Notes to Consolidated Financial Statements
(unaudited)
Nature of Business
- Palatin Technologies, Inc.
(“Palatin” or the “Company”) is a
specialized biopharmaceutical company developing first-in-class
medicines based on molecules that modulate the activity of the
melanocortin and natriuretic peptide receptor systems.
Palatin’s product candidates are targeted, receptor-specific
therapeutics for the treatment of diseases with significant unmet
medical need and commercial potential. The most advanced product
candidate is Vyleesi™, the trade name for bremelanotide, a
peptide melanocortin receptor 4 (“MC4r”) agonist, for
the treatment of premenopausal women with acquired, generalized
hypoactive sexual desire disorder (“HSDD”), which is a
type of female sexual dysfunction (“FSD”), defined as
low desire with associated distress or interpersonal
difficulty.
A New
Drug Application (“NDA”) has been submitted to the U.S.
Food and Drug Administration (“FDA”) for Vyleesi by our
exclusive North American licensee, AMAG Pharmaceuticals, Inc.
(“AMAG”), and accepted for filing by the FDA, with an
FDA decision on approval expected in the second quarter of calendar
year 2019. Palatin has also licensed rights to Vyleesi to Shanghai
Fosun Pharmaceutical Industrial Development Co. Ltd.
(“Fosun”) for the territories of the People’s
Republic of China, Taiwan, Hong Kong S.A.R. and Macau S.A.R.
(collectively, the “Chinese Territories”), and
Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) for
the Republic of Korea (“Korea”).
Palatin’s
new product development activities primarily focus on melanocortin
receptor 1 (“MC1r”) agonists, with potential to treat a
number of inflammatory and autoimmune diseases such as dry eye
disease, also known as keratoconjunctivitis sicca, uveitis,
diabetic retinopathy and inflammatory bowel disease. Palatin has
also designed and is developing potential natriuretic peptide
receptor (“NPR”) candidate drugs that are selective for
one or more different natriuretic peptide receptors, including
natriuretic peptide receptor-A (“NPR-A”), natriuretic
peptide receptor B (“NPR-B”), and natriuretic peptide
receptor C (“NPR-C”), which may be useful in the
treatment of cardiovascular diseases, including reducing cardiac
hypertrophy and fibrosis, heart failure, acute asthma, other
pulmonary diseases and hypertension.
Business Risk and Liquidity –
Since inception, the
Company has incurred negative cash flows from operations, and has
expended, and expects to continue to expend, substantial funds to
complete its planned product development efforts. As shown in the
accompanying consolidated financial statements, the Company had an
accumulated deficit as of December 31, 2018 of $342,270,312 and a
net loss for the three and six months ended December 31, 2018 of
$5,042,350 and $10,724,406, respectively, and the Company
anticipates incurring significant expenses in the future as a
result of spending on its development programs and will require
substantial additional financing or revenues to continue to fund
its planned developmental activities. To achieve sustained
profitability, if ever, the Company, alone or with others, must
successfully develop and commercialize its technologies and
proposed products, conduct successful preclinical studies and
clinical trials, obtain required regulatory approvals and
successfully manufacture and market such technologies and proposed
products. The time required to reach sustained profitability is
highly uncertain, and the Company may never be able to achieve
profitability on a sustained basis, if at all.
As of
December 31, 2018, the Company’s cash and cash equivalents
were $24,658,024 and current liabilities were $4,528,542. The
Company intends to utilize existing capital resources for general
corporate purposes and working capital, including preclinical and
clinical development of our MC1r and MC4r peptide programs and
natriuretic peptide program, and development of other portfolio
products.
Management
believes that the Company’s existing capital resources,
together with proceeds received from sales of common stock in the
Company’s “at-the-market” program (if any), will
be adequate to fund the Company’s planned operations through
at least March 31, 2020. The Company will need additional funding
to complete required clinical trials for its other product
candidates and, assuming those clinical trials are successful, as
to which there can be no assurance, to complete submission of
required applications to the FDA. If the Company is unable to
obtain approval or otherwise advance in the FDA approval process,
the Company’s ability to sustain its operations would be
materially adversely affected.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
The
Company may seek the additional capital necessary to fund its
operations through public or private equity offerings,
collaboration agreements, debt financings or licensing
arrangements. Additional capital that is required by the Company
may not be available on reasonable terms, or at all.
Concentrations –
Concentrations in the Company’s
assets and operations subject it to certain related risks.
Financial instruments that subject the Company to concentrations of
credit risk primarily consist of cash and cash equivalents. The
Company’s cash and cash equivalents are primarily invested in
one money market account sponsored by a large financial
institution. For the six months ended December 31, 2018, the
Company reported $34,505 in license and contract revenue related to
a license agreement with AMAG for Vyleesi for North America
(“AMAG License Agreement”) (Note 5). For the three and
six months ended December 31, 2017, the Company reported
$10,612,153 and $32,553,661, respectively, in contract revenue
related to the AMAG License Agreement. In addition, for the six
months ended December 31, 2017, the Company reported $5,000,000 in
license revenue related to a license agreement with Fosun (the
“Fosun License Agreement”) (Note 6).
Trading –
The Company’s common stock is listed
on the NYSE American under the symbol
“PTN”.
