UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





(Mark
One)





[X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended December 31, 2009





or





[  ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ___________ to __________





Commission
file number: 001-15543


________________________





PALATIN
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            95-4078884(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)4C
      Cedar Brook Drive
              Cranbury,
      New Jersey
            
            08512(Address
      of principal executive offices)
            
            (Zip
      Code)





(609)
495-2200


(Registrant's
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has 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.


Yes x   No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes  ̈   No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
accelerated filer  ̈                                                                         Accelerated
filer  ̈


Non-accelerated
filer  ̈                                                                           Smaller
reporting company x


(Do not check
if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈   No
x


As of
February 11, 2010, 96,736,949 shares of the registrant's common stock, par value
$.01 per share, were outstanding.





PALATIN TECHNOLOGIES,
INC.


Tableof Contents





PagePART
      I – FINANCIAL INFORMATIONItem
      1. Financial Statements (Unaudited)Consolidated Balance Sheets as of December 31, 2009 and
      June 30, 2009
            2Consolidated Statements of Operations for the Three and
      Six Months Ended
              December 31, 2009 and 2008
            3Consolidated Statements of Cash Flows for the Six Months
      Ended
              December 31, 2009 and 2008
            4Notes to Consolidated Financial
    Statements
            5Item
      2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            11Item
      3. Quantitative and Qualitative Disclosures About
      Market Risk
            14Item
      4. Controls and Procedures
            14PART
      II – OTHER INFORMATIONItem
      1. Legal Proceedings
            15Item
      1A. Risk Factors
            15Item
      2. Unregistered Sales of Equity Securities and Use
      of Proceeds
            15Item
      3. Defaults Upon Senior Securities
            15Item
      4. Submission of Matters to a Vote of Security
      Holders
            15Item
      5. Other Information
            15Item
      6. Exhibits
            15SIGNATURES


1
 Table of Contents


PART
I - FINANCIAL INFORMATION





Item
1.                        Financial
Statements


PALATINTECHNOLOGIES, INC.


and
Subsidiary





Consolidated
Balance Sheets


(unaudited)





December
      31,
              2009
            
            June
      30,
              2009ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $       3,922,685
            
            $       4,378,662Available-for-sale
      investments
            
            3,431,724
            
            3,439,650Accounts
      receivable
            
            892,587
            
            508,528Other
      receivables
            
            1,319,591
            
            -Prepaid
      expenses and other current assets
            
            290,387
            
            492,824Total
      current assets
            
            9,856,974
            
            8,819,664Property
      and equipment, net
            
            2,983,994
            
            3,650,783Restricted
      cash
            
            475,000
            
            475,000Other
      assets
            
            254,206
            
            254,364Total
      assets
            
            $     13,570,174
            
            $     13,199,811LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Capital
      lease obligations
            
            $            20,307
            
            $            87,675Accounts
      payable
            
            305,173
            
            206,363Accrued
      expenses
            
            1,164,904
            
            1,420,741Deferred
      revenue
            
            -
            
            6,955,553Total
      current liabilities
            
            1,490,384
            
            8,670,332Capital
      lease obligations
            
            24,372
            
            33,954Deferred
      rent
            
            931,318
            
            1,182,026Total
      liabilities
            
            2,446,074
            
            9,886,312Stockholders'
      equity:Preferred
      stock of $.01 par value – authorized 10,000,000 shares;Series
      A Convertible; issued and outstanding 4,997 shares as of December 31, 2009
      and June 30, 2009, respectively
            
            50
            
            50Common
      stock of $.01 par value – authorized 150,000,000 shares; issued and
      outstanding 96,214,999 and 86,662,901 shares as of December 31, 2009 and
      June 30, 2009, respectively
            
            962,150
            
            866,629Additional
      paid-in capital
            
            212,970,575
            
            209,712,379Accumulated
      other comprehensive income
            
            108,185
            
            116,111Accumulated
      deficit
            
            (202,916,860)
            
            (207,381,670)Total
      stockholders’ equity
            
            11,124,100
            
            3,313,499Total
      liabilities and stockholders’ equity
            
            $     13,570,174
            
            $     13,199,811





The
accompanying notes are an integral part of these consolidated financial
statements.
 2
 Table of Contents


PALATINTECHNOLOGIES, INC.


and
Subsidiary





Consolidated
Statements of Operations


(unaudited)








Three
      Months Ended December 31,
            
            Six
      Months Ended December 31,2009
            
            2008
            
            2009
            
            2008REVENUES
            
            $     7,283,299
            
            $     1,211,405
            
            $    10,945,918
            
            $     1,965,251OPERATING
      EXPENSES:Research
      and development
            
            2,712,871
            
            2,839,451
            
            5,382,435
            
            6,497,450General
      and administrative
            
            1,134,963
            
            1,151,475
            
            2,288,694
            
            2,608,323Total
      operating expenses
            
            3,847,834
            
            3,990,926
            
            7,671,129
            
            9,105,773Income/(Loss)
      from operations
            
            3,435,465
            
            (2,779,521)
            
            3,274,789
            
            (7,140,522)OTHER
      INCOME/ (EXPENSE):Investment
      income
            
            70,317
            
            77,236
            
            103,629
            
            160,216Interest
      expense
            
            (2,315)
            
