U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-4078884 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 4C Cedar Brook Drive | |
| Cranbury, New Jersey | 08512 |
| (Address of principal executive offices) | (Zip Code) |
Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 15, 2003, 41,816,651 shares of the issuer's common stock, par value $.01 per share, were outstanding.
PALATIN TECHNOLOGIES, INC.
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements (unaudited) | |
| CONSOLIDATED BALANCE SHEETS -- As of March 31, 2003
and June 30, 2002 |
Page 3 |
|
| CONSOLIDATED STATEMENTS OF OPERATIONS --
For the Three and Nine Months Ended March 31, 2003 and March 31, 2002 and the Period from January 28, 1986 (inception) through March 31, 2003 |
Page 4 |
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS --
For the Nine Months Ended March 31, 2003 and March 31, 2002 and the Period from January 28, 1986 (inception) through March 31, 2003 |
Page 5 |
|
| Notes to Consolidated Financial Statements | Page 6 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition
and Results of Operations |
Page 12 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | Page 18 |
| Item 4. | Controls and Procedures | Page 18 |
PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings | Page 19 |
| Item 2. | Changes in Securities and Use of Proceeds | Page 19 |
| Item 3. | Defaults Upon Senior Securities | Page 19 |
| Item 4. | Submission of Matters to a Vote of Security Holders | Page 19 |
| Item 5. | Other Information | Page 19 |
| Item 6. | Exhibits and Reports on Form 8-K | Page 19 |
| Signatures | Page 21 | |
2
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(unaudited)
March 31, 2003 June 30, 2002
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,391,839 $ 7,944,264
Available for sale investments 3,108,902 1,160,773
Prepaid expenses and other 649,939 349,883
-------------- --------------
Total current assets 26,150,680 9,454,920
Property and equipment, net 3,426,713 2,416,499
Restricted cash 428,075 433,844
Other 59,577 52,953
-------------- --------------
$ 30,065,045 $ 12,358,216
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 145,382 $ -
Accounts payable 1,385,495 1,579,336
Accrued expenses 2,933,446 661,883
Accrued compensation - 236,200
Accrued litigation settlement - 400,000
Deferred revenue 490,131 794,018
-------------- --------------
Total current liabilities 4,954,454 3,671,437
-------------- --------------
Long term debt 114,097 -
-------------- --------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock of $.01 par value - authorized 10,000,000 shares;
Series A Convertible; Issued and outstanding 24,867 and 26,192
shares as of March 31, 2003 and June 30, 2002, respectively; 249 262
Series C Convertible; 700,000 shares issued and outstanding
as of March 31, 2003 and June 30, 2002 respectively; 7,000 7,000
Common stock of $.01 par value - authorized 75,000,000 shares;
Issued and outstanding 41,816,653 and 17,423,076 shares as of
March 31, 2003 and June 30, 2002, respectively 418,167 174,231
Additional paid-in capital 108,943,698 78,792,240
Deferred compensation (35,070) (53,942)
Accumulated other comprehensive income 8,700 10,604
Deficit accumulated during development stage (84,346,250) (70,243,616)
-------------- --------------
Total stockholders' equity 24,996,494 8,686,779
-------------- --------------
$ 30,065,045 $ 12,358,216
============== ==============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
3
Inception
(January 28,
1986)
Three Months Ended March 31, Nine Months Ended March 31, through
2003 2002 2003 2002 March 31, 2003
------------- ------------- -------------- -------------- --------------
REVENUES:
Grants and contracts $ 181,417 $ 57,772 $ 641,417 $ 57,772 $ 10,265,511
License fees 148,878 41,667 545,887 125,001 2,647,276
Other - - - - 318,917
------------- ------------- -------------- -------------- --------------
Total revenues 330,295 99,439 1,187,304 182,773 13,231,704
------------- ------------- -------------- -------------- --------------
OPERATING EXPENSES:
Research and development 4,744,379 3,537,765 12,015,910 8,889,591 66,989,223
General and administrative 1,280,305 1,123,885 3,651,738 3,039,047 31,032,996
Net intangibles write down - - - - 259,334
------------- ------------- -------------- -------------- --------------
Total operating expenses 6,024,684 4,661,650 15,667,648 11,928,638 98,281,553
------------- ------------- -------------- -------------- --------------
OTHER INCOME (EXPENSES):
Interest income 50,120 64,527 147,079 246,587 2,600,658
Interest expense (7,310) (1,018) (14,462) (2,374) (1,973,603)
Merger costs - - - - (525,000)
------------- ------------- -------------- -------------- --------------
