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. The
Company’s product candidates are targeted, receptor-specific
therapeutics for the treatment of diseases with significant unmet
medical need and commercial potential.
Melanocortin Receptor System. The melanocortin receptor
(“MCr”) system is hormone driven, with effects on food
intake, metabolism, sexual function, inflammation and immune system
responses. There are five melanocortin receptors, MC1r through
MC5r. Modulation of these receptors, through use of
receptor-specific agonists, which activate receptor function, or
receptor-specific antagonists, which block receptor function, can
have significant pharmacological effects.
The
Company’s lead product, Vyleesi®, was approved by the
U.S. Food and Drug Administration (“FDA”) in June 2019
and is being marketed in North America by AMAG Pharmaceuticals,
Inc. (“AMAG”) for the treatment of hypoactive sexual
desire disorder (“HSDD”) in premenopausal
women.
The
Company’s new product development activities focus primarily
on MC1r agonists, with potential to treat inflammatory and
autoimmune diseases such as dry eye disease, which is also known as
keratoconjunctivitis sicca, uveitis, diabetic retinopathy and
inflammatory bowel disease. The Company believes that the MC1r
agonist peptides in development have broad anti-inflammatory
effects and appear to utilize mechanisms engaged by the endogenous
melanocortin system in regulation of the immune system and
resolution of inflammatory responses. The Company is also
developing peptides that are active at more than one melanocortin
receptor, and MC4r peptide and small molecule agonists with
potential utility in obesity and metabolic-related disorders,
including rare disease and orphan indications.
Natriuretic Peptide Receptor System. The natriuretic peptide
receptor (“NPR”) system regulates cardiovascular
functions, and therapeutic agents modulating this system have
potential to treat cardiovascular and fibrotic diseases. The
Company has designed and is developing potential NPR candidate
drugs 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”).
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, 2019 of $305,517,455 and a
net loss for the three and six months ended December 31, 2019 of
$5,243,627 and $9,744,576, respectively, and the Company
anticipates incurring significant expenses in the future as a
result of spending on its development programs and will require
substantial additional financing or revenues to continue to fund
its planned developmental activities. To achieve sustained
profitability, if ever, the Company, alone or with others, must
successfully develop and commercialize its technologies and
proposed products, conduct successful preclinical studies and
clinical trials, obtain required regulatory approvals and
successfully manufacture and market such technologies and proposed
products. The time required to reach sustained profitability is
highly uncertain, and the Company may never be able to achieve
profitability on a sustained basis, if at all.
As of
December 31, 2019, the Company’s cash and cash equivalents
were $91,459,480 and current liabilities were $1,374,940.
Management intends to utilize existing capital resources for
general corporate purposes and working capital, including
preclinical and clinical development of the Company’s MC1r
and MC4r peptide programs and natriuretic peptide program, and
development of other portfolio products.
Management
believes that the Company’s existing capital resources will
be adequate to fund the Company’s planned operations through
at least calendar year 2021. The Company will need additional
funding to complete required clinical trials for its other product
candidates and, assuming those clinical trials are successful, as
to which there can be no assurance, to complete submission of
required applications to the FDA. If the Company is unable to
obtain approval or otherwise advance in the FDA approval process,
the Company’s ability to sustain its operations could be
materially adversely affected.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
The
Company may seek the additional capital necessary to fund its
operations through public or private equity offerings,
collaboration agreements, debt financings or licensing
arrangements. Additional capital that is required by the Company
may not be available on reasonable terms, or at all.
Concentrations – Concentrations in the Company’s
assets and operations subject it to certain related risks.
Financial instruments that subject the Company to concentrations of
credit risk primarily consist of cash and cash equivalents. The
Company’s cash and cash equivalents are primarily invested in
one money market account sponsored by a large financial
institution. For the three and six months ended December 31, 2019,
the Company reported $20,610 and $117,989 in revenue, respectively,
solely related to a license agreement with AMAG for Vyleesi for
North America (“AMAG License Agreement”) (Notes 5 and
14). For the six months ended December 31, 2018, the Company
reported $34,505 in revenue solely related to the AMAG License
Agreement.
