Notes to Consolidated Financial Statements
(unaudited)
Nature of Business
– Palatin
Technologies, Inc. (Palatin or the Company) is a biopharmaceutical
company developing targeted, receptor-specific peptide therapeutics
for the treatment of diseases with significant unmet medical need
and commercial potential. Palatin’s programs are based on
molecules that modulate the activity of the melanocortin and
natriuretic peptide receptor systems. The melanocortin system is
involved in a large and diverse number of physiologic functions,
and therapeutic agents modulating this system may have the
potential to treat a variety of conditions and diseases, including
sexual dysfunction, obesity and related disorders, cachexia
(wasting syndrome) and inflammation-related diseases. The
natriuretic peptide receptor system has numerous cardiovascular
functions, and therapeutic agents modulating this system may be
useful in treatment of acute asthma, heart failure, hypertension
and other cardiovascular diseases.
The
Company’s primary product in development is
Rekynda
™, the
Company’s trade name for bremelanotide, for the treatment of
hypoactive sexual desire disorder (HSDD), which is a type of female
sexual dysfunction (FSD). The Company also has drug candidates or
development programs for cardiovascular diseases, inflammatory
diseases, obesity and dermatologic diseases.
As
discussed in Note 12, on January 8, 2017 the Company entered into
an exclusive license agreement (License Agreement) with AMAG
Pharmaceuticals, Inc. (AMAG) for Rekynda for North America. The
License Agreement became effective on February 2, 2017 (Effective
Date), and the Company received an upfront payment of $60,000,000
pursuant to the License Agreement on the Effective
Date.
Key
elements of the Company’s business strategy include using its
technology and expertise to develop and commercialize therapeutic
products; entering into alliances and partnerships with
pharmaceutical companies to facilitate the development,
manufacture, marketing, sale and distribution of product candidates
that the Company is developing; and partially funding its product
candidate development programs with the cash flow generated from
third parties.
Going Concern –
Since inception,
the Company has incurred negative cash flows from operations, and
has expended, and expects to continue to expend, substantial funds
to complete its planned product development efforts. As shown in
the accompanying consolidated financial statements, the Company had
an accumulated deficit as of December 31, 2016 of $366,494,411 and
incurred a net loss for the three and six months ended December 31,
2016 of $10,029,419 and $23,082,189, respectively. The Company
anticipates incurring additional losses in the future as a result
of spending on its development programs and will require
substantial additional financing to continue to fund its planned
developmental activities. To achieve profitability, if ever, the
Company, alone or with others, must successfully develop and
commercialize its technologies and proposed products, conduct
successful preclinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture and market such
technologies and proposed products. The time required to reach
profitability is highly uncertain, and the Company may never be
able to achieve profitability on a sustained basis, if at all. As
discussed in Note 11, on December 6, 2016, the Company closed on an
underwritten public offering of units resulting in gross proceeds
of $16,500,000, with net proceeds, after deducting underwriting
discounts and commissions and offering expenses, of
$15,386,075.
As of
December 31, 2016, the Company’s cash, cash equivalents and
investments were $13,490,540 before giving effect to receipt of
$60,000,000 from AMAG pursuant to the License Agreement discussed
in Note 12, and current liabilities were $19,608,498. The Company
intends to utilize existing capital resources for general corporate
purposes and working capital, including required ancillary studies
with
Rekynda
for
HSDD preparatory to filing a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA), and preclinical and
clinical development of our other product candidates and programs,
including natriuretic peptide receptor and melanocortin receptor
programs.
Management believes
that the Company’s existing capital resources will be
adequate to fund its planned operations through at least the fiscal
year ending June 30, 2018. The Company will also need additional
funding to complete required clinical trials for its other product
candidates and, assuming those clinical trials are successful, as
to which there can be no assurance, to complete submission of
required applications to the FDA. If the Company is unable to
obtain approval or otherwise advance in the FDA approval process,
the Company’s ability to sustain its operations would be
materially adversely affected.
The
Company may seek the additional capital necessary to fund its
operations through public or private equity offerings,
collaboration agreements, debt financings or licensing
arrangements. Additional capital that is required by the Company
may not be available on reasonable terms, or at all.
Concentrations –
Concentrations
in the Company’s assets and operations subject it to certain
related risks. Financial instruments that subject the Company to
concentrations of credit risk primarily consist of cash and cash
equivalents and available-for-sale investments. The
Company’s cash and cash equivalents are primarily invested in
one money market account sponsored by a large financial
institution. For the three and six months ended December 31, 2016,
and 2015, the Company had no revenues reported.
(2)
BASIS
OF PRESENTATION:
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) for interim
financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and
footnote disclosures required to be presented for complete
financial statements. In the opinion of management, these
consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary
for fair presentation. The results of operations for the three and
six months ended December 31, 2016 may not necessarily be
indicative of the results of operations expected for the full
year.
