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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
AMENDMENT NO. 1
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from September 1, 1995 to June 30, 1996
Commission file number 0-22686
------------------------------------
PALATIN TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4078884
(State of incorporation or organization) (I.R.S. Employer Identification No.)
214 CARNEGIE CENTER - SUITE 100
PRINCETON, NEW JERSEY 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 520-1911
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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. |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or by any
amendment to this Form 10-KSB. |_|
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked price of such stock, as of September 24, 1996, was $21,111,385.
The Registrant's revenues for the period ended June 30, 1996 were $24,457.
As of September 24, 1996, 11,537,412 shares of the Registrant's common stock,
par value $.01 per share, were outstanding.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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<PAGE>
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Transition Report on
Form 10-KSB for the transition period from September 1, 1995, to
June 30, 1996, as set forth in the pages attached hereto.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto filed as part of this
Form 10-KSB.
Prior to May 10, 1995, Interfilm had been primarily engaged in the
business of exploiting the 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 May 10, 1995, the Board of
Directors of Interfilm decided to substantially curtail the operations of
Interfilm and its subsidiaries. As a result of the Merger, which became
effective on June 25, 1996, RhoMed became a wholly-owned subsidiary of the
Company, with the holders of RhoMed preferred stock and RhoMed common stock
(including the holders of options pursuant to RhoMed's qualified and
nonqualified stock option plans and RhoMed common stock warrants) receiving an
aggregate of an approximately 96% interest in the equity securities of the
Company on a fully-diluted basis. Since the former stockholders of RhoMed
retained more than a 50% controlling interest in the Company, the Merger was
treated as a reverse acquisition for accounting purposes. The historical
financial statements of the Company presented prior to the Merger are those of
RhoMed and the business of RhoMed represents the on-going business of the
Company.
Results of Operations
Ten Month Period Ended June 30, 1996 Compared to Ten Month Period Ended
June 30, 1995. License fees and royalties were zero for the ten months ended
June 30, 1996, compared to $64,296 in the prior ten month period. The
decrease in license fees and royalties is primarily attributable to the timing
of when these fees are earned; during the ten months ended June 30, 1996,
there were no royalties on product sales or new license agreements. Sales of
RhoChek, the sole product sold by the Company, decreased $6,090 to $24,457 in
the current ten month period from $30,546 in the prior ten month period. Due
to insufficient sales, the Company expects to discontinue the manufacture and
sale of its RhoChek product in fiscal 1997. The Company expects sales to
decrease in fiscal 1997 as product sales for RhoChek are discontinued.
Research and development expenses increased by $391,983 to $869,896 for
the ten months ended June 30, 1996, from $477,913 in the ten months ended June
30, 1995. The majority of the increase is attributable to the Company's Leu-
Tech project, including increased consulting, clinical trial and manufacturing
scale-up expenses.
General and administrative expenses increased to $1,250,343 in the
current ten month period from $598,560 for the ten months ended June 30, 1995.
The majority of the increase is due to the hiring of a Chairman and CEO; Vice
President of Finance and CFO; the leasing of general and administrative
offices in New Jersey; and increased travel and consulting expenses.
Page 1
<PAGE>
Other expenses increased to $1,802,097 for the ten months ended June 30,
1996 from $305,615 for the ten months ended June 30, 1995. The increase is
attributable primarily to increased interest expense, commission and fees paid
in connection with the Company's debt offerings ($168,970), costs and fees
associated with the Merger ($525,000), costs and expenses associated with the
relocation of the Company's research and general and administrative offices
($284,000), including primarily severance costs, facility closing expenses and
recruiting fees, and the write down of certain patents not currently used in
development projects ($259,334).
Net loss increased to $3,897,879 in the ten months ended June 30, 1996,
compared to $1,287,246 in the prior ten month period.
Fiscal Year Ended August 31, 1995 Compared to Fiscal Year Ended August
31, 1994. Total revenues decreased by $49,946 to $97,902 for the fiscal year
ended August 31, 1995, from $147,848 in the previous fiscal year. The
decrease is attributable to no grant revenue during fiscal year 1995 compared
to $50,289 for the previous fiscal year.
Research and development expenses were $619,354 for the fiscal year ended
August 31, 1995 compared to $584,941 for the previous fiscal year.
General and administrative expenses decreased to $776,291 for the fiscal
year ended August 31, 1995 from $939,155 in the previous fiscal year. Such
decrease was primarily attributable to decreased offering expenses.
Other expenses increased to $341,121 for the fiscal year ended August 31,
1995 from $168,707 in the previous fiscal year. The increase is attributable to
higher interest expense due to a higher average debt balance outstanding
throughout the 1995 fiscal year.
Net loss for the fiscal year ended August 31, 1995 increased to
$1,638,864 from $1,544,955 in the previous fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has incurred net operating losses and,
as of June 30, 1996, had an accumulated deficit of approximately $8,100,000.
The Company has financed its net operating losses through June 30, 1996 by a
series of debt and equity financings. At June 30, 1996, the Company's cash
position amounted to $6,791,300.
For the ten months ended June 30, 1996, the net increase in cash amounted
to $6,317,282. Cash provided by financing activities was $9,053,350, mainly
comprised of net proceeds from common stock offerings of $9,143,303, which was
offset by net cash used for operating activities of $2,709,491 and net cash
used for investing activities of $26,577.
The Company has $1,000,000 face amount senior bridge notes which mature,
with accrued interest, in August and September of 1996. The current portion of
long-term debt maturing in fiscal year 1997 totals $311,695.
The Company's current cash position is sufficient to meet its debt
obligations in fiscal year 1997, and fund its operations, at their current
level, through fiscal year 1997.
The Company has incurred negative cash flows from operations since its
inception. The Company has expended, and will continue to expend in the future,
if available, substantial funds to continue its research and development
programs, including pre-clinical studies and clinical trials, to seek
Page 2
<PAGE>
regulatory approval of its products and to develop manufacturing and
distribution capabilities. Further, the Company has a significant portion of
short-term debt coming due during the fiscal year ending June 30, 1997. The
Company anticipates, based on projected expenditure levels, that its existing
capital resources will be adequate to make scheduled debt payments and to fund
its operations through fiscal year 1997. The Company's future capital
requirements depend on numerous factors which cannot be quantified, including
continued progress in its research and development activities, progress with
pre-clinical studies and clinical trials, prosecuting and enforcing patent
claims, technological and market developments, the ability of the Company to
establish product development arrangements, the cost of manufacturing scale-up
and effective marketing activities and arrangements. The Company will seek to
obtain additional funds through equity or debt financing, collaborative or
other arrangements with corporate partners and others, and from other sources.
No assurance can be given that additional financing will be available when
needed or on terms acceptable to the Company. If adequate additional funds are
not available, the Company may be required to delay, scale back or eliminate
certain of its research, drug discovery or development activities or certain
other aspects of its business. If adequate funds are not available, the
Company's business will be materially and adversely affected.
The Company intends to relocate its research and development facility
from Albuquerque, New Mexico to the Princeton, New Jersey area during fiscal
year 1997. The Company may incur significant costs to build and equip research
and development laboratory space, although an estimate of expenditure and lease
costs for a new facility cannot be determined at this time.
The Company anticipates incurring additional losses over at least the
next several years, and such losses are expected to increase as the Company
expands its research and development activities relating to its metallopeptide
technology and its radiolabeling technology. To achieve profitability, the
Company, alone or with others, must successfully develop and commercialize its
technologies and products, conduct pre-clinical studies and clinical trials,
obtain required regulatory approvals and successfully manufacture, introduce
and market such technologies and 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.
