The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements filed as part of this Annual Report.
38
Forward-Looking Statements
The following discussion and analysis contains forward-looking statements within
the meaning of the federal securities laws. You are urged to carefully review
our description and examples of forward-looking statements included earlier in
this Annual Report immediately prior to Part I, under the heading
"Forward-Looking Statements." Forward-looking statements are subject to risk
that could cause actual results to differ materially from those expressed in the
forward-looking statements. You are urged to carefully review the disclosures we
make concerning risks and other factors that may affect our business and
operating results, including those made in Part I, Item 1A of this Annual
Report, and any of those made in our other reports filed with the SEC. You are
cautioned not to place undue reliance on the forward-looking statements included
herein, which speak only as of the date of this document. We do not intend, and
undertake no obligation, to publish revised forward-looking statements to
reflect events or circumstances after the date of this document or to reflect
the occurrence of unanticipated events.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the consolidated
financial statements included in this Annual Report. We believe that our
accounting policies and estimates relating to revenue recognition, accrued
expenses and stock-based compensation are the most critical.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers
("ASC Topic 606"), which, along with amendments from 2015 and 2016 requires an
entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to customers. ASC Topic 606 replaced
most existing revenue recognition guidance in U.S. GAAP when it became
effective.
On July 1, 2018, we adopted ASC Topic 606 using the modified retrospective
approach, a practical expedient permitted under ASC Topic 606, and applied this
approach only to contracts that were not completed as of July 1, 2018. We
calculated a one-time cumulative transition adjustment of $500,000, which was
recorded on July 1, 2018 to the opening balance of accumulated deficit related
to our license agreement with Kwangdong (the "Kwangdong License Agreement")
because we determined a significant revenue reversal would not occur in a future
period. The one-time adjustment consisted of the recognition of $500,000 of
deferred revenue.
Revenue Recognition for Periods Prior to July 1, 2018
We have generated revenue solely through license and collaboration agreements.
Prior to July 1, 2018, we recognized revenue in accordance with FASB Accounting
Standards Codification ("ASC") Topic 605-25, Revenue Recognition for
Arrangements with Multiple Elements, which addressed the determination of
whether an arrangement involving multiple deliverables contained more than one
unit of accounting. A delivered item within an arrangement was considered a
separate unit of accounting only if both of the following criteria were met:
?
the delivered item had value to the customer on a stand-alone basis; and
?
if the arrangement included a general right of return relative to the delivered
item, delivery or performance of the undelivered item was considered probable
and substantially in control of the vendor.
Under FASB ASC Topic 605-25, if both of the criteria above were not met, then
separate accounting for the individual deliverables was not appropriate.
We determined that it was appropriate to recognize such revenue specifically
related to the up-front payment the Company received using the input-based
proportional method during the period of Palatin's development obligations as
defined in the license agreement with AMAG (the "AMAG License Agreement"). Refer
to Note 4 of the accompanying consolidated financial statements for additional
information.
Under the license agreement with Fosun for exclusive rights to commercialize
Vyleesi in the China (the "Fosun License Agreement"), as discussed in Note 5 of
the accompanying consolidated financial statements, we received consideration in
the form of an upfront license fee payment and determined that it was
appropriate to recognize such consideration as revenue in the first quarter of
the fiscal year ended June 30, 2018 ("fiscal 2018"), which was the quarter in
which the license was granted, since the license had stand-alone value and the
upfront payment we received was non-refundable.
Under the Kwangdong License Agreement, as discussed in Note 6 of the
accompanying consolidated financial statements, we received consideration in the
form of an upfront license fee payment in fiscal 2018 and determined that it was
appropriate to record such consideration as deferred revenue because the upfront
payment we received is subject to certain refund provisions.
39
Revenue resulting from the achievement of development milestones was recorded in
accordance with the accounting guidance for the milestone method of revenue
recognition. Amounts received prior to satisfying the revenue recognition
criteria were recorded as deferred revenue on our consolidated balance sheet.
Revenue Recognition for Periods Commencing July 1, 2018
For licenses of intellectual property, we assess, at contract inception, whether
the intellectual property is distinct from other performance obligations
identified in the arrangement. If the licensing of intellectual property is
determined to be distinct, revenue is recognized for nonrefundable, upfront
license fees when the license is transferred to the customer and the customer
can use and benefit from the license. If the licensing of intellectual property
is determined not to be distinct, then the license will be bundled with other
promises in the arrangement into one performance obligation. We need to
determine if the bundled performance obligation is satisfied over time or at a
point in time. If we conclude that the nonrefundable, upfront license fees will
be recognized over time, we will need to assess the appropriate method of
measuring proportional performance.
