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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and
its cash flows for each of the years in the three-year period ended
June 30, 2019, 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, 2019, 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 12, 2019
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial
reporting.
Change in Accounting Principle
As
discussed in Note 2 of the consolidated financial statements, the
Company has changed its method of accounting for revenue in the
year ended June 30, 2019 due to the adoption of Financial
Accounting Standards Board Accounting Standards Codification Topic
606, Revenue from Contracts with
Customers.
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.
/s/
KPMG LLP
We have
served as the Company’s auditor since 2002.
Philadelphia,
Pennsylvania
September
12, 2019
PALATIN TECHNOLOGIES, INC.
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
ASSETS
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
$43,510,422
|
$38,000,171
|
Accounts
receivable
|
60,265,970
|
-
|
Prepaid expenses
and other current assets
|
637,289
|
513,688
|
Total current
assets
|
104,413,681
|
38,513,859
|
|
|
|
Property and
equipment, net
|
141,539
|
164,035
|
Other
assets
|
179,916
|
338,916
|
Total
assets
|
$104,735,136
|
$39,016,810
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$504,787
|
$2,223,693
|
Accrued
expenses
|
2,848,692
|
2,103,021
|
Notes payable, net
of discount
|
332,896
|
5,948,763
|
Other current
liabilities
|
499,517
|
487,488
|
Total current
liabilities
|
4,185,892
|
10,762,965
|
|
|
|
Notes payable, net
of discount
|
-
|
332,898
|
Deferred
revenue
|
-
|
500,000
|
Other non-current
liabilities
|
-
|
456,038
|
Total
liabilities
|
4,185,892
|
12,051,901
|
|
|
|
Commitments and
contingencies (Note 12)
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
Preferred stock of
$0.01 par value – authorized 10,000,000 shares; shares issued
and outstanding designated as follows:
|
|
|
Series A
Convertible: authorized 264,000 shares: issued and outstanding
4,030 shares as of June 30, 2019 and June 30, 2018
|
40
|
40
|
Common stock of
$0.01 par value – authorized 300,000,000 shares:
|
|
|
issued and
outstanding 226,815,363 shares as of June 30, 2019 and 200,554,205
shares as of June 30, 2018
|
2,268,154
|
2,005,542
|
Additional paid-in
capital
|
394,053,929
|
357,005,233
|
Accumulated
deficit
|
(295,772,879)
|
(332,045,906)
|
Total
stockholders’ equity
|
100,549,244
|
26,964,909
|
Total liabilities
and stockholders’ equity
|
$104,735,136
|
$39,016,810
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements
PALATIN TECHNOLOGIES, INC.
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
License
and contract
|
$60,300,476
|
$67,134,758
|
$44,723,827
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Research
and development
|
14,857,095
|
32,566,217
|
45,683,174
|
General
and administrative
|
9,699,061
|
8,641,976
|
9,610,147
|
Total
operating expenses
|
24,556,156
|
41,208,193
|
55,293,321
|
|
|
|
|
Income
(loss) from operations
|
35,744,320
|
25,926,565
|
(10,569,494)
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
Investment
income
|
446,268
|
310,663
|
26,270
|
Interest
expense
|
(417,561)
|
(1,452,014)
|
(2,288,309)
|
Total
other income (expense), net
|
28,707
|
(1,141,351)
|
(2,262,039)
|
|
|
|
|
Income
(loss) before income taxes
|
35,773,027
|
24,785,214
|
(12,831,533)
|
Income
tax expense
|
-
|
(82,500)
|
(500,000)
|
|
|
|
|
NET
INCOME (LOSS)
|
$35,773,027
|
$24,702,714
|
$(13,331,533)
|
|
|
|
|
Basic
net income (loss) per common share
|
$0.17
|
$0.12
|
$(0.07)
|
|
|
|
|
Diluted
net income (loss) income per common share
|
$0.16
|
$0.12
|
$(0.07)
|
|
|
|
|
Weighted
average number of common shares outstanding used in computing basic
net income (loss) per common share
|
207,670,607
|
198,101,060
|
184,087,719
|
|
|
|
|
Weighted
average number of common shares outstanding used in computing
diluted net income (loss) per common share
|
217,133,374
|
207,007,558
|
184,087,719
|
The
accompanying notes are an integral part of these consolidated
financial statements
PALATIN
TECHNOLOGIES, INC.
|
|
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$35,773,027
|
$24,702,714
|
$(13,331,533)
|
|
|
|
|
Other comprehensive
income:
|
|
|
|
Unrealized gain on
available-for-sale investments
|
-
|
590
|
1,354
|
|
|
|
|
Total comprehensive
income (loss)
|
$35,773,027
|
$24,703,304
|
$(13,330,179)
|
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,
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
|
Cumulative effect of
accounting change
|
-
|
-
|
-
|
-
|
-
|
-
|
500,000
|
500,000
|
Stock-based
compensation
|
-
|
-
|
327,692
|
3,277
|
3,478,800
|
-
|
-
|
3,482,077
|
Sale of common stock ,
net of costs
|
-
|
-
|
24,785,814
|
247,858
|
32,888,202
|
-
|
-
|
33,136,060
|
Withholding taxes
related to restricted stock units
|
-
|
-
|
(67,038)
|
(670)
|
(65,322)
|
-
|
-
|
(65,992)
|
Withholding taxes
related to stock options
|
-
|
-
|
(37,994)
|
(380)
|
(49,391)
|
-
|
-
|
(49,771)
|
Warrant
exercises
|
-
|
-
|
1,115,333
|
11,153
|
797,781
|
-
|
-
|
808,934
|
Option
exercises
|
-
|
-
|
137,351
|
1,374
|
(1,374)
|
-
|
-
|
-
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
35,773,027
|
35,773,027
|
Balance, June 30,
2019
|
4,030
|
$40
|
226,815,363
|
$2,268,154
|
$394,053,929
|
$-
|
$(295,772,879)
|
$100,549,244
|
The accompanying
notes are an integral part of these consolidated financial
statements.
PALATIN
TECHNOLOGIES, INC.
