**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                           |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **For the quarterly period ended June 30, 2003**                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                   |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **For the transition period from                     to                   ** |
|       |   |                                                                                                                                                                                                                                                   |
|       |   | **Commission File Number:   0-21134**                                                                                                                                                                                                             |

 

**Paligent Inc.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     |   | **04-2893483**                              |
|------------------------------------------------------------------|--------|---------------------------------------------|
| (State or other jurisdiction  of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |   |                                        |
| **369 Lexington Avenue, New York, New York**                     |   | **10017**                                   |
| (Address of principal  executive offices)                        |   | (zip code)                                  |
|                                                             |   |                                        |
| **(212) 453-3111**                                               |
| (Registrant’s telephone number, including area code)        |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES   ý  NO   o

 

The number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| **Class**                      |   | **Outstanding as of  August 1, 2003** |
|--------------------------------|--------|---------------------------------------|
|                           |   |                                  |
| Common  Stock, $0.01 par value |   | 32,490,948                            |

 

 

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**PALIGENTINC.**

 

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                       |
|----------------|-----------------------------------------------------------------------------------------------------------------|
|           |                                                                                                            |
| **Item 1.**    | Financial  Statements                                                                                           |
|           |                                                                                                            |
|           | Condensed Consolidated Balance Sheets  June 30, 2003 (unaudited) and December 31, 2002                          |
|           |                                                                                                            |
|           | Condensed Consolidated Statements of  Operations (unaudited)  Three and six months ended June 30, 2003 and 2002 |
|           |                                                                                                            |
|           | Condensed Consolidated Statements of Cash  Flows (unaudited)  Six months ended June 30, 2003 and 2002           |
|           |                                                                                                            |
|           | Notes to Condensed Consolidated Financial  Statements (unaudited)                                               |
|           |                                                                                                            |
| **Item 2.**    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                     |
|           |                                                                                                            |
| **Item 3.**    | Quantitative and Qualitative Disclosure  About Market Risk                                                      |
|           |                                                                                                            |
| **Item 4.**    | Controls and Procedures                                                                                         |
|           |                                                                                                            |
| **PART II.**   | **OTHER INFORMATION**                                                                                           |
|           |                                                                                                            |
| **Item 6.**    | Exhibits and Reports on Form 8-K                                                                                |
|           |                                                                                                            |
| **SIGNATURES** |
|           |                                                                                                            |
|                |                                                                                                                 |  |

 

2

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**PALIGENTINC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                          |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                                          |   | **(unaudited)**    |    |                   |   |
| ASSETS                                                                                                                                        |   |               |    |                   |   |
| Current assets:                                                                                                                               |   |               |    |                   |   |
| Cash and cash equivalents                                                                                                                     |   | $                  | 231,464 |                   | $      | 153,046 |   |
| Prepaid expenses and other current assets                                                                                                     |   | 28,965             |    | 94                     |   |
| Total current assets                                                                                                                          |   | 260,429            |    | 153,140                |   |
|                                                                                                                                          |   |               |    |                   |   |
| Property and equipment, net                                                                                                                   |   | 58,485             |    | 75,789                 |   |
| Security deposits                                                                                                                             |   | 75,672             |    | 77,582                 |   |
| Other assets                                                                                                                                  |   | 39,073             |    | 33,669                 |   |
| Total assets                                                                                                                                  |   | $                  | 433,659 |                   | $      | 340,180 |   |
|                                                                                                                                          |   |               |    |                   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                     |   |               |    |                   |   |
| Current liabilities:                                                                                                                          |   |               |    |                   |   |
| Accounts payable                                                                                                                              |   | $                  | 60,689  |                   | $      | 95,061 |   |
| Accrued compensation                                                                                                                          |   | 9,327              |    | 10,037                 |   |
| Accrued professional services                                                                                                                 |   | 44,800             |    | 75,000                 |   |
| Current portion of capital lease  obligations                                                                                                 |   | 18,460             |    | 20,383                 |   |
| Total current liabilities                                                                                                                     |   | 133,276            |    | 200,481                |   |
|                                                                                                                                          |   |               |    |                   |   |
| Deferred rent                                                                                                                                 |   | 28,298             |    | 32,342                 |   |
| Security deposits                                                                                                                             |   | 20,000             |    | 20,000                 |   |
| Capital lease obligations                                                                                                                     |   | 11,100             |    | 20,545                 |   |
|                                                                                                                                          |   |               |    |                   |   |
| Stockholders’ equity:                                                                                                                    |   |               |    |                   |   |
| Common stock, $.01 par value; 75,000,000  shares authorized; 32,490,948 shares issued and outstanding at June 30, 2003  and December 31, 2002 |   | 324,910            |    | 324,910                |   |
| Additional paid-in capital                                                                                                                    |   | 154,634,974        |    | 154,634,974            |   |
| Accumulated deficit                                                                                                                           |   | (154,718,899       | )       | (154,893,072           | )      |
| Total stockholders’ equity                                                                                                               |   | 240,985            |    | 66,812                 |   |
| Total liabilities and stockholders’ equity                                                                                               |   | $                  | 433,659 |                   | $      | 340,180 |   |