(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, 2019 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, 2019, filed with
the Securities and Exchange Commission (“SEC”), which
includes consolidated financial statements as of June 30, 2019 and
2018 and for each of the fiscal years in the three-year period
ended June 30, 2019.
(3)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated
financial statements include the accounts of Palatin and its
wholly-owned inactive subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates – The preparation of consolidated
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents – Cash and cash equivalents
include cash on hand, cash in banks and all highly liquid
investments with a purchased maturity of less than three months.
Cash equivalents consist of $91,257,600 and $43,381,556 in a money
market account at December 31, 2019 and June 30, 2019,
respectively.
Fair Value of Financial Instruments – The
Company’s financial instruments consist primarily of cash
equivalents, accounts receivable and accounts payable. Management
believes that the carrying values of cash equivalents, accounts
receivable and accounts payable are representative of their
respective fair values based on the short-term nature of these
instruments.
Credit Risk – Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents. Total cash and cash
equivalent balances have exceeded balances insured 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 $2,425,149 and
$2,388,644 as of December 31, 2019 and June 30, 2019,
respectively.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Impairment of Long-Lived Assets – The Company reviews
its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of a
long-lived asset, management evaluates whether the estimated future
undiscounted net cash flows from the asset are less than its
carrying amount. If impairment is indicated, the long-lived asset
would be written down to fair value. Fair value is determined by an
evaluation of available price information at which assets could be
bought or sold, including quoted market prices, if available, or
the present value of the estimated future cash flows based on
reasonable and supportable assumptions.
Revenue 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.
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 is 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 and such sales-based royalties
and milestone payments are 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.
Research and Development Costs – The costs of research
and development activities are charged to expense as incurred,
including the cost of equipment for which there is no alternative
future use.
Accrued Expenses – Third parties perform a significant
portion of the Company’s development activities. The Company
reviews the activities performed under all contracts each quarter
and accrues expenses and the amount of any reimbursement to be
received from its collaborators based upon the estimated amount of
work completed. Estimating the value or stage of completion of
certain services requires judgment based on available information.
If the Company does not identify services performed for it but not
billed by the service-provider, or if it underestimates or
overestimates the value of services performed as of a given date,
reported expenses will be understated or overstated.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Stock-Based Compensation – The Company charges to
expense the fair value of stock options and other equity awards
granted. Compensation costs for stock-based awards with time-based
vesting are determined using the quoted market price of the
Company’s common stock on the date of grant or for stock
options, the value determined utilizing the Black-Scholes option
pricing model, and are recognized on a straight-line basis, while
awards containing a market condition are valued using multifactor
Monte Carlo simulations. Compensation costs for awards containing a
performance condition are determined using the quoted price of the
Company’s common stock on the date of grant or for stock
options, the value is determined utilizing the Black Scholes option
pricing model, and are recognized based on the probability of
achievement of the performance condition over the service period.
Forfeitures are recognized as they occur.
Income Taxes – The Company and its subsidiary file
consolidated federal and separate-company state income tax returns.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences or operating loss and
tax credit carryforwards are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the enactment
date. The Company has recorded and continues to maintain a full
valuation allowance against its deferred tax assets based on the
history of losses incurred and lack of experience projecting future
sales-based royalty and milestone payments.
Net Loss per Common Share - Basic and diluted loss per
common share (“EPS”) are calculated in accordance with
the provisions of FASB Accounting Standards Codification
(“ASC”) Topic 260, Earnings per Share.
For the
three and six months ended December 31, 2019 and 2018, no
additional common shares were added to the computation of diluted
EPS because to do so would have been anti-dilutive. The potential
number of common shares excluded from diluted EPS during the three
and six months ended December 31, 2019 and 2018 was 33,143,857 and
40,850,175 respectively.