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net
income (loss)
|
$35,773,027
|
$24,702,714
|
$(13,331,533)
|
Adjustments to
reconcile net income (loss) to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
58,635
|
56,569
|
33,051
|
Non-cash interest
expense
|
51,234
|
175,493
|
298,790
|
Stock-based
compensation
|
3,482,077
|
3,518,351
|
1,757,259
|
Deferred income tax
benefit
|
-
|
(500,000)
|
-
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(60,265,970)
|
15,116,822
|
(15,116,822)
|
Prepaid expenses
and other assets
|
35,399
|
715,533
|
308,917
|
Accounts
payable
|
(1,718,906)
|
672,326
|
837,477
|
Accrued
expenses
|
745,671
|
(8,393,698)
|
2,728,985
|
Deferred
revenue
|
-
|
(34,550,572)
|
35,050,572
|
Other non-current
liabilities
|
55,992
|
189,565
|
314,831
|
Net cash (used in)
provided by operating activities
|
(21,782,841)
|
1,703,103
|
12,881,527
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
Proceeds from
sale/maturity of investments
|
-
|
250,000
|
1,124,999
|
Purchases of
property and equipment
|
(36,139)
|
(22,451)
|
(133,403)
|
Net cash (used in)
provided by investing activities
|
(36,139)
|
227,549
|
991,596
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
Payments on capital
lease obligations
|
-
|
(14,324)
|
(27,424)
|
Payment of
withholding taxes related to restricted
|
|
|
|
stock
units and stock options
|
(115,763)
|
(45,165)
|
(2,708)
|
Payment on notes
payable obligations
|
(6,500,000)
|
(8,000,000)
|
(5,666,666)
|
Proceeds from the
exercise of stock options
|
-
|
159,881
|
-
|
Proceeds from
exercise of common stock warrants
|
808,934
|
2,511,029
|
164,358
|
Proceeds from the
sale of common stock and warrants, net
|
|
|
|
of
costs
|
33,136,060
|
1,257,774
|
23,856,973
|
Net cash provided
by (used in) financing activities
|
27,329,231
|
(4,130,805)
|
18,324,533
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH
|
|
|
|
AND
CASH EQUIVALENTS
|
5,510,251
|
(2,200,153)
|
32,197,656
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of year
|
38,000,171
|
40,200,324
|
8,002,668
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of year
|
$43,510,422
|
$38,000,171
|
$40,200,324
|
|
|
|
|
SUPPLEMENTAL CASH
FLOW INFORMATION:
|
|
|
|
Cash paid for
interest
|
$354,456
|
$1,084,158
|
$1,676,954
|
Cash paid for
income taxes
|
-
|
500,000
|
-
|
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. The Company’s product candidates are
targeted, receptor-specific therapeutics for the treatment of
diseases with significant unmet medical need and commercial
potential.
Melanocortin Receptor System. The melanocortin receptor
(“MCr”) system is hormone driven, with effects on food
intake, metabolism, sexual function, inflammation and immune system
responses. There are five melanocortin receptors, MC1r through
MC5r. Modulation of these receptors, through use of
receptor-specific agonists, which activate receptor function, or
receptor-specific antagonists, which block receptor function, can
have significant pharmacological effects.
The
Company’s lead product, Vyleesi™, was approved by the
U.S. Food and Drug Administration (“FDA”) in June 2019,
and is being marketed in North America by AMAG Pharmaceuticals,
Inc. (“AMAG”) for the treatment of hypoactive sexual
desire disorder (“HSDD”) in premenopausal
women.
The
Company’s new product development activities focus primarily
on MC1r agonists, with potential to treat inflammatory and
autoimmune diseases such as dry eye disease, which is also known as
keratoconjunctivitis sicca, uveitis, diabetic retinopathy and
inflammatory bowel disease. The Company believes that the MC1r
agonist peptides in development have broad anti-inflammatory
effects and appear to utilize mechanisms engaged by the endogenous
melanocortin system in regulation of the immune system and
resolution of inflammatory responses. The Company is also
developing peptides that are active at more than one melanocortin
receptor, and MC4r peptide and small molecule agonists with
potential utility in obesity and metabolic-related disorders,
including rare disease and orphan indications.
Natriuretic Peptide Receptor System. The natriuretic peptide
receptor (“NPR”) system regulates cardiovascular
functions, and therapeutic agents modulating this system have
potential to treat cardiovascular and fibrotic diseases. The
Company has designed and is developing potential NPR candidate
drugs selective for one or more different natriuretic peptide
receptors, including natriuretic peptide receptor-A
(“NPR-A”), natriuretic peptide receptor B
(“NPR-B”), and natriuretic peptide receptor C
(“NPR-C”).
Business Risk and Liquidity – Since inception, the
Company has incurred negative cash flows from operations, and has
expended, and expects to continue to expend, substantial funds to
complete its planned product development efforts. As shown in the
accompanying consolidated financial statements, the Company had an
accumulated deficit as of June 30, 2019 of
$295,772,879.
Income
for fiscal 2019 and fiscal 2018 was based on the achieving
development milestones. The Company has not yet earned revenue from
the commercialization of Vyleesi.
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, 2019, the Company’s cash and cash equivalents were
$43,510,422, accounts receivable were $60,265,970 and current
liabilities were $4,185,892. Management intends to utilize existing
capital resources for general corporate purposes and working
capital, including, preclinical and clinical development of the
Company’s MC1r and MC4r peptide programs and natriuretic
peptide program, and development of other portfolio
products.
Management
believes that the Company’s existing capital resources will
be adequate to fund the Company’s planned operations through
at least September 30, 2020. The Company will need additional
funding to complete required clinical trials for its other product
candidates and, assuming those clinical trials are successful, as
to which there can be no assurance, to complete submission of
required applications to the FDA. If the Company is unable to
obtain approval or otherwise advance in the FDA approval process,
the Company’s ability to sustain its operations could be
materially adversely affected.
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 and
accounts receivable. The Company’s cash and cash equivalents
are primarily invested in one money market account sponsored by a
large financial institution. For the year ended June 30, 2019, the
Company reported $60,300,476 in license and contract revenue
related to a license agreement with AMAG for Vyleesi for North
America (“AMAG License Agreement”) (Note 4). For the
year ended June 30, 2018, the Company reported $62,134,758 in
license and contract revenue related to the AMAG License Agreement.
In addition, for the year ended June 30, 2018, the Company reported
$5,000,000 in license revenue related to a license agreement with
Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd.
(“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 $43,381,556 and $37,808,099 in a money
market account at June 30, 2019 and 2018,
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, 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 the terms of the notes.
Credit Risk – Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents and accounts receivable.
Total cash and cash equivalent balances have exceeded balances
insured by the Federal Depository Insurance Company
(“FDIC”). The Company’s accounts receivable
balance at June 30, 2019 has arisen from a milestone payment due
from AMAG as it related to the FDA’s approval of Vyleesi and
was subsequently collected in July 2019.