 

The accompanying notes are an integral partof the condensed consolidated financial statements.

 

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**PALIGENTINC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                       |   | **Three  months ended June 30,** |    | **Six months  ended June 30,** |   |
|--------------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                                       |   | **2003**                         |    | **2002**                       |   | **2003** |   | **2002** |   |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Revenue:                                   |   |                             |    |                           |   |   |   |   |   |
| Interest income                            |   | $                                | 412     |                           | $      | 2,359 |   | $ | 525 |   | $ | 6,170 |   |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Costs and expenses:                        |   |                             |    |                           |   |   |   |   |   |
| General and administrative                 |   | 155,639                          |    | 279,359                        |   | 326,352 |   | 552,334 |   |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Loss from operations                       |   | (155,227                         | )       | (277,000                       | )      | (325,827 | ) | (546,164 | ) |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Other income                               |   | 500,000                          |    | —                         |   | 500,000 |   | — |   |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Net income (loss)                          |   | $                                | 344,773 |                           | $      | (277,000 | ) | $ | 174,173 |   | $ | (546,164 | ) |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Net income (loss) per common share         |   |                             |    |                           |   |   |   |   |   |
| Basic                                      |   | $                                | 0.01    |                           | $      | (0.01 | ) | $ | 0.01 |   | $ | (0.02 | ) |
| Diluted                                    |   | $                                | 0.01    |                           | $      | (0.01 | ) | $ | 0.00 |   | $ | (0.02 | ) |
|                                       |   |                             |    |                           |   |   |   |   |   |
| Weighted average common shares outstanding |   |                             |    |                           |   |   |   |   |   |
| Basic                                      |   | 32,490,948                       |    | 32,490,948                     |   | 32,490,948 |   | 32,490,948 |   |
| Diluted                                    |   | 44,632,933                       |    | 32,490,948                     |   | 45,911,345 |   | 32,490,948 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

4

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**PALIGENTINC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 

 
|                                                                                                |   | **Six months  ended June 30,** |    |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                                |   | **2003**                       |    | **2002** |   |
| Cash flows from  operating activities:                                                              |   |                           |    |   |   |
| Net income (loss)                                                                                   |   | $                              | 174,173 |   | $ | (546,164 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                           |    |   |   |
| Depreciation and amortization                                                                       |   | 20,995                         |    | 24,698 |   |
| Deferred rent                                                                                       |   | (4,044                         | )       | (1,109 | ) |
| Changes in operating assets and  liabilities:                                                       |   |                           |    |   |   |
| Due from related party                                                                              |   | —                         |    | 137,091 |   |
| Prepaid expenses and  other current assets                                                          |   | (28,871                        | )       | (21,648 | ) |
| Other assets                                                                                        |   | (9,095                         | )       | — |   |
| Security deposits                                                                                   |   | 1,910                          |    | — |   |
| Accounts payable                                                                                    |   | (34,372                        | )       | 18,096 |   |
| Accrued patent and research costs                                                                   |   | —                         |    | (285,859 | ) |
| Accrued expenses and other current  liabilities                                                     |   | (30,910                        | )       | (46,474 | ) |
| Net cash provided by (used in) operating activities                                                 |   | 89,786                         |    | (721,369 | ) |
|                                                                                                |   |                           |    |   |   |
| Cash flows from investing activities:                                                               |   |                           |    |   |   |
| Capital expenditures                                                                                |   | —                         |    | (5,618 | ) |
| Net cash used in investing activities                                                               |   | —                         |    | (5,618 | ) |
|                                                                                                |   |                           |    |   |   |
| Cash flows from financing activities:                                                               |   |                           |    |   |   |
| Proceeds from related party loan                                                                    |   | 30,000                         |    | — |   |
| Repayment of related party loan                                                                     |   | (30,000                        | )       | — |   |
| Principal payments on capital lease  obligations                                                    |   | (11,368                        | )       | (10,784 | ) |
| Net cash used in financing activities                                                               |   | (11,368                        | )       | (10,784 | ) |
|                                                                                                |   |                           |    |   |   |
| Net change in cash and cash equivalents                                                             |   | 78,418                         |    | (737,771 | ) |
|                                                                                                |   |                           |    |   |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 153,046                        |    | 1,298,266 |   |
|                                                                                                |   |                           |    |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                              | 231,464 |   | $ | 560,495 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

