**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, 2004**                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                 |
| **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 as specified in its charter)

 
| **Delaware**                                                    |   | **04-2893483**                              |
|-----------------------------------------------------------------|--------|---------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                            |   |                                        |
| **10 East 53rd Street, New York, New York**                     |   | **10022**                                   |
| (Address of principal executive offices)                        |   | (zip code)                                  |

 

**(212) 755-5461**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES  ý NO  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

YES  o NO  ý

 

Thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 

| **Class**                     |   | **Outstanding  as of August 6, 2004** |
|-------------------------------|--------|--------------------------------------------|
|                          |   |                                       |
| Common Stock, $0.01 par value |   | 32,490,948                                 |

 

 

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**PALIGENT INC.**

 

**INDEX**

 
| **PART I.**        | **FINANCIAL INFORMATION**                                                                                            |   |
|--------------------|----------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                                 |   |
| **Item 1.**        | Financial  Statements                                                                                                |   |
|               |                                                                                                                 |   |
|               | Condensed  Consolidated Balance Sheets  June 30, 2004 (unaudited) and December 31, 2003                    |   |
|               |                                                                                                                 |   |
|               | Condensed  Consolidated Statements of Operations (unaudited)  Three and six months ended June 30, 2004 and 2003 |   |
|               |                                                                                                                 |   |
|               | Condensed  Consolidated Statements of Cash Flows (unaudited)  Six months ended June 30, 2004 and 2003           |   |
|               |                                                                                                                 |   |
|               | 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 1.**        | Legal Proceedings                                                                                                    |   |
|               |                                                                                                                 |   |
| **Item 6.**        | Exhibits and Reports on Form 8-K                                                                                     |   |
|               |                                                                                                                 |
| **SIGNATURES**     |                                                                                                                 |
|               |                                                                                                                 |
| **EXHIBIT  INDEX** |                                                                                                                 |

 

2

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**PALIGENT INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                    |   | **June 30,  2004** |    | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                                                    |   | **(unaudited)**         |    |                        |   |
| ASSETS                                                                                                                                                  |   |                    |    |                        |   |
| Current assets:                                                                                                                                         |   |                    |    |                        |   |
| Cash and cash equivalents                                                                                                                               |   | $                       | 34,582  |                        | $      | 41,321 |   |
| Current portion of subtenant receivable                                                                                                                 |   | 75,000                  |    | 100,000                     |   |
| Property held for sale                                                                                                                                  |   | —                  |    | 10,000                      |   |
| Prepaid expenses and other current assets                                                                                                               |   | 30,463                  |    | —                      |   |
| Total current assets                                                                                                                                    |   | 140,045                 |    | 151,321                     |   |
|                                                                                                                                                    |   |                    |    |                        |   |
| Property and equipment, net                                                                                                                             |   | 1,877                   |    | 2,813                       |   |
| Subtenant receivable                                                                                                                                    |   | —                  |    | 25,000                      |   |
| Security deposits                                                                                                                                       |   | —                  |    | 9,543                       |   |
| Total assets                                                                                                                                            |   | $                       | 141,922 |                        | $      | 188,677 |   |
|                                                                                                                                                    |   |                    |    |                        |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                              |   |                    |    |                        |   |
| Current liabilities:                                                                                                                                    |   |                    |    |                        |   |
| Accounts payable and accrued expenses                                                                                                                   |   | $                       | 110,383 |                        | $      | 132,935 |   |
| Accrued professional services                                                                                                                           |   | 16,100                  |    | 34,100                      |   |
| Accrued rent                                                                                                                                            |   | 63,415                  |    | —                      |   |
| Due to related party                                                                                                                                    |   | 395,328                 |    | 111,189                     |   |
| Capital lease obligation                                                                                                                                |   | —                  |    | 10,000                      |   |
| Total current liabilities                                                                                                                               |   | 585,226                 |    | 288,224                     |   |
|                                                                                                                                                    |   |                    |    |                        |   |
| Deferred rent                                                                                                                                           |   | —                  |    | 22,262                      |   |
|                                                                                                                                                    |   |                    |    |                        |   |
| Stockholders’ deficit:                                                                                                                             |   |                    |    |                        |   |
| Common stock, $.01 par value; 75,000,000  shares authorized; 32,490,948 shares issued and outstanding at June 30,  2004 and December 31, 2003 |   | 324,910                 |    | 324,910                     |   |
| Additional paid-in capital                                                                                                                              |   | 154,634,974             |    | 154,634,974                 |   |
| Accumulated deficit                                                                                                                                     |   | (155,403,188            | )       | (155,081,693                | )      |
| Total stockholders’ deficit                                                                                                                        |   | (443,304                | )       | (121,809                    | )      |
| Total liabilities and stockholders’ deficit                                                                                                        |   | $                       | 141,922 |                        | $      | 188,677 |   |