(2)
BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”)
for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnote disclosures required to be presented for complete
financial statements. In the opinion of management, these
consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary
for fair presentation. The results of operations for the three and
six months ended December 31, 2018 may not necessarily be
indicative of the results of operations expected for the full
year.
The
accompanying unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended June 30, 2018, filed with
the SEC, which includes consolidated financial statements as of
June 30, 2018 and 2017 and for each of the fiscal years in the
three-year period ended June 30, 2018.
(3)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
– The consolidated
financial statements include the accounts of Palatin and its
wholly-owned inactive subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
– The preparation of consolidated
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
– Cash and cash equivalents
include cash on hand, cash in banks and all highly liquid
investments with a purchased maturity of less than three months.
Cash equivalents consist of $24,466,104 and $37,808,099 in a money
market account at December 31, 2018 and June 30, 2018,
respectively.
Fair Value of Financial Instruments
– The
Company’s financial instruments consist primarily of cash
equivalents, accounts payable and notes payable. Management
believes that the carrying values of cash equivalents and accounts
payable are representative of their respective fair values based on
the short-term nature of these instruments. Management believes
that the carrying amount of its notes payable approximates fair
value based on the terms of the notes.
Credit Risk
– Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents. Total cash and cash
equivalent balances have exceeded insured balances by the Federal
Depository Insurance Company (“FDIC”).
Property and Equipment
– Property and equipment
consists of office and laboratory equipment, office furniture and
leasehold improvements and includes assets acquired under capital
leases. Property and equipment are recorded at cost. Depreciation
is recognized using the straight-line method over the estimated
useful lives of the related assets, generally five years for
laboratory and computer equipment, seven years for office furniture
and equipment and the lesser of the term of the lease or the useful
life for leasehold improvements. Amortization of assets acquired
under capital leases is included in depreciation expense.
Maintenance and repairs are expensed as incurred while expenditures
that extend the useful life of an asset are capitalized.
Accumulated depreciation and amortization was $2,366,440 and
$2,338,558 as of December 31, 2018 and June 30, 2018,
respectively.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Impairment of Long-Lived Assets
– The Company reviews
its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of a
long-lived asset, management evaluates whether the estimated future
undiscounted net cash flows from the asset are less than its
carrying amount. If impairment is indicated, the long-lived asset
would be written down to fair value. Fair value is determined by an
evaluation of available price information at which assets could be
bought or sold, including quoted market prices, if available, or
the present value of the estimated future cash flows based on
reasonable and supportable assumptions.
Revenue Recognition
–
In
May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09,
Revenue from Contracts with
Customers
(“ASC Topic
606”), which, along with amendments from 2015 and 2016
requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or
services to customers. ASC Topic 606 replaced most existing revenue
recognition guidance in U.S. GAAP when it became
effective.
On July 1, 2018, the Company adopted ASC Topic 606 using the
modified retrospective approach, a practical expedient permitted
under ASC Topic 606, and applied this approach only to contracts
that were not completed as of July 1, 2018. The Company calculated
a one-time cumulative transition adjustment of $500,000 which was
recorded on July 1, 2018 to the opening balance of accumulated
deficit related to its license agreement with Kwangdong (the
“Kwangdong License Agreement”) as the Company
determined a significant revenue reversal would not occur in a
future period. The one-time adjustment consisted of the recognition
of $500,000 of deferred revenue.
Revenue recognition for periods prior to July 1, 2018
The
Company has generated revenue solely through license and
collaboration agreements. Prior to July 1, 2018, the Company
recognized revenue in accordance with FASB ASC Topic 605-25,
Revenue Recognition for
Arrangements with Multiple Elements
, which addressed the
determination of whether an arrangement involving multiple
deliverables contained more than one unit of accounting. A
delivered item within an arrangement was considered a separate unit
of accounting only if both of the following criteria were
met:
●
the delivered item
had value to the customer on a stand-alone basis; and
●
if the arrangement
included a general right of return relative to the delivered item,
delivery or performance of the undelivered item was considered
probable and substantially in control of the vendor.
Under
FASB ASC Topic 605-25, if both of the criteria above were not met,
then separate accounting for the individual deliverables was not
appropriate.
The
Company determined that it was appropriate to recognize such
revenue using the input-based proportional method during the period
of Palatin’s development obligations as defined in the AMAG
License Agreement. Refer to Note 5 for additional
information.
Under
the Fosun License Agreement (Note 6), the Company received
consideration in the form of an upfront license fee payment and
determined that it was appropriate to recognize such consideration
as revenue in the first quarter of fiscal year 2018, which was the
quarter in which the license was granted, since the license had
stand-alone value and the upfront payment received by the Company
was non-refundable.
Under
the Kwangdong License Agreement (Note 7), the Company received
consideration in the form of an upfront license fee payment and
determined that it was appropriate to record such consideration as
deferred revenue because the upfront payment received by the
Company is subject to certain refund provisions.
Revenue
resulting from the achievement of development milestones was
recorded in accordance with the accounting guidance for the
milestone method of revenue recognition. Amounts received prior to
satisfying the revenue recognition criteria were recorded as
deferred revenue on the Company’s consolidated balance
sheet.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Revenue recognition for periods commencing July 1,
2018
For
licenses of intellectual property, the Company assesses, at
contract inception, whether the intellectual property is distinct
from other performance obligations identified in the arrangement.