            (7,524)
            
            (7,016)
            
            (12,018)Gain
      on sale of supplies and equipment
            
            -
            
            550,968
            
            95,000
            
            550,968Total
      other income, net
            
            68,002
            
            620,680
            
            191,613
            
            699,166Income/(Loss)
      before income taxes
            
            3,503,467
            
            (2,158,841)
            
            3,466,402
            
            (6,441,356)Income
      tax benefit
            
            998,408
            
            1,741,476
            
            998,408
            
            1,741,476NET
      INCOME/(LOSS)
            
            $      4,501,875
            
            $    
         (417,365)
            
            $      4,464,810
            
            $    (4,699,880)Basic
      net income/(loss) per common share
            
            $               0.04
            
            $              0.00
            
            $               0.04
            
            $             (0.05)Diluted
      net income/(loss) per common share
            
            $               0.04
            
            $              0.00
            
            $               0.04
            
            $             (0.05)Weighted
      average number of common shares outstanding used in computing basic net
      income/(loss) per common share
            
            96,169,542
            
            86,640,647
            
            93,737,883
            
            86,082,481Weighted
      average number of common shares outstanding used in computing diluted net
      income/(loss) per common share
            
            96,645,078
            
            86,640,647
            
            94,176,625
            
            86,082,481





The
accompanying notes are an integral part of these consolidated financial
statements.
 3
 Table of Contents


PALATINTECHNOLOGIES, INC.


and
Subsidiary





Consolidated
Statements of Cash Flows


(unaudited)





Six
      Months Ended December 31,2009
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income/(Loss)
            
            $        4,464,810
            
            $      (4,699,880)Adjustments
      to reconcile net income/(loss) to net cashused
      in operating activities:Depreciation
      and amortization
            
            666,789
            
            671,749Gain
      on sale of supplies and equipment
            
            (95,000)
            
            (550,968)Stock-based
      compensation
            
            635,108
            
            824,658Changes
      in operating assets and liabilities:Accounts
      receivable
            
            (1,382,467)
            
            (4,894,739)Prepaid
      expenses and other assets
            
            202,595
            
            138,020Accounts
      payable
            
            98,810
            
            (290,736)Accrued
      expenses and other liabilities
            
            (506,545)
            
            (1,265,066)Deferred
      revenues
            
            (7,276,736)
            
            3,266,667Net
      cash used in operating activities
            
            (3,192,636)
            
            (6,800,295)CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of supplies and equipment
            
            95,000
            
            500,000Purchases
      of property and equipment
            
            -
            
            (29,032)Net
      cash provided by investing activities
            
            95,000
            
            470,968CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on capital lease obligations
            
            (76,950)
            
            (139,077)Payment of withholding taxes related to restricted
              stock units
            
            (84,379)
            
            -Proceeds
      from sale of common stock and warrants and exercise of common stock
      options
            
            2,802,988
            
            -Net
      cash provided by (used in) financing activities
            
            2,641,659
            
            (139,077)NET
      DECREASE IN CASH ANDCASH
      EQUIVALENTS
            
            (455,977)
            
            (6,468,404)CASH
      AND CASH EQUIVALENTS, beginningof
      period
            
            4,378,662
            
            9,421,770CASH
      AND CASH EQUIVALENTS, end of period
            
            $    
          3,922,685
            
            $        2,953,366SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid for interest
            
            $               7,016
            
            $            18,018Unrealized
      gain (loss) on available-for-sale investments
            
            $       
            (7,926)
            
            $            22,303


The
accompanying notes are an integral part of these consolidated financial
statements.
 4
 Table of Contents


PALATINTECHNOLOGIES, INC.


and
Subsidiary





Notes
to Consolidated Financial Statements


(unaudited)





(1)           ORGANIZATION:




Nature of Business – Palatin
Technologies, Inc. (Palatin or the Company) is a biopharmaceutical company
dedicated to the development of peptide, peptide mimetic and small molecule
agonist compounds with a focus on melanocortin and natriuretic peptide receptor
systems. Palatin has a diverse pipeline of active development programs targeting
melanocortin and natriuretic receptors. The melanocortin system is involved in a
large and diverse number of physiologic functions, and therapeutic agents
modulating this system may have the potential to treat a variety of conditions
and diseases, including sexual dysfunction, obesity and related disorders,
ischemia-reperfusion injury, hemorrhagic shock and inflammation-related
diseases. The natriuretic peptide receptor system has numerous cardiovascular
functions, and therapeutic agents modulating this system may be useful in
treatment of heart failure, hypertension, acute asthma and other cardiovascular
diseases.




The Company’s products in development
include bremelanotide and PL-6983, peptide melanocortin receptor agonists for
treatment of sexual dysfunction, and PL-3994, an agonist peptide mimetic which
binds to natriuretic peptide receptor A for treatment of heart failure. The
Company has an exclusive global licensing and research collaboration agreement
with AstraZeneca AB (AstraZeneca) to discover, develop and commercialize
compounds that target melanocortin receptors for the treatment of obesity,
diabetes and related metabolic syndrome.