PART III
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
The following financial statements of the Company are filed as part of
this report:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants, Arthur Andersen LLP................................................ F-1
Consolidated Balance Sheets as of June 30, 1996 and August 31, 1995.......................................... F-3
Consolidated Statements of Operations for the period from inception (January 28, 1986)
through June 30, 1996 and for the ten months ended June 30, 1996 and
the years ended August 31, 1995 and 1994................................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the period from inception
(January 28, 1986) through June 30, 1996................................................................... F-6
Consolidated Statements of Cash Flows for the period from inception (January 28, 1986)
through June 30, 1996 and for the ten months ended June 30, 1996 and
the years ended August 31, 1995 and 1994................................................................... F-8
Notes to Consolidated Financial Statements................................................................... F-10
</TABLE>
Page 3
<PAGE>
(A)(2) EXHIBITS
The following exhibits are filed as part of this report:
2.1 Agreement and Plan of Reorganization dated as of April 12,
1996 by and between Interfilm, Inc., Interfilm Acquisition
Corp. and RhoMed Incorporated. (a)
2.2 Waiver and Consent dated as of June 24, 1996, between
Interfilm, Inc., Interfilm Acquisition Corp. and RhoMed
Incorporated. (b)*
3.1 Restated Certificate of Incorporation of the Company, as
filed with the Delaware Secretary of State on November 3,
1993. (c)
3.2 Amendment to the Restated Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on
July 19, 1996. (d)
3.3 Bylaws of the Company. (e)
3.4 Amended Certificate of Designation of Series A Preferred
Stock of the Company, filed on June 24, 1996. (f)
3.5 Amended Certificate of Designation of Series B Preferred
Stock of the Company, filed on June 24, 1996. (g)
4.1 Specimen Certificate for Common Stock. (h)
4.2 Patent Assignment and License Agreement dated as of July 15,
1993, between RhoMed Incorporated and Aberlyn Capital
Management Limited Partnership. (b)*
4.3 Master Lease Agreement dated November 16, 1994, between
RhoMed Incorporated and Aberlyn Capital Management Limited
Partnership. (b)*
4.4 Letter Agreement, dated as of April 28, 1995, between Aberlyn
Capital Management Limited Partnership and RhoMed
Incorporated. (b)*
4.5 Stock Purchase and Modification Agreement, dated as of June
24, 1996, between Aberlyn Capital Management Limited
Partnership, Aberlyn Holding Company, Inc. and RhoMed
Incorporated. (b)*
10.01 Lease between Charles C. and Ellen C. France Revocable Trust
and RhoMed Incorporated dated December 18, 1992. (b)*
10.02 Amendment, dated November 1, 1993, to Lease between Charles
C. and Ellen C. France Revocable Trust and RhoMed
Incorporated. (b)*
10.03 Second Amendment, dated July 5, 1996, to Lease between
Charles C. and Ellen C. France Revocable Trust and RhoMed
Incorporated. (b)*
10.04 RhoMed Incorporated 1995 Employee Incentive Stock Option
Plan. (b)(i)*
Page 4
<PAGE>
10.05 RhoMed Incorporated 1995 Nonqualified Stock Option Plan.
(b)(i)*
10.06 1996 Stock Option Plan of the Company. (b)(i)*
10.07 Employment Agreement dated as of November 16, 1995, between
RhoMed Incorporated and Edward J. Quilty. (b)(i)*
10.08 Employment Agreement dated as of September 27, 1996, between
Palatin Technology, Inc. and Carl Spana. (b)(i)*
10.09 Employment Agreement dated as of September 27, 1996, between
Palatin Technology, Inc. and Charles Putnam. (b)(i)*
10.10 Class C Warrant for the Purchase of Shares of Common Stock
issued to William I. Franzblau June 24, 1996. (b)(i)*
10.11 License Agreement between Rougier Bio-Tech Limited and RhoMed
Incorporated dated May 1, 1992. (b)*
10.12 License Agreement between Sterling Winthrop Inc. and RhoMed
Incorporated dated November 2, 1992. (b)*
10.13 Assignment and Assumption dated January 21, 1994, between
Sterling Winthrop, Inc. and Burroughs Wellcome Co. (b)*
10.14 Option Agreement between RhoMed Incorporated and The Wistar
Institute of Anatomy and Biology dated August 22, 1996. (b)*
10.15 Consulting Agreement dated as of March 7, 1995, between
RhoMed Incorporated and Buck A. Rhodes. (b)*
10.16 Form of Class A Warrant. (b)*
10.17 Form of Placement Agent Warrant for the Class A Offering.
(b)*
10.18 Form of Unit Purchase Agreement for the Class A Offering,
including registration rights referred to in the Form of
Class A Warrant and Form of Placement Agent Warrant for the
Class A Offering. (b)*
10.19 Form of Class B Warrant. (b)*
10.20 Form of Placement Agent Warrant for the Class B Offering.
(b)*
10.21 Form of Unit Purchase Agreement for the Class B Offering,
including registration rights referred to in the Form of
Class B Warrant and Form of Placement Agent Warrant for the
Class B Offering. (b)*
10.22 Form of Placement Agent Warrant for the RhoMed Common Stock
Offering. (b)*
10.23 Form of Common Stock Purchase Agreement for the RhoMed Common
Stock Offering, including registration rights referred to in
the Form of Placement Agent Warrant for the RhoMed Common
Stock Offering. (b)*
16.1 Letter dated July 19, 1996 from Deloitte & Touche LLP. (j)
Page 5
<PAGE>
21.1 Current list of subsidiaries of the registrant. (b)*
23.1 Consent of Arthur Andersen LLP. (b)*
23.2 Consent of Arthur Andersen LLP. (k)
27.1 Financial Data Schedule. (b)*
99.1 Certificate of Limited Partnership of "The Interfilm
Stockholders Limited Partnership," as filed with the Delaware
Secretary of State on June 17, 1996. (b)*
99.2 Agreement of Limited Partnership of The Interfilm
Stockholders Limited Partnership, dated June 11, 1996. (b)*
99.3 The Interfilm Stockholders Trust, established by Interfilm,
Inc. and Interfilm Technologies, Inc. on June 11, 1996. (b)*
99.4 General Bill of Sale, Assignment and Assumption Agreement
among, on the one hand, Interfilm, Inc. and Interfilm
Technologies, Inc. and on the other hand, The Interfilm
Stockholders Limited Partnership, dated June 25, 1996. (b)*
NOTES TO EXHIBITS
* Filed as an exhibit to the registrant's Form 10-KSB transition report
for the transition period from September 1, 1995 to June 30, 1996, of
which this Amendment No. 1 forms a part.
(a) Incorporated by reference to Exhibit 2.1 of the registrant's Form 8-K
dated June 25, 1996, filed with the Commission on July 10, 1996.
(b) Filed as an exhibit to this Form 10-KSB Annual Report for the period
ended June 30, 1996.
(c) Incorporated by reference to Exhibit 3.1 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(d) Incorporated by reference to Exhibit 3.2 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(e) Incorporated by reference to Exhibit 3.2 of the registrant's
Registration Statement No. 33-67862.
(f) Incorporated by reference to Exhibit 3.3 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(g) Incorporated by reference to Exhibit 3.4 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(h) Incorporated by reference to Exhibit 4.1 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(i) A management contract or compensatory plan or arrangement.
(j) Incorporated by reference to Exhibit 16.1 of the registrant's
Form 8-K/A dated June 25, 1996, filed with the Commission on
July 23, 1996.
(k) Filed as an exhibit to this Amendment No. 1 to Form 10-KSB transition
report for the transition period from September 1, 1995 to
June 30, 1996.
Page 6
<PAGE>
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the three
months ended June 30, 1996.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PALATIN TECHNOLOGIES, INC.