Included
in the weighted average common shares used in computing basic and
diluted net loss per common share are 6,167,750 and 3,952,875
vested restricted stock units that had not been issued as of
December 31, 2019 and 2018, respectively, due to a provision in the
restricted stock unit agreements to delay delivery.
(4)
NEW
AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2019, the FASB issued ASU No. 2019-12,
Income
Taxes (Topic 740): Simplifying the Accounting for Income
Taxes. The amendments in this
update simplify the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments
also improve consistent application and simplify U.S. GAAP for
other areas of Topic 740 by clarifying and amending existing
guidance. The guidance is effective for public entities for fiscal
years beginning after December 15, 2020, and for interim periods
within those fiscal years, with early adoption permitted. The
guidance is applicable to the Company beginning July 1, 2021. The
Company is currently evaluating the potential effects of this
guidance on its consolidated financial
statements.
In November 2018, the FASB issued ASU No. 2018-18,
Collaborative
Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606. This
update provides clarification on the interaction between Revenue
Recognition (Topic 606) and Collaborative Arrangements (Topic 808),
including the alignment of unit of account guidance between the two
topics. The guidance is
effective for public entities for fiscal years beginning after
December 15, 2019, and for interim periods within those fiscal
years, with early adoption permitted. The guidance is
applicable to the Company beginning July 1, 2020. The Company is
currently evaluating the potential effects of this guidance on its
consolidated financial statements.
In 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. The
Company is currently evaluating the effect that ASU No. 2016-13
will have on its consolidated financial statements and related
disclosures.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
On July
1, 2019, the Company adopted the requirements of ASU No.2016-02,
Leases (“Topic
842”). The objective of this ASU, along with several related
ASUs issued subsequently, is to increase transparency and
comparability between organizations that enter into lease
agreements. For lessees, the key difference of the new standard
from the previous guidance (“Topic 840”) is the
recognition of a right-of-use (“ROU”) asset and lease
liability on the balance sheet. The most significant change is the
requirement to recognize ROU assets and lease liabilities for
leases classified as operating leases. The standard requires
disclosures to meet the objective of enabling users of financial
statements to assess the amount, timing, and uncertainty of cash
flows arising from leases. As part of the transition to the new
standard, the Company elected to measure and recognize leases that
existed at July 1, 2019 using a modified retrospective approach,
including the option to not restate comparative periods. For leases
existing at the effective date, the Company elected the package of
three transition practical expedients and therefore did not
reassess whether an arrangement is or contains a lease, did not
reassess lease classification, and did not reassess what qualifies
as an initial direct cost. Additionally, the Company elected, as
practical expedients, not separating lease and non-lease components
for all of its leases and the short-term lease recognition
exemption for all of its leases that qualify. The Company did not
elect the use of the hindsight practical expedient. The adoption of
Topic 842 resulted in the recognition of an operating ROU asset and
operating lease liability of $225,134 as of July 1, 2019. The
adoption did not have a material impact on the consolidated
statements of operations, stockholder’s equity and cash flows
for the six months ended December 31, 2019.
At
lease inception, the Company determines whether an arrangement is
or contains a lease. Operating leases are included in operating
lease ROU assets, current operating lease liabilities, and
noncurrent operating lease liabilities in the consolidated
financial statements. ROU assets represent the Company’s
right to use leased assets over the term of the lease. Lease
liabilities represent the Company’s contractual obligation to
make lease payments over the lease term. For operating leases, ROU
assets and lease liabilities are recognized at the commencement
date. The lease liability is measured as the present value of the
lease payments over the lease term. The Company uses the rate
implicit in the lease if it is determinable. When the rate implicit
in the lease is not determinable, the Company uses an estimate
based on a hypothetical rate provided by a third party as the
Company currently does not have issued debt. Operating ROU assets
are calculated as the present value of the remaining lease payments
plus unamortized initial direct costs plus any prepayments less any
unamortized lease incentives received. Lease terms may include
renewal or extension options to the extent they are reasonably
certain to be exercised. The assessment of whether renewal or
extension options are reasonably certain to be exercised is made at
lease commencement. Factors considered in determining whether an
option is reasonably certain of exercise include, but are not
limited to, the value of any leasehold improvements, the value of
renewal rates compared to market rates, and the presence of factors
that would cause incremental costs to the Company if the option
were not exercised. Lease expense is recognized on a straight-line
basis over the lease term. The Company has elected not to recognize
an ROU asset and obligation for leases with an initial term of
twelve months or less. The expense associated with short term
leases is included in general and administrative expense in the
statement of operations. To the extent a lease arrangement includes
both lease and non-lease components, the Company has elected to
account for the components as a single lease
component.