 

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

 

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**PALIGENT INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                                  |   | **Three  months ended June 30,** |    | **Six months  ended June 30,** |   |
|-------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                  |   | **2004**                              |    | **2003**                            |   | **2004** |   | **2003** |   |
| Revenue:                                              |   |                                  |    |                                |   |   |   |   |   |
| Interest income                                       |   | $                                     | 1,125   |                                | $      | 412 |   | $ | 2,250 |   | $ | 525 |   |
|                                                  |   |                                  |    |                                |   |   |   |   |   |
| Costs and expenses:                                   |   |                                  |    |                                |   |   |   |   |   |
| General and administrative                            |   | 62,055                                |    | 155,639                             |   | 323,745 |   | 326,352 |   |
|                                                  |   |                                  |    |                                |   |   |   |   |   |
| Loss from operations                                  |   | (60,930                               | )       | (155,227                            | )      | (321,495 | ) | (325,827 | ) |
|                                                  |   |                                  |    |                                |   |   |   |   |   |
| Other income                                          |   | —                                |    | 500,000                             |   | — |   | 500,000 |   |
|                                                  |   |                                  |    |                                |   |   |   |   |   |
| Net (loss) income                                     |   | $                                     | (60,930 | )                                   | $      | 344,773 |   | $ | (321,495 | ) | $ | 174,173 |   |
|                                                  |   |                                  |    |                                |   |   |   |   |   |
| Basic and diluted net (loss) income per  common share |   | $                                     | (0.00   | )                                   | $      | 0.01 |   | $ | (0.01 | ) | $ | 0.01 |   |
|                                                  |   |                                  |    |                                |   |   |   |   |   |
| Weighted average number of common shares  outstanding |   |                                  |    |                                |   |   |   |   |   |
| Basic and diluted                                     |   | 32,490,948                            |    | 32,490,948                          |   | 32,490,948 |   | 32,490,948 |   |

 

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

 

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**PALIGENT INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                                                |   | **Six months  ended June 30,** |     |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------|----------|
|                                                                                                |   | **2004**                            |     | **2003** |   |
|                                                                                                |   |                                |     |   |   |
| Cash flows from operating activities:                                                               |   |                                |     |   |   |
| Net (loss) income                                                                                   |   | $                                   | (321,495 | ) | $ | 174,173 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operating activities: |   |                                |     |   |   |
| Depreciation and amortization                                                                       |   | 936                                 |     | 20,995 |   |
| Write-off of security deposits                                                                      |   | 9,543                               |     | 1,910 |   |
| Write-down of accrued rent                                                                          |   | (81,185                             | )        | — |   |
| Deferred charges                                                                                    |   | —                              |     | (9,095 | ) |
| Deferred rent                                                                                       |   | (22,262                             | )        | (4,044 | ) |
| Changes in operating assets and  liabilities:                                                       |   |                                |     |   |   |
| Prepaid expenses and other current assets                                                           |   | (30,463                             | )        | (28,871 | ) |
| Subtenant receivable                                                                                |   | 50,000                              |     | — |   |
| Accounts payable and accrued expenses                                                               |   | (41,741                             | )        | (65,282 | ) |
| Interest payable to related party                                                                   |   | 10,328                              |     | — |   |
| Accrued rent                                                                                        |   | 144,600                             |     | — |   |
| Net cash (used in) provided by operating  activities                                                |   | (281,739                            | )        | 89,786 |   |
|                                                                                                |   |                                |     |   |   |
| Cash flows from investing activities:                                                               |   |                                |     |   |   |
| Proceeds from sale of assets                                                                        |   | 10,000                              |     | — |   |
| Net cash provided by investing activities                                                           |   | 10,000                              |     | — |   |
|                                                                                                |   |                                |     |   |   |
| Cash flows from financing activities:                                                               |   |                                |     |   |   |
| Proceeds from related party loan                                                                    |   | 275,000                             |     | 30,000 |   |
| Repayment of related party loan                                                                     |   | —                              |     | (30,000 | ) |
| Principal payments on capital lease  obligations                                                    |   | (10,000                             | )        | (11,368 | ) |
| Net cash provided by (used in) financing  activities                                                |   | 265,000                             |     | (11,368 | ) |
|                                                                                                |   |                                |     |   |   |
| Net (decrease) increase in cash and cash  equivalents                                               |   | (6,739                              | )        | 78,418 |   |
|                                                                                                |   |                                |     |   |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 41,321                              |     | 153,046 |   |
|                                                                                                |   |                                |     |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                                   | 34,582   |   | $ | 231,464 |   |