If the licensing of intellectual property is determined to be
distinct, revenue is recognized for nonrefundable, upfront license
fees when the license is transferred to the customer and the
customer can use and benefit from the license. If the licensing of
intellectual property is determined not to be distinct, then the
license will be bundled with other promises in the arrangement into
one performance obligation. The Company needs to determine if the
bundled performance obligation is satisfied over time or at a point
in time. If the Company concludes that the nonrefundable, upfront
license fees will be recognized over time, the Company will need to
assess the appropriate method of measuring proportional
performance.
Regulatory
milestone payments are excluded from the transaction price due to
the inability to estimate the probability of reversal. Revenue
relating to achievement of these milestones will be recognized in
the period in which the milestone is achieved.
Sales-based
royalty and milestone payments resulting from customer contracts
solely or predominately for the license of intellectual property
will only be recognized upon occurrence of the underlying sale or
achievement of the sales milestone in the future and such
sales-based royalties and milestone payments will be recognized in
the same period earned.
The Company recognizes revenue for reimbursements of research and
development costs under collaboration agreements as the services
are performed. The Company records these reimbursements as revenue
and not as a reduction of research and development expenses as the
Company is the principal in the research and development activities
based upon its control of such activities, which is considered part
of its ordinary activities.
Development milestone payments are generally due 30 business days
after the milestone is achieved. Sales milestone payments are
generally due 45 business days after the calendar year in which the
sales milestone is achieved. Royalty payments are generally due on
a quarterly basis 20 business days after being
invoiced.
The cumulative effect of applying ASC Topic 606 to the
Company’s consolidated balance sheet was as
follows:
|
|
|
|
Deferred
revenue
|
$
500,000
|
$
(500,000
)
|
$
-
|
Accumulated
deficit
|
(332,045,906
)
|
500,000
|
(331,545,906
)
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
The impact of adoption of ASC Topic 606 on the Company’s
consolidated balance sheet as of December 31, 2018 is as
follows:
PALATIN TECHNOLOGIES, INC
.
and Subsidiary
Consolidated Balance Sheets
(unaudited)
|
Impact of change
in accounting policies
|
|
As
reported
December
31,
2018
|
|
As reported
without adoption of ASC Topic 606
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
24,658,024
|
$
-
|
$
24,658,024
|
Prepaid expenses
and other current assets
|
535,147
|
-
|
535,147
|
Total current
assets
|
25,193,171
|
-
|
25,193,171
|
|
|
|
-
|
Property and
equipment, net
|
136,153
|
-
|
136,153
|
Other
assets
|
338,916
|
-
|
338,916
|
Total
assets
|
$
25,668,240
|
$
-
|
$
25,668,240
|
|
|
|
-
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
619,900
|
$
-
|
$
619,900
|
Accrued
expenses
|
1,101,045
|
-
|
1,101,045
|
Notes payable, net
of discount
|
2,321,123
|
-
|
2,321,123
|
Other current
liabilities
|
486,474
|
-
|
486,474
|
Total current
liabilities
|
4,528,542
|
-
|
4,528,542
|
|
|
|
-
|
Notes payable, net
of discount
|
-
|
-
|
-
|
Deferred
revenue
|
-
|
500,000
|
500,000
|
Other non-current
liabilities
|
-
|
-
|
-
|
Total
liabilities
|
4,528,542
|
500,000
|
5,028,542
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred
stock
|
40
|
-
|
40
|
Common
stock
|
2,030,634
|
-
|
2,030,634
|
Additional paid-in
capital
|
361,379,336
|
-
|
361,379,336
|
Accumulated
deficit
|
(342,270,312
)
|
(500,000
)
|
(342,770,312
)
|
Total
stockholders’ equity
|
21,139,698
|
(500,000
)
|
20,639,698
|
Total liabilities
and stockholders’ equity
|
$
25,668,240
|
$
-
|
$
25,668,240
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
ASC Topic 606 did not have an impact on the Company’s
consolidated statements of operations or cash flows.
Research and Development Costs
– The costs of research
and development activities are charged to expense as incurred,
including the cost of equipment for which there is no alternative
future use.
Accrued Expenses –
Third parties perform a significant
portion of the Company’s development activities. The Company
reviews the activities performed under all contracts each quarter
and accrues expenses and the amount of any reimbursement to be
received from its collaborators based upon the estimated amount of
work completed. Estimating the value or stage of completion of
certain services requires judgment based on available information.
If the Company does not identify services performed for it but not
billed by the service-provider, or if it underestimates or
overestimates the value of services performed as of a given date,
reported expenses will be understated or overstated.
Stock-Based Compensation –
The Company charges to
expense the fair value of stock options and other equity awards
granted. Compensation costs for stock-based awards with time-based
vesting are determined using the quoted market price of the
Company’s common stock on the date of grant or for stock
options, the value determined utilizing the Black-Scholes option
pricing model, and are recognized on a straight-line basis, while
awards containing a market condition are valued using multifactor
Monte Carlo simulations. Compensation costs for awards containing a
performance condition are determined using the quoted price of the
Company’s common stock on the date of grant or for stock
options, the value is determined utilizing the Black Scholes option
pricing model, and are recognized based on the probability of
achievement of the performance condition over the service period.