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 a New Drug Application
(“NDA”) for Vyleesi for HSDD in the United States
related to Palatin’s development obligations.
The
Company determined there was no stand-alone value for the license,
and that the license and the reimbursable direct out-of-pocket
expenses, pursuant to the terms of the License Agreement,
represented a combined unit of accounting which totaled
$85,000,000. The Company recognized revenue of the combined unit of
accounting over the arrangement using the input-based proportional
method as the Company completed its development obligations. During
the three and six months ended December 31, 2019, license and
contract revenue included additional billings for AMAG related
Vyleesi costs of $20,610 and $117,989, respectively. During the six
months ended December 31, 2018, license and contract revenue
included additional billings for AMAG related Vyleesi costs of
$34,505.
On June
4, 2018, the FDA accepted the Vyleesi NDA for filing. The
FDA’s acceptance triggered a $20,000,000 milestone payment to
Palatin from AMAG. As a result, the Company recognized $20,000,000
in revenue related to regulatory milestones in fiscal 2018. On June
21, 2019, the FDA granted approval of Vyleesi for use in the United
States. The FDA’s approval triggered a $60,000,000 milestone
payment to Palatin from AMAG. As a result, the Company recognized
$60,000,000 in revenue related to regulatory milestones in fiscal
2019. In addition, pursuant to the terms of and subject to the
conditions in the AMAG License Agreement, the Company is eligible
to receive from AMAG 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 upon the latest to occur of (i) the
earliest date on which there are no valid claims of the
Company’s patent rights covering such Product in such
country, (ii) the expiration of the regulatory exclusivity period
for such Product in such country and (iii) ten years following the
first commercial sale of such Product in such country. Such
royalties are subject to reductions in the event that:
(a) AMAG must license additional third-party intellectual
property in order to develop, manufacture or commercialize a
Product, or (b) generic competition occurs with respect to a
Product in a given country, subject to an aggregate cap on such
deductions of royalties otherwise payable to the Company. After the
expiration of the applicable royalties for any Product in a given
country, the license for such Product in such country will become a
fully paid-up, royalty-free, perpetual and irrevocable license. See
note 14 for additional information related to AMAG.
The
Company engaged Greenhill & Co. LLC (“Greenhill”)
as the Company’s sole financial advisor in connection with a
potential transaction with respect to Vyleesi. Under the
engagement agreement with Greenhill, the Company was obligated to
pay Greenhill a fee equal to 2% of all proceeds and consideration,
as defined, paid or to be paid to the Company by AMAG in connection
with the AMAG License Agreement, subject to a minimum fee of
$2,500,000. The minimum fee of $2,500,000, less a credit of $50,000
for an advisory fee previously paid by the Company, was paid to
Greenhill and recorded as an expense upon the closing of the
licensing transaction. This amount was credited toward amounts that
were to become due to Greenhill, provided that the aggregate fee
payable to Greenhill would not be less than 2% of all proceeds and
consideration, as defined, paid or to be paid to the Company by
AMAG in connection with the AMAG License Agreement. On November 21,
2019, the Company and Greenhill mutually agreed to terminate the
engagement agreement. As a result, the Company made a final payment
to Greenhill of $625,000, which was recorded in general and
administrative expenses during the three and six months ended
December 31, 2019. The Company has no future payment obligations to
Greenhill.
