Report of Independent Registered Public Accounting
Firm
To the
Stockholders and Board of Directors
Palatin
Technologies, Inc.:
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated balance sheets of Palatin
Technologies, Inc. and subsidiary (the Company) as of
June 30, 2018 and 2017, the related consolidated statements of
operations, comprehensive income (loss), stockholders’ equity
(deficiency), and cash flows for each of the years in the
three-year period ended June 30, 2018, and the related notes
(collectively, the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
June 30, 2018 and 2017, and the results of its operations and
its cash flows for each of the years in the three-year period ended
June 30, 2018, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of
June 30, 2018, based on criteria established in
Internal Control – Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated September 13, 2018
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial
reporting.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our
opinion.
We have
served as the Company’s auditor since 2002.
Philadelphia,
Pennsylvania
September
13, 2018
PALATIN TECHNOLOGIES, INC
.
|
|
Consolidated
Balance Sheets
|
|
|
|
ASSETS
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
$
38,000,171
|
$
40,200,324
|
Available-for-sale
investments
|
-
|
249,837
|
Accounts
receivable
|
-
|
15,116,822
|
Prepaid expenses
and other current assets
|
513,688
|
1,011,221
|
Total current
assets
|
38,513,859
|
56,578,204
|
|
|
|
Property and
equipment, net
|
164,035
|
198,153
|
Other
assets
|
338,916
|
56,916
|
Total
assets
|
$
39,016,810
|
$
56,833,273
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$
2,223,693
|
$
1,551,367
|
Accrued
expenses
|
2,103,021
|
10,521,098
|
Notes payable, net
of discount
|
5,948,763
|
7,824,935
|
Capital lease
obligations
|
-
|
14,324
|
Deferred
revenue
|
-
|
35,050,572
|
Other current
liabilities
|
487,488
|
-
|
Total current
liabilities
|
10,762,965
|
54,962,296
|
|
|
|
Notes payable, net
of discount
|
332,898
|
6,281,660
|
Deferred
revenue
|
500,000
|
-
|
Other non-current
liabilities
|
456,038
|
753,961
|
Total
liabilities
|
12,051,901
|
61,997,917
|
|
|
|
Commitments and
contingencies (Note 13)
|
|
|
|
|
|
Stockholders’
equity (deficiency):
|
|
|
Preferred stock of
$0.01 par value – authorized 10,000,000 shares:
|
|
|
Series A
Convertible: issued and outstanding 4,030 shares as of June 30,
2018 and June 30, 2017
|
40
|
40
|
Common stock of
$0.01 par value – authorized 300,000,000 shares;
|
|
|
issued and
outstanding 200,554,205 shares as of June 30, 2018 and 160,515,361
as of June 30, 2017
|
2,005,542
|
1,605,153
|
Additional paid-in
capital
|
357,005,233
|
349,974,538
|
Accumulated other
comprehensive loss
|
-
|
(590
)
|
Accumulated
deficit
|
(332,045,906
)
|
(356,743,785
)
|
Total
stockholders’ equity (deficiency)
|
26,964,909
|
(5,164,644
)
|
Total liabilities
and stockholders’ equity (deficiency)
|
$
39,016,810
|
$
56,833,273
|
The
accompanying notes are an integral part of these consolidated
financial statements
PALATIN
TECHNOLOGIES, INC.
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
License and
contract
|
$
67,134,758
|
$
44,723,827
|
$
-
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Research and
development
|
32,566,217
|
45,683,174
|
43,071,051
|
General and
administrative
|
8,641,976
|
9,610,147
|
6,179,084
|
Total operating
expenses
|
41,208,193
|
55,293,321
|
49,250,135
|
|
|
|
|
Income (loss) from
operations
|
25,926,565
|
(10,569,494
)
|
(49,250,135
)
|
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
Investment
income
|
310,663
|
26,270
|
50,226
|
Interest
expense
|
(1,452,014
)
|
(2,288,309
)
|
(2,513,027
)
|
Total other
expense, net
|
(1,141,351
)
|
(2,262,039
)
|
(2,462,801
)
|
|
|
|
|
Income (loss)
before income taxes
|
24,785,214
|
(12,831,533
)
|
(51,712,936
)
|
Income tax
expense
|
(82,500
)
|
(500,000
)
|
-
|
|
|
|
|
NET INCOME
(LOSS)
|
$
24,702,714
|
$
(13,331,533
)
|
$
(51,712,936
)
|
|
|
|
|
Basic net income
(loss) per common share
|
$
0.12
|
$
(0.07
)
|
$
(0.33
)
|
|
|
|
|
Diluted net income
(loss) income per common share
|
$
0.12
|
$
(0.07
)
|
$
(0.33
)
|
|
|
|
|
Weighted average
number of common shares outstanding used in computing basic net
income (loss) per common share
|
198,101,060
|
184,087,719
|
156,553,534
|
|
|
|
|
Weighted average
number of common shares outstanding used in computing diluted
income (loss) per common share
|
207,007,558
|
184,087,719
|
156,553,534
|
The
accompanying notes are an integral part of these consolidated
financial statements
PALATIN
TECHNOLOGIES, INC.
|
|
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
24,702,714
|
$
(13,331,533
)
|
$
(51,712,936
)
|
|
|
|
|
Other comprehensive
income (loss):
|
|
|
|
Unrealized gain
(loss) on available-for-sale investments
|
590
|
1,354
|
(1,944
)
|
|
|
|
|
Total comprehensive
income (loss)
|
$
24,703,304
|
$
(13,330,179
)
|
$
(51,714,880
)
|
The accompanying notes are an integral part of these consolidated
financial statements
PALATIN TECHNOLOGIES, INC.