The
accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form
10-K for the year ended June 30, 2016, filed with the SEC, which
includes consolidated financial statements as of June 30, 2016 and
2015 and for each of the fiscal years in the three-year period
ended June 30, 2016.
(3)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
– The
consolidated financial statements include the accounts of Palatin
and its wholly-owned inactive subsidiary. All intercompany accounts
and transactions have been eliminated in
consolidation.
Use of Estimates
– The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported 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.
Cash and Cash Equivalents
– Cash
and cash equivalents include cash on hand, cash in banks and all
highly liquid investments with a purchased maturity of less than
three months. Cash equivalents consist of $11,939,046 and
$7,782,243 in a money market account at December 31, 2016 and June
30, 2016, respectively.
Investments
– The Company
determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates
such determinations at each balance sheet date. Debt securities are
classified as held-to-maturity when the Company has the
intent and ability to hold the securities to maturity. Debt
securities for which the Company does not have the intent or
ability to hold to maturity are classified as
available-for-sale. Held-to-maturity
securities are recorded as either short-term or
long-term on the balance sheet, based on the contractual
maturity date and are stated at amortized cost. Marketable
securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities
and are reported at fair value, with unrealized gains and losses
recognized in earnings. Debt and marketable equity securities not
classified as held-to-maturity or as trading are
classified as available-for-sale and are carried at
fair market value, with the unrealized gains and losses, net of
tax, included in the determination of other comprehensive (loss)
income.
The
fair value of substantially all securities is determined by quoted
market prices. The estimated fair value of securities for which
there are no quoted market prices is based on similar types of
securities that are traded in the market.
Fair Value of Financial Instruments
– The Company’s financial instruments consist primarily
of cash equivalents, available-for-sale investments, accounts
payable and notes payable. Management believes that the carrying
values of cash equivalents, available-for-sale investments and
accounts payable are representative of their respective fair values
based on the short-term nature of these instruments. Management
believes that the carrying amount of its notes payable approximates
fair value based on the terms of the notes.
Credit Risk
– Financial
instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents.
Total cash and cash equivalent balances have exceeded insured
balances by the Federal Depository Insurance Company
(FDIC).
Property and Equipment
– Property
and equipment consists of office and laboratory equipment, office
furniture and leasehold improvements and includes assets acquired
under capital leases. Property and equipment are recorded at cost.
Depreciation is recognized using the straight-line method over the
estimated useful lives of the related assets, generally five years
for laboratory and computer equipment, seven years for office
furniture and equipment and the lesser of the term of the lease or
the useful life for leasehold improvements. Amortization of assets
acquired under capital leases is included in depreciation expense.
Maintenance and repairs are expensed as incurred while expenditures
that extend the useful life of an asset are
capitalized.
Impairment of Long-Lived Assets
–
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. To determine
recoverability of a long-lived asset, management evaluates whether
the estimated future undiscounted net cash flows from the asset are
less than its carrying amount. If impairment is indicated, the
long-lived asset would be written down to fair value. Fair value is
determined by an evaluation of available price information at which
assets could be bought or sold, including quoted market prices, if
available, or the present value of the estimated future cash flows
based on reasonable and supportable assumptions.
Revenue Recognition
– Under our
license, co-development and commercialization agreement with Gedeon
Richter (Note 5), we received consideration in the form of a
license fee and development milestone payment.
Revenue
resulting from license fees is recognized upon delivery of the
license for the portion of the license fee payment that is
non-contingent and non-refundable, if the license has standalone
value. Revenue resulting from the achievement of development
milestones is recorded in accordance with the accounting guidance
for the milestone method of revenue recognition.
Research and Development Costs
–
The costs of research and development activities are charged to
expense as incurred, including the cost of equipment for which
there is no alternative future use.
Accrued Expenses –
Third parties
perform a significant portion of our development activities. We
review the activities performed under significant contracts each
quarter and accrue expenses and the amount of any reimbursement to
be received from our collaborators based upon the estimated amount
of work completed. Estimating the value or stage of completion of
certain services requires judgment based on available information.
If we do not identify services performed for us but not billed by
the service-provider, or if we underestimate or overestimate the
value of services performed as of a given date, reported expenses
will be understated or overstated.
Stock-Based Compensation –
The
Company charges to expense the fair value of stock options and
other equity awards granted. The Company determines the value of
stock options utilizing the Black-Scholes option pricing model.
Compensation costs for share-based awards with pro-rata vesting are
determined using the quoted market price of the Company’s
common stock on the date of grant and allocated to periods on a
straight-line basis, while awards containing a market
condition are valued using multifactor Monte Carlo
simulations.
Income Taxes
– The Company and
its subsidiary file consolidated federal and separate-company state
income tax returns. Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
or operating loss and tax credit carryforwards are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that includes the enactment date. The Company has recorded a
valuation allowance against its deferred tax assets based on the
history of losses incurred.