Pursuant
to the AMAG License Agreement, the Company has assigned to AMAG the
Company’s manufacturing and supply agreements with Catalent
Belgium S.A. to perform fill, finish and packaging of
Vyleesi.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(6)
AGREEMENT
WITH FOSUN:
On
September 6, 2017, the Company entered into a license agreement
with Fosun (“Fosun License Agreement”) for exclusive
rights to commercialize Vyleesi in China. Under the terms of the
agreement, the Company received $4,500,000 in October 2017, which
consisted of an upfront payment of $5,000,000 less $500,000 that
was withheld in accordance with tax withholding requirements in the
Chinese Territories and recorded as an expense during the year
ended June 30, 2018. The Company will receive a $7,500,000
milestone payment when regulatory approval in China 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.
(7)
AGREEMENT
WITH KWANGDONG:
On
November 21, 2017, the Company entered into a license agreement with Kwangdong
(“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.
On July 1, 2018, in conjunction with
the adoption of ASC Topic 606, a one-time transition 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 /
Regulatory costs
|
$88,985
|
$61,798
|
Insurance
premiums
|
65,892
|
87,937
|
Other
|
501,722
|
487,554
|
|
$656,599
|
$637,289
|
(9)
FAIR
VALUE MEASUREMENTS
The
fair value of cash equivalents is classified using a hierarchy
prioritized based on inputs. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on
management’s own assumptions used to measure assets and
liabilities at fair value. A financial asset’s or
liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair
value measurement.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
The
following table provides the assets carried at fair
value:
|
|
Quoted prices in
active markets
(Level
1)
|
Other
quoted/observable inputs (Level 2)
|
Significant
unobservable inputs (Level 3)
|
December 31,
2019:
|
|
|
|
|
Money Market
Account
|
$91,257,600
|
$91,257,600
|
$-
|
$-
|
June 30,
2019:
|
|
|
|
|
Money Market
Account
|
$43,381,556
|
$43,831,556
|
$-
|
$-
|
|
|
|
|
|
The
Company has operating leases of office and laboratory space, each
of which expires on June 30, 2020. The Company also has operating
leases of copier equipment that expire October 15,
2021.
The
components of lease expense are as follows:
Lease
cost
|
Three months
ended
December
31,
2019
|
Six months
ended
December
31,
2019
|
Operating lease
cost
|
$50,394
|
$99,258
|
Variable lease
cost
|
17,824
|
35,649
|
Short-term lease
cost
|
3,600
|
12,120
|
Total lease
cost
|
$71,818
|
$147,027
|
Supplemental
balance sheet information related to leases was as
follows:
|
|
Operating lease ROU
asset and liability
|
$173,666
|
Supplemental
lease term and discount rate information related to leases was as
follows:
Weighted-average
remaining lease term (years)
|
0.7
|
Weighted-average
discount rate
|
6.25%
|
PALATIN
TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Supplemental
cash flow information related to leases was as
follows:
|
Three months
ended
December
31,
2019
|
Six months
ended
December
31,
2019
|
Cash paid for the
amounts included in the measurement of lease
liabilities:
|
|
|
Operating
cash flows for operating leases
|
$77,096
|
$148,935
|
Supplemental
non-cash information on lease liabilities arisng from obtaining
right-of-use assets:
|
|
|
Right-of-use
assets obtained in exchange for new lease obligation
|
$36,720
|
$93,435
|
The
following table summarizes the maturity of the Company’s
operating lease liability as of December 31, 2019:
|
|
Year Ending June
30
|
|
2020
|
$154,194
|
2021
|
18,360
|
2022
|
4,590
|
Less imputed
interest
|
(3,478)
|
Total
|
$173,666
|
As of
June 30, 2019, the Company had $225,120 in future lease payments
for the year ending June 30, 2020 under ASC Topic 840.