Total other income (expenses) 42,810 63,509 132,617 244,213 102,055
------------- ------------- -------------- -------------- --------------
Loss before income taxes and
cumulative effect of accounting
change (5,651,579) (4,498,702) (14,347,727) (11,501,652) (84,947,794)
Income tax benefit - 230,400 245,093 392,410 962,655
------------- ------------- -------------- -------------- --------------
Loss before cumulative effect of
accounting change (5,651,579) (4,268,302) (14,102,634) (11,109,242) (83,985,139)
Cumulative effect of accounting change - - - - (361,111)
------------- ------------- -------------- -------------- --------------
NET LOSS (5,651,579) (4,268,302) (14,102,634) (11,109,242) (84,346,250)
PREFERRED STOCK DIVIDEND (87,339) - (203,138) (285,725) (3,511,765)
------------- ------------- -------------- -------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (5,738,918) $ (4,268,302) $ (14,305,772) $ (11,394,967) $ (87,858,015)
============= ============= ============== ============== ==============
Basic and diluted net loss per common share $ (0.19) $ (0.26) $ (0.58) $ (0.85)
============= ============= ============== ==============
Weighted average number of common shares
outstanding used in computing basic
and diluted net loss per common share 30,162,510 16,140,790 24,532,567 13,431,685
============= ============= ============== ==============
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
4
Inception
(January 28, 1986)
Nine Months Ended March 31, Through
2003 2002 March 31, 2003
-------------- ------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,102,634) $(11,109,242) $(84,346,250) $
Adjustments to reconcile net loss to net cash
used for operating activities:
Cumulative effect of accounting change - - 361,111
Depreciation and amortization 434,502 865,754 2,965,232
License fee - - 500,000
Interest expense on note payable - - 72,691
Accrued interest on long-term financing - - 796,038
Accrued interest on short-term financing - - 7,936
Intangibles and equipment write down - - 278,318
Common stock and notes payable issued for expenses - - 751,038
Settlement with consultant - - (28,731)
Acceleration of options previously granted - - 1,505,315
Stock based compensation 18,872 40,431 4,416,653
Deferred revenue (303,887) (125,001) 129,020
Changes in certain operating assets and
liabilities:
Prepaid expenses and other (308,418) (160,448) (1,459,771)
Accounts payable (193,841) 412,603 1,385,495
Accrued expenses and other 665,114 23,657 1,502,030
-------------- ------------------ ---------------------
Net cash used for operating activities (13,790,292) (10,052,246) (71,163,875)
-------------- ------------------ ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales/(Purchases) of investments, net (1,950,034) - (3,122,041)
Purchases of property and equipment (1,019,289) (956,814) (5,827,024)
-------------- ------------------ ---------------------
Net cash provided/(used) for investing
activities (2,969,323) (956,814) (8,949,065)
-------------- ------------------ ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party - - 302,000
Payments on notes payable, related party - - (302,000)
Proceeds from senior bridge notes payable - - 1,850,000
Payments on senior bridge notes payable - - (1,850,000)
Payments on capital lease obligations (158,441) - (158,441)
Proceeds from notes payable and long-term debt - - 3,951,327
Payments on notes payable and long-term debt - - (1,951,327)
Proceeds from common stock, stock option
and warrant issuances, net 31,365,631 10,204,608 76,454,561
Proceeds from preferred stock, net - - 24,210,326
Purchase of treasury stock - - (1,667)
-------------- ------------------ ---------------------
Net cash provided by financing activities 31,207,190 10,204,608 102,504,779
-------------- ------------------ ---------------------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 14,447,575 (804,452) 22,391,839
CASH AND CASH EQUIVALENTS, beginning of period 7,944,264 11,456,424 -
-------------- ------------------ ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 22,391,839 $ 10,651,972 $ 22,391,839 $
============== ================== =====================
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
5
Nature of Business — Palatin Technologies, Inc. (“Palatin” or the “Company”) is a development-stage biopharmaceutical company. The Company does not currently offer any products for sale. The Company is currently conducting clinical investigations with its lead drug, PT-141, for the treatment of male and female sexual dysfunction, and is developing additional therapeutic compounds, discovered using its enabling peptide platform technology, MIDAS™. Additionally, Palatin is developing a product for infection imaging, LeuTech®, based on a proprietary radiolabeled monoclonal antibody.