Forfeitures are recognized as they occur.
Income Taxes
– The Company and its subsidiary file
consolidated federal and separate-company state income tax returns.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences or operating loss and
tax credit carryforwards are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the enactment
date. The Company has recorded and continues to maintain a full
valuation allowance against its deferred tax assets based on the
history of losses incurred.
On
December 22, 2017, the U.S. government enacted wide-ranging tax
legislation, the Tax Cuts and Jobs Act (the “2017 Tax
Act”). The 2017 Tax Act significantly revises U.S. tax law
by, among other provisions, (a) lowering the applicable U.S.
federal statutory corporate income tax rate from 35% to 21%, (b)
eliminating or reducing certain income tax deductions, such as
deductions for interest expense, executive compensation expenses
and certain employee expenses, and (c) repealing the federal
alternative minimum tax (“AMT”) and providing for the
refund of existing AMT credits.
Other
provisions enacted include a new provision designed to tax
low-taxed income of foreign subsidiaries (i.e.,
“GILTI”) and a one-time transition tax on the deemed
repatriation of post-1986 undistributed foreign subsidiary earnings
and profits (“E&P”) from controlled foreign
corporations (“CFC”). The Company does not have any
foreign subsidiaries, and thus these provisions do not
apply.
During
the year ended June 30, 2018, the Company recorded income tax
expense of $82,500, which consisted of $500,000 that was withheld
in accordance with tax withholding requirements in the Chinese
Territories related to the Fosun License Agreement (Note 6) and
$82,500, which was withheld in accordance with tax withholding
requirements in Korea related to the Kwangdong License Agreement
(Note 7). The total income tax expense related to withholding
requirements of $582,500 was offset by an income tax benefit of
$500,000, which resulted from the 2017 Tax Act, under which AMT
credits became refundable, and therefore a $500,000 benefit related
to the release of a valuation allowance against an AMT credit was
recorded during the three and six months ended December 2017. The
Company’s June 30, 2017 tax return was filed during the three
months ended March 31, 2018 and the Company did not incur an AMT
liability. As a result, as of December 31, 2018 and June 30, 2018,
the Company has a current income tax receivable of $218,000 and a
long-term income tax receivable of $282,000 from estimated AMT that
can be refunded in the future.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Net Income (Loss) per Common Share -
Basic and diluted
earnings per common share (“EPS”) are calculated in
accordance with the provisions of FASB ASC Topic 260,
Earnings per Share
, which includes
guidance pertaining to the warrants issued in connection with the
July 3, 2012, December 23, 2014, and July 2, 2015 private placement
offerings and the August 4, 2016 underwritten offering, that were
exercisable for nominal consideration and, therefore, to the extent
not yet exercised were considered in the computation of basic and
diluted net income (loss) per common share. As of November 21,
2017, all warrants exercisable for nominal value had been converted
into common stock.
The
following table is a reconciliation of net (loss) income and the
shares used in calculating basic and diluted net (loss) income per
common share for the three and six months ended December 31, 2018
and 2017:
|
Three Months
Ended December 31,
|
Six Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income
|
$
(5,042,350
)
|
$
3,030,193
|
$
(10,724,406
)
|
$
13,633,823
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average
common shares - Basic
|
206,487,984
|
197,238,056
|
205,724,321
|
197,175,316
|
|
|
|
|
|
Effect of dilutive
shares:
|
|
|
|
|
Common stock
equivalents arising from stock options,
|
|
|
|
|
warrants and
conversion of preferred stock
|
-
|
3,525,013
|
-
|
1,792,803
|
Restriced stock
units
|
-
|
1,948,547
|
-
|
1,462,705
|
Weighted average
common shares - Diluted
|
206,487,984
|
202,711,616
|
205,724,321
|
200,430,824
|
|
|
|
|
|
Net (loss) income
per common share:
|
|
|
|
|
Basic
|
$
(0.02
)
|
$
0.02
|
$
(0.05
)
|
$
0.07
|
Diluted
|
$
(0.02
)
|
$
0.01
|
$
(0.05
)
|
$
0.07
|
As of
December 31, 2017, common shares issuable upon the exercise of
outstanding options and warrants, excluding outstanding warrants
exercisable for nominal consideration, and the vesting of
restricted stock units in an aggregate amount of 1,146,250 shares
were excluded from the weighted average number of common shares
used in computing diluted net income per common share because they
were anti-dilutive during the period or the minimum performance
requirements or market conditions had not been met. For the three
and six months ended December 31, 2018, no additional common shares
were added to the computation of diluted EPS because to do so would
have been anti-dilutive. The potential number of common shares
excluded from diluted EPS during the three and six months ended
December 31, 2018 was 40,850,175.
Included
in the weighted average common shares used in computing basic and
diluted net income (loss) per common share are 3,952,875 and
2,121,113 vested RSUs that have not been issued as of December 31,
2018 and 2017, respectively, due to a provision in the RSU
agreements to delay delivery.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(4)
NEW
AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In November 2018, the FASB issued ASU No. 2018-18,
Collaborative
Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606.