5

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**PALIGENT INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

** **

**NOTE1 – BASIS OF PRESENTATION**

 

**InterimFinancial Statements**

 

The condensed consolidatedfinancial statements included herein have been prepared by Paligent Inc.(“Paligent” or the “Company”) pursuant to the rules and regulations of theUnited States Securities and Exchange Commission.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments (consisting only ofnormal recurring accruals) necessary for a fair presentation of the financialposition of the Company at June 30, 2003 and the results of its operations andits cash flows for the interim periods ended June 30, 2003 and 2002. Thecondensed consolidated balance sheet as of December 31, 2002 was derived fromaudited financial statements but does not include all disclosures required bygenerally accepted accounting principles. The accompanying condensed consolidated financial statements have beenprepared in accordance with accounting standards for interim financialstatements and should be read in conjunction with the audited consolidated financialstatements and the notes thereto included in the Company’s Form 10-K for theyear ended December 31, 2002.  The results of operations for the interimperiods are not necessarily indicative of the results of operations to beexpected for the fiscal year or any other interim period.

 

The accompanying consolidated financialstatements have been prepared on a going concern basis which contemplates therealization of assets and the satisfaction of liabilities in the ordinarycourse of business.  The Company hasincurred losses from operations since inception, has working capital andstockholders’ deficits and has limited cash to fund operations in 2003.  Since disposing of its Internet assets andrelated operations in December 2000, the Company has significantly reduced itsoperating costs.  During April 2003, theCompany received $500,000 in connection with the amendment of its licenseagreement with Indevus Pharmaceuticals, Inc. However, at its present rate of spending, the Company expects that itsexisting funds and interest income will only be sufficient to fund theCompany’s current operations into the fourth quarter of 2003.  While the Company evaluates strategicalternatives, including potential business investments and related financing,the Company’s rate of spending could vary from its current estimate.  No assurance can be given that the Companywill be able to complete a business investment or that such financing will beavailable to the Company.  If theCompany is unable to generate significant revenue from acquired operations, obtainadditional revenue from its existing out-licensing of its biotechnology assets,secure additional financing for its present operations or secure sufficientfinancing for operations resulting from acquisition or merger, the Company willexperience a cash shortage in the fourth quarter of 2003, the effect of whichcould result in the discontinuance of operations.  If additional funds are raised by issuing equity securities,further dilution to existing stockholders will result and future investors maybe granted rights superior to those of existing stockholders.

 

These circumstances raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

**Reclassification**

 

Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

6

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**NOTE2**–**BASIC ANDDILUTED NET INCOME (LOSS) PER SHARE**

 

Basic earnings per share (“EPS”) excludes dilution and is computed bydividing income (loss) applicable to common stockholders by the weightedaverage number of common shares outstanding for the period.  Diluted EPS is based upon the weightedaverage number of common shares outstanding during the period plus theadditional weighted average common equivalent shares during the period.  Common equivalent shares are not included inthe per share calculations where the effect of their inclusion would beanti-dilutive.  Common equivalent sharesresult from the assumed exercises of outstanding stock options and warrants,the proceeds of which are then assumed to have been used to repurchaseoutstanding shares of common stock (the “treasury stock method”).

 

For the three and six months ended June 30, 2003, the weighted averagenumber of common shares outstanding includes the dilutive effect of stockoptions and warrants that were exercisable during the periods presented.  For the three and six months ended June 30,2002, the Company had stock options and warrants outstanding that wereanti-dilutive.  These securities werenot included in the computation of diluted EPS for the fiscal 2002 periodspresented because to do so would have been anti-dilutive.