Date: July 15, 1997
By: /s/ John J. McDonough
------------------------------------
John J. McDonough
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Page 7
<PAGE>
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, 1996 (post-Merger, see Note 1) and August 31, 1995
(pre-Merger), and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period from September 1,
1995 through June 30, 1996 (post-Merger, consisting of the statement of
operations and cash flows of RhoMed Incorporated, predecessor corporation in
the continuing business of Palatin Technologies, Inc. and subsidiaries for the
period from September 1, 1995 through June 25, 1996 (pre-Merger), audited by
us,
and the statements of operations and cash flows of Palatin Technologies, Inc.
and subsidiaries for the period from June 26, 1996 through June 30, 1996
(post-Merger), also audited by us, and for the years ended August 31, 1995 and
1994 (pre-Merger). We have also audited the consolidated statements of
operations and cash flows of Palatin Technologies, Inc. and subsidiaries for
the period from inception (January 28, 1986) through June 30, 1996
(post-Merger, consisting of the statements of operations and cash flows of
RhoMed Incorporated and Palatin Technologies, Inc. and subsidiaries as
described above). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
F-1
<PAGE>
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, 1996, and August 31, 1995, and the results of their
operations and their cash flows for each of the periods indicated above in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 31, 1996
F-2
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Balance Sheets
June 30, 1996 and August 31, 1995
<TABLE>
<CAPTION>
June 30, 1996 August 31, 1995
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,791,300 $ 474,018
Accounts receivable, including employee receivables of $113 and
$1,121 as of June 30, 1996 and August 31, 1995, respectively 4,574 5,626
Prepaid expenses and other 66,430 19,752
-------------- ----------
Total current assets 6,862,304 499,396
Equipment, net (Notes 2 and 4) 96,354 134,368
Intangibles, net of accumulated amortization of $91,336 and
$68,938 as of June 30, 1996 and August 31, 1995, respectively
(Notes 5 and 6) 82,547 319,965
-------------- ----------
$ 7,041,205 $ 953,729
============== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Balance Sheets
June 30, 1996 and August 31, 1995
- Continued -
<TABLE>
<CAPTION>
June 30, 1996 August 31, 1995
--------------------- ---------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, including related party payables of $34,234 as of
June 30, 1996 $ 214,424 $ 305,857
Accrued compensation owed to employees (Note 3) 78,084 171,290
Accrued expenses (Note 1) 655,197 112,747
Notes payable, related party (Note 3) -- 23,286
Current portion of long-term financing, including accrued interest
of $38,912 (Note 6) 311,695 105,000
Senior bridge notes, including related party transaction of $110,000
and $100,000 as of June 30, 1996 and August 31, 1995, respectively (Note 7) 1,100,000 1,000,000
------------ ------------
Total current liabilities 2,359,400 1,718,180
Long-term financing, including accrued interest of $273,339
and $285,614 as of June 30, 1996 and August 31, 1995, respectively
(Note 6) 1,727,619 1,972,677
Notes payable to stockholders, including accrued interest of
$35,979 and $29,312 as of June 30, 1996 and August 31, 1995,
respectively (Note 8) 115,979 109,312
------------ ------------
4,202,998 3,800,169
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit) (Notes 1, 3, 6, 7, 8, 9 and 10):
Preferred stock, $.01 and zero par value, and 2,000,000 and 10,000,000
shares authorized, as of June 30, 1996 and August 31, 1995, respectively;
no shares issued as of June 30, 1996 and August 31, 1995; 4,000,000
subscribed as of August 31, 1995 -- --
Preferred stock subscribed -- 4,000
Preferred stock receivable -- (4,000)
Common stock, $.01 and zero par value, and 25,000,000 and 40,000,000
shares authorized, as of June 30, 1996 and August 31, 1995, respectively;
11,538,777 and 6,922,069 issued as of June 30, 1996 and
August 31, 1995, respectively 115,388 1,177,786
Additional paid-in capital 10,804,394 --
Common stock earned but not issued 53,030 110,833
Paid-in capital from common stock warrants -- 100,000
Treasury stock, 1,229 shares (1,667) --
Deficit accumulated during development stage (8,132,938) (4,235,059)
------------ ------------
2,838,207 (2,846,440)
------------ ------------
$ 7,041,205 $ 953,729
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-4
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Operations
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended June 30, 1996
and the Years Ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Inception Fiscal Year Ended
(January 28, 1986) Ten Months August 31,
through Ended ----------------------------------
June 30, 1996 June 30, 1996 1995 1994
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Grants and contracts (Note 11) $ 2,860,512 $ - $ - $ 50,289
License fees and royalties (Note 12) 334,296 - 64,296 50,000
Sales 296,733 24,457 33,606 47,559
----------------- ---------------- ---------------- ----------------
Total revenues 3,491,541 24,457 97,902 147,848
----------------- ---------------- ---------------- ----------------
EXPENSES:
Research and development 4,396,408 869,896 619,354 584,941
General and administrative 5,018,961 1,366,343 776,291 939,155
Restructuring charge (Note 9) 284,000 284,000 - -
Net intangibles write down (Note 5) 259,334 259,334 - -
----------------- ---------------- ---------------- ----------------
Total operating expenses 9,958,703 2,779,573 1,395,645 1,524,096
----------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSES):
Other income 71,380 10,515 2,744 16,561
Interest expense (1,043,186) (459,308) (343,865) (185,268)
Placement agent commissions and
fees on debt offering (168,970) (168,970) - -
Merger costs (525,000) (525,000) - -
----------------- ---------------- ---------------- ----------------
Total other income (expenses) (1,665,776) (1,142,763) (341,121) (168,707)
----------------- ---------------- ---------------- ----------------
NET LOSS $ (8,132,938) $ (3,897,879) $ (1,638,864) $ (1,544,955)
================= ================ ================ ================
Weighted average number of common
shares outstanding 1,173,525 2,144,131 1,238,192 1,205,617
================= ================ ================ ================
Net loss per common share $ (6.93) $ (1.82) $ (1.32) $ (1.28)
================= ================ ================ ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from Inception (January 28, 1986)
Through June 30, 1996
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------------------
Shares Amount Subscriptions Receivable
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance at inception -- $ -- $ -- $ --
Issuance of shares from inception -- -- -- --
Net loss from inception -- -- -- --
------------------ ------------------ ------------------ ------------------
Balance, August 31, 1994 -- -- -- --
Issuance of shares -- -- -- --
Shares earned but not issued -- -- -- --
Issuance of options -- -- -- --
Paid-in capital from common
stock warrants -- -- -- --
Preferred stock subscriptions -- -- 4,000 (4,000)
Net loss -- -- -- --
------------------ ------------------ ------------------ ------------------
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 -- -- -- --
Issuance of common shares -- -- -- --
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. -- -- -- --
Issuance of common shares -- -- -- --
Purchase of treasury stock -- -- -- --
------------------ ------------------ ------------------ ------------------
Balance, June 30, 1996 -- $ -- $ -- $ --
================== ================== ================== ==================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from Inception (January 28, 1986)
Through June 30, 1996
- Continued -
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------------------------------------------
Paid-in
Additional Earned but Capital from
Shares Amount Paid-in Capital not Issued Warrants
------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at inception -- $ -- $ -- $ -- $ --
Issuance of shares from inception 6,562,467 1,158,883 -- -- --
Net loss from inception -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, August 31, 1994 6,562,467 1,158,883 -- -- --
Issuance of shares 359,602 10,203 -- -- --
Shares earned but not issued -- -- -- 110,833 --
Issuance of options -- 8,700 -- -- --
Paid-in capital from common
stock warrants -- -- -- -- 100,000
Preferred stock subscriptions -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, August 31, 1995 6,922,069 1,177,786 -- 110,833 100,000
Preferred stock subscriptions -- -- -- -- --
Issuance of preferred shares -- -- -- -- --
Issuance of common shares on
$10,395,400 private placement 41,581,600 9,139,303 -- -- --
Shares earned but not issued -- -- -- 266,743 --
Issuance of common shares 1,054,548 458,977 -- (324,546) (100,000)
Net loss -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, June 25, 1996 49,558,217 10,776,066 -- 53,030 --
Conversion to Palatin Technologies, Inc. (38,555,207) (10,666,035) 10,670,035 -- --
------------ ------------ --------------- ------------ -------------
Adjusted balance, June 25, 1996 11,003,010 110,031 10,670,035 53,030 --
Shares outstanding of Palatin
Technologies, Inc. 432,750 4,327 (4,327) -- --
Issuance of common shares 103,017 1,030 138,686 -- --
Purchase of treasury stock -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, June 30, 1996 11,538,777 $ 115,388 $ 10,804,394 $ 53,030 $ --