Regulatory milestone payments are excluded from the transaction price due to the
inability to estimate the probability of reversal. Revenue relating to
achievement of these milestones is recognized in the period in which the
milestone is achieved.
Sales-based royalty and milestone payments resulting from customer contracts
solely or predominately for the license of intellectual property will only be
recognized upon occurrence of the underlying sale or achievement of the sales
milestone in the future and such sales-based royalties and milestone payments
will be recognized in the same period earned.
We recognize revenue for reimbursements of research and development costs under
collaboration agreements as the services are performed. We record these
reimbursements as revenue and not as a reduction of research and development
expenses as we are the principal in the research and development activities
based upon our control of such activities, which is considered part of our
ordinary activities.
Development milestone payments are generally due 30 business days after the
milestone is achieved. Sales milestone payments are generally due 45 business
days after the calendar year in which the sales milestone is achieved. Royalty
payments are generally due on a quarterly basis 20 business days after being
invoiced.
Accrued Expenses
Third parties perform a significant portion of the Company's development
activities. The Company reviews the activities performed under all contracts
each quarter and accrues expenses and the amount of any reimbursement to be
received from its collaborators based upon the estimated amount of work
completed. Estimating the value or stage of completion of certain services
requires judgment based on available information. If the Company does not
identify services performed for it but not billed by the service-provider, or if
it underestimates or overestimates the value of services performed as of a given
date, reported expenses will be understated or overstated.
Stock-Based Compensation
We expense the fair value of stock options and other equity awards granted.
Compensation costs for stock-based awards with time-based vesting are determined
using the quoted market price of our common stock on the date of grant or for
stock options, the value determined utilizing the Black-Scholes option pricing
model, and are recognized on a straight-line basis, while awards containing a
market condition are valued using multifactor Monte Carlo simulations.
Compensation costs for awards containing a performance condition are determined
using the quoted price of our common stock on the date of grant or for stock
options, the value is determined utilizing the Black Scholes option pricing
model, and are recognized based on the probability of achievement of the
performance condition over the service period. The Black-Scholes option pricing
model requires us to make estimates of expected volatility and interest rates,
which we estimate based on prior experience and public sources of information.
The expected term of the option used is based upon the simplified method, which
represents the average of the vesting and contractual term. Compensation expense
is not adjusted for subsequent changes in the estimates used to calculate fair
value or for actual experience. Forfeitures are recognized as they occur. As the
amount and timing of compensation expense to be recorded in future periods may
be affected by the achievement of performance conditions and employee
terminations, stock-based compensation may vary significantly period to period.
See Note 3 to the consolidated financial statements included in this Annual
Report for a description of recent accounting pronouncements that affect us.
40
Results of Operations
Year Ended June 30, 2020 Compared to the Year Ended June 30, 2019:
Revenue - For the fiscal year ended June 30, 2020 ("fiscal 2020"), we recognized
$117,989 in revenue pursuant to our license agreement with AMAG compared to
$60,300,476 in revenue for the fiscal year ended June 30, 2019 ("fiscal 2019").
On January 8, 2017, we entered into the AMAG License Agreement which provided
for $60,000,000 as a one-time initial payment. Pursuant to the terms of and
subject to the conditions in the AMAG License Agreement, AMAG reimbursed us
$25,000,000, less certain expenses directly paid by AMAG for direct
out-of-pocket expenses we incurred following the effective date of the AMAG
License Agreement in connection with development and regulatory activities
necessary to file an NDA for Vyleesi for HSDD in the United States, less certain
other expenses directly paid or to be paid by AMAG. We recognized $117,989 and
$300,476 for fiscal 2020 and fiscal 2019, respectively, as license and contract
revenue which included additional billings for AMAG-related Vyleesi costs.
In addition, pursuant to the terms of and subject to the conditions in the AMAG
License Agreement, we were eligible to receive up to $80,000,000 from AMAG in
specified regulatory milestone payments upon achievement of certain regulatory
milestones. On June 21, 2019, the FDA granted approval of Vyleesi for use in the
United States, which triggered a $60,000,000 milestone payment to Palatin. As a
result, we recognized $60,000,000 in revenue related to regulatory milestones in
fiscal 2019.
Due to the early commercial stage of Vyleesi and the sales and marketing
strategy of AMAG, including no charge for the first Vyleesi prescription, AMAG
has not generated positive net sales through June 30, 2020, which resulted in no
royalties to Palatin during this period. On January 9, 2020, AMAG announced
plans to divest Vyleesi.
