UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2002 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number: 0-21134 |
Paligent Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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04-2893483 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. EmployerIdentification No.) |
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369 Lexington Avenue, New York, New York |
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10017 |
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(Address of principal executive offices) |
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(zip code) |
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(212) 453-3111 |
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(Registrant’s telephone number, including area code) |
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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 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 ý NO o
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding as of August 14, 2002 |
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Common Stock, $0.01 par value |
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32,490,948 |
PALIGENT INC.
INDEX
2
PALIGENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, 2002 |
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December 31, 2001 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
560,495 |
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$ |
1,298,266 |
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Due from related party |
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— |
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137,091 |
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Prepaid expenses and other current assets |
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30,795 |
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9,147 |
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Total current assets |
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591,290 |
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1,444,504 |
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Property and equipment, net |
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95,565 |
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110,954 |
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Other assets |
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91,118 |
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94,809 |
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Total assets |
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$ |
777,973 |
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$ |
1,650,267 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
51,165 |
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$ |
33,069 |
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Accrued compensation |
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8,598 |
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7,549 |
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Accrued professional services |
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91,477 |
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139,000 |
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Accrued patent and research costs |
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— |
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285,859 |
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Current portion of capital lease obligations |
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22,301 |
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22,365 |
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Current portion of deferred rent |
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7,089 |
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4,155 |
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Total current liabilities |
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180,630 |
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491,997 |
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Deferred rent and other liabilities |
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48,298 |
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52,341 |
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Capital lease obligations |
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32,791 |
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43,511 |
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Stockholders’ equity: |
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Common stock, $.01 par value; 75,000,000 shares authorized; 32,490,948 shares issued and outstanding at June 30, 2002 and December 31, 2001 |
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324,910 |
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324,910 |
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Additional paid-in capital |
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154,634,974 |
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154,634,974 |
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Accumulated deficit |
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(154,443,630 |
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(153,897,466 |
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Total stockholders’ equity |
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516,254 |
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1,062,418 |
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Total liabilities and stockholders’ equity |
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$ |
777,973 |
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$ |
1,650,267 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
PALIGENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2002 |
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2001 |
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2002 |
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2001 |
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Revenue: |
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Interest income |
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$ |
2,359 |
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$ |
20,091 |
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$ |
6,170 |
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$ |
53,170 |
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Costs and expenses: |
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General and administrative |
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279,359 |
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412,229 |
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552,334 |
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777,532 |
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Loss from operations |
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(277,000 |
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(392,138 |
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(546,164 |
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(724,362 |
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Other expense |
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— |
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124 |
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— |
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13,125 |
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Net loss |
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$ |
(277,000 |
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$ |
(392,262 |
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$ |
(546,164 |
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$ |
(737,487 |
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Basic and diluted net loss per common share |
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$ |
(0.01 |
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$ |
(0.01 |
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$ |
(0.02 |
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$ |
(0.02 |
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Weighted-average number of common shares outstanding – basic and diluted |
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32,490,948 |
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32,490,948 |
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32,490,948 |
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32,490,948 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PALIGENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Six months ended June 30, |
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2002 |
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2001 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(546,164 |
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$ |
(737,487 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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21,007 |
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43,274 |
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Loss on sale of property and equipment |
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— |
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13,125 |
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Deferred rent |
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(1,109 |
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5,811 |
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Changes in operating assets and liabilities: |
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Due from related party |
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137,091 |
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(81,147 |
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Prepaid expenses and other current assets |
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(21,648 |
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77,786 |
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Other assets |
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3,691 |
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— |
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Accounts payable |
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18,095 |
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(90,735 |
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Accrued patent and research costs |
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(285,859 |
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— |
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Accrued expenses and other current liabilities |
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(46,474 |
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(373,532 |
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Other liabilities |
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— |
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20,000 |
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Net cash used in operating activities |
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(721,369 |
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(1,122,905 |
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Cash flows from investing activities: |
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Capital expenditures |
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(5,618 |
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— |
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Proceeds from sales of assets |
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— |
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97,100 |
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Net cash (used in) provided by investing activities |
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(5,618 |
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97,100 |
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Cash flows from financing activities: |
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Principal payments on capital lease obligations |
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(10,784 |
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(50,442 |
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Net cash used in financing activities |
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(10,784 |
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(50,442 |
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Net change in cash and cash equivalents |
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(737,771 |
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(1,076,247 |
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Cash and cash equivalents at beginning of period |
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1,298,266 |
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2,971,690 |
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Cash and cash equivalents at end of period |
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$ |
560,495 |
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$ |
1,895,443 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
8,065 |
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$ |
10,063 |
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The accompanying notes are an integral part of the condensed consolidated financial statements
5
PALIGENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
Interim Financial Statements
The condensed consolidated financial statements included herein have been prepared by Paligent Inc. (“Paligent” or the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position of the Company at June 30, 2002 and the results of its operations and its cash flows for the interim periods ended June 30, 2002 and 2001. The condensed consolidated balance sheet as of December 31, 2001 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting standards for interim financial statements and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2001. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the fiscal year or any other interim period.