|
and Subsidiary
|
Consolidated Statements of Stockholders’ Equity
(Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30,
2015
|
4,697
|
$
47
|
57,128,433
|
$
571,284
|
$
303,332,460
|
$
-
|
$
(291,699,316
)
|
$
12,204,475
|
Stock-based
compensation
|
-
|
-
|
662,186
|
6,622
|
1,836,743
|
-
|
-
|
1,843,365
|
Sale of common stock units, net of
costs
|
-
|
-
|
-
|
-
|
19,834,278
|
-
|
-
|
19,834,278
|
Issuance of warrants on
debt
|
-
|
-
|
-
|
-
|
305,196
|
-
|
-
|
305,196
|
Withholding taxes related to
restricted stock units
|
-
|
-
|
(123,483
)
|
(1,235
)
|
(57,166
)
|
-
|
-
|
(58,401
)
|
Warrant
exercises
|
-
|
-
|
10,890,889
|
108,909
|
(108,909
)
|
-
|
-
|
-
|
Series A
Conversion
|
(667
)
|
(7
)
|
10,030
|
100
|
(93
)
|
-
|
-
|
-
|
Unrealized loss on
investments
|
-
|
-
|
-
|
-
|
-
|
(1,944
)
|
-
|
(1,944
)
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(51,712,936
)
|
(51,712,936
)
|
Balance, June 30,
2016
|
4,030
|
40
|
68,568,055
|
685,680
|
325,142,509
|
(1,944
)
|
(343,412,252
)
|
(17,585,967
)
|
Stock-based
compensation
|
-
|
-
|
579,400
|
5,794
|
1,751,465
|
-
|
-
|
1,757,259
|
Sale of common stock units, net of
costs
|
-
|
-
|
36,866,097
|
368,661
|
23,488,312
|
-
|
-
|
23,856,973
|
Withholding taxes related to
restricted stock units
|
-
|
-
|
(75,993
)
|
(760
)
|
(26,328
)
|
-
|
-
|
(27,088
)
|
Warrant
exercises
|
-
|
-
|
54,577,802
|
545,778
|
(381,420
)
|
-
|
-
|
164,358
|
Unrealized gains on
investments
|
-
|
-
|
-
|
-
|
-
|
1,354
|
-
|
1,354
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,331,533
)
|
(13,331,533
)
|
Balance, June 30,
2017
|
4,030
|
40
|
160,515,361
|
1,605,153
|
349,974,538
|
(590
)
|
(356,743,785
)
|
(5,164,644
)
|
Cumulative effect of accounting
change
|
-
|
-
|
-
|
-
|
4,835
|
-
|
(4,835
)
|
-
|
Stock-based
compensation
|
-
|
-
|
795,041
|
7,951
|
3,510,400
|
-
|
-
|
3,518,351
|
Sale of common stock , net of
costs
|
-
|
-
|
1,283,754
|
12,838
|
1,244,936
|
-
|
-
|
1,257,774
|
Withholding taxes related to
restricted stock units
|
-
|
-
|
(27,465
)
|
(275
)
|
(20,511
)
|
-
|
-
|
(20,786
)
|
Warrant
exercises
|
-
|
-
|
37,778,614
|
377,786
|
2,133,243
|
-
|
-
|
2,511,029
|
Option
exercises
|
-
|
-
|
208,900
|
2,089
|
157,792
|
-
|
-
|
159,881
|
Unrealized gains on
investments
|
-
|
-
|
-
|
-
|
-
|
590
|
-
|
590
|
Net Income
|
-
|
-
|
-
|
-
|
-
|
-
|
24,702,714
|
24,702,714
|
Balance, June 30,
2018
|
4,030
|
$
40
|
200,554,205
|
$
2,005,542
|
$
357,005,233
|
$
-
|
$
(332,045,906
)
|
$
26,964,909
|
The
accompanying notes are an integral part of these consolidated
financial statements
PALATIN TECHNOLOGIES, INC.
|
and Subsidiary
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net
income (loss)
|
$
24,702,714
|
$
(13,331,533
)
|
$
(51,712,936
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|
|
|
(used)
in operating activities:
|
|
|
|
Depreciation and
amortization
|
56,569
|
33,051
|
43,052
|
Non-cash interest
expense
|
175,493
|
298,790
|
327,479
|
Stock-based
compensation
|
3,518,351
|
1,757,259
|
1,843,365
|
Deferred income tax
benefit
|
(500,000
)
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
15,116,822
|
(15,116,822
)
|
-
|
Prepaid expenses
and other assets
|
715,533
|
308,917
|
503,785
|
Accounts
payable
|
672,326
|
837,477
|
(392,594
)
|
Accrued
expenses
|
(8,393,698
)
|
2,728,985
|
1,676,209
|
Deferred
revenue
|
(34,550,572
)
|
35,050,572
|
-
|
Other non-current
liabilities
|
189,565
|
314,831
|
347,826
|
Net cash provided
by (used in) operating activities
|
1,703,103
|
12,881,527
|
(47,363,814
)
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
Proceeds from
sale/maturity of investments
|
250,000
|
1,124,999
|
-
|
Purchases of
investments
|
-
|
-
|
(1,387,022
)
|
Purchases of
property and equipment
|
(22,451
)
|
(133,403
)
|
(17,695
)
|
Net cash provided
by (used in) investing activities
|
227,549
|
991,596
|
(1,404,717
)
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
Payments on capital
lease obligations
|
(14,324
)
|
(27,424
)
|
(25,872
)
|
Payment of
withholding taxes related to restricted
|
|
|
|
stock
units
|
(45,165
)
|
(2,708
)
|
(190,360
)
|
Payment on debt
obligations
|
(8,000,000
)
|
(5,666,666
)
|
-
|
Proceeds from the
exercise of stock options
|
159,881
|
-
|
-
|
Proceeds from
exercise of common stock warrants
|
2,511,029
|
164,358
|
-
|
Proceeds from the
sale of common stock and warrants, net
|
|
|
|
of
costs
|
1,257,774
|
23,856,973
|
19,834,278
|
Proceeds from the
issuance of notes payable and warrants
|
-
|
-
|
10,000,000
|
Payment of debt
issuance costs
|
-
|
-
|
(146,115
)
|
Net cash (used in)
provided by financing activities
|
(4,130,805
)
|
18,324,533
|
29,471,931
|
|
|
|
|
NET (DECREASE)
INCREASE IN CASH
|
|
|
|
AND
CASH EQUIVALENTS
|
(2,200,153
)
|
32,197,656
|
(19,296,600
)
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of year
|
40,200,324
|
8,002,668
|
27,299,268
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of year
|
$
38,000,171
|
$
40,200,324
|
$
8,002,668
|
|
|
|
|
SUPPLEMENTAL CASH
FLOW INFORMATION:
|
|
|
|
Cash paid for
interest
|
$
1,084,158
|
$
1,676,954
|
$
1,836,743
|
Issuance of
warrants in connection with debt financing
|
-
|
-
|
305,196
|
The
accompanying notes are an integral part of these consolidated
financial statements
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
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. Our product candidates are targeted,
receptor-specific therapeutics for the treatment of diseases with
significant unmet medical need and commercial potential. Our 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”) 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 first quarter of calendar
2019.
Vyleesi.
Vyleesi is an on demand subcutaneous injectable
product for the treatment of HSDD in premenopausal women. Vyleesi
is a synthetic peptide analog of the naturally occurring hormone
alpha-MSH (melanocyte-stimulating hormone). In March 2018, our
exclusive North American licensee for Vyleesi, AMAG, submitted an
NDA to the FDA for Vyleesi for the treatment of HSDD in
premenopausal women, which was accepted for filing and review by
the FDA. The Prescription Drug User Fee Act (“PDUFA”)
date for completion of FDA review of the Vyleesi NDA is March 23,
2019. We have 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, “China”), and Kwangdong Pharmaceutical
Co., Ltd. (“Kwangdong”) for the Republic of Korea
(“Korea”).
Our
Phase 3 studies for HSDD in premenopausal women, called the
RECONNECT studies, consisted of two double-blind
placebo-controlled, randomized parallel group studies comparing the
on demand use of 1.75 mg of Vyleesi versus placebo, in each case,
delivered via a subcutaneous auto-injector. Each trial consisted of
more than 600 patients randomized in a 1:1 ratio to either the
treatment arm or placebo with a 24-week evaluation period. In both
clinical trials, Vyleesi met the pre-specified co-primary efficacy
endpoints of improvement in desire and decrease in distress
associated with low sexual desire as measured using validated
patient-reported outcome instruments.
After
completing the studies, patients had the option to continue in an
open-label safety extension study for an additional 52 weeks.
Nearly 80% of patients who completed the randomized portion of the
study elected to remain in the open-label portion of the study. In
the Phase 3 clinical trials, the most frequent adverse events were
nausea, flushing, and headache, which were generally
mild-to-moderate in intensity and were transient.
We
retain worldwide rights for Vyleesi for HSDD and all other
indications outside North America, Korea and China. We are actively
seeking potential partners for marketing and commercialization
rights for Vyleesi for HSDD outside the licensed territories.
However, we may not be able to enter into suitable agreements with
potential partners on acceptable terms, if at all.
Melanocortin Receptor Systems.