On July 27, 2020, Palatin and AMAG announced that they had mutually terminated
the license agreement for Vyleesi effective July 24, 2020. Under the terms of
the termination agreement, the Company regained all North American development
and commercialization rights for Vyleesi. AMAG made a $12.0 million payment to
the Company at closing and will make a $4.3 million payment to the Company on
March 31, 2021. The Company assumed all Vyleesi manufacturing agreements, and
AMAG will transfer information, data, and assets related exclusively to Vyleesi,
including, but not limited to, existing inventory. AMAG is providing certain
transitional services to the Company for a period of time to ensure continued
patient access to Vyleesi during the transition back to the Company. The Company
will reimburse AMAG for the costs of the transition services.
Research and Development - Total research and development expenses, including
general research and development spending, were $13,959,379 for fiscal 2020
compared to $14,857,059 for fiscal 2019. The decrease is a result of lower
compensation cost in fiscal 2020 along with lower spending on our Vyleesi
program offset by an increase in spending on our other melanocortin receptor
programs.
Research and development expenses related to our Vyleesi, PL3994, PL8177, MC1r,
MC4r and other preclinical projects were $10,187,786 and $10,129,640 in fiscal
2020 and fiscal 2019, respectively. The increase in spending for fiscal 2020 as
compared to fiscal 2019 is a result of increased spending primarily on our
melanocortin receptor programs offset by a decrease in spending on our Vyleesi
program. The amount of such spending and the nature of future development
activities are dependent on a number of factors, including primarily the
availability of funds to support future development activities, success of our
clinical trials and preclinical and discovery programs, and our ability to
progress compounds in addition to Vyleesi, PL8177 and PL3994 into human clinical
trials.
The amounts of project spending above exclude general research and development
spending, which was $3,771,611 and $4,727,455 in fiscal 2020 and fiscal 2019,
respectively. The decrease in general research and development spending is
primarily attributable to lower compensation cost in fiscal 2020.
Cumulative spending from inception to June 30, 2020 was approximately
$311,400,000 on our Vyleesi program and approximately $154,700,000 on all our
other programs (which include PL8177, PL9643, other melanocortin receptor
agonists, NPR programs and terminated programs). Due to various risk factors
described herein under "Risk Factors," including the difficulty in currently
estimating the costs and timing of future Phase 1 clinical trials and
larger-scale Phase 2 and Phase 3 clinical trials for any product under
development, we cannot predict with reasonable certainty when, if ever, a
program will advance to the next stage of development or be successfully
completed, or when, if ever, related net cash inflows will be generated.
General and Administrative - General and administrative expenses, which consist
mainly of compensation and related costs, were $9,765,372 for fiscal 2020
compared to $9,699,061 for fiscal 2019. The increase in general and
administrative expenses is primarily attributable the final payment made in
connection with the Greenhill agreement and professional fees related to the
Vyleesi divestiture offset by a decrease in compensation costs.
41
Other Income (Expense) - Total other income (expense), net was $1,180,757 and
$28,707 for fiscal 2020 and fiscal 2019, respectively. For fiscal 2020, we
recognized $1,200,898 of investment income offset by $20,141 of interest
expense. For fiscal 2019, we recognized $446,268 of investment income offset by
$417,561 of interest expense primarily related to our venture debt. The increase
in investment income is a result of Company's increased cash position. The
decrease in interest expense relates to our paying down of the venture debt.
Income Taxes - For fiscal 2020 and fiscal 2019, the Company recorded no income
tax benefit or expense as a result of the generation of and utilization of net
operating losses that were subject to a full valuation allowance.
Year Ended June 30, 2019 Compared to the Year Ended June 30, 2018:
Revenue - For fiscal 2019, we recognized $60,300,476 in revenue pursuant to our
license agreement with AMAG compared to $67,134,758 in revenue for fiscal 2018
pursuant to our license agreements with AMAG and Fosun.
On January 8, 2017, we entered into the AMAG License Agreement which provided
for $60,000,000 as a one-time initial payment. Pursuant to the terms of and
subject to the conditions in the AMAG License Agreement, AMAG reimbursed us
$25,000,000, less certain expenses directly paid by AMAG for direct
out-of-pocket expenses we incurred following the effective date of the AMAG
License Agreement in connection with development and regulatory activities
necessary to file an NDA for Vyleesi for HSDD in the United States, less certain
other expenses directly paid or to be paid by AMAG. We recognized $300,476 and
$42,134,758 for fiscal 2019 and fiscal 2018, respectively, as license and
contract revenue which included additional billings for AMAG-related Vyleesi
costs of $300,476 and $1,151,243 in fiscal 2019 and fiscal 2018, respectively.
