10-K 1 0001.txt ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 2000 THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON SEPTEMBER 29, 2000 PURSUANT TO A RULE 201 TEMPORARY HARDHSIP EXEMPTION. U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission file number 0-22686 PALATIN TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 95-4078884 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 103 Carnegie Center, Suite 200 Princeton, New Jersey 08540 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 520-1911 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was sold, as of September 25, 2000, was $47,782,831. As of September 25, 2000, 8,199,136 shares of the registrant's common stock, par value $.01 per share, were outstanding. Documents incorporated by reference: the registrant's definitive proxy statement relating to the annual meeting of stockholders currently scheduled for November 2000, incorporated by reference in Part III of this Form 10-K. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] TABLE OF CONTENTS PART I Page Item 1. Business .........................................................1 Item 2. Properties ......................................................12 Item 3. Legal Proceedings ...............................................12 Item 4. Submission of Matters to a Vote of Security Holders .............13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................................................13 Item 6. Selected Financial Data .........................................14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......25 Item 8. Financial Statements and Supplementary Data .....................26 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ..................................58 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act .........59* Item 11. Executive Compensation ...........................................59* Item 12. Security Ownership of Certain Beneficial Owners and Management ...59* Item 13. Certain Relationships and Related Transactions ...................59* *Incorporated by reference from our definitive proxy statement relating to the annual meeting of stockholders scheduled for November 15, 2000, which we will file with the Securities and Exchange Commission within 120 days after our June 30, 2000 fiscal year end. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..59 Signatures ..................................................................63 Exhibit Index................................................................65 PART I ITEM 1. BUSINESS. FORWARD-LOOKING STATEMENTS We make forward-looking statements in this report and the documents we incorporate by reference. Sometimes these statements contain words such as "anticipates," "plans," "intends," "expects" and similar expressions to identify forward-looking statements. These statements are not guarantees of our future performance. Our business involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from what we say in this report and in the documents we incorporate by reference. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We will not revise these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. OVERVIEW We are in the early stages of developing pharmaceutical products and technologies. We are concentrating our efforts on the following: o MIDAS(TM), a peptide technology which may be useful to develop drugs to treat diseases or for diagnostic imaging. A peptide is a short chain of amino acids. We are engaged in research and development of this technology to treat obesity and eating disorders and for neural regeneration, and believe that this technology may have applications in a variety of other areas as well, including immune disorders, cancers and cardiology. o PT-141, a drug to treat sexual dysfunction, initially male erectile dysfunction. PT-141 is a stabilized peptide that works like a natural hormone. PT-141 is in preclinical testing, and we expect to start clinical trials in late 2000 or early 2001. o LeuTech(R), a diagnostic imaging product used to image and locate the site of infection or inflammation within the body. We have completed clinical trials with LeuTech for the diagnosis of equivocal appendicitis and filed an application with the United States Food and Drug Administration for approval to market LeuTech for that indication. FDA review of our clinical efficacy and safety data is complete and the FDA has not requested any further data on efficacy or safety. However, the FDA has requested additional manufacturing and process validation data. We are currently working on responding to the FDA's request for additional data. We are conducting additional clinical trials with LeuTech to diagnose other infections such as bone infections, infections of prostheses, or artificial body parts, and abscesses. We believe that LeuTech can be used to diagnose a wide range of other infections, including infections of the intra-abdominal area, such as intestinal, spleen, liver or urinary tract infections. 1 PRODUCTS AND TECHNOLOGIES IN RESEARCH AND DEVELOPMENT MIDAS. MIDAS is a novel peptide chemistry that may have broad applications in the pharmaceutical and radiopharmaceutical industries. The MIDAS technology combines a metal ion with a specially designed peptide, resulting in a biologically active molecule. Peptides, which are short chains of amino acids, play important roles in regulating a variety of biological functions. Natural peptides function by conforming or bending to fit specific molecules on cell surfaces, called receptors, thereby signaling the cell to initiate a biological activity. Some important biological functions that are affected in this manner include overall growth and behavior, inflammatory responses, immune responses and wound healing. In order to effectively regulate cell signaling, a peptide must bind to its target receptor with high affinity. The affinity of a peptide for its target receptor is highly dependent on its three-dimensional shape or conformation. Many naturally occurring peptides are flexible and can take on multiple conformations, allowing them to interact with more than one type of cell receptor, and to control multiple functions within the body. However, when such peptides are used as drugs, this multiple reactivity is a disadvantage as it may potentially lead to side effects. The ability to construct high-affinity, receptor-specific peptides offers a significant opportunity to develop potent receptor-specific drugs. We believe that our patented MIDAS technology can be used for rational design and production of receptor-specific drugs. Using MIDAS, highly stable complexes of a peptide and a metal ion are formed, which mimic the three-dimensional structure that fits a particular receptor ("conformation"). We hope that by designing MIDAS peptides to mimic the conformation required for a specific receptor, we can make a stable, receptor-specific drug, with enhanced biological activity and fewer side effects. We may be able to develop radiopharmaceutical products, which may be diagnostic or therapeutic, using radioactive metal ions in MIDAS peptides. Non-radioactive metal ions may be used in the development of biopharmaceutical MIDAS peptides. We are engaged in research and development on a number of product opportunities for our MIDAS technology, including use of peptide molecules for the treatment of obesity and eating disorders with a melanocortin receptor-based therapeutic agent, and for neural regeneration. We believe that MIDAS technology may have medical applications in a variety of areas, including immune disorders, cancers and cardiology. We intend to seek to enter into strategic alliances or collaborative arrangements to provide additional financial and technical resources for MIDAS development. AGREEMENT WITH NIHON MEDI-PHYSICS. In 1996, we entered into a license option agreement with Nihon Medi-Physics Co. Ltd., a large Japanese pharmaceutical company. We received an initial payment of $1,000,000, before Japanese withholding taxes of $100,000. On December 29, 1998, we terminated the existing license option agreement with Nihon by mutual agreement, and signed a letter of intent relating to development of diagnostic and therapeutic 2 radiopharmaceutical products based on our MIDAS peptide technology. We have decided not to pursue any opportunities with Nihon Medi-Physics at the present time. PT-14 AND PT141. PT-14 is a stabilized peptide based on the natural hormone alpha-MSH. We are developing it for the treatment of male erectile dysfunction. We believe that PT-14 will be different from currently available treatments for male erectile dysfunction because its mechanism of action is through receptors found in the brain, as compared to a direct effect on blood flow to the penis. PT-14 may be useful in treating patients who do not respond well to current therapies. In a preliminary double-blind clinical study using PT-14 conducted under a physician-sponsored FDA investigational new drug application prior to our licensing of PT-14, eight out of 10 men achieved clinically significant erectile response. Studies during the last ten years indicate that as many as 20 million to 30 million men in the United States may be afflicted with some form of male erectile dysfunction. Because of the large number of men believed to be afflicted with male erectile dysfunction, we believe the total market for treatment will be several billion dollars per year. There is tremendous competition to develop and market drugs for treatment of male erectile dysfunction. In March 1998, we entered into a license and development agreement with Watson Laboratories, Inc., formerly TheraTech, Inc., which included a license to some patents owned by TheraTech, to collaboratively develop an oral transmucosal delivery system for PT-14. On March 15, 2000 we entered into an agreement with Watson Laboratories to terminate this license and development agreement. PT-141. PT-141 is a safer, more potent derivative of PT-14. We have initiated development efforts on a nasal delivery formulation of PT-141. We intend to further evaluate PT-141 for male erectile dysfunction. We expect to file an investigational new drug application with the FDA later this year, after which we expect to begin our initial clinical trials with the enrollment of test subjects. LEUTECH. The LeuTech kit system contains a modified mouse monoclonal antibody and our proprietary chemistry for radiolabeling the antibody. Prior to use in patients, the antibody contained in the LeuTech kit is radiolabeled with technetium-99m, a radioactive isotope, by a radiopharmacy (a pharmacy specializing in radioactive materials) or by a hospital's nuclear medicine department. After radiolabeling, LeuTech is administered to the patient by intravenous injection, and rapidly binds to white blood cells present at the site of the infection or circulating in the blood stream. Using LeuTech, physicians can take a definitive image within 45 minutes of administration, permitting rapid imaging and detection of the site of infection. LeuTech has been used to image a variety of infections within the intra-abdominal area, such as intestine, spleen, liver or urinary tract abscesses, as well bone, prosthetic and other abscesses. As part of the body's immune response to an infection, large numbers of white blood cells migrate to and collect at the site of the infection. The concentration of white blood cells at 3 the site of the infection can be used as the basis of detection. By using an agent such as LeuTech, which "tags" or labels the white blood cells with temporary radioactivity, the site of the infection can be readily detected using a camera that records radioactivity. The most accurate procedure currently available for the nuclear medicine imaging of infection sites involves white blood cells labeled with radioactivity outside of the patient's body. This white blood cell labeling procedure begins with the removal of blood cells from the patient, isolating white blood cells from the patient's blood, radiolabeling the white blood cells and injecting the radiolabeled white blood cells back into the patient. The radiolabeled white blood cells then localize at the site of infection, and can be detected using the appropriate camera. This procedure is expensive, involves risks to patients and technicians associated with blood handling, and generally takes between eight and twelve hours to generate a diagnostically useful image. In order to understand the process of drug testing and approval, it is helpful to be familiar with the following terminology of clinical trial phases and FDA applications: Preclinical testing: animal trials to evaluate toxicity. Phase I: In Phase I clinical trials, researchers test a new drug or treatment in a small group of people for the first time to evaluate its safety, determine a safe dosage range, and identify side effects. Phase II: In Phase II clinical trials, the study drug or treatment is given to a larger group of people to see if it is effective and to further evaluate its safety. Phase III: In Phase III studies, the study drug or treatment is given to large groups of people to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow the drug or treatment to be used safely. Phase IV: Phase IV studies are done after the drug or treatment has been marketed. These studies continue testing the study drug or treatment to collect information about their effect in various populations and any side effects associated with long-term use. Investigational new drug application: report on preclinical and clinical testing through Phase III, with manufacturing and labeling information. Biologics license application, or BLA: application for FDA approval for sale of a product classified as a biologic. New drug application: application for FDA approval for sale of a product classified as a drug. MIDAC: Medical Imaging Drug Advisory Committee. We submitted an investigational new drug application to the FDA on LeuTech for diagnosis of appendicitis. We completed Phase I, II and III clinical trials of LeuTech and submitted a biologics license application to the FDA for approval to market LeuTech for the diagnosis of equivocal appendicitis. The Phase I clinical trial tested the safety of LeuTech, and investigated the sites where it can be found after administration. In that study, LeuTech was administered to 10 healthy 4 volunteers who were monitored for adverse events. The results showed that there were no significant safety concerns associated with LeuTech administration. In the Phase II clinical trial, we evaluated LeuTech for its ability to diagnose equivocal appendicitis. The Phase II clinical trial enrolled 56 patients with a preliminary diagnosis of equivocal appendicitis at two medical centers. In the study, the commercial preparation of LeuTech demonstrated 88% accuracy and 100% sensitivity in the diagnosis of equivocal appendicitis. In July 1998, we met with representatives of the FDA to discuss the LeuTech Phase II clinical results and to discuss the LeuTech Phase III clinical trials protocol. Following the meeting, we submitted a Phase III protocol and began Phase III clinical trials for the diagnosis of equivocal appendicitis in September 1998. Palatin completed Phase III trials in the spring of 1999. In May 1999, we met with representatives of the FDA to discuss the LeuTech Phase III clinical results and to discuss filing a biologics license application for approval to market LeuTech for diagnosis of equivocal appendicitis. We filed the biologics license application on November 23, 1999. In July 2000, we met with the FDA MIDAC, which determined in two unanimous (9-0) votes that LeuTech is safe and effective for use in the diagnosis of appendicitis in patients with equivocal signs and symptoms, and that the it has demonstrated clinical utility managing these patients. In September 2000, as part of the normal review process, we received a complete review letter containing the FDA's comments. FDA review of the clinical efficacy and safety data is complete, and the FDA did not request further data on efficacy or safety. The letter advises us that the manufacturing process validation data which we previously submitted were not adequate for final approval. The FDA listed its issues and concerns regarding our application and provided specific details on how we must supplement our application to remedy the issues. Resolving the outstanding manufacturing issues will impact the timing of FDA approval. Although we cannot know for certain whether we can address these issues to the FDA's satisfaction, we are confident that we will be able to resovle them. We have conducted small-scale LeuTech trials for indications involving other infections. We have obtained images in indications such as osteomyelitis, abdominal abscesses, and pulmonary infections. In many cases, researchers were able to obtain LeuTech diagnostic images in under one hour. We are currently conducting Phase II clinical trials to evaluate potential LeuTech indications as well as safety studies on the risks of repeat doses causing a human anti-mouse antigen response in the presence of human anti-mouse antigens. Strategic Collaboration Agreement with Mallinckrodt. On August 16, 1999, we entered into a strategic collaboration agreement with Mallinckrodt, Inc., a large international healthcare products company, to jointly develop and market LeuTech. Under the terms of the agreement, Mallinckrodt: 5 o received an exclusive worldwide license (excluding Europe) for sales, marketing and distribution of LeuTech and paid a licensing fee of $500,000; o agreed to make milestone payments of $5,000,000 on FDA approval of the first LeuTech indication and $5,000,000 on attainment of sales goals following product launch; o agreed to reimburse us for 50% of all ongoing LeuTech development costs, subject to a cap, which can be amended; o agreed to pay us a transfer price on each LeuTech product unit delivered to Mallinckrodt and a quarterly royalty on Mallinckrodt's future net sales of LeuTech; o purchased 700,000 restricted shares of our non-voting Series C convertible preferred stock for $13,000,000; o agreed that the Series C convertible preferred stock would be convertible after five years, or earlier upon the occurrence of a change in control (as defined in the agreement), into 700,000 shares of our common stock with certain registration and anti-dilution rights; o agreed to the oversight of LeuTech development and marketing activities by a joint steering committee, comprised of equal numbers of representatives to be appointed; o agreed to the potential termination of the agreement by either party in the event of material breach or nonpayment by the other party and the expiration of the agreement after the commercial sale of LeuTech ceases; o agreed that if the agreement was validly terminated by us before its expiration due to material breach or nonpayment by Mallinckrodt, then, among other things, all licenses granted to Mallinckrodt will be terminated, Mallinckrodt will assign to us any interest they may have in any trademarks used to market LeuTech as well as any regulatory filings Mallinckrodt may have made in connection with LeuTech and Mallinckrodt will continue to pay us royalty on the sale of any inventory they may have the right to dispose of; and o agreed that if the agreement was validly terminated by Mallinckrodt before