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. Our new
product development activities primarily focus on 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. We believe that MC1r agonists,
including the MC1r agonist peptides we are developing, 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. We are also
developing peptides that are active at more than one melanocortin
receptor, and MC4r agonists, with potential utility in a number of
obesity and metabolic-related disorders, including rare disease and
orphan indications.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
●
PL-8177, a
selective MC1r agonist peptide, is our lead clinical development
candidate for inflammatory bowel diseases, with potential
applicability for a number of other diseases. We filed an
Investigational New Drug (“IND”) application on PL-8177
in late 2017 and have completed subcutaneous dosing of human
subjects in a Phase 1 single and multiple ascending dose clinical
safety study, with data expected in the fourth quarter of calendar
year 2018. We anticipate starting a clinical study with oral dosing
of PL-8177 in human subjects in the second half of calendar year
2018, with data expected in the first half of calendar
2019.
●
PL-8331, a dual
MC1r and MC5r peptide agonist, is a preclinical development
candidate for treating ocular inflammation. We have initiated IND
preclinical enabling activities with PL-8331, and if results are
favorable, anticipate filing an IND and initiating clinical trials
for treatment of dry eye disease in the second half of calendar
year 2019.
●
We have initiated
preclinical programs with MC4r peptides and orally-active small
molecules for treatment of rare genetic metabolic and obesity
disorders, and if results are favorable, anticipate selecting a
lead clinical development candidate and completing IND enabling
activities in calendar year 2019.
Natriuretic Peptide Receptor Systems.
The natriuretic
peptide receptor (“NPR”) system has numerous
cardiovascular functions, and therapeutic agents modulating this
system may be useful in treatment of cardiovascular diseases,
including reducing cardiac hypertrophy and fibrosis, heart failure,
acute asthma, other pulmonary diseases and hypertension. While the
therapeutic potential of modulating this system is well
appreciated, development of therapeutic agents has been difficult
due, in part, to the short biological half-life of native peptide
agonists. We have designed and are developing potential 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”).
●
PL-3994 is an NPR-A
agonist we developed which has completed Phase 1 clinical safety
studies. It has potential utility in treatment of a number of
cardiovascular diseases, including genetic and orphan diseases
resulting from a deficiency of endogenous active NPR-A. We have
ongoing academic collaborations with several institutions with
PL-3994.
●
PL-5028, a dual
NPR-A and NPR-C agonist we developed, is in preclinical development
for cardiovascular diseases, including reducing cardiac hypertrophy
and fibrosis. We have ongoing academic collaborations with several
institutions with PL-5028, and seek to enter into a development
partnership by the end of calendar year 2019.
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 June 30, 2018 of $332,045,906 and while
the Company earned net income for fiscal 2018 of $24,702,714, 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
June 30, 2018, the Company’s cash and cash equivalents, were
$38,000,171 and current liabilities were $10,762,965. We intend 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 September 30, 2019. 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
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,
accounts receivable and investments. The Company’s cash and
cash equivalents are primarily invested in one money market account
sponsored by a large financial institution. For year ended June 30,
2018, the Company reported $62,134,758 in license and contract
revenue related to a license agreement with AMAG for Vyleesi for
North America (“AMAG License Agreement”) (Note 4). In
addition, for the year ended June 30, 2018, the Company reported
$5,000,000 in license revenue related to a license agreement with
Fosun for Vyleesi for China and certain other Asian territories
(“Fosun License Agreement”) (Note 5). For the year
ended June 30, 2017, the Company reported $44,723,827 in contract
revenue related to the AMAG License Agreement.
(2)
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 accounting principles
generally accepted in the United States of America (“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 $37,808,099 and $40,019,336 in a money
market account at June 30, 2018 and 2017,
respectively.
Investments
–The Company
determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates
such determinations at each balance sheet date. Debt securities are
classified as held-to-maturity when the Company has the intent and
ability to hold the securities to maturity. Debt securities for
which the Company does not have the intent or ability to hold to
maturity are classified as available-for-sale. Held-to-maturity
securities are recorded as either short-term or long-term on the
balance sheet, based on the contractual maturity date and are
stated at amortized cost. Marketable securities that are bought and
held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair
value, with unrealized gains and losses recognized in earnings.
Debt and marketable equity securities not classified as
held-to-maturity or as trading are classified as available-for-sale
and are carried at fair market value, with the unrealized gains and
losses, net of tax, included in the determination of other
comprehensive income (loss).
The fair value of substantially all securities is determined by
quoted market prices. The estimated fair value of securities for
which there are no quoted market prices is based on similar types
of securities that are traded in the market.
Fair Value of Financial Instruments
– The
Company’s financial instruments consist primarily of cash
equivalents, accounts receivable, accounts payable and notes
payable. Management believes that the carrying values of cash
equivalents, available-for-sale investments, accounts receivable
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 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.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
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
– The Company has generated
revenue solely through license and collaboration agreements. The
Company recognizes revenue in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 605-25,
Revenue Recognition for Arrangements with
Multiple Elements
, which addresses the determination of
whether an arrangement involving multiple deliverables contains
more than one unit of accounting. A delivered item within an
arrangement is considered a separate unit of accounting only if
both of the following criteria are met:
●
the delivered item
has value to the customer on a stand-alone basis; and
●
if the arrangement
includes a general right of return relative to the delivered item,
delivery or performance of the undelivered item is considered
probable and substantially in control of the vendor.
Under
FASB ASC Topic 605-25, if both of the criteria above are not met,
then separate accounting for the individual deliverables is not
appropriate.
The
Company has determined that it is appropriate to recognize such
revenue using the input-based proportional method during the period
of Palatin’s development obligations as defined in the
license agreement with AMAG (the “AMAG License
Agreement”). Refer to Note 4 for additional
information.
Under
its license agreement with Fosun (the “Fosun License
Agreement”) (Note 5), 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 2018, which was the quarter in which the
license was granted, since the license has stand-alone value and
the upfront payment received by the Company is
non-refundable.
Under
its license agreement with Kwangdong (the “Kwangdong License
Agreement”) (Note 6), the Company received consideration in
the form of an upfront license fee payment and has currently
determined that it is appropriate to record such consideration as
non-current deferred revenue because the upfront payment received
by the Company is subject to certain refund
provisions.
Revenue
resulting from the achievement of development milestones is
recorded in accordance with the accounting guidance for the
milestone method of revenue recognition.
Amounts
received prior to satisfying the revenue recognition criteria are
recorded as deferred revenue on the Company’s consolidated
balance sheet. Amounts expected to be recognized as revenue in the
next 12 months following the balance sheet date are classified as
current liabilities.
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 our development activities. We review the activities
performed under all contracts each quarter and accrue expenses and
the amount of any reimbursement to be received from our
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 we do not
identify services performed for us but not billed by the
service-provider, or if we underestimate or overestimate 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
Stock-Based Compensation –
The Company charges to
expense the fair value of stock options and other equity awards
granted. The Company determines the value of stock options
utilizing the Black-Scholes option pricing model. Compensation
costs for share-based awards with pro-rata vesting are determined
using the quoted market price of the Company’s common stock
on the date of grant and allocated to periods 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 and
allocated to the periods based on the probability of achievement of
the performance condition over the service period.
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 a valuation allowance against its
deferred tax assets based on the history of losses
incurred.
Pursuant
to the Fosun License Agreement (Note 5) and Kwangdong License
Agreement (Note 6), $500,000 and $82,500, respectively, was
withheld in accordance with tax withholding requirements in China
and Korea, respectively, and was recorded as an expense during the
year ended June 30, 2018. Any potential credit to be received by
the Company on its United States tax returns is currently offset by
the Company’s valuation allowance.
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.
