** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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## **FORM 10-Q**

** **

** **

**ý****                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March31, 2002**

** **

**o****                                 TRANSITIONREPORT 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               |   | (I.R.S.  Employer |
| incorporation or organization)                |   | Identification No.)    |
|                                          |   |                   |
| **369  Lexington Avenue, New York, New York** |   | **10017**              |
| (Address of principal executive offices)      |   | (zip code)             |

 

 

**(212)453-3111**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES  ý      NOo

 

 

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

 

| **Class**                      |   | **Outstanding as of May 10, 2002** |
|--------------------------------|--------|------------------------------------|
|                           |   |                               |
| 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 March 31, 2002 (unaudited) and December 31, 2001                  |   |
|           |                                                                                                     |   |   |
|           | Condensed  Consolidated Statements of Operations (unaudited) Three months ended March  31, 2002 and 2001 |   |
|           |                                                                                                     |   |   |
|           | Condensed  Consolidated Statements of Cash Flows (unaudited) Three months ended March  31, 2002 and 2001 |   |
|           |                                                                                                     |   |   |
|           | Notes  to Condensed Consolidated Financial Statements                                                    |   |
|           |                                                                                                     |   |   |
| **Item 2.**    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              |   |
|           |                                                                                                     |   |   |
| **Item 3.**    | Quantitative  and Qualitative Disclosure About Market Risk                                               |   |   |
|           |                                                                                                     |   |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                    |   |   |
|           |                                                                                                     |   |   |
| **Item 6.**    | Exhibits  and Reports on Form 8-K                                                                        |   |   |
|           |                                                                                                     |   |   |
| **SIGNATURES** |                                                                                                     |   |

 

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**PALIGENT INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 

 

                                                                                                                                **                 **
|                                                                                                                                           |   | **March 31,  2002  (unaudited)** |      | **December  31, 2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|------------------------|--------|
|                                                                                                                                           |   |                             |      |                   |   |
| ASSETS                                                                                                                                         |   |                             |      |                   |   |
| Current assets:                                                                                                                                |   |                             |      |                   |   |
| Cash and cash  equivalents                                                                                                                     |   | $                                | 860,351   |                   | $      | 1,298,266 |   |
| Due from related  party                                                                                                                        |   | —                           |      | 137,091                |   |
| Prepaid expenses  and other current assets                                                                                                     |   | 31,769                           |      | 9,147                  |   |
| Total current  assets                                                                                                                          |   | 892,120                          |      | 1,444,504              |   |
|                                                                                                                                           |   |                             |      |                   |   |
| Property and  equipment, net                                                                                                                   |   | 100,991                          |      | 110,954                |   |
| Other assets                                                                                                                                   |   | 92,964                           |      | 94,809                 |   |
| Total assets                                                                                                                                   |   | $                                | 1,086,075 |                   | $      | 1,650,267 |   |
|                                                                                                                                           |   |                             |      |                   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                     |   |                             |      |                   |   |
| Current  liabilities:                                                                                                                          |   |                             |      |                   |   |
| Accounts payable                                                                                                                               |   | $                                | 77,180    |                   | $      | 33,069 |   |
| Accrued  compensation                                                                                                                          |   | 5,889                            |      | 7,549                  |   |
| Accrued  professional services                                                                                                                 |   | 92,751                           |      | 139,000                |   |
| Accrued patent  and research costs                                                                                                             |   | —                           |      | 285,859                |   |
| Current portion  of capital lease obligations                                                                                                  |   | 22,365                           |      | 22,365                 |   |
| Current portion  of deferred rent                                                                                                              |   | 5,608                            |      | 4,155                  |   |
| Total current  liabilities                                                                                                                     |   | 203,793                          |      | 491,997                |   |
|                                                                                                                                           |   |                             |      |                   |   |
| Deferred rent  and other liabilities                                                                                                           |   | 50,818                           |      | 52,341                 |   |
| Capital lease  obligations                                                                                                                     |   | 38,210                           |      | 43,511                 |   |
|                                                                                                                                           |   |                             |      |                   |   |
| Stockholders’  equity:                                                                                                                    |   |                             |      |                   |   |
| Common stock,  $.01 par value; 75,000,000 shares authorized; 32,490,948 shares issued and  outstanding at March 31, 2002 and December 31, 2001 |   | 324,910                          |      | 324,910                |   |
| Additional  paid-in capital                                                                                                                    |   | 154,634,974                      |      | 154,634,974            |   |
| Accumulated  deficit                                                                                                                           |   | (154,166,630                     | )         | (153,897,466           | )      |
| Total  stockholders’ equity                                                                                                               |   | 793,254                          |      | 1,062,418              |   |
| Total  liabilities and stockholders’ equity                                                                                               |   | $                                | 1,086,075 |                   | $      | 1,650,267 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

 

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**PALIGENT INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(unaudited)**

 