============ ============ =============== ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Treasury Development
Stock Stage Total
------------ --------------- --------------
<S> <C> <C> <C>
Balance at inception $ -- $ -- $ --
Issuance of shares from inception -- -- 1,158,883
Net loss from inception -- (2,596,195) (2,596,195)
------------ --------------- --------------
Balance, August 31, 1994 -- (2,596,195) (1,437,312)
Issuance of shares -- -- 10,203
Shares earned but not issued -- -- 110,833
Issuance of options -- -- 8,700
Paid-in capital from common
stock warrants -- -- 100,000
Preferred stock subscriptions -- -- --
Net loss -- (1,638,864) (1,638,864)
------------ --------------- --------------
Balance, August 31, 1995 -- (4,235,059) (2,846,440)
Preferred stock subscriptions -- -- --
Issuance of preferred shares -- -- 4,000
Issuance of common shares on
$10,395,400 private placement -- -- 9,139,303
Shares earned but not issued -- -- 266,743
Issuance of common shares -- -- 34,431
Net loss -- (3,897,879) (3,897,879)
------------ --------------- --------------
Balance, June 25, 1996 -- (8,132,938) 2,700,158
Conversion to Palatin Technologies, Inc. -- -- --
------------ --------------- --------------
Adjusted balance, June 25, 1996 -- (8,132,938) 2,700,158
Shares outstanding of Palatin
Technologies, Inc. -- -- --
Issuance of common shares -- -- 139,716
Purchase of treasury stock (1,667) -- (1,667)
------------ --------------- --------------
Balance, June 30, 1996 $ (1,667) $ (8,132,938) $ 2,838,207
============ =============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended June 30, 1996
and the Years Ended August 31, 1995 and 1994
Inception Fiscal Year Ended
(January 28, 1986) Ten Months August 31,
through Ended ----------------------------
June 30, 1996 June 30, 1996 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,132,938) $ (3,897,879) $ (1,638,864) $ (1,544,955)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 308,574 68,005 85,947 80,523
Interest expense on related-party debt 53,387 6,667 8,000 8,000
Accrued interest on long-term financing 796,038 293,380 320,709 169,438
Accrued interest on short-term financing 107,936 100,000 7,936 --
Intangibles and equipment write down 278,318 278,318 -- --
Equity and notes payable issued for expenses 296,047 174,147 10,350 15,450
Settlement with consultant (28,731) -- -- --
Changes in certain operating assets and liabilities:
Accounts receivable (4,574) 1,052 2,557 (1,198)
Prepaid expenses and other (66,430) (46,678) (5,206) 13,257
Intangibles (427,337) (44,314) (66,152) (73,383)
Accounts payable 213,524 (91,433) 164,744 67,269
Accrued compensation owed to employees 94,632 (93,206) 10,551 (4,444)
Accrued expenses 683,928 542,450 39,961 9,825
------------- ------------- ------------ ------------
Net cash used for operating activities (5,827,626) (2,709,491) (1,059,467) (1,260,218)
------------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (335,229) (26,577) (4,294) (133,714)
------------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party 302,000 -- 302,000 --
Payments on notes payable, related party (309,936) (23,286) (286,650) --
Proceeds from senior bridge notes payable 1,850,000 850,000 1,000,000 --
Payments on senior bridge notes (850,000) (850,000) -- --
Proceeds from notes payable and
long-term financing 1,951,327 -- 292,063 500,000
Payments on notes payable and
long-term financing (190,061) (65,000) (92,384) (15,477)
Proceeds from paid-in capital from common
stock warrants 100,000 -- 100,000 --
Proceeds from common stock, stock option
issuances and preferred stock, net 10,102,492 9,143,303 345 191,812
Purchase of treasury stock (1,667) (1,667) -- --
------------- ------------- ------------ ------------
Net cash provided by financing activities 12,954,155 9,053,350 1,315,374 676,335
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH 6,791,300 6,317,282 251,613 (717,597)
CASH, beginning of period -- 474,018 222,405 940,002
------------- ------------- ------------ ------------
CASH, end of period $ 6,791,300 $ 6,791,300 $ 474,018 $ 222,405
============= ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended June 30, 1996
and the Years Ended August 31, 1995 and 1994
- Continued -
Inception Fiscal Year Ended
(January 28, 1986) Ten Months August 31,
through Ended ---------------------------
June 30, 1996 June 30, 1996 1995 1994
---------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 77,523 $ 49,494 $ 28,029 $ -
================ ================ ============= ============
NON-CASH TRANSACTION:
Settlement of accounts payable with
equipment $ 900 $ - $ - $ 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
(included above) $285,332 $174,147 $ 10,350 $ 15,450
================ ================ ============= ============
Common stock issued for accrued salaries
and bonuses $ 16,548 $ - $ 9,858 $ 3,390
================ ================ ============= ============
Accrued interest payable in common stock $375,926 $266,743 $109,183 $ -
================ ================ ============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-9
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended
June 30, 1996 and the Years Ended August 31, 1995 and 1994
(1) ORGANIZATION ACTIVITIES:
Corporate Structure -- Palatin Technologies, Inc. ("Palatin"),
formerly Interfilm, Inc., was incorporated under the laws of the State of
Delaware on November 21, 1986. Since November 4, 1993, when Palatin acquired
Interfilm Technologies, Inc., a New York corporation, it had been primarily
engaged in the business of exploiting the 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.
Palatin's initial public offering was consummated on October 28, 1993. On May
10, 1995, the Board of Directors of Palatin decided to substantially curtail
the operations of Palatin and its subsidiaries.
Merger -- On June 25, 1996, a newly formed, wholly-owned subsidiary of
Palatin, 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 Palatin's common stock (the "Merger"). As a
result of the Merger, RhoMed became a wholly-owned subsidiary of Palatin, with
the holders of RhoMed preferred stock and RhoMed common stock (including the
holders of "RhoMed Derivative Securities" as hereafter defined) receiving an
aggregate of approximately 96% interest in the equity securities of Palatin on
a fully-diluted basis. Additionally, all warrants and options to purchase
common stock of RhoMed outstanding immediately prior to the Merger (the
"RhoMed Derivative Securities"), including without limitation, any rights
underlying RhoMed's qualified or nonqualified stock option plans, were
automatically converted into rights upon exercise to receive Palatin'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. Certain assets and liabilities of Palatin
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 Palatin stockholders of record as of
June 21, 1996, immediately prior to the Merger. Pro forma combined operating
results of the merged companies are not presented since the reverse merger is
not a business combination for accounting purposes. The historical financial
statements prior to June 25, 1996, are those of RhoMed, except that the net
loss per common share has been stated on an as if converted basis. In
addition, the Merger costs of $450,000 have been charged to operations for the
ten months ended June 30, 1996, and accrued expenses include $231,635 of this
amount as of June 30, 1996.
On July 19, 1996, an amendment to the Certificate of Incorporation of
Palatin (the "Amendment") was filed, which (a) effected the change of name
from Interfilm, Inc. to Palatin Technologies, Inc., (b) increased the total
number of authorized shares of Palatin's common stock, par value $.01 per
share (the "Common Stock"), from 10,000,000 to 25,000,000, and (c) effected a
1-for-10 reverse split of Common Stock. Upon the filing of the Amendment, each
share of RhoMed preferred stock was
F-10
<PAGE>
converted into .46695404349 shares of Common Stock, and each share of RhoMed
common stock was converted into .184332593 shares of Common Stock. The
consolidated financial statements have been adjusted to reflect the Amendment
as if it had been filed on June 30, 1996.
Nature of Business -- Palatin, through its wholly-owned subsidiary,
RhoMed, is a development stage enterprise dedicated to developing and
commercializing products and technologies for diagnostic imaging, cancer
therapy and ethical drug development based upon its proprietary monoclonal
antibody, radiolabeling and enabling peptide platform technologies. Palatin
had, prior to June 25, 1996, conducted no on-going business activities since
May 10, 1995. The business of RhoMed, conducted by Palatin since June 25,
1996, when the Merger became effective, represents the on-going business of
Palatin.
Since its inception, RhoMed has devoted substantially all of its
efforts and resources to the research and development of its technology.
RhoMed has experienced operating losses in each year since its inception and,
as of June 30, 1996, Palatin, including its wholly-owned subsidiary RhoMed,
had a deficit accumulated during the development stage of $8,132,938. Palatin
expects to incur additional operating losses over the next several years and
expects cumulative losses to increase as Palatin's research and development
and clinical testing efforts continue and expand. The ultimate completion of
Palatin's development projects is contingent upon a number of factors,
including the successful completion of technology and product development,
obtaining required regulatory approvals and additional financing and,
ultimately, achieving profitable operations.