Net Loss per Common Share
– Basic
and diluted earnings per common share (EPS) are calculated in
accordance with the provisions of Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 260,
“Earnings per Share,” which includes guidance
pertaining to the warrants, issued in connection with the July 3,
2012, December 23, 2014, and July 2, 2015 private placement
offerings and the August 4, 2016 underwritten offering, that are
exercisable for nominal consideration and, therefore, are to be
considered in the computation of basic and diluted net loss per
common share. The Series A 2012 warrants issued on July 3, 2012 to
purchase up to 31,988,151 shares of common stock are included in
the weighted average number of common shares outstanding used in
computing basic and diluted net loss per common share for all
periods presented in the consolidated statements of
operations.
The
Series B 2012 warrants issued on July 3, 2012 to purchase up to
35,488,380 shares of common stock are included in the weighted
average number of common shares outstanding used in computing basic
and diluted net loss per common share for all periods presented in
the consolidated statements of operations.
The
Series C 2014 warrants to purchase up to 24,949,325 shares of
common stock were exercisable starting at December 23, 2014 and,
therefore are included in the weighted average number of common
shares outstanding used in computing basic and diluted net loss per
common share starting on December 23, 2014.
The
Series E 2015 warrants to purchase up to 21,917,808 shares of
common stock were exercisable starting at July 2, 2015 and,
therefore are included in the weighted average number of common
shares outstanding used in computing basic and diluted net loss per
common share starting on July 2, 2015.
The
Series I 2016 warrants to purchase up to 2,218,045 shares of common
stock were exercisable starting at August 4, 2016 and, therefore
are included in the weighted average number of common shares
outstanding used in computing basic and diluted net loss per common
share starting on August 4, 2016 (Note 11).
As of
December 31, 2016 and 2015, common shares issuable upon conversion
of Series A Convertible Preferred Stock, the exercise of
outstanding options and warrants (excluding the Series A 2012,
Series B 2012, Series C 2014, Series E 2015 and Series I 2016
warrants issued in connection with the July 3, 2012, December 23,
2014, and July 2, 2015 private placement offerings and the August
4, 2016 underwritten offering), and the vesting of restricted stock
units amounted to an aggregate of 57,174,473, and 34,901,635
shares, respectively. These share amounts have been excluded from
the calculation of net loss per share as the impact would be
anti-dilutive.
(4)
NEW
AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments Credit Losses:
Measurement of Credit Losses on Financial Instruments,
which
requires measurement and recognition of expected credit losses for
financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. This is different from the current guidance as this will
require immediate recognition of estimated credit losses expected
to occur over the remaining life of many financial assets. The new
guidance will be effective for the Company on July 1, 2020. Early
adoption will be available on July 1, 2019. The Company is
currently evaluating the effect that the updated standard will have
on its consolidated financial statements and related
disclosures.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Improvement to Employee
Share-Based Payment Accounting
, which amends the
current guidance related to stock compensation. The updated
guidance changes how companies account for certain aspects of
share-based payment awards to employees, including the
accounting for income taxes, forfeitures, and statutory tax
withholding requirements, as well as classification in the
statement of cash flows. The update to the standard is effective
for the Company on July 1, 2017, with early application permitted.
The Company is evaluating the effect that the new guidance will
have on its consolidated financial statements and related
disclosures.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases, Related to the Recognition of Lease
Assets and Lease Liabilities
. The new guidance requires
lessees to recognize almost all leases on their balance sheet as a
right-of-use asset and a lease liability, other than
leases that meet the definition of a short term lease, and
requires expanded disclosures about leasing arrangements. The
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee have not significantly
changed from the current guidance. Lessor accounting is similar to
the current guidance, but updated to align with certain changes to
the lessee model and the new revenue recognition standard. The new
guidance is effective for the Company on July 1, 2019, with early
adoption permitted. The Company is evaluating the impact that the
new guidance will have on its consolidated financial statements and
related disclosures.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments: Recognition and
Measurement of Financial Assets and Financial Liabilities
.
The new guidance relates to the recognition and measurement of
financial assets and liabilities. The new guidance makes targeted
improvements to GAAP impacting equity investments (other than those
accounted for under the equity method or consolidated), financial
liabilities accounted for under the fair value election, and
presentation and disclosure requirements for financial instruments,
among other changes. The new guidance is effective for the Company
on July 1, 2018, with early adoption prohibited other than for
certain provisions. The Company is evaluating the impact that the
new guidance will have on its consolidated financial statements and
related disclosures.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes: Balance Sheet Classification of
Deferred Taxes,
which simplifies the balance sheet
classification of deferred taxes. The new guidance requires that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a
tax-paying component of an entity be offset and presented as
a single amount is not affected by the new guidance. The new
guidance is effective for the Company on July 1, 2017, with early
adoption permitted as of the beginning of an interim or annual
reporting period. The new guidance may be applied either
prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. The Company is evaluating
the impact that the new guidance will have on its consolidated
financial statements and related disclosures. However, at the
present time the Company has recorded a valuation allowance against
its deferred tax assets based on the history of losses
incurred.
