-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsiSyeKlLhgD1t5kroITbk9SlLOpUZt94EN0EEityQ0KG65TmU5vKjXF/WM6nxOz SR+OXTGd1X3/LFX4HAj00Q== 0001088020-99-000017.txt : 19991117 0001088020-99-000017.hdr.sgml : 19991117 ACCESSION NUMBER: 0001088020-99-000017 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALATIN TECHNOLOGIES INC CENTRAL INDEX KEY: 0000911216 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 954078884 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22686 FILM NUMBER: 99756861 BUSINESS ADDRESS: STREET 1: 214 CARNEGIE CENTER STREET 2: SUITE 100 CITY: PRINCETON STATE: NJ ZIP: 08540 BUSINESS PHONE: 6095201911 MAIL ADDRESS: STREET 1: 214 CARNEGIE CENTER STREET 2: SUITE 100 CITY: PRINCETON STATE: NJ ZIP: 08540 FORMER COMPANY: FORMER CONFORMED NAME: INTERFILM INC DATE OF NAME CHANGE: 19930825 10QSB 1 QUARTERLY REPORT FOR THREE MONTHS ENDED 9/30/99 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number 0-22686 PALATIN TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) Delaware 95-4078884 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 214 Carnegie Center - Suite 100 Princeton, New Jersey 08540 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (609) 520-1911 Check whether the Issuer (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 Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 12, 1999, 7,243,784 shares of the Issuer's common stock, par value $.01 per share, were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] ================================================================================ PALATIN TECHNOLOGIES, INC. Table of Contents PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) CONSOLIDATED BALANCE SHEETS -- As of September 30, 1999 and June 30, 1999 ............................................... Page 3 CONSOLIDATED STATEMENTS OF OPERATIONS -- For the Three Months Ended September 30, 1999 and September 30, 1998 and the Period from January 28, 1986 (Commencement of Operations) through September 30, 1999.......... Page 4 CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the Three Months Ended September 30, 1999 and September 30, 1998 and the Period From January 28, 1986 (Commencement of Operations) through September 30, 1999.......... Page 5 Notes to Consolidated Financial Statements......................... Page 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. Page 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................ Page 14 Item 2. Changes in Securities and Use of Proceeds.................... Page 14 Item 3. Defaults Upon Senior Securities.............................. Page 14 Item 4. Submission of Matters to a Vote of Security Holders.......... Page 14 Item 5. Other Information............................................ Page 14 Item 6. Exhibits and Reports on Form 8-K............................. Page 14 Signatures.............................................................. Page 15 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Balance Sheets (unaudited) September 30, 1999 June 30, 1999 ---------------------- ---------------------- ASSETS Current assets: Cash and cash equivalents $ 10,725,204 $ 2,333,801 Accounts receivable 1,250,000 - Short term investments 857,457 454,827 Prepaid expenses and other 78,321 147,780 ---------------------- ---------------------- Total current assets 12,910,982 2,936,408 Fixed assets, net of accumulated depreciation and amortization of $733,030 and $676,362, respectively 1,405,750 1,457,605 Restricted cash 185,000 185,000 Other 62,530 144,032 ---------------------- ---------------------- $ 14,564,262 $ 4,723,045 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,326,766 $ 1,116,894 Accrued expenses 1,285,709 1,264,893 ---------------------- ---------------------- Total current liabilities 2,612,475 2,381,787 ---------------------- ---------------------- Long term debt - 2,000,000 ---------------------- ---------------------- Commitments and contingencies (Note 4) Stockholders' equity: Preferred stock of $.01 par value - authorized 10,000,000 shares; Series A Convertible; 38,936 and 42,484 shares issued and outstanding as of September 30, 1999 and June 30, 1999, respectively; 389 425 Series B Convertible; 12,875 and 13,575 shares issued and outstanding as of September 30, 1999 and June 30, 1999 respectively; 129 136 Series C Convertible; 700,000 shares issued and outstanding as of September 30, 1999; 7,000 - Common stock of $.01 par value - authorized 75,000,000 shares; Issued and outstanding 7,240,329 and 7,137,595 shares as of September 30, 1999 and June 30, 1999, respectively; 72,404 71,376 Additional paid-in capital 48,616,207 35,610,243 Unamortized deferred compensation - (18,558) Deficit accumulated during development stage (36,744,342) (35,322,364) ---------------------- ---------------------- Total stockholders' equity 11,951,787 341,258 ---------------------- ---------------------- $ 14,564,262 $ 4,723,045 ====================== ====================== The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