Change in 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -- The consolidated financial statements
include the accounts of Palatin and its wholly owned subsidiary, RhoMed. The
remaining subsidiaries of Palatin - Interfilm Technologies, Inc., Ediflex
Digital Systems, Inc. and Production Equipment Leasing Corp. LP - are
inactive. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Accounting Basis -- The financial books and records of Palatin are
maintained on the accrual basis of accounting. As a development stage
enterprise, cumulative results of operations from inception are presented.
Cash -- For purposes of presenting cash flows, Palatin considers cash
as amounts on hand, on deposit in financial institutions and highly liquid
investments purchased with an original maturity of three months or less.
Equipment -- Equipment and office furniture are stated at cost, net of
accumulated depreciation. Depreciation is recognized using an accelerated
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 expensed as incurred while expenditures that
extend the useful life of an asset are capitalized.
Patents -- Patents represent the costs capitalized to successfully
obtain a patent registration. Internal costs to obtain and develop the patents
have been expensed. Patents are included as intangible assets in the
accompanying consolidated financial statements and are stated at cost, net of
accumulated amortization. Amortization is recognized using the straight-line
method over the estimated patent lives
F-11
<PAGE>
ranging up to 17 years. Unsuccessful patent costs and patents with no
demonstrated future value are expensed when so determined by management.
Revenue Recognition -- The Company recognizes revenue as follows: grants
and contracts - at the time such related expenses are incurred in compliance
with contractual terms; license fees and royalties - ratably over the term of
the license or royalty agreement; and sales - upon shipment of the product.
Research and Development Costs -- The costs of research and development
activities are expensed as incurred.
Stock Options and Warrants -- Warrants and most common stock options 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 in the fiscal years
ended August 31, 1995 and 1994 under a nonqualified stock option plan at an
exercise price below market value. The difference between the exercise price
and the market value of these securities has been included in general and
administrative expense in the fiscal years ended August 31, 1995 and 1994, and
as an addition to equity.
Income Taxes -- Palatin and its subsidiaries intend to file consolidated
federal and combined state income tax returns. Palatin 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.
Palatin 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, Palatin has recorded valuation allowances
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 Palatin's ability to utilize its tax loss carryforwards.
Net Loss per Common Share -- Net loss per common share is calculated
based upon the weighted average number of shares of Common Stock, on an as if
converted basis, outstanding during each period. All options and warrants
were excluded in the calculation of weighted average shares outstanding since
their inclusion would have had an anti-dilutive effect.
Financial Statement Presentation -- Certain amounts in the accompanying
consolidated financial statements have been reclassified and certain notes have
been modified from previous financial statements to clarify disclosure.
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.
New Pronouncements -- The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation." SFAS 123 recommends changes in accounting for
employee stock-based compensation plans, and requires certain disclosures with
respect to these plans. The disclosures of SFAS 123 will be adopted by
F-12
<PAGE>
Palatin effective July 1, 1996. Management has not determined the effect of
this pronouncement on the Company's financial statements.
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 Palatin.
The following methods and assumptions were used by Palatin 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
Palatin's fixed rate long-term debt is estimated based on the current rates
offered to Palatin for debt of the same remaining maturities. Based on the
above, the amount reported on the balance sheet approximates the fair value.
(3) RELATED PARTY TRANSACTIONS:
Castle Transaction -- During the fiscal year ended August 31, 1995,
RhoMed encountered serious liquidity and working capital deficiencies. As a
result, effective April 1995, RhoMed 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 RhoMed agreed to sell to Castle or its designees, for
$4,000 consideration paid, 4,000,000 shares of RhoMed Series A Preferred Stock
(equivalent to 1,867,809 shares of Common Stock). At the time the letter of
intent was entered into with Castle, RhoMed was insolvent and its equity had
nominal value; accordingly, the sale of RhoMed Series A Preferred Stock to
Castle or its designees was recorded at the nominal $4,000 consideration paid.
The issuance of RhoMed Series A Preferred Stock to designees of Castle was
consummated on October 25, 1995. This resulted in Dr. Rosenwald and his
designees obtaining majority ownership and control of RhoMed. Pursuant to the
letter of intent, Castle provided a $300,000 line of credit. RhoMed borrowed
up to the maximum under the line of credit and, at August 31, 1995, had
$23,286 outstanding thereunder, which was paid in September, 1995. The
average interest rate for the line of credit was 10.90%, and the average
balance outstanding was $191,549.
Dr. Rosenwald is the Chairman of Paramount Capital, Inc. ("Paramount"),
which served as placement agent for RhoMed as set forth below. Commencing
July 24, 1995, two of the then three members of the Board of Directors of
RhoMed were employees of entities controlled by Dr. Rosenwald (the "Interested
Directors"). These Interested Directors may have benefited, directly or
indirectly, from the payment of commissions and expenses, and the issuance of
warrants, to Paramount and affiliates. On July 28, 1995, RhoMed's Board of
Directors approved an offering of Senior Bridge Notes and Class A Warrants
(the "Class A Offering") (see Note 7), for which Paramount served as placement
agent. Because the Interested Directors could be deemed to have a direct or
indirect interest in a transaction involving a potential conflict of interest
with RhoMed (a "Conflict Of Interest Transaction") contemplated under certain
terms of the Class A Offering, the transaction was ratified by disinterested
F-13
<PAGE>
stockholders on August 15, 1995. In the Class A Offering, investment funds
managed by a company of which Dr. Rosenwald is president purchased Senior
Bridge Notes with a face value of $100,000, and Class A Warrants to purchase
300,000 shares of RhoMed common stock at $.01 per share (equivalent to 55,299
shares of Common Stock at $.05 per share).
On November 27, 1995, RhoMed's Board of Directors approved an offering of
Senior Bridge Notes and Class B Warrants (the "Class B Offering") (see Note
7), for which Paramount served as placement agent. Because certain terms of
the Class B Offering could also be deemed to be a Conflict of Interest
Transaction, the Interested Directors recused themselves from voting on the
matter, and the Class B Offering was approved by the two disinterested
directors. In the Class B Offering, investment funds managed by a company of
which Dr. Rosenwald is president purchased Senior Bridge Notes with a face
value of $100,000, and Class B Warrants to purchase 100,000 shares of RhoMed
common stock at an adjusted exercise price of $.125 per share (equivalent to
18,433 shares of Common Stock at $.68 per share).
On March 4, 1996, the Board of Directors approved an offering of common
stock (the "Common Stock Offering") (see Note 10), 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 RhoMed on terms more favorable than the Common Stock
Offering. The price per share of RhoMed common stock in the Common Stock
Offering of $.25 was determined through negotiations between RhoMed and
Paramount. On May 14, 1996, the Board of Directors approved an increase in
the Common Stock Offering, on which the Interested Directors recused
themselves, and which was approved by the two disinterested directors. In the
Common Stock Offering, investment funds managed by a company of which Dr.
Rosenwald is president purchased 7,002,000 shares of RhoMed common stock at
$.25 per share (equivalent to 1,290,696 shares of Common Stock at $1.36 per
share).
Accrued Compensation -- At June 30, 1996 and August 31, 1995, RhoMed owed
employees approximately $78,000 and $171,000, respectively, for accrued and
unpaid compensation and related benefits. These amounts do not accrue
interest and are included in accrued compensation in the accompanying
consolidated financial statements. All such amounts are expected to be paid
in fiscal year 1997.
Other Transactions -- There have been certain transactions between
Palatin and certain related parties which have resulted in the exchange of
assets or services for equity securities (see Note 10).
Management of Palatin 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.
F-14
<PAGE>
(4) EQUIPMENT:
Equipment consists of the following at June 30, 1996 and August 31, 1995:
June 30, August 31,
1996 1995
------------- ------------
Office equipment $ 202,960 $ 183,322
Laboratory equipment 76,929 69,989
Leasehold improvements - 57,668
------------- ------------
Equipment at cost 279,889 310,979
Less: Accumulated depreciation 183,535 176,611
------------- ------------
$ 96,354 $ 134,368
============= ============
(5) INTANGIBLES:
Palatin has obtained 11 United States (U.S.) patents and corresponding
international applications have been issued or are pending in selected
countries on a majority of issued U.S. patents. Palatin has applications
pending for 17 additional U.S. patents, the majority of which have pending
international counterparts in selected countries. Palatin has received
Notices of Allowance, and has paid issue fees, on certain pending U.S. patent
applications.