Accrued
expenses consist of the
following:
|
|
|
|
|
|
Clinical /
Regulatory costs
|
$520,470
|
$943,721
|
Other research
related expenses
|
504,337
|
1,361,414
|
Professional
services
|
32,000
|
317,500
|
Other
|
22,784
|
226,057
|
|
$1,079,591
|
$2,848,692
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Notes
payable consist of the following:
|
|
|
|
Notes payable under
venture loan
|
$333,333
|
Unamortized related
debt discount
|
(295)
|
Unamortized debt
issuance costs
|
(142)
|
Notes
payable
|
332,896
|
|
|
Less: current
portion
|
332,896
|
|
|
Long-term
portion
|
$-
|
On
December 23, 2014, the Company closed on a $10,000,000 venture loan
which was led by Horizon Technology Finance Corporation
(“Horizon”). The debt facility was a four-year senior
secured term loan that bore interest at a floating coupon rate of
one-month LIBOR (floor of 0.50%) plus 8.50%, and provided for
interest-only payments for the first eighteen months followed by
monthly payments of principal of $333,333 plus accrued interest
through January 1, 2019. The lenders also received five-year
immediately exercisable Series D 2014 warrants to purchase 666,666
shares of common stock exercisable at an exercise price of $0.75
per share. The Company recorded a debt discount of $267,820 equal
to the fair value of these warrants at issuance, which was
amortized to interest expense over the term of the related debt.
This debt discount was offset against the note payable balance and
included in additional paid-in capital on the Company’s
balance sheet. In addition, a final incremental payment of $500,000
was due on January 1, 2019, or upon early repayment of the loan.
This final incremental payment was accreted to interest expense
over the term of the related debt and 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 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 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 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 recorded a debt discount of $305,196 equal to the fair
value of these warrants at issuance, which were amortized to
interest expense over the term of the related debt. This debt
discount was offset against the note payable balance and was
included in additional paid-in capital on the Company’s
balance sheet. In addition, a final incremental payment of $500,000
was due on August 1, 2019. This final incremental payment was
accreted to interest expense over the term of the related debt and
was included in other current liabilities on the consolidated
balance sheet. The Company incurred $146,115 of costs in connection
with the loan agreement. These costs were capitalized as deferred
financing costs and were offset against the note payable balance.
These debt issuance costs were amortized to interest expense over
the term of the related debt. During the three months ended
September 30, 2019, the loan matured, and on July 31, 2019, the
Company made the final incremental payment of
$500,000.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
(13)
STOCKHOLDERS’
EQUITY
Financing Transactions – On June 21, 2019 and April 20, 2018, the Company
entered into equity distribution agreements with Canaccord Genuity
LLC (“Canaccord”) (the “2019 Equity Distribution
Agreement” and the “2018 Equity Distribution
Agreement”, respectively), pursuant to which the Company may,
from time to time, sell shares of the Company’s common
stock at market prices by
methods deemed to be an “at-the-market offering” as
defined in Rule 415 promulgated under the Securities Act of 1933,
as amended. The 2018 Equity Distribution Agreement and related
prospectus was limited to sales of up to an aggregate maximum $25.0
million of shares of the Company’s common stock, and the 2019
Equity Distribution Agreement and related prospectus is limited to
sales of up to an aggregate maximum $40.0 million of shares of the
Company’s common stock. The Company pays Canaccord 3.0% of
the gross proceeds as a commission.
For the three and six months ended December 31, 2019, respectively,
1,238,040 and 1,895,934 shares of common stock were sold through
Canaccord under the 2019 Equity Distribution Agreement for net
proceeds of $1,001,768 and $1,581,498 after payment of commission
fees of $31,756 and $51,696 and other related expenses of $25,000
and $90,000, respectively From inception of the 2019 Equity
Distribution Agreement through December 31, 2019, a total of
9,460,509 shares of common Stock were sold for net proceeds of
$11,870,334 after payment of commission fees of $369,907 and other
related expenses of $90,000. For the three and six months ended
December 31, 2018, respectively, 31,300 and 2,256,445 shares of
common stock were sold through Canaccord under the 2018 Equity
Distribution Agreement for net proceeds of $30,361 and $2,252,808,
respectively, after payment of commission fees of $939 and $69,674,
respectively. From inception of the 2018 Equity Distribution
Agreement through June 26, 2019, a total of 18,504,993 shares of
common Stock were sold for net proceeds of $24,249,997 after
payment of commission fees of $750,000, and the 2018 Equity
Distribution Agreement is deemed completed.