its expiration due to a material breach or nonpayment by us, then, among other things, all licenses granted to Mallinckrodt under the terms of the agreement will be considered exclusive and irrevocable, we shall transfer to Mallinckrodt all contractual and intellectual property rights necessary for the production of LeuTech in quantities sufficient to meet Mallinckrodt's needs, and Mallinckrodt shall continue to pay us royalty on all sales of LeuTech. RESEARCH AND DEVELOPMENT. Our research and development efforts primarily focus on two areas: diagnostic imaging and peptide-based therapeutics. Taken collectively, we believe our technologies will facilitate the development of a portfolio of potential products. A summary 6 of our research and development program appears below. "Research" includes the identification of novel molecular targets, development of assay systems, discovery and evaluation of prototype compounds in vitro and in vivo with animal testing. "Development" includes product formulation, toxicology and additional animal testing of a compound, followed by clinical testing and manufacturing methods development. Program Indication Status Commercial Rights ------- ---------- ------ ----------------- LeuTech appendicitis BLA Mallinckrodt osteomyelitis Phase II Mallinckrodt post-surgical abscess Phase II Mallinckrodt PT-141 erectile dysfunction development MIDAS obesity and eating disorders research neural regeneration research Over the last three fiscal years, we have spent approximately the following amounts on research and development activities: o year ended June 30, 2000: $9,110,000 o year ended June 30, 1999: $8,720,000 o year ended June 30, 1998: $7,110,000 PATENTS AND PROPRIETARY INFORMATION PATENT PROTECTION. Our success will depend in substantial part on our ability to obtain, defend and enforce patents, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and abroad. We aggressively seek patent protection for its technology in the United States and, selectively, in those foreign countries where protection is important to the development of our business. We own or have rights to patents and pending applications directed to radiolabeling of antibodies, antibody fragments, and peptides; MIDAS peptides; peptide pharmaceuticals; and to methods for making and using the foregoing in diagnostic and therapeutic applications. We own or have rights to over 25 United States patents, several pending United States patent applications, and foreign patents and applications in selected foreign countries corresponding to certain United States patents and applications. Although we have filed patent applications covering the LeuTech products, and those applications are pending, we may not be able to obtain a patent, and the claims of the patent may not provide meaningful protection for the LeuTech product. In addition, even if the patent 7 issues, it may not be valid. We do not know for certain that the use or sale of LeuTech will not infringe upon patents of third parties. In the event that a third party has also filed a patent application relating to an invention we claimed in a patent application, we may be required to participate in an interference proceeding adjudicated by the United States Patent and Trademark Office ("PTO") to determine priority of invention. The possibility of an interference proceeding could result in substantial uncertainties and cost, even if the eventual outcome is favorable to us. An adverse outcome could result in losing patent protection for the subject of the interference, subjecting us to significant liabilities to third parties and requiring us to obtain licenses from third parties at undetermined cost or to cease using the technology. FUTURE PATENT INFRINGEMENT. We do not know for certain that our commercial activities will not infringe upon patents or patent applications of third parties, some of which may not even have been issued yet. Although we are not aware of any valid U.S. patents which are infringed by LeuTech or by our method of making LeuTech, such patents might arise in the future. We may be unable to avoid infringement of any such patents and may have to seek a license, defend an infringement action, or challenge the validity of such patents in court. Patent litigation is costly and time consuming. If we do not obtain a license under any such patents, are found liable for infringement, or if such patents are not found to be invalid, we may be liable for significant money damages, may encounter significant delays in bringing products to market, or may be precluded from participating in the manufacture, use or sale of products or methods of treatment covered by such patents. GOVERNMENT RIGHTS. Some of our patents relating to LeuTech are directed to inventions developed internally or within academic institutions from which we previously acquired rights to such patents with funds from United States government agencies. As a result of these arrangements, the United States government may have rights in certain inventions developed during the course of the performance of federally funded projects, as required by law or agreements with the funding agency. PROPRIETARY INFORMATION. We rely on proprietary information, such as trade secrets and know-how, which is not patented. We have taken steps to protect our unpatented trade secrets and know-how, in part through the use of confidentiality agreements with our employees, consultants and certain contractors. If our employees, scientific consultants or collaborators or licensees develop inventions or processes independently that may be applicable to our product candidates, disputes may arise about ownership of proprietary rights to those inventions and processes. Such inventions and processes will not necessarily become our property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights. If trade secrets are breached, our recourse will be solely against the person who caused the secrecy breach. This might not be an adequate remedy to us, because third parties other than 8 the person who causes the breach will be free to use the information without accountability to us. This is an inherent limitation of the law of trade secret protection. GOVERNMENTAL REGULATION The FDA, comparable agencies in foreign countries and state regulatory authorities have established regulations and guidelines which apply, among other things, to the clinical testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, promotion and marketing of our proposed products. Noncompliance with applicable requirements can result in fines, recalls or seizures of products, total or partial suspension of production, refusal of the regulatory authorities to approve marketing applications, and criminal prosecution. After approving a product for marketing, the FDA may require post-marketing testing, including extensive Phase IV studies, and surveillance to monitor the effects of the product in general use. The FDA may withdraw product approvals if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, the FDA may impose restrictions on the use of a drug that may limit its marketing potential. GOOD MANUFACTURING PRACTICES. In addition to obtaining either a biologics license application or new drug application approval from the FDA for any of our proposed products, if the proposed product is manufactured in the United States, the drug manufacturing establishment must be registered with, and inspected by, the FDA. Such drug manufacturing establishments are subject to biennial inspections by the FDA, and must comply with current good manufacturing practices regulations enforced by the FDA. To supply products for use in the United States, foreign manufacturing establishments must comply with current good manufacturing practices and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in such other countries under reciprocal agreements with the FDA. In complying with standards established by the FDA, manufacturing establishments must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. We depend on contract manufacturing establishments, both in the United States and in foreign countries, to manufacture components of LeuTech. We anticipate that contract manufacturing establishments will manufacture PT-141 and proposed products resulting from our MIDAS technology. THIRD-PARTY REIMBURSEMENTS Successful sales of our proposed products in the United States and other countries will depend on the availability of adequate reimbursement from third-party payors such as governmental entities, managed care organizations and private insurance plans. Reimbursement by a third-party payor may depend on a number of factors, including the payor's determination that use of a product is safe and efficacious, neither experimental nor investigational, medically necessary, appropriate for the specific patient and cost effective. Since reimbursement approval is required from each payor individually, seeking such approvals is a time-consuming and costly process. Third-party payors routinely limit reimbursement coverage and in many instances are exerting significant pressure on medical suppliers to lower their prices. There is significant uncertainty concerning third-party reimbursement for the use of any pharmaceutical product 9 incorporating new technology, and we are not sure whether third-party reimbursement will be available for our proposed products, or that the reimbursement, if obtained, will be adequate. Less than full reimbursement by governmental and other third-party payors for our products would adversely affect the market acceptance of these products. Further, health care reimbursement systems vary from country to country, and we are not sure whether third-party reimbursement will be made available for our proposed products under any other reimbursement system. MANUFACTURING AND MARKETING To be successful, our products must be manufactured in commercial quantities under current good manufacturing practices requirements prescribed by the FDA and at acceptable costs. We do not have the facilities to manufacture any products in commercial quantities under good manufacturing practices. We intend to rely on collaborators, licensees or contract manufacturers for the commercial manufacture of our products. We are dependent on Dutch State Mines of the Netherlands for the manufacture of the antibody used in LeuTech, and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of LeuTech kits. The failure of either of these manufacturers to comply with FDA current good manufacturing practices or to supply these key components of LeuTech on a timely basis or at all, could force us to seek alternative sources of supply and could interfere with our ability to deliver product on a timely basis or at basis. Establishing relationships with new suppliers, any of whom must be FDA-approved, is a time-consuming and costly process. If LeuTech is approved for marketing by the FDA, we will rely on our arrangement with Mallinckrodt to market, sell and distribute LeuTech. We will have limited control over these activities. Proposed products resulting from MIDAS technology and PT-141 are synthetic peptides. The peptides are synthesized from readily available amino acids, and the production process involves well-established technology. We currently contract with third-party manufacturers for the production of peptides and anticipate doing so in the future. We intend to package and ship our radiopharmaceutical products in the form of non-radioactive kits. Prior to patient administration, the product would be radiolabeled with the specified radioisotope, generally by a specialized radiopharmacy. We do not intend to sell or distribute any radioactive substance. PRODUCT LIABILITY AND INSURANCE Our business may be affected by potential product liability risks which are inherent in the testing, manufacturing and marketing of our proposed products. We have liability insurance providing up to $5,000,000 coverage per occurrence and in the aggregate as to certain clinical 10 trial risks, and we will seek to obtain additional product liability insurance before the commercialization of our products. EMPLOYEES As of September 25, 2000, we employed 27 persons full time, of whom 20 were engaged in research and development activities and seven were engaged in administration and management. Seven of our employees hold Ph.D. degrees. We have been successful in attracting skilled and experienced scientific personnel, however, competition for personnel in our industry is intense. None of our employees are covered by a collective bargaining agreement. Our employees have executed confidentiality agreements. We consider relations with our employees to be good. From time to time, we hire scientific consultants to work on specific research and development programs. We also rely on independent organizations, advisors and consultants to provide services, including most aspects of manufacturing and some aspects of regulatory approval and clinical management. Our independent advisors and consultants generally sign agreements that provide for confidentiality of our proprietary information. HISTORY AND MERGER Interfilm, Inc. Palatin was incorporated as a Delaware corporation on November 21, 1986 under the name of Cinedco, Inc., which it later changed to Interfilm, Inc. From 1993 to 1995, Interfilm was primarily engaged in the interactive motion picture business. Interfilm suspended its business activities in May 1995. RhoMed merger. On June 25, 1996, Interfilm merged with RhoMed Incorporated, a New Mexico corporation engaged in biotechnology research and development. All of RhoMed's outstanding equity securities were exchanged for equity securities of Palatin. The business of RhoMed became the ongoing business of Palatin. RhoMed remains as a wholly-owned, inactive subsidiary of Palatin. New name and capital restructuring. On July 19, 1996, we amended our certificate of incorporation to: o change our name from Interfilm, Inc. to Palatin Technologies, Inc., o increase our authorized common stock from 10,000,000 to 25,000,000 shares, and o effect a 1-for-10 reverse split of the common stock. On September 5, 1997, we again amended our certificate of incorporation, to: o increase our authorized common stock from 25,000,000 to 75,000,000 shares, o increase our authorized preferred stock from 2,000,000 to 10,000,000 shares, and 11 o effect a 1-for-4 reverse split of the common stock. ITEM 2. PROPERTIES. Our executive offices are located at 103 Carnegie Center, Suite 200, Princeton, New Jersey, where we lease approximately 7,300 square feet under a lease which expires December 15, 2004. Our research and development facility is located in Edison, New Jersey, where we lease approximately 16,000 square feet under a lease which expires July 31, 2007. The leased properties are in good condition. ITEM 3. LEGAL PROCEEDINGS. On March 14, 2000, we announced that we would not be extending the merger consummation date of March 31, 2000 for our previously announced proposed merger with San Diego-based Molecular Biosystems, Inc. and would not be proceeding with the merger. Our decision not to proceed with the merger was based on management's view that the merger was not in the best interests of our stockholders. On or about April 28, 2000, Molecular Biosystems commenced a legal action against us and against Evergreen Merger Corporation, our wholly-owned shell subsidiary, in the Superior Court of the State of Delaware, County of New Castle. In the complaint, Molecular Biosystems seeks damages against us and Evergreen arising from the alleged improper termination of the merger agreement dated November 11, 1999, among Molecular Biosystems, Palatin and Evergreen. Under the merger agreement, Evergreen would have merged with and into Molecular Biosystems, which would have become a wholly-owned subsidiary of ours. As a consequence of the claims alleged in the complaint, Molecular Biosystems contends that it is entitled to an award of damages against us and Evergreen in amounts to be determined at trial, but in any event, at least equal to $1,765,305. This figure represents the amount of a "breakup fee" of $1,000,000 provided for in the merger agreement and $765,305 for the costs and expenses allegedly incurred by Molecular Biosystems in connection with the proposed merger. In addition, Molecular Biosystems seeks consequential damages in an unstated amount plus interest and Molecular Biosystems' costs and expenses of the action. In our response filed in June of 2000, we have denied the material allegations. Management believes that we have good and meritorious defenses to the action and we intend vigorously to defend the action. We are involved in various claims and litigation arising in the normal course of business, consisting of actions commenced against Palatin prior to the RhoMed merger. We believe that the outcome of such claims and litigation will not have a material adverse effect on our business. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock has been quoted on The American Stock Exchange under the symbol PTN, since December 21, 1999. It had previously traded on the Nasdaq SmallCap Market under the symbol PLTN. The table below provides, for the fiscal quarters indicated, the reported high and low closing sales prices for the common stock on AMEX since December 21, 1999, and the reported high and low bid prices for the common stock on Nasdaq before December 21, 1999. YEAR ENDED JUNE 30, 2000 HIGH LOW Fourth Quarter...................................... $ 7-5/16 $ 3-5/8 Third Quarter....................................... $ 9-1/4 $ 2-3/4 Second Quarter...................................... $ 4 $ 2-3/8 First Quarter....................................... $ 5-3/16 $ 2-31/32 YEAR ENDED JUNE 30, 1999 HIGH LOW Fourth Quarter...................................... $ 7 $ 3-3/8 Third Quarter....................................... $ 6-3/8 $ 3-3/4 Second Quarter...................................... $ 5-13/16 $ 1-3/8 First Quarter....................................... $ 5-1/2 $ 1-29/32 HOLDERS OF COMMON STOCK. On September 25, 2000, we had approximately 335 holders of record of common stock. About half of our outstanding common stock is registered in the name of depositories and brokers, which represent a much larger number of individual share accounts. On September 25, 2000 the closing sales price of our common stock as reported on the AMEX was $6.25 per share. DIVIDENDS AND DIVIDEND POLICY. We have never declared or paid any dividends. We currently intend to retain earnings, if any, for use in our business. We do not anticipate paying dividends in the foreseeable future. 