This
update provides clarification on the interaction between Revenue
Recognition (Topic 606) and Collaborative Arrangements (Topic 808),
including the alignment of unit of account guidance between the two
topics
. The
guidance is effective for public entities for fiscal years
beginning after December 15, 2019, and for interim periods within
those fiscal years, with early adoption permitted. The
guidance is applicable to the Company beginning July 1, 2020. The
Company is currently evaluating the potential effects of this
guidance on its consolidated financial
statements.
In May
2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting
, which clarifies when to
account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new guidance,
modification accounting is required only if the fair value, the
vesting conditions, or the classification of the award (as equity
or liability) changes as a result of the change in terms or
conditions. It is effective prospectively for the annual period
ending June 30, 2019 and interim periods within that annual period.
Early adoption is permitted. The Company adopted this guidance
during the six months ended December 31, 2018. The adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements.
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses:
Measurement of Credit Losses on Financial Instruments
, which
requires measurement and recognition of expected credit losses for
financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. This is different from the current guidance as this will
require immediate recognition of estimated credit losses expected
to occur over the remaining life of many financial assets. The new
guidance will be effective for the Company on July 1, 2020. Early
adoption will be available on July 1, 2019. The Company is
currently evaluating the effect that ASU No. 2016-13 will have on
its consolidated financial statements and related
disclosures.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases,
relating to the recognition of
lease assets and lease liabilities. The new guidance requires
lessees to recognize almost all leases on their balance sheet as a
right-of-use asset and a lease liability, other than leases that
meet the definition of a short- term lease, and requires expanded
disclosures about leasing arrangements. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee have not significantly changed from the
current guidance. Lessor accounting is similar to the current
guidance, but updated to align with certain changes to the lessee
model and the new revenue recognition standard. The new guidance is
effective for the Company on July 1, 2019, with early adoption
permitted. The Company is currently evaluating the impact that ASU
No. 2016-02 will have on its consolidated financial statements and
related disclosures.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments: Recognition and
Measurement of Financial Assets and Financial Liabilities
.
The new guidance relates to the recognition and measurement of
financial assets and liabilities. The new guidance makes targeted
improvements to GAAP impacting equity investments (other than those
accounted for under the equity method or consolidated), financial
liabilities accounted for under the fair value election, and
presentation and disclosure requirements for financial instruments,
among other changes. The Company adopted this guidance during the
six months ended December 31, 2018. The adoption of this standard
did not have a material impact on the Company’s consolidated
financial statements.
On
January 8, 2017, the Company entered into the AMAG License
Agreement. Under the terms of the AMAG License Agreement, the
Company granted to AMAG (i) an exclusive license in all countries
of North America (the “Territory”), with the right to
grant sub-licenses, to research, develop and commercialize products
containing Vyleesi (each a “Product”, and collectively,
“Products”), (ii) a non-exclusive license in the
Territory, with the right to grant sub-licenses, to manufacture the
Products, and (iii) a non-exclusive license in all countries
outside the Territory, with the right to grant sub-licenses, to
research, develop and manufacture (but not commercialize) the
Products.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Following
the satisfaction of certain conditions to closing, the license
agreement became effective on February 2, 2017. On that date, AMAG
paid the Company $60,000,000 as a one-time initial payment.
Pursuant to the terms of and subject to the conditions in the AMAG
License Agreement, AMAG was required to reimburse the Company up to
an aggregate amount of $25,000,000 for reasonable, documented,
direct out-of-pocket expenses incurred by the Company following
February 2, 2017, in connection with the development and regulatory
activities necessary to file an NDA for Vyleesi for HSDD in the
United States related to Palatin’s development
obligations.
The
Company determined there was no stand-alone value for the license,
and that the license and the reimbursable direct out-of-pocket
expenses, pursuant to the terms of the License Agreement,
represented a combined unit of accounting which totaled
$85,000,000. The Company recognized revenue of the combined unit of
accounting over the arrangement using the input-based proportional
method as the Company completed its development obligations. For
the three and six months ended December 31, 2017, the Company
recognized $10,612,153 and $32,553,661, respectively, as license
and contract revenue. During the six months ended December 31,
2018, license and contract revenue included additional billings for
AMAG related Vyleesi costs of $34,505.
In
addition, pursuant to the terms of and subject to the conditions in
the AMAG License Agreement, the Company will be eligible to receive
from AMAG (i) up to $60,000,000 upon FDA approval of Vyleesi,
and (ii) up to $300,000,000 in sales milestone payments based on
achievement of certain annual net sales for all Products in the
Territory.
AMAG is
also obligated to pay the Company tiered royalties on annual net
sales of Products, on a product-by-product basis, in the Territory
ranging from the high single-digits to the low double-digits. The
royalties will expire on a product-by-product and
country-by-country basis until the latest to occur of (i) the
earliest date on which there are no valid claims of the
Company’s patent rights covering such Product in such
country, (ii) the expiration of the regulatory exclusivity period
for such Product in such country and (iii) ten years following the
first commercial sale of such Product in such country. Such
royalties are subject to reductions in the event that:
(a) AMAG must license additional third-party intellectual
property in order to develop, manufacture or commercialize a
Product, or (b) generic competition occurs with respect to a
Product in a given country, subject to an aggregate cap on such
deductions of royalties otherwise payable to the Company. After the
expiration of the applicable royalties for any Product in a given
country, the license for such Product in such country will become a
fully paid-up, royalty-free, perpetual and irrevocable
license.