Business Risk and Liquidity — As shown in the accompanying financial statements, the Company incurred a substantial net loss of $14,102,634 for the nine months ended March 31, 2003 and has a deficit accumulated during development stage of $84,346,250, cash and cash equivalents of $22,391,839 and available for sale investments of $3,108,902 as of March 31, 2003. The Company anticipates incurring additional losses in the future as it continues development of LeuTech for diagnosis of appendicitis and expands clinical trials for other indications of LeuTech and continues research and development of PT-141 and its MIDAS technology. To achieve profitability, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all.
In March 2003, the Company concluded a private placement of its common stock and warrants, which yielded gross proceeds of approximately $19.1 million (see Note 6).
The Company has incurred negative cash flows from operations since its inception. The Company has expended and expects to continue to expend in the future, substantial funds to complete its planned product development efforts. The Company expects that its existing capital resources will be adequate to fund the Company’s projected operations through the fiscal year ending June 30, 2004, based on current expenditure levels. No assurance can be given that the Company will not consume a significant amount of its available resources before that time. Management plans to continue to refine its operations, control expenses, evaluate alternative methods to conduct its business, and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Should appropriate sources of financing not be available, management would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that the Company’s financing efforts will be successful. If adequate funds are not available, our financial condition and results of operations will be materially and adversely affected.
6
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnote disclosures required to be presented for complete financial statements. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position as of March 31, 2003 and the results of operations and cash flows for the three and nine month periods ended March 31, 2003 and 2002 and for the period from inception (January 28, 1986) to March 31, 2003. The results of operations for the nine month period ended March 31, 2003 may not necessarily be indicative of the results of operations expected for the full year, except that the Company expects to incur a significant loss for the fiscal year ending June 30, 2003.
The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K, filed with the Securities and Exchange Commission, which includes financial statements as of June 30, 2002 and 2001 and for each of the three fiscal years in the period ended June 30, 2002.
Principles of Consolidation — The consolidated financial statements include the accounts of Palatin and its wholly-owned inactive subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates — The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Statements of Cash Flows — Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a maturity of less than three months. As of March 31, 2003 and June 30, 2002, approximately $428,000 and $434,000, respectively, of cash was restricted to secure letters of credit for security deposits on leases.
Investments — The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115 “Accounting For Certain Investments in Debt and Equity Securities.” The Company classifies such investments as available for sale investments and as such all investments are recorded at fair value. The investments consist principally of corporate debt securities with a minimum credit rating of A2 and mutual funds with average durations ranging from one to three years and credit ratings of AAA. Unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in other comprehensive income and as a separate component of stockholders’ equity until realized. Interest on securities classified as available for sale is included in interest income. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs.
7
The following is a summary of available for sale investments as of March 31, 2003:
Cost Gross Gross Fair Value
Unrealized Unrealized
Gains Losses
Corporate debt securities $ 100,000 $ 2,101 $ - $ 102,101
Mutual funds 3,000,202 6,599 - 3,006,801
-------------- ----------------- ----------------- ----------------
Total $ 3,100,202 $ 8,700 $ - $ 3,108,902
============== ================= ================= ================
The following is a summary of available for sale investments as of June 30, 2002:
Cost Gross Gross Fair Value
Unrealized Unrealized
Gains Losses
Government securities $ 50,000 $ 672 $ - $ 50,672
Corporate debt securities 100,000 860 - 100,860
Mutual funds 1,000,169 9,072 - 1,009,241
--------------- ------------------ ----------------- ----------------
Total $ 1,150,169 $ 10,604 $ - $ 1,160,773
=============== ================== ================= ================
Property and Equipment — Property and equipment consist of office and laboratory equipment, office furniture and leasehold improvements. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of five years for equipment, seven years for office furniture and over the term of the lease for leasehold improvements. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized.
Impairment of Long-Lived Assets — The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, management evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold including quoted market prices, if available, or the present value of the estimated future discounted cash flows based on reasonable and supportable assumptions.
Revenue Recognition — Grant and contract revenues are recognized as the Company provides the services stipulated in the underlying grants and/or contracts based on the time and materials incurred. License revenues are recognized when the license fee is received and the Company has no future performance obligations.
8
The Company recognized $137,417 in grant revenue pursuant to the Small Business Technology Transfer programs of the Department of Health and Human Services for the three and nine months ended March 31, 2003.
The Company recognized $44,000 and $504,000, respectively, for the three and nine months ended March 31, 2003 in contract revenue related to the attainment of certain milestones and other shared development costs of LeuTech pursuant to our collaboration agreement, as amended, with Mallinckrodt, Inc. a division of Tyco International, Ltd. described below.
In August 1999, the Company entered into a strategic collaboration agreement with Mallinckrodt, Inc. to jointly develop and market one of its proposed products. Under the terms of the agreement, the Company granted a worldwide license, excluding Europe, for sales, marketing and distribution and received a nonrefundable licensing fee of $500,000. The licensing fee was recognized as revenue in the period that such nonrefundable fees were received.