13 DIVIDEND RESTRICTIONS. Our two outstanding series of preferred stock, Series A and C, contain the following restrictions on our ability to pay dividends or make distributions to stockholders. o Series A: We may not pay a dividend or make any distribution to holders of any class of stock unless we first pay a special dividend or distribution of $100 per share to the holders of Series A preferred stock. o Series C: We may not pay a dividend or make any distribution to holders of any class of stock while any Series C preferred stock remains outstanding. RECENT SALES OF UNREGISTERED SECURITIES. In April 2000, we issued warrants to eight accredited investors to purchase a total of 50,000 shares of our common stock at an exercise price of $.01 per share. We issued the warrants in connection our termination of a license and development agreement with Watson Laboratories and the investors' privately negotiated purchase from Watson of a total of 363,636 shares of our common stock, for a total price of $2 million. Watson had purchased the shares from us in July 1998. The warrants are exercisable in whole or in part at any time before March 15, 2005. We will proportionately adjust the number of shares issuable on exercise of the warrants if we effect a division, recombination or reclassification of our common stock, or if we make a distribution of securities on the basis of all outstanding common stock. We relied on the exemption under Section 4(2) of the Securities Act of 1933 in that the issuance did not involve any public offering of the warrants. The warrants are not transferable absent registration or an exemption from registration, and the warrant certificates bear a restrictive legend to that effect. The warrant holders have piggy-back registration rights for five years, or until the common stock underlying the warrants is registered or can be sold without volume limitations under SEC Rule 144. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data has been derived from the consolidated financial statements of Palatin Technologies, Inc. as of and for each of the five years in the period ended June 30, 2000 which have been audited by Arthur Andersen LLP, independent public accountants. This data should be read in conjunction with our consolidated financial statements, including the notes to the financial statements, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report. 14 (In thousands, except per share data) Year Ended June 30, ------------------- 1996(1) 1997 1998 1999 2000 --------------------------------------------------- Statement of Operations Data: REVENUES: Grants and contracts $ -- $ 350 $ 34 $ 60 $ 4,617 License fees and royalties -- 350 -- 550 500 Other 24 22 -- -- -- ------- -------- --------- --------- -------- Total revenues 24 722 34 610 5,117 ------- -------- --------- --------- -------- (In thousands, except per share data) Year Ended June 30, ------------------- 1996(1) 1997 1998 1999 2000 --------------------------------------------------- OPERATING EXPENSES: Research and development 870 3,410 7,111 8,720 9,110 General and administrative 1,701 2,533 2,991 3,957 4,567 Net intangibles write down 259 -- -- -- -- ------- -------- --------- --------- -------- Total operating expenses 2,830 5,943 10,102 12,677 13,677 OTHER INCOME (EXPENSES) Interest income 11 296 409 172 405 Interest expense (628) (375) (227) (107) (29) Merger costs (475) -- -- -- -- -------- -------- --------- --------- -------- Total other income (expense) (1,092) (79) 182 65 376 -------- -------- --------- --------- -------- NET LOSS $(3,898) $(5,300) $(9,886) $(12,002) $(8,184) PREFERRED STOCK DIVIDEND -- (2,889) (233) -- -- -------- -------- --------- --------- -------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(3,898) $(8,189) $(10,119) $(12,002) $(8,184) ======== ======== ========= ========= ======== Net loss per common share (2) $ (1.82) $ (2.80) $ (3.15) $ (2.02) $ (1.10) Weighted avg. common shares Outstanding 2,144 2,924 3,211 5,936 7,441 ======== ======== ========= ========= ======== 15 June 30, ---------------------------------------------------- 1996 1997 1998 1999 2000 ---------------------------------------------------- Balance Sheet Data: Cash, cash equivalents and Investments $ 6,791 $12,622 $ 4,326 $ 2,789 $ 5,842 Property, plant & equipment, net 96 922 1,610 1,458 1,573 Working capital 4,503 10,142 2,069 554 4,995 Total assets 7,041 14,063 6,475 4,723 8,885 Long term debt, net of current portion 1,844 940 - 2,000 - Common stock 115 30 41 71 79 Net stockholders' equity 2,838 9,835 3,390 341 6,905 ------------------------------------ (1) Ten Months Ended June 30, 1996. (2) Basic and diluted. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the financial statements filed as part of this report. RESULTS OF OPERATIONS YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR ENDED JUNE 30, 1999 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash, cash equivalents and short-term investments increased to $5,375,210 at June 30, 2000 from $2,788,628 at June 30, 1999. The increase was due to the receipt of funds, approximately $11,450,000 net, from the collaboration agreement signed with Mallinckrodt, Inc. on August 17, 1999. Pursuant to the agreement we: o Received $500,000 from a one-time, non-refundable exclusive worldwide license (excluding Europe) for sales, marketing and distribution of LeuTech. o Received $13,000,000 from the sale of 700,000 restricted shares of our non-voting Series C convertible preferred stock. o Paid $2,000,000 in principal as repayment of a subordinated non-negotiable promissory note from Mallinckrodt, plus $46,489 in interest. 16 ACCOUNTS RECEIVABLE - Accounts receivable increased to $953,163 at June 30, 2000 from zero at June 30, 1999. The increase was due to the recognition of contract revenue pursuant to our strategic collaboration agreement with Mallinckrodt, see below. GRANT AND CONTRACTS - We recorded $4,141,480 as contract revenue during the year ended June 30, 2000 related to the shared development costs and product direct costs of LeuTech, pursuant to our strategic collaboration agreement with Mallinckrodt. We also recorded $475,631 as grant revenue for the year ended June 30, 2000. We completed Phase I grants and a Phase II grant, previously awarded, under the Small Business Innovative Research program with the National Institutes of Health of the Department of Health and Human Services. We had no revenues from contracts and recorded $59,977 as grant revenue for the year ended June 30, 1999. LICENSE FEES AND ROYALTIES - We recorded $500,000 in license fees as revenue for the year ended June 30, 2000. We received these fees as a one-time, non-refundable payment pursuant to our strategic collaboration agreement with Mallinckrodt. We recognized $550,000 in license fees as revenue during the year ended June 30, 1999 related to our license option agreement with Nihon Medi-Physics ("Nihon"). We recognized this $550,000, previously recorded as "deferred revenue," because we and Nihon changed the development emphasis and termination provisions of the original agreement. We are not required to perform any future services under this agreement. RESEARCH AND DEVELOPMENT - Research and development expenses increased to $9,109,619 for the year ended June 30, 2000 compared to $8,719,562 for the year ended June 30, 1999. The increase in R&D is primarily related to development of our LeuTech product, including increased expenses for manufacturing scale-up, consulting and clinical trials. We expect research and development expenses to continue to increase in future quarters as we expand clinical trials and manufacturing efforts on the LeuTech product and expand efforts to develop PT-141 and the MIDAS technology. GENERAL AND ADMINISTRATIVE - General and administrative expenses increased to $4,567,273 for the year ended June 30, 2000 compared to $3,957,401 for the year ended June 30, 1999. The increase in general and administrative expenses was mainly attributable to the payment of approximately $625,000 of costs pursuant to the proposed merger with Molecular Biosystems. INTEREST INCOME - Interest income increased to $405,590 for the year ended June 30, 2000 compared to $172,241 for the year ended June 30, 1999. The increase in interest income is the result of the receipt of funds pursuant to our strategic collaboration agreement with Mallinckrodt, which enabled an increase in funds available for investment purposes. INTEREST EXPENSE - Interest expense decreased to $29,247 for the year ended June 30, 2000 compared to $107,639 for the year ended June 30, 1999. The decrease in interest expense is due to the repayment of debt due to Mallinckrodt. NET LOSS - Net loss decreased to $8,183,438 for the year ended June 30, 2000 compared to $12,002,384 for the year ended June 30, 1999. The decrease is attributable to revenues earned related to cost sharing provisions pursuant to the collaboration agreement with Mallinckrodt. 17 YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998 GRANTS AND CONTRACTS - During the year ended June 30, 1999 we recognized $59,977 as revenue under the Small Business Technology Transfer program of the Department of Health and Human Services. Grant revenue under the Small Business Innovative Research program of the Department of Health and Human Services was $33,967 for the year ended June 30, 1998. During the year ended June 30, 1999, we were awarded two new grants under the National Institutes of Health Small Business Innovative Research program totaling $850,000. LICENSE FEES AND ROYALTIES - We recognized $550,000 in license fees as revenue during the year ended June 30, 1999 related to its termination of a license option agreement with Nihon. This $550,000 was previously reported as deferred license revenue. We had no revenues from license fees or royalties during the year ended June 30, 1998. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses increased to $8,719,562 for the year ended June 30, 1999 from $7,111,716 for the year ended June 30, 1998. We substantially increased research and development spending, primarily relating to development of LeuTech, including increased expenses for manufacturing scale-up, consulting and clinical trials, and also relating to research expenses on PT-14 and the MIDAS technology. The increase is also attributable to the amortization of deferred compensation totaling $313,202. We expect research and development expenses to continue to increase in future quarters as we expand research and manufacturing efforts on LeuTech and expand efforts to develop PT-14 and MIDAS technology. GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses increased to $3,957,401 for the year ended June 30, 1999 from $2,990,756 for the year ended June 30, 1998. The increase in general and administrative expenses was mainly attributable to the amortization of deferred compensation and the value of options granted at exercise prices below the then current market price of our common stock totaling $995,473. INTEREST INCOME - Interest income decreased to $172,241 for the year ended June 30, 1999 from $408,770 for the year ended June 30, 1998. The decrease in interest income is primarily the result of the depletion of funds available for investment purposes and used to fund operations. INTEREST EXPENSE - Interest expense decreased to $107,639 for the year ended June 30, 1999 from $227,143 for the year ended June 30, 1998. The decrease in interest expense is due to repayment of a portion of outstanding principal on long-term debt. NET LOSS - Net loss increased to $12,002,384 for the year ended June 30, 1999 from $9,886,878 for the year ended June 30, 1998. YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997 GRANTS AND CONTRACTS - During the year ended June 30, 1998, we completed four Phase I grants with the National Institutes of Health under the Small Business Innovative Research program. Grant revenue from these research grants was $33,967, compared to $350,173 during the year ended June 30, 1997. LICENSE FEES AND ROYALTIES - We had no revenues from license fees or royalties during the 18 year ended June 30, 1998. In the year ended June 30, 1997, we entered into an option agreement with Nihon, pursuant to which we received an initial payment of $1,000,000 before Japanese withholding taxes of $100,000. We accounted for the initial payment by recognizing license fee revenue of $350,000 and deferred license fee revenue of $550,000. OTHER - We had no revenues from sales during the year ended June 30, 1998. During the year ended June 30, 1997, we discontinued sales of our RhoChek product due to insufficient sales. Total revenues from sales during the year ended June 30, 1997, were $22,184. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses increased to $7,111,716 for the year ended June 30, 1998 from $3,409,983 for the year ended June 30, 1997. We substantially increased research and development spending, primarily relating to development of LeuTech, including increased expenses for manufacturing scale-up, consulting and initiation of Palatin-sponsored clinical trials, and also relating to research expenses on MIDAS. The increase is also attributable to the amortization of deferred compensation, and to the value of options granted at exercise prices below the then current market price of our common stock, totaling $797,570 for the year ended June 30, 1998. GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses increased to $2,990,756 for the year ended June 30, 1998 from $2,533,883 for the year ended June 30, 1997. The increase in general and administrative expenses was mainly attributable to the amortization of deferred compensation, totaling $925,740 for the year ended June 30, 1998, and the value of options granted at exercise prices below the then current market price of our common stock. INTEREST INCOME - Interest income increased to $408,770 for the year ended June 30, 1998 from $296,009 for the year ended June 30, 1997. The interest income was primarily the result of interest on the net proceeds from our offering of Series A preferred stock. INTEREST EXPENSE - Interest expense decreased to $227,143 for the year ended June 30, 1998 from $374,664 for the year ended June 30, 1997. The decrease is due to our repayment of outstanding principal on long-term debt provided by Aberlyn Capital Management Limited Partnership. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have incurred net operating losses. As of June 30, 2000, we had a deficit accumulated during the development stage of $43,505,802. We have financed our net operating losses through June 30, 2000 by a series of debt and equity financings. At June 30, 2000, we had cash, cash equivalents and investments of $5,842,044 and accounts receivable of $953,163. For the year ended June 30, 2000, the net increase in cash and cash equivalents amounted to $885,792. Net cash used for operating activities was $8,540,107, net cash used for investing activities was $2,054,809, and net cash provided by financing activities was $11,480,708. In September 2000, we received $10.8 million from a private offering consisting of common stock and warrants. Investors, consisting of financial institutions based in Europe, purchased 1.8 million shares at a per share price of $6.00, which represented the closing market price of Palatin shares on the American Stock Exchange on September 7, 2000. For every five shares purchased, the investors also received a five-year warrant to purchase one share of 19 common stock at a 25 percent premium to the closing price. The net proceeds will be used primarily for general corporate purposes, especially for the development and clinical trials of new products based on our proprietary technologies. On March 15, 2000 we entered into an agreement with Watson Laboratories Inc. (f/k/a TheraTech, Inc.) to terminate our License and Development Agreement with Watson dated March 18, 1998. In connection with the termination, we paid Watson approximately $500,000. On August 16, 1999, we entered into a strategic collaboration agreement with Mallinckrodt, a large international healthcare products company, to jointly develop and market LeuTech. Under the terms of the agreement, Mallinckrodt: o received an exclusive worldwide license (excluding Europe) for sales, marketing and distributions of LeuTech and paid a licensing fee of $500,000; o agreed to make milestone payments of $5,000,000 upon FDA approval of the first LeuTech indication and $5,000,000 on the attainment of sales goals following product launch; o agreed to reimburse us for 50% of all ongoing LeuTech development costs, subject to a cap, which can be amended; o agreed to pay to us a transfer price for each LeuTech product unit delivered to Mallinckrodt and a quarterly royalty on Mallinckrodt's future net sales of LeuTech; o purchased 700,000 restricted shares of our non-voting Series C convertible preferred stock for $13,000,000; and o agreed that the Series C convertible preferred stock would be convertible after five years, or earlier upon the occurrence of a change in control (as defined in the agreement), into 700,000 shares of our common stock with certain registration rights and anti-dilution rights. As of December 7, 1999, we entered into a five-year lease on administrative offices in Princeton, New Jersey. Minimum future lease payments range from approximately $187,374 in year one to approximately $202,070 in year five. We have entered into a sublease agreement with Derma Sciences, Inc. on our previous administrative offices. Under the sublease agreement Derma reimburses us 100% of all rents and utility charges. In March 1997, we entered into a ten-year lease on research and development facilities in Edison, New Jersey, which commenced August 1, 1997. Minimum annual future lease payments escalate from approximately $116,000 per year to $200,000 per year after the fifth year of the lease term. The lease will expire in fiscal year 2007. As of April 2000, we entered into an amendment to our research facility lease, which increased our rentable space from approximately 10,500 square feet to approximately 15,800. 