 

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

 

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**PALIGENT INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**NOTE 1 – BASIS OF PRESENTATION**

 

**Interim Financial Statements**

 

Thecondensed consolidated financial statements included herein have been preparedby Paligent Inc. (“Paligent” or the “Company”) pursuant to the rules andregulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  In the opinionof management, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments (consisting only of normal recurringaccruals) necessary for a fair presentation of the financial position of theCompany at June 30, 2004 and the results of its operations and its cashflows for the interim periods ended June 30, 2004 and 2003. The condensedconsolidated balance sheet as of December 31, 2003 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 consolidatedfinancial statements and the notes thereto included in the Company’s Form 10-Kfor the year ended December 31, 2003. The results of operations for the interim periods are not necessarilyindicative of the results of operations to be expected for the fiscal year orany other interim period.

 

Theaccompanying consolidated financial statements have been prepared on a goingconcern basis which contemplates the realization of assets and the satisfactionof liabilities in the ordinary course of business.  The Company has incurred losses from operations since inception,has working capital and stockholders’ deficits and has limited cash to fund operationsin 2004.  The Company is presentlyrelying on borrowings from Richard J. Kurtz, its principal stockholder, to fundcontinuing operations.  Mr. Kurtz hasmade no commitment to continue to make loans to the Company.

 

Whilethe Company evaluates strategic alternatives, including potential businessinvestments and related financing, the Company’s rate of spending could varyfrom its current estimate.  No assurancecan be given that the Company will be able to complete a business investment orthat such financing will be available to the Company.  If the Company is unable to generate significant revenue fromacquired operations, obtain additional revenue from its existing out-licensingof its biotechnology assets, secure additional financing for its presentoperations, obtain financing from its principal stockholder or securesufficient financing for operations resulting from acquisition or merger, theCompany will experience a cash shortage in 2004, the effect of which couldresult in the discontinuance of operations. If additional funds are raised by issuing equity securities, furtherdilution to existing stockholders will result and future investors may begranted rights superior to those of existing stockholders.

 

Thesecircumstances raise substantial doubt about the Company’s ability to continueas a going concern.  The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

**Reclassification**

 

Certainprior period amounts have been reclassified to conform to the current periodpresentation.

 

6

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**NOTE 2 – BASIC AND DILUTED NET INCOME (LOSS) PER SHARE**

 

Basicearnings per share (“EPS”) excludes dilution and is computed by dividing income(loss) applicable to common stockholders by the weighted average number ofcommon shares outstanding for the period. Diluted EPS is based upon the weighted average number of common sharesoutstanding during the period plus the additional weighted average commonequivalent shares during the period. Common equivalent shares result from the assumed exercises ofoutstanding stock options and warrants, the proceeds of which are then assumedto have been used to repurchase outstanding shares of common stock (the“treasury stock method”).  Commonequivalent shares are not included in the per share calculations where theeffect of their inclusion would be anti-dilutive.  Inherently, stock options and warrants are deemed to beanti-dilutive when the average market price of the common stock during theperiod exceeds the exercise price of the stock options or warrants.

