas (a) four or more countries in Europe, (b) Japan, (c) two or more countries in Central and/or South America, (d) two or more countries in Asia, excluding Japan and China, and (e) Australia, which is also considered a performance condition. The fair value of these options was $602,760. The Company is amortizingamortized the fair value over the derived service period of 1.1 years or upon the attainment of the performance condition. Pursuant to the FDA acceptance of the NDA filing of Vyleesi, 30% of the target number of options vested in June 2018.2018 and 50% of the target number of options vested in June 2019 upon FDA approval of Vyleesi.
 
Restricted Stock Units – For the three and six months ended December 31, 2019, the Company recorded stock-based compensation related to restricted stock units of $470,372 and $953,947, respectively. For the three and six months ended December 31, 2018, the Company recorded stock-based compensation related to restricted stock units of $661,090 and $1,461,968, respectively. For the three and six months ended December 2017, the Company recorded stock-based compensation related to restricted stock units of $415,396 and $677,393, respectively.
 
A summary of restricted stock unit activity is as follows:
 
 
Number of RSUs
 
Outstanding at July 1, 20182019
  9,323,87610,327,833 
Granted
  - 
Forfeited
  (178,851-)
Vested
  (319,817523,775)
Outstanding at December 31, 20182019
  8,825,2089,804,058
    
 
Included in outstanding RSUsrestricted stock units in the table above are 3,952,8756,167,750 vested shares that have not been issued as of December 31, 20182019 due to a provision in the RSUrestricted stock unit agreements to delay delivery.
 
Time-based restricted stock units granted to the Company’s executive officers, employees and non-employee directors generally vest over 24 months, 48 months and 12 months, respectively.
 
In June 2019, the Company granted 438,000 performance-based restricted stock units to its executive officers and 182,725 performance-based restricted stock units to other employees which vest during a performance period ending June 24, 2023. The performance-based restricted stock units vest on performance criteria relating to advancement of MC1r programs, including initiation of clinical trials and licensing of Vyleesi in additional countries or regions.



PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

In December 2017, the Company granted 1,075,000 performance-based restricted stock units to its executive officers and 670,000 performance-based restricted stock units to other employees which vest during a performance period, ending on December 31, 2020, if and upon either i) as to 100% of the target number of shares upon achievement of a closing price for the Company’s common stock equal to or greater than $1.50 per share for 20 consecutive trading days, which is considered a market condition; or ii) as to thirty percent (30%) of the target number of shares, upon the acceptance for filing by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is considered a performance condition; iii) as to fifty percent (50%) of the target number of shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD in premenopausal women during the performance period, which is also considered a performance condition; iv) as to twenty percent (20%) of the target number of shares, upon entry into a licensing agreement during the performance period for the commercialization of Vyleesi for FSD in at least two of the following geographic areas (a) four or more countries in Europe, (b) Japan, (c) two or more countries in Central and/or South America, (d) two or more countries in Asia, excluding Japan and China, and (e) Australia, which is also considered a performance condition. The fair value of these awards was $913,750 and $569,500, respectively. The Company is amortizingamortized the fair value over the derived service period of 1.1 years or upon the attainment of the performance condition. Pursuant to the FDA acceptance of the NDA filing for Vyleesi, 30% of the target number of shares vested in June 2018. Pursuant to the FDA approval of Vyleesi, 50% of the target number of shares vested in June 2019.

(14)            
SUBSEQUENT EVENTS
On January 9, 2020, AMAG announced plans to divest Vyleesi and Intrarosa® (prasterone), both women’s healthcare products. While AMAG indicated that it has received preliminary expressions of interest to acquire or sublicense rights to these products, there have been no public disclosures of any potential licensees of AMAG’s rights to Vyleesi in North America. We licensed all rights to commercialize Vyleesi in North America to AMAG, and subsequent to FDA approval of Vyleesi in June 2019, AMAG launched Vyleesi nationally in September 2019 through select specialty pharmacies with its women’s health sales force. Under the license agreement, AMAG has a contractual obligation to use commercially reasonable efforts to commercialize Vyleesi, and if AMAG materially breaches its obligations, we could have the right to terminate the license agreement and require AMAG to assign and transfer certain Vyleesi rights to Palatin. In the event AMAG assigns its Vyleesi license to a third party, the assignee must expressly agree to be bound by the license agreement between AMAG and Palatin. The Company is currently assessing the potential impact on the Company’s operations caused by this announcement.
 