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PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Operations (unaudited) Inception (January 28, 1986) Three Months Ended September 30, through 1999 1998 September 30, 1999 ------------------ ------------------ ---------------------- REVENUES: Grants and contracts $ 1,250,000 $ - $ 4,554,629 License fees and royalties 500,000 - 1,734,296 Other - - 318,917 ------------------ ------------------ ---------------------- Total revenues 1,750,000 - 6,607,842 ------------------ ------------------ ---------------------- OPERATING EXPENSES: Research and development 2,448,623 2,137,591 26,086,292 General and administrative 769,434 846,290 15,554,435 Net intangibles write down - - 259,334 ------------------ ------------------ ---------------------- Total operating expenses 3,218,057 2,983,881 41,900,061 ------------------ ------------------ ---------------------- OTHER INCOME (EXPENSES): Interest income 71,315 60,216 1,019,715 Interest expense (25,236) (33,999) (1,946,838) Merger costs - - (525,000) ------------------ ------------------ ---------------------- Total other income/(expenses) 46,079 26,217 (1,452,123) ------------------ ------------------ ---------------------- NET LOSS (1,421,978) (2,957,664) (36,744,342) PREFERRED STOCK DIVIDEND - - (3,121,525) ------------------ ------------------ ---------------------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,421,978) $ (2,957,664) $ (39,865,867) ================== ================== ====================== Basic and diluted net loss per common share $ (0.20) $ (0.66) $ (29.69) ================== ================== ====================== Weighted average number of common shares outstanding used in computing basic and diluted net loss per common share 7,203,601 4,502,090 1,342,745 ================== ================== ====================== The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
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PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Cash Flows (unaudited) Inception (January 28, 1986) Three Months Ended September 30, Through 1999 1998 September 30, 1999 ----------------- ------------------- ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,421,978) $ (2,957,664) $ (36,744,342) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 59,170 57,757 896,449 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 - 751,038 expenses - Settlement with consultant - - (28,731) Amortization of deferred compensation 18,558 254,881 3,444,926 Changes in certain operating assets and liabilities: Accounts receivable (1,250,000) - (1,250,000) Prepaid expenses and other 69,459 (104,578) (78,322) Other 79,000 (8,856) (630,700) Accounts payable 209,872 452,205 1,325,866 Accrued expenses and other 20,816 (451,999) 825,442 ----------------- ------------------- ------------------ Net cash used for operating activities (2,215,103) (2,758,254) (29,833,391) ----------------- ------------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short term investments (402,630) - (857,457) Purchases of property and equipment (4,812) (15,825) (2,194,120) ----------------- ------------------- ------------------ Net cash used for investing activities (407,442) (15,825) (3,051,577) ----------------- ------------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable, related party - - 302,000 Payments on notes payable, related party - - (302,000) Proceeds from senior bridge notes payable - - 1,850,000 Payments on senior bridge notes payable - - (1,850,000) Proceeds from notes payable and long term debt - - 3,951,327 Payments on notes payable and long term debt - (241,707) (1,951,327) Proceeds from Common stock, stock option and warrant issuances, net 13,948 2,209,324 17,401,513 Proceeds from Preferred stock, net 11,000,000 - 24,210,326 Purchase of treasury stock - - (1,667) ----------------- ------------------- ------------------ Net cash provided by financing activities 11,013,948 1,967,617 43,610,172 ----------------- ------------------- ------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,391,403 (806,462) 10,725,204 CASH AND CASH EQUIVALENTS, beginning of period 2,333,801 4,511,187 - ----------------- ------------------- ------------------ CASH AND CASH EQUIVALENTS, end of period $ 10,725,204 $ 3,704,725 $ 10,725,204 ================= =================== ================== The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
5 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Notes to Consolidated Financial Statements (Unaudited) (1) Organization Activities: Nature of Business -- Palatin Technologies, Inc. ("Palatin" or the "Company") is a development-stage, pharmaceutical company headquartered in Princeton, New Jersey, with its research facility in Edison, New Jersey. The Company is dedicated to developing and commercializing products and technologies for diagnostic imaging and ethical drug development utilizing peptide, monoclonal antibody, and radiopharmaceutical technologies. The Company is concentrating on the following products and technologies: (i) LeuTech(TM), an infection and inflammation imaging product ("LeuTech"), (ii) PT-14, a peptide hormone product for the treatment of sexual dysfunction ("PT-14"), and (iii) Metal Ion-induced Distinctive Array of Structures ("MIDAS(TM)") metallopeptide technology ("MIDAS technology"). Business Risk and Liquidity - As shown in the accompanying financial statements, the Company incurred substantial net losses of $1,421,978 for the three months ended September 30, 1999 and has a deficit accumulated during development stage of $36,744,342. The Company anticipates incurring additional losses over at least the next several years, and such losses are expected to increase as the Company expands its research and development activities relating to various technologies. 