 

Forthe three and six months ended June 30, 2004 and 2003, the Company hadstock options and warrants outstanding that were anti-dilutive.  These securities could potentially dilutebasic EPS in the future but were not included in the computation of diluted EPSfor the periods presented because to do so would have been anti-dilutive.  Consequently, there were no differencesbetween basic and diluted EPS for these periods.

 

**NOTE 3 – RELATED PARTIES**

 

OnOctober 8, 2003, in anticipation of completing a business combination withDigital Products of Delaware, Inc. (“Digital”), or another entity, the Companyexecuted a promissory note (the “Promissory Note”) with Mr. Kurtz under whichthe Company expects to receive loans that will enable it to meet itsanticipated cash operating needs.  Mr.Kurtz is also the principal shareholder of Digital.  The Promissory Note bears interest at 8% per annum andcontemplates repayment upon the occurrence of (i) the first anniversary of themaking of the first loan; and (ii) the first funding of debt and/or equitycapital subsequent to the completion of the proposed business combinationbetween the Company and Digital that results in aggregate net proceeds to theCompany of not less than $1 million.  OnJanuary 16, 2004 the Company announced that the contemplated Digitalacquisition was being indefinitely postponed. On July 28, 2004, the Company executed a letter of intent toacquire privately held SoyToy LLC, of which Mr. Kurtz holds a 50% membershipinterest (see Note 7 - “Subsequent Event”).

 

Asof June 30, 2004, Mr. Kurtz has loaned the Company an aggregate of$385,000 to fund its continuing operations.

 

**NOTE 4 – SUBTENANT RECEIVABLE**

 

OnDecember 31, 2003, the Company executed a Surrender Agreement andPromissory Note with its former subtenant pursuant to which the Companyreceived cash and a promissory note approximately equivalent to the aggregateamount due as of December 31, 2003. The Promissory Note, in the original amount of $75,000, bears interestat the rate of 6% per annum and was to be payable in three installments of$25,000, plus accrued interest, on June 30, 2004, December 31, 2004and June 30, 2005.  The Company didnot receive from the maker of the Promissory Note the installment payment thatwas due on June 30, 2004.  Themaker verbally indicated to the Company that it was expecting to receivesufficient funds to cure its default of the Promissory Note by the close of thethird quarter of 2004.  Accordingly, theCompany has not recorded a reserve for uncollectiblity against the PromissoryNote as of June 30, 2004.

 

7

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**NOTE 5 – ACCRUED RENT**

 

OnJanuary 16, 2004, the Company voluntarily vacated its office at 369Lexington Avenue, New York, New York (the “Lexington Office”).  The commitment under the lease for theLexington Office (the “Lexington Lease”) requires the Company to pay monthlybase rent and an allocable percentage of operating costs and property taxesthroughout the remaining term of the Lexington Lease, which expires onApril 30, 2005.

 

Pursuantto Statement of Financial Accounting Standards No. (“FAS”) 146, “Accounting forCosts Associated with Exit or Disposal Activities,” the Company recognizesJanuary 16, 2004, the date that it vacated the Lexington Office, as thecease-use date.  Accordingly, aliability for costs that continue to be incurred under the Lexington Lease forthe remaining term was recognized and measured at their fair value at thattime. The fair value was determined based on remaining lease rentals reduced byestimated sublease rentals that could be reasonably obtained for the property.

 

AtMarch 31, 2004, the Company estimated the fair value of costs to beincurred under the Lexington Lease was $154,100, which, after reduction for theremaining balance of the lease security deposit of $9,500, resulted in aliability for accrued rent of $144,600. In July 2004, the Company reached a negotiated settlement with thelandlord under the Lexington Lease (the “Lexington Landlord”) for amounts duethrough March 30, 2004, the date that the Lexington Landlord sold thebuilding.  Based on the settlement withthe Lexington Landlord and other relevant factors, and in accordance with FAS146, the Company re-estimated the fair value of costs to be incurred under theLexington Lease for its remaining term. Accordingly, the Company reduced the liability for accrued rent atJune 30, 2004 to $63,400, resulting in a reduction of $81,200 in generaland administrative expenses for the three and six months ended June 30,2004.