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.
Impairment of Long-Lived Assets – The Company reviews
its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of a
long-lived asset, management evaluates whether the estimated future
undiscounted net cash flows from the asset are less than its
carrying amount. If impairment is indicated, the long-lived asset
would be written down to fair value. Fair value is determined by an
evaluation of available price information at which assets could be
bought or sold, including quoted market prices, if available, or
the present value of the estimated future cash flows based on
reasonable and supportable assumptions.
Revenue Recognition – In
May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, Revenue from Contracts with
Customers (“ASC Topic
606”), which, along with amendments from 2015 and 2016
requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or
services to customers. ASC Topic 606 replaced most existing revenue
recognition guidance in U.S. GAAP when it became
effective.
On July 1, 2018, the Company adopted ASC Topic 606 using the
modified retrospective approach, a practical expedient permitted
under ASC Topic 606, and applied this approach only to contracts
that were not completed as of July 1, 2018. The Company calculated
a one-time cumulative transition adjustment of $500,000 which was
recorded on July 1, 2018 to the opening balance of accumulated
deficit related to its license agreement (the “Kwangdong
License Agreement”) with Kwangdong Pharmaceutical Co., Ltd.
(“Kwangdong”) as the Company determined a significant
revenue reversal would not occur in a future period. The one-time
adjustment consisted of the recognition of $500,000 of deferred
revenue.
Revenue Recognition for Periods Prior to July 1, 2018
The
Company has generated revenue solely through license and
collaboration agreements. Prior to July 1, 2018, the Company
recognized revenue in accordance with FASB ASC Topic 605-25,
Revenue Recognition for
Arrangements with Multiple Elements, which addressed the
determination of whether an arrangement involving multiple
deliverables contained more than one unit of accounting. A
delivered item within an arrangement was considered a separate unit
of accounting only if both of the following criteria were
met:
●
the delivered item
had value to the customer on a stand-alone basis; and
●
if the arrangement
included a general right of return relative to the delivered item,
delivery or performance of the undelivered item was considered
probable and substantially in control of the vendor.
Under
FASB ASC Topic 605-25, if both of the criteria above were not met,
then separate accounting for the individual deliverables was not
appropriate.
The
Company determined that it was appropriate to recognize such
revenue using the input-based proportional method during the period
of Palatin’s development obligations as defined in the AMAG
License Agreement. Refer to Note 4 for additional
information.
Under
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 had
stand-alone value and the upfront payment received by the Company
was non-refundable.
Under
the Kwangdong License Agreement (Note 6), the Company received
consideration in the form of an upfront license fee payment and
determined that it was appropriate to record such consideration as
deferred revenue because the upfront payment received by the
Company is subject to certain refund provisions.
Revenue
resulting from the achievement of development milestones was
recorded in accordance with the accounting guidance for the
milestone method of revenue recognition. Amounts received prior to
satisfying the revenue recognition criteria were recorded as
deferred revenue on the Company’s consolidated balance
sheet.
Revenue Recognition for Periods Commencing July 1,
2018
For
licenses of intellectual property, the Company assesses, at
contract inception, whether the intellectual property is distinct
from other performance obligations identified in the arrangement.
If the licensing of intellectual property is determined to be
distinct, revenue is recognized for nonrefundable, upfront license
fees when the license is transferred to the customer and the
customer can use and benefit from the license. If the licensing of
intellectual property is determined not to be distinct, then the
license will be bundled with other promises in the arrangement into
one performance obligation. The Company needs to determine if the
bundled performance obligation is satisfied over time or at a point
in time. If the Company concludes that the nonrefundable, upfront
license fees will be recognized over time, the Company will need to
assess the appropriate method of measuring proportional
performance.
Regulatory
milestone payments are excluded from the transaction price due to
the inability to estimate the probability of reversal. Revenue
relating to achievement of these milestones is recognized in the
period in which the milestone is achieved.
Sales-based
royalty and milestone payments resulting from customer contracts
solely or predominately for the license of intellectual property
will only be recognized upon occurrence of the underlying sale or
achievement of the sales milestone in the future and such
sales-based royalties and milestone payments will be recognized in
the same period earned.
The Company recognizes revenue for reimbursements of research and
development costs under collaboration agreements as the services
are performed. The Company records these reimbursements as revenue
and not as a reduction of research and development expenses as the
Company is the principal in the research and development activities
based upon its control of such activities, which is considered part
of its ordinary activities.
Development milestone payments are generally due 30 business days
after the milestone is achieved. Sales milestone payments are
generally due 45 business days after the calendar year in which the
sales milestone is achieved. Royalty payments are generally due on
a quarterly basis 20 business days after being
invoiced.
The cumulative effect of applying ASC Topic 606 to the
Company’s consolidated balance sheet was as
follows:
|
|
|
|
Deferred
revenue
|
$500,000
|
$(500,000)
|
$-
|
Accumulated
deficit
|
(332,045,906)
|
500,000
|
(331,545,906)
|
The impact of adoption of ASC Topic 606 on the Company’s
consolidated balance sheet as of June 30, 2019 is as
follows:
|
Impact of change in
accounting policies
|
|
As reported June
30, 2019
|
|
As reported without
adoption of ASC Topic 606
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$43,510,422
|
$-
|
$43,510,422
|
Accounts
Receiveable
|
60,265,970
|
-
|
60,265,970
|
Prepaid expenses
and other current assets
|
637,289
|
-
|
637,289
|
Total current
assets
|
104,413,681
|
-
|
104,413,681
|
|
-
|
|
-
|
Property and
equipment, net
|
141,539
|
-
|
141,539
|
Other
assets
|
179,916
|
-
|
179,916
|
Total
assets
|
$104,735,136
|
$-
|
$104,735,136
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$504,787
|
$-
|
$504,787
|
Accrued
expenses
|
2,848,692
|
-
|
2,848,692
|
Notes payable, net
of discount
|
332,896
|
-
|
332,896
|
Other current
liabilities
|
499,517
|
-
|
499,517
|
Total current
liabilities
|
4,185,892
|
-
|
4,185,892
|
|
-
|
|
-
|
Deferred
revenue
|
-
|
500,000
|
500,000
|
Total
liabilities
|
4,185,892
|
500,000
|
4,685,892
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred
stock
|
40
|
-
|
40
|
Common
stock
|
2,268,154
|
-
|
2,268,154
|
Additional paid-in
capital
|
394,053,929
|
-
|
394,053,929
|
Accumulated
deficit
|
(295,772,879)
|
(500,000)
|
(296,272,879)
|
Total
stockholders’ equity
|
100,549,244
|
(500,000)
|
100,049,244
|
Total liabilities
and stockholders’ equity
|
$104,735,136
|
$-
|
$104,735,136
|
ASC Topic 606 did not have an impact on the Company’s
consolidated statements of operations or cash flows.