The Company has sustained net losses and negative cash flows from operations since its inception. The Company is currently evaluating strategic alternatives, including potential business investments and related financing. If the Company is unable to generate significant revenue from acquired operations, obtain additional revenue from its out-licensing arrangements in connection with the existing licenses of the Company's biotechnology assets, secure additional financing for its present operations or secure sufficient financing for operations resulting from acquisition or merger, the Company will experience a cash shortage in the first quarter of 2003, the effect of which could result in the discontinuance of operations.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2 – BASIC AND DILUTED NET LOSS PER SHARE
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing (loss) income applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period plus the additional weighted average common equivalent shares during the period. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be anti-dilutive. Common equivalent shares result from the assumed exercises of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding shares of common stock (the “treasury stock method”).
For the three and six months ended June 30, 2002 and 2001, the Company had stock options and warrants outstanding that were anti-dilutive. These securities could potentially dilute basic EPS in the future and were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented. Consequently, there were no differences between basic and diluted EPS for these periods.
6
NOTE 3 – RELATED PARTIES
On February 28, 2002, the Company’s subsidiary, Procept, Inc. (“Procept”), and the United States Public Health Service (“PHS”) executed an exclusive Patent License Agreement (the “New License Agreement”), which superceded the license agreement dated February 6, 1998 between Procept and The Penn State Research Foundation (“PSRF”) (the “Original License Agreement”). The New License Agreement affirms Procept’s worldwide patent rights to O6-Benzylguanine (“O6-BG”) and related compounds, and acknowledges Procept’s sublicense agreement with AOI Pharmaceuticals, Inc. (“AOI”) dated October 13, 2000 (the “Sublicense Agreement”), as of the date executed by Procept and AOI. At the time of executing the New License Agreement, Procept paid to PHS a one-time license issue royalty fee of $86,000 for outstanding patent prosecution costs accrued at December 31, 2001. In connection with the execution of the New License Agreement, Procept, together with the National Cancer Institute (“NCI”) and AOI, also executed an amendment to the Cooperative Research and Development Agreement (“CRADA”), originally executed with the NCI in August 1998 (the “Amended CRADA”), pursuant to which AOI replaced Procept as Collaborator (i.e., the research and development partner). Under terms of the Amended CRADA, AOI assumed direct responsibility for all remaining research and payment obligations, effective as of February 28, 2002. As part of the Amended CRADA, Procept made a final payment of $200,000 to NCI for production and clinical distribution costs relating to O6-BG, which costs were accrued at December 31, 2001. Prior to executing the Amended CRADA, AOI was obligated to reimburse Procept for costs that Procept paid, pursuant to, and subsequent to the effective date of, the Sublicense Agreement. Shortly thereafter, Procept and AOI agreed that AOI would defer its reimbursement to Procept for costs that Procept had paid relating to its maintenance of patent rights and CRADA obligations until the execution of the New License Agreement and the Amended CRADA. As of December 31, 2001, such reimbursable costs amounted to $137,000. On February 28, 2002, AOI paid to the Company the total balance of deferred reimbursable costs. Mr. Michael S. Weiss, Chairman of the Board of the Company from July 1997 to May 7, 2002, is the Chairman of the Board of AOI. In addition, the principal stockholder of the Company is a stockholder of an affiliate of AOI.