In fiscal 2001, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”) which requires up front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time non-cash charge of $361,111, which reflects the deferral of the $500,000 up-front license fee received from Mallinckrodt in August 1999. Under SAB 101, this payment has been recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the three and nine months ended March 31, 2003, the Company recognized $10,418 and $38,199, respectively, in license revenue that was included in the cumulative effect adjustment as of July 1, 2000.
In May 2002, the Company entered into an agreement with Mallinckrodt to amend the original agreement. Under the terms of this amended agreement, Mallinckrodt committed, among other things, up to an additional $3.2 million, subject to certain conditions and attainment of certain milestones, to cover half of the Company’s estimated expenses associated with completing the FDA review process of LeuTech. Pursuant to this amendment, $800,000 was received upon execution of this agreement. Under SAB 101, this payment has been recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the three and nine months ended March 31, 2003, the Company recognized $138,460 and $507,688, respectively in license revenue under this agreement.
Research and Development Costs — The costs of research and development activities are charged to expense as incurred.
Stock Options — The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, as amended in SFAS No. 148, “Accounting for Stock-Based Compensation” (“SFAS 148”), the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123.
9
Had compensation cost for the Company’s common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the Company’s net income and net income per share would have been reduced to the following pro forma amounts:
For the three months ended For the nine months ended
March 31, March 31,
2003 2002 2003 2002
Net loss attributable to common stockholders:
As reported $ (5,738,918) $(4,268,302) $(14,305,772) $(11,394,967)
Impact of total stock-based compensation
expense determined under fair-value
based method (244,804) (395,667) (1,000,769) (1,198,018)
------------- ------------ ------------- -------------
Pro forma net loss attributable to common
stockholders $ (5,983,722) $(4,663,969) $(15,306,541) $(12,592,985)
============= ============ ============= =============
Basic and diluted net loss per common share:
As reported $ (0.19) $ (0.26) $ (0.58) $ (0.85)
============= ============ ============= =============
Pro forma $ (0.20) $ (0.29) $ (0.62) $ (0.94)
============= ============ ============= =============
Income Taxes — The Company and its subsidiaries file consolidated federal and combined state income tax returns. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes.
The Company provides for deferred income taxes relating to temporary differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109.
In accordance with SFAS 109, the Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management’s estimates and analysis, which includes tax laws which may limit the Company’s ability to utilize its tax loss carry-forwards.
Net Loss per Common Share — The Company applies Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). SFAS 128 requires dual presentation of basic and diluted earnings per share (“EPS”) for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing the income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into Common stock, such as stock options. For the three and nine months ended March 31, 2003 and 2002, there were no dilutive effects of stock options or warrants as the Company incurred a net loss in each period. Options and warrants to purchase 15,305,190 shares of Common Stock at prices ranging from $0.01 to $21.70 per share were outstanding at March 31, 2003.
Fair Value of Financial Instruments — Statement of Financial Accounting Standards No. 107 “Disclosure about Fair Value of Financial Instruments” (“SFAS 107”), requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
10
Accrued expenses consist of the following:
March 31, 2003 June 30, 2002
--------------------------------
Product development costs $ 988,800 $ 208,000
Private placement offering costs 970,250 -
Other 974,396 453,883
------------------------------
$ 2,933,446 $ 661,883
==============================
Leases — The Company currently leases two facilities in New Jersey under non-cancelable operating leases and is in the process of terminating the lease for the Company’s former corporate offices located in Princeton. In July 2002, the Company moved into a new facility in Cranbury, New Jersey that combined both the research and development facility in Edison, New Jersey and corporate offices in Princeton, New Jersey.
As of March 31, 2003, the Company had accrued approximately $100,000 related to the estimated additional costs to terminate the Princeton lease.
Capital Leases – In September 2002, the Company acquired $417,920 of laboratory equipment under capital leases. The term of these leases range from 24 to 60 months. As of March 31, 2003, $259,479 remains outstanding pursuant to these lease obligations.
License Agreements — The Company has three license agreements that require minimum annual payments. The cost to maintain these license agreements for the fiscal year ending June 30, 2003 amounts to $250,000, of which $187,500 was expensed during the nine months ended March 31, 2003 under these agreements.