 
ItemItem 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 notes to the consolidated financial statements filed as part of this report and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2018.2019.
 
The following discussion and analysis contain forward-looking statements within the meaning of the federal securities laws. You are urged to carefully review our description and examples of forward-looking statements included earlier in this Quarterly Report immediately prior to Part I, under the heading “Special Note Regarding Forward-Looking Statements.” Forward-looking statements are subject to risk that could cause actual results to differ materially from those expressed in the forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in this Quarterly Report and our Annual Report on Form 10-K for the year ended June 30, 2019, as well as any of those made in our other reports filed with the SEC. You are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as of the date of this document. We do not intend, and undertake no obligation, to publish revised forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
Critical Accounting Policies and Estimates
 
Except for the adoption of ASCAccounting Standards Codification (“ASC”) Topic 606,842, our significant accounting policies, which are described in the notes to our consolidated financial statements included in this report and in our Annual Report on Form 10-K for the year ended June 30, 2018,2019, have not changed during the six months ended December 31, 2018.2019. We believe that our accounting policies and estimates relating to revenue recognition, accrued expenses and stock-based compensation are the most critical.
 
Overview
 
We are a specialized biopharmaceutical company developing first-in-class medicines based on molecules that modulate the activity of the melanocortin and natriuretic peptide receptor systems. Our product candidates are targeted, receptor-specific therapeutics for the treatment of diseases with significant unmet medical need and commercial potential. Our most advanced product candidate is Vyleesi™, the trade name for bremelanotide, a peptide melanocortin receptor 4 (MC4r) agonist, for the treatment of premenopausal women with acquired, generalized HSDD, which is a type of FSD, defined as low desire with associated distress or interpersonal difficulty.
Vyleesi. Vyleesi is a subcutaneous injectable product for the treatment of HSDD in premenopausal women. Vyleesi is a synthetic peptide analog of the naturally occurring hormone alpha-MSH (melanocyte-stimulating hormone). In March 2018, our exclusive North American licensee for Vyleesi, AMAG, submitted an NDA to the FDA for Vyleesi for the treatment of HSDD in premenopausal women, which was accepted for filing and review by the FDA. In November 2018, AMAG announced that the FDA requested additional data assessing 24-hour ambulatory blood pressure with short term daily use of Vyleesi, which study is ongoing. The Prescription Drug User Fee Act (“PDUFA”) date for completion of FDA review of the Vyleesi NDA was extended by three months to June 23, 2019. We have also licensed rights to Vyleesi to Fosun for the Chinese Territories and Kwangdong for Korea.
Our Phase 3 studies for HSDD in premenopausal women, called the RECONNECT studies, consisted of two double-blind placebo-controlled, randomized parallel group studies comparing the on demand use of 1.75 mg of Vyleesi versus placebo, in each case, delivered via a subcutaneous auto-injector. Each trial consisted of more than 600 patients randomized in a 1:1 ratio to either the treatment arm or placebo with a 24-week evaluation period. In both clinical trials, Vyleesi met the pre-specified co-primary efficacy endpoints of improvement in desire and decrease in distress associated with low sexual desire as measured using validated patient-reported outcome instruments.
After completing the studies, patients had the option to continue in an open-label safety extension study for an additional 52 weeks. Nearly 80% of patients who completed the randomized portion of the study elected to remain in the open-label portion of the study. In the Phase 3 clinical trials, the most frequent adverse events were nausea, flushing, injection site reactions and headache, which were generally mild-to-moderate in intensity and were transient.
We retain worldwide rights for Vyleesi for HSDD and all other indications outside North America, Korea and the Chinese Territories. We are actively seeking potential partners for marketing and commercialization rights for Vyleesi for HSDD outside the licensed territories. However, we may not be able to enter into suitable agreements with potential partners on acceptable terms, if at all.
 