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. On August 16, 1999, the Company entered into a Strategic Collaboration Agreement with Mallinckrodt, Inc., a large international healthcare products company, to jointly develop and market LeuTech. Under the terms of the agreement, Mallinckrodt paid a $500,000 license fee, which the Company recognized as revenue in the three months ended September 30, 1999, and purchased 700,000 restricted shares of our Series C Convertible Preferred Stock for $13,000,000. Upon the occurrence of the earlier of 5 years or a change of control in Palatin (as defined in the agreement), the stock is convertible into 700,000 shares of Common Stock with certain registration rights and anti-dilution rights . In addition, Mallinckrodt agreed to make milestone payments totaling $10,000,000 upon FDA approval of the first LeuTech indication and attainment of sales goals following product launch, reimburse us for 50% of all ongoing LeuTech development costs and pay us a transfer price on each LeuTech product unit and a royalty on Mallinckrodt's future net sales of LeuTech. After offsetting our $2,000,000 subordinated note to Mallinckrodt including interest of $46,849, we received net proceeds of $11,453,151 on August 17, 1999. During the three months ended September 30, 1999, the Company recognized $1,250,000 as contract revenue related to the shared development costs of LeuTech. 6 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. Management believes that through one or a combination of such factors the Company will be able to obtain adequate financing to fund its operations through calendar year 2000, based on current expenditure levels. There can be no assurance that the Company's efforts will be successful. (2) Basis of Presentation: The accompanying financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). Certain information and footnote disclosures normally included in the Company's audited annual financial statements have been condensed or omitted in the Company's interim financial statements. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 1999 and the results of operations and cash flows for the three month period ended September 30, 1999 and 1998 and for the period from inception (January 28, 1986) to September 30, 1999. The results of operations for the three month period ended September 30, 1999 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 ended June 30, 2000. The accompanying financial statements and the related notes should be read in conjunction with the Company's audited financial statements for the fiscal years ended June 30, 1999 and 1998 filed with the Company's Form 10-KSB for the year ended June 30, 1999. (3) Summary of Significant Accounting Policies: Principles of Consolidation -- The consolidated financial statements include the accounts of Palatin and its wholly-owned inactive subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Short-Term 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 of certificates of deposit. As of September 30, 1999 the unrealized gain on investments was immaterial. Fixed Assets -- Fixed assets consist of equipment, office furniture and leasehold improvements. Fixed assets are stated at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of 5 years for equipment, 7 years for office furniture and over the term of 7 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 complies with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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, the Company 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. Revenue Recognition -- Grant and contract revenues are recognized as services are provided. License and royalty revenues are recognized when earned. Research and Development Costs -- The costs of research and development activities are expensed as incurred. Stock Options and Warrants -- Warrants and the majority of common stock options have been issued at exercise prices greater than, or equal to, their fair market value at the date granted. Accordingly, no value has been assigned to these instruments. However, certain stock options were issued under non-plan option agreements and a non-qualified stock option plan at exercise prices below market value. The difference between the exercise price and the market value of these securities has been recorded as deferred compensation and is being expensed over the vesting period of the option. Income Taxes -- The Company and its subsidiaries intend to 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 ("SFAS 109"), "Accounting for Income Taxes." 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 timing 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 carryforwards. Net Loss per Common Share -- The Company applies SFAS 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 months ended September 30, 1999 and 1998 and for the period from inception (January 28, 1986) through September 30, 1999, 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 5,421,837 shares of 8 common stock at prices ranging from $0.20 to $360 per share were outstanding at September 30, 1999. Reclassifications -- Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Fair Value of Financial Instruments -- Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments," 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. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: the carrying amount reported on the balance sheet approximates the fair value for cash, short-term borrowings and current maturities of long-term debt; and the fair value for the Company's fixed rate long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities. Based on the above, the amount reported on the balance sheet approximates the fair value. New Accounting Pronouncements - Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"("SFAS 130"). This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. For the years ended June 30, 1999, 1998 and 1997, the Company's comprehensive income consists only of its net loss. Effective July 1, 1998 the Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes additional standards for segment reporting in the financial statements. The Company operates in one industry segment and, accordingly, the adoption of SFAS 131 had no effect on the Company. (4) Commitments and Contingencies: Consulting Agreements -- The Company is obligated under three consulting agreements to make payments totaling $112,800 in fiscal 2000. License Agreements - -- The Company has four license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2000- $200,000, 2001 - $150,000, 2002 - $200,000, 2003 - $200,000 and 2004 - $200,000. Legal Proceedings -- The Company is subject to various claims and litigation in the ordinary course of its business. Management believes that the outcome of such legal proceedings will not have a material adverse effect on the Company. 