In March 2003, the Company concluded a private placement of its common stock and warrants, which yielded gross proceeds of approximately $19.1 million. Investors, consisting of domestic financial institutions and accredited investors purchased 13,433,096 shares of common stock and 3,358,275 warrants at a market value of approximately $1.42 per share. For every four shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.77 per share. Based on the sales price of the common stock and warrants in this private placement, the conversion price of the Company’s outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a non-cash, deemed dividend of $87,339 has been reflected in the Company’s consolidated statement of operations during the three months ended March 31, 2003. Included in accrued expenses, as of March 31, 2003, are $970,250 of private placement offering costs. These accrued expenses were paid in April 2003.
11
In November 2002, the Company concluded a private placement of its common stock and warrants, which yielded gross proceeds of $11.5 million. Investors, consisting of domestic and European financial institutions and other domestic accredited investors purchased approximately 9,373,940 shares of common stock and 1,874,788 warrants at a market value of approximately $1.23 per share. For every five shares of common stock purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.54 per share. Based on the sales price of the common stock and warrants in this private placement, the conversion price of the Company’s outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a deemed dividend of $98,340 has been reflected in the Company’s consolidated statement of operations.
In July 2002, the Company received gross proceeds of $1.8 million pursuant to the second tranche of the Spring 2002 private placement of common stock and warrants. Investors, consisting of domestic and European financial institutions and other domestic accredited investors purchased 1,545,063 shares of common stock and 309,012 warrants at a market value of approximately $1.17 per share. For every five shares of common stock purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.46 per share. Based on the sales price of the common stock and warrants in this private placement, the conversion price of the Company’s outstanding Series A Preferred Stock and the exercise price of certain outstanding warrants have been adjusted downward in accordance with the existing terms of those securities. As a result, a deemed dividend of $17,459 has been reflected in the Company’s consolidated statement of operations
In December 2002, the Company sold New Jersey net operating losses pursuant to the New Jersey Economic Development Authority’s Tax Transfer Program. As a result, the Company received $245,093, which is reflected as an income tax benefit in the statement of operations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes filed as part of this report.
We make forward-looking statements in this report. Sometimes these statements contain words such as “anticipates,” “plans,” “intends,” “expects” and similar expressions to identify forward-looking statements. These statements are not guarantees of our future performance. Our business involves known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from what we say in this report. We describe a number of these factors in our annual report on Form 10-K for the year ended June 30, 2002. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We may not revise these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
12
We expect to incur additional losses in the future as we continue development of LeuTech for diagnosis of appendicitis and expand clinical trials for other indications of LeuTech and continue research and development of PT-141 and our MIDAS technology. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of when we incur expenses.
Our significant accounting policies are described in Note 3 to the consolidated financial statements included in this report. We believe our most critical accounting policy is revenue recognition. Revenue from corporate collaborations and licensing agreements consists of up-front fees, research and development funding, and milestone payments. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate our performance period as the initial research term. The actual performance period may vary. We will adjust the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when we have adequate evidence that the milestone is deemed to be substantive.
We are a development-stage biopharmaceutical company committed to the discovery, development and commercialization of novel therapeutics. We do not currently offer any products for sale. We are concentrating our efforts on the following:
| PT-141, is a new, nasally administered peptide for the treatment of male and female sexual dysfunction. Our research suggests this mechanism may involve the central nervous system, which, is a different mechanism from currently marketed male erectile dysfunction (MED) therapies. We believe PT-141 has the potential to treat both male and female sexual dysfunction (FSD) and that it may offer significant benefits in terms of safety and efficacy over currently marketed products. We have completed various Phase 1 safety studies and Phase 2A efficacy studies in male subjects and patients and a Phase 1 study in female subjects. We are planning to start a placebo-controlled Phase 2B “at home” efficacy study in male patients in the first half of calendar year 2003. |