As a
result of the enactment of the new corporate income tax rate, the
Company remeasured certain deferred tax assets and liabilities
based on the rates at which they are expected to reverse but
continues to maintain a full valuation allowance against its net
deferred tax assets.
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.
As a
result of the 2017 Tax Act, during the quarter ended December 31,
2017, the Company recorded a tax benefit of $500,000 related to the
release of a valuation allowance against an AMT credit (Note
15).
In
addition, as a result of the enactment of the new corporate income
tax rate, the Company remeasured certain deferred tax assets and
liabilities based on the rates at which they are expected to
reverse but continues to maintain a full valuation allowance
against its net deferred tax assets.
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.
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 are considered in the computation of basic and
diluted net income (loss) per common share. As of June 30, 2018,
all warrants exercisable for nominal value have been converted into
common stock.
The
following table is a reconciliation of net income (loss) and the
shares used in calculating basic and diluted net income (loss) per
common share for the three years ended June 30, 2018, 2017 and
2016:
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
24,702,714
|
$
(13,331,533
)
|
$
(51,712,936
)
|
|
|
|
|
Denominator:
|
|
|
|
Weighted average
common shares outstanding - Basic
|
198,101,060
|
184,087,719
|
156,553,534
|
|
|
|
|
Effect of dilutive
shares:
|
|
|
|
Common stock
equivalents arising from stock options,
|
|
|
|
warrants and
conversion of preferred stock
|
6,752,604
|
-
|
-
|
Restriced stock
units
|
2,153,894
|
-
|
-
|
Weighted average
common shares outstanding - Diluted
|
207,007,558
|
184,087,719
|
156,553,534
|
|
|
|
|
Net income (loss)
per common share:
|
|
|
|
Basic
|
$
0.12
|
$
(0.07
)
|
$
(0.33
)
|
Diluted
|
$
0.12
|
$
(0.07
)
|
$
(0.33
)
|
As of
June 30, 2018, 2017 and 2016 common shares issuable upon conversion
of Series A Convertible Preferred Stock, the exercise of
outstanding options and warrants, excluding outstanding warrants
exercisable for nominal consideration, and the vesting of
restricted stock units amounted in an aggregate of 5,197,592,
40,597,194 and 32,167,737 shares, respectively, being excluded from
the weighted average number of common shares outstanding used in
computing diluted net income (loss) per common share because they
were anti-dilutive during the period or the minimum performance
requirements or market conditions had not been met.
(3)
NEW
AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
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 has not completed review of the impact of this guidance but
does not expect this new guidance to have a material impact 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. 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
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Improvements to Employee
Share-Based Payment Accounting
, which amended the guidance
related to stock compensation. The updated guidance changes how
companies account for certain aspects of share-based payment awards
to employees, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows.
Under this guidance, on a prospective basis,
companies will no longer record excess tax benefits and certain tax
deficiencies as additional paid-in capital. Instead, companies will
record all excess tax benefits and tax deficiencies as income tax
expense or benefit in the income statement. In addition, the
guidance eliminates the requirement that excess tax benefits be
realized before companies can recognize them. The ASU requires a
cumulative-effect adjustment for previously unrecognized excess tax
benefits in opening retained earnings in the period of adoption.
Effective July 1, 2017, the Company adopted this updated guidance
and elected to recognize forfeitures when they occur using a
modified retrospective approach. The adoption of ASU No. 2016-09
did not have a material impact on the Company’s consolidated
financial statements.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases,
related 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 new guidance is effective for the Company
on July 1, 2018, with early adoption prohibited other than for
certain provisions.
The Company has
not completed review of the impact of this guidance but does not
expect this new guidance to have a material impact on its
consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes:
Balance Sheet Classification of Deferred Taxes,
which simplifies the balance sheet classification
of deferred taxes. The new guidance requires that deferred tax
liabilities and assets be classified as noncurrent in a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the new guidance. Effective July 1, 2017, the Company adopted
this updated guidance, which did not have a material impact on the
Company’s financial position or results of operations because
its net deferred tax assets were fully offset by a valuation
allowance based on the history of losses
incurred.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with
Customers
, which 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. The ASU will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB voted to defer the effective date of the new standard until
fiscal years beginning after December 15, 2017 with early
application permitted for fiscal years beginning after December 15,
2016. With the deferral, the new standard is effective for the
Company on July 1, 2018.
In addition, in April 2016, the
FASB issued ASU No. 2016-10,
Identifying Performance Obligations and
Licensing
, which addresses various issues associated with
identifying performance obligations, licensing of intellectual
property, royalty considerations, and other matters. ASU No.
2016-10 is effective in connection with ASU No. 2014-09.
The two permitted transition methods
under ASU 2014-09 are the full retrospective method, in which case
the new standard would be applied to each prior period presented
and the cumulative effect of applying the standard would be
recognized as of the earliest period reported, or the modified
retrospective method, in which case the cumulative effect of
applying the new standard would be recognized as of the date of
initial application.
The Company has elected to adopt the new standard using the
modified retrospective approach. The Company has completed its
review to assess the impact to its consolidated financial
statements, including an assessment of the Company’s three
key contracts. Based on the review of these contracts, the Company
expects the effect of initially applying the new standard to result
in a decrease to the opening balance of accumulated deficit of
$500,000 as a result of recognition of revenue deferred as of June
30, 2018. The Company is continuing its assessment of the impact
over its financial reporting disclosures.
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 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
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 has determined there is 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, represent a combined unit of accounting which totals
$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 years ended June 30, 2018 and 2017, the Company recognized
$42,134,758 and $44,723,827, respectively, as license and contract
revenue which included additional billings for AMAG related Vyleesi
costs of $1,151,243 and $707,342 in fiscal 2018 and fiscal 2017,
respectively.
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 $80,000,000 in specified regulatory
milestone payments upon achievement of certain regulatory
milestones, 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. On June 4, 2018 the FDA accepted the Vyleesi NDA
for filing. The NDA was filed on March 23,
2018. The
FDA’s acceptance triggered a $20,000,000 million milestone
payment to Palatin from AMAG. As a result, the Company recognized
$20,000,000 in revenue related to regulatory milestones for the
year ended June 30, 2018.
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 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.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(5)
AGREEMENT
WITH FOSUN:
On
September 6, 2017, the Company entered into the 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 China 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.
(6)
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 has
been recorded as non-current deferred revenue at June 30, 2018. 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.
(7)
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses
and other
current assets consist of the following:
|
|
|
|
|
|
Clinical study
costs
|
$
145,994
|
$
657,069
|
Insurance
premiums
|
42,605
|
182,966
|
Other
|
325,089
|
171,186
|
|
$
513,688
|
$
1,011,221
|
The
following summarizes the carrying value of our available-for-sale
investments, which consist of corporate debt
securities:
|
|
|
|
|
|
Cost
|
$
-
|
$
1,387,022
|
Matured
investments
|
-
|
(1,124,999
)
|
Amortization of
premium
|
-
|
(11,596
)
|
Gross unrealized
loss
|
-
|
(590
)
|
Fair
value
|
$
-
|
$
249,837
|
(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 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
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)
|
June 30,
2018:
|
|
|
|
|
Money Market
Account
|
$
37,808,099
|
$
37,808,099
|
$
-
|
$
-
|
June 30,
2017:
|
|
|
|
|
Money Market
Account
|
$
40,019,336
|
$
40,019,336
|
$
-
|
$
-
|
(10)
PROPERTY
AND EQUIPMENT, NET
Property
and equipment, net, consists of the following:
|
|
|
|
|
|
Office
equipment
|
$
1,193,162
|
$
1,180,210
|
Laboratory
equipment
|
558,205
|
548,706
|
Leasehold
improvements
|
751,226
|
751,226
|
|
2,502,593
|
2,480,142
|
Less: Accumulated
depreciation and amortization
|
(2,338,558
)
|
(2,281,989
)
|
|
$
164,035
|
$
198,153
|
The
aggregate cost of assets acquired under capital leases was $146,115
as of both June 30, 2018 and 2017. Accumulated amortization
associated with assets acquired under capital leases was $122,115
and $106,115 as of June 30, 2018 and 2017,
respectively.