 

**NOTE 6 – STOCK-BASED COMPENSATION**

 

TheCompany complies with FAS 148, “Accounting for Stock-Based Compensation -Transition and Disclosure, an Amendment of FAS 123.”  This statement provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition, FAS148 amends the disclosure requirements of FAS 123 to require more prominent andmore frequent disclosures in financial statements about the effects ofstock-based compensation.

 

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 (loss) income and net (loss) income per share would have beenadjusted to the pro forma amounts indicated below:

 

8

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|                                                                            |   | **Three months  ended June 30,** |    | **Six months  ended June 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                                            |   | **2004**                              |    | **2003**                            |   | **2004** |   | **2003** |   |
|                                                                            |   |                                  |    |                                |   |   |   |   |   |
| Net (loss) income – as reported                                            |   | $                                     | (60,930 | )                                   | $      | 344,773 |   | $ | (321,495 | ) | $ | 174,173 |   |
| Adjustment to net (loss) income for pro  forma stock-based compensation expense |   | (10,059                               | )       | (17,030                             | )      | (27,089 | ) | (34,060 | ) |
| Net (loss) income - pro forma                                                   |   | $                                     | (70,989 | )                                   | $      | 327,743 |   | $ | (348,584 | ) | $ | 140,113 |   |
|                                                                            |   |                                  |    |                                |   |   |   |   |   |
| Basic and diluted net (loss) income per  common share – as reported        |   | $                                     | (0.00   | )                                   | $      | 0.01 |   | $ | (0.01 | ) | $ | 0.01 |   |
| Basic and diluted net (loss) income per  common share – pro forma          |   | $                                     | (0.00   | )                                   | $      | 0.01 |   | $ | (0.01 | ) | $ | 0.00 |   |

 

**NOTE 7 – SUBSEQUENT EVENT**

 

OnJuly 28, 2004, the Company executed a letter of intent to acquireprivately held SoyToy LLC (“SoyToy”). Mr. Kurtz holds a 50% membership interest in SoyToy.  The Company proposes to acquire all of theissued and outstanding membership interests of SoyToy in consideration of theissuance of shares of common stock of the Company such that the presentstockholders of Paligent and equity holders of SoyToy would each own 50% of theoutstanding stock of the post-acquisition company, subject to adjustment forfuture issuances.  In addition, it iscurrently contemplated that approximately one-half of the existing relatedparty debt of SoyToy, which aggregates $600,000 (including accrued interest),will be converted at the closing into convertible preferred stock of theCompany, the terms of which are to be mutually acceptable to the Company andMr. Kurtz, the holder of the related party debt.  The proposed acquisition is subject, among other things, to theexecution of definitive acquisition documentation and the approval by theholders of a majority of shares of Paligent common stock that are not owned byMr. Kurtz or his affiliates. The Company estimates that approximately $1.5million will be needed to fund the initial phase of SoyToy’s business plan,which the Company and SoyToy anticipate financing, at least in part, prior tothe completion of the business combination.

 

9

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

 

***Note RegardingForward-Looking Statements***

 

*Statements in this Form 10-Q that are not statements ordescriptions of historical facts are “forward-looking” statements underSection 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 futurebusiness plans.  Factors that may affectthe Company’s future business plans include: (i) its ability to identify,complete and integrate an acquisition of an operating business; (ii) theviability of the Company’s business strategy in connection with an acquisitionand its ability to implement such strategy; (iii) its ability to securefinancing for its current and potential future operations; and (iv) its abilityto generate revenues sufficient to meet its operating costs.  Such statements reflect the current view ofthe Company with respect to future events and are subject to certain risks,uncertainties and assumptions.  In addition,the Company’s business, operations and financial condition are subject to therisks, uncertainties and assumptions that are described in the Company’sreports and statements 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 financial conditionare subject are as of the date of this report. The Company assumes no obligation to update any such forward-lookingstatements.*

 

**Overview**

 

Since2001, Paligent Inc., together with its subsidiaries (collectively, the“Company”), has been engaged in seeking business opportunities to maximizevalue for its stockholders.  The Companyhas evaluated various strategic alternatives, including acquisitions of newoperating businesses and technologies as well as potential mergeropportunities.