| LeuTech®, is a product in development that is to be used to rapidly image and diagnose sites of infection. When injected into the blood stream, LeuTech binds to white blood cells present at the infection site, labeling these cells with a radioactive tracer. As a result, physicians can rapidly image and detect an infection using a gamma camera, a common piece of hospital equipment that records radioactivity. The FDA Medical Imaging Drugs Advisory Committee unanimously voted that LeuTech is safe and effective for the diagnosis of equivocal appendicitis. The FDA reviewed the biologics license application (BLA) and determined that the efficacy and safety data are complete, yet additional manufacturing and process validation data were required prior to final approval. We are working to resolve the outstanding issues and we intend to commence the filing of an amendment to the BLA for equivocal appendicitis in the first half of calendar year 2003. We are testing LeuTech for detection of other infections, including osteomyelitis (infection deep inside a bone), fever of unknown origin, post-surgical abscess, inflammatory bowel disease, and pulmonary imaging, which are now in Phase 2 studies. |
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| MIDAS™ (Metal Ion-induced Distinctive Array of Structures), is our proprietary technology platform that allows us to routinely design and synthesize novel pharmaceuticals that mimic the activity of peptides, but which we believe offer significant advantages to conventional protein or peptide-based drugs. MIDAS uses metal ions to fix the three-dimensional shape of peptides, forming conformationally rigid molecules that remain folded specifically in their active forms. These MIDAS molecules are simple to synthesize, stable chemically and proteolytically, and have the potential to be orally bioavailable. Moreover, unlike most other drug discovery approaches, we believe that MIDAS is unique in that it can be used to generate either receptor antagonists (drugs that block a particular metabolic response) or agonists (drugs that promote a particular metabolic response). In addition, MIDAS molecules are information-rich and provide data on structure-activity relationships that can be used to design traditional small molecule drugs. |
| We have initiated a MIDAS program to discover and develop compounds that interact with the melanocortin (MC) family of receptors. MC receptors regulate a diverse array of functions such as pigmentation, adrenocortical function, immune modulation, sexual arousal and energy maintenance. Based on this effort, we have identified several MIDAS molecules that are now in preclinical development as potential treatments for obesity, sexual dysfunction and inflammation. We expect to file an Investigational New Drug Application (“IND”) for at least one of these preclinical compounds and initiate clinical testing within the next 12 months. |
| Generation of commercially viable protein and peptide drug molecules with desirable properties continues to be arduous, expensive and labor-intensive. We believe that our MIDAS technology simplifies the development process by eliminating many of the inherent limitations associated with peptides and proteins. We intend to seek to enter into strategic alliances or collaborative arrangements to provide additional financial and technical resources for MIDAS development. |
Three and Nine Month Periods Ended March 31, 2003 Compared to Three and Nine Month Periods Ended March 31, 2002.
Grants and Contracts – For the three and nine months ended March 31, 2003, we recognized $44,000 and $504,000, respectively, in contract revenue related to the shared development costs of LeuTech pursuant to our collaboration agreement with Mallinckrodt, Inc., a division of Tyco International, Ltd. compared to nothing for the three and nine months ended March 31, 2002. The increase in contract revenue was attributable to additional shared development costs of LeuTech pursuant to the amended agreement. (See Notes to Consolidated Financial Statements). For the three and nine months ended March 31, 2003, we recorded $137,417 in grant revenue pursuant to the Small Business Technology Transfer programs of the Department of Health and Human Services compared to $57,772 for both the three and nine months ended March 31, 2002.
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License Fees and Royalties – During the fiscal year ended June 30, 2001, we adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”), which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. The cumulative effect of adopting SAB 101 resulted in a one-time, non-cash charge of $361,111 in fiscal 2001, which reflects the deferral portion of an up-front license fee received from Mallinkrodt, Inc. related to licensing of LeuTech recognized in the fiscal year ended June 30, 2000. Previously we had recognized up-front license fees when they were received and we had no obligations to return the fees under any circumstances. Under SAB 101 these payments are recorded as deferred revenue to be recognized over the remaining term of the related agreements. For the three and nine months ended March 31, 2003, we recorded $148,878 and $545,887, respectively, of license revenue and for the three and nine months ended March 31, 2002, we recorded $41,667 and $125,001, respectively, of license revenue. Of the license revenue recorded for the three and nine months ended March 31, 2003, $10,418 and $38,199 was included in the cumulative effect adjustment as of July 1, 2000 and $138,460 and $507,688, respectively, was recorded as a result of the initial $800,000 payment received from Mallinckrodt pursuant to our amended collaboration agreement in May 2002. We recorded $41,667 and $125,001, respectively, of license revenue for the three and nine months ended March 31, 2002 that was included in the cumulative effect adjustment as of July 1, 2000.