Research and Development Costs – The costs of research
and development activities are charged to expense as incurred,
including the cost of equipment for which there is no alternative
future use.
Accrued Expenses – Third parties perform a significant
portion of the Company’s development activities. The Company
reviews the activities performed under all contracts each quarter
and accrues expenses and the amount of any reimbursement to be
received from its collaborators based upon the estimated amount of
work completed. Estimating the value or stage of completion of
certain services requires judgment based on available information.
If the Company does not identify services performed for it but not
billed by the service-provider, or if it underestimates or
overestimates the value of services performed as of a given date,
reported expenses will be understated or overstated.
Stock-Based Compensation – The Company charges to
expense the fair value of stock options and other equity awards
granted. Compensation costs for stock-based awards with time-based
vesting are determined using the quoted market price of the
Company’s common stock on the date of grant or for stock
options, the value determined utilizing the Black-Scholes option
pricing model, and are recognized on a straight-line basis, while
awards containing a market condition are valued using multifactor
Monte Carlo simulations. Compensation costs for awards containing a
performance condition are determined using the quoted price of the
Company’s common stock on the date of grant or for stock
options, the value is determined utilizing the Black Scholes option
pricing model, and are recognized based on the probability of
achievement of the performance condition over the service period.
Forfeitures are recognized as they occur.
Income Taxes – The Company and its subsidiary file
consolidated federal and separate-company state income tax returns.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences or operating loss and
tax credit carryforwards are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the enactment
date. The Company has recorded and continues to maintain a full
valuation allowance against its deferred tax assets based on the
history of losses incurred and lack of experience projecting future
sales-based royalty and milestone payments.
On
December 22, 2017, the U.S. government enacted wide-ranging tax
legislation, the 2017 Tax Act. The 2017 Tax Act significantly
revised 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 Alternate Minimum Tax (“AMT”) and
providing for the refund of existing AMT credits.
Other
provisions enacted include a new provision designed to tax
low-taxed income of foreign subsidiaries (i.e., “GILTI”
and a one-time transition tax on the deemed repatriation of
post-1986 undistributed foreign subsidiary earnings and profits
from controlled foreign corporations. 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 Accounting Standards
Codification (“ASC”) Topic 260, Earnings per Share, which includes
guidance pertaining to the warrants issued in connection with the
Company’s July 3, 2012, December 23, 2014, and July 2, 2015
private placement offerings and the August 4, 2016 underwritten
offering, that were exercisable for nominal consideration and,
therefore, to the extent not yet exercised were considered in the
computation of basic and diluted net income (loss) per common
share. As of November 21, 2017, all warrants exercisable for
nominal value had been converted into common stock.
The
following table is a reconciliation of net income (loss) and the
shares used in calculating basic and diluted net income (loss) per
common share for the years ended June 30, 2019, 2018 and
2017:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$35,773,027
|
$24,702,714
|
$(13,331,533)
|
|
|
|
|
Denominator:
|
|
|
|
Weighted
average common shares outstanding - Basic
|
207,670,607
|
198,101,060
|
184,087,719
|
|
|
|
|
Effect
of dilutive shares:
|
|
|
|
Common
stock equivalents arising from stock options,
|
|
|
|
warrants
and conversion of preferred stock
|
7,142,309
|
6,752,604
|
-
|
Restricted
stock units
|
2,320,458
|
2,153,894
|
-
|
Weighted
average common shares outstanding - Diluted
|
217,133,374
|
207,007,558
|
184,087,719
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
Basic
|
$0.17
|
$0.12
|
$(0.07)
|
Diluted
|
$0.16
|
$0.12
|
$(0.07)
|
As of
June 30, 2019, 2018 and 2017 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 6,130,876,
5,197,592, and 40,597,194 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.
Included
in the weighted average common shares used in computing basic and
diluted net income (loss) per common share are 6,138,166, 3,140,499
and 1,378,750 vested restricted stock units that had not been
issued as of June 30, 2019, 2018 and 2017, respectively, due to a
provision in the restricted stock unit agreements to delay
delivery
(3)
NEW
AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In November 2018, the FASB issued ASU No. 2018-18,
Collaborative
Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606. This
update provides clarification on the interaction between Revenue
Recognition (Topic 606) and Collaborative Arrangements (Topic 808),
including the alignment of unit of account guidance between the two
topics. The guidance is
effective for public entities for fiscal years beginning after
December 15, 2019, and for interim periods within those fiscal
years, with early adoption permitted. The guidance is applicable to
the Company beginning July 1, 2020. The Company is currently
evaluating the potential effects of this guidance on its
consolidated financial statements.
In May
2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting, which clarifies when to
account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new guidance,
modification accounting is required only if the fair value, the
vesting conditions, or the classification of the award (as equity
or liability) changes as a result of the change in terms or
conditions. It is effective prospectively for the annual period
ending June 30, 2019 and interim periods within that annual period.
Early adoption is permitted. The Company adopted this guidance
during the year ended June 30, 2019. The adoption of this standard
did not have a material impact on the Company’s consolidated
financial statements.
In June
2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses:
Measurement of Credit Losses on Financial Instruments, which
requires measurement and recognition of expected credit losses for
financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. This is different from the current guidance as this will
require immediate recognition of estimated credit losses expected
to occur over the remaining life of many financial assets. The new
guidance will be effective for the Company on July 1, 2020. Early
adoption will be available on July 1, 2019. The Company is
currently evaluating the effect that ASU No. 2016-13 will have on
its consolidated financial statements and related
disclosures.
In
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.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, relating to the recognition of
lease assets and lease liabilities. The new guidance requires
lessees to recognize almost all leases on their balance sheet as a
right-of-use asset and a lease liability, other than leases that
meet the definition of a short- term lease, and requires expanded
disclosures about leasing arrangements. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee have not significantly changed from the
current guidance. Lessor accounting is similar to the current
guidance, but updated to align with certain changes to the lessee
model and the new revenue recognition standard. The new guidance is
effective for the Company on July 1, 2019. The Company believes
that the adoption of ASU No. 2016-02 will not have a material
impact on its consolidated results of operations and expects to
record between $200,000 to $250,000 of right-of-use assets and
lease liabilities on the balance sheet as a result of adopting this
new standard.