Melanocortin Receptor Systems.System. The melanocortin receptor (“MCr”) system is hormone driven, with effects on food intake, metabolism, sexual function, inflammation and immune system responses. There are five melanocortin receptors, MC1r through MC5r. Modulation of these receptors, through use of receptor-specific agonists, which activate receptor function, or receptor-specific antagonists, which block receptor function, can have significant pharmacological effects.
Our lead product, Vyleesi®, was approved by the U.S. Food and Drug Administration (“FDA”) on June 21, 2019, and is being marketed in North America by AMAG, with product availability in the United States starting in August 2019. Vyleesi is indicated for the treatment of premenopausal women with acquired, generalized HSDD, characterized by low sexual desire that causes marked distress or interpersonal difficulty not due to a co-existing medical or psychiatric condition, relationship problems, or effects of a medication or drug substance.
Our new product development activities focus primarily focus on MC1r agonists, with potential to treat a number of inflammatory and autoimmune diseases such as dry eye disease, which is also known as keratoconjunctivitis sicca, uveitis, diabetic retinopathy and inflammatory bowel disease. An investigational new drug application for PL9643, a peptide we developed, to treat dry eye disease was filed with the FDA in December 2019, with a phase 2 study expected to commence in the first quarter of calendar year 2020. A phase 2 proof-of-concept study of PL8177 in ulcerative colitis patients is anticipated to commence in mid-calendar year 2020. We believe that MC1r agonists, including the MC1r agonist peptides we are developing have broad anti-inflammatory effects and appear to utilize mechanisms engaged by the endogenous melanocortin system in regulation of the immune system and resolution of inflammatory responses. We are also developing peptides that are active at more than one melanocortin receptor, and MC4r peptide and small molecule agonists with potential utility in a number of obesity and metabolic-related disorders, including rare disease and orphan indications.



PL-8177, a selective MC1r agonist peptide, is our lead clinical development candidate for inflammatory bowel diseases, with potential applicability for a number of other diseases. We filed an Investigational New Drug (“IND”) application on PL-8177 in late 2017 and have completed subcutaneous dosing of human subjects in a Phase 1 single and multiple ascending dose clinical safety study, with favorable results issued in a press release dated November 8, 2018. We started a clinical study with oral dosing of PL-8177 in human subjects in the fourth quarter of calendar year 2018, with data expected in the first quarter of calendar year 2019.
PL-8331, a dual MC1r and MC5r peptide agonist, is a preclinical development candidate for treating ocular inflammation. We have initiated IND-enabling preclinical activities with PL-8331, and if results are favorable, anticipate filing an IND and initiating clinical trials for treatment of dry eye disease in the second half of calendar year 2019.
We have initiated preclinical programs with MC4r peptides and orally-active small molecules for treatment of rare genetic metabolic and obesity disorders, and if results are favorable, anticipate selecting a lead clinical development candidate and completing IND-enabling activities in calendar year 2019.
 
Natriuretic Peptide Receptor Systems.System. The natriuretic peptide receptor (“NPR”) system has numerousregulates cardiovascular functions, and therapeutic agents modulating this system may be useful in treatment ofhave potential to treat fibrotic diseases, cardiovascular diseases, including reducing cardiac hypertrophy and fibrosis, heart failure, acute asthma, other pulmonary diseases and hypertension. While the therapeutic potential of modulating this system is well appreciated, development of therapeutic agents has been difficult due, in part, to the short biological half-life of native peptide agonists. We have designed and are developing potential NPR candidate drugs that are selective for one or more different natriuretic peptide receptors, including natriuretic peptide receptor-A (“NPR-A”), natriuretic peptide receptor B (“NPR-B”), and natriuretic peptide receptor C (“NPR-C”).
 