9 (5) Subsequent Event: On November 12, 1999, the Company announced that the Board of Directors of both Palatin and Molecular Biosystems, Inc. ("MBI"), have approved a definitive agreement to merge the two companies. The combined company will keep the Palatin name and be headquartered in Princeton, New Jersey. The definitive agreement specifies that the merger is subject to approval of the stockholders of both companies. Under the agreement, stockholders of MBI will receive 0.525 shares of Palatin Common stock for each share of MBI Common stock. The stock swap will be accounted for using the purchase method of accounting. Upon completion of the transaction, stockholders of Palatin and stockholders of MBI will each own approximately 50% of the combined company. The merger agreement provides for a termination payment in the event that either party terminates the merger. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes filed as part of this report. Unless otherwise indicated, all references to our business include Palatin and our wholly owned inactive subsidiary, RhoMed. 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-KSB for the year ended June 30, 1999. 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 will 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. We expect to incur substantial operating losses over the next several years due to continuing expenses associated with our research and development programs, including pre-clinical testing, clinical trials and manufacturing. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of when we incur expenses. Results of Operations Three Month Period Ended September 30, 1999 Compared to Three Month Period Ended September 30, 1998. Grants and Contracts - We recorded $1,250,000 as contract revenue during the three month period ended September 30, 1999 related to the shared development costs of LeuTech pursuant to our strategic collaboration agreement. We had no revenues from grants and contracts during the three month period ended September 30, 1998. 10 License Fees and Royalties - We recorded $500,000 in license fees as revenue during the three month period ended September 30, 1999. We received these license fees pursuant to our strategic collaboration agreement with Mallinckrodt, Inc. We had no revenues from license fees or royalties during the three month period ended September 30, 1998. Research and development - Research and development expenses increased to $2,448,623 for the three month period ended September 30, 1999 compared to $2,137,591 for the three month period ended September 30, 1998. We substantially increased research and development spending, primarily relating to development of LeuTech, including increased expenses for manufacturing scale-up and regulatory consulting. We expect research and development expenses to continue to increase in future quarters as we expand clinical trials and manufacturing efforts on LeuTech and expand our efforts to develop our PT-14 technology. General and administrative - General and administrative expenses decreased to $769,434 for the three month period ended September 30, 1999 compared to $846,290 for the three month period ended September 30, 1998. The decrease in general and administrative expenses were mainly attributable to the decrease in amortization expense of deferred compensation, totaling $18,558 for the three month period ended September 30, 1999. Interest income - Interest income increased to $71,315 for the three month period ended September 30, 1999 compared to $60,216 for the three month period ended September 30, 1998. Interest income increased primarily because we received funds available for investment purposes pursuant to our strategic collaboration agreement with Mallinckrodt. Interest expense - Interest expense decreased to $25,236 for the three month period ended September 30, 1999 compared to $33,999 for the three month period ended September 30, 1998. Interest expense decreased because we repaid outstanding principal on long-term debt provided by Phoenixcor, outstanding in 1998. That decrease was partially offset by interest expense on the $2,000,000 note payable to Mallinckrodt which was repaid in connection with the strategic collaboration agreement. Net loss - Net loss decreased to $1,421,978 for the three month period ended September 30, 1999 compared to $2,957,664 for the three month period ended September 30, 1998. The decrease is due to revenues received under our strategic collaboration agreement with Mallinckrodt. Liquidity and Capital Resources Since inception, we have incurred net operating losses. As of September 30, 1999, we had a deficit accumulated during development stage of $36,744,342. We have financed our net operating losses through September 30, 1999 by a series of debt and equity financings. At September 30, 1999, we had cash and investments of $11,582,661. For the three months ended September 30, 1999, the net increase in cash was $8,391,403. Net cash used for operating activities was $2,215,103, net cash used for investing activities was $407,442 and net cash provided by financing activities was $11,013,948. As of August 17, 1999, we entered into a strategic collaboration agreement with Mallinckrodt, a large international healthcare products company, to jointly develop, manufacture, market