The
Company will adopt the standard on July 1, 2019 and use the
effective date as its initial date of application. The new standard
provides practical expedients and certain exemptions for an
entity’s ongoing accounting. The Company currently expects to
elect the short-term lease recognition exemption for all leases
that qualify.
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments: Recognition and
Measurement of Financial Assets and Financial Liabilities.
The new guidance relates to the recognition and measurement of
financial assets and liabilities. The new guidance makes targeted
improvements to GAAP impacting equity investments (other than those
accounted for under the equity method or consolidated), financial
liabilities accounted for under the fair value election, and
presentation and disclosure requirements for financial instruments,
among other changes. The Company adopted this guidance during the
year ended June 30, 2019. The adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
On
January 8, 2017, the Company entered into the AMAG License
Agreement. Under the terms of the AMAG License Agreement, the
Company granted to AMAG (i) an exclusive license in all countries
of North America (the “Territory”), with the right to
grant sub-licenses, to research, develop and commercialize products
containing Vyleesi (each a “Product”, and collectively,
“Products”), (ii) a non-exclusive license in the
Territory, with the right to grant sub-licenses, to manufacture the
Products, and (iii) a non-exclusive license in all countries
outside the Territory, with the right to grant sub-licenses, to
research, develop and manufacture (but not commercialize) the
Products.
Following
the satisfaction of certain conditions to closing, the license
agreement became effective on February 2, 2017. On that date, AMAG
paid the Company $60,000,000 as a one-time initial payment.
Pursuant to the terms of and subject to the conditions in the AMAG
License Agreement, AMAG was required to reimburse the Company up to
an aggregate amount of $25,000,000 for reasonable, documented,
direct out-of-pocket expenses incurred by the Company following
February 2, 2017, in connection with the development and regulatory
activities necessary to file a New Drug Application
(“NDA”) for Vyleesi for HSDD in the United States
related to Palatin’s development obligations.
The
Company determined there was no stand-alone value for the license,
and that the license and the reimbursable direct out-of-pocket
expenses, pursuant to the terms of the License Agreement,
represented a combined unit of accounting which totaled
$85,000,000. The Company recognized revenue of the combined unit of
accounting over the arrangement using the input-based proportional
method as the Company completed its development obligations. 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. For the year ended June 30, 2019, additional billings
were $300,476. On June 4, 2018, the FDA accepted the Vyleesi NDA
for filing. The FDA’s acceptance triggered a $20,000,000
milestone payment to Palatin from AMAG. As a result, the Company
recognized $20,000,000 in revenue related to regulatory milestones
in fiscal 2018. On June 21, 2019, the FDA granted approval of
Vyleesi for use in the United States. The FDA’s approval
triggered a $60,000,000 milestone payment to Palatin from AMAG. As
a result, the Company recognized $60,000,000 in revenue related to
regulatory milestones in fiscal 2019. In addition, pursuant to the
terms of and subject to the conditions in the AMAG License
Agreement, the Company is eligible to receive from AMAG up to
$300,000,000 in sales milestone payments based on achievement of
certain annual net sales for all Products in the
Territory.
AMAG is
also obligated to pay the Company tiered royalties on annual net
sales of Products, on a product-by-product basis, in the Territory
ranging from the high single-digits to the low double-digits. The
royalties will expire on a product-by-product and
country-by-country basis 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 is obligated to
pay Greenhill a fee equal to 2% of all proceeds and consideration,
as defined, paid or to be paid to the Company by AMAG in connection
with the AMAG License Agreement, subject to a minimum fee of
$2,500,000. The minimum fee of $2,500,000, less a credit of $50,000
for an advisory fee previously paid by the Company, was paid to
Greenhill and recorded as an expense upon the closing of the
licensing transaction. This amount is credited toward amounts that
were and will 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, as defined, paid or to be paid to
the Company by AMAG in connection with the AMAG License Agreement.
The Company will generally pay Greenhill 2% of all future proceeds
and consideration paid to the Company by AMAG in connection with
the AMAG License Agreement, including milestone and royalty
payments. The Company also reimbursed Greenhill $7,263 for certain
expenses incurred in connection with its advisory
services.
Pursuant
to the AMAG License Agreement, the Company has assigned to AMAG the
Company’s manufacturing and supply agreements with Catalent
Belgium S.A. to perform fill, finish and packaging of
Vyleesi.
(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 was recorded as non-current deferred revenue at
June 30, 2018. On July 1, 2018, in conjunction with the adoption of
ASC Topic 606, a one-time transition adjustment of $500,000 was
recorded to the opening balance of accumulated deficit as the
Company determined a significant revenue reversal would not occur
in a future period. The Company will receive a $3,000,000 milestone
payment based on the first commercial sale in Korea. Palatin has
the potential to receive up to $37,500,000 in additional sales
related milestone payments and mid-single-digit to low double-digit
royalties on net sales in the licensed territory. All development,
regulatory, sales, marketing, and commercial activities and
associated costs in the licensed territory will be the sole
responsibility of Kwangdong.
(7)
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other
current assets consist of the following:
|
|
|
|
|
|
Clinical study
costs
|
$61,798
|
$145,994
|
Insurance
premiums
|
87,937
|
42,605
|
Other
|
487,554
|
325,089
|
|
$637,289
|
$513,688
|
(8)
FAIR
VALUE MEASUREMENTS
The
fair value of cash equivalents is classified using a hierarchy
prioritized based on inputs. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on
management’s own assumptions used to measure assets and
liabilities at fair value. A financial asset’s or
liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair
value measurement.
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,
2019:
|
|
|
|
|
Money Market
Account
|
$43,381,556
|
$43,381,556
|
$-
|
$-
|
June 30,
2018:
|
|
|
|
|
Money Market
Account
|
$37,808,099
|
$37,808,099
|
$-
|
$-
|
(9)
PROPERTY
AND EQUIPMENT, NET
Property
and equipment, net, consists of the following:
|
|
|
|
|
|
Office
equipment
|
$1,193,162
|
$1,193,162
|
Laboratory
equipment
|
585,795
|
558,205
|
Leasehold
improvements
|
751,226
|
751,226
|
|
2,530,183
|
2,502,593
|
Less:
Accumulated depreciation and amortization
|
(2,388,644)
|
(2,338,558)
|
|
$141,539
|
$164,035
|
The
aggregate cost of assets acquired under capital leases was $146,115
as of both June 30, 2019 and 2018. Accumulated amortization
associated with assets acquired under capital leases was $122,115
as of both June 30, 2019 and 2018.