In
April 2015, the FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance
Costs
, which requires debt issuance costs related to a
recognized debt liability to be presented on the balance sheet as a
direct deduction from the debt liability, similar to the
presentation of debt discounts. In August 2015, the FASB issued a
clarification that debt issuance costs related to line-of-credit
arrangements were not within the scope of the new guidance and
therefore should continue to be accounted for as deferred assets in
the balance sheet, consistent with existing GAAP. The Company
adopted the retrospective guidance as of July 1, 2016. As a result
of the adoption of ASU No. 2015-03, we made the following
adjustments to the June 30, 2016 consolidated balance sheet: a
$110,441 decrease to prepaid expenses and other current assets, a
$83,215 decrease to other assets, a $110,441 decrease to the
current portion of notes payable, net of discounts and debt
issuance costs, and a $83,215 decrease to the long-term portion of
notes payable, net of discounts and debt issuance
costs.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going
Concern: Disclosures of Uncertainties about an Entity’s
Ability to Continue as a Going Concern
. The amendments in
this update provide guidance in U.S. GAAP about management's
responsibility to evaluate whether there is substantial doubt about
an entity’s ability to continue as a going concern and to
provide related footnote disclosures. In doing so, the amendments
should reduce diversity in the timing and content of footnote
disclosures. The new standard is effective for the Company for its
fiscal year ending June 30, 2017. The Company is evaluating the
effect of the standard, if any, on its consolidated financial
statements.
In May 2014, the FASB issued ASU No.
2014-09,
Revenue from Contracts with
Customers
, which requires an
entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to
customers. The ASU will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB voted to defer the effective date of the new standard until
fiscal years beginning after December 15, 2017 with early
application permitted for fiscal years beginning after December 15,
2016. With the deferral, the new standard is effective for the
Company on July 1, 2018, with early adoption permitted one year
prior. The standard permits the use of either the retrospective or
cumulative effect transition method.
In addition, in April
2016 the FASB issued ASU No. 2016-10,
Identifying Performance Obligations and
Licensing
, which addresses various issues associated with
identifying performance obligations, licensing of intellectual
property, royalty considerations, and other matters. ASU No.
2016-10 is effective in connection with ASU No. 2014-09.
The Company is evaluating the effect
that these standards will have on its consolidated financial
statements and related disclosures. The Company has not yet
selected a transition method nor has it determined the effect of
these standards on its ongoing financial
reporting.
(5)
AGREEMENT
WITH GEDEON RICHTER:
In
August 2014, the Company entered into a license, co-development and
commercialization agreement with Gedeon Richter on
Rekynda
for FSD in Europe and
selected countries. On September 16, 2015, the Company and Gedeon
Richter mutually and amicably agreed to terminate the license,
co-development and commercialization agreement. In connection with
the termination of the license agreement, all rights and licenses
to co-develop and commercialize
Rekynda
for FSD indications
granted by the Company under the license agreement to Gedeon
Richter terminated and reverted to the Company, and neither party
is expected to have any future material obligations under the
license agreement. Neither the Company nor Gedeon Richter incurred
any early termination penalties or other payment or reimbursement
obligations as a result of the termination of the license
agreement.
The
Company viewed the delivery of the license for
Rekynda
as a revenue
generating activity that is part of its ongoing and central
operations. The other elements of the agreement with Gedeon Richter
were considered non-revenue activities associated with the
collaborative arrangement. The Company believes the license had
standalone value from the other elements of the collaborative
arrangement because it conveyed all of the rights necessary to
develop and commercialize
Rekynda
in the licensed
territory. For the three and six months ended December 31, 2016,
and 2015, the Company had no revenues reported.