20 Our aggregate future annual minimum lease payments escalate from approximately $203,000 until July 13, 2002 to $300,000 from July 14, 2002 through July 13, 2007. We have three license agreements that require minimum yearly payments. Future annual minimum payments under the license agreements are: 2001 - $150,000, 2002 - $200,000, 2003 - $200,000, 2004 - $200,000 and 2005 - $200,000. We are and expect to continue actively searching for certain products and technologies to license or acquire, now or in the future. If we are successful in identifying a product or technology for acquisition, we may require substantial funds for such an acquisition and subsequent development or commercialization. We do not know whether any acquisition will be consummated in the future. We have incurred negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to complete our planned product development efforts. We expect our existing capital resources, including the funds we received in September 2000, will be adequate to fund our projected operations through June 30, 2001, based on current expenditure levels. We anticipate incurring additional losses over at least the next several years, and we expect our losses to increase as we expand our research and development activities relating to LeuTech, PT-141 and MIDAS. To achieve profitability, we, alone or with others, must successfully develop and commercialize our technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and we do not know whether we will be able to achieve profitability on a sustained basis, if at all. FACTORS AFFECTING OUR BUSINESS CONDITION In addition to the other information included in this report, the following factors should be considered in evaluating our business and future prospects: DEVELOPMENT AND COMMERCIALIZATION OF OUR PROPOSED PRODUCTS AND TECHNOLOGIES INVOLVES A LENGTHY, COMPLEX AND COSTLY PROCESS AND WE MAY NEVER DEVELOP OR COMMERCIALIZE ANY PRODUCTS. Our proposed products are at various stages of research and development and may never be successfully developed or commercialized. LeuTech will require regulatory approval to market it for diagnosis of appendicitis, as well as additional clinical trials for other indications. PT-141 and our MIDAS technology will require significant further research, development and testing. You should evaluate Palatin in light of the uncertainties, delays, difficulties and expenses commonly experienced by early stage pharmaceutical companies, which generally include unanticipated problems and additional costs relating to: 21 o the development and testing of products in animals and humans o product approval or clearance o regulatory compliance o good manufacturing practices o product introduction o marketing and competition. WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES OVER THE NEXT SEVERAL YEARS AND WE MAY NEVER BECOME PROFITABLE. We have never been profitable and we may never become profitable. As of June 30, 2000, we had an accumulated deficit of $43,505,802 and a loss for the year then ended of $8,183,438. We anticipate substantial losses over the next few years as we begin to manufacture and market LeuTech, expand clinical trials for LeuTech's other indications and for PT-141, and to continue research and development of PT-141 and our MIDAS technology. WE MAY SELL ADDITIONAL EQUITY SECURITIES, WHICH WOULD CAUSE DILUTION. We may sell more equity securities in the future to obtain operating funds. We may sell these securities at a discount to the market price. Any future sales of equity securities will dilute the holdings of existing stockholders, possibly reducing the value of their investment. WE COULD LOSE OUR RIGHTS TO LEUTECH AND PT-141, WHICH WOULD ADVERSELY AFFECT OUR POTENTIAL REVENUES. Our rights to a key antibody used in LeuTech are dependent upon an exclusive license agreement with The Wistar Institute of Biology and Anatomy. Our rights to PT-141 are dependent upon an exclusive license agreement with Competitive Technologies, Inc. These agreements contain specific performance criteria and require us to pay royalties and make milestone payments. Failure to meet these requirements, or any other event of default under the license agreements, could lead to termination of the license agreements. If a license agreement is terminated we may be unable to make or market the covered product, in which case we may lose the value of our substantial investment in developing the product, as well as any future revenues from selling the product. If we were to lose rights to LeuTech, our first product to reach the stage of an FDA license application, the negative impact would be especially severe. THE FDA MAY NOT APPROVE THE MARKETING OF LEUTECH, WHICH WOULD ADVERSELY AFFECT OUR POTENTIAL REVENUES. We completed clinical trials of LeuTech for the diagnosis of equivocal appendicitis in the spring of 1999. In November 1999, we filed an application with the FDA for approval to market 22 LeuTech for that indication. FDA review of the application can be a long, expensive and uncertain process. The application must demonstrate that LeuTech has met rigorous standards of safety, efficacy and manufacturing before it can be approved by the FDA for commercial use. The FDA has requested additional data on LeuTech manufacturing and process validation. We cannot know for certain whether we can remedy these matters to the FDA's satisfaction. Failure to obtain regulatory approval of LeuTech, or delays in obtaining regulatory approval of LeuTech, would eliminate or delay our potential revenues from sales of LeuTech. This could make it more difficult to attract investment capital for funding our other research and development projects. WE DEPEND ON TWO CONTRACT MANUFACTURERS, DUTCH STATE MINES AND BEN VENUE LABORATORIES, SO PRODUCTION AND SUPPLY OF LEUTECH DEPENDS ON PERFORMANCE OF CONTRACTS BY THIRD PARTIES OVER WHOM WE HAVE NO CONTROL. We have no ability or capacity to manufacture LeuTech. We are dependent on Dutch State Mines of the Netherlands for the manufacture of the antibody used in LeuTech, and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of LeuTech kits. The failure of either of these manufacturers to supply these key components of LeuTech on a timely basis or at all, could force us to seek alternative sources of supply and could interfere with our ability to deliver product on a timely basis. Establishing relationships with new suppliers, any of whom must be FDA-approved, is a time-consuming and costly process. WE HAVE LIMITED EXPERIENCE IN MARKETING, DISTRIBUTING AND SELLING DIAGNOSTIC IMAGING PRODUCTS AND MAY BE UNABLE TO ESTABLISH SUCCESSFUL MARKETING, DISTRIBUTION AND SELLING CAPABILITIES FOR LEUTECH. If the FDA approves LeuTech for marketing, we expect to rely on arrangements with other companies, such as Mallinckrodt, to market, sell and distribute LeuTech. If such arrangements fail, we may have difficulty establishing the necessary marketing relationships, and in any event, we will have limited control over these activities. If we do not establish sufficient marketing capability with other companies, our potential revenues from the sale of LeuTech will be adversely affected. IF LEUTECH DOES NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WILL SUFFER. Approval of LeuTech for marketing and sale does not assure the product's commercial success. LeuTech, if successfully developed, will compete with drugs manufactured and marketed by major pharmaceutical and other biotechnology companies. Physicians, patients or the medical community in general may not accept and utilize LeuTech. Imaging agents such as LeuTech generally take longer to achieve market acceptance following marketing approval than other drugs. The degree of market acceptance of LeuTech will depend on a number of factors, including: o the establishment and demonstration of the clinical efficacy and safety; o potential advantage over alternative treatment methods; and o reimbursement policies of government and third-party payors. 23 If LeuTech does not achieve adequate market acceptance, our business, financial condition and results of operations will be adversely affected. COMPETING PRODUCTS AND TECHNOLOGIES MAY MAKE LEUTECH AND OUR OTHER POTENTIAL PRODUCTS NONCOMPETITIVE. We are aware of one company developing an antibody-based product which may compete with LeuTech as to certain indications. The competing product is marketed in some European countries and regulatory approval is pending in the United States. Palatin is also aware of at least one other company developing a peptide-based product which may also compete with LeuTech as to certain indications. In addition, other technologies may also be used to diagnose appendicitis, including computerized tomography or CT scan, and ultrasound technologies. The pharmaceutical industry, and in particular the diagnostics industry, is highly competitive. We are likely to encounter significant competition with respect to LeuTech and our other potential products. The intellectual property issues discussed above may affect the extent of competition that we may face. (See "Business of Palatin--Patents and Proprietary Information.") Many of our competitors have substantially greater financial and technological resources than us. Many of them also have significantly greater experience in research and development, marketing, distribution and sales than us. Accordingly, our competitors may succeed in developing, marketing, distributing and selling products and underlying technologies more rapidly than us. These competitive products or technologies may be more effective and useful and less costly than LeuTech or our other potential products. Academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and may develop competing products or technologies on their own or through strategic alliances or collaborative arrangements. CONTAMINATION OR INJURY FROM HAZARDOUS MATERIALS USED IN THE DEVELOPMENT OF LEUTECH, PT-141 AND MIDAS COULD RESULT IN LIABILITY EXCEEDING OUR FINANCIAL RESOURCES. Our research and development of LeuTech, PT-141 and MIDAS involves the use of hazardous materials and chemicals, including radioactive compounds. We cannot completely eliminate the risk of contamination or injury from these materials. In the event of contamination or injury, we may be responsible for any resulting damages. Damages could be significant and could exceed our financial resources, including the limits of its insurance. OUR STOCK PRICE HAS RANGED FROM $9.25 TO $2.37 OVER THE LAST 12 MONTHS, AND WE EXPECT IT TO REMAIN VOLATILE, WHICH COULD LIMIT INVESTORS' ABILITY TO SELL STOCK AT A PROFIT. The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to: o continued operating losses o announcements of technological innovations or new therapeutic products 24 o announcement or termination of collaborative relationships by us or our competitors o announcements of mergers and acquisitions involving our suppliers and collaborators o FDA approval or disapproval for marketing LeuTech o governmental regulation o clinical trial results o developments in patent or other proprietary rights o public concern as to the safety of our products TRADING IN OUR STOCK OVER THE LAST 12 MONTHS HAS BEEN LIMITED, SO INVESTORS MAY NOT BE ABLE TO SELL AS MUCH STOCK AS THEY WANT AT PREVAILING PRICES. The average daily trading volume in our common stock was approximately 59,000 shares and the average daily number of transactions was approximately 50 over the last twelve months. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices. OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS TOGETHER CONTROL APPROXIMATELY 37% OF OUR VOTING SECURITIES, WHICH CONCENTRATION OF OWNERSHIP COULD DELAY OR PREVENT A CHANGE IN CONTROL. After giving effect to the sale of 1,800,000 shares of common stock in September 2000, our executive officers and directors beneficially own approximately 13% of our voting securities and our 5% or greater stockholders beneficially own approximately 24% of our voting securities. These stockholders, acting together, will be able to influence and possibly control most matters submitted for approval by our stockholders, including the election of directors, delaying or preventing a change of control, and the consideration of transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK. Our exposure to market risk related to changes in interest rates relates primarily to our investment portfolio. We invest in instruments that meet high credit quality standards, and we limit the amount of credit exposure as to any one issue, issuer and type of investments. As of June 30, 2000, our cash and cash equivalents and investments consisted of $5,842,044, most of which were short term investments having a maturity of less than one year. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short term fluctuations in interest rates would materially affect the value of our securities. 25 ITEM 8. PALATIN TECHNOLOGIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of the Company are filed as part of this Report: Page Report of Independent Public Accountants.............................27 Consolidated Balance Sheets..........................................28 Consolidated Statements of Operations................................30 Consolidated Statements of Stockholders' Equity (Deficit)............32 Consolidated Statements of Cash Flows................................37 Notes to Consolidated Financial Statements...........................40 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Palatin Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. (a Delaware corporation in the development stage) and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2000 and the period from January 28, 1986 (inception) to June 30, 2000. These financial statements are the responsibility of Palatin's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiaries as of June 30, 2000 and 1999 and the results of their operations and their cash flows for each of the periods indicated above, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Philadelphia, PA September 27, 2000 27
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Balance Sheets June 30, 2000 June 30, 1999 ---------------------- ---------------------- ASSETS Current assets: Cash and cash equivalents $ 3,219,593 $ 2,333,801 Accounts receivable 953,163 - Short-term investments 2,155,617 454,827 Prepaid expenses and other 179,792 147,780 ---------------------- ---------------------- Total current assets 6,508,165 2,936,408 Fixed assets, net of accumulated depreciation and amortization of $914,846 and $676,362 respectively 1,573,140 1,457,605 Restricted cash 263,075 185,000 Other 541,017 144,032 ---------------------- ---------------------- $ 8,885,397 $ 4,723,045 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,012,070 $ 1,116,894 Accrued expenses 968,166 1,264,893 ---------------------- ---------------------- Total current liabilities 1,980,236 2,381,787 ---------------------- ---------------------- Long-term liabilities, net of current portion - 2,000,000 ---------------------- ---------------------- Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock of $.01 par value - authorized 10,000,000 shares; Series A Convertible; 31,561 and 42,484 shares issued and outstanding as of June 30, 2000 and 1999, respectively; 316 425 Series B Convertible; 2,000 and 13,575 shares issued and outstanding as of June 30, 2000 and 1999, respectively; 20 136 Series C Convertible; 700,000 shares issued and outstanding as of June 30, 2000; 7,000 - Common stock of $.01 par value - authorized 75,000,000 shares; Issued and outstanding 7,902,372 and 7,137,595 shares as of June 30, 2000 and 1999 respectively; 79,024 71,376 Additional paid-in capital 50,324,603 35,610,243 Unamortized deferred compensation - (18,558) Deficit accumulated during development stage (43,505,802) (35,322,364) ---------------------- ---------------------- Total stockholders' equity 6,905,161 341,258 ---------------------- ---------------------- $ 8,885,397 $ 4,723,045 ====================== ====================== The accompanying notes to consolidated financial statements are an integral part of these financial statements.
28 THIS PAGE INTENTIONALLY LEFT BLANK 29
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Operations Inception (January 28, 1986) Year Year Year through Ended Ended Ended June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1998 ------------------ ----------------------- ---------------------- ------------------------ REVENUES: Grants and contracts $ 7,921,740 $ 4,617,111 $ 59,977 $ 33,967 License fees and royalties 1,734,296 500,000 550,000 - Other 318,917 - - - ------------------ ----------------------- ---------------------- ------------------------ Total revenues 9,974,953 5,117,111 609,977 33,967 ------------------ ----------------------- ---------------------- ------------------------ OPERATING EXPENSES: Research and development 32,747,288 9,109,619 8,719,562 7,111,716 General and administrative 19,352,274 4,567,273 3,957,401 2,990,756 Net intangibles write down 259,334 - - - ------------------ ----------------------- ---------------------- ------------------------ Total operating expenses 52,358,896 13,676,892 12,676,963 10,102,472 ------------------ ----------------------- ---------------------- ------------------------ OTHER INCOME (EXPENSES): Interest income 1,353,990 405,590 172,241 408,770 Interest expense (1,950,849) (29,247) (107,639) (227,143) Merger costs (525,000) - - - ------------------ ----------------------- ---------------------- ------------------------ Total other income/(expenses) (1,121,859) 376,343 64,602 181,627 ------------------ ----------------------- ---------------------- ------------------------ NET LOSS (43,505,802) (8,183,438) (12,002,384) (9,886,878) PREFERRED STOCK DIVIDEND (3,121,525) - - (232,590) ------------------ ----------------------- ---------------------- ------------------------ 30 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Operations Inception (January 28, 1986) Year Year Year through Ended Ended Ended June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1998 ------------------ ----------------------- ---------------------- ------------------------ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (46,627,327) $ (8,183,438) $ (12,002,384) $ (10,119,468) ================== ======================= ====================== ======================== Basic and diluted net loss per Common share $ (27.35) $ (1.10) $ (2.02) $ (3.15) ================== ======================= ====================== ======================== Weighted average number of Common shares outstanding used in computing basic and diluted net loss per Common share 1,704,685 7,441,082 5,936,498 3,210,684 ================== ======================= ====================== ======================== The accompanying notes to consolidated financial statements are an integral part of these financial statements.
31
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) Preferred Stock ---------------------------------------------------------------------------------- Shares Amount Subscriptions Receivable ------------------- ------------------- ------------------- ------------------- Balance at inception - $ - $ - $ - Preferred stock subscriptions - - 4,000 (4,000) Net loss from inception - - - - ------------------- ------------------- ------------------- ------------------- Balance, August 31, 1995 - - 4,000 (4,000) Preferred stock subscriptions - - (4,000) 4,000 Issuance of Preferred shares 4,000,000 4,000 - - Issuance of Common shares on $10,395,400 private placement - - - - Shares earned but not issued - - - - Net loss - - - - ------------------- ------------------- ------------------- ------------------- Balance, June 25, 1996 4,000,000 4,000 - - Conversion to Palatin Technologies, Inc. (4,000,000) (4,000) - - Adjusted balance, June 25, 1996 - - - - Shares outstanding of Palatin Technologies, Inc. - - - - Purchase of treasury stock - - - - Net loss - - - - ------------------- ------------------- ------------------- ------------------- Balance, June 30, 1996 - - - - Issuance of Preferred shares, net of expenses 137,780 1,378 - - Net loss - - - - ------------------- ------------------- ------------------- ------------------- 32 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) Preferred Stock ---------------------------------------------------------------------------------- Shares Amount Subscriptions Receivable ------------------- ------------------- ------------------- ------------------- Balance, June 30, 1997 137,780 1,378 - - Issuance of Preferred shares, net of expenses 18,875 189 - - Conversion of Preferred shares into Common shares (49,451) (495) - - Net loss - - - - ------------------- ------------------- ------------------- ------------------- Balance, June 30, 1998 107,204 1,072 - - Conversion of Preferred shares into Common shares (51,145) (511) - - Net loss - - - - ------------------- ------------------- ------------------- ------------------- Balance, June 30, 1999 56,059 561 - - Issuance of Preferred shares, net of expenses 700,000 7,000 - - Conversion of Preferred shares into Common shares (22,498) (225) - - Net loss - - - - ------------------- ------------------- ------------------- ------------------- Balance, June 30, 2000 733,561 $ 7,336 $ - $ - =================== =================== =================== =================== The accompanying notes to consolidated financial statements are an integral part of these financial statements.