Based on an evaluation by the new President and Chief Executive Officer
of RhoMed and his new management team (see Note 9) of products in development
and determination of the likelihood of product development and
commercialization, intangible assets relating to patents not being utilized
for products in active development were written-off to expense. Historical
costs in each patent were used to determine the total write-off to expense of
$259,334.
Palatin has assigned its interest in several patents to secure long-term
financing (see Note 6).
(6) LONG-TERM FINANCING:
Palatin has a long-term financing agreement with Aberlyn Holding Co.,
Inc., and its affiliates (collectively "Aberlyn"). Aberlyn has, in a series
of transactions, loaned to Palatin approximately $1,800,000, secured by
certain of Palatin's patents, intellectual property and equipment. Certain
fees and costs related to the borrowings have been deferred as intangible
assets and are being amortized over the remaining terms of the arrangement
using the effective interest method. The agreement requires the accrual of
certain interest as payable before it is earned; therefore, at any time before
the scheduled payoff, the recorded long-term liability will be less than the
total amount payable to settle the obligation.
Palatin is obligated, at June 30, 1996, to make monthly payments to
Aberlyn of $20,000 from June 1, 1996 through May 1, 1997, and payments of
$91,695 from June 1, 1997 through May 1, 1999. Payments through May 1, 1997
will be applied to principal only; interest will be accrued during this period
at an annual effective rate of 15% and paid in Palatin's Common Stock. On
June 24, 1996, RhoMed issued 930,023 shares of RhoMed common stock (equivalent
F-15
<PAGE>
to 171,433 shares of Common Stock) in payment of accrued interest of $324,546
through April 30, 1996, at an immaterial premium of approximately $.10 per
share over the then fair market value of RhoMed common stock. In addition,
certain warrants held by Aberlyn were terminated, and RhoMed agreed that
Common Stock paid as interest through May 1, 1997, would contain certain
registration rights, and would be valued at the rate of 75% of the per share
offering price for RhoMed's common stock in any offering commencing after the
consummation of the Common Stock Offering, in which the total offering
proceeds exceeds $5,000,000, or in the event no such offering is completed
before April 30, 1997, at the rate of 75% of the average per share closing
price for the twenty trading days immediately preceding April 30, 1997. The
25% discount to market value of Common Stock will represent additional
interest payable. However, management does not anticipate the additional
interest will have a material impact on the financial position or operations
of the Company.
Scheduled principal payments on the long-term financing through fiscal
year 1999 at June 30, 1996, are as follows:
Years ending June 30,
---------------------
1997 $ 272,783
1998 697,317
1999 756,963
-------------
Total principal payments 1,727,063
Accrued interest 312,251
-------------
$ 2,039,314
=============
(7) SENIOR BRIDGE NOTES:
The warrants set forth below were initially exercisable for RhoMed common
stock and are so described. At Note 10 all outstanding warrants, including
all RhoMed warrants, are shown as converted to Common Stock.
Class A Offering -- On July 28, 1995, the Board of Directors of RhoMed
authorized an offering of up to 40 units at $25,000 per unit, with each unit
consisting of a $25,000 face amount Senior Bridge Note and a Class A Warrant
to purchase 75,000 shares of RhoMed common stock at an exercise price of $.01
per share (the "Class A Offering") (see Note 3). The nominal exercise price
for the warrants reflected the seriously troubled financial condition of
RhoMed on the date of the transaction, and accordingly no value was assigned
to the Class A Warrants upon issuance. The Senior Bridge Notes sold in the
Class A Offering bear interest at 1% per month, and are payable, with accrued
interest, one year from the date of issuance. Class A Warrants are
exercisable at any time, terminate ten years from the date of issuance, have
certain registration rights, and are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of, the Common Stock.
All Class A Offering units were purchased, with net proceeds to RhoMed of
approximately $907,000 after payment of the placement agent's commissions and
expenses ($90,000) and offering expenses (approximately $3,000). Paramount
(see Note 3), served as placement agent for the offering and received (i) a
cash commission equal to 6% of the gross proceeds from the sale of the units,
(ii) a non-accountable expense allowance equal to 3% of gross proceeds and
(iii) placement agent's warrants ("Class A Placement Agent Warrants"), on the
F-16
<PAGE>
same terms as the Class A Warrants, equal to 15% of the Common Stock
underlying the Class A Warrants issued in the Class A Offering.
Class B Offering -- On November 27, 1995, the Board of Directors of
RhoMed authorized an offering of up to 7.5 units at $100,000 per unit, with
each unit consisting of a $100,000 face amount Senior Bridge Note and a Class
B Warrant to purchase 100,000 shares of RhoMed common stock at an exercise
price of the lesser of (a) $.25 per share and (b) 50% of the price per share
of common stock in a subsequent equity offering of RhoMed common stock in
which gross proceeds exceed $2,500,000 (the "Class B Offering"). Due to the
seriously troubled financial condition of RhoMed on the date of the
transaction, no value was assigned to the Class B Warrants upon issuance. On
January 25, 1996, the Board of Directors increased the Class B Offering from
7.5 units to 8.5 units. The Senior Bridge Notes sold in the Class B Offering
bore interest at 1% per month, and were payable, with accrued interest, at the
earlier of (a) 5 days following the closing of an equity offering of RhoMed's
securities in which gross proceeds exceeded $2,500,000 and (b) 12 months from
the date of issuance. The Class B Warrants are exercisable at any time,
terminate 5 years from the date of issuance, have certain registration rights,
contain a call provision and are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of, the Common Stock.
On February 15, 1996, the purchase of units was completed. Net proceeds
to RhoMed were $739,500 after payment of the placement agent's commissions and
expenses ($110,500). Paramount (see Note 3), served as placement agent for
the Class B Offering and received (i) a cash commission equal to 9% of the
gross proceeds from the sale of the units, (ii) a non-accountable expense
allowance equal to 4% of gross proceeds and (iii) placement agent's warrants
("Class B Placement Agent Warrants"), at an exercise price of $.30 per share
but otherwise on the same terms as the Class B Warrants, equal to 5% of the
Common Stock underlying the Class B Warrants issued in the Class B Offering.
On June 28, 1996, the Class B Offering Senior Bridge Notes with accrued
interest were paid in full.
(8) NOTES PAYABLE TO STOCKHOLDERS:
At June 30, 1996 and August 31, 1995, notes payable to stockholders
consisted of four ten year notes totaling $80,000 plus interest accrued
thereon. These notes were issued as part of a combined stock and debt
offering during the fiscal year ended August 31, 1992 (see Note 10). Each
note is a promissory note from RhoMed to the purchaser in the face amount of
$20,000, bearing interest at 10% per year, accruing annually. Principal and
interest on the notes becomes due and payable on the earlier of (i) July 31,
2002, or (ii) 30 days after RhoMed, or its successor, receives net proceeds
from a public offering of its common stock of at least $5,000,000 or (iii) 30
days after the end of a fiscal year in which, as reflected on the audited
financial statements of RhoMed or its successor, RhoMed or its successor has
net assets of at least $5,000,000 or net income of at least $5,000,000. The
notes had a provision providing for conversion into common stock on the basis
of one share of stock for each $1.50 of principal and accrued interest. As a
result of the Merger, there is no longer a right to convert.
(9) COMMITMENTS AND CONTINGENCIES:
Leases -- Palatin leases certain of its facilities and equipment under
noncancellable operating leases. The lease on the facility in Albuquerque,
New Mexico expires on December 31, 1996. Minimum future annual lease payments
F-17
<PAGE>
at June 30, 1996, are approximately $55,000 in fiscal year 1997, and
approximately $12,000 to $21,000 per year thereafter until fiscal year 2001.
Certain leases have been personally guaranteed by one or more former officers
of RhoMed.