 

**NOTE3**–**RELATEDPARTIES**

 

On March 3, 2003, Richard J.Kurtz, a director and shareholder of the Company, loaned $30,000 to the Companyto fund its current operations.  InApril 2003, the Company’s repaid this loan to Mr. Kurtz from proceeds receivedunder the PRO 2000 Amendment (see Note 4).

 

**NOTE4**–**SIGNIFICANT EVENT**

 

On April 11, 2003, the Companyand Indevus Pharmaceuticals, Inc. (“Indevus”) executed an Amendment (the “PRO2000 Amendment”) to the license agreement dated June 14, 2000 (the “PRO 2000License”).  Under the terms of the PRO2000 License, Indevus holds the exclusive, worldwide rights to develop andmarket PRO 2000 Gel.  Upon execution ofthe PRO 2000 Amendment, the Company received $500,000 from Indevus in exchangefor (i) the elimination of the $500,000 milestone payment that was to be paidunder the PRO 2000 License upon the initiation of a Phase II safety trial(planned to begin later in 2003); and (ii) a second option, upon which exercisethe Company would receive an additional payment of $500,000, to acquire all ofthe Company’s rights, title and interest to PRO 2000 Gel as set forth in thePRO 2000 License, provided that such second option is exercised prior toSeptember 30, 2004.

 

**NOTE5**–**RECENTACCOUNTING PRONOUNCEMENTS**

 

InDecember 2002, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. (“FAS”) 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure, an Amendment of FAS 123.”  This statement provides alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosure requirements of FAS123 to require more prominent and more frequent disclosures in financialstatements about the effects of stock-based compensation.  The provisions of FAS 148 are effective forfiscal years ending after December 15, 2002 and the interim disclosureprovisions are effective for financial reports containing financial statementsfor interim periods beginning after December 15, 2002.  The Company adopted FAS 148 during thefourth quarter ended December 31, 2002. The adoption of FAS 148 did not have a material impact on the Company’sresults of operations or financial position and the additional requireddisclosures are provided below.

 

7

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TheCompany applies Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations, in accounting for itsstock-based compensation plans. Accordingly, no compensation cost has been recognized for its stockoption plan.  Had compensation cost forthe Company’s stock-based compensation plan been determined based on the fairvalue at the grant dates for awards under those plans consistent with FAS 123,the Company’s net income (loss) and net income (loss) per share would have beenadjusted to the pro forma amounts indicated below:

 
|                                                                            |   | **Three months ended June 30,** |    | **Six months ended June 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|
|                                                                            |   | **2003**                        |    | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                            |   |                            |    |                          |   |   |   |   |   |
| Net income (loss) – as reported                                            |   | $                               | 344,773 |                          | $      | (277,000 | ) | $ | 174,173 |   | $ | (546,164 | ) |
| Adjustment to net income (loss) for pro forma stock-based  compensation expense |   | (17,030                         | )       | (17,030                       | )      | (34,060 | ) | (49,965 | ) |
| Net income (loss) – pro forma                                              |   | $                               | 327,743 |                          | $      | (294,030 | ) | $ | 140,113 |   | $ | (596,129 | ) |
|                                                                            |   |                            |    |                          |   |   |   |   |   |
| Net income (loss) per common share:                                             |   |                            |    |                          |   |   |   |   |   |
| Basic – as reported                                                        |   | $                               | 0.01    |                          | $      | (0.01 | ) | $ | 0.01 |   | $ | (0.02 | ) |
| Basic – pro forma                                                          |   | $                               | 0.01    |                          | $      | (0.01 | ) | $ | 0.00 |   | $ | (0.02 | ) |
| Diluted – as reported                                                      |   | $                               | 0.01    |                          | $      | (0.01 | ) | $ | 0.00 |   | $ | (0.02 | ) |
| Diluted – pro forma                                                        |   | $                               | 0.01    |                          | $      | (0.01 | ) | $ | 0.00 |   | $ | (0.02 | ) |

 

In November 2002, the FASB issued FASBInterpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others - an Interpretation ofFASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.34.”  FIN 45 expands on the existingaccounting guidance and disclosure requirements for most guarantees, includingindemnifications.  It requires that, atthe time a company issues a guarantee, the company must recognize an initialliability for the fair value of the obligations it assumes under that guaranteeif that amount is reasonably estimable, and must disclose that information inits interim and annual financial statements. The provisions for initialrecognition and measurement of the liability are to be applied on a prospectivebasis to guarantees issued or modified on or after January 1, 2003.  The Company’s initial adoption of thisstatement on January 1, 2003 did not have a material impact on its results ofoperations, financial position, or cash flows. Guarantees issued or modified after January 1, 2003, will be recognizedat their fair value in the Company’s financial statements.