The
Company engaged Greenhill & Co. LLC (“Greenhill”)
as the Company’s sole financial advisor in connection with a
potential transaction with respect to Vyleesi. Under the
engagement agreement with Greenhill, the Company was obligated to
pay Greenhill a fee equal to 2% of all proceeds and consideration
paid to the Company by AMAG in connection with the AMAG License
Agreement, subject to a minimum fee of $2,500,000. The minimum fee
of $2,500,000, less a credit of $50,000 for an advisory fee
previously paid by the Company, was paid to Greenhill and recorded
as an expense upon the closing of the licensing transaction. This
amount will be credited toward amounts that become due to Greenhill
in the future, provided that the aggregate fee payable to Greenhill
will not be less than 2% of all proceeds and consideration paid to
the Company by AMAG in connection with the AMAG License Agreement.
The Company will pay Greenhill an aggregate total of 2% of all
proceeds and consideration paid to the Company by AMAG in
connection with the License Agreement, including future milestone
and royalty payments, after crediting the $2,500,000 that was paid
to Greenhill upon entering into the AMAG License Agreement. The
Company also reimbursed Greenhill $7,263 for certain expenses
incurred in connection with its advisory services.
Pursuant
to the License Agreement, the Company has assigned to AMAG the
Company’s manufacturing and supply agreements with Catalent
Belgium S.A. to perform fill, finish and packaging of
Vyleesi.
(6)
AGREEMENT
WITH FOSUN:
On
September 6, 2017, the Company entered into the Fosun License
Agreement for exclusive rights to commercialize Vyleesi in the
Chinese Territories. Under the terms of the agreement, the Company
received $4,500,000 in October 2017, which consisted of an upfront
payment of $5,000,000 less $500,000 that was withheld in accordance
with tax withholding requirements in the Chinese Territories and
recorded as an expense during the year ended June 30, 2018. The
Company will receive a $7,500,000 milestone payment when regulatory
approval in Chinese Territories is obtained, provided that a
commercial supply agreement for Vyleesi has been entered into.
Palatin has the potential to receive up to $92,500,000 in
additional sales related milestone payments and high single-digit
to low double-digit royalties on net sales in the licensed
territory. All development, regulatory, sales, marketing, and
commercial activities and associated costs in the licensed
territory will be the sole responsibility of Fosun.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(7)
AGREEMENT
WITH KWANGDONG:
On
November 21, 2017, the Company entered into the Kwangdong License
Agreement for exclusive rights to commercialize Vyleesi in
Korea.
Under
the terms of the agreement, the Company received $417,500 in
December 2017, consisting of an upfront payment of $500,000, less
$82,500, which was withheld in accordance with tax withholding
requirements in Korea and recorded as an expense during the year
ended June 30, 2018. Based upon certain refund provisions, the
upfront payment was recorded as non-current deferred revenue at
December 31, 2017. O
n July 1, 2018, in
conjunction with the adoption of ASC Topic 606, a one-time
transition of adjustment of $500,000 was recorded to the opening
balance of accumulated deficit as the Company determined a
significant revenue reversal would not occur in a future
period.
The Company will receive a $3,000,000 milestone
payment based on the first commercial sale in Korea. Palatin has
the potential to receive up to $37,500,000 in additional sales
related milestone payments and mid-single-digit to low double-digit
royalties on net sales in the licensed territory. All development,
regulatory, sales, marketing, and commercial activities and
associated costs in the licensed territory will be the sole
responsibility of Kwangdong.
(8)
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses
and other
current assets consist of the following:
|
|
|
Clinical study
costs
|
$
175,915
|
$
145,994
|
Insurance
premiums
|
19,366
|
42,605
|
Other
|
339,866
|
325,089
|
|
$
535,147
|
$
513,688
|
(9)
FAIR
VALUE MEASUREMENTS
The
fair value of cash equivalents is classified using a hierarchy
prioritized based on inputs. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on
management’s own assumptions used to measure assets and
liabilities at fair value. A financial asset’s or
liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair
value measurement.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
The
following table provides the assets carried at fair
value:
|
|
Quoted prices in
active markets
(Level 1)
|
Other quoted/observable inputs (Level 2)
|
Significant unobservable inputs
(Level 3)
|
December
31, 2018:
|
|
|
|
|
Money
market account
|
$
24,466,104
|
$
24,466,104
|
$
-
|
$
-
|
June
30, 2018:
|
|
|
|
|
Money
market account
|
$
37,808,099
|
$
37,808,099
|
$
-
|
$
-
|
Accrued
expenses
consist of the
following:
|
|
|
Clinical study
costs
|
$
324,969
|
$
983,410
|
Other research
related expenses
|
351,025
|
590,236
|
Professional
services
|
74,830
|
297,731
|
Severance
|
349,854
|
115,362
|
Other
|
367
|
116,282
|
|
$
1,101,045
|
$
2,103,021
|
Notes
payable consist of the following:
|
|
|
Notes payable under
venture loan
|
$
2,333,333
|
$
6,333,334
|
Unamortized related
debt discount
|
(8,257
)
|
(33,535
)
|
Unamortized debt
issuance costs
|
(3,953
)
|
(18,138
)
|
Notes
payable
|
2,321,123
|
6,281,661
|
|
|
|
Less: current
portion
|
2,321,123
|
5,948,763
|
|
|
|
Long-term
portion
|
$
-
|
$
332,898
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
On
December 23, 2014, the Company closed on a $10,000,000 venture loan
which was led by Horizon Technology Finance Corporation
(“Horizon”). The debt facility was a four-year senior
secured term loan that bore interest at a floating coupon rate of
one-month LIBOR (floor of 0.50%) plus 8.50%, and provided for
interest-only payments for the first eighteen months followed by
monthly payments of principal of $333,333 plus accrued interest
through January 1, 2019. The lenders also received five-year
immediately exercisable Series D 2014 warrants to purchase 666,666
shares of common stock exercisable at an exercise price of $0.75
per share. The Company recorded a debt discount of $267,820 equal
to the fair value of these warrants at issuance, which was
amortized to interest expense over the term of the related debt.