 

 
|                                                                      |   | **Three  months ended March 31,** |     |
|---------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                      |   | **2002**                          |     | **2001** |   |
| Revenue:                                                                  |   |                              |     |   |   |
| Interest income                                                           |   | $                                 | 3,811    |   | $ | 33,079 |   |
|                                                                      |   |                              |     |   |   |
| Costs and expenses:                                                       |   |                              |     |   |   |
| General and  administrative                                               |   | 272,975                           |     | 365,303 |   |
|                                                                      |   |                              |     |   |   |
| Loss from  operations                                                     |   | (269,164                          | )        | (332,224 | ) |
|                                                                      |   |                              |     |   |   |
| Other expense                                                             |   | —                            |     | 13,001 |   |
|                                                                      |   |                              |     |   |   |
| Net loss                                                                  |   | $                                 | (269,164 | ) | $ | (345,225 | ) |
|                                                                      |   |                              |     |   |   |
| Basic and diluted  net loss per common share                              |   | $                                 | (0.01    | ) | $ | (0.01 | ) |
|                                                                      |   |                              |     |   |   |
| Weighted average  number of common shares outstanding - basic and diluted |   | 32,490,948                        |     | 32,490,948 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

 

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**PALIGENT INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(unaudited)**

 

 

 
|                                                                         |   | **Three  months ended March 31,** |     |
|------------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                         |   | **2002**                          |     | **2001** |   |
| Cash flows from operating activities:                                        |   |                              |     |   |   |
| Net loss                                                                     |   | $                                 | (269,164 | ) | $ | (345,225 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                              |     |   |   |
| Depreciation and  amortization                                               |   | 9,963                             |     | 26,015 |   |
| Loss on sale of  property and equipment                                      |   | —                            |     | 13,001 |   |
| Deferred rent                                                                |   | (70                               | )        | 2,906 |   |
| Changes in  operating assets and liabilities:                                |   |                              |     |   |   |
| Due from related party                                                       |   | 137,091                           |     | (32,194 | ) |
| Prepaid expenses and other current assets                                    |   | (22,622                           | )        | 35,081 |   |
| Other assets                                                                 |   | 1,845                             |     | — |   |
| Accounts payable                                                             |   | 44,111                            |     | (122,189 | ) |
| Accrued patent  and research costs                                           |   | (285,859                          | )        | — |   |
| Accrued expenses  and other current liabilities                              |   | (47,909                           | )        | (343,663 | ) |
| Net cash used in  operating activities                                       |   | (432,614                          | )        | (766,268 | ) |
|                                                                         |   |                              |     |   |   |
| Cash flows from  investing activities:                                       |   |                              |     |   |   |
| Proceeds from  sales of assets                                               |   | —                            |     | 96,800 |   |
| Net cash  provided by investing activities                                   |   | —                            |     | 96,800 |   |
|                                                                         |   |                              |     |   |   |
| Cash flows from  financing activities:                                       |   |                              |     |   |   |
| Principal  payments on capital lease obligations                             |   | (5,301                            | )        | (45,667 | ) |
| Net cash used in  financing activities                                       |   | (5,301                            | )        | (45,667 | ) |
|                                                                         |   |                              |     |   |   |
| Net change in  cash and cash equivalents                                     |   | (437,915                          | )        | (715,135 | ) |
|                                                                         |   |                              |     |   |   |
| Cash and cash  equivalents at beginning of period                            |   | 1,298,266                         |     | 2,971,690 |   |
|                                                                         |   |                              |     |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                 | 860,351  |   | $ | 2,256,555 |   |
|                                                                         |   |                              |     |   |   |
| Supplemental disclosure of cash flow information:                            |   |                              |     |   |   |
| Interest paid                                                                |   | $                                 | 4,058    |   | $ | 5,355 |   |

 

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

 

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**PALIGENTINC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1 — BASIS OF PRESENTATION**

 

# **Interim Financial Statements**

 

The condensed consolidated financial statements included herein havebeen prepared by Paligent Inc. (“Paligent” or the “Company”) without auditpursuant to the rules and regulations of the United States Securities andExchange 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 condensed consolidated financial statements reflectall adjustments (consisting only of normal recurring accruals) necessary for afair presentation of the financial position of the Company at March 31, 2002and the results of its operations and its cash flows for the interim periodsended March 31, 2002 and 2001. The condensed consolidated balance sheet as ofDecember 31, 2001 was derived from audited financial statements but does notinclude all disclosures required by generally accepted accountingprinciples.  The accompanying condensedconsolidated financial statements have been prepared in accordance withaccounting standards for interim financial statements and should be read inconjunction with the audited consolidated financial statements and the notes thereto included inthe Company’s Form 10-K for the year ended December 31, 2001.  Theresults of operations for the interim periods are not necessarily indicative ofthe results of operations to be expected for the fiscal year or any otherinterim period.

 

# **Reclassifications**

 

Certain prior periodamounts have been reclassified to conform to the current year presentation.

 

**NOTE 2 — BASIC AND DILUTED NET LOSSPER SHARE**

 

Basic earnings per share(“EPS”) excludes dilution and is computed by dividing (loss) income applicableto common stockholders by the weighted average number of common sharesoutstanding for the period.  Diluted EPSis based upon the weighted average number of common shares outstanding duringthe period plus the additional weighted average common equivalent shares duringthe period.  Common equivalent sharesare not included in the per share calculations where the effect of theirinclusion would be anti-dilutive.  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 “treasurystock method”).

 

For the three monthsended March 31, 2002 and 2001, the Company had stock options and warrantsoutstanding that were anti-dilutive. These securities could potentially dilute basic EPS in the future andwere not included in the computation of diluted EPS because to do so would havebeen anti-dilutive for the periods presented. Consequently, there were no differences between basic and diluted EPSfor these periods.

 

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**NOTE 3 — RELATED PARTIES**

 

On February 28,