(6)
PREPAID EXPENSES AND OTHER CURRENT
ASSETS:
Prepaid
expenses and other current assets consist of the
following:
|
|
|
Clinical
study costs
|
$
643,429
|
$
1,146,975
|
Insurance
premiums
|
29,619
|
23,010
|
Other
|
165,212
|
143,856
|
|
$
838,260
|
$
1,313,841
|
The
following summarizes the carrying value of our
available-for-sale investments, which consist of
corporate debt securities:
|
|
|
Cost
|
$
1,387,022
|
$
1,387,022
|
Amortization
of premium
|
(9,057
)
|
(4,522
)
|
Gross
unrealized loss
|
(2,006
)
|
(1,944
)
|
Fair
value
|
$
1,375,959
|
$
1,380,556
|
(8)
FAIR
VALUE MEASUREMENTS:
The
fair value of cash equivalents is classified using a hierarchy
prioritized based on inputs. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on
management’s own assumptions used to measure assets and
liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
The
following table provides the assets carried at fair
value:
|
|
Quoted prices in
active markets
(Level 1)
|
Other quoted/observable inputs (Level 2)
|
Significant unobservable inputs
(Level 3)
|
December
31, 2016:
|
|
|
|
|
Money
market account
|
11,939,046
|
11,939,046
|
-
|
-
|
TOTAL
|
$
11,939,046
|
$
11,939,046
|
$
-
|
$
-
|
June
30, 2016:
|
|
|
|
|
Money
market account
|
7,782,243
|
7,782,243
|
-
|
-
|
TOTAL
|
$
7,782,243
|
$
7,782,243
|
$
-
|
$
-
|
Accrued
expenses consist of the following:
|
|
|
Rekynda
program costs
|
$
7,072,200
|
$
6,983,581
|
Other
research related expenses
|
182,575
|
69,609
|
Professional
services
|
120,371
|
231,482
|
Other
|
71,679
|
483,061
|
|
$
7,446,825
|
$
7,767,733
|
Notes
payable consist of the following:
|
|
|
Notes
payable under venture loan
|
$
18,000,000
|
$
20,000,000
|
Unamortized
related debt discount
|
$
(228,121
)
|
$
(324,800
)
|
Unamortized
debt issuance costs
|
(134,159
)
|
(193,655
)
|
Notes
payable
|
$
17,637,720
|
$
19,481,545
|
|
|
|
Less:
current portion
|
7,427,445
|
5,374,951
|
|
|
|
Long-term
portion
|
$
10,210,275
|
$
14,106,594
|
On July
2, 2015, the Company closed on a $10,000,000 venture loan led by
Horizon Technology Finance Corporation (Horizon). The debt facility
is a four-year senior secured term loan that bears interest at a
floating coupon rate of one-month LIBOR (floor of 0.50%) plus 8.50%
and provides for interest-only payments for the first eighteen
months followed by monthly payments of principal payments of
$333,333 plus accrued interest through August 1, 2019. The lenders
also received five-year immediately exercisable Series G warrants
to purchase 549,450 shares of Palatin common stock exercisable at
an exercise price of $0.91 per share. The Company has recorded a
debt discount of $305,196 equal to the fair value of these warrants
at issuance, which is being amortized to interest expense over the
term of the related debt. This debt discount will offset against
the note payable balance and is included in additional paid-in
capital on the Company’s balance sheet at December 31, 2016
and June 30, 2016. In addition, a final incremental payment of
$500,000 is due on August 1, 2019, or upon early repayment of the
loan. This final incremental payment is being accreted to interest
expense over the term of the related debt. The Company incurred
approximately $146,000 of costs in connection with the loan
agreement. These costs were capitalized as deferred financing costs
and are offset against the note payable balance. These debt
issuance costs are being amortized to interest expense over the
term of the related debt. In addition, if the Company repays all or
a portion of the loan prior to the applicable maturity date, it
will pay the lenders a prepayment penalty fee, based on a
percentage of the then outstanding principal balance, equal to 3%
if the prepayment occurs on or before 18 months after the funding
date thereof or 1% if the prepayment occurs more than 18 months
after, but on or before 30 months after, the funding
date.
On
December 23, 2014, the Company closed on a $10,000,000 venture loan
which was led by Horizon. The debt facility is a four year senior
secured term loan that bears interest at a floating coupon rate of
one-month LIBOR (floor of 0.50%) plus 8.50%, and provides for
interest-only payments for the first eighteen months followed by
monthly payments of principal payments of $333,333 plus accrued
interest through January 1, 2019. The lenders also received
five-year immediately exercisable Series D 2014 warrants to
purchase 666,666 shares of common stock exercisable at an exercise
price of $0.75 per share. The Company recorded a debt discount of
$267,820 equal to the fair value of these warrants at issuance,
which is being amortized to interest expense over the term of the
related debt. This debt discount is offset against the note payable
balance and included in additional paid-in capital on the
Company’s balance sheet at December 31, 2016, and June 30,
2016. In addition, a final incremental payment of $500,000 is due
on January 1, 2019, or upon early repayment of the loan. This final
incremental payment is being accreted to interest expense over the
term of the related debt. The Company incurred $209,000 of costs in
connection with the loan agreement. These costs were capitalized as
deferred financing costs and are offset against the note payable
balance. These debt issuance costs are being amortized to interest
expense over the term of the related debt. In addition, if the
Company repays all or a portion of the loan prior to the applicable
maturity date, it will pay the lenders a prepayment penalty fee,
based on a percentage of the then outstanding principal balance,
equal to 3% if the prepayment occurs on or before 18 months after
the funding date thereof or 1% if the prepayment occurs more than
18 months after, but on or before 30 months after, the funding
date.