Stock Purchase Warrants – On September 13, 2019, the
Company’s Board of Directors approved a plan to offer to
purchase and terminate certain outstanding common stock purchase
warrants through privately negotiated transactions. The purchase
and termination program has no time limit and may be suspended for
periods or discontinued at any time.
During
the three and six months ended December 31, 2019, the Company
entered into several warrant termination agreements to repurchase
and cancel the following previously issued Series F, Series H and
Series J warrants for the following aggregate buyback prices, plus
additional consideration upon any sale of the Company within six
months of the respective agreement:
|
Three months
ended December 31, 2019
|
Six months ended
December 31, 2019
|
|
|
|
|
|
Series F
Warrants
|
297,352
|
$62,712
|
297,352
|
$62,712
|
Series H
Warrants
|
992,387
|
390,600
|
1,466,432
|
577,373
|
Series J
Warrants
|
1,908,080
|
760,657
|
4,774,889
|
1,907,381
|
|
3,197,819
|
$1,213,969
|
6,538,673
|
$2,547,466
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
During
the three months ended December 31, 2019, the Company issued 26,861
shares of common stock upon the cashless exercise provisions of
666,666 Series D warrants at an exercise price of $0.75 per
share.
Stock Options – For the three and six months ended
December 31, 2019, the Company recorded stock-based compensation
related to stock options of $334,564 and $678,724, respectively.
For the three and six months ended December 31, 2018, the Company
recorded stock-based compensation related to stock options of
$317,704 and $641,407, respectively.
In July
2018, the terms of certain options were modified to accelerate
vesting and extend the option exercise period. As a result, the
Company recorded additional stock-based compensation of $109,004
during the six months ended December 31, 2018.
A
summary of stock option activity is as follows:
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Term in Years
|
Aggregate
Intrinsic Value
|
Outstanding - June
30, 2019
|
14,435,650
|
0.85
|
7.3
|
|
|
|
|
|
|
Granted
|
-
|
-
|
|
|
Forfeited
|
-
|
-
|
|
|
Exercised
|
-
|
-
|
|
|
Expired
|
(77,100)
|
2.72
|
|
|
Outstanding -
December 31, 2019
|
14,358,550
|
$0.84
|
6.8
|
$1,503,989
|
|
|
|
|
|
Exercisable at
December 31, 2019
|
8,934,000
|
$0.77
|
5.8
|
$990,474
|
|
|
|
|
|
Expected to vest at
December 31, 2019
|
5,424,550
|
$0.96
|
8.5
|
$513,515
|
Stock
options granted to the Company’s executive officers and
employees generally vest over a 48-month period, while stock
options granted to its non-employee directors vest over a 12-month
period.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Included
in the options outstanding above are 1,075,000 and 117,500
performance-based options granted in December 2017 to executive
officers and employees, respectively, which vest during a
performance period ending on December 31, 2020, if and upon either
i) as to 100% of the target number of shares upon achievement of a
closing price for the Company’s common stock equal to or
greater than $1.50 per share for 20 consecutive trading days, which
is considered a market condition; or ii) as to thirty percent (30%)
of the target number of shares, upon the acceptance for filing by
the FDA of an NDA for Vyleesi for HSDD in premenopausal women
during the performance period, which is considered a performance
condition; iii) as to fifty percent (50%) of the target number of
shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD
in premenopausal women during the performance period, which is also
considered a performance condition; iv) as to twenty percent (20%)
of the target number of shares, upon entry into a licensing
agreement during the performance period for the commercialization
of Vyleesi for FSD in 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 options was $602,760. The Company amortized 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 and 50% of the target number of options vested in June
2019 upon FDA approval of Vyleesi.