and sell LeuTech. Under the terms of the agreement, Mallinckrodt: o received an exclusive worldwide license (excluding Europe) for sales, marketing and distribution of LeuTech and paid a licensing fee of $500,000; 11 o agreed to make milestone payments totaling $10,000,000 upon FDA approval of the first LeuTech indication and upon the attainment of certain sales goals following product launch; o agreed to reimburse Palatin for 50% of all ongoing LeuTech development costs, subject to a cap, which can be amended; o agreed to pay to Palatin a transfer price for each LeuTech product unit delivered to Mallinckrodt and a quarterly royalty on Mallinckrodt's future net sales of LeuTech; o purchased 700,000 restricted shares of Palatin's non-voting Series C convertible preferred stock for $13,000,000; and o agreed that the Series C convertible preferred stock purchased by them would be convertible after five years, or earlier upon the occurrence of a change in control in Palatin (as defined in the agreement), into 700,000 shares of our common stock with certain registration rights and anti-dilution rights. In March 1997, we entered into a ten-year lease on research and development facilities in Edison, New Jersey, which commenced August 1, 1997. Minimum future lease payments escalate from approximately $116,000 per year to $200,000 per year after the fifth year of the lease term. The lease will expire in fiscal year 2007. Effective August 1, 1997, we entered into a five-year lease on administrative offices in Princeton, New Jersey. Minimum future lease payments are approximately $97,000 per year. We have entered into four license agreements, which require minimum yearly payments. Future minimum fiscal year payments under the license agreements are as follows: 2000 - $200,000, 2001 - $150,000, 2002 - $200,000, 2003 - $200,000 and 2004 - $200,000. We are and expect to continue actively searching for certain products and technologies to license or acquire, now or in the future. If we are successful in identifying a product or technology for acquisition, we may require substantial funds for such an acquisition and subsequent development or commercialization. We do not know whether any acquisition will be consummated in the future. We have incurred negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. We expect that our existing capital resources, subsequent to the execution of the strategic collaboration agreement with Mallinckrodt, will be adequate to fund our projected operations through December 31, 2000, based on current expenditure levels. 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-14 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. 12 Year 2000 Compatibility The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. In other words, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions and information or engage in similar normal business activities. We believe that we do not have significant year 2000 issues related to our computerized information systems. It is possible that certain computer systems or software products of our suppliers and contractors may not be year 2000 compatible. Since we are not heavily dependent on any particular software package or vendor in our operations, our assessment of these year 2000 issues related to our suppliers and contractors is minimal. We currently believe that costs of addressing these issues will not have a material adverse impact on our financial position. We plan to devote all resources required to resolve any significant year 2000 issues in a timely manner. Through the fiscal year ended June 30, 1999, we have expended under $10,000 on the year 2000 issue and expect that future costs will be approximately $10,000. There were no systems projects or undertakings which were delayed or postponed due to the Company's Year 2000 efforts. To date, we have not made any contingency plans to address third-party year 2000 risks. We will formulate contingency plans to the extent necessary in the remainder of 1999. 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. As of August 17, 1999, we sold 700,000 restricted shares of Series C Convertible Preferred Stock to Mallinckrodt, Inc. at an effective sale price in excess of $18.57 per share, for gross proceeds of $13,000,000. We sold the preferred stock to Mallinckrodt, an accredited investor, pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended. Mallinckrodt represented that it was purchasing the preferred stock for its own account for investment and not with a view toward resale or distribution to others. The certificate representing the preferred stock bears a restrictive legend. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K We filed no reports on Form 8-K during the three months ended September 30, 1999. 14 SIGNATURES 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) /s/ Edward J. Quilty ---------------------------- Date: November 15, 1999 Edward J. Quilty Chairman of the Board and Chief Executive Officer /s/ Stephen T. Wills ---------------------------- Date: November 15, 1999 Stephen T. Wills Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 15 EX-27 2 FDS -- 3 MONTHS ENDED 09/30/99
5 This schedule contains summary financial information extracted from the registrant's unaudited consolidated financial statements for the three month period ended September 30, 1999 and is qualified in its entirety by reference to those financial statements. U.S. Dollars 3-MOS JUN-30-1999 JUL-1-1999 SEP-30-1999 1 10,725,204 857,457 1,250,000 0 0 12,910,982 2,138,780 733,030 14,564,262 2,612,475 0 0 7,518 72,404 11,871,865 14,564,262 0 1,750,000 0 3,218,057 0 0 25,236 (1,421,978) 0 (1,421,978) 0 0 0 (1,421,978) (.20) (.20)
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