The
Company’s obligations under the 2015 amended and restated
loan agreement, which includes the 2014 venture loan, are secured
by a first priority security interest in substantially all of its
assets other than its intellectual property. The Company also has
agreed to specified limitations on pledging or otherwise
encumbering its intellectual property assets.
The
2015 amended and restated loan agreement include customary
affirmative and restrictive covenants, but does not include any
covenants to attain or maintain specified financial metrics. The
loan agreement includes customary events of default, including
payment defaults, breaches of covenants, change of control and a
material adverse change default. Upon the occurrence of an event of
default and following any applicable cure periods, a default
interest rate of an additional 5% may be applied to the outstanding
loan balances, and the lenders may declare all outstanding
obligations immediately due and payable and take such other actions
as set forth in the loan agreement. As of December 31, 2016, the
Company was in compliance with all of its loan
covenants.
(11)
STOCKHOLDERS’
DEFICIENCY:
Financing Transactions –
On December 6, 2016, the
Company closed on an underwritten public offering of units, with
each unit consisting of a share of common stock and a Series J
warrant to purchase 0.50 of a share of common stock. Gross proceeds
were $16,500,000, with net proceeds to the Company, after deducting
underwriting discounts and commissions and offering expenses, of
$15,386,075. The Company issued 25,384,616 shares of common stock
and Series J warrants to purchase 12,692,310 shares of common stock
at an initial exercise price of $0.80 per share, which warrants are
exercisable immediately upon issuance and expire on the fifth
anniversary of the date of issuance.
The Series J warrants are subject to
limitation on exercise if the holder and its affiliates would
beneficially own more than 9.99%, or 4.99% for certain holders, of
the total number of the Company’s shares of common stock
following such exercise.
On
August 4, 2016, the Company closed on an underwritten offering of
units, with each unit consisting of a share of common stock and a
Series H warrant to purchase 0.75 of a share of common stock.
Investors whose purchase of units in the offering would result in
them beneficially owning more than 9.99% of the Company’s
outstanding common stock following the completion of the offering
had the opportunity to acquire units with Series I prefunded
warrants substituted for any common stock they would have otherwise
acquired. Gross proceeds were $9,225,000, with net proceeds to the
Company, after deducting offering expenses, of $8,470,897. The
Company issued 11,481,481 shares of common stock and ten year
prefunded Series I warrants to purchase 2,218,045 shares of common
stock at an exercise price of $0.01, together with Series H
warrants to purchase 10,274,646 shares of common stock at an
exercise price of $0.70 per share.
The
Series I warrants are exercisable at an initial exercise price of
$0.01 per share, exercisable immediately upon issuance and expire
on the tenth anniversary of the date of issuance. The Series I
warrants are subject to limitation on exercise if the holder and
its affiliates would beneficially own more than 9.99% of the total
number of the Company’s shares of common stock following such
exercise. The Series H warrants are exercisable at an initial
exercise price of $0.70 per share, are exercisable commencing six
months following the date of issuance and expire on the fifth
anniversary of the date of issuance. The Series H warrants are
subject to the same beneficial ownership limitation as the Series I
warrants.
On July
2, 2015, the Company closed on a private placement of Series E
warrants to purchase 21,917,808 shares of Palatin common stock and
Series F warrants to purchase 2,191,781 shares of the
Company’s common stock. Certain funds managed by QVT
Financial LP (QVT) invested $5,000,000 and another accredited
investment fund invested $15,000,000. The funds paid $0.90 for each
Series E warrant and $0.125 for each Series F warrant, resulting in
gross proceeds to the Company of $20,000,000, with net proceeds,
after deducting estimated offering expenses, of
$19,834,278.
The
Series E warrants, which may be exercised on a cashless basis, are
exercisable immediately upon issuance at an initial exercise price
of $0.01 per share and expire on the tenth anniversary of the date
of issuance. The Series E warrants are subject to limitation
on exercise if QVT and its affiliates would beneficially own more
than 9.99% (4.99% for the other accredited investment fund holder)
of the total number of the Company’s shares of common stock
following such exercise. The Series F warrants are exercisable at
an initial exercise price of $0.91 per share, exercisable
immediately upon issuance and expire on the fifth anniversary of
the date of issuance. The Series F warrants are subject to the same
beneficial ownership limitation as the Series E
warrants.
The
purchase agreement for the private placement provides that the
purchasers have certain rights until the earlier of approval of
Rekynda
for FSD
by the U.S. Food and Drug Administration and July 3, 2018,
including rights of first refusal and participation in any
subsequent equity or debt financing. The purchase agreement also
contains certain restrictive covenants so long as the funds
continue to hold specified amounts of warrants or beneficially own
specified amounts of the outstanding shares of common
stock.