33
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) - Continued - Common Stock -------------------------------------------------------------------------------------------------- Deficit Unamortized Accumulated Additional Earned Deferred During Shares Amount Paid-in but not Treasury Compensation Development Total Capital Issue Stock Stage ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance at inception - $ - $ - $ - $ - $ - $ - $ - Issuance of shares from inception 6,922,069 1,177,786 100,000 110,833 - - 1,388,619 Net loss from inception - - - - - (4,235,059) (4,235,059) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, August 31, 1995 6,922,069 1,177,786 100,000 110,833 - - (4,235,059) (2,846,440) Issuance of Preferred shares - - - - - - - 4,000 Issuance of Common shares on $10,395,400 private placement 41,581,600 9,139,303 - - - - - 9,139,303 Shares earned but not issued - - - 266,743 - - - 266,743 Issuance of Common shares 1,054,548 458,977 (100,000) (324,546) - - - 34,431 Net loss - - - - - - (3,897,879) (3,897,879) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, June 25, 1996 49,558,217 10,776,066 - 53,030 - - (8,132,938) 2,700,158 Conversion to Palatin Technologies Inc. (46,807,465) (10,748,558) 10,752,558 - - - - - Adjusted balance, June 25, 1996 2,750,752 27,508 10,752,558 53,030 - - (8,132,938) 2,700,158 Shares outstanding of Palatin Technologies, Inc. 108,188 1,082 (1,082) - - - - - Issuance of Common shares 25,754 257 139,459 - - - - 139,716 Purchase of treasury stock - - - - (1,667) - - (1,667) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, June 30, 1996 2,884,694 28,847 10,890,935 53,030 (1,667) - (8,132,938) 2,838,207 Issuance of Preferred shares, net of expenses - - 11,635,653 - - - - 11,637,031 Shares earned but not issued - - - 250,141 - - 250,141 Issuance of Common shares 135,987 1,360 316,761 (303,171) - - - 14,950 34 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) - Continued - Retirement treasury shares (308) (3) (1,664) - 1,667 - - - Issuance of stock options below fair market value - - 1,472,716 - - (1,472,716) - - Amortization of deferred compensation - - - - - 394,383 - 394,383 Net loss - - - - - - (5,300,164) (5,300,164) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, June 30, 1997 3,020,373 30,204 24,314,401 - - (1,078,333) (13,433,102) 9,834,548 Issuance of Preferred shares, net of expenses - - 1,573,295 - - - - 1,573,295 Issuance of Preferred shares expense recapture - - 49,733 - - - - 49,733 Issuance of Common shares 66,696 666 94,873 - - - - 95,539 Issuance of Common shares upon conversion of Preferred shares 1,012,554 10,126 (9,820) - - - - - Issuance of stock options below fair market value - - 1,161,156 - - (1,161,156) - - Amortization of deferred compensation - - - - - 1,723,310 1,723,310 Net loss - - - - - - (9,886,878) (9,886,878) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, June 30, 1998 4,099,623 40,995 27,183,638 - - (516,179) (23,319,980) 3,389,547 Issuance of Common shares 1,842,101 18,421 7,594,182 - - - - 7,612,603 Issuance of Common shares upon conversion of Preferred shares 1,115,740 11,158 (10,655) - - - - (9) Issuance of Common shares upon exercise of warrants 9,874 99 18,676 - - - - 18,775 Issuance of Common shares upon exercise of options 70,257 703 13,348 - - - - 14,051 35 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) - Continued - Issuance of stock options below fair market value - - 811,054 - - (811,054) - - Amortization of deferred compensation - - - - - 1,308,675 1,308,675 Net loss - - - - - - (12,002,384)(12,002,384) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, June 30, 1999 7,137,595 71,376 35,610,243 (18,558) (35,322,364) 341,258 - Issuance of Preferred shares, net of expenses - - 12,999,058 - - - 12,999,058 Issuance of Preferred shares - - - - - - - 7,000 Issuance of Common shares upon conversion of Preferred 37 shares 572,374 5,724 (5,462) - - - - Issuance of Common shares upon exercise of warrants 111,551 1,115 451,097 - - - - 452,212 Issuance of Common shares upon exercise of options 80,852 809 99,667 - - - - 100,476 Acceleration of options previously granted - - 1,170,000 - - - 1,170,000 Amortization of stock based 18,558 - 18,558 compensation - - - - - Net loss - - - - - - (8,183,438) (8,183,438) ---------- ------------ ----------- --------- -------- ----------- ------------ ---------- Balance, June 30, 2000 7,902,372 $ 79,024 $50,324,603 $ - $ - $ - $(43,505,802) $6,905,161 ========== ============ =========== ========= ======== =========== ============ ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements.
36
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Cash Flows Inception (January 28, Year Year Year 1986) through Ended Ended Ended June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1998 ------------------ ---------------- ------------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (43,505,802) (8,183,438) (12,002,384) (9,886,878) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 1,085,770 248,491 232,625 230,160 License fee 500,000 - - 500,000 Interest expense on note payable 72,691 - - - Accrued interest on long-term financing 796,038 - - - Accrued interest on short-term financing 7,936 - - - Intangibles and equipment write down 278,318 - - - Common stock and notes payable issued for 751,038 - 127,350 expenses 77,500 Settlement with consultant (28,731) - - - Deferred revenue - (550,000) - Acceleration of options previously granted 1,170,000 1,170,000 - - Amortization of stock based compensation 3,444,926 18,558 1,308,675 1,723,310 Changes in certain operating assets and liabilities: Accounts receivable (953,163) (953,163) - 84,562 Prepaid expenses and other (1,296,485) (439,004) 50,985 (301,780) Accounts payable 1,012,070 (104,824) 655,348 145,273 Accrued expenses and other 506,999 (296,727) 130,505 (189,229) ---------------- -------------- -------------- --------------- Net cash used for operating activities (36,158,395) (8,540,107) (10,046,896) (7,617,082) ---------------- -------------- -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (2,155,617) (1,700,790) (454,827) - Purchases of property and equipment (2,543,327) (354,019) (69,145) (1,505,229) ---------------- -------------- -------------- --------------- Net cash used for investing activities (4,698,944) (2,054,809) (523,972) (1,505,229) ---------------- -------------- -------------- --------------- 37 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Cash Flows Inception (January 28, Year Year Year 1986) through Ended Ended Ended June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1998 ------------------ ---------------- ------------------ --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable, related party 302,000 - - - Payments on notes payable, related party (302,000) - - (80,000) Proceeds from senior bridge notes payable 1,850,000 - - - Payments on senior bridge notes payable (1,850,000) - - - Proceeds from notes payable and long-term debt 3,951,327 - 2,000,000 - Payments on notes payable and long-term debt (1,951,327) - (939,588) (869,551) Proceeds from common stock, stock option and warrant issuances, net 17,868,273 480,708 7,518,070 18,037 Proceeds from preferred stock, net 24,210,326 11,000,000 - 1,573,295 Purchase of treasury stock (1,667) - - - ---------------- -------------- -------------- --------------- Net cash provided by financing activities 44,076,932 11,480,708 8,578,482 641,781 ---------------- -------------- -------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,219,593 885,792 (1,992,386) (8,480,530) CASH AND CASH EQUIVALENTS, beginning of period - 2,333,801 4,326,187 12,806,717 ---------------- -------------- -------------- --------------- CASH AND CASH EQUIVALENTS, end of period $ 3,219,593 $ 3,219,593 $ 2,333,801 $ 4,326,187 ================ ============== ============== =============== The accompanying notes to consolidated financial statements are an integral part of these financial statements.
38
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Cash Flows Inception (January 28, 1986) Year Year Year through Ended Ended Ended June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1998 ------------------ ---------------- ----------------- ---------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 627,590 $ 29,247 $ 87,536 $ 281,285 ================ ================ ================ ================ NON-CASH TRANSACTION: Settlement of accounts payable with equipment $ 900 $ - $ - $ - ================ ================ ================ ================ NON-CASH STOCK ACTIVITY: Conversion of loans from employees to Common stock $ 74,187 $ - $ - $ - ================ ================ ================ ================ Conversion of note payable to Common stock $ 16,000 $ - $ - $ - ================ ================ ================ ================ Common stock issued for equipment $ 2,327 $ - $ - $ - ================ ================ ================ ================ Common stock issued for expenses $ 884,565 $ - $ 127,350 $ 77,500 ================ ================ ================ ================ Common stock issued for accrued salaries and bonuses $ 16,548 $ - $ - $ - ================ ================ ================ ================ Accrued interest payable in Common stock $ 679,097 $ - $ - $ - ================ ================ ================ ================ The accompanying notes to consolidated financial statements are an integral part of these financial statements.
39 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Notes to Consolidated Financial Statements (1) ORGANIZATION ACTIVITIES: NATURE OF BUSINESS -- Palatin Technologies, Inc. ("Palatin" or the "Company") is a development-stage, pharmaceutical company headquartered in Princeton, NJ with its research facility in Edison, NJ. The Company is dedicated to developing and commercializing products and technologies for diagnostic imaging and ethical drug development utilizing peptide, monoclonal antibody, and radiopharmaceutical technologies. The Company is concentrating on the following products and technologies: (i) Metal Ion-induced Distinctive Array of Structures ("MIDAS(TM)") metallopeptide technology ("MIDAS technology"), (ii) PT-141, a peptide hormone product for the treatment of sexual dysfunction ("PT-141"), and (iii) LeuTech(R), an infection and inflammation imaging product ("LeuTech"). CORPORATE HISTORY -- Palatin, formerly Interfilm, Inc., was incorporated under the laws of the State of Delaware on November 21, 1986. From November 4, 1993 until May 10, 1995, the date on which the Board of Directors substantially curtailed the operations of the Company, the Company had been primarily engaged in the business of exploiting rights related to its interactive motion picture process, including the production and distribution of interactive motion pictures for initial exhibition in theaters and subsequently in enhanced versions for distribution to the home market. On June 25, 1996, a newly formed, wholly-owned subsidiary of the Company, Interfilm Acquisition Corporation ("InSub"), a New Mexico corporation, merged with and into RhoMed Incorporated ("RhoMed"), a New Mexico corporation, with all outstanding shares of RhoMed equity securities ultimately being exchanged for the Company's common stock (the "Merger"). As a result of the Merger, RhoMed became a wholly-owned subsidiary of the Company, with the holders of RhoMed preferred stock and RhoMed common stock (including the holders of "RhoMed Securities" as hereafter defined) receiving an aggregate of approximately 96% interest in the equity securities of the Company on a fully-diluted basis. Additionally, all warrants and options to purchase common stock of RhoMed outstanding immediately prior to the Merger (the "RhoMed Securities"), including without limitation, any rights underlying RhoMed's qualified or non-qualified stock option plans, were automatically converted into rights upon exercise to receive the Company's common stock in the same manner in which the shares of RhoMed common stock were converted. Since the former stockholders of RhoMed retained more than a 50% controlling interest in the surviving company (Palatin), the Merger was accounted for as a reverse merger, with RhoMed deemed as the acquiror for accounting purposes. The business of RhoMed, conducted by Palatin since June 25, 1996, represents the on-going business of Palatin. Certain assets and liabilities of the Company and a subsidiary existing prior to the Merger, consisting principally of certain intellectual property and litigation claims against Sony Corporation of America and related entities, were transferred to an unaffiliated limited liability partnership for the benefit of the Company's stockholders of record as of June 21, 1996 (pre-Merger stockholders). The historical 40 financial statements prior to June 25, 1996, are those of RhoMed, except that the stock transactions have been presented in the notes on an as if converted basis. References to the Company's activities, results of operations and financial condition prior to June 25, 1996 are to RhoMed unless otherwise specified. CHARTER AMENDMENT - On September 5, 1997, an amendment to the Restated Certificate of Incorporation of the Company (the "Amendment") was filed, which: (i) increased the total number of authorized shares of Common Stock from 25,000,000 to 75,000,000. (ii) Increased the total number of authorized shares of Preferred Stock from 2,000,000 to 10,000,000. (iii) Effected a 1-for-4 reverse split of Common Stock. (iv) The consolidated financial statements have been retroactively restated to reflect the Amendment. (2) BUSINESS RISK AND LIQUIDITY: As shown in the accompanying financial statements, the Company incurred substantial net losses of $8,183,438 for the year ended June 30, 2000 and has a deficit accumulated in the development stage of $43,505,802 as of June 30, 2000. The Company anticipates incurring additional losses in the future, as it begins to manufacture and market LeuTech, expand clinical trials for LeuTech's other indications and for PT-141, and to continue research and development of PT-141 and MIDAS technology. To achieve profitability, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. In September 2000, the Company received $10.8 million from a private offering consisting of common stock and warrants. Investors, consisting of financial institutions based in Europe, purchased 1.8 million shares at a per share price of $6.00, which represented the closing market price of Palatin shares on the American Stock Exchange on September 7, 2000. For every five shares purchased, the investors also received a five-year warrant to purchase one share of common stock at a 25 percent premium to the closing price. Management plans to continue to refine its operations, control expenses, evaluate alternative methods to conduct its business, and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Management believes that through one or a combination of such factors that it will be able to obtain adequate financing to fund the Company's operations through fiscal year 2001, based on current expenditure levels. There can be no assurance that the Company's efforts will be successful. 41 (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Palatin and its wholly owned inactive subsidiaries, RhoMed, Inc., Interfilm Technologies, Inc. and Evergreen Merger Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FISCAL YEAR -- Effective June 30, 1996, Palatin and RhoMed each changed its fiscal year end to June 30. The fiscal year ends of Palatin and RhoMed prior to the Merger were December 31 and August 31, respectively. SHORT-TERM INVESTMENTS -- The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting For Certain Investments in Debt and Equity Securities." The Company classifies such investments as available for sale investments and as such all investments are recorded at fair value. The investments consist of certificates of deposit. Unrealized gains and losses are classified as a separate component of stockholders' equity. As of June 30, 2000 the unrealized gain on investments was immaterial. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs. FIXED ASSETS -- Fixed assets consist of equipment, office furniture and leasehold improvements. Fixed assets are stated at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of 5 years for equipment, 7 years for office furniture and over the term of the lease for leasehold improvements. Maintenance and repairs are charged to expense as incurred while expenditures that extend the useful life of an asset are capitalized. IMPAIRMENT OF LONG-LIVED ASSETS -- The Company complies with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. 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 discounted cash flows based on reasonable and supportable assumptions. REVENUE RECOGNITION -- Grant and contract revenues are recognized as the Company provides the services stipulated in the underlying grants and/or contracts based on the time and materials incurred. License revenues are recognized when the license fee is received and the Company has no future obligations. In December 1999, the Securities and Exchange Commission issued the Staff Accounting Bulletin No. 101-Revenue Recognition in Financial Statements (SAB 101). The bulletin draws on existing accounting rules and provides specific guidance on how those accounting rules should be 42 applied and specifically addresses revenue recognition for non-refundable technology access fees in the biotechnology industry. SAB 101 is effective for fiscal years beginning after December 15, 1999. In August 1999, the Company entered into a strategic collaboration with Mallinckrodt, Inc. to jointly develop and market one of the Company's products. Under the terms of the agreement, the Company granted a worldwide license for sales, marketing and distribution and received a nonrefundable licensing fee of $500,000. The licensing fee was recognized as revenue in the period that such nonrefundable fees were received, as consistent with industry practice. In connection with the issuance of SAB 101, the Company is required to defer such amounts and recognize revenue over the term of the agreement or the expected period of performance. Management estimates that the expected period of performance is two years. The Company will report a change in accounting principle and will record the impact of this change as a cumulative effect in its statement of operations in its fourth quarter of fiscal 2001. RESEARCH AND DEVELOPMENT COSTS -- The costs of research and development activities are charged to expense as incurred. STOCK OPTIONS AND WARRANTS -- Warrants and the majority of common stock options issued to employees and non-employee directors have been issued at exercise prices greater than, or equal to, their fair market value at the date granted. Accordingly, no value has been assigned to these instruments. However, certain stock options were issued under non-plan option agreements and a non-qualified stock option plan at exercise prices below market value. The difference between the exercise price and the market value of these securities has been recorded as deferred compensation and is being charged to expense over the vesting period of the option. In addition, during the fiscal year stock options were granted to non-employees for past services. The deemed value pursuant to SFAS No. 123, as calculated by the Black-Scholes option pricing model was charged to the statement of operations. INCOME TAXES -- The Company and its subsidiaries file consolidated federal and combined state income tax returns. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes. The Company provides for deferred income taxes relating to timing differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109. In accordance with SFAS 109, the Company has recorded a valuation allowance against the realization of its deferred tax assets. The valuation allowance is based on management's estimates and analysis, which includes tax laws which may limit the Company's ability to utilize its tax loss carryforwards. NET LOSS PER COMMON SHARE -- The Company applies SFAS No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing the income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion 43 of securities into common stock, such as stock options. For the years ended June 30, 2000, 1999 and 1998 and for the period from inception (January 28, 1986) through June 30, 2000, there were no dilutive effects of stock options or warrants as the Company incurred a net loss in each period. Options and warrants to purchase 5,508,067 shares of common stock at prices ranging from $0.20 to $306.00 per share were outstanding at June 30, 2000. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: the carrying amount reported on the balance sheet approximates the fair value for cash, short-term borrowings and current maturities of long-term debt; and the fair value for the Company's fixed rate long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities. Based on the above, the amount reported on the balance sheet approximates the fair value. RECLASSIFICATIONS -- Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. (4) RELATED PARTY TRANSACTIONS: During the fiscal year ended August 31, 1995, the Company encountered serious liquidity and working capital deficiencies. As a result, effective April 1995, the Company entered into a letter of intent with The Castle Group Ltd. ("Castle"), a company controlled by Lindsay A. Rosenwald, M.D. ("Dr. Rosenwald"), under which Castle agreed to arrange for a line of credit of up to $300,000 to finance ongoing operations; agreed to arrange for future financings; and the Company agreed to sell to Castle or its designees, for $4,000 consideration paid, 4,000,000 shares of preferred stock which converted into 466,952 shares of Common Stock. At the time the letter of intent was entered into with Castle, the Company was insolvent and its equity had nominal value; accordingly, the sale of preferred stock to Castle or its designees was recorded at the nominal $4,000 consideration paid. The issuance of the preferred stock to designees of Castle was consummated on October 25, 1995 and resulted in Dr. Rosenwald and his designees obtaining majority ownership and control of the Company on that date. On July 28, 1995, the Board of Directors approved an offering of senior bridge notes and warrants (the "Class A Offering"), for which Paramount Capital, Inc. ("Paramount"), of which Dr. Rosenwald is the Chairman, served as placement agent. Two of the then three members of the Board of Directors of RhoMed were employees of entities controlled by Dr. Rosenwald. The transaction and selection of the placement agent was ratified by disinterested stockholders on August 15, 1995. 44 Paramount received (i) a cash commission equal to 6% of the gross proceeds from the sale of the units or $60,000, (ii) a non-accountable expense allowance equal to 3% of gross proceeds or $30,000 and (iii) placement agent's warrants, on the same terms as the warrants, equal to 15% of the Common Stock underlying the warrants issued in the Class A Offering. Additionally, investment funds managed by a company of which Dr. Rosenwald is president purchased senior bridge notes with a face value of $100,000 and warrants to purchase 13,824 shares of Common Stock at $.22 per share. On November 27, 1995, the Company's Board of Directors approved an offering of senior bridge notes and warrants (the "Class B Offering"), for which Paramount served as placement agent, which was approved by the two disinterested directors. Paramount received (i) a cash commission equal to 9% of the gross proceeds from the sale of the units or $76,500, (ii) a non-accountable expense allowance equal to 4% of gross proceeds or $34,000 and (iii) placement agent's warrants at an exercise price of $6.52 per share but otherwise on the same terms as the warrants, equal to 5% of the Common Stock underlying the warrants issued in the Class B Offering. Additionally, investment funds managed by a company of which Dr. Rosenwald is president purchased senior bridge notes with a face value of $100,000 and warrants to purchase 4,608 shares of Common Stock at $2.72 per share. On March 4, 1996, the Board of Directors approved an offering of common stock (the "Common Stock Offering") and authorized an offering committee of the Board of Directors, consisting of the two disinterested directors, to determine the placement agent for the Common Stock Offering. The selection of Paramount as placement agent was approved by the disinterested directors, who concluded that alternative means of financings were not available to the Company on terms more favorable than the Common Stock Offering. The price per share of common stock in the Common Stock Offering of $5.44 was determined through negotiations between the Company and Paramount. On May 14, 1996, the disinterested directors approved an increase in the Common Stock Offering. Paramount received (i) a cash commission equal to 9% of the gross proceeds from the sale of the units or $868,000, (ii) a non-accountable expense allowance equal to 4% of gross proceeds or $386,000 and (iii) placement agent's warrants, equal to 10% of the common stock issued in the Common Stock Offering, at an exercise price of $6.52 per common stock share, which are freely exercisable, terminate ten years from the date of issuance and have certain registration rights. Additionally investment funds managed by a company of which Dr. Rosenwald is president purchased 322,674 shares of Common Stock at $5.44 per share. On December 2, 1996, the Board of Directors approved an offering of Series A Preferred Convertible Stock (the "Series A Preferred Offering"), which was approved by the four disinterested directors. The selection of Paramount as placement agent was approved by the disinterested directors, who concluded that alternative means of financings were not available to the Company on terms more favorable than the Series A Preferred Offering. The Series A Preferred Convertible Stock was initially convertible into Common Stock at a 15% discount to the average closing bid price of the Company's Common Stock for the twenty (20) consecutive trading days immediately preceding the final closing. The 15% discount on conversion of the Series A Preferred Convertible Stock to Common Stock was determined through negotiations between the Company and the placement agent. The 15% discount has been reflected in the Company's consolidated statement of operations as a dividend to the Series A Preferred Convertible Stock of $2,888,935. The Series A Preferred Convertible Stock is currently convertible into Common Stock at a price per share of Common Stock of $4.67. Paramount received (i) a cash commission equal to 9% of the gross proceeds 45 from the sale of the units or $1,240,020, (ii) a non-accountable expense allowance equal to 4% of gross proceeds or $551,120 and (iii) placement agent's warrants, equal to 10% of the Series A Preferred Convertible Stock issued in the Series A Preferred Offering at an exercise price of $110.00 per share of Series A Preferred Convertible Stock, which terminate ten years from the date of issuance and have certain registration rights. The Company has valued those warrants at $573,537. In the Series A Preferred Offering, investment funds managed by a company of which Dr. Rosenwald is president purchased 10,000 shares of Series A Preferred Convertible Stock at $100 per share. Pursuant to the placement agency agreement for the Series A Preferred Offering, the Company entered into an introduction agreement with Paramount (the "Introduction Agreement"), under which Paramount acted as the Company's non-exclusive financial advisor for a minimum period of 18 months commencing January 1, 1997, and received (i) out-of-pocket expenses incurred in connection with services performed under the Introduction Agreement, (ii) a retainer of $72,000, (iii) a warrant to purchase 6,250 shares of Common Stock at $8.75 per share issued to a designee of Paramount and (iv) a percentage or lump sum success fees in the event that Paramount assists the Company in connection with certain financing and strategic transactions. The Introduction Agreement replaced a similar agreement in effect from September 1, 1996 through December 31, 1996, pursuant to which Paramount Capital received a retainer of $5,000 per month and a warrant to purchase 6,250 shares of Common Stock at $9.00 per share issued to a designee of Paramount. On April 28, 1998, the Board of Directors approved an offering of Series B Preferred Convertible Stock (the "Series B Preferred Offering"), which was approved by the four disinterested directors. The selection of Paramount as finder pursuant to a finder's fee agreement was approved by the disinterested directors, who concluded that alternative means of financings were not available to the Company on terms more favorable than the Series B Preferred Offering. The Series B Preferred Convertible Stock was initially convertible into Common Stock at a conversion price per share of Common Stock of $5.50. A 12.3% discount to the average closing bid price of the Company's Common Stock as of the closing, which conversion price was determined through negotiations between the Company and the investors. The 12.3% discount has been reflected in the Company's consolidated statement of operations as a dividend to the Series B Preferred Convertible Stock of $232,590. The Series B Preferred Convertible Stock is currently convertible into Common Stock at a price per share of Common Stock of $3.52. Paramount received a finder's fee equal to 10% of the gross proceeds from the sale of the units or $188,750. Upon the closing of the equity investments sold during the fiscal year ended June 30, 1999, the Company issued to Paramount, or its designees, pursuant to the Introduction Agreement referenced above; (i) warrants to purchase a total of 186,923 shares of the Company's Common Stock at prices ranging from $4.70 to $5.57, (ii) paid commissions of $295,020 in cash and (iii) paid non accountable expenses of $30,000 in cash. Management of the Company believes that the terms of the transactions and the agreements described above are on terms at least as favorable as those which it could otherwise have obtained from unrelated parties. 46 (5) PROPERTY AND EQUIPMENT: Property and equipment consists of the following: June 30, June 30, 2000 1999 ---- ---- Office equipment $ 544,265 $ 374,147 Laboratory equipment 449,857 428,162 Leasehold improvements 1,493,864 1,331,658 ------------------ ---------------- 2,487,986 2,133,967 Less: Accumulated depreciation and amortization (914,846) (676,362) ------------------ ---------------- $1,573,140 $1,457,605 ================== ================ (6) LONG-TERM FINANCING: On May 13, 1999, the Company received $2,000,000 pursuant to a Subordinated Non-negotiable Promissory Note from Mallinckrodt, Inc. Principal and interest accrued at 9% per annum was due by December 31, 2000. The Note was secured by the assets of the Company. This note and accrued interest of $46,489 was satisfied pursuant to the execution of a Strategic Collaboration Agreement signed with Mallinckrodt, Inc. on August 16, 1999. (See Note 11). The $2,000,000 in principal along with interest of $46,489 was netted against the $13,500,000 that the Company was due under this agreement. On August 17, 1999 the Company received the net funds of $11,453,511 from Mallinckrodt. (7) SENIOR BRIDGE NOTES: CLASS A OFFERING -- On July 28, 1995, the Company initiated the Class A Offering of 40 units, with each unit consisting of a $25,000 face amount senior bridge note and a warrant to purchase 3,456 shares of Common Stock at an exercise price of $.22 per share. All units were purchased, with net proceeds to the Company of approximately $907,000 after payment of the placement agent's commissions and expenses ($90,000) and offering expenses (approximately $3,000). The nominal exercise price for the warrants reflected the seriously troubled financial condition of the Company on the date of the transaction, and accordingly, no value was assigned to the warrants upon issuance. The senior bridge notes sold in the Class A Offering accrued interest at 1% per month, and were payable, with interest, one year from the date of issuance. In August and September of 1996, the Class A Offering notes with accrued interest were repaid in full. The warrants are exercisable at any time, terminate ten years from the date of issuance, and have certain registration rights. CLASS B OFFERING -- On November 27, 1995, the Company initiated the Class B Offering of 47 up to 7.5 units at $100,000 per unit, subsequently increased to 8.5 units, with each unit consisting of a $100,000 face amount senior bridge note and a warrant to purchase an equivalent of 4,608 shares of common stock at an exercise price of $2.72. Net proceeds to the Company were $739,500 after payment of the placement agent's commissions and expenses ($110,500). Due to the seriously troubled financial condition of the Company on the date of the transaction, no value was assigned to the warrants upon issuance. The senior bridge notes sold in the Class B Offering accrued interest at 1% per month, and were payable, with interest 12 months from the date of issuance, unless accelerated under certain circumstances. On June 28, 1996, the Class B Offering notes with accrued interest were paid in full. The warrants are exercisable at any time, terminate five years from the date of issuance, have certain registration rights, and contain a call provision. (8) COMMITMENTS AND CONTINGENCIES: LEASES -- The Company leases two facilities in New Jersey under non-cancelable operating leases. Future minimum lease payments under those two leases are as follows: Fiscal Year 2000 $ 421,613 2001 425,287 2002 494,751 2003 498,425 2004 and thereafter 1,102,157 ----------- $2,942,233 EMPLOYMENT AGREEMENTS -- On June 13, 2000, the Company entered into a separation agreement with Edward J. Quilty, who resigned as president, chairman and chief executive officer on that date. Pursuant to the agreement, Mr. Quilty's previously granted options became fully vested with an expiration date of June 13, 2004. The agreement further provides for benefits as follows: 1. $400,000 payable in 24 equal monthly installments of $16,666.66 less benefit deductions, tax withholding and other deductions required by law. 2. Payment by the Company of premiums necessary for the continuation of current group health insurance coverage under the Federal Law called "COBRA" for 18 months. 3. Continuation of life and disability insurance substantially similar to that which Mr. Quilty was receiving immediately prior to such resignation for 24 months. The June 30, 2000 statement of operations reflects $1,073,500 relating to the option acceleration and the above separation agreement. 