Accrued
expenses
consist of the
following:
|
|
|
|
|
|
Clinical study
costs
|
$
983,410
|
$
9,138,827
|
Other research
related expenses
|
590,236
|
217,307
|
Professional
services
|
297,731
|
434,768
|
Other
|
231,644
|
730,196
|
|
$
2,103,021
|
$
10,521,098
|
Notes
payable consist of the following:
|
|
|
|
|
|
Notes payable under
venture loan
|
$
6,333,334
|
$
14,333,334
|
Unamortized related
debt discount
|
(33,535
)
|
(143,524
)
|
Unamortized debt
issuance costs
|
(18,138
)
|
(83,215
)
|
Notes
payable
|
6,281,661
|
14,106,595
|
|
|
|
Less: current
portion
|
5,948,763
|
7,824,935
|
|
|
|
Long-term
portion
|
$
332,898
|
$
6,281,660
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
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 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 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 is being
amortized to interest expense over the term of the related debt.
This debt discount is offset against the note payable balance and
included in additional paid-in capital on the Company’s
balance sheet at June 30, 2018 and June 30, 2017. In addition, a
final incremental payment of $500,000 is due on January 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 June 30, 2018. The Company
incurred $209,367 of costs in connection with the loan. 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.
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 June 30, 2018 and June 30, 2017. 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 non-current liabilities on the
consolidated balance sheet as of June 30, 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 June 30,
2018, the Company was in compliance with all of its loan covenants.
Scheduled future principal payments related to notes payable as of
June 30, 2018 are as follows:
Year
Ending June 30,
|
|
2019
|
$
6,000,000
|
2020
|
333,334
|
|
6,333,334
|
Less: Unamortized
debt discount and issuance costs
|
(51,673
)
|
Net
|
$
6,281,661
|
(13)
COMMITMENTS
AND CONTINGENCIES
Operating Leases
– The Company currently leases
facilities under two non-cancelable operating leases. The lease on
our corporate offices was renewed effective July 1, 2015 and
expires on June 30, 2020 and in June 2016 we entered into a lease
for approximately 1,700 square feet of laboratory space which
expires in August 2019. Future minimum lease payments under these
leases are as follows:
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Year
Ending June 30,
|
|
2019
|
$
260,960
|
2020
|
227,136
|
|
$
488,096
|
For the
years ended June 30, 2018, 2017 and 2016, rent expense was
$292,411, $261,580 and $256,642 respectively.
Employment Agreements
– The Company has employment
agreements with two executive officers which provide a stated
annual compensation amount, subject to annual increases, and annual
bonus compensation in an amount to be approved by the
Company’s Board of Directors. Each agreement allows the
Company or the employee to terminate the agreement in certain
circumstances. In some circumstances, early termination by the
Company may result in severance pay to the employee for a period of
18 to 24 months at the salary then in effect, continuation of
health insurance premiums over the severance period and immediate
vesting of all stock options and restricted stock units.
Termination following a change in control will result in a lump sum
payment of one and one-half to two times the salary then in effect
and immediate vesting of all stock options and restricted stock
units.
Employee Retirement Savings Plan
– The Company
maintains a defined contribution 401(k) plan for the benefit of its
employees. The Company currently matches a portion of employee
contributions to the plan. For the years ended June 30, 2018, 2017
and 2016, Company contributions were $166,962, $199,264 and
$138,184, respectively.
Contingencies
– The Company accounts for litigation
losses in accordance with ASC 450-20,
Loss Contingencies
. Under ASC 450-20,
loss contingency provisions are recorded for probable losses when
management is able to reasonably estimate the loss. Any outcome
upon settlement that deviates from the Company’s best
estimate may result in additional expense or in a reduction in
expense in a future accounting period. The Company records legal
expenses associated with such contingencies as
incurred.
The
Company is involved, from time to time, in various claims and legal
proceedings arising in the ordinary course of its business. The
Company is not currently a party to any such claims or proceedings
that, if decided adversely to it, would either individually or in
the aggregate have a material adverse effect on its business,
financial condition or results of operations.
(14)
STOCKHOLDERS’
EQUITY (DEFICIENCY)
Series A Convertible Preferred Stock
– As of June
30, 2018, 4,030 shares of Series A Convertible Preferred Stock were
outstanding. Each share of Series A Convertible Preferred Stock is
convertible at any time, at the option of the holder, into the
number of shares of common stock equal to $100 divided by the
Series A Conversion Price. As of June 30, 2018, the Series A
Conversion Price was $6.65, so each share of Series A Convertible
Preferred Stock is currently convertible into approximately 15.0
shares of common stock. The Series A Conversion Price is subject to
adjustment, under certain circumstances, upon the sale or issuance
of common stock for consideration per share less than either (i)
the Series A Conversion Price in effect on the date of such sale or
issuance, or (ii) the market price of the common stock as of the
date of such sale or issuance. The Series A Conversion Price is
also subject to adjustment upon the occurrence of a merger,
reorganization, consolidation, reclassification, stock dividend or
stock split which will result in an increase or decrease in the
number of shares of common stock outstanding. Shares of Series A
Convertible Preferred Stock have a preference in liquidation,
including certain merger transactions, of $100 per share, or
$403,000 in the aggregate as of June 30, 2018. Additionally, the
Company may not pay a dividend or make any distribution to holders
of any class of stock unless the Company first pays a special
dividend or distribution of $100 per share to holders of the Series
A Convertible Preferred Stock.
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. Between April 20, 2018 and June 30, 2018,
a total of 1,283,754 shares of common stock were sold through
Canaccord under the Equity Distribution Agreement for net proceeds
of $1,257,773 after payment of commission fees of $43,385 and other
related expenses of $145,000. 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.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
On
December 6, 2016, the Company closed on an underwritten public
offering of units, with each unit consisting of a share of common
stock and a Series J warrant to purchase 0.50 of a share of common
stock. Gross proceeds of the offering were $16,500,000, with net
proceeds to the Company, after deducting underwriting discounts and
commissions and offering expenses, of $15,386,076. The Company
issued 25,384,616 shares of common stock and Series J warrants to
purchase 12,692,310 shares of common stock at an initial exercise
price of $0.80 per share, which warrants are exercisable
immediately upon issuance and expire on the fifth anniversary of
the date of issuance. The Series J warrants are subject to a
limitation on their exercise if the holder and its affiliates would
beneficially own more than 9.99%, or 4.99% for certain holders, of
the total number of the Company’s shares of common stock
following such exercise.
On
August 4, 2016, the Company closed on an underwritten offering of
units, with each unit consisting of a share of common stock and a
Series H warrant to purchase 0.75 of a share of common stock.