In addition, pursuant to the terms of and subject to the conditions in the AMAG
License Agreement, we were eligible to receive up to $80,000,000 from AMAG in
specified regulatory milestone payments upon achievement of certain regulatory
milestones. On June 4, 2018, the FDA accepted the Vyleesi NDA for filing, which
triggered a $20,000,000 milestone payment to Palatin from AMAG, that was
recognized in revenue in fiscal 2018. On June 21, 2019, the FDA granted approval
of Vyleesi for use in the United States, which triggered a $60,000,000 milestone
payment to Palatin. As a result, we recognized $60,000,000 in revenue related to
regulatory milestones in fiscal 2019.
On September 6, 2017, we entered into the Fosun License Agreement, which
provided for $5,000,000 as a one-time non-refundable upfront payment, which was
recorded as revenue during the year ended June 30, 2018. Pursuant to the Fosun
License Agreement, $500,000 was withheld in accordance with tax withholding
requirements in the Chinese Territories and was recorded as an expense during
the year ended June 30, 2018.
Research and Development - Total research and development expenses, including
general research and development spending, were $14,857,095 for fiscal 2019
compared to $32,566,217 for fiscal 2018. Fiscal 2019 costs primarily relate to
our MC4r and other preclinical programs along with an additional Phase 1 study
for Vyleesi. Fiscal 2018 costs primarily relate to our Vyleesi Phase 3 clinical
trial program and ancillary studies necessary to file an NDA for Vyleesi for
HSDD.
Research and development expenses related to our Vyleesi, PL3994, PL8177, MC1r,
MC4r and other preclinical projects were $10,129,640 and $27,449,494 in fiscal
2019 and fiscal 2018, respectively. Spending to date was primarily related to
our Vyleesi for the treatment of HSDD program. The decrease in research and
development expenses is mainly attributable to the conclusion of Phase 3
clinical trial and development of Vyleesi for HSDD. The amount of such spending
and the nature of future development activities are dependent on a number of
factors, including primarily the availability of funds to support future
development activities, success of our clinical trials and preclinical and
discovery programs, and our ability to progress compounds in addition to
Vyleesi, PL8177 and PL3994 into human clinical trials.
The amounts of project spending above exclude general research and development
spending, which was $4,727,455 and $5,116,723 in fiscal 2019 and fiscal 2018,
respectively. The decrease in general research and development spending is
primarily attributable to lower stock-based compensation in fiscal 2019.
Cumulative spending from inception to June 30, 2019 was approximately
$310,200,000 on our Vyleesi program and approximately $142,000,000 on all our
other programs (which include PL8177, PL9643, other melanocortin receptor
agonists, NPR programs and terminated programs). Due to various risk factors
described herein under "Risk Factors," including the difficulty in currently
estimating the costs and timing of future Phase 1 clinical trials and
larger-scale Phase 2 and Phase 3 clinical trials for any product under
development, we cannot predict with reasonable certainty when, if ever, a
program will advance to the next stage of development or be successfully
completed, or when, if ever, related net cash inflows will be generated.
42
General and Administrative - General and administrative expenses, which consist
mainly of compensation and related costs, were $9,699,061 for fiscal 2019
compared to $8,641,976 for fiscal 2018. The increase in general and
administrative expenses is primarily attributable to an increase in compensation
expense.
Other Income (Expense) - Total other income, net was $28,707 for fiscal 2019 and
total other expenses, net was $1,141,351 for fiscal 2018. For fiscal 2019, we
recognized $446,268 of investment income offset by $417,561 of interest expense
primarily related to our venture debt. For fiscal 2018, we recognized $1,452,014
of interest expense primarily related to our venture debt, offset by $310,663 of
investment income. The decrease in interest expense relates to our paying down
of the venture debt.
Income Taxes - For fiscal 2019, the Company recorded no income tax expense as a
result of the utilization of net operating losses that were subject to a full
valuation allowance.
Effects of Inflation
We do not believe that inflation has had a material impact on our business,
revenues or operating results during the periods presented.
Liquidity and Capital Resources
Since inception, we have generally incurred net operating losses, primarily
related to spending on our research and development programs. We have financed
our net operating losses primarily through debt and equity financings and
amounts received under collaborative agreements.
Our product candidates are at various stages of development and will require
significant further research, development and testing and some may never be
successfully developed or commercialized. We may experience uncertainties,
delays, difficulties and expenses commonly experienced by early stage
biopharmaceutical companies, which may include unanticipated problems and
additional costs relating to:
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the development and testing of products in animals and humans;
?
product approval or clearance;
?
regulatory compliance;
?