48 On June 13, 2000, the Board of Directors of the Company appointed Carl Spana, Ph.D. as president and chief executive officer of the Company. The Board of Directors also named John K.A. Prendergast to serve as chairman of the Board of Directors, at a compensation of $116,000 per year. On October 12, 1998, the Board of Directors ratified employment agreements with three officers of the Company, Carl Spana, Ph.D., Stephen T. Wills and Charles Putnam effective September 11, 1998. Pursuant to the agreements, each is serving as an executive vice president of the Company. The agreements expire in September 2001. Pursuant to the agreements, each officer was granted options to purchase 50,000 shares of the Company's Common Stock at an exercise price of $2.50, the closing price of the Company's Common Stock on September 11, 1998. These options vested over a two year period with the first 33% vested immediately, the next 33% vested on the first anniversary of the date of grant and the remaining 34% vested on the second anniversary of the date of grant. The agreements include specified termination pay and vesting of stock options under certain termination events. LICENSE AGREEMENTS -- The Company has three license agreements that require minimum yearly payments. Future minimum payments under the license agreements are: 2001 - $150,000, 2002 - $200,000, 2003 - $200,000, 2004 - $200,000 and 2005 - $200,000. On March 15, 2000, the Company entered into an agreement with Watson Laboratories Inc. (f/k/a TheraTech, Inc.) to terminate a license and development agreement with Watson dated March 18, 1998. In connection with the termination, the Company paid Watson approximately $500,000. LEGAL PROCEEDINGS -- The Company is subject to various claims and litigation in the ordinary course of its business. Management believes that the outcome of such legal proceedings will not have a material adverse effect on the Company. On March 14, 2000, the Company announced that it would not be extending the merger consummation date of March 31, 2000 for its previously announced proposed merger with San Diego-based Molecular Biosystems, Inc. and would not be proceeding with the merger. The Company's decision not to proceed with the merger was based on management's view that the merger was not in the best interests of the Company's stockholders. On or about April 28, 2000, Molecular Biosystems commenced a legal action against the Company and against Evergreen Merger Corporation, a wholly-owned shell subsidiary of the Company, in the Superior Court of the State of Delaware, County of New Castle. In the complaint, Molecular Biosystems seeks damages against the Company and Evergreen arising from the alleged improper termination of the merger agreement dated November 11, 1999, among Molecular Biosystems, the Company and Evergreen. Under the merger agreement, Evergreen would have merged with and into Molecular Biosystems, which would have become a wholly-owned subsidiary of the Company. As a consequence of the claims alleged in the complaint, Molecular Biosystems contends that it is entitled to an award of damages against the Company and Evergreen in amounts to be determined at trial, but in any event, at least equal to $1,765,305. This figure represents the amount of a "breakup fee" of $1,000,000 provided for in the merger agreement and $765,305 for the costs and expenses allegedly incurred by Molecular Biosystems in connection with the proposed merger. In 49 addition, Molecular Biosystems seeks consequential damages in an unstated amount plus interest and Molecular Biosystems' costs and expenses of the action. In the Company's response filed in June of 2000, the Company has denied the material allegations. Management believes that the Company has good and meritorious defenses to the action and the Company intends vigorously to defend the action. (9) STOCKHOLDERS' EQUITY (DEFICIT): SERIES C PREFERRED OFFERING -- As of August 16, 1999, pursuant to the strategic collaboration agreement with Mallinckrodt, the Company sold 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. The Series C stock is convertible into 700,000 shares of common stock with certain registration and anti-dilution rights, upon the occurrence of the earlier of five years or earlier upon the occurrence of a change in control of the Company (as defined in the agreement). SERIES B PREFERRED OFFERING -- As of April 28, 1998, the Company completed a private placement of 18,875 shares of Series B Convertible Preferred Stock at a price per share of $100. The net proceeds to the Company were approximately $1,600,000, after deducting the finder's fee and other expenses of the Series B Preferred Offering. As of June 30, 2000, Series B Convertible Preferred Stock convertible into 56,818 shares of common stock remained outstanding, all of which has since been converted. SERIES A PREFERRED OFFERING -- On December 2, 1996, the Company commenced the Series A Preferred Offering of units at a price of $100,000 per unit, each unit consisting of 1,000 shares of Series A Convertible Preferred Stock. The final closing on the Series A Preferred Offering was effective as of May 9, 1997, with the Company having sold an aggregate total of 137.78 units, representing 137,780 shares of Series A Convertible Preferred Stock, for net proceeds to the Company of approximately $11,637,000, after deducting commission and other expenses of the Series A Preferred Offering. 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". The current Series A Conversion Price is $4.67, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 21.4 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 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 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. COMMON STOCK TRANSACTIONS -- At various times in March 1999, the Company sold in a private placement, an aggregate of 514,215 shares of its $.01 par value Common stock and 565,629 detachable five-year non-redeemable warrants. Each Warrant is exercisable for one share of Common stock at an exercise price equal to the per share Common stock purchase price. The Common stock purchase price, which was based on the average closing bid price for the five business days immediately prior to the 50 respective closing dates, ranged from $4.48 per share to $5.06 per share. The Company received net proceeds of approximately $2,175,000, which is being used for working capital and research and development programs. In connection with the private placement, the Company paid compensation to third parties consisting of an aggregate of $222,370 in cash and agreed to issue five-year warrants to purchase an aggregate of 114,073 shares of Common stock at not less than the exercise prices of the warrants sold in the private placement. In February 1999, the Company sold in a private placement 651,750 shares of its $.01 par value Common stock, at $4.00 per share and 651,750 detachable five-year non-redeemable warrants. Each Warrant is exercisable for one share of Common stock at an exercise price of $4.70. The Company received net proceeds of approximately $2,350,000, which is being used for working capital and research and development programs. In connection with the private placement, the Company paid compensation to third parties consisting of an aggregate of $248,130 in cash and agreed to issue five-year warrants to purchase an aggregate of 194,600 shares of Common stock at $4.70. On December 31, 1998, the Company sold in a private placement 287,500 shares of its $.01 par value Common stock, at $4.00 per share and 287,500 detachable five-year non-redeemable warrants. Each Warrant is exercisable for one share of Common stock at an exercise price of $4.375 per share. The Company received net proceeds of approximately $1,000,000, which was used for working capital and research and development programs. In connection with the private placement, the Company paid compensation to third parties consisting of an aggregate of $92,000 in cash and agreed to issue five-year warrants to purchase an aggregate of 60,000 shares of Common stock at prices ranging from $3.75 to $4.375. On July 8, 1998, the Company sold TheraTech 363,636 shares of Common stock at a sale price of $5.50 per share or $2,000,000. The net proceeds of the offering, approximately $1,964,000, were used for research and development of the dosage form of PT-14, the Company's peptide hormone product for the treatment of male erectile dysfunction. In the fiscal year ended June 30, 1999, the Company issued 25,000 shares of Common Stock in exchange for services and recorded compensation expense for the fair market value of $5.094 per share. In the fiscal year ended June 30, 1998, the Company issued 10,000 shares of Common Stock in exchange for services and recorded compensation expense for the fair market value of $7.75 per share. On March 4, 1996, the Company initiated the Common Stock Offering of units at $100,000 per unit, with each unit consisting of 18,433 shares of Common Stock at a purchase price of $5.44 per share. The Common Stock Offering was terminated on June 24, 1996, with 96.454 units having been sold, realizing net proceeds of approximately $8,391,000, and resulting in the issuance of 1,777,961 shares of Common Stock. On June 24, 1996, and pursuant to the Merger, certain stockholders of Interfilm, Inc. prior to the Merger and third parties purchased 138,249 shares of Common Stock at a purchase price of $5.44 per share, with net proceeds of approximately $748,000. In addition, and pursuant to the 51 Merger, warrants to purchase 69,124 shares of Common Stock at an exercise price of $8.68 were issued to certain stockholders of Interfilm prior to the Merger and third parties. These warrants are exercisable at any time, terminate four years from the date of issuance, have certain registration rights, contain a call provision and are subject to adjustment in certain circumstances. In the ten months ended June 30, 1996, the Company issued 31,492 shares of Common Stock in exchange for services and recorded compensation expense for the fair market value of the shares. The Company commenced a private offering of preferred stock in fiscal 1994, and a private offering of units consisting of common stock and common stock warrants in fiscal 1995, both of which were terminated without having raised the minimum required for closing. Stock issuance costs incurred in connection with both offerings were expensed to operations in the fiscal year in which such costs were incurred. In February 1993, the Company sold 26,912 shares of Common Stock for net proceeds of approximately $577,000. In September 1992, the Company sold 12,288 shares of Common Stock for net proceeds of approximately $191,000. In December 1991, the Company issued a private offering memorandum for the sale of units consisting of 1,211 shares of Common Stock and a $20,000 note (see Note 8). Four units were sold for $25,000 per unit. All pre-Merger common stock issuances were for RhoMed common stock, subsequently converted into the Company's Common Stock as a result of the Merger, and were at issuance prices representing market value of the RhoMed common stock on the date of issuance. OUTSTANDING STOCK PURCHASE WARRANTS -- At June 30, 2000, the Company had the following warrants outstanding: [table on following page] 52
Common Exercise Price Latest Warrant Stock Shares per Share Termination Date Class A Offering 55,300 $ .22 9/13/05 Class A Placement Agent 20,737 .22 9/13/05 Class B Offering 29,119 2.64 2/15/06 Class B Placement Agent 2,334 5.43 2/15/06 Common Stock Offering Placement Agent 212,329 5.43 6/25/06 Merger Warrants 69,124 8.68 6/24/02 Series A Preferred Offering Placement Agent 278,958 5.137 11/9/02 Palatin Offering #1 864,250 4.375 - 4.70 12/31/03 Offering #1 Placement Agent 254,600 3.75 - 4.70 12/31/03 Palatin Offering #2 540,629 4.48 - 5.06 3/9/04 Offering #2 Placement Agent 114,073 4.48 - 5.57 3/9/04 Watson termination agreement 41,062 .01 3/15/05 Other Warrants 17,052 6.45 - 6.56 5/9/02 ---------------- ---------------- ----------- Total 2,499,567 $.22 - $8.68 6/25/06 ================ ================ ===========
The Class B Offering and Merger Warrants contain provisions providing for termination of the warrant if not exercised following notice of specified per share trading prices. STOCK OPTION PLANS -- The Company has one stock option plan currently in effect under which future grants may be issued, the 1996 Stock Option Plan, as amended, approved by the Company's stockholders on June 17,1999, for which 2,500,000 shares of common stock are reserved. The Company has also granted options under agreements with individuals, and not under any plan. On March 24, 1998 the Company's stockholders approved options to two executive officers to purchase a total of 148,392 shares of common stock at an exercise price of $1.00 per share, which options replaced previously granted options to purchase the same number of shares at an exercise price of $5.42 per share. Prior to the Merger, the Company had adopted a 1993 Equity Incentive Plan, pursuant to which options for 750 shares of common stock, giving effect to the Merger and Amendment, were granted and outstanding at June 30, 2000. No new shares can be issued under this plan. Pursuant to the Merger, options which had been granted under RhoMed's four stock option plans constituted RhoMed Securities which were automatically converted into rights upon 53 exercise to receive Common Stock in the same manner in which the shares of RhoMed common stock were converted. The Company applies disclosures required by Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Effective July 1, 1996, the Company has elected to adopt the disclosures of this pronouncement. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under SFAS 123, the Company's net loss and basic and diluted net loss attributable to common stockholders per share for the year ended June 30, 2000 would have been $10,438,724 and $1.40 respectively. Net loss and basic and diluted net loss attributable to common stockholders per share for the year ended June 30, 1999 would have been $12,883,151 and $2.17, respectively, while net loss and basic and diluted net loss attributable to common stockholders per share for the year ended June 30, 1998 would have been $9,533,412 and $3.04, respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to September 1, 1995, the resulting pro forma compensation cost, and thus pro forma net loss, may not be representative of that to be expected in future years. The weighted average fair market value at the date of grant for options granted during 2000, 1999 and 1998 is estimated as $2.41, $1.29 and $2.55 per share, respectively, using the Black-Scholes option-pricing model. The assumptions used in the Black-Scholes model are as follows: dividend yield of 0%, expected volatility of 60%, weighted average risk-free interest rate of 6.47% in 2000, 4.66% in 1999 and 5.83% in 1998, and an expected option life of 7 years. The status of the plans and individual agreements, including predecessor and replacement plans under which options remain outstanding, giving effect to the Merger and the Amendment, during the three years ended June 30, 2000, was as follows: [table on following page] 54
Number of shares Range of prices Weighted average subject to options per share Prices per share ------------------ -------------- ---------------- Outstanding at June 30, 1997 838,122 $.20 - $360.00 $8.02 513,542 $.20 - $7.75 Granted Expired or canceled (201,584) $ .20 - $10.85 Exercised (5,944) $.22 ---------- ---------------- ------ Outstanding at June 30, 1998 1,144,136 $.20 - $360.00 $ 6.92 Granted 940,088 $2.50 - $5.813 Expired or canceled (38,559) $.22 - $360.00 Exercised (70,257) $.22 ---------- ---------------- ------ Outstanding at June 30, 1999 1,975,408 $.20 - $306.00 $4.26 Granted 1,238,210 $.20 - $6.625 Expired or canceled (124,264) $2.50 - $10.85 Exercised (80,854) $.22 - $6.25 ---------- ---------------- ------ Outstanding at June 30, 2000 3,008,500 $.20 - $306.00 $3.92 ========= ============== ===== Exercisable at June 30, 2000 2,292,978 $.20 - $306.00 4.65 ========= ============== ====
(10) INCOME TAXES: Palatin has had no income tax expense or benefit since inception because of operating losses. Deferred tax assets and liabilities are determined based on the estimated future tax effect of differences between the financial statements and tax reporting basis of assets and liabilities, given the provisions of the tax laws. A valuation allowance for the net deferred tax assets has been recorded at June 30, 1999, based on the weight of evidence that the deferred tax assets exceed the likely reversal of deferred tax liabilities and likely taxable income. The Tax Reform Act of 1986 imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes occur. As a result of the change in majority ownership relating to the Castle preferred stock transaction, the Common Stock Offering, the Merger, and the Series A Preferred Stock Offering, Palatin most likely will not be able to fully realize the benefit of its net operating loss carryforwards. 55 Significant components of the Palatin's deferred tax asset for federal and state purposes is as follows:
June 30 --------------------------------------------------- 2000 1999 ------------------------- ------------------------- Net operating loss carryforwards...................... $14,855,424 $13,015,397 Research and development tax credits.................. 550,591 245,958 Non-deductible expenses............................... 276,232 204,721 Other................................................. - (32,577) ------------------------- ------------------------- 15,682,247 13,433,499 Valuation Allowances.................................. (15,682,247) (13,433,499) ------------------------- ------------------------- Net deferred tax assets............................... $ - $ - ========================= =========================