Accrued
expenses consist of the
following:
|
|
|
|
|
|
Clinical study
costs
|
$943,721
|
$983,410
|
Other research
related expenses
|
1,361,414
|
590,236
|
Professional
services
|
317,500
|
297,731
|
Other
|
226,057
|
231,644
|
|
$2,848,692
|
$2,103,021
|
Notes
payable consist of the following:
|
|
|
|
|
|
Notes payable under
venture loan
|
$333,333
|
$6,333,334
|
Unamortized related
debt discount
|
(295)
|
(33,535)
|
Unamortized debt
issuance costs
|
(142)
|
(18,138)
|
Notes
payable
|
332,896
|
6,281,661
|
|
|
|
Less: current
portion
|
332,896
|
5,948,763
|
|
|
|
Long-term
portion
|
$-
|
$332,898
|
On
December 23, 2014, the Company closed on a $10,000,000 venture loan
which was led by Horizon Technology Finance Corporation
(“Horizon”). The debt facility was a four-year senior
secured term loan that bore interest at a floating coupon rate of
one-month LIBOR (floor of 0.50%) plus 8.50%, and provided for
interest-only payments for the first eighteen months followed by
monthly payments of principal of $333,333 plus accrued interest
through January 1, 2019. The lenders also received five-year
immediately exercisable Series D 2014 warrants to purchase 666,666
shares of common stock exercisable at an exercise price of $0.75
per share. The Company recorded a debt discount of $267,820 equal
to the fair value of these warrants at issuance, which was
amortized to interest expense over the term of the related debt.
This debt discount was offset against the note payable balance and
included in additional paid-in capital on the Company’s
balance sheet. In addition, a final incremental payment of $500,000
was due on January 1, 2019, or upon early repayment of the loan.
This final incremental payment was accreted to interest expense
over the term of the related debt and included in other liabilities
on the consolidated balance sheet. The Company incurred $209,367 of
costs in connection with the loan. These costs were capitalized as
deferred financing costs and were offset against the note payable
balance. These debt issuance costs were amortized to interest
expense over the term of the related debt. During the year ended
June 30, 2019, the loan matured, and on December 31, 2018, the
Company made the final incremental payment of
$500,000.
On July
2, 2015, the Company closed on a $10,000,000 venture loan led by
Horizon. The debt facility is a four-year senior secured term loan
that bears interest at a floating coupon rate of one-month LIBOR
(floor of 0.50%) plus 8.50% and provides for interest-only payments
for the first eighteen months followed by monthly payments of
principal of $333,333 plus accrued interest through August 1, 2019.
The lenders also received five-year immediately exercisable Series
G warrants to purchase 549,450 shares of the Company’s common
stock exercisable at an exercise price of $0.91 per share. The
Company has recorded a debt discount of $305,196 equal to the fair
value of these warrants at issuance, which is being amortized to
interest expense over the term of the related debt. This debt
discount is offset against the note payable balance and is included
in additional paid-in capital on the Company’s balance sheet.
In addition, a final incremental payment of $500,000 is due on
August 1, 2019, or upon early repayment of the loan. This final
incremental payment is being accreted to interest expense over the
term of the related debt and is included in other current
liabilities on the consolidated balance sheet as of June 30, 2019.
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 included the 2015 venture loan, were secured
by a first priority security interest in substantially all of its
assets other than its intellectual property. The Company also
agreed to specified limitations on pledging or otherwise
encumbering its intellectual property assets. The 2015 amended and
restated loan agreement included customary affirmative and
restrictive covenants but did not include any covenants to attain
or maintain specified financial metrics. The loan agreement
included customary events of default, including payment defaults,
breaches of covenants, change of control and a material adverse
change default. As of June 30, 2019, the Company was in compliance
with all of its loan covenants. Scheduled future principal payments
related to notes payable as of June 30, 2019 were as
follows:
Year
Ending June 30,
|
|
2020
|
$333,333
|
Less: Unamortized
debt discount and issuance costs
|
(437)
|
Net
|
$332,896
|
The
final payments were made in July 2019.
(12)
COMMITMENTS
AND CONTINGENCIES
Operating Leases – The Company currently leases
facilities under two non-cancelable operating leases. The lease on
the Company’s corporate offices was renewed effective July 1,
2015 and expires on June 30, 2020 and in June 2016 the Company
entered into a lease for approximately 1,700 square feet of
laboratory space which expires in June 2020. Future minimum lease
payments under these leases are $225,120 for the year ending June
30, 2020.
For the
years ended June 30, 2019, 2018 and 2017, rent expense was
$285,453, $292,411, and $261,580 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, 2019, 2018
and 2017, Company contributions were $170,643, $166,962, and
$199,264, 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.
(13)
STOCKHOLDERS’
EQUITY (DEFICIENCY)
Series A Convertible Preferred Stock – As of June
30, 2019, 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, 2019, the Series A
Conversion Price was $6.14, so each share of Series A Convertible
Preferred Stock is currently convertible into approximately 16.3
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, 2019. 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 June 21, 2019 and April 20, 2018, the Company
entered into equity distribution agreements with Canaccord Genuity
LLC (“Canaccord”) (the “2019 Equity Distribution
Agreement” and the “2018 Equity Distribution
Agreement”, respectively), pursuant to which the Company may,
from time to time, sell shares of the Company’s common
stock at market prices by
methods deemed to be an “at-the-market offering” as
defined in Rule 415 promulgated under the Securities Act of 1933,
as amended. The 2018 Equity Distribution Agreement and related
prospectus is limited to sales of up to an aggregate maximum $25.0
million of shares of the Company’s common stock, and the 2019
Equity Distribution Agreement and related prospectus is limited to
sales of up to an aggregate maximum $40.0 million of shares of the
Company’s common stock. The Company pays Canaccord 3.0% of
the gross proceeds as a commission. For the quarter ended June 30,
2019, a total of 14,964,794 shares of common stock were sold
through Canaccord under the 2018 Equity Distribution Agreement for
net proceeds of $20,594,415 after payment of commission fees of
$636,941. From inception of the 2018 Equity Distribution Agreement
through June 30, 2019, a total of 18,504,993 shares of common Stock
were sold for net proceeds of $24,249,997 after payment of
commission fees of $750,000, and the 2018 Equity Distribution
Agreement is deemed completed. For the quarter ended June 30, 2019,
a total of 7,564,575 shares of common stock were sold through
Canaccord under the 2019 Equity Distribution Agreement for net
proceeds of $10,288,836 after payment of commission fees of
$318,211. The Company has no obligation to sell any additional
shares under the 2019 Equity Distribution Agreement and may at any
time suspend solicitation and offers under the 2019 Equity
Distribution Agreement. Between July 1, 2019 and September 10,
2019, there were no sales of the Company’s common stock
through Canaccord under the 2019 Equity Distribution
Agreement.