During
the six months ended December 31, 2016, and 2015 the Company issued
27,989,685 shares and 10,890,889 shares, respectively, of common
stock pursuant to the cashless exercise provisions of warrants at
an exercise price of $0.01 per share. As of December 31, 2016,
there were 62,046,764 warrants outstanding at an exercise price of
$0.01 per share.
Stock Options
– In September
2016, the Company granted 828,000 options to its executive officers
and 336,000 options to its employees under the Company’s 2011
Stock Incentive Plan. The Company is amortizing the fair value of
the options vesting over a 48 month period, consisting of 595,000
options granted to its executive officers and all options granted
to its employees, of $188,245 and $106,303, respectively, over the
vesting period. The Company recognized $16,568 and $21,784,
respectively, of stock-based compensation expense related to these
options during the three and six months ended December 31, 2016.
233,000 options granted to its executive officers vest 12 months
from the date of grant, and the Company is amortizing the fair
value of these options of $67,160 over this vesting period. The
Company recognized $15,111 and $19,868, respectively, of
stock-based compensation expense related to these options during
the three and six months ended December 31, 2016.
In June
2016, the Company granted 262,500 options to its non-employee
directors under the Company’s 2011 Stock Incentive Plan. The
Company is amortizing the fair value of these options of $81,435
over the vesting period. The Company recognized $20,359 and
$40,718, respectively, of stock-based compensation expense related
to these options during the three and six months ended December 31,
2016.
In June
2015, the Company granted 570,000 options to its executive
officers, 185,800 options to its employees and 160,000 options to
its non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
options of $446,748, $145,439 and $111,876, respectively, over the
vesting period. The Company recognized $35,192, and $67,485,
respectively, of stock-based compensation expense related to these
options during the three and six months ended December 31, 2016 and
$62,443 and $120,020, respectively, during the three and six months
ended December 31, 2015.
Unless
otherwise stated, stock options granted to the Company’s
executive officers and employees vest over a 48 month period, while
stock options granted to its non-employee directors vest over a 12
month period.
Restricted Stock Units
– In
September 2016, the Company granted 558,000 restricted stock units
to its executive officers, 415,000 of which vest over 24 months and
143,000 of which vest at 12 months, and 336,000 restricted stock
units to its employees under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of the
restricted stock units of $284,580, and $171,360, respectively,
over the vesting periods. The Company recognized $80,228 and
$100,732, respectively, of stock-based compensation expense related
to these restricted stock units during the three and six months
ended December 31, 2016.
In June
2016, the Company granted 262,500 restricted stock units to its
non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
restricted stock units of $131,250 over the vesting period. The
Company recognized $32,813 and $65,625, respectively, of
stock-based compensation expense related to these restricted stock
units during the three and six months ended December 31,
2016.
In
December 2015, the Company granted 625,000 performance-based
restricted stock units to its executive officers and 200,000
performance-based restricted stock units to its employees under the
Company’s 2011 Stock Incentive Plan, which vest during the
performance period, ending December 31, 2017, if and upon the
earlier of: i) achievement of a closing price for the
Company’s common stock equal to or greater than $1.20 per
share for 20 consecutive trading days, which is considered a market
condition, or ii) entering into a collaboration agreement (U.S. or
global) of
Rekynda
for FSD, which is
considered a performance condition. This performance condition was
deemed met as of February 2, 2017, the Effective Date of the
License Agreement on Rekynda with AMAG. Prior to meeting the
performance condition, the Company determined that it was not
probable of achievement on the date of grant since meeting the
condition was outside the control of the Company. The fair
value of these awards, as calculated under a multi-factor Monte
Carlo simulation, was $338,250. The Company amortized the fair
value over the derived service period of 0.96 years. The Company
recognized $55,410 and $142,289, respectively, of stock-based
compensation expense related to these restricted stock units during
the three and six months ended December 31, 2016 and $22,202 during
the three and six months ended December 31, 2015.
Also,
in December 2015, the Company granted 625,000 restricted stock
units to its executive officers, 340,000 restricted stock units to
its non-employee directors and 200,000 restricted stock units to
its employees under the Company’s 2011 Stock Incentive Plan.
For executive officers and employees, the restricted stock units
vest 25% on the date of grant and 25% on the first, second and
third anniversary dates from the date of grant. For non-employee
directors, the restricted stock units vest 50% on the first and
second anniversary dates from the date of grant. The fair value of
these restricted stock units is $425,000, $231,200 and $136,000,
respectively. The Company recognized $85,996 and $187,252,
respectively, of stock-based compensation expense related to these
restricted stock units during the three and six months ended
December 31, 2016 and $167,756 during the three and six months
ended December 31, 2015.