Restricted Stock Units – For the three and six months
ended December 31, 2019, the Company recorded stock-based
compensation related to restricted stock units of $470,372 and
$953,947, respectively. For the three and six months ended December
31, 2018, the Company recorded stock-based compensation related to
restricted stock units of $661,090 and $1,461,968,
respectively.
A
summary of restricted stock unit activity is as
follows:
|
|
Outstanding at July
1, 2019
|
10,327,833
|
Granted
|
-
|
Forfeited
|
-
|
Vested
|
(523,775)
|
Outstanding at
December 31, 2019
|
9,804,058
|
|
|
Included
in outstanding restricted stock units in the table above are
6,167,750 vested shares that have not been issued as of December
31, 2019 due to a provision in the restricted stock unit agreements
to delay delivery.
Time-based
restricted stock units granted to the Company’s executive
officers, employees and non-employee directors generally vest over
24 months, 48 months and 12 months, respectively.
In June
2019, the Company granted 438,000 performance-based restricted
stock units to its executive officers and 182,725 performance-based
restricted stock units to other employees which vest during a
performance period ending June 24, 2023. The performance-based
restricted stock units vest on performance criteria relating to
advancement of MC1r programs, including initiation of clinical
trials and licensing of Vyleesi in additional countries or
regions.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
In
December 2017, the Company granted 1,075,000 performance-based
restricted stock units to its executive officers and 670,000
performance-based restricted stock units to other employees which
vest during a performance period, ending on December 31, 2020, if
and upon either i) as to 100% of the target number of shares upon
achievement of a closing price for the Company’s common stock
equal to or greater than $1.50 per share for 20 consecutive trading
days, which is considered a market condition; or ii) as to thirty
percent (30%) of the target number of shares, upon the acceptance
for filing by the FDA of an NDA for Vyleesi for HSDD in
premenopausal women during the performance period, which is
considered a performance condition; iii) as to fifty percent (50%)
of the target number of shares, upon the approval by the FDA of an
NDA for Vyleesi for HSDD in premenopausal women during the
performance period, which is also considered a performance
condition; iv) as to twenty percent (20%) of the target number of
shares, upon entry into a licensing agreement during the
performance period for the commercialization of Vyleesi for FSD in
at least two of the following geographic areas (a) four or more
countries in Europe, (b) Japan, (c) two or more countries in
Central and/or South America, (d) two or more countries in Asia,
excluding Japan and China, and (e) Australia, which is also
considered a performance condition. The fair value of these awards
was $913,750 and $569,500, respectively. The Company amortized the
fair value over the derived service period of 1.1 years or upon the
attainment of the performance condition. Pursuant to the FDA
acceptance of the NDA filing for Vyleesi, 30% of the target number
of shares vested in June 2018. Pursuant to the FDA approval of
Vyleesi, 50% of the target number of shares vested in June
2019.
On
January 9, 2020, AMAG announced plans to divest Vyleesi and
Intrarosa® (prasterone), both women’s healthcare
products. While AMAG indicated that it has received preliminary
expressions of interest to acquire or sublicense rights to these
products, there have been no public disclosures of any potential
licensees of AMAG’s rights to Vyleesi in North America. We
licensed all rights to commercialize Vyleesi in North America to
AMAG, and subsequent to FDA approval of Vyleesi in June 2019, AMAG
launched Vyleesi nationally in September 2019 through select
specialty pharmacies with its women’s health sales force.
Under the license agreement, AMAG has a contractual obligation to
use commercially reasonable efforts to commercialize Vyleesi, and
if AMAG materially breaches its obligations, we could have the
right to terminate the license agreement and require AMAG to assign
and transfer certain Vyleesi rights to Palatin. In the event AMAG
assigns its Vyleesi license to a third party, the assignee must
expressly agree to be bound by the license agreement between AMAG
and Palatin. The Company is currently assessing the potential
impact on the Company’s operations caused by this
announcement.