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.
Outstanding Stock Purchase Warrants – As of June 30,
2019, the Company had outstanding warrants exercisable for shares
of common stock as follows:
Shares of
Common
|
|
Exercise Price
per
|
|
Latest
Termination
|
Stock
|
|
Share
|
|
Date
|
666,666
|
|
0.75
|
|
December
23, 2019
|
2,191,781
|
|
0.91
|
|
July 2,
2020
|
549,450
|
|
0.91
|
|
July 2,
2020
|
9,441,313
|
|
0.70
|
|
August
4, 2021
|
25,000
|
|
0.70
|
|
August
4, 2021
|
9,414,503
|
|
0.80
|
|
December
6, 2021
|
22,288,713
|
|
|
|
|
During
the year ended June 30, 2019, the Company received $225,600 and
issued 282,000 shares of common stock pursuant to the exercise of
warrants at an exercise price of $0.80 per share. The Company also
received $583,334 and issued 833,333 shares of common stock
pursuant to the exercise of warrants at an exercise price of $0.70
per share.
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,
2019, 4,293,461 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, 2019, 2018 and 2017:
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Term in Years
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
Outstanding - July
1, 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
|
|
|
|
|
|
|
Granted
|
2,340,200
|
1.34
|
|
|
Forfeited
|
(280,362)
|
0.62
|
|
|
Exercised
|
(270,500)
|
0.64
|
|
|
Expired
|
(129,150)
|
1.77
|
|
|
Outstanding - June
30, 2019
|
14,435,650
|
$0.85
|
7.3
|
$5,021,759
|
|
|
|
|
|
Exercisable at June
30, 2019
|
8,226,113
|
$0.77
|
6.1
|
$3,311,791
|
|
|
|
|
|
Expected to vest at
June 30, 2019
|
6,209,537
|
$0.95
|
8.9
|
$1,709,968
|
Stock
options granted to the Company’s executive officers and
employees generally vest over a 48-month period, while stock
options granted to its non-employee directors vest over a 12-month
period.
Included
in the options outstanding above are 1,075,000 and 117,500
performance-based options granted in December 2017 to executive
officers and employees, respectively, which vest during a
performance period ending on December 31, 2020, if and upon either
i) as to 100% of the target number of shares upon achievement of a
closing price for the Company’s common stock equal to or
greater than $1.50 per share for 20 consecutive trading days, which
is considered a market condition; or ii) as to thirty percent (30%)
of the target number of shares, upon the acceptance for filing by
the FDA of an NDA for Vyleesi for HSDD in premenopausal women
during the performance period, which is considered a performance
condition; iii) as to fifty percent (50%) of the target number of
shares, upon the approval by the FDA of an NDA for Vyleesi for HSDD
in premenopausal women during the performance period, which is also
considered a performance condition; iv) as to twenty percent (20%)
of the target number of shares, upon entry into a licensing
agreement during the performance period for the commercialization
of Vyleesi for FSD in at least two of the following geographic
areas (a) four or more countries in Europe, (b) Japan, (c) two or
more countries in Central and/or South America, (d) two or more
countries in Asia, excluding Japan and China, and (e) Australia,
which is also considered a performance condition. The fair value of
these options was $602,760. The Company amortized the fair value
over the derived service period of 1.1 years or upon the attainment
of the performance condition. Pursuant to the FDA acceptance of the
NDA filing of Vyleesi, 30% of the target number of options vested
in June 2018 and 50% of the target number of options vested in June
2019 upon FDA approval of Vyleesi.
For the
years ended June 30, 2019, 2018 and 2017, 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, 2019,
2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
Risk-free interest
rate
|
1.9%
|
1.8%
|
1.7%
|
Volatility
factor
|
69.3%
|
52.6%
|
75.0%
|
Dividend
yield
|
0%
|
0%
|
0%
|
Expected option
life (years)
|
6.1
|
6.0
|
6.2
|
Weighted average
grant date fair value
|
$0.85
|
$0.58
|
$0.27
|
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, 2019, 2018 and 2017, the Company recorded
stock-based compensation related to stock options of $1,116,350,
$1,131,895, and $547,953. As of June 30, 2019, there was $3,468,126
of unrecognized compensation cost related to unvested options,
which is expected to be recognized over a weighted-average period
of 3.1 years.
During
fiscal 2019, the terms of certain options were modified to
accelerate vesting and extend the date to exercise the options. As
a result, the Company recorded additional stock-based compensation
of $111,499.
In
connection with the cashless exercise of stock options during the
year ended June 30, 2019, the Company withheld 37,994 shares with
aggregate value of $49,771 in satisfaction of minimum tax
withholding obligations.
Restricted Stock Units – The following table
summarizes restricted stock award activity for the years ended June
30, 2019, 2018 and 2017:
|
|
|
|
Outstanding at
beginning of year
|
9,323,876
|
5,209,617
|
2,665,768
|
Granted
|
1,517,450
|
4,914,550
|
3,192,000
|
Forfeited
|
(182,351)
|
(5,250)
|
(68,751)
|
Vested
|
(331,142)
|
(795,041)
|
(579,400)
|
Outstanding at end
of year
|
10,327,833
|
9,323,876
|
5,209,617
|
|
|
|
|
For the
years ended June 30, 2019, 2018 and 2017 the Company recorded
stock-based compensation related to restricted stock units of
$2,143,640, $2,386,456, and $1,202,421, respectively.
During
fiscal 2019, the terms of certain restricted stock units were
modified to accelerate vesting. As a result, the Company recorded
additional stock-based compensation of $110,589.
Included
in outstanding restricted stock units in the table above are
6,138,166 vested shares that have not been issued as of June 30,
2019 due to a provision in the restricted stock unit agreements to
delay delivery.
Time-based
restricted stock units granted to the Company’s executive
officers, employees and non-employee directors generally vest over
24 months, 48 months and 12 months, respectively.