PL-3994 is an NPR-A agonist we developed which has completed Phase 1 clinical safety studies. It has potential utility in treatment of a number of cardiovascular diseases, including genetic and orphan diseases resulting from a deficiency of endogenous active NPR-A. We have ongoing academic collaborations with several institutions with PL-3994.

  
PL-5028, a dual NPR-A and NPR-C agonist we developed, is in preclinical development for cardiovascular diseases, including reducing cardiac hypertrophy and fibrosis. We have ongoing academic collaborations with several institutions related to PL-5028, and seek to enter into a development partnership by the end of calendar year 2019.

The following chart illustrates the status of our drug development programs.programs and Vyleesi, which has been approved by the FDA for the treatment of premenopausal women with acquired, generalized HSDD. 
 


 
Our Strategy
 
Key elements of our business strategy include:
 
UsingMaximizing revenue from Vyleesi by supporting our technologyexisting licensees and expertiselicensing Vyleesi for global areas outside of North America, China and South Korea;
Assembling and maintaining a team to create, develop and commercialize MCr and NPR products in our active drug development programs;addressing unmet medical needs;
 
Entering into strategic alliances and partnerships with pharmaceutical companies to facilitate the development, manufacture, marketing, sale and distribution of product candidates that we are developing;
 
Partially funding our product development programs with the cash flow generated from existing license agreements, as well as any future research, collaboration or license agreements; and
 
Completing development and seeking regulatory approval of certain of our other product candidates.
 
We were incorporated under the laws of the State of Delaware on November 21, 1986 and commenced operations in the biopharmaceutical area in 1996. Our corporate offices are located at 4B Cedar Brook Drive, Cedar Brook Corporate Center, Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We maintain an Internet site at 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 SEC. Our website and the information contained in it or connected to it are not incorporated into this Quarterly Report on Form 10-Q. The reference to our website is an inactive textual reference only.
 
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (www.sec.gov).



Results of Operations
 
Three and Six Months Ended December 31, 20182019 Compared to the Three and Six Months Ended December 31, 2017:2018:
 
Revenue – For the three and six months ended December 31, 2018,2019, we recognized $0$20,610 and $117,989, respectively, in license and contract revenue compared to zero and $34,505 in revenue pursuant to our license agreement with AMAG compared to $10,612,153 and $37,553,661 incontract revenue for the three and six months ended December 31, 20172018, respectively, pursuant to our license agreementsagreement with AMAG and Fosun.AMAG.
On January 8, 2017, we entered into the AMAG License Agreement that provided for $60,000,000 as a one-time initial payment. Pursuant to the terms of and subject to the conditions in the AMAG License Agreement, AMAG reimbursed us $25,000,000, less certain expenses directly paid or to be paid by AMAG, for reasonable, documented, direct out-of-pocket expenses we incurred following the effective date of the License Agreement in connection with development and regulatory activities necessary to file an NDA for Vyleesi for HSDD in the United States. For the three and six months ended December 31, 2017, we recognized $10,612,153 and $32,553,661, respectively, of revenue related to this agreement under the input-based proportional method.
On September 6, 2017, we entered into the Fosun License Agreement for exclusive rights to commercialize Vyleesi in the Chinese Territories, which provided for $5,000,000 as a one-time non-refundable upfront payment, which was recorded as revenue during the six months ended December 31, 2017. Pursuant to the Fosun License Agreement, $500,000 was withheld in accordance with tax withholding requirements in the Chinese Territories and was recorded as an expense during the year ended June 30, 2018.
 