GMP compliance;
?
intellectual property rights;
?
product introduction;
?
marketing, sales and competition; and
?
obtaining sufficient capital.
Failure to enter into or successfully perform under collaboration agreements and
obtain timely regulatory approval for our product candidates and indications
would impact our ability to generate revenues and could make it more difficult
to attract investment capital for funding our operations. Any of these
possibilities could materially and adversely affect our operations and require
us to curtail or cease certain programs.
In addition, the COVID-19 pandemic may negatively impact our operations,
including possible effects on our financial condition, ability to access the
capital markets on attractive terms or at all, liquidity, operations, suppliers,
industry, and workforce. We will continue to evaluate the impact that these
events could have on the operations, financial position, and the results of
operations and cash flows during fiscal year 2021 and beyond.
During fiscal 2020, net cash provided by operating activities was $41,326,415
compared to net cash used in operating activities of $21,782,841 in fiscal 2019
and net cash provided by operating activities of $1,703,103 in fiscal 2018. The
difference in cash provided by operations in fiscal 2020 compared with cash used
in operations in fiscal 2019 and compared with cash provided by operating
activities in fiscal 2018 was primarily related to the timing of the receipt of
payments related to revenue recorded for the AMAG License Agreement, including
for the FDA's approval of Vyleesi.
During fiscal 2020, net cash used in investing activities consisted of $62,880
compared to $36,139 during fiscal 2019, which consisted of the acquisition of
equipment. During fiscal 2018, net cash provided by investing activities was
$227,549, which consisted of $250,000 of proceeds from maturity of investments
offset by $22,451 used for the acquisition of equipment.
During fiscal 2020 net cash used in financing activities was $1,921,687 which
consisted of payment on notes payable obligations of $832,851, repurchase and
cancellation of outstanding warrants of $2,547,466 and payment of withholding
taxes related to restricted stock units of $122,868 offset by net proceeds from
the sale of common stock of $1,581,498 in our "at-the-market" offering program.
During fiscal 2019, net cash provided by financing activities was $27,329,231
which consisted of proceeds from the sale of common stock of $33,136,060 and
proceeds from the exercise of common stock warrants of $808,934 offset by
payment of withholding taxes related to restricted stock units and stock options
of $115,763 and payment of debt obligations of $6,500,000. During fiscal 2018,
net cash used in financing activities was $4,130,805, which consisted of
payments of capital lease obligations of $14,324, payment of withholding taxes
related to restricted stock units of $45,165, and payment of debt obligations of
$8,000,000, offset by proceeds from the exercise of stock options, and common
stock warrants of $2,670,910 and sale of common stock of $1,257,774.
43
We have incurred cumulative negative cash flows from operations since our
inception, and have expended, and expect to continue to expend in the future,
substantial funds to develop the capability to market and distribute Vyleesi in
the United States and to complete our planned product development efforts.
Continued operations are dependent upon our ability to generate future income
from sales of Vyleesi in the United States and from existing licenses, including
royalties and milestones, to complete equity or debt financing activities and
enter into additional licensing or collaboration arrangements. As of June 30,
2020, our cash and cash equivalents were $82,852,270 with current liabilities of
$3,927,553.
We intend to utilize existing capital resources for general corporate purposes
and working capital, including establishing marketing and distribution
capabilities for Vyleesi in the United States and preclinical and clinical
development of our MC1r and MC4r peptide programs and natriuretic peptide
program, and development of other portfolio products.
We believe that our cash and cash equivalents as of June 30, 2020 will be
sufficient to fund our current operating plans through at least September 2021.
We will need additional funding to complete required clinical trials for our
other product candidates and development programs and, if those clinical trials
are successful (which we cannot predict), to complete submission of required
regulatory applications to the FDA.
We had a net loss for fiscal 2020 of $22,426,023. We may not attain
profitability in future years, which is dependent on numerous factors, including
whether and when development and sales milestones are met, regulatory actions by
the FDA and other regulatory bodies, the performance of our licensees, and
market acceptance of our products.
We expect to incur significant expenses as we continue to develop marketing and
distribution capability for Vyleesi in the United States and continue to develop
our MC1r and natriuretic peptide product candidates. These expenses, among other
things, have had and will continue to have an adverse effect on our
stockholders' equity, total assets, and working capital.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
We have entered into various contractual obligations and commercial commitments.
The following table summarizes our most significant contractual obligations as
of June 30, 2020:
Payments due by Period
More
Less than than 5
Total 1 Year 1 - 3 Years 3 - 5 Years Years
Operating leases $1,434,330 $355,164 $556,818 $522,348 $-
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PALATIN TECHNOLOGIES, INC. 