 

Fromits inception in 1985 through 1999, the Company 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 and human clinical trials focusing on twobiotechnology compounds, PRO 2000 Gel and O6-Benzylguanine (“O6-BG”).  During fiscal 2000, the Company closed itsresearch facilities and out-licensed PRO 2000 Gel and O6-BG.  Under the terms of the respectiveout-licensing agreements, the Company retains certain future rights, includingthe right to receive certain agreed-upon payments upon the achievement ofcertain milestones as well as royalties from commercial sales, if any.

 

**Results of Operations**

 

Frominception through June 30, 2004, the Company has generated no revenuesfrom product sales or services and has not been profitable.  As the Company evaluates various strategicalternatives in its quest for new growth areas that will maximize value toexisting stockholders, the Company expects to incur additional losses.

 

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*Three and six months ended June 30, 2004as compared to the three and six months ended June 30, 2003*

 

Duringthe three months ended June 30, 2004, the Company reported a net loss of$61,000, or $0.00 per share, as compared to net income of $345,000, or $0.01per share, in the comparable period in 2003. For the six months ended June 30, 2004, the Company reported a netloss of $321,000, or $0.01 per share, as compared to net income of $174,000, or$0.01 per share, for the similar period in 2003.

 

TheCompany’s total revenue, which is derived from interest income, was $1,125 and$2,250, respectively, for the three and six month periods ended June 30,2004, as compared to $412 and 525, respectively, for the comparable three andsix month periods in 2003.  The increasein interest income is attributable to the accrual of interest earnings on thesubtenant note receivable.

 

TheCompany’s total operating expenses, consisting of general and administrativecosts, were $62,000 and $324,000, respectively, for the three and six monthperiods ended June 30, 2004 as compared to $156,000 and $326,000,respectively, for the comparable periods in 2003.  The decrease in general and administrative costs of $94,000 forthe three months ended June 30, 2004 is principally due to a write-down of$81,000 in accrued rent resulting from a change in estimate relating to thefair value of costs to be incurred under the Lexington Lease.  The remaining decrease of $13,000 in generaland administrative costs is primarily attributable to a reduction inprofessional fees.

 

Duringthe three months ended June 30, 2003, the Company received proceeds of$500,000 in connection with its execution of an amendment to its licenseagreement with Indevus Pharmaceuticals, Inc. (“Indevus”) dated June 14,2000 under which agreement Indevus holds the exclusive, worldwide rights todevelop and market PRO 2000 Gel.  Thisamount was recorded as other income.  Therewere no items of other income or expense in 2004.

 

**Liquidity and Capital Resources**

 

AtJune 30, 2004, the Company’s aggregate cash and cash equivalents were$35,000, a net decrease of $7,000 from the end of the prior year.  The net decrease in cash is attributable tocash payments of $282,000 and $10,000, respectively, for operating activitiesand payments on capital leases during the six month period ended June 30,2004, which were offset by proceeds from related party loans of $275,000 and theCompany’s receipt of $10,000 in connection with the sale of assets.

 

TheCompany has incurred losses since inception, has working capital andstockholders’ deficits and has limited cash to fund its operations.  The Company is presently relying onborrowings from its principal stockholder to fund continuing operations.  While the Company pursues strategicalternatives, including potential business combination and related financing,the Company expects to finance its continuing operations through furtherborrowings from its principal stockholder. The stockholder has made no commitment to continue to make loans to theCompany.  No assurance can be given thatthe Company will be able to complete a business combination or that suchfinancing from its principal stockholder will continue to be available to theCompany.  If the Company is unable togenerate significant revenue from acquired operations, obtain additionalrevenue from its existing out-licensing of its biotechnology assets, secureadditional financing for its present operations, obtain financing from itsprincipal stockholder or secure sufficient financing for operations resultingfrom acquisition or merger, the Company will experience a cash shortage, theeffect of which could result in the discontinuance of operations.  If additional funds are raised by issuingequity securities, further dilution to existing stockholders will result andfuture investors may be granted rights superior to those of existingstockholders.

 

These circumstances raise substantial doubt about the Company’s abilityto continue as a going concern.