Research and Development – Research and development expenses were $3,257,624 and $6,385,113 for the three and six months ended December 31, 2019, respectively, compared to $2,961,656 and $6,584,347 respectively, for the three and six months ended December 31, 2018, compared to $6,045,884 and $20,208,981, respectivelyrespectively. The increase for the three andmonths ended December 31, 2019 as compared to the three months ended December 31, 2018 is primarily related to an increase in spending on our PL8177 program. The decrease for the six months ended December 31, 2017. The2019 as compared to the six months ended December 31, 2018, is primarily related to a decrease related primarily to completion ofin stock-based compensation offset by an increase in spending on our Vyleesi Phase 3 clinical trial program and ancillary studies necessary to file an NDA for Vyleesi for HSDD in March 2018.PL8177 program.
 
Research and development expenses related to our Vyleesi, PL-3994, PL-8177,PL3994, PL8177, MC1r, MC4r and other preclinical programs were $2,359,516 and $4,657,058 for the three and six months ended December 31, 2019, respectively, compared to $2,174,366 and $4,118,606 respectively, for the three and six months ended December 31, 2018, compared to $4,850,502 and $18,035,608, respectively, for the three and six months ended December 31, 2017. Spending to date has beenrespectively. The increase is primarily related to an increase in spending on our Vyleesi for the treatment of HSDDPL8177 program. The decrease in research and development expenses is mainly attributable to the conclusion of Phase 3 clinical trial and development of Vyleesi for HSDD in March 2018. The amount of such spending and the nature of future development activities are dependent on a number of factors, including primarily the availability of funds to support future development activities, success of our clinical trials and preclinical and discovery programs, and our ability to progress compounds in addition to Vyleesi, PL-8177 and PL-3994 into human clinical trials.
 


The amounts of project spending above exclude general research and development spending, which was $898,108 and $1,728,055 for the three and six months ended December 31, 2019, respectively, compared to $787,290 and $2,465,741 respectively, for the three and six months ended December 31, 2018, compared to $1,195,382 and $2,173,373, respectively for the three and six months ended December 31, 2017.respectively. The fiscal year to date increasedecrease in general research and development spending is primarily attributable to an increasea decrease in stock-based compensation.compensation and salaries.
 
Cumulative spending from inception to December 31, 20182019 was approximately $307,500,000$310,700,000 on our Vyleesi program and approximately $136,300,000$147,900,000 on all of our other programs (which include PL-3994, PL-8177,PL3994, PL8177, other melanocortin receptor agonists, other discovery programs and terminated programs). Due to various risk factors described in our Annual Report on Form 10-K for the year ended June 30, 2018,2019, under “Risk Factors,” including the difficulty in currently estimating the costs and timing of future Phase 1 clinical trials and larger-scale Phase 2 and Phase 3 clinical trials for any product under development, we cannot predict with reasonable certainty when, if ever, a program will advance to the next stage of development or be successfully completed, or when, if ever, related net cash inflows will be generated.
 
General and Administrative – General and administrative expenses, which consist mainly of compensation and related costs, were $2,404,093 and $4,236,535 for the three and six months ended December 31, 2019, respectively, compared to $2,088,585 and $4,129,147 respectively, for the three and six months ended December 31, 2018, compared to $1,625,189respectively. The increase in general and $3,169,764, respectively,administrative expenses for the three and six months ended December 31, 2017. The increase in general and administrative expenses2019 is primarily attributable to an increasethe final payment made in employee-related expenses recognized duringconnection with the three and six months ended December 31, 2018.Greenhill agreement offset by a decrease in stock-based compensation.
 