Product Liability -- The testing, marketing and sale of human health care
products entails an inherent risk of allegations of product liability.
Palatin does not currently have product liability insurance coverage.
Restructuring Charge -- In conjunction with Palatin's decision to
consolidate and relocate its research and development facilities and executive
offices in the New Jersey area, Palatin established a restructuring charge of
$284,000. The restructuring charge represents severance costs of $115,000 and
facility closing expenses of $169,000. It is anticipated that eight research
and development and administration and management employees will be severed;
through June 30, 1996, five employees had been severed. Facility closing
expenses consist primarily of costs related to lease termination and fixed
asset disposals. Included in accrued expenses at June 30, 1996, is $257,152 of
remaining restructuring charge.
Commitments -- On November 27, 1995, the Board of Directors of RhoMed
ratified an employment agreement (the "Employment Agreement") with Edward J.
Quilty ("Mr. Quilty") to serve as President and Chief Executive Officer of
RhoMed. Pursuant to the Agreement, RhoMed agreed to grant Mr. Quilty an
option to acquire such number of shares of common stock as equal a 10% fully
diluted equity interest in RhoMed at an exercise price of $.01 per share,
which option vests in 36 equal increments on each of the first 36 monthly
anniversaries of the commencement of Mr. Quilty's employment with RhoMed, and
may be accelerated or terminated in part on the happening of certain events
(the "Initial Option"). The Agreement further provides for anti-dilutive
options, pursuant to which Mr. Quilty will be issued options to acquire the
number of shares that, when aggregated with the shares issuable pursuant to
the Initial Option, equal not less than 3.75% of the shares of common stock of
RhoMed. The Agreement is for an initial period of one year, with automatic
one year extensions, and provides that, on certain termination events, the
portion of the options that would otherwise have terminated without vesting,
vest and are exercisable upon termination, and also provides for specified
termination pay.
Palatin is obligated under two consulting agreements to make payments of
$157,000 in fiscal year 1997 and $76,500 in fiscal year 1998.
Legal Proceedings -- Palatin is subject to various claims and litigation
in the ordinary course of its business, including patent proceedings.
Management believes that the outcome of such legal proceedings will not have a
material adverse effect on Palatin's financial position or future results of
operation.
(10) STOCKHOLDERS' EQUITY (DEFICIT):
Palatin Authorized Shares -- The authorized capital stock of Palatin at
the time of the Merger consisted of 10,000,000 Common Stock shares and
2,000,000 shares of preferred stock, $.01 par value per share. On July 19,
1996, Palatin's Certificate of Incorporation was amended to, among other
things, increase the number of shares of authorized Common Stock to 25,000,000
and to effect a 1-for-10 reverse split of the Common Stock. The consolidated
financial statements have been adjusted to reflect the amendment to the
Certificate of Incorporation.
RhoMed Authorized Shares -- By Articles of Amendment approved by RhoMed's
stockholders on April 4, 1996 and filed April 10, 1996, RhoMed amended its
Articles of Incorporation to increase its
F-18
<PAGE>
authorized common stock from 40,000,000 to 60,000,000 shares with no par
value. By Articles of Amendment approved by RhoMed's stockholders on
May 24, 1996 and filed June 7, 1996, RhoMed amended its Articles of
Incorporation to increase its authorized common stock from 60,000,000 to
90,000,000 shares with no par value. RhoMed has 10,000,000 shares of
authorized preferred stock, no par value.
Stock Transactions -- On March 4, 1996, the Board of Directors of
RhoMed authorized an offering of up to 40 units at $100,000 per unit, with
each unit consisting of 400,000 shares of RhoMed common stock at a purchase
price of $.25 per share (the "Common Stock Offering") (equivalent to 73,733
shares per unit at a purchase price of $1.36 per Palatin Common Stock share).
On May 14, 1996, the Board of Directors authorized an increase in the Common
Stock Offering of up to 100 units. Paramount served as placement agent for the
Common Stock Offering and received (i) a cash commission equal to 9% of the
gross proceeds from the sale of the units, (ii) a non-accountable expense
allowance equal to 4% of gross proceeds and (iii) placement agent's warrants
("Stock Offering Placement Agent Warrant"), equal to 10% of the common stock
issued in the Common Stock Offering, at an exercise price of $.30 per RhoMed
common stock share (equivalent to $1.63 per Palatin Common Stock share), which
are freely exercisable and terminate ten years from the date of issuance, have
certain registration rights, and are subject to adjustment in certain
circumstances. On June 24, 1996, RhoMed terminated the Common Stock Offering.
RhoMed sold 96.454 units, realizing net proceeds of approximately $8,391,000,
and issued 38,581,600 shares of RhoMed common stock (equivalent to 7,111,846
shares of Common Stock).
On June 24, 1996, and pursuant to the Merger, certain stockholders of
Interfilm prior to the Merger and third parties purchased 3,000,000 shares of
RhoMed common stock at a purchase price of $.25 per share, with net proceeds
to RhoMed of approximately $748,000 (equivalent to 552,997 shares of Common
Stock at a purchase price of $1.36). Also, and pursuant to the Merger,
warrants to purchase 1,500,000 shares of RhoMed common stock at an exercise
price of $.40 were issued to certain stockholders of Interfilm prior to the
Merger and third parties ("Merger Warrants") (equivalent to 276,499 shares of
Common Stock at an exercise price of $2.17). The Merger 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, RhoMed issued 124,525 shares of
RhoMed common stock (equivalent to 22,954 shares of Common Stock) in exchange
for services, and Palatin issued 103,017 shares of Common Stock in exchange
for services. In addition, RhoMed has issued stock for accrued interest, and
Palatin is obligated to issue additional stock in payment of accrued interest
(see Note 6).
RhoMed commenced a private offering of preferred stock in fiscal year
1994, and a private offering of units consisting of RhoMed common stock and
common stock warrants in fiscal year 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, RhoMed issued a private offering memorandum for the
sale of securities, consisting of units of 10,000 shares of RhoMed common
stock for $10,000 per unit ($1.00 per share). RhoMed sold 58.4 units,
realizing net proceeds of approximately $577,000.
In September 1992, RhoMed issued a private offering memorandum for the
sale of securities, consisting of units of 33,333 shares of RhoMed common
stock for $25,000 per unit ($.75 per share). RhoMed sold 8 units, realizing
net proceeds of approximately $191,000.
F-19
<PAGE>
In December 1991, RhoMed issued a private offering memorandum for the
sale of units consisting of 26,289 shares of RhoMed common stock and a $20,000
note (see Note 8). Four units were sold for $25,000 per unit.
RhoMed common stock issuance prices represented market value of the
RhoMed common stock on the date of issuance.
Outstanding Stock Purchase Warrants -- At June 30, 1996, Palatin had the
following warrants outstanding, all of which are currently exercisable except
11,111 warrants included in "Other Warrants." Each warrant is restated as
Common Stock:
<TABLE>
<CAPTION>
Palatin Common Exercise Price Latest
Warrant Stock Shares per Share Termination Date
- - - -------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
Class A Offering 552,997 $ .05 9/13/05
Class A Placement Agent 82,949 .05 9/13/05
Class B Offering 156,683 .68 2/15/01
Class B Placement Agent 7,834 1.63 2/15/06
Stock Offering Placement Agent 711,184 1.63 6/25/06
Merger Warrants 276,499 2.17 6/24/00
Other Warrants 31,967 $2.71 - $70.50 10/20/99
---------- -------------- --------
Total 1,820,113 $ .05 - $70.50 6/25/06
========== ============== ========
</TABLE>
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.
Palatin Stock Option Plans -- Palatin had, prior to the Merger, adopted
its 1993 Equity Incentive Plan, pursuant to which options for 26,750 Common
Stock shares, calculated on a post-reverse stock split basis, were granted and
outstanding at June 30, 1996. Palatin does not intend to issue any new
options under the 1993 Equity Incentive Plan.
RhoMed Stock Option Plans -- RhoMed has 4 stock option plans, with
options granted thereunder constituting RhoMed Derivative Securities which,
pursuant to the Merger, were automatically converted into rights upon exercise
to receive Common Stock in the same manner in which the shares of RhoMed
common stock were converted.