In June
2015, the Company granted 400,000 restricted stock units to its
executive officers, 185,800 restricted stock units to its employees
and 160,000 restricted stock units to its non-employee directors
under the Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of these restricted stock units of
$432,000, $200,664, and $172,800, respectively, over the vesting
period. The Company recognized $40,430 and $80,859, respectively,
of stock-based compensation expense related to these restricted
stock units during the three and six months ended December 31, 2016
and $150,328 and $300,656, respectively, during the three and six
months ended December 31, 2015.
Unless
otherwise stated, restricted stock units granted to the
Company’s executive officers, employees and non-employee
directors vest over 24 months, 48 months and 12 months,
respectively.
Stock-based
compensation cost for the three and six months ended December 31,
2016 for stock options and equity-based instruments issued other
than the stock options and restricted stock units described above
was $67,926 and $126,629, respectively, and $97,625 and $190,114,
respectively, for the three and six months ended December 31,
2015.
Rekynda
License Agreement –
On
January 8, 2017, the Company entered into the License Agreement
with AMAG. Under the terms of the License Agreement, the Company
granted to AMAG (i) an exclusive license in all countries of North
America (the Territory), with the right to grant sub-licenses, to
research, develop and commercialize products containing
bremelanotide (each a Product, and collectively, Products), (ii) a
non-exclusive license in the Territory, with the right to grant
sub-licenses, to manufacture Products, and (iii) a non-exclusive
license in all countries outside the Territory, with the right to
grant sub-licenses, to research, develop and manufacture (but not
commercialize) the Products.
Following the
satisfaction of certain conditions to closing the License Agreement
became effective on the Effective Date. On the Effective Date AMAG
paid the Company $60,000,000 as a one-time initial payment.
Pursuant to the terms of and subject to the conditions in the
License Agreement, AMAG is required to pay the Company up to an
aggregate amount of $25,000,000 to reimburse the Company for all
reasonable, documented, out-of-pocket expenses incurred by the
Company following the Effective Date, in connection with the
development and regulatory activities necessary to file a new drug
application, or NDA, for Rekynda for HSDD in the United
States.
In
addition, pursuant to the terms of and subject to the conditions in
the License Agreement, the Company will be eligible to receive from
AMAG: (i) up to $80,000,000 in specified regulatory payments
upon achievement of certain regulatory milestones, and (ii) up to
$300,000,000 in sales milestone payments based on achievement of
annual net sales amounts for all Products in the
Territory.
AMAG is
also obligated to pay the Company tiered royalties on annual net
sales of Products, on a product-by-product basis, in the Territory
ranging from the high single-digits to the low double-digits. The
royalties will expire on a product-by-product and
country-by-country basis upon the latest to occur of (i) the
earliest date on which there are no valid claims of the
Company’s patent rights covering such Product in such
country, (ii) the expiration of the regulatory exclusivity period
for such Product in such country and (iii) ten years following the
first commercial sale of such Product in such country. Such
royalties are subject to reductions in the event that:
(a) AMAG must license additional third party intellectual
property in order to develop, manufacture or commercialize a
Product, or (b) generic competition occurs with respect to a
Product in a given country, subject to an aggregate cap on such
deductions of royalties otherwise payable to the Company. After the
expiration of the applicable royalties for any Product in a given
country, the license for such Product in such country will become a
fully paid-up, royalty-free, perpetual and irrevocable
license.
The
Company engaged Greenhill & Co. LLC (Greenhill) as the
Company’s sole financial advisor in connection with a
potential transaction with respect to Rekynda. Under the
engagement agreement with Greenhill, as a result of the License
Agreement with AMAG the Company is obligated to pay Greenhill a fee
equal to 2% of all proceeds and consideration paid to the Company
by AMAG in connection with the License Agreement, subject to a
minimum fee of $2,500,000. The minimum fee of $2,500,000, less
credit of $50,000 for an advisory fee previously paid by the
Company, is due to Greenhill as a result of the closing of the
licensing transaction. This amount will be credited toward amounts
that become due to Greenhill in the future, provided that the
aggregate fee payable to Greenhill will not be less than 2% of all
proceeds and consideration paid to the Company by AMAG in
connection with the License Agreement, and will pay Greenhill an
aggregate total of 2% of all proceeds and consideration paid to us
by AMAG in connection with the License Agreement after crediting
the $2,500,000 due on account of entering into the License
Agreement with AMAG. The Company is also obligated to reimburse
Greenhill for certain expenses incurred in connection with its
advisory services.
Pursuant to the
License Agreement, the Company has assigned to AMAG the
Company’s manufacturing and supply agreements with Catalent
Belgium S.A. (Catalent) to perform fill, finish and packaging of
Rekynda.
Outstanding Common Stock –
Between December 31, 2016 and February 9, 2017, the Company issued
4,500,000 shares of common stock pursuant to the exercise of
warrants at an exercise price of $0.01 per share. As of February 9,
2017, warrants with an exercise price of $0.01 per share to
purchase 57,546,764 shares of common stock are outstanding, all of
which include cashless exercise provisions.