In May 2002, Procept executed an amendment to the New License Agreement (the “Amendment”). The Amendment clarified language in the New License Agreement pertaining to future sublicensing agreements, in the event that such agreements were to be executed. In addition, the Company, together with PHS, PHRF, AOI and the University of Chicago (“UC”), also executed, in May 2002, a Comprehensive Release Agreement (the “Release Agreement”). The Release Agreement provides for the irrevocable and absolute release of the Company by PHS, PSRF and UC from any and all claims or obligations arising out of, or related to the Original License Agreement. The Release Agreement was made part of the New License Agreement.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Note Regarding Forward-Looking Statements
Statements in this Form 10-Q that are not statements or descriptions of historical facts are “forward-looking” statements under Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 and are subject to numerous risks and uncertainties. These forward-looking statements can generally be identified by the use of such terms as “anticipate,” “believe,” “continue,” “expect,” “may,” “should,” or similar variations or the negative thereof. These forward looking statements involve risks and uncertainties, many of which are out of the Company’s control and which may affect its future business plans. Factors that may affect the Company’s future business plans include: (i) its ability to identify, complete and integrate an acquisition of an operating business; (ii) the viability of the Company’s business strategy in connection with an acquisition and its ability to implement such strategy; (iii) its ability to secure financing for its operations; and (iv) its ability to generate revenues sufficient to meet its operating costs. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. In addition, the Company’s business, operations and financial condition are subject to the risks, uncertainties and assumptions that are described in the Company’s reports and statements filed from time to time with the Securities and Exchange Commission. Should one or more of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those discussed herein. The descriptions of the risks, uncertainties and assumptions to which the Company’s business, operations and financial condition are subject are as of the date of this report. The Company assumes no obligation to update any such forward-looking statements.
Overview
Paligent Inc., together with its subsidiaries (collectively, “Paligent” or the “Company”), is presently seeking business opportunities to maximize value for its shareholders. In 2001, the Company significantly reduced its operating costs following the disposition of its Internet business and the out-licensing of its remaining biotechnology assets in 2000. All employees were released, except for the Company’s chief executive officer and an executive assistant, and the Company subleased a substantial portion of its office facility and related equipment. The Company is continuing to evaluate various strategic alternatives, including acquisitions of new operating businesses and technologies as well as potential merger opportunities.
From its inception in 1985 through 1999, Paligent operated as a biotechnology company engaged in the development and commercialization of novel drugs with a product portfolio focused on infectious diseases and oncology. During 1999, the Company’s principal efforts were devoted to drug development, human clinical trials and partnership commercialization focusing on two biotechnology compounds, PRO 2000 Gel and O6-Benzylguanine (“O6-BG”). Beginning in fiscal 2000, the Company pursued an Internet strategy that focused on promoting and facilitating transactions between consumers, funeral industry service providers and financing institutions. During fiscal 2000, the Company also closed its research facilities and out-licensed PRO 2000 Gel and O6-BG. Under the terms of the out-licensing agreements, the Company retains certain future rights, including the receipt of payments based on the achievement of certain milestones as well as royalties from commercial sales, if any. After a sustained period of deterioration in the Internet and technology sectors and related capital markets, the Company decided, in the fourth quarter of 2000, to discontinue the pursuit of its Internet strategy. Shortly thereafter, the Company entered into an agreement to sell all of its Web-based assets and Internet operations and ceased its Internet activities.
8
Results of Operations
From inception through June 30, 2002, the Company has generated no revenues from product sales or services and has not been profitable. As the Company evaluates various strategic alternatives in its quest for new growth areas that will maximize value to existing stockholders, the Company expects to incur additional losses.