Other Income (Expense) – Total other income (expense), net was $397,480 and $759,083 for the three and six months ended December 31, 2019, respectively, compared with $7,871 and $(45,417), respectively, for the three and six months ended December 31, 2018, compared with $(310,007) and $(714,958), respectively, for the three and six months ended December 31 2017. For the three months ended December 31, 2018, we recognized $100,169 of investment income offset by $(92,298) of interest expense primarily related to our venture debt and for the six months ended December 31, 2018 we recognized $(299,169) of interest expense offset by $253,752 investment income.respectively. For the three and six months ended December 31, 20172019, we recognized $(391,363)$399,982 and $(848,040),$770,636, respectively, of investment income offset by $2,502 and $11,553, respectively, of interest expense primarily related to our venture debt offset by $81,356 and $133,082, respectively, of investment income. Interest expense has decreased as we pay down our venture debt.
Income Taxes – No income tax expense was recorded for For the three and six months ended December 31, 2018. Income tax benefit was $399,1202018, we recognized $100,169 and $173,865,$253,752, respectively, for the threeof investment income offset by $92,298 and six months ended December 31, 2017$299,169, respectively, of interest expense primarily related to the foreign withholding tax requirementsour venture debt. Interest income has increased as a result of the Fosun License Agreement.Company’s increased cash position. Interest expense has decreased as we have repaid our venture debt as of July 2019.
 
Liquidity and Capital Resources
 
Since inception, we have generally incurred net operating losses, primarily related to spending on our research and development programs. We have financed our net operating losses primarily through debt and equity financings and amounts received under collaborative and license agreements.
 


Our product candidates are at various stages of development and will require significant further research, development and testing and some may never be successfully developed or commercialized. We may experience uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to:
 
the development and testing of products in animals and humans;
 
product approval or clearance;
 
regulatory compliance;
 
good manufacturing practices (“GMP”) compliance;
 
intellectual property rights;
 
product introduction;
 
marketing, sales and competition; and
 
obtaining sufficient capital.
 
Failure to enter into or successfully perform under collaboration agreements and obtain timely regulatory approval for our product candidates and indications would impact our ability to increase revenues and could make it more difficult to attract investment capital for funding our operations. Any of these possibilities could materially and adversely affect our operations and require us to curtail or cease certain programs.
 


During the six months ended December 31, 2018,2019, net cash provided by operating activities was $49,914,993 compared to cash used in operating activities wasoperations of $11,028,963 compared to $1,558,456 for the six months ended December 31, 2017.2018. The increasedifference in cash used inprovided by operations for the six months ended December 31, 20182019 compared with cash used in operating activities for the six months ended December 31, 20172018 was the result of lower cash receipts relatingprimarily related to the timing of the receipt of payments related to revenue recorded for our license agreement with AMAG, License Agreement.including payments related to the FDA’s approval of Vylessi.
 
During the six months ended December 31, 2018,2019, net cash provided byused in investing activities was $0$62,880 compared to $240,500$0 for the six months ended December 31, 2017.2018. The decreasechange in cash providedused by investing activities for the six months ended December 31, 2018 compared to the six months ended December 31,2017 was theis a result of proceeds from the maturitypurchase of investmentsproperty and equipment during the six months ended December 31, 2017.2019.
 
During the six months ended December 31, 2019, net cash used in financing activities was $1,903,055, which consisted of payment on notes payable obligations of $832,851, repurchase and cancellation of outstanding warrants of $2,547,466 and payment of withholding taxes related to restricted stock units of $104,236 offset by net proceeds from the sale of common stock of $1,581,498 in our “at-the-market” offering program. During the six months ended December 31, 2018, net cash used in financing activities was $2,313,184, which consisted of payment on notes payable obligations of $4,500,000, andpayment of withholding taxes related to restricted stock units of $65,992 offset by net proceeds from the sale of common stock of $2,252,808 in our “at-the-market” offering program. During the six months ended December 31, 2017, net cash used in financing activities was $3,924,320, which consisted of payments on notes payable obligations of $4,000,000, withholding taxes related to restricted stock units of $24,380, and capital lease obligations of $14,324, offset by proceeds from the exercise of warrants of $114,384.
 