 

In May 2003, the FASB issued FAS 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  FAS 150requires that certain financial instruments, which under previous guidance wereaccounted for as equity, must now be accounted for as liabilities.  The financial instruments affected includemandatory redeemable stock, certain financial instruments that require or mayrequire the issuer to buy back some of its shares in exchange for cash or otherassets and certain obligations that can be settled with shares of stock.  FAS 150 is effective for all financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  The Company does not expect theadoption of FAS 150 to have a material impact on its consolidated financialposition, results of operations or cash flows.

 

8

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

***Note Regarding Forward-Looking Statements***

 

*Statements in this Form 10-Q that are notstatements or descriptions of historical facts are “forward-looking” statementsunder Section 21E of the Securities Exchange Act of 1934, as amended, and thePrivate Securities Litigation Reform Act of 1995 and are subject to numerousrisks and uncertainties.  Theseforward-looking statements can generally be identified by the use of such termsas “anticipate,” “believe,” “continue,” “expect,” “may,” “should,” or similarvariations or the negative thereof. These forward looking statements involve risks and uncertainties, manyof which are out of the Company’s control and which may affect its future businessplans.  Factors that may affect the Company’sfuture business plans include: (i) its ability to identify, complete andintegrate an acquisition of an operating business; (ii) the viability of theCompany’s business strategy in connection with an acquisition and its abilityto implement such strategy; (iii) its ability to secure financing for itscurrent and potential future operations; and (iv) its ability to generaterevenues sufficient to meet its operating costs.  Such statements reflect the current view of the Company withrespect to future events and are subject to certain risks, uncertainties andassumptions.  In addition, the Company’sbusiness, operations and financial condition are subject to the risks,uncertainties and assumptions that are described in the Company’s reports andstatements filed from time to time with the Securities and ExchangeCommission.  Should one or more of thoserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual results may vary materially from those discussed herein.  The descriptions of the risks, uncertaintiesand assumptions to which the Company’s business, operations and financialcondition are subject are as of the date of this report.  The Company assumes no obligation to updateany such forward-looking statements.*

 

**Overview**

 

PaligentInc., together with its subsidiaries (collectively, “Paligent” or the“Company”), is presently seeking business opportunities to maximize value forits shareholders.  Since 2001, theCompany has been evaluating various strategic alternatives, includingacquisitions of new operating businesses and technologies as well as potentialmerger opportunities.

 

Fromits inception in 1985 through 1999, Paligent operated as a biotechnologycompany engaged in the development and commercialization of novel drugs with aproduct portfolio focused on infectious diseases and oncology.  During 1999, the Company’s principal effortswere devoted to drug development, human clinical trials and partnershipcommercialization focusing on two biotechnology compounds, PRO 2000 Gel andO6-Benzylguanine (“O6-BG”).  Beginningin fiscal 2000, the Company pursued an Internet strategy that focused onpromoting and facilitating transactions between consumers, funeral industryservice providers and financing institutions. During fiscal 2000, the Company also closed its research facilities andout-licensed PRO 2000 Gel and O6-BG. Under the terms of the out-licensing agreements, the Company retainscertain future rights, including the receipt of payments based on the achievementof certain milestones as well as royalties from commercial sales, if any.  After a sustained period of deterioration inthe Internet and technology sectors and related capital markets, the Companydecided, in the fourth quarter of 2000, to discontinue the pursuit of itsInternet strategy.  Shortly thereafter,the Company entered into an agreement to sell all of its Web-based assets andInternet operations and ceased its Internet activities.

 

9

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**Results of Operations**

 

From inception through June 30,2003, the Company has generated no revenues from product sales or services and,except for the net income reported for the three and six month periods endedJune 30, 2003, has not been profitable. As the Company evaluates various strategic alternatives in its quest fornew growth areas that will maximize value to existing stockholders, the Companyexpects to incur additional losses.

 

*Three and six months ended June 30, 2003 as compared to the three andsix months ended June 30, 2002*

 

During the three months endedJune 30, 2003, the Company reported net income of $345,000, or $0.01 per share,as compared to a net loss of $277,000, or $0.01 per share, in the comparableperiod in 2002.  For the six monthsended June 30, 2003, the Company reported net income of $174,000, or $0.01 pershare, as compared to a net loss of $546,000, or $0.02 per share, for thesimilar period in 2002.