 

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**Proposed Acquisition**

 

OnJuly 28, 2004, the Company executed a letter of intent to acquireprivately held SoyToy LLC (“SoyToy”). Richard J. Kurtz, a director and the principal stockholder of theCompany, holds a 50% membership interest in SoyToy.  The Company proposes to acquire all of the issued and outstandingmembership interests of SoyToy in consideration of the issuance of shares of commonstock of the Company such that the present stockholders of Paligent and equityholders of SoyToy would each own 50% of the outstanding stock of thepost-acquisition company, subject to adjustment for future issuances.  In addition, it is currently contemplatedthat approximately one-half of the existing related party debt of SoyToy, whichaggregates $600,000 (including accrued interest), will be converted at theclosing into convertible preferred stock of the Company, the terms of which areto be mutually acceptable to the Company and Mr. Kurtz, the holder of therelated party debt.  The proposedacquisition is subject, among other things, to the execution of definitiveacquisition documentation and the approval by the holders of a majority ofshares of Paligent common stock that are not owned by Mr. Kurtz or hisaffiliates. The Company estimates that approximately $1.5 million will beneeded to fund the initial phase of SoyToy’s business plan, which the Companyand SoyToy anticipate financing, at least in part, prior to the completion ofthe business combination.

 

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

 

InJanuary 1997, the Securities and Exchange Commission issued FinancialReporting Release 48 (“FRR 48”), “Disclosure of Accounting Policies forDerivative Financial Instruments and Derivative Commodity Instruments, andDisclosure of Quantitative and Qualitative Information About Market RiskInherent in Derivative Financial Instruments, Other Financial Instruments andDerivative Commodity Instruments.”  FRR48 required disclosure of qualitative and quantitative information about marketrisk inherent in derivative financial instruments, other financial instruments,and derivative commodity instruments beyond those already required undergenerally accepted accounting principles. The Company is not a party to any of the instruments discussed in FRR 48and considers its market risk to be minimal.

 

**Item 4****.  Controls and Procedures**

 

Asof the end of the period covered by this Quarterly Report on Form 10-Q, anevaluation was performed under the supervision of the Company’s Chief ExecutiveOfficer and Principal Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer andPrincipal Financial Officer concluded that the Company’s disclosure controlsand procedures were effective as of the end of the period covered by thisreport.  In addition, there were nochanges in the Company’s internal control over financial reporting during thequarter ended June 30, 2004 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II****.  OTHER INFORMATION**

 

**Item 1****.  Legal Proceedings**

 

Onor about May 28, 2004, the Company’s landlord under the Lexington Lease (the“Lexington Landlord”) brought an action against the Company in Civil Court ofthe City of New York, New York County (the “Action”).  The Action alleged that the Company failed to pay its rentbeginning in October 2003 and was in default under the Lexington Lease.  The Action sought payment of rent throughMarch 30, 2004, the date the Lexington Landlord sold the building.  The net amount claimed due and owing by theLexington Landlord of $50,000 reflected a total lease obligation throughMarch 30, 2004 of $125,000 less an offset of $75,000 from the applicationof the Company’s security deposit.  OnJuly 23, 2004, the Company and the Lexington Landlord reached a negotiatedsettlement in the amount of $30,000, pursuant to which the Action was fully andcompletely resolved.

 

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

 

(a)                                  Exhibits.

 

31.1                           Certification of Chief Executive Officer and Principal FinancialOfficer Required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities ExchangeAct of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.  Filed herewith.

 

32.1                           Certification of Chief Executive Officer and Principal FinancialOfficer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.

 

(b)                                 Reports on Form 8-K.

 

None.

 

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**SIGNATURES**

 

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

 
|                             | PALIGENT  INC. |
|----------------------------------|----------------|
|                             | (Registrant)   |
|                             |           |
|                             |           |
| Date:  August 13, 2004 | by:            | /s/  Salvatore A. Bucci |   |
|                             |           | Salvatore  A. Bucci |
|                             |           | President  and Chief Executive Officer |

 

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**EXHIBIT INDEX**

 

31.1                                                                           Certification of Chief Executive Officer andPrincipal Financial Officer Required by Rule 13a-14(a) or Rule 15d-14(a) of theSecurities Exchange Act of 1934, as Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1                                                                           Certification of Chief Executive Officer andPrincipal Financial Officer Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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