This debt discount was offset against the note payable balance and
included in additional paid-in capital on the Company’s
balance sheet. In addition, a final incremental payment of $500,000
was due on January 1, 2019, or upon early repayment of the loan.
This final incremental payment was being accreted to interest
expense over the term of the related debt and was included in other
liabilities on the consolidated balance sheet. The Company incurred
$209,367 of costs in connection with the loan. These costs were
capitalized as deferred financing costs and were offset against the
note payable balance. These debt issuance costs were being
amortized to interest expense over the term of the related debt.
During the three months ended December 31, 2018, the loan matured
and on December 31, 2018, the Company made the final incremental
payment of $500,000.
On July
2, 2015, the Company closed on a $10,000,000 venture loan led by
Horizon. The debt facility is a four-year senior secured term loan
that bears interest at a floating coupon rate of one-month LIBOR
(floor of 0.50%) plus 8.50% and provides for interest-only payments
for the first eighteen months followed by monthly payments of
principal of $333,333 plus accrued interest through August 1, 2019.
The lenders also received five-year immediately exercisable Series
G warrants to purchase 549,450 shares of the Company’s common
stock exercisable at an exercise price of $0.91 per share. The
Company has recorded a debt discount of $305,196 equal to the fair
value of these warrants at issuance, which is being amortized to
interest expense over the term of the related debt. This debt
discount is offset against the note payable balance and is included
in additional paid-in capital on the Company’s balance sheet
at December 31, 2018 and June 30, 2018. In addition, a final
incremental payment of $500,000 is due on August 1, 2019, or upon
early repayment of the loan. This final incremental payment is
being accreted to interest expense over the term of the related
debt and is included in other current liabilities on the
consolidated balance sheet as of December 31, 2018. The Company
incurred $146,115 of costs in connection with the loan agreement.
These costs were capitalized as deferred financing costs and are
offset against the note payable balance. These debt issuance costs
are being amortized to interest expense over the term of the
related debt.
The
Company’s obligations under the 2015 amended and restated
loan agreement, which includes both the 2014 venture loan and the
2015 venture loan, are secured by a first priority security
interest in substantially all of its assets other than its
intellectual property. The Company also has agreed to specified
limitations on pledging or otherwise encumbering its intellectual
property assets. The 2015 amended and restated loan agreement
includes customary affirmative and restrictive covenants, but does
not include any covenants to attain or maintain specified financial
metrics. The loan agreement includes customary events of default,
including payment defaults, breaches of covenants, change of
control and a material adverse change default. Upon the occurrence
of an event of default and following any applicable cure periods, a
default interest rate of an additional 5% may be applied to the
outstanding loan balances, and the lenders may declare all
outstanding obligations immediately due and payable and take such
other actions as set forth in the loan agreement. As of December
31, 2018, the Company was in compliance with all of its loan
covenants.
(12)
STOCKHOLDERS’
EQUITY
Financing Transactions –
On April 20, 2018, the Company entered into an
equity distribution agreement (the “Equity Distribution
Agreement”) with Canaccord Genuity LLC
(“Canaccord”), pursuant to which the Company may, from
time to time, sell shares of the Company’s common
stock
at market prices by
methods deemed to be an “at-the-market offering” as
defined in Rule 415 promulgated under the Securities Act of 1933,
as amended. The Company will pay Canaccord 3.0% of the gross
proceeds as a commission. For the three and six months ended
December 31, 2018, 31,300 and 2,256,445 shares of the
Company’s common stock were sold through Canaccord under the
Equity Distribution Agreement for net proceeds of $30,361 and
$2,252,808, respectively, after payment of commission fees of $939
and $69,674, respectively.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
The Company has no obligation to sell any shares under the Equity
Distribution Agreement and may at any time suspend solicitation and
offers under the Equity Distribution Agreement.