 

The Company’s total revenue,which is derived from interest income, was $400 and $500, respectively, for thethree and six month periods ended June 30, 2003, as compared to $2,400 and$6,200, respectively, for the comparable three and six month periods in2002.  The reduction in interest incomeis attributable to a decrease in average cash balances available for investmentduring the respective periods.

 

TheCompany’s total operating expenses, consisting of general and administrativecosts, were $156,000 and $326,000, respectively, for the three and six monthperiods ended June 30, 2003 as compared to $279,000 and $552,000, respectively,for the comparable periods in 2002.  Thedecreases in general and administrative costs of $123,000 and $226,000,respectively, for the comparable three and six month periods is principally dueto reductions in professional fees, including non-recurring legal fees incurredin fiscal 2002 that were attributable to the resolution of the patent licensingagreement relating to O6-BG.

 

Duringthe second quarter ended June 30, 2003, the Company received proceeds of $500,000in connection with its execution of an Amendment (the “PRO 2000 Amendment”) toits license agreement with Indevus Pharmaceuticals, Inc. (“Indevus”) dated June14, 2000 (the “PRO 2000 License”).  Thisamount was recorded as other income. Under the terms of the PRO 2000 License, Indevus holds the exclusive,worldwide rights to develop and market PRO 2000 Gel.  The payment to the Company under the PRO 2000 Amendment wasreceived in exchange for (i) the elimination of the $500,000 milestone paymentthat was to be paid under the PRO 2000 License upon the initiation of a PhaseII safety trial (planned to begin later in 2003); and (ii) a second option,upon which exercise the Company would receive an additional payment of$500,000, to acquire all of the Company’s rights, title and interest to PRO2000 Gel as set forth in the PRO 2000 License, provided that such second optionis exercised prior to September 30, 2004.

 

**Liquidityand Capital Resources**

 

AtJune 30, 2003, the Company’s aggregate cash and cash equivalents were $231,000,a net increase of $78,000 from the end of the prior year.  The increase in cash is attributable to theCompany’s receipt of $500,000 in connection with the PRO 2000 Amendment, whichwas offset by cash payments for operating activities and payments on capitalleases during the six month period ended June 30, 2003.  Additionally, in March 2003, the Companyreceived $30,000 of loan proceeds from Richard J. Kurtz, a director andshareholder of the Company.  This loanwas repaid in April 2003.

 

Except for the net incomereported for the three and six month periods ended June 30, 2003, the Companyhas incurred losses since inception and has limited cash to fund operations in2003.  Since disposing of its Internetassets and related operations in December 2000, the Company has significantly

 

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reduced its operatingcosts.  Although the Company received$500,000 in connection with the PRO 2000 Amendment, the Company expects, at itspresent rate of spending, that its existing funds and interest income will onlybe sufficient to fund the Company’s current operations into the fourth quarterof 2003.  While the Company evaluatesstrategic alternatives, including potential business investments and relatedfinancing, the Company’s rate of spending could vary from its currentestimate.  No assurance can be giventhat the Company will be able to complete a business investment or that suchfinancing will be available to the Company. If the Company is unable to generate significant revenue from acquiredoperations, obtain additional revenue from its existing out-licensing of itsbiotechnology assets, secure additional financing for its present operations orsecure sufficient financing for operations resulting from acquisition ormerger, the Company will experience a cash shortage in the fourth quarter of2003, the effect of which could result in the discontinuance ofoperations.  If additional funds areraised by issuing equity securities, further dilution to existing stockholderswill result and future investors may be granted rights superior to those ofexisting stockholders.

 

These circumstances raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s expectations regarding its rate of spending and thesufficiency of its cash resources over future periods are forward-lookingstatements. The rate of spending and sufficiency of such resources will beaffected by numerous factors including the rate of planned and unplannedexpenditures by the Company and the timing of payments received, if any, underthe sublicenses of the biotechnology assets.

 

**ProposedAcquisition**

 

On July 2, 2003, the Company announced thatit had entered into a non-binding letter of intent to acquire privately heldDigital Products of Delaware, Inc. (“Digital”).  Digital, based in Pompano Beach, Florida, is engaged in providingelectronic monitoring products and services to the criminal justice and correctionsindustry under the trade name Digital Technologies 2000.  Richard J. Kurtz, a director and theprincipal shareholder of the Company, is the principal shareholder of Digital.