Research and development – Research and development expenses (“R&D”) increased to $4,744,379 and $12,015,910, respectively, for the three and nine months ended March 31, 2003 compared to $3,537,765 and $8,889,591, respectively, for the three and nine months ended March 31, 2002. The increase in R&D is primarily related to our increased development efforts and expanding clinical trials of PT-141 and LeuTech. Our R&D efforts, and their respective allocated costs, are currently concentrated on the following:
| • | PT-141, to date we have incurred approximately $18.3 million in allocated R&D expenses. For the three and nine months ended March 31, 2003, $1,660,432 and $5,205,918, respectively, of R&D expense was allocated to PT-141 compared to $1,672,376 and $4,290,922, respectively, for the three and nine months ended March 31, 2002. We anticipate incurring approximately $15.0 million over the next 12 months as we progress with our clinical trials and product development programs. |
| • | LeuTech, to date we have incurred approximately $39.9 million in allocated R&D expenses. For the three and nine months ended March 31, 2003, $2,324,689 and $4,697,395, respectively, of R&D expense was allocated to LeuTech compared to $1,172,321 and $3,003,248, respectively, for the three and nine months ended March 31, 2002. Currently, we are in the process of resolving outstanding manufacturing issues with the FDA and we intend to commence the filing of an amendment to the Biologics License Application for equivocal appendicitis in the first half of calendar year 2003. We are also currently conducting various Phase 2 studies with respect to other infection indications. We anticipate incurring approximately $3.0 million in additional R&D expenses during calendar year 2003. |
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| • | MIDAS, to date we have incurred approximately $8.8 million in allocated R&D expenses. For the three and nine months ended March 31, 2003, $759,258 and $2,112,597, respectively, of R&D expense was allocated to MIDAS compared to $693,068 and $1,595,421, respectively, for the three and nine months ended March 31, 2002. Based on this effort, we have identified several molecules that are now in preclinical development as potential treatments for obesity, sexual dysfunction and inflammation. We expect to file an IND with the FDA for at least one of these preclinical compounds and initiate clinical testing within the next 12 months. |
General and administrative — General and administrative expenses increased to $1,280,305 and $3,651,738, respectively, for the three and nine month periods ended March 31, 2003 compared to $1,123,885 and $3,039,047, respectively, for the three and nine month periods ended March 31, 2002. The increase in general and administrative expenses is primarily attributable to an increase in salaries and related personnel expenses and the costs associated with the consolidation and move of our previous locations in New Jersey to Cranbury, New Jersey.
Interest income — Interest income decreased to $50,120 and $147,079, respectively, for the three and nine month periods ended March 31, 2003 compared to $64,527 and $246,587, respectively, for the three and nine month periods ended March 31, 2002. The decrease in interest income is attributable to lower amounts of cash, cash equivalents and investments available to be invested and the decrease in interest rates these deposits earn.
Net loss — Net loss increased to $5,651,579 and $14,102,634, respectively, for the three and nine month periods ended March 31, 2003 compared to $4,268,302 and $11,109,242, respectively, for the three and nine month periods ended March 31, 2002. The increase was attributable to the increase in expenses explained above.
Since inception, we have incurred net operating losses. As of March 31, 2003, we had a deficit accumulated during development stage of $84,346,250. We have financed our net operating losses through March 31, 2003 by a series of debt and equity financings. At March 31, 2003, we had cash and cash equivalents of $22,391,839 and available for sale investments of $3,108,902.
For the nine months ended March 31, 2003, the net increase in cash was $14,447,575. Net cash used for operating activities was $13,790,292, net cash used by investing activities was $2,969,323 and net cash provided by financing activities was $31,207,190.
Our product candidates are at various stages of research and development and may never be successfully developed or commercialized. We will need regulatory approval to market LeuTech for diagnosis of appendicitis. PT-141, MIDAS and LeuTech for other indications will require significant further research, development and testing. We may experience uncertainties, delays, difficulties and expenses commonly experienced by early stage bio-pharmaceutical companies, which may include unanticipated problems and additional costs relating to:
| • | the development and testing of products in animals and humans; |
| • | product approval or clearance; |
| • | regulatory compliance; |
| • | good manufacturing practices; |
| • | product introduction; and |
| • | marketing and competition. |
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Failure to obtain regulatory approval of LeuTech for diagnosis of appendicitis, or delays in obtaining regulatory approval of LeuTech, would eliminate or delay our potential revenues from sales of LeuTech for diagnosis of appendicitis. This could make it more difficult to attract investment capital for funding our other research and development projects. Any of these possibilities could materially and adversely affect our operations.
In March 2003, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of approximately $19.1 million. Investors, consisting of domestic financial institutions and accredited investors, purchased 13,433,096 shares of common stock and 3,358,275 warrants at a market value of approximately $1.42 per share. For every four shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.77 per share. Included in accrued expenses, as of March 31, 2003, are $970,250 of private placement offering costs. These accrued expenses were paid in April 2003. The net proceeds of approximately $18 million will be used primarily for general corporate purposes, including the development and clinical trials of new products based on certain of our proprietary technologies.