During the three months ended June 30, 2002, the Company reported a net loss of $277,000, or $0.01 per share, as compared to a net loss of $392,000, or $0.01 per share, in the comparable period in 2001. For the six months ended June 30, 2002, the Company reported a net loss of $546,000, or $0.02 per share, as compared to a net loss of 737,000, or $0.02 per share, for the similar period in 2001.
The Company’s total revenue, which is derived from interest income, was $2,000 and $6,000, respectively, for the three and six months ended June 30, 2002, as compared to $20,000 and $53,000, respectively, for the comparable three and six month periods in 2001. The reduction in interest income is attributable to decreases in interest rates and average cash balances available for investment during the respective periods.
Total operating expenses were $279,000 for the quarter ended June 30, 2002 as compared to $412,000 for the comparable quarter in 2001, a decrease of $133,000. The Company’s total operating expenses decreased by $225,000, to $552,000, for the six months ended June 30, 2002, from $777,000 for the comparable period of 2001. The decrease in general and administrative costs in the three and six month periods ended June 30, 2002 is primarily related to the Company’s subleasing of a substantial portion of its office space on July 1, 2001.
During the six months ended June 30, 2001, the Company recorded a loss of $13,000 from the sale of office equipment. This loss was recorded to other expense. There were no comparable items of gain or loss in the current period.
Liquidity and Capital Resources
At June 30, 2002, the Company’s aggregate cash and cash equivalents were $560,000, a net decrease of $738,000 from the end of the prior year. This decrease is primarily attributable to the $721,000 of cash used to fund operations, including $149,000 of net patent and research costs outstanding as of December 31, 2001 (i.e., total expenditures of $286,000 less the receipt of $137,000 from the collection of the related party receivable).
Since disposing of its Internet assets and related operations in December 2000, the Company has significantly reduced its operating costs. At its present rate of spending, the Company expects that its existing funds and interest income will be sufficient to fund the Company’s current operations into the first quarter of 2003. While the Company evaluates strategic alternatives, including potential business investments and related financing, the Company's rate of spending could vary from its current estimate. No assurance can be given that the Company will be able to complete a business investment or that such financing will be available to the Company. If the Company is unable to generate significant revenue from acquired operations, obtain additional revenue from its out-licensing arrangements in connection with the existing licenses of the Company’s biotechnology assets, secure additional financing for its present operations or secure sufficient financing for operations resulting from acquisition or merger, the Company will experience a cash shortage in the first quarter 2003, the effect of which could result in the discontinuance of operations. If additional funds are raised by issuing equity securities, further dilution to existing stockholders will result and future investors may be granted rights superior to those of existing stockholders.
The Company’s expectations regarding its rate of spending and the sufficiency of its cash resources over future periods are forward-looking statements. The rate of spending and sufficiency of such resources will be affected by numerous factors including the rate of planned and unplanned expenditures by the Company and the timing of payments received, if any, under the sublicenses of the biotechnology assets.
9
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
In January 1997, the Securities and Exchange Commission issued Financial Reporting Release 48 (“FRR 48”), “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” FRR 48 required disclosure of qualitative and quantitative information about market risk inherent in derivative financial instruments, other financial instruments, and derivative commodity instruments beyond those already required under generally accepted accounting principles. The Company is not a party to any of the instruments discussed in FRR 48 and considers its market risk to be minimal.
10
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.16 First Amendment to Exclusive License Agreement dated May 17, 2002 between Procept, Inc. and the United States Public Health Service. Filed herewith.
10.17 Comprehensive Release Agreement dated May 29, 2002 between Procept, Inc., the United States Public Health Service, The Penn State Research Foundation, the University of Chicago and AOI Pharmaceuticals, Inc. Filed herewith.
99.1 Certification of CEO and principal financial officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(b) Reports on Form 8-K.
None.
11
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.
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PALIGENT INC. |
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(Registrant) |
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Date: August 14, 2002 |
by: |
/s/ Salvatore A. Bucci |
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Salvatore A. Bucci |
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President and Chief Executive Officer |
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12