A valuation allowance was established for 100% of the deferred tax assets as realization of such benefits is not assured. (11) GRANTS AND CONTRACTS: The Company applies for and has received grants and contracts under the Small Business Innovative Research ("SBIR") program and other federally funded grant and contract programs. Since inception, approximately $3,446,000 of the Company's revenues have been derived from federally or state funded grants and contracts. Under federal grants and contracts, there are no royalties or other forms of repayment; however, in certain limited circumstances the government can acquire rights to technology which is not being commercially exploited. On August 16, 1999, the Company entered into a Strategic Collaboration Agreement with Mallinckrodt, Inc., a large international healthcare products company, to jointly develop and market LeuTech. Under the terms of the agreement, Mallinckrodt paid a $500,000 license fee, which the Company recognized as revenue in the year ended June 30, 2000 and purchased 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. The stock is convertible into 700,000 shares of common stock with certain registration rights and anti-dilution rights upon the occurrence of the earlier of 5 years or a change of control in Palatin (as defined in the agreement). In addition, Mallinckrodt agreed to make milestone payments totaling $10,000,000 upon FDA approval of the first LeuTech indication and attainment of sales goals following product launch, reimburse the Company for 50% of all ongoing LeuTech development costs and pay the Company a transfer price on each LeuTech product unit and a royalty on Mallinckrodt's future net sales of LeuTech. After offsetting the $2,000,000 subordinated note to Mallinckrodt including interest of $46,849, the Company received net proceeds of $11,453,151 on August 17, 1999. During the year ended June 30, 2000, the 56 Company recognized approximately $4,150,000 as contract revenue related to the shared development costs of LeuTech. (12) LICENSING FEES AND ROYALTIES: In December 1996, the Company entered into an Option Agreement with Nihon Medi-Physics ("Nihon"), pursuant to which the Company received, in January 1997, an initial payment of $1,000,000 before Japanese withholding taxes of $100,000 (the "Initial Payment"). The Company has accounted for the Initial Payment by recognizing license fee revenue of $350,000, which represents the non-refundable portion of the Initial Payment, and deferred license fee revenue of $550,000. The Company recognized $550,000 in license fees as revenue during the quarter ended December 31, 1998 related to its license option agreement with Nihon Medi-Physics Ltd. ("Nihon"). This $550,000 was recognized pursuant to a determination by both Nihon and the Company to change the development emphasis and terminate the original agreement. The Company is not required to perform any future services under this agreement. In May 1997, the Company entered into a License Agreement with The Wistar Institute of Anatomy and Biology ("Wistar") related to the antibody and cell line used for LeuTech for a defined field of use. The agreement includes future payments to Wistar based on milestones. The Company paid $50,000 in license fees during the year ended June 30, 1999, such fee was accounted for as an expense in the statement of operations during the year ended June 30, 1999. On March 18, 1998, the Company entered into a License and Development Agreement with TheraTech, Inc. ("TheraTech") pursuant to which the Company paid, in July 1998, $500,000 to TheraTech as a license fee. Such license fee was accounted for as an expense in the statement of operations during the year ended June 30, 1998. The development agreement includes additional payments to TheraTech related to the joint effort under the product development program. On March 31, 1998, the Company entered into a License Agreement with Competitive Technologies, Inc. ("CTI") pursuant to which the Company paid, in July 1998, $50,000 to CTI as a license fee. Such license fee was accounted for as an expense in the statement of operations during the year ended June 30, 1998. The agreement includes future payments to CTI in subsequent years based on certain factors. The Company paid $50,000 in license fees during the year ended June 30, 1999, such fee was accounted for as an expense in the statement of operations during the year ended June 30, 1999. On August 16, 1999, the Company received an exclusive worldwide license fee of $500,000 (excluding Europe) for sales, marketing and distribution of LeuTech from Mallinckrodt, Inc. (See Note 11) 57 (13) SUBSEQUENT EVENT: In September of 2000, the Company received $10.8 million from a private offering consisting of common stock and warrants. Investors, consisting of financial institutions based in Europe, purchased 1.8 million shares at a per share price of $6.00, which represented the closing market price of Palatin shares on the American Stock Exchange on September 7, 2000. For every five shares purchased, the investors also received a five-year warrant to purchase one share of common stock at a 25 percent premium to the closing price. The net proceeds will be used primarily for general corporate purposes, especially for the development and clinical trials of new products based on the Company's proprietary technologies. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 58 PART III The information required by Part III of Form 10-K (Item 10 -- Directors and Executive Officers of the Registrant, Item 11 -- Executive Compensation, Item 12 -- Security Ownership of Certain Beneficial Owners and Management and Item 13 -- Certain Relationships and Transactions) is incorporated by reference from our definitive proxy statement relating to the annual meeting of stockholders scheduled for November 15, 2000, which we will file with the SEC within 120 days after our June 30, 2000 fiscal year end. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) DOCUMENTS FILED AS PART OF THE REPORT: 1. Financial statements: the following financial statements are filed as a part of this report under Item 8 -- Financial Statements and Supplementary Data: - Report of Independent Public Accountants - Consolidated Balance Sheets - Consolidated Statements of Operations - Consolidated Statements of Stockholders' Equity (Deficit) - Consolidated Statements of Cash Flows - Notes to Consolidated Financial Statements 2. Financial statement schedules: none. 3. Exhibits: The following exhibits are filed with this report, or incorporated by reference as noted. Exhibits filed with this report are marked with an asterisk (*). Exhibits which consist of or include a management contract or compensatory plan or arrangement are marked with an obelisk (+). Number Description 2.01 Agreement and Plan of Merger dated as of November 11, 1999, between Palatin, Molecular Biosystems, Inc. and Evergreen Merger Corporation. Incorporated by reference to Exhibit 99.2 of our current report on Form 8-K dated November 12, 1999, filed with the SEC on November 30, 1999. We agree to furnish supplementally to the SEC upon request a copy of any omitted schedule. 3.01 Certificate of incorporation. * 59 3.02 Bylaws. Incorporated by reference to Exhibit 3.2 of our Form 10-QSB for the quarter ended December 31, 1997, filed with the SEC on February 13, 1998. 10.01 RhoMed Incorporated 1995 Employee Incentive Stock Option Plan. Incorporated by reference to Exhibit 10.04 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.02 1996 Stock Option Plan, as amended effective July 1, 1999. Incorporated by reference to Exhibit 10.02 of our amended annual report on Form 10-KSB/A for the period ended June 30, 1999, filed with the SEC on December 28, 1999. 10.03 Carl Spana Stock Option Agreement. Incorporated by reference to Exhibit 4.15 of our Form S-8 filed with the SEC on June 17, 1998. + 10.04 Charles L. Putnam Stock Option Agreement. Incorporated by reference to Exhibit 4.16 of our Form S-8 filed with the SEC on June 17, 1998. + 10.05 Executive Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our Form S-8 filed with the SEC on June 17, 1998. + 10.06 Employment Agreement dated as of October 9, 1998, between Palatin Technologies, Inc. and Charles Putnam. Incorporated by reference to Exhibit 10.37 of our quarterly report on Form 10-QSB for the period ended September 30, 1998, filed with the SEC on November 16, 1998. + 10.07 Employment Agreement dated as of October 9, 1998, between Palatin Technologies, Inc. and Carl Spana. Incorporated by reference to Exhibit 10.38 of our quarterly report on Form 10-QSB for the period ended September 30, 1998, filed with the SEC on November 16, 1998. + 10.08 Employment Agreement dated as of October 9, 1998, between Palatin Technologies, Inc. and Stephen T. Wills. Incorporated by reference to Exhibit 10.39 of our quarterly report on Form 10-QSB for the period ended September 30, 1998, filed with the SEC on November 16, 1998. + 10.09 Employment Agreement dated July 9, 1999 between Palatin Technologies, Inc. and Edward J. Quilty. Incorporated by reference to Exhibit 10.09 of our annual report on Form 10-KSB for the period ended June 30, 1999, filed with the SEC on September 28, 1999.+ 10.10 Form of RhoMed Class A Warrant. Incorporated by reference to Exhibit 10.16 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 60 10.11 Form of Placement Agent Warrant for the RhoMed Class A Offering. Incorporated by reference to Exhibit 10.17 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.12 Form of RhoMed Class B Warrant. Incorporated by reference to Exhibit 10.19 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.13 Form of Placement Agent Warrant for the RhoMed Class B Offering. Incorporated by reference to Exhibit 10.20 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.14 Form of Placement Agent Warrant for the RhoMed common stock offering. Incorporated by reference to Exhibit 10.22 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.15 Form of Placement Agent Warrant for the Series A Convertible Preferred Stock Offering. Incorporated by reference to Exhibit 10.29 of our registration statement on Form S-3, filed with the SEC on November 25, 1997. 10.16 Convertible Preferred Stock Purchase Agreement dated as of April 28, 1998, between Palatin and the named purchasers, relating to Series B convertible preferred stock. Incorporated by reference to Exhibit 99.1 of our current report on Form 8-K dated April 28, 1998, filed with the SEC May 8, 1998. 10.17 Stock Purchase Agreement dated as of July 6, 1998, between Palatin and TheraTech, Inc. Incorporated by reference to Exhibit 99.1 of our current report on Form 8-K dated July 8, 1998, filed with the SEC on July 9, 1998. 10.18 Lease between Carnegie 214 Associates Limited Partnership and Palatin Technologies, Inc. dated May 6, 1997. Incorporated by reference to Exhibit 10.26 of our annual report on Form 10-KSB for the year ended June 30, 1997, filed with the SEC on September 26, 1997. 10.19 Lease between WHC-Six Real Estate, L.P. and Palatin Technologies, Inc. dated March 13, 1997. Incorporated by reference to Exhibit 10.27 of our Form 10-KSB for the year ended June 30, 1997, filed with the SEC on September 26, 1997. 61 10.20 Consulting Agreement between Palatin and Summercloud Bay, Inc. Incorporated by reference to Exhibit 10.36 of our annual report on Form 10-KSB/A, Amendment No. 1, dated June 30, 1998, filed with the SEC on October 2, 1998. + 10.21 Strategic Collaboration Agreement dated as of August 17, 1999, between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.21 of our amended annual report on Form 10-KSB/A for the period ended June 30, 1999, filed with the SEC on December 28, 1999. 10.22 Form of warrant and registration rights for the warrant issued in April 2000 with an expiration date of March 15, 2005. * 10.23 Separation Agreement dated as of June 13, 2000 between Palatin Technologies, Inc. and Edward J. Quilty. * + 10.24 Letter agreement dated as of July 31, 2000 between Palatin Technologies, Inc. and Robert G. Moussa. * + 10.25 Letter agreement dated as of July 31, 2000 between Palatin Technologies, Inc. and James T. O'Brien. * + 21 Subsidiaries of the registrant. * 23.01 Consent of Arthur Andersen LLP, Independent Auditors, with respect to the financial statements of Palatin. * 27 Financial data schedule. * -------------------------------------- * Exhibit filed with this report. + Management contract b) REPORTS ON FORM 8-K During the last quarter of the fiscal year ended June 30, 2000, we filed one report on Form 8-K dated June 14, 2000, relating to the appointment of Carl Spana, Ph.D. (formerly an executive vice president and chief technology officer) as our new chief executive officer, and the appointment of director John K. A. Prendergast as our new chairman, following the resignation of our former president, chairman and chief executive officer, Edward J. Quilty. We reported Item 5, Other Events, consisting of a brief description of the appointments, and Item 7, Exhibits, consisting of our press release concerning the appointments. 62 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PALATIN TECHNOLOGIES, INC. By: s/Carl Spana ------------------------------------ Carl Spana, Ph.D. President and Chief Executive Officer Date: September 28, 2000 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Carl Spana --------------------- President September 28, 2000 Carl Spana and Chief Executive Officer (principal executive officer) /s/ Stephen T. Wills --------------------- Executive Vice President and September 28, 2000 Stephen T. Wills Chief Financial Officer (principal financial and accounting officer) /s/ Charles L. Putnam --------------------- Executive Vice President and September 28, 2000 Charles L. Putnam Director s/ John K.A. Prendergast --------------------- Chairman and Director September 28, 2000 John K.A. Prendergast 63 s/ Robert K. deVeer, Jr. --------------------- Director September 28, 2000 Robert K. deVeer, Jr. /s Kevin S. Flannery --------------------- Director September 28, 2000 Kevin S. Flannery 64 EXHIBIT INDEX Number Description 2.01 Agreement and Plan of Merger dated as of November 11, 1999, between Palatin, Molecular Biosystems, Inc. and Evergreen Merger Corporation. Incorporated by reference to Exhibit 99.2 of our current report on Form 8-K dated November 12, 1999, filed with the SEC on November 30, 1999. We agree to furnish supplementally to the SEC upon request a copy of any omitted schedule. 3.01 Certificate of incorporation. * 3.02 Bylaws. Incorporated by reference to Exhibit 3.2 of our Form 10-QSB for the quarter ended December 31, 1997, filed with the SEC on February 13, 1998. 10.01 RhoMed Incorporated 1995 Employee Incentive Stock Option Plan. Incorporated by reference to Exhibit 10.04 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.02 1996 Stock Option Plan, as amended effective July 1, 1999. Incorporated by reference to Exhibit 10.02 of our amended annual report on Form 10-KSB/A for the period ended June 30, 1999, filed with the SEC on December 28, 1999. 10.03 Carl Spana Stock Option Agreement. Incorporated by reference to Exhibit 4.15 of our Form S-8 filed with the SEC on June 17, 1998. + 10.04 Charles L. Putnam Stock Option Agreement. Incorporated by reference to Exhibit 4.16 of our Form S-8 filed with the SEC on June 17, 1998. + 10.05 Executive Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our Form S-8 filed with the SEC on June 17, 1998. + 10.06 Employment Agreement dated as of October 9, 1998, between Palatin Technologies, Inc. and Charles Putnam. Incorporated by reference to Exhibit 10.37 of our quarterly report on Form 10-QSB for the period ended September 30, 1998, filed with the SEC on November 16, 1998. + 10.07 Employment Agreement dated as of October 9, 1998, between Palatin Technologies, Inc. and Carl Spana. Incorporated by reference to Exhibit 10.38 of our quarterly report on Form 10-QSB for the period ended September 30, 1998, filed with the SEC on November 16, 1998. + 10.08 Employment Agreement dated as of October 9, 1998, between Palatin Technologies, Inc. and Stephen T. Wills. Incorporated by reference to Exhibit 10.39 of our quarterly report on Form 10-QSB for the period ended September 30, 1998, filed with the SEC on November 16, 1998. + 65 10.09 Employment Agreement dated July 9, 1999 between Palatin Technologies, Inc. and Edward J. Quilty. Incorporated by reference to Exhibit 10.09 of our annual report on Form 10-KSB for the period ended June 30, 1999, filed with the SEC on September 28, 1999.+ 10.10 Form of RhoMed Class A Warrant. Incorporated by reference to Exhibit 10.16 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.11 Form of Placement Agent Warrant for the RhoMed Class A Offering. Incorporated by reference to Exhibit 10.17 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.12 Form of RhoMed Class B Warrant. Incorporated by reference to Exhibit 10.19 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.13 Form of Placement Agent Warrant for the RhoMed Class B Offering. Incorporated by reference to Exhibit 10.20 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.14 Form of Placement Agent Warrant for the RhoMed common stock offering. Incorporated by reference to Exhibit 10.22 of our annual report on Form 10-KSB for the period ended June 30, 1996, filed with the SEC on September 27, 1996. 10.15 Form of Placement Agent Warrant for the Series A Convertible Preferred Stock Offering. Incorporated by reference to Exhibit 10.29 of our registration statement on Form S-3, filed with the SEC on November 25, 1997. 10.16 Convertible Preferred Stock Purchase Agreement dated as of April 28, 1998, between Palatin and the named purchasers, relating to Series B convertible preferred stock. Incorporated by reference to Exhibit 99.1 of our current report on Form 8-K dated April 28, 1998, filed with the SEC May 8, 1998. 10.17 Stock Purchase Agreement dated as of July 6, 1998, between Palatin and TheraTech, Inc. Incorporated by reference to Exhibit 99.1 of our current report on Form 8-K dated July 8, 1998, filed with the SEC on July 9, 1998. 10.18 Lease between Carnegie 214 Associates Limited Partnership and Palatin Technologies, Inc. dated May 6, 1997. Incorporated by reference to Exhibit 10.26 of our annual report on Form 10-KSB for the year ended June 30, 1997, filed with the SEC on September 26, 1997. 66 10.19 Lease between WHC-Six Real Estate, L.P. and Palatin Technologies, Inc. dated March 13, 1997. Incorporated by reference to Exhibit 10.27 of our Form 10-KSB for the year ended June 30, 1997, filed with the SEC on September 26, 1997. 10.20 Consulting Agreement between Palatin and Summercloud Bay, Inc. Incorporated by reference to Exhibit 10.36 of our annual report on Form 10-KSB/A, Amendment No. 1, dated June 30, 1998, filed with the SEC on October 2, 1998. + 10.21 Strategic Collaboration Agreement dated as of August 17, 1999, between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.21 of our amended annual report on Form 10-KSB/A for the period ended June 30, 1999, filed with the SEC on December 28, 1999. 10.22 Form of warrant and registration rights for the warrant issued in April 2000 with an expiration date of March 15, 2005. * 10.23 Separation Agreement dated as of June 13, 2000 between Palatin Technologies, Inc. and Edward J. Quilty. * + 10.24 Letter agreement dated as of July 31, 2000 between Palatin Technologies, Inc. and Robert G. Moussa. * + 10.25 Letter agreement dated as of July 31, 2000 between Palatin Technologies, Inc. and James T. O'Brien. * + 21 Subsidiaries of the registrant. * 23.01 Consent of Arthur Andersen LLP, Independent Auditors, with respect to the financial statements of Palatin. * 27 Financial data schedule. * -------------------------------------- * Exhibit filed with this report. + Management contract 67