Stock Purchase Warrants
– During the three and six
months ended December 31, 2017, the Company issued 10,980,232 and
23,344,451 shares, respectively, of common stock pursuant to the
cashless exercise provisions of warrants at an exercise price of
$0.01 per share. During the six months ended December 31, 2017, the
Company received $114,384 and issued 11,438,356 shares of common
stock pursuant to the exercise of warrants at an exercise price of
$0.01 per share.
Stock Options –
For the three and six months ended
December 31, 2018, the Company recorded stock-based compensation
related to stock options of $317,704 and $641,407, respectively.
For the three and six months ended December 31, 2017, the Company
recorded stock-based compensation related to stock options of
$204,633 and $364,507, respectively.
In July
2018, the terms of certain options were modified to accelerate
vesting and extend the option life. As a result the Company
recorded additional stock-based compensation of $109,004 during the
six months ended December 31, 2018. There were no such
modifications during the six months ended December 31,
2017.
A
summary of stock option activity is as follows:
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Term in Years
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
Outstanding - July
1, 2018
|
12,775,462
|
$
0.76
|
7.7
|
|
|
|
|
|
|
Granted
|
-
|
-
|
|
|
Forfeited
|
(133,851
)
|
0.53
|
|
|
Expired
|
(129,150
)
|
1.77
|
|
|
|
|
|
|
|
Outstanding -
December 31, 2018
|
12,512,461
|
$
0.75
|
7.2
|
$
1,171,032
|
|
|
|
|
|
Exercisable at
December 31, 2018
|
6,837,011
|
$
0.77
|
6.0
|
$
544,282
|
|
|
|
|
|
Expected to vest at
December 31, 2018
|
5,675,450
|
$
0.73
|
8.7
|
$
626,750
|
Stock
options granted to the Company’s executive officers and
employees generally vest over a 48-month period, while stock
options granted to its non-employee directors vest over a 12-month
period.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Included
in the options outstanding above are 1,075,000 and 125,000
performance-based options granted in December 2017 to executive
officers and employees, respectively, which vest during a
performance period ending on December 31, 2020, if and upon either
i) as to 100% of the target number of shares upon achievement of a
closing price for the Company’s common stock equal to or
greater than $1.50 per share for 20 consecutive trading days, which
is considered a market condition; or ii) as to thirty percent (30%)
of the target number of shares, upon the acceptance for filing by
the FDA of an NDA for Vyleesi for HSDD in premenopausal women
during the performance period, which is considered a performance
condition; iii) as to fifty percent (50%) of the target number of
shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD
in premenopausal women during the performance period, which is also
considered a performance condition; iv) as to twenty percent (20%)
of the target number of shares, upon entry into a licensing
agreement during the performance period for the commercialization
of Vyleesi for FSD in selected countries, which is also considered
a performance condition. The fair value of these options was
$602,760. The Company is amortizing the fair value over the derived
service period of 1.1 years or upon the attainment of the
performance condition. Pursuant to the FDA acceptance of the NDA
filing of Vyleesi, 30% of the target number of options vested in
June 2018.
Restricted Stock Units –
For the three and six months
ended December 2018, the Company recorded stock-based compensation
related to restricted stock units of $661,090 and $1,461,968,
respectively. For the three and six months ended December 2017, the
Company recorded stock-based compensation related to restricted
stock units of $415,396 and $677,393, respectively.
A
summary of restricted stock unit activity is as
follows:
|
|
Outstanding at July
1, 2018
|
9,323,876
|
Granted
|
-
|
Forfeited
|
(178,851
)
|
Vested
|
(319,817
)
|
Outstanding at
December 31, 2018
|
8,825,208
|
Included
in outstanding RSUs in the table above are 3,952,875 vested shares
that have not been issued as of December 31, 2018 due to a
provision in the RSU agreements to delay delivery.
Time-based
restricted stock units granted to the Company’s executive
officers, employees and non-employee directors generally vest over
24 months, 48 months and 12 months, respectively.
In
December 2017, the Company granted 1,075,000 performance-based
restricted stock units to its executive officers and 670,000
performance-based restricted stock units to other employees which
vest during a performance period, ending on December 31, 2020, if
and upon either i) as to 100% of the target number of shares upon
achievement of a closing price for the Company’s common stock
equal to or greater than $1.50 per share for 20 consecutive trading
days, which is considered a market condition; or ii) as to thirty
percent (30%) of the target number of shares, upon the acceptance
for filing by the FDA of an NDA for Vyleesi for HSDD in
premenopausal women during the performance period, which is
considered a performance condition; iii) as to fifty percent (50%)
of the target number of shares, upon the approval by the FDA of an
NDA for Vyleesi for HSDD in premenopausal women during the
performance period, which is also considered a performance
condition; iv) as to twenty percent (20%) of the target number of
shares, upon entry into a licensing agreement during the
performance period for the commercialization of Vyleesi for FSD in
at least two of the following geographic areas (a) four or more
countries in Europe, (b) Japan, (c) two or more countries in
Central and/or South America, (d) two or more countries in Asia,
excluding Japan and China, and (e) Australia, which is also
considered a performance condition. The fair value of these awards
was $913,750 and $569,500, respectively. The Company is amortizing
the fair value over the derived service period of 1.1 years or upon
the attainment of the performance condition. Pursuant to the FDA
acceptance of the NDA filing for Vyleesi, 30% of the target number
of shares vested in June 2018.