We have incurred cumulative negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. Continued operations are dependent upon our ability to generate future income from existing licenses, to complete equity or debt financing activities and to enter into additional licensing or collaboration arrangements. As of December 31, 2018,2019, our cash and cash equivalents were $24,658,024$91,459,480 and our current liabilities were $4,528,542.$1,374,940.
 
We intend to utilize existing capital resources for general corporate purposes and working capital, including Vyleesi, preclinical and clinical development of our MC1r and MC4r peptide programs and natriuretic peptide program, and development of other portfolio products.
 
We believe that our existing capital resources together with proceeds received from sales of common stock in our “at-the-market” program (if any), will be adequate to fund our planned operations through at least March 31, 2020.calendar year 2021. We will need additional funding to complete required clinical trials for our product candidates and development programs other than Vyleesi and, if those clinical trials are successful (which we cannot predict), to complete submission of required regulatory applications to the FDA.
 
We expect to incur significant expenses as we continue our development of natriuretic peptide and MC1r products. These expenses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital. The time required to reach sustained profitability is highly uncertain, and we do not know whether we will be able to achieve profitability on a sustained basis, if at all.
 

Off-Balance Sheet Arrangements
 
None.
   
ItemItem 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Not required to be provided by smaller reporting companies.
 
ItemItem 4.  Controls and Procedures.
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.2019. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. 
 

 
PART II – OTHER INFORMATION
 
ItemItem 1. Legal Proceedings.
 
We may be involved, from time to time, in various claims and legal proceedings arising in the ordinary course of our business. We are not currently a party to any claim or legal proceeding.
 
ItemItem 1A. Risk Factors.
 
This report and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. These statements are not guarantees of future performance, and they involve certain risks, uncertainties and assumptions that are difficult to predict. You should carefully consider the risks and uncertainties facing our business.
 
ThereThe following information should be read in conjunction with the risk factors and uncertainties disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended June 30, 2019, filed with the SEC on September 12, 2019. Except as disclosed below, there have been no material changes to our risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended June 30, 2018.2019.
 
ItemThe announcement by AMAG of its intent to divest itself of its women’s healthcare products, including Vyleesi, creates significant uncertainty regarding marketing, sales and distribution of Vyleesi in the United States.
On January 9, 2020, AMAG announced plans to divest Vyleesi and Intrarosa® (prasterone), both women’s healthcare products. While AMAG indicated that it has received preliminary expressions of interest to acquire or sublicense rights to these products, there have been no public disclosures of any potential licensees of AMAG’s rights to Vyleesi in North America. In 2017, we licensed all rights to commercialize Vyleesi in North America to AMAG, and following the U.S. Food and Drug Administration approval of Vyleesi in June 2019, AMAG launched Vyleesi nationally in September 2019 through select specialty pharmacies with its women’s health sales force. Under the license agreement, AMAG has a contractual obligation to use commercially reasonable efforts to commercialize Vyleesi, and if AMAG materially breaches its obligations, we could have the right to terminate the license agreement and require AMAG to assign and transfer certain Vyleesi rights to Palatin. In the event AMAG assigns its Vyleesi license to a third party, the assignee must expressly agree to be bound by the license agreement between AMAG and Palatin.
If AMAG fails to assign or license rights to Vyleesi to a third party with the resources and capability to effectively market Vyleesi, we could experience significant delays or an inability to successfully commercialize Vyleesi. Even if AMAG assigns or licenses rights to Vyleesi to a third party with the resources and capability to effectively market Vyleesi, there may be significant delays in the successful commercialization of Vyleesi for HSDD in North America, and we may be unable to realize the potential value of the license agreement in a timely manner. If we obtain all rights to Vyleesi from AMAG, as a result of termination of the license agreement for breach or otherwise, we will need to establish sales and marketing, contract manufacturing, distribution, pharmacovigilance and related capabilities, which will be expensive and time consuming. If we are unable to establish adequate capabilities to make and sell Vyleesi, whether independently or with third parties, we may not be able to generate product revenue and our business would suffer.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
 
Item 3.  Defaults Upon Senior Securities.
None.
Item 4.  Mine Safety Disclosures.
Not applicable.
Item 5.  Other Information.
None.On September 13, 2019, our Board of Directors approved a plan to offer to purchase and terminate outstanding Series F, Series H and Series J common stock purchase warrants through privately negotiated transactions. The purchase and termination program has no time limit and may be suspended for periods or discontinued at any time.
 