 

The Company proposes to acquire all of theissued and outstanding stock of Digital in consideration of the issuance ofshares of common stock of the Company such that the shareholders of Digitalwill own 80% of the outstanding stock of the post-acquisition company.  The proposed acquisition is subject to anumber of conditions, including the receipt of audited financial statements ofDigital, satisfactory completion of due diligence, the receipt of a fairnessopinion and the negotiation of definitive documentation.

 

**Impactof Recently Issued Accounting Standards**

 

In November 2002, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 45,  “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers - an Interpretation of FASB Statements No. 5, 57, and 107 and Rescissionof FASB Interpretation No. 34.”  FIN 45expands on the existing accounting guidance and disclosure requirements formost guarantees, including indemnifications. It requires that, at the time a company issues a guarantee, the companymust recognize an initial liability for the fair value of the obligations itassumes under that guarantee if that amount is reasonably estimable, and mustdisclose that information in its interim and annual financial statements. Theprovisions for initial recognition and measurement of the liability are to beapplied on a prospective basis to guarantees issued or modified on or afterJanuary 1, 2003.  The Company’s initialadoption of this statement on January 1, 2003 did not have a material impact onits results of operations, financial position, or cash flows.  Guarantees issued or modified after January1, 2003, will be recognized at their fair value in the Company’s financialstatements.

 

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In May 2003, the FASB issued Statement ofFinancial Accounting Standards No. (“FAS”) 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity.”  FAS 150 requires that certainfinancial instruments, which under previous guidance were accounted for as equity,must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock,certain financial instruments that require or may require the issuer to buyback some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock.  FAS 150 is effective for all financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003.  The Company does not expect the adoption ofFAS 150 to have a material impact on its consolidated financial position,results of operations or cash flows.

 

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**Item 3. Quantitative and Qualitative Disclosure About Market Risk.**

 

In January 1997, the Securities and ExchangeCommission issued Financial Reporting Release 48 (“FRR 48”), “Disclosure ofAccounting Policies for Derivative Financial Instruments and DerivativeCommodity Instruments, and Disclosure of Quantitative and QualitativeInformation About Market Risk Inherent in Derivative Financial Instruments,Other Financial Instruments and Derivative Commodity Instruments.”  FRR 48 required disclosure of qualitativeand quantitative information about market risk inherent in derivative financialinstruments, other financial instruments, and derivative commodity instrumentsbeyond those already required under generally accepted accountingprinciples.  The Company is not a partyto any of the instruments discussed in FRR 48 and considers its market risk tobe minimal.

 

**Item 4. Controls and Procedures**

 

As of a date within 90days prior to the filing of this Quarterly Report on Form 10-Q (the “EvaluationDate”), an evaluation was performed under the supervision of the Company’sChief Executive Officer and principal financial officer, of the effectivenessof the design and operation of the Company’s disclosure controls andprocedures.  Based on that evaluation, theCompany’s Chief Executive Officer and principal financial officer concludedthat the Company’s disclosure controls and procedures were effective as of theEvaluation Date.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the internal controls subsequent to the EvaluationDate.

 

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**PARTII.  OTHER INFORMATION**

 

**Item 6. Exhibits and Reports on Form 8-K.**

 
| (a)    |   | Exhibits.                                                                                                                                                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                        |
|   |   | 31.1                                                                                                                                                                                                                                                        | Certification  of CEO and  principal financial officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.  Filed  herewith. |
|   |   |                                                                                                                                                                                                                                                        |   |
|   |   | 32.1                                                                                                                                                                                                                                                        | Certification of CEO and  principal financial officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith. |
|   |   |                                                                                                                                                                                                                                                        |
| (b)    |   | Reports on  Form 8-K.                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                        |
|   |   | Current Report on Form 8-K  dated April 11, 2003 filed with the Securities and Exchange Commission on  April 18, 2003 relating to the Amendment to the License Agreement between the  Company and Indevus Pharmaceuticals, Inc. dated as of April 10, 2003. |

 

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**SIGNATURES**

 

 

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

 
|                       | PALIGENT  INC. |
|----------------------------|----------------|
|                       | (Registrant)   |
|                       |           |
|                       |           |
| Date:  August 8, 2003 | by:            | /s/  Salvatore A. Bucci |   |
|                       |           | Salvatore A.  Bucci |
|                       |           | President  and Chief Executive Officer |

 

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