Investors whose purchase of units in the offering would result in
them beneficially owning more than 9.99% of the Company’s
outstanding common stock following the completion of the offering
had the opportunity to acquire units with Series I prefunded
warrants substituted for any common stock they would have otherwise
acquired. Gross proceeds of the offering were $9,225,000, with net
proceeds to the Company, after deducting offering expenses, of
$8,470,897. The Company issued 11,481,481 shares of common stock
and ten-year prefunded Series I warrants to purchase 2,218,045
shares of common stock at an exercise price of $0.01, together with
Series H warrants to purchase 10,274,646 shares of common stock at
an exercise price of $0.70 per share.
The
Series I warrants were exercisable immediately upon issuance and
were exercised during the year ended June 30, 2017. The Series H
warrants are exercisable at an initial exercise price of $0.70 per
share, are exercisable commencing six months following the date of
issuance and expire on the fifth anniversary of the date of
issuance. The Series H warrants are subject to a limitation on
their exercise if the holder and its affiliates would beneficially
own more than 9.99% of the total number of the Company’s
shares of common stock following such exercise.
On July
2, 2015, the Company closed on a private placement of Series E
warrants to purchase 21,917,808 shares of common stock and Series F
warrants to purchase 2,191,781 shares of common stock. Certain
funds managed by QVT Financial LP (“QVT”) invested
$5,000,000 and another accredited investment fund invested
$15,000,000. The funds paid $0.90 for each Series E warrant and
$0.125 for each Series F warrant, resulting in gross proceeds to
the Company of $20,000,000, with net proceeds, after deducting
estimated offering expenses, of approximately
$19,834,278.
The
Series E warrants, which would be exercised on a cashless basis,
were exercisable immediately upon issuance at an initial exercise
price of $0.01 per share, and the exercise of all Series E warrants
was completed during the year ended June 30, 2018. The Series F
warrants are exercisable at an initial exercise price of $0.91 per
share, exercisable immediately upon issuance and expire on the
fifth anniversary of the date of issuance. The Series F warrants
are subject to a limitation on their exercise if the holder and its
affiliates would beneficially own more than 9.99% of the total
number of the Company’s shares of common stock following such
exercise.
Outstanding Stock Purchase Warrants
– As of June 30,
2018, the Company had outstanding warrants exercisable for shares
of common stock as follows:
|
|
Latest
Termination
|
|
|
Date
|
666,666
|
0.75
|
December 23,
2019
|
2,191,781
|
0.91
|
July 2,
2020
|
549,450
|
0.91
|
July 2,
2020
|
10,274,646
|
0.70
|
August 4,
2021
|
25,000
|
0.70
|
August 4,
2021
|
9,696,503
|
0.80
|
December 6,
2021
|
23,404,046
|
|
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
During
the year ended June 30, 2018, the Company received $2,396,646 and
$114,383, respectively, and issued 2,995,807 shares of common stock
pursuant to the exercise of warrants at an exercise price of $0.80
per share and issued 11,438,356 shares of common stock pursuant to
the exercise of warrants at an exercise price of $0.01 per share.
The Company also issued 23,344,451 shares of common stock pursuant
to the cashless exercise provisions of warrants at an exercise
price of $0.01 per share. As of June 30, 2018, there were no
warrants outstanding at an exercise price of $0.01 per
share.
During
the year ended June 30, 2017, the Company issued 38,141,991 shares
of common stock pursuant to the cashless exercise provisions of
warrants at an exercise price of $0.01 per share, and during the
year ended June 30, 2017, the Company received $164,358 and issued
16,435,811 shares of common stock pursuant to the exercise of
warrants at an exercise price of $0.01 per share. During the year
ended June 30, 2016, the Company issued 10,890,889 shares of common
stock pursuant to the cashless exercise provisions of warrants at
an exercise price of $0.01.
On
October 31, 2016, in connection with a contract for financial
advisory services, the Company issued to each of PSL Business
Development Consulting and SARL Avisius, or their permitted
designees, as partial consideration for services, a warrant to
purchase up to 12,500 shares of the Company’s common stock at
an exercise price of $0.70 per share. The warrants are exercisable
at any time, and expire on August 4, 2021. The Company recorded
stock-based compensation related to these stock warrants of $6,885
for the year ended June 30, 2017.
Stock Plan –
The Company’s 2011 Stock Incentive
Plan was approved by the Company’s stockholders at the annual
meeting of stockholders held in May 2011 and amended at the annual
meeting of stockholders held on June 8, 2017 and again at the
annual meeting of stockholders held on June 26, 2018. The 2011
Stock Incentive Plan provides for incentive and nonqualified stock
option grants, restricted stock unit awards and other stock-based
awards to employees, non-employee directors and consultants for up
to 32,500,000 shares of common stock. The 2011 Stock Incentive Plan
is administered under the direction of the Board of Directors,
which may specify grant terms and recipients. Options granted by
the Company generally expire ten years from the date of grant and
generally vest over three to four years. The Company’s former
2005 Stock Plan was terminated and replaced by the 2011 Stock
Incentive Plan, and shares of common stock that were available for
grant under the 2005 Stock Plan became available for grant under
the 2011 Stock Incentive Plan. No new awards can be granted under
the 2005 Stock Plan, but awards granted under the 2005 Stock Plan
remain outstanding in accordance with their terms. As of June 30,
2018, 7,559,248 shares were available for grant under the 2011
Stock Incentive Plan.
The
Company has outstanding options that were granted under the 2005
Stock Plan. The Company expects to settle option exercises under
any of its plans with authorized but currently unissued
shares.
The
following table summarizes option activity and related information
for the years ended June 30, 2018, 2017 and 2016:
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Term in Years
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
Outstanding - July
1, 2015
|
5,130,230
|
1.46
|
7.3
|
|
|
|
|
|
|
Granted
|
355,000
|
0.54
|
|
|
Forfeited
|
(170,550
)
|
0.80
|
|
|
Expired
|
(52,940
)
|
22.53
|
|
|
|
|
|
|
|
Outstanding - June
30, 2016
|
5,261,740
|
1.21
|
6.2
|
|
|
|
|
|
|
Granted
|
4,119,000
|
0.46
|
|
|
Forfeited
|
(410,388
)
|
1.12
|
|
|
Expired
|
(43,220
)
|
22.59
|
|
|
|
|
|
|
|
Outstanding - June
30, 2017
|
8,927,132
|
0.76
|
7.5
|
|
|
|
|
|
|
Granted
|
4,182,550
|
0.90
|
|
|
Forfeited
|
(39,500
)
|
1.70
|
|
|
Exercised
|
(208,900
)
|
0.77
|
|
|
Expired
|
(85,820
)
|
6.95
|
|
|
|
|
|
|
|
Outstanding - June
30, 2018
|
12,775,462
|
$
0.76
|
7.7
|
$
3,115,515
|
|
|
|
|
|
Exercisable at June
30, 2018
|
6,163,850
|
$
0.79
|
6.0
|
$
1,460,394
|
|
|
|
|
|
Expected to vest at
June 30, 2018
|
6,611,612
|
$
0.54
|
9.2
|
$
1,651,121
|
For the
years ended June 30, 2018, 2017 and 2016, the fair value of option
grants was estimated at the grant date using the Black-Scholes
model or a multi-factor Monte Carlo simulation. The Company’s
weighted average assumptions for the years ended June 30, 2018,
2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
Risk-free interest
rate
|
1.8
%
|
1.7
%
|
1.4
%
|
Volatility
factor
|
52.6
%
|
75.0
%
|
73.5
%
|
Dividend
yield
|
0
%
|
0
%
|
0
%
|
Expected option
life (years)
|
4.4
|
6.2
|
5.7
|
Weighted average
grant date fair value
|
$
0.58
|
$
0.27
|
$
0.35
|
Expected
volatilities are based on the Company’s historical
volatility. The expected term of options is based upon the
simplified method, which represents the average of the vesting term
and the contractual term. The risk-free interest rate is based on
U.S. Treasury yields for securities with terms approximating the
expected term of the option.