In June
2019, the Company granted 438,000 performance-based restricted
stock units to its executive officers and 182,725 performance-based
restricted stock units to other employees which vest during a
performance period ending June 24, 2023. The performance-based
restricted stock units vest on performance criteria relating to
advancement of MC1r programs, including initiation of clinical
trials and licensing of Vyleesi in additional countries or
regions.
In
December 2017, the Company granted 1,075,000 performance-based
restricted stock units to its executive officers and 670,000
performance-based restricted stock units to other employees which
vest during a performance period, ending on December 31, 2020, if
and upon either i) as to 100% of the target number of shares upon
achievement of a closing price for the Company’s common stock
equal to or greater than $1.50 per share for 20 consecutive trading
days, which is considered a market condition; or ii) as to thirty
percent (30%) of the target number of shares, upon the acceptance
for filing by the FDA of an NDA for Vyleesi for HSDD in
premenopausal women during the performance period, which is
considered a performance condition; iii) as to fifty percent (50%)
of the target number of shares, upon the approval by the FDA of an
NDA for Vyleesi for HSDD in premenopausal women during the
performance period, which is also considered a performance
condition; iv) as to twenty percent (20%) of the target number of
shares, upon entry into a licensing agreement during the
performance period for the commercialization of Vyleesi for FSD in
at least two of the following geographic areas (a) four or more
countries in Europe, (b) Japan, (c) two or more countries in
Central and/or South America, (d) two or more countries in Asia,
excluding Japan and China, and (e) Australia, which is also
considered a performance condition. The fair value of these awards
was $913,750 and $569,500, respectively. The Company amortized the
fair value over the derived service period of 1.1 years or upon the
attainment of the performance condition. Pursuant to the FDA
acceptance of the NDA filing for Vyleesi, 30% of the target number
of shares vested in June 2018. Pursuant to the FDA approval of
Vyleesi, 50% of the target number of shares vested in June
2019.
In
connection with the vesting of restricted share units during the
years ended June 30, 2019, 2018 and 2017, the Company withheld
67,038, 27,465, and 75,993 shares with aggregate values of $65,992,
$20,786, and $27,088 respectively, in satisfaction of minimum tax
withholding obligations.
For
fiscal 2019, the Company recorded no income tax expense as a result
of the utilization of net operating losses that were subject to a
full valuation allowance.
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 the Fosun License
Agreement (Note 5) and $82,500, which was withheld in accordance
with tax withholding requirements in Korea related to the Kwangdong
License Agreement (Note 6). Any potential credit to be received by
the Company on its United States tax returns is offset by the
Company’s valuation allowance. 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 had 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. As of
June 30, 2019, based upon the filing of the Company’s June
30, 2018 tax return, the Company has a current income tax
receivable of $376,000 and a long-term income tax receivable of
$123,000.
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.
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.
For
fiscal 2018, 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, 2019, the Company had state net operating loss
carryforwards of approximately $80,000,000, which will expire, if
not utilized, between 2032 and 2037, federal net operating loss
carryforwards of approximately $62,100,000, federal research and
development credits of approximately $6,200,000, which expire, if
not utilized, between 2020 and 2039, and foreign tax credits of
$582,500, which expire, if not utilized, in 2028.
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. Based on a history of losses incurred, the Company has
recognized a full valuation allowance against its net deferred tax
assets during the years ended June 30, 2019, 2018, and
2017.
A
sustained period of profitability in the Company’s operations
is required before it would change its judgment regarding the need
for a full valuation allowance against its net deferred tax assets.
Accordingly, although the Company was profitable in fiscal 2018 and
fiscal 2019 based in part on revenue recorded upon the achievement
of certain regulatory milestones, the Company continues to record a
full valuation allowance against the net deferred tax assets.
Although the weight of negative evidence related to cumulative
losses is decreasing as the Company delivers on its programs,
management believes that this objectively-measured negative
evidence outweighs current subjective positive evidence of
potential operating results and, as such, the Company has not
changed its judgment regarding the need for a full valuation
allowance as of June 30, 2019.
Continued
improvement in the Company’s operating results, however,
could lead to a reversal of all or some portion of the valuation
allowance. Until such time, the use of net operating loss
carryforwards and tax credits to offset profits, if any, will
reduce the overall level of deferred tax assets subject to
valuation allowance.
The Tax
Reform Act of 1986 (the “Act”) provides for limitation
on the use of the Company’s 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, 2019.
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
and research and development credits.
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
|
$18,724,000
|
$29,504,000
|
Research and
development and AMT tax credits
|
6,207,000
|
5,649,000
|
Foreign tax
credits
|
583,000
|
583,000
|
Basis differences
in fixed assets and other
|
1,072,000
|
1,734,000
|
|
26,586,000
|
37,470,000
|
Valuation
allowance
|
(26,586,000)
|
(37,470,000)
|
Net deferred tax
assets
|
$-
|
$-
|
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 2019, 2018 or 2017. As of June 30, 2019 and
2018, the Company had no liabilities for uncertain income tax
matters.
(15)
CONSOLIDATED
QUARTERLY FINANCIAL DATA - UNAUDITED
The
following tables provide quarterly data for the years ended June
30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in
thousands, except per share data)
|
Revenues
|
$60,265
|
$-
|
$-
|
$35
|
Operating
expenses
|
8,080
|
5,763
|
5,050
|
5,663
|
Other
income(expense), net
|
39
|
36
|
8
|
(54)
|
Income
(loss) before income taxes
|
52,224
|
(5,727)
|
(5,042)
|
(5,682)
|
Income
taxes
|
-
|
-
|
-
|
-
|
Net
income (loss)
|
$52,224
|
$(5,727)
|
$(5,042)
|
$(5,682)
|
Basic
net income (loss) per common share
|
$0.25
|
$(0.03)
|
$(0.02)
|
$(0.03)
|
Diluted
net income (loss) per common share
|
$0.23
|
$(0.03)
|
$(0.02)
|
$(0.03)
|
Weighted
average number of
|
|
|
|
|
common
shares outstanding
|
|
|
|
|
used
in computing basic net
|
|
|
|
|
income
(loss) per common share
|
212,253,194
|
207,016,304
|
206,487,984
|
205,009,278
|
Weighted
average number of
|
|
|
|
|
common
shares outstanding
|
|
|
|
|
used
in computing diluted net
|
|
|
|
|
income
(loss) per common share
|
228,526,106
|
207,016,304
|
206,487,984
|
205,009,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|