Two RhoMed stock option plans are qualified "incentive stock option"
plans under the Internal Revenue Code, for which 8,250,000 shares of RhoMed
common stock were reserved. The other plans are nonqualified stock option
plans, for which 3,250,000 shares of RhoMed common stock were reserved.
Palatin does not intend to issue any new options under the RhoMed stock option
plans.
The table below presents options in RhoMed common stock, with
conversion to Common Stock shown as "Restated to Palatin Options." The
"Outstanding" and "Exercisable" as of June 30, 1996, are stated as Common
Stock. Information related to stock option activity under these plans for the
period from inception to June 30, 1996 is as follows:
F-20
<PAGE>
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Stock Options
--------------------------------- -------------------------------
Number Number
of Shares Price per Share of Shares Price per Share
------------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Balance at inception - $ - - $ -
Granted 628,750 .50 - 1.00 1,053,179 .425 - 1.00
Terminated 37,000 1.00 2,500 1.00
------------- ------------- ---------- ------------
Outstanding, August 31, 1994 591,750 .50 - 1.00 1,050,679 .425 - 1.00
Granted 99,000 .35 196,400 .30 - 1.00
Terminated 36,000 1.00 - -
------------- ------------- ---------- ------------
Outstanding, August 31, 1995 654,750 .35 - 1.00 1,247,079 .30 - 1.00
Granted 7,601,204 .01 - .25 1,718,123 .01 - .25
Terminated 193,750 .25 - 1.00 57,000 1.00
------------- ------------- ---------- ------------
Outstanding, June 25, 1996 8,062,204 .01 - 1.00 2,908,202 .01 - 1.00
Conversion to Palatin Options (6,576,078) (2,372,126)
------------- ----------
Restated to Palatin Options 1,486,126 .05 - 5.42 536,076 .05 - 5.42
Palatin Options Outstanding, June 25, 1996 26,750 76.50 - 90.00 - -
------------- ------------- ----------- ------------
Outstanding, June 30, 1996 1,512,876 $.05 - $90.00 536,076 $.05 - $5.42
============= ============= ========== ============
Exercisable, June 30, 1996 214,472 $.05 - $90.00 225,453 $.05 - $5.42
============= ============= ========== ============
</TABLE>
No options have been exercised since inception.
(11) GRANTS, CONTRACTS AND ROYALTIES:
Pursuant to contract with the New Mexico Research and Development
Institute to develop products for medical research and diagnostic imaging, for
which all work has now been completed, the State of New Mexico earns (i) a 2%
royalty on gross revenues for products developed under the contract and
manufactured in New Mexico and (ii) a 5% royalty on products manufactured
outside New Mexico, subject to maximum repayment limits over specified time
frames.
RhoMed 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 $2,526,000 of
RhoMed'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.
Most contract costs, including indirect costs, are subject to audit and
adjustment by negotiation with government representatives.
RhoMed also engages in contract development work with private sector
companies, both foreign and domestic. From inception to August 31, 1995,
RhoMed's contract revenues from such private sector companies are
approximately $335,000.
RhoMed has solicited and performed cooperative research and development
agreements with various national laboratories of the Department of Energy,
which did not involve any payment of funds to the Department of Energy or its
contractors by RhoMed and were cancelable by RhoMed upon less than six month's
notice to the relevant contractor.
(12) LICENSING AGREEMENTS:
RhoMed entered into a license agreement, effective November 2, 1992, with
Sterling Winthrop, Inc., a major pharmaceutical company ("Sterling"), under
which RhoMed granted to Sterling (i) a non-exclusive license to certain
patented radiolabeling technology for imaging uses and (ii) an option to
acquire a license on similar terms for therapeutic uses. The license
agreement is renewable annually and provides for certain license fee payments
to RhoMed together with milestone payments on product development and
percentage of sales production royalties. During the fiscal years ended
F-21
<PAGE>
August 31, 1995 and 1994, RhoMed received $50,000 in royalties and option
payments under the license agreement. During the fiscal year ended August 31,
1994, the license agreement was assigned by Sterling to Burroughs Wellcome
Co., a major pharmaceutical company, in conjunction with the purchase of
certain assets of Sterling by Burroughs Wellcome Co. Concurrently with
entering into the license agreement, RhoMed entered into a development
agreement, which expired December 31, 1993, with Sterling, under which RhoMed
performed specified product development services for $125,000, of which
$25,000 is included in grant and contract revenue for the fiscal year ended
August 31, 1994.
RhoMed entered into a license agreement, effective May 1, 1992, with
Rougier Bio-Tech Limited, a foreign biotechnology concern ("Rougier"), under
which RhoMed granted Rougier an exclusive license to certain patented
radiolabeling technology for a defined field-of-use. The agreement, which is
for the life of the patents and is renewable annually, provides for license
fee payments to RhoMed and percentage of sales production royalties with a
minimum annual royalty. Under this agreement, $7,500 of royalties and fees
were paid to RhoMed in the fiscal year ended August 31, 1995.
(13) INCOME TAXES:
Effective September 1, 1993, RhoMed adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Prior
to 1993, RhoMed accounted for income taxes following the provisions of
Accounting Principles Board Opinion No. 11.
RhoMed 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, 1996, based on the weight of evidence
that the deferred tax assets exceed the likely reversal of deferred tax
liabilities and likely taxable income. The difference between the expected
benefit of the federal tax rate of 34% and the actual benefit of zero is due
to this valuation allowance. Significant components of deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
June 30, 1996 August 31, 1995
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Payroll compensation accruals $ 39,887 $ 84,088
Restructuring accrual 55,484 -
Net operating losses 2,793,025 1,596,736
Other 43,710 32,766
----------- ------------
Total gross deferred tax assets 2,932,106 1,713,584
Less: Valuation allowance (2,915,557) (1,603,744)
----------- ------------
Deferred tax assets, net 16,549 109,840
----------- ------------
Deferred tax liabilities:
Basis difference in intellectual and
proprietary property (12,516) (109,291)
Other (4,033) (549)
----------- ------------
Total gross deferred tax liabilities (16,549) (109,840)
----------- ------------
Deferred tax assets (liabilities), net $ - $ -
=========== =============
</TABLE>
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 transaction
(see Note 3), the Common Stock Offering (see Note 10) and the Merger (see Note
1), under Internal Revenue Code Section 382, RhoMed most likely will not be
able to utilize its net operating loss carryforwards after the dates of
ownership change. Thus, Palatin most likely will not be able to realize the
benefit of any or all of RhoMed's net operating loss carryforwards in the
future.
F-22
<PAGE>
Furthermore, due to the Merger, Palatin applied to the Internal
Revenue Service to change its year end to June 30 from December 31. Internal
Revenue Service approval of this change is still pending.
Income tax returns for RhoMed for the years ended August 31, 1995 and
1994 have not been filed; however, management believes that since there is no
tax liability, there will be no material adverse effect on Palatin.
(14) COMPARISON WITH TEN MONTHS ENDED JUNE 30, 1995:
As noted above (see Note 1), Palatin changed its fiscal year end to
June 30. Therefore, the following June 30, 1995, selected financial
information, adjusted to reflect the amendment to the Certificate of
Incorporation of Palatin as if it had been filed on June 30, 1995, and as
if the Merger had been consummated on June 25, 1995, is presented
for comparative purposes only (unaudited):
Ten Months Ended
June 30,
-------------------------------------
1996 1995
------------ -------------
Revenues $ 24,457 $ 94,842
Expenses 2,779,573 1,076,473
Other income (expenses) (1,142,763) (305,615)
------------ ------------
Net loss $ (3,897,879) $ (1,287,246)
============ ============
Weighted average number of
common shares outstanding 2,144,131 1,230,550
============ ============
Net loss per common share $ (1.82) $ (1.05)
============ ============
F-23
[letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation in
this Form 10-KSB/A Amendment No. 1 of our report dated July 31, 1996. It
should be noted that we have not audited any financial statements of PALATIN
TECHNOLOGIES, INC. AND SUBSIDIARIES subsequent to June 30, 1996 or performed
any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Albuquerque, New Mexico
July 15, 1997