 
ItemThe following table provides information with respect to purchase and termination of common stock purchase warrants by the Company during the fiscal quarter ended December 31, 2019.
Fiscal Month Period
 
Total Number of Warrant Shares Purchased (1)
 
 
Average Price per Warrant Share
 
 
Total Number of Warrant Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
 
Maximum Number of Warrant Shares that May Yet be Purchased Under Announced Plans or Programs (3)
 
October 1, 2019 through October 31, 2019
  3,197,819 
 $0.38 
  - 
  14,508,924 
November 1, 2019 through November 30, 2019
  - 
  - 
  - 
  - 
December 1, 2019 through December 31, 2019
  - 
  - 
  - 
  - 
Total
  3,197,819 
 $0.38 
  - 
  14,508,924 

(1)       
During the fiscal quarter ended December 31, 2019, we purchased common stock purchase warrants exercisable for an aggregate of 3,197,819 shares of our common stock consisting of 297,352 Series F warrants, 992,387 Series H warrants and 1,908,080 Series J warrants in privately negotiated transactions.

(2)       
None.

(3)       
As of December 31, 2019, the maximum number of common stock purchase warrants that may yet be purchased under the plan is 14,508,924.
Except as discussed above with respect to repurchase of certain warranty we have not and do not currently intend to retire or repurchase any of our capital securities other than providing our employees with the option to withhold shares to satisfy tax withholding amounts due from employees upon the vesting of restricted stock units in connection with our 2011 Stock Incentive Plan. As indicated in thetable below, 87,179 shares were withheld during the three months ended December 31, 2019 at the direction of the employees as permitted under the 2011 Stock Incentive Plan in order to pay the minimum amount of tax liability owed by the employee from the vesting of those units:

Fiscal Month Period
 
Total Number of Shares Purchased (1)
 
 
Weighted Average Price per Share
 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
 
Maximum Number of Shares that May Yet be Purchased Under Announced Plans or Programs
 
October 1, 2019 through October 31, 2019
  87,179 
 $1.15 
  - 
  - 
November 1, 2019 through November 30, 2019
  - 
  - 
  - 
  - 
December 1, 2019 through December 31, 2019
  - 
  - 
  - 
  - 
Total
  87,179 
 $1.15 
  - 
  - 
(1) Consists solely of 87,179 shares that were withheld to satisfy tax withholding amounts due from employees upon the vesting of previously issued restricted stock units.

Item 3.  Defaults Upon Senior Securities.
None.
Item 4.  Mine Safety Disclosures.
Not applicable.
Item 5.  Other Information.
None.

Item 6.  Exhibits.
 
Exhibits filed or furnished with this report:
 
Exhibit Number
Description
Filed Herewith
Form
Filing Date
SEC File No.
Certification of Chief Executive Officer.
X
 
 
Certification of Chief Financial Officer.
X
 
 
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
 
 
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
 
 
101.INS
XBRL Instance Document.
X
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
X
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
X
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
X
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
X
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
X
 
 
 
 

 
SIGNATURESSIGNATURES
 
Pursuant to the requirements 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. 
  (Registrant) 
   
 
 
  /s/  /s/ Carl Spana 
Date: February 11, 201910, 2020 
Carl Spana, Ph.D.
President and
Chief Executive Officer (Principal
Executive Officer)
 
    
    
    
  /s/  /s/ Stephen T. Wills 
Date: February 11, 201910, 2020 
Stephen T. Wills, CPA, MST
Executive Vice President, Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
 
 
 

 
 
 
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