Key elements of the Company’s business
strategy include using its technology and expertise to develop and commercialize
therapeutic products; entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing,
sale and distribution of product candidates the Company is developing; partially
funding its development and discovery programs with the cash flow from the
Company’s AstraZeneca collaboration agreement and any future agreements with
other companies; and, depending on the availability of sufficient funding,
expanding the Company’s pipeline by using its expertise in drug discovery
technologies for melanocortin and natriuretic peptide receptor systems and
acquiring synergistic products and technologies.




Business Risk and Liquidity–
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts. As shown
in the accompanying consolidated financial statements, the Company has an
accumulated deficit as of December 31, 2009 and despite reporting a net income
for the three and six months ended December 31, 2009, the Company anticipates
incurring additional losses in the future as a result of spending on its
development programs. To achieve profitability, the Company, alone or with
others, must successfully develop and commercialize its technologies and
proposed products, conduct successful preclinical studies and clinical trials,
obtain required regulatory approvals and successfully manufacture and market
such technologies and proposed products. The time required to reach
profitability is highly uncertain, and there can be no assurance that the
Company will be able to achieve profitability on a sustained basis, if at
all.




The Company believes that its cash,
cash equivalents, accounts receivable and available-for-sale investments as of
December 31, 2009, together with the additional receipts from our agreement with
AstraZeneca and other income, are adequate to fund operations through at least
September 30, 2010. The nature and timing of the Company’s development
activities are highly dependent on its financing activities. Management plans to
continue to refine its operations, control expenses, evaluate alternative
methods to conduct its business, and seek available sources of public or private
financing and sharing of development costs through collaborative agreements or
other arrangements. Should appropriate sources of financing not be available,
management will curtail operations and delay clinical trials and research
activities until such time, if ever, as appropriate financing is available.
There can be no assurance that the Company will be able to obtain financing when
required, or that financing efforts will be successful.




Concentrations –
Concentrations in the Company’s assets and operations subject it to certain
related risks. Financial instruments that subject the Company to concentrations
of credit risk primarily consist of cash and cash equivalents,
available-for-sale investments and accounts receivable. The Company’s cash and
cash equivalents are primarily invested in one money market fund sponsored by a
large financial institution. The Company’s accounts receivable balance as of
December 31, 2009 consists of amounts due from AstraZeneca. For the three and
six months ended December 31, 2009 and 2008, 100% of revenues were from
AstraZeneca.




5
 Table of Contents


(2)           BASIS
OF PRESENTATION:




The accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnote disclosures required to be presented for complete
financial statements. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the Company’s financial position as of
December 31, 2009, and its results of operations and its cash flows for the
three and six months ended December 31, 2009 and 2008. The results of operations
for the three and six month periods ended December 31, 2009 may not necessarily
be indicative of the results of operations expected for the full year,
specifically that the Company expects to incur a significant loss for the fiscal
year ending June 30, 2010.




The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company’s annual report on Form
10-K for the year ended June 30, 2009, filed with the Securities and Exchange
Commission (SEC), which includes consolidated financial statements as of June
30, 2009 and 2008 and for each of the fiscal years in the three-year period
ended June 30, 2009.




(3)           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:




Principles of Consolidation –
The consolidated financial statements include the accounts of Palatin and its
wholly-owned inactive subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.




Use of Estimates – The
preparation of consolidated financial statements in conformity with U.S.
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.




Cash and Cash Equivalents –
Cash and cash equivalents include cash on hand, cash in banks and all highly
liquid investments with a purchased maturity of less than three months.
Restricted cash secures letters of credit for security deposits on
leases.




Investments–The Company classifies
its investments as available-for-sale investments and all such investments are
recorded at fair value based on quoted market prices. Unrealized holding gains
and losses, net of the related tax effect, if any, are generally excluded from
earnings and are reported in accumulated other comprehensive income/loss until
realized. Interest and dividends on securities classified as available-for-sale
are included in investment income. Gains and losses are recorded in the
statement of operations when realized or when unrealized holding losses are
determined to be other than temporary, on a specific-identification
basis.




Fair Value of Financial
Instruments – The Company’s financial instruments consist primarily of
cash and cash equivalents, available-for-sale investments, accounts receivable,
accounts payable, and capital lease obligations. Management believes that the
carrying value of these assets and liabilities are representative of their
respective fair values based on quoted market prices for investments and the
short-term nature of the other instruments.




Property and Equipment –
Property and equipment consists of office and laboratory equipment, office
furniture and leasehold improvements and includes assets acquired under capital
leases. Property and equipment are recorded at cost. Depreciation is recognized
using the straight-line method over the estimated useful lives of the related
assets, generally five years for laboratory and computer equipment, seven years
for office furniture and equipment and the lesser of the term of the lease or
the useful life for leasehold improvements. Amortization of assets acquired
under capital leases is included in depreciation expense. Maintenance and
repairs are expensed as incurred while expenditures that extend the useful life
of an asset are capitalized.