For the
years ended June 30, 2018, 2017 and 2016 the Company recorded
stock-based compensation related to stock options of $1,131,895,
$547,953, and $545,641, respectively. As of June 30, 2018, there
was $2,706,207 of unrecognized compensation cost related to
unvested options, which is expected to be recognized over a
weighted-average period of 2.9 years.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
In June
2018, the Company granted 987,000 options to its executive
officers, 262,550 options to its employees and 224,000 options to
its non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
options of $659,159, $175,342 and $139,666, respectively, over the
vesting period.
In
December 2017, the Company granted 1,200,000 options to its
executive officers and 225,000 options to its non-employee
directors under the Company’s 2011 Stock Incentive Plan. The
fair value of these options was $691,171 and $126,130,
respectively. The Company is amortizing the fair value of these
options over a 48-month vesting period for its executive officers
and over a 36-month vesting period for its non-employee
directors.
Also,
in December 2017, the Company granted 1,075,000 and 125,000
performance-based options to its 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.
In
September 2017, the Company granted 54,000 options to a newly
appointed non-employee director under the Company’s 2011
Stock Incentive Plan. The Company is amortizing the fair value of
these options of $18,176 over a 48-month vesting
period.
During
the year ended June 30, 2018, the Company also granted 30,000
options to three new hires under the Company’s 2011 Stock
Incentive Plan. The fair value of these options was $14,505. The
Company is amortizing the fair value of these options over a
48-month vesting period.
In June
2017, the Company granted 1,797,000 options to its executive
officers, 780,000 options to its employees and 378,000 options to
its non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
options of $445,533, $194,689 and $89,220, respectively, over the
vesting period.
In
September 2016, the Company granted 828,000 options to its
executive officers and 336,000 options to its employees under the
Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of the options vesting over a 48-month
period, consisting of 595,000 options granted to its executive
officers and all options granted to its employees, of $188,245 and
$106,303, respectively, over the vesting period. The remaining
233,000 options granted to its executive officers vested 12 months
from the date of grant, and the Company amortized the fair value of
these options of $67,160 over this vesting period.
In June
2016, the Company granted 262,500 options to its non-employee
directors under the Company’s 2011 Stock Incentive Plan. The
Company amortized the fair value of these options of $81,435 over
the vesting period and they were fully vested as of June 30,
2017.
During
the year-ended June 30, 2016, the Company granted an aggregate
92,500 options to certain employees under the Company’s 2011
Stock Incentive Plan. The Company is amortizing the fair value of
these options of $41,470 over the vesting period.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Unless
otherwise stated, stock options granted to the Company’s
executive officers and employees vest over a 48-month period, while
stock options granted to its non-employee directors vest over a
12-month period.
Restricted Stock Units –
The following table
summarizes restricted stock award activity for the years ended June
30, 2018, 2017 and 2016:
|
|
|
|
Outstanding at
beginning of year
|
5,209,617
|
2,665,768
|
1,028,017
|
Granted
|
4,914,550
|
3,192,000
|
2,302,500
|
Forfeited
|
(5,250
)
|
(68,751
)
|
(2,563
)
|
Vested
|
(795,041
)
|
(579,400
)
|
(662,186
)
|
Outstanding at end
of year
|
9,323,876
|
5,209,617
|
2,665,768
|
For the
years ended June 30, 2018, 2017 and 2016 the Company recorded
stock-based compensation related to restricted stock units of
$2,386,456, $1,202,421, and $1,297,724, respectively.
In June
2018, the Company granted 659,000 restricted stock units to its
executive officers, 262,550 restricted stock units to its employees
and 224,000 restricted stock units to its non-employee directors
under the Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of these restricted stock units of
$659,000, $262,550, and $224,000, respectively, over the vesting
period.
In
December 2017, the Company granted 1,200,000 restricted stock units
to its executive officers, 225,000 restricted stock units to its
non-employee directors and 545,000 restricted stock units to its
employees under the Company’s 2011 Stock Incentive Plan. The
fair value of these restricted stock units was $1,020,000, $191,250
and $463,250, respectively. For executive officers and employees,
the restricted stock units vest 25% on the first, second, third and
fourth anniversary dates from the date of grant. For non-employee
directors, the restricted stock units vest 33 1/3% on the first,
second and third anniversary dates from the date of
grant.
Also,
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.
In
September 2017, the Company granted 54,000 restricted stock units
to a newly appointed non-employee director under the
Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of these restricted stock units of
$27,000 over a 48-month vesting period.
In June
2017, the Company granted 1,140,000 restricted stock units to its
executive officers, 780,000 restricted stock units to its employees
and 378,000 restricted stock units to its non-employee directors
under the Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of these restricted stock units of
$421,800, $288,600, and $139,860, respectively, over the vesting
period.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
In
September 2016, the Company granted 558,000 restricted stock units
to its executive officers, 415,000 of which vest over 24 months and
143,000 of which vested at 12 months, and 336,000 restricted stock
units to its employees under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of the
restricted stock units of $284,580, and $171,360, respectively,
over the vesting periods.
In June
2016, the Company granted 262,500 restricted stock units to its
non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company amortized the fair value of these
options of $131,250, over the vesting period.
In
December 2015, the Company granted 625,000 performance-based
restricted stock units to its executive officers and 200,000
performance-based restricted stock units to its employees under the
Company’s 2011 Stock Incentive Plan, which vested during the
performance period, ended December 31, 2017, upon the earlier of:
i) achievement of a closing price for the Company’s common
stock equal to or greater than $1.20 per share for 20 consecutive
trading days, which was considered a market condition, or ii)
entering into a collaboration agreement (U.S. or global) of Vyleesi
for FSD, which was considered a performance condition. This
performance condition was deemed met as of February 2, 2017, the
effective date of the License Agreement on Vyleesi with AMAG. Prior
to meeting the performance condition, the Company determined that
it was not probable of achievement on the date of grant since
meeting the condition was outside the control of the Company. The
fair value of these awards, as calculated under a multifactor Monte
Carlo simulation, was $338,250 and was recognized over the derived
service period which was through December 2016. Upon the
achievement of the performance condition, which occurred in the
three-month period ended March 31, 2017 the grant date fair value
was utilized and an incremental $222,075 was recognized as
stock-based compensation expense during the three months ended
March 31, 2017. Also, in December 2015, the Company granted 625,000
restricted stock units to its executive officers, 340,000
restricted stock units to its non-employee directors and 200,000
restricted stock units to its employees under the Company’s
2011 Stock Incentive Plan. For executive officers and employees,
the restricted stock units vest 25% on the date of grant and 25% on
the first, second and third anniversary dates from the date of
grant. For non-employee directors, the restricted stock units
vested 50% on the first and second anniversary dates from the date
of grant. The Company is amortizing the fair value of these
restricted stock units of $425,000, $231,200 and $136,000,
respectively, over the vesting period.
Unless
otherwise stated, time-based restricted stock units granted to the
Company’s executive officers, employees and non-employee
directors vest over 24 months, 48 months and 12 months,
respectively.
In
connection with the vesting of restricted share units during the
years ended June 30, 2018, 2017 and 2016, the Company withheld
27,465, 75,993 and 123,483 shares with aggregate values of $20,786,
$27,088 and $58,401 respectively, in satisfaction of minimum tax
withholding obligations.