On November 15, 2002, we concluded a private placement of our common stock and warrants, which yielded gross proceeds of $11.5 million. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased 9,373,940 shares of common stock and 1,874,788 warrants at a market value of approximately $1.23 per share. For every five shares purchased, the investors also received a five-year warrant. Each warrant entitles the purchaser to purchase one share of common stock at an exercise price of approximately $1.54 per share. The net proceeds of approximately $10.7 million are being used primarily for general corporate purposes, including the development and clinical trials of new products based on certain of our proprietary technologies.
In July 2002, we received gross proceeds of $1.8 million pursuant to the second tranche of the Spring 2002 private placement of common stock and warrants. Investors, consisting of domestic and European financial institutions and other domestic accredited investors, purchased approximately 1.5 million shares of common stock shares at approximately $1.17 per share. For every five shares purchased, the investors also received a five-year warrant to purchase one share of common stock at an exercise price of approximately $1.46 per share. The net proceeds of approximately $1.7 million were used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies.
On July 17, 2002, we moved into our new leased facility of approximately 28,000 square feet in Cranbury, New Jersey that combines both the research and development facility formerly located in Edison, New Jersey and the corporate offices formerly located in Princeton, New Jersey. Our initial cash outlay related to the move was approximately $1.6 million. Minimum annual future lease payments escalate from approximately $920,000 per year to $1,550,000 per year. The lease will expire in July 2012.
We have three license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2003 — $250,000, 2004 — $250,000, 2005 — $200,000, 2006 — $200,000 and 2007 — $200,000.
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We are and expect to continue searching for certain products and technologies to license or acquire, now or in the future. If we are successful in identifying a product or technology for acquisition, we may require substantial funds for such an acquisition and subsequent development or commercialization. We do not know whether any acquisition will be consummated in the future.
We have incurred negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. We expect that our existing capital resources will be adequate to fund our projected operations through fiscal year ending June 30, 2004, based on current expenditure levels. No assurance can be given that we will not consume a significant amount of our available resources before that time. We plan to continue to refine our operations, control expenses, evaluate alternative methods to conduct our business and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Should appropriate sources of financing not be available, we would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that our financing efforts will be successful. If adequate funds are not available, our financial condition and results of operations will be materially and adversely affected, and we may be forced to cease operations.
We anticipate incurring additional losses over at least the next several years, and we expect our losses to increase as we expand our research and development activities relating to LeuTech, PT-141 and our MIDAS technology. To achieve profitability, we, alone or with others, must successfully develop and commercialize our technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and we do not know whether we will be able to achieve profitability on a sustained basis, if at all.
Interest Rate Risk. Our exposure to market risk related to changes in interest rates relates primarily to our investment portfolio. We invest in instruments that meet high credit quality standards, and we limit the amount of credit exposure as to any one issue, issuer and type of investments.
As of March 31, 2003, our cash, cash equivalents and available for sale investments totaled $25,500,741, most of which were short term investments having an original maturity of less than three months. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short-term fluctuations in interest rates would materially affect the value of our securities.
Evaluation of Disclosure Controls and Procedures. Within the 90 days before we filed this report, our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based on their evaluation, they concluded that our disclosure controls and procedures were adequate and effective to ensure that other persons within Palatin and its consolidated subsidiaries informed those officers in a timely manner of material information relating to Palatin and its subsidiaries, particularly during the period in which we were preparing this report.
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Changes in Internal Controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses in our internal controls. Accordingly, we did not require or undertake any corrective actions.
None.
In March 2003, we concluded a private placement of common stock and warrants in which we sold 13,433,096 shares of our $.01 par value common stock at a market value of approximately $1.42 per unit. For every four shares purchased, the investors also received a five-year warrant which entitles the holder to purchase one share of common stock at an exercise price of approximately $1.77 per share. The gross proceeds were approximately $19.1 million and the net proceeds were approximately $18 million. We made the private placement solely to domestic financial institutions and accredited investors pursuant to Regulation D under the Securities Act of 1933. The investors represented to us that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants bear restrictive legends. In connection with the private placement, we paid placement fees totaling $985,250.
None.
None.
None.
(a) Exhibits filed with this report:
| 99.1 Section 302 Certification of Chief Executive Officer | |
| 99.2 Section 302 Certification of Chief Financial Officer | |
| 99.3 Section 906 Certifications |
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(b) Reports on Form 8-K
| • | On February 14, 2003, we filed a current report on Form 8-K reporting an Item 9 Regulation FD disclosure regarding a certification pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Palatin Technologies, Inc. (Registrant) |
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| Date: May 15, 2003 |
/s/ Carl Spana Carl Spana, Ph.D. President and Chief Executive Officer |
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| Date: May 15, 2003 |
/s/ Stephen T. Wills Stephen T. Wills Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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