Impairment of Long-Lived
Assets – The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of a
long-lived asset, management evaluates whether the estimated future undiscounted
net cash flows from the asset are less than its carrying amount. If impairment
is indicated, the long-lived asset would be written down to fair value. Fair
value is determined by an evaluation of available price information at which
assets could be bought or sold, including quoted market prices if available, or
the present value of the estimated future cash flows based on reasonable and
supportable assumptions.




Deferred Rent–The Company’s operating
leases provide for rent increases over the terms of the leases. Deferred rent
consists of the difference between periodic rent payments and the amount
recognized as rent expense




6
 Table of Contents


on a
straight-line basis, as well as tenant allowances for leasehold improvements.
Rent expenses are being recognized ratably over the terms of the
leases.




Revenue Recognition– Revenue
from corporate collaborations and licensing agreements consists of up-front
fees, research and development funding, and milestone payments. Non-refundable
up-front fees are deferred and amortized to revenue over the related performance
period. The Company estimates the performance period as the period in which it
performs certain development activities under the applicable agreement.
Reimbursements for research and development activities are recorded in the
period that the Company performs the related activities under the terms of the
applicable agreements. Revenue resulting from the achievement of milestone
events stipulated in the applicable agreements is recognized when the milestone
is achieved, provided that such milestone is substantive in nature.




Research and Development
Costs – The costs of research and development activities are charged to
expense as incurred, including the cost of equipment for which there is no
alternative future use.




Stock-Based Compensation –
The Company charges to expense the fair value of stock options and similar
awards granted. The Company determines the value of stock options utilizing the
Black-Scholes option pricing model. Compensation costs for share-based awards
with pro rata vesting are allocated to periods on a straight-line
basis.




Income Taxes – The Company
and its subsidiary file consolidated federal and separate-company state income
tax returns. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences or operating loss and tax credit
carryforwards are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. The Company has recorded a valuation allowance
against its deferred tax assets based on the history of losses
incurred.




During the three months ended December
31, 2009 and 2008, the Company sold New Jersey state net operating loss
carryforwards, which resulted in the recognition of $998,408 and $1,741,476,
respectively, in tax benefits. The proceeds of $998,408 from the sale of net
operating loss carryforwards were received in January 2010, and were included in
other receivables as of December 31, 2009.




Net Income/(Loss) per Common
Share–Basic and diluted net earnings
per common share (EPS) are calculated in accordance with the provisions of
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 260, “Earnings per Share.” In June 2008 the FASB issued
guidance stating that nonvested share-based payment awards that include
nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are considered participating securities, and the two-class method of
computing EPS is required for all periods presented. The Company adopted
the provisions of ASC Topic 260 relating to the two-class method of computing
EPS effective July 1, 2009.




The
Company’s outstanding shares of Series A Convertible Preferred stock contain
rights that entitle the holder to a special dividend or distribution of $100 per
share before the Company can pay dividends or make distributions to the common
stockholders. The other outstanding share-based compensation awards do not
include nonforfeitable rights to dividends. Accordingly, only the
outstanding Series A Convertible Preferred stock is considered a participating
security and must be included in the computation of EPS. The adoption of
the provisions of ASC Topic 260 relating to the two-class method of computing
EPS did not change the basic and diluted EPS for the three and six month period
ended December 31, 2008. The adoption of the provisions of ASC Topic 260
relating to the two-class method of computing EPS reduced the basic and diluted
EPS by $0.01 for the three and six month period ended December 31,
2009.




The
following table sets forth the computation of basic and diluted
EPS:




7
 Table of Contents





Three
      months ended December 31,
            
            Six
      months ended December 31,2009
            
            2008
            
            2009
            
            2008Net
      income/(loss) per common share – Basic:Net
      income/(loss)
            $      4,501,875
            
            $   
         (417,365)
            
            $     4,464,810
            
            $    (4,699,880)Net
      income allocated to Series A Preferred Shares
            (508,876)
            
            -
            
            (508,791)
            
            -Net
      income/(loss) available to common stockholders
            $      3,992,999
            
            $       (417,365)
            
            $  
        3,956,019
            
            $  
      (4,699,880)Weighted
      average common shares outstanding
            96,169,542
            
            86,640,647
            
            93,737,883
            
            86,082,481Net
      income/(loss) per common share –
      Basic
            $               0.04
            
            $               0.00
            
            $   
                0.04
            
            $  
               (0.05)Net
      income/(loss) per common share – Diluted:Net
      income/(loss)
            $      4,501,875
            
            $   
         (417,365)
            
            $     4,464,810
            
            $  
      (4,699,880)Net
      income allocated to Series A Preferred Shares
            (508,876)
            
            -
            
            (508,791)
            
            -Net
      income/(loss) available to common stockholders
            $      3,992,999
            
            $       (417,365)
            
            $  
        3,956,019
            
            $ 
      (4,699,880)Weighted
      average common shares outstanding
            96,169,542
            
            86,640,647
            
            93,737,883
            
            86,082,481Dilutive
      securities
            475,536
            
            -
            
            438,742
            
            -Weighted
      average common and dilutive shares outstanding
            96,645,078
            
            86,640,647
            
            94,176,625
            
            86,082,481Net
      income/(loss) per common share –
      Diluted
            $               0.04
            
            $               0.00
            
            $             0.04
            
            $           (0.05)







As of  December 31, 2009 and
2008, common shares issuable upon conversion of Series A Convertible Preferred
Stock, the exercise of outstanding option and warrants and the vesting of
restricted stock units amounted to an aggregate of 17,993,905 and 15,201,545
shares, respectively.