For
fiscal 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 China related to our Fosun License
Agreement (Note 5) and $82,500, which was withheld in accordance
with tax withholding requirements in Korea related to our Kwangdong
License Agreement (Note 6). The total income tax expense 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 quarter ended December 2017. The Company’s June 30, 2017
tax return was filed during the quarter ended March 31, 2018 and
the Company did not incur an AMT liability. As a result, as of 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 fiscal 2018 AMT that can be refunded in the
future.
For
fiscal 2017, the Company incurred $500,000 of estimated federal AMT
expense based on estimated federal alternative minimum taxable
income attributable to the $60,000,000 initial payment from AMAG.
For fiscal 2016 the Company had no income tax expense because of
operating losses or a tax benefit from the sale of New Jersey state
net operating loss carryforwards on account that it reached the
state limits on the sale of New Jersey state net operating loss
carryforwards and tax credits.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Deferred
tax assets and liabilities are determined based on the estimated
future tax effect of differences between the financial statement
and tax reporting basis of assets and liabilities, as well as for,
net operating loss carryforwards and research and development
credit carryforwards, given the provisions of existing tax
laws.
As a
result of the enactment of the new corporate income tax rate, the
Company remeasured certain deferred tax assets and liabilities
based on the rates at which they are expected to reverse, but
continues to maintain a full valuation allowance against its
deferred tax assets.
As of
June 30, 2018, the Company had state net operating loss
carryforwards of approximately $118,309,000, which will expire, if
not utilized, between 2030 and 2037, federal net operating loss
carryforwards of approximately $100,439,000, federal research and
development credits of approximately $5,649,000, which expire, if
not utilized, between 2020 and 2038, and foreign tax credits of
$582,500, which expire, if not utilized, in 2028.
The Tax
Reform Act of 1986 (the “Act”) provides for limitation
on the use of these net operating loss and research and development
tax credit carryforwards following certain ownership changes (as
defined by the Act) that could limit the Company’s ability to
utilize these carryforwards. Since its inception, the Company has
completed several financings and sales of common stock which has
resulted in multiple ownership changes defined by Section 382 of
the Act. Accordingly, the Company’s ability to utilize the
aforementioned carryforwards are subject to limitation under
Section 382.
The
Company does have adequate levels of available net operating loss
carryforwards that are not subject to limitation under Section 382
to offset taxable income during the tax year ended June 30, 2018.
If the Company undergoes a future ownership change or as it
completes its Section 382 limitation assessment, any unutilized
carryforwards that were not previously subject to a Section 382
limitation may become subject to limitation which may result in a
significant limitation and loss of net operating loss
carryforwards.
Additionally,
U.S. tax laws limit the time during which these carryforwards may
be applied against future taxes; therefore, the Company may not be
able to take full advantage of these carryforwards for federal
income tax purposes. Accordingly, a portion of the carryforwards
may expire unutilized.
The
Company’s net deferred tax assets are as
follows:
|
|
|
|
|
|
Net operating loss
carryforwards
|
$
29,504,000
|
$
103,845,000
|
Research and
development and AMT tax credits
|
5,649,000
|
12,360,000
|
Foreign tax
credits
|
583,000
|
-
|
Basis differences
in fixed assets and other
|
1,734,000
|
1,510,000
|
Basis difference in
deferred revenue
|
-
|
14,318,000
|
|
37,470,000
|
132,033,000
|
Valuation
allowance
|
(37,470,000
)
|
(132,033,000
)
|
Net deferred tax
assets
|
$
-
|
$
-
|
In
assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income and the application of loss limitation
provisions related to ownership changes. The Company assesses the
available positive and negative evidence to estimate if sufficient
future taxable income will be generated to use the existing
deferred tax assets. The Company also considers the scheduled
reversal of deferred tax liabilities (including the impact of
available carryback and carryforward periods), projected future
taxable income, and tax-planning strategies in making this
assessment. A significant piece of objective negative evidence
evaluated was the cumulative loss incurred over the three-year
period from July 1, 2015 through June 30, 2018. On the basis of
these considerations, the Company continued to recognize a full
valuation allowance against its net deferred tax assets as of June
30, 2018 and 2017.
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
The
Company recognizes interest expense and penalties on uncertain
income tax positions as a component of interest expense. No
interest expense or penalties were recorded for uncertain income
tax matters in fiscal 2018, 2017 or 2016. As of June 30, 2018 and
2017, the Company had no liabilities for uncertain income tax
matters.
(16)
CONSOLIDATED
QUARTERLY FINANCIAL DATA - UNAUDITED
The
following tables provide quarterly data for the years ended June
30, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands, except per share
data)
|
Revenues
|
$
20,618
|
$
8,963
|
$
10,612
|
$
26,942
|
Operating
expenses
|
8,349
|
9,480
|
7,671
|
15,708
|
Other expense,
net
|
(185
)
|
(241
)
|
(310
)
|
(405
)
|
Income (loss)
before income taxes
|
12,083
|
(758
)
|
2,631
|
10,829
|
Income
taxes
|
(276
)
|
19
|
399
|
(225
)
|
Net income
(loss)
|
$
11,807
|
$
(739
)
|
$
3,030
|
$
10,604
|
Basic net income
(loss) per common share
|
$
0.06
|
$
-
|
$
0.02
|
$
0.05
|
Diluted net income
(loss) per common share
|
$
0.06
|
$
-
|
$
0.01
|
$
0.05
|
Weighted average
number of
|
|
|
|
|
common shares
outstanding
|
|
|
|
|
used in computing
basic net
|
|
|
|
|
income (loss) per
common share
|
200,581,435
|
197,485,758
|
197,238,056
|
197,112,400
|
Weighted average
number of
|
|
|
|
|
common shares
outstanding
|
|
|
|
|
used in computing
diluted net
|
|
|
|
|
income (loss) per
common share
|
211,047,927
|
197,485,758
|
202,711,616
|
201,360,736
|
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in
thousands, except per share data)
|
Revenues
|
$
33,900
|
$
10,824
|
$
-
|
$
-
|
Operating
expenses
|
19,581
|
13,836
|
9,441
|
12,435
|
Other expense,
net
|
(504
)
|
(552
)
|
(588
)
|
(618
)
|
Income (loss)
before income taxes
|
13,815
|
(3,564
)
|
(10,029
)
|
(13,053
)
|
Income
taxes
|
(500
)
|
-
|
-
|
-
|
Net income
(loss)
|
$
13,315
|
$
(3,564
)
|
$
(10,029
)
|
$
(13,053
)
|
Basic net income
(loss) per common share
|
$
0.07
|
$
(0.02
)
|
$
(0.06
)
|
$
(0.08
)
|
Diluted net income
(loss) per common share
|
$
0.07
|
$
(0.02
)
|
$
(0.06
)
|
$
(0.08
)
|
Weighted average
number of
|
|
|
|
|
common shares
outstanding
|
|
|
|
|
used in computing
basic net
|
|
|
|
|
income (loss) per
common share
|
196,874,145
|
196,580,519
|
177,798,511
|
165,848,269
|
Weighted average
number of
|
|
|
|
|
common shares
outstanding
|
|
|
|
|
used in computing
diluted net
|
|
|
|
|
income (loss) per
common share
|
197,948,721
|
196,580,519
|
177,798,511
|
165,848,269
|
Between July 1, 2018 and September 11, 2018, a total of 1,305,949
shares of the Company’s common stock were sold through
Canaccord under the Equity Distribution Agreement for net proceeds
of $1,299,263 after payment of commission fees of
$40,183.