Subsequent Events – The
Company has evaluated subsequent events through February 12, 2010.




Recently Issued Accounting
Pronouncements – In June 2009, the FASB issued ASC 105-10 (formerly
Statement of Financial Accounting Standards 168), “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles,”
which was effective for the Company beginning July 1, 2009. The FASB Accounting
Standards Codification (the Codification) officially became the single source of
authoritative nongovernmental generally accepted accounting principles (GAAP),
superseding existing FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force and related accounting literature. After that date,
only one level of authoritative GAAP exists. All other accounting literature is
considered non-authoritative. The Codification reorganizes the thousands of GAAP
pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included in the Codification is relevant SEC guidance
organized using the same topical structure in separate sections within the
Codification. The Company adopted this statement and has updated its existing
GAAP references to the new codification.




(4)           AGREEMENT
WITH ASTRAZENECA:




In January 2007, the Company entered
into an exclusive global licensing and research collaboration agreement with
AstraZeneca to discover, develop and commercialize compounds that target
melanocortin receptors for the treatment of obesity, diabetes and related
metabolic syndrome. In June 2008, the licensing and research collaboration
agreement was amended to include additional compounds and associated
intellectual property developed by the Company. In December 2008, the licensing
and research collaboration agreement was further




8
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amended
to include additional compounds and associated intellectual property developed
by the Company and extended the research collaboration for an additional year
through January 2010. In September 2009, the licensing and research
collaboration agreement was further amended to modify royalty rates and
milestone payments. The collaboration is based on the Company’s melanocortin
receptor obesity program and includes access to compound libraries, core
technologies and expertise in melanocortin receptor drug discovery and
development. As part of the September 2009 amendment to the licensing and
research collaboration agreement, the Company agreed to conduct additional
studies on the effects of melanocortin receptor specific compounds on food
intake, obesity and other metabolic parameters.




In December 2009 and 2008, the Company
also entered into clinical trial sponsored research agreements with AstraZeneca,
under which the Company agreed to conduct studies of the effects of melanocortin
receptor specific compounds on food intake, obesity and other metabolic
parameters. Under the terms of these clinical trial agreements, AstraZeneca will
pay all costs associated with these studies. The Company recognized $121,284 and
$243,375, respectively, as revenue in the three and six months ended December
31, 2009, and $482,239 for the three and six months ended December 31, 2008
under these clinical trial sponsored research agreements.




The Company received a $10,000,000
up-front payment from AstraZeneca on execution of the licensing and research
collaboration agreement. Under the September 2009 amendment the Company is being
paid an additional $5,000,000 in consideration of reduction of future milestones
and royalties and providing specified materials to AstraZeneca, of which
$2,500,000 has already been received. The Company is now eligible for milestone
payments totaling up to $145,250,000, with up to $85,250,000 contingent on
development and regulatory milestones and the balance contingent on achievement
of sales targets. In addition, the Company will receive royalties on sales of
any approved products. AstraZeneca assumed responsibility for product
commercialization, product discovery and development costs, with both companies
contributing scientific expertise in the research collaboration. The Company
provided research services to AstraZeneca through January 2010, the expiration
of the research collaboration portion of the licensing and research
collaboration agreement, at a contractual rate per full-time-equivalent
employee.




The Company has determined that the
license agreement and research services should be evaluated together as a single
unit for purposes of revenue recognition. Accordingly, the aggregate payments of
$15,000,000 are being recognized as revenue on a straight-line basis over the
period during which the Company may perform research services under the
agreement. The Company must continually evaluate the estimated remaining
performance period, and has revised the estimated performance period to end
January 2010 based on the September 2009 amendment. For the three and six months
ended December 31, 2009 the Company recognized as revenue $6,232,599, and
$8,926,736, respectively, related to these aggregate payments, and for the three
and six months ended December 31, 2008 the Company recognized $416,667 and
$833,334, respectively. Per-employee compensation from AstraZeneca for research
services is recognized as earned at the contractual rate, which approximates the
fair value of such services. Revenue recognized for research services for the
three and six months ended December 31, 2009 were $929,416 and $1,775,807
respectively. Revenue recognized for research services for the three and six
months ended December 31, 2008 were $312,499 and $649,678,
respectively.




(5)           INVESTMENTS:




The following is a summary of
available-for-sale investments:




December
      31,
            June
      30,2009
            2009Cost
            
            $              3,323,539
            $              3,323,539Gross
      unrealized gains
            
            143,193
            116,170Gross
      unrealized losses
            
            (35,008)
            (59)Total
      available-for-sale investments
            
            $              3,431,724
            $              3,439,650




The fair value of investments is
classified using a hierarchy prioritized based on inputs. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets or
liabilities. Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or liability,
either directly or indirectly through market corroboration, for substantially
the full term of the financial instrument. Level 3 inputs are unobservable
inputs based on management’s own assumptions used to measure assets and
liabilities at fair value. A financial asset or liability’s classification
within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.




The following table provides the assets
carried at fair value as of December 31, 2009:




9
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Fair
      Value
            Quoted
      prices in
              active
      markets
              (Level
      1)
            Quoted
      prices in
              active
      markets
              (Level
      2)
            Quoted
      prices in
              active
      markets
              (Level
      3)Mutual
      Funds
            $               3,431,724
            $           3,431,724
            $                          -
            $                       -




(6)           COMPREHENSIVE
INCOME/(LOSS):




Comprehensive income/(loss) consists of
the following:




Three
      months ended December 31,
            
            Six
      months ended December 31,2009
            
            2008
            
            2009
            
            2008Net
      income/(loss)
            
            $         4,501,875
            
            $     (417,365)
            
            $       4,464,810
            
            $   (4,699,880)Unrealized
      gain/(loss) on available-for-sale investments
            
            (34,949)
            
            22,362
            
            (7,926)
            
            22,303Comprehensive
      income/(loss)
            
            $         4,466,926
            
            $     (395,003)
            
            $       4,456,884
            
            $   (4,677,577)




(7)           STOCKHOLDERS’
EQUITY:




On December 10, 2008, the Company
granted restricted stock units to its executive officers under the Company’s
2005 Stock Plan totaling 750,000 shares of common stock. The restricted stock
units vested on December 31, 2009. The Company amortized the fair value of these
restricted stock units, totaling $67,500, on a straight-line basis through
December 31, 2009. For the three and six month period ended December 31, 2009,
the Company recognized $15,577 and $31,154, respectively, as stock-based
compensation expense related to these restricted stock units and $5,192 for the
three and six month period ended December 31, 2008.




Stock-based compensation costs for the
three and six months ended December 31, 2009 for stock options and equity-based
instruments issued other than the restricted stock units described above totaled
approximately $301,999 and $603,954, respectively, and $304,843 and $819,466,
respectively for the three and six months ended December 31, 2008.




10
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Item2.  Management’s Discussion and Analysis
of Financial Condition and Results of Operations.




The following discussion and analysis
should be read in conjunction with the consolidated financial statements and
notes to the consolidated financial statements filed as part of this
report.




Statements in this quarterly report on
Form 10-Q, as well as oral statements that may be made by us or by our officers,
directors, or employees acting on our behalf, that are not historical facts
constitute “forward-looking statements”, which are made pursuant to the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934 as
amended (the Exchange Act). The forward-looking statements in this quarterly
report on Form 10-Q do not constitute guarantees of future performance.
Investors are cautioned that statements that are not strictly historical
statements contained in this quarterly report on Form 10-Q, including, without
limitation, current or future financial performance, management’s plans and
objectives for future operations, clinical trials and results, product plans and
performance, management’s assessment of market factors, as well as statements
regarding our strategy and plans and our strategic partners, constitute
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that could cause our actual
results to be materially different from historical results or from any results
expressed or implied by such forward-looking statements. Our future operating
results are subject to risks and uncertainties and are dependent upon many
factors, including, without limitation, the risks identified in this report, in
our annual report on Form 10-K for the year ended June 30, 2009 and in our other
Securities and Exchange Commission (SEC) filings.




We expect to incur losses in the future
as a result of spending on our planned development programs and losses may
fluctuate significantly from quarter to quarter.




In this quarterly report on Form 10-Q,
references to “we”, “our”, “us” or “Palatin” means Palatin Technologies, Inc.
and subsidiary.




Critical
Accounting Policies and Estimates




Our significant accounting policies are
described in the notes to our consolidated financial statements included in this
report and in our annual report on Form 10-K for the year ended June 30, 2009,
and have not changed as of December 31, 2009. We believe that our accounting
policies and estimates relating to revenue recognition, accrued expenses and
stock-based compensation are the most critical.






Overview




We are a biopharmaceutical company
dedicated to the development of peptide, peptide mimetic and small molecule
agonist compounds with a focus on melanocortin and natriuretic peptide receptor
systems. We have a diverse pipeline of active development programs targeting
melanocortin and natriuretic receptors, including development of proposed
products for treatment of sexual dysfunction, heart failure, hypertension, acute
asthma, obesity, diabetes and metabolic syndrome.




We currently have the following active
drug development programs:




·
            Bremelanotide,
      a peptide melanocortin receptor agonist, for treatment of sexual
      dysfunction, targeting erectile dysfunction (ED) in patients
      non-responsive to current therapies and female sexual dysfunction
      (FSD).




·
            PL-6983,
      a peptide melanocortin receptor agonist, for treatment of sexual
      dysfunction.




·
            PL-3994,
      a peptide mimetic natriuretic peptide receptor A (NPR-A) agonist, for
      treatment of heart failure, refractory or difficult-to-control
      hypertension and acute severe
asthma.




·
            Melanocortin
      receptor-based compounds for treatment of obesity, diabetes and related
      metabolic syndrome pursuant to a research collaboration and global license
      with AstraZeneca AB (AstraZeneca).




Key elements of our business strategy
include: using our technology and expertise to develop and commercialize
therapeutic products; entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing,
sale and distribution of product candidates we are developing; partially funding
our development and discovery programs with the cash flow from our AstraZeneca
collaboration agreement and any future agreements with other companies; and,
depending on the availability of sufficient funding, expanding our pipeline by
using our expertise in drug discovery technologies for melanocortin and
natriuretic peptide receptor systems and acquiring synergistic products and
technologies.




11
 Table of Contents


We incorporated in Delaware in 1986 and
commenced operations in the biopharmaceutical area in 1996. Our corporate
offices and research and development facility are located at 4C Cedar Brook
Drive, Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We
maintain an Internet site at http://www.palatin.com, where among other things,
we make available free of charge on and through this website our Forms 3, 4 and
5, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) and Section 16 of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. Our website and the information contained in it or connected to it
shall not be deemed to be incorporated into this quarterly report on Form
10-Q.






Results
of Operations




Three and Six Months Ended December
31, 2009 Compared to the Three and Six Months Ended December 31,
2008





Revenue –For the three and
six months ended December 31, 2009, we recognized $7.3 million and $10.9
million, respectively, in revenue pursuant to our license agreement with
AstraZeneca, compared to $1.2 million and $2.0 million, respectively, for three
and six months ended December 31, 2008.




Revenue for the three and six months
ended December 31, 2009 consisted of $1.1 million and $2.0 million,
respectively, related to our research services performed during those periods,
and $6.2 million and $8.9 million, respectively, of revenue related to
AstraZeneca’s license fees. Revenue for the three and six months ended December
31, 2008 consisted of $0.8 million and $1.1 million, respectively, related to
our research services performed during those periods, and $0.4 million and $0.9
million, respectively, of revenue related to AstraZeneca’s license fees. The
increase in revenue relating to AstraZeneca’s license fees is related primarily
to revision of the period during which we may perform research services for
purposes of revenue recognition and secondarily to the receipt of additional
license fees. The research services obligation under our agreement with
AstraZeneca expired in January 2010. There were no substantive development
activities on our NeutroSpec program during the three and six months ended
December 31, 2009 and 2008, and we do not anticipate any substantive development
activities on the NeutroSpec program in the fiscal year ending June 30, 2010,
though the agreement with Mallinckrodt has not been terminated. Future contract
revenue from AstraZeneca and Mallinckrodt, in the form of reimbursement of
shared development costs or the recognition of deferred license fees, will
fluctuate based on development activities in our obesity and NeutroSpec
programs. We may also earn contract revenue based on the attainment of
development milestones.




Research and Development –
Research and development expenses decreased to $2.7 million for the three months
ended December 31, 2009 from $2.8 million for the three months ended December
31, 2008. Research and development expenses decreased to $5.4 million for the
six months ended December 31, 2009 from $6.5 million for the six months ended
December 31, 2008. The decrease is the result of the restructuring of our
clinical-stage product portfolio and development programs.




Research
and development expenses related to our bremelanotide, PL-3994, PL-6983,
obesity, NeutroSpec and other preclinical programs were $0.6 millionand $1.1 million,
respectively, for the three and six months ended December 31, 2009 compared to
$0.6 million and $1.7 million, respectively, for the three and six months ended
December 31, 2008. Spending to date has been primarily related to the
identification and optimization of lead compounds, and secondarily to a study of
the effects of melanocortin receptor-specific compounds on food intake, obesity
and other metabolic parameters and preclinical studies and a Phase 1 trial with
subcutaneously administered bremelanotide. 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 bremelanotide and
PL-3994 into human clinical trials.




The
historical amounts of project spending above exclude general research and
development spending, which decreased to $2.1 million and $4.3 million,
respectively, for three and six months ended December 31, 2009 compared to $2.2
million and $4.8 million, respectively, for three and six months ended December
31, 2008. The decrease is primarily related to management’s refinement of
operations and expense control.




Cumulative spending from inception to
December 31, 2009 on our bremelanotide, NeutroSpec and other programs (which
includes PL-3994, PL-6983, obesity, and other discovery programs) amounts to
approximately $128.5 million, $55.5 million and $54.6 million, respectively. Due
to various risk factors described in our periodic filings with the SEC,
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, net cash inflows will be
generated.




12
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General and Administrative –
General and administrative expenses remained the same at $1.1 million for the
three months ended December 31, 2009 and 2008, but decreased to $2.3 million for
the six months ended December 31, 2009 compared to $2.6 million, for the six
months ended December 31, 2008. The decrease is primarily related to
management’s refinement of operations and expense control.






Liquidity and Capital
Resources




Since inception, we have incurred net
operating losses, primarily related to spending on our research and development
programs. We have financed our net operating losses primarily through 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:




•           the
development and testing of products in animals and humans;




•           product
approval or clearance;




•           regulatory
compliance;




•           good
manufacturing practices;




•           intellectual
property rights;




•           product
introduction;




•           marketing,
sales and competition; and




•           obtaining
sufficient capital.




Failure
to obtain timely regulatory approval for our product candidates and indications
would impact our ability to increase 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 or our operations.




During the six months ended December
31, 2009, we used $3.2 million of cash for our operating activities, compared to
$6.8 million used in the six months ended December 31, 2008. Lower cash outflows
from operations in the six months ended December 31, 2009 resulted primarily
from lower operating expenses. Our periodic accounts receivable balances will
continue to be highly dependent on the timing of receipts from collaboration
partners and the division of development responsibilities between us and our
collaboration partners.




During the six months ended December
31, 2009, cash provided by investing activities of $0.1 million consisted solely
of the sale of supplies. During the six months ended December 31, 2008, cash
provided by investing activities of $0.5 million consisted primarily from the
sale of equipment.




During the six months ended December
31, 2009, cash provided by financing activities was $2.6 million, consisting
primarily of net proceeds of approximately $2.8 million from the sale in August
2009 of 9,484,848 units in a registered direct offering. Each unit consisted of
one share of common stock and a five-year warrant to purchase 0.35 shares of
common stock at an exercise price of $0.33 per share.




In
September 2009, we signed an amendment to our collaboration agreement with
AstraZeneca which provided for $5.0 million in payments to us, of which $2.5
million has been received with the balance due in the first quarter of calendar
2010.




As of
December 31, 2009, our cash and cash equivalents were $3.9 million, our
available-for-sale investments were $3.4 million and our accounts receivable
were $1.9 million. We believe that these amounts, together with the additional
receipts from the September 2009 amendment to our AstraZeneca agreement and
other income, are adequate to fund operations through at least September 30,
2010. We will need additional funds to continue development of bremelanotide,
PL-3994 and PL-6983, as well as our early stage research and discovery programs,
and to fund operations after that date.




We intend
to seek additional capital through public or private equity financings,
collaborative arrangements on our product candidates, milestone payments or
other sources. However, additional funding may not be available on acceptable
terms or at all. If adequate funds are not available, we will further curtail
operations significantly, including the delay, modification or cancelation of
product candidate development plans and further decreases in staffing levels. We
plan to continue to monitor the progress of our development programs and the
timing and




13
 Table of Contents


amount of
related expenditures and potential milestone receipts, refine our operations,
control expenses, evaluate alternative methods to conduct our business and seek
additional financing and sharing of development costs through strategic
collaboration agreements or other resources. No assurance can be given that we
will earn future milestone payments that are contingent on specified events or
that we will not consume a significant amount of our available resources before
that time. We may also be required to seek collaborators for our product
candidates at an earlier stage than otherwise would be desirable and on terms
that are less favorable than might otherwise be available, and relinquish,
license or otherwise dispose of rights on unfavorable terms to technologies and
product candidates that we would otherwise seek to develop or commercialize
ourselves.




We anticipate incurring additional
losses over at least the next few years. To achieve profitability, we, alone or
with others, must successfully develop and commercialize our technologies and
proposed products, conduct preclinical studies and clinical trials, obtain
required regulatory approvals and successfully manufacture and market such
technologies and proposed products. The time required to reach profitability is
highly uncertain, and we do not know whether we will be able to achieve
profitability on a sustained basis, if at all.




Item3.  Quantitative and Qualitative
Disclosures About Market Risk.




Not requiredto be provided by
smaller reporting companies.




Item4.  Controls and
Procedures.




Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective. There were no changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter that materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.




14
 Table of Contents


PART
II - OTHER INFORMATION







Item1.    Legal Proceedings.




We
may be involved, from time to time, in various claims and legal proceedings
arising in the ordinary course of our business. We are not currently a party to
any such claims or proceedings that, if decided adversely to us, would either
individually or in the aggregate have a material adverse effect on our business,
financial condition or results of operations.




Item1A. Risk Factors.




There
have been no material changes to our risk factors disclosed in Part I, Item 1A.
of our annual report on Form 10-K for the fiscal year ended June 30,
2009.




Item2.    Unregistered Sales of
Equity Securities and Use of Proceeds.




None.




Item3.    Defaults Upon Senior
Securities.




None.




Item4.    Submission of Matters to a Vote of
Security Holders.




None.




Item5.    Other Information.




None.




Item6.    Exhibits.




Exhibits
filed or furnished with this report:




31.2
Certification of Chief Financial Officer. *  32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. *  32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
added by Section 906 of the Sarbanes-Oxley Act of 2002.
*


____________________




* Exhibit
filed with this report.







15
 Table of Contents


SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.




Palatin
      Technologies, Inc.(Registrant)Date:
      February 12, 2010
              /s/
      Carl
      SpanaCarl
      Spana, Ph.D.
                President
      and
                Chief
      Executive Officer (Principal
                Executive
      Officer)Date:
      February 12, 2010
              /s/
      Stephen T.
      WillsStephen
      T. Wills
                Executive
      Vice President and
                Chief
      Financial Officer (Principal
                Financial
      and Accounting Officer)


16


EXHIBIT INDEX 
 31.1
Certification of Chief Executive Officer. *
  31.2
Certification of Chief Financial Officer. *
  32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
added by Section 906 of the Sarbanes-Oxley Act of 2002. *
  32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
added by Section 906 of the Sarbanes-Oxley Act of 2002. *
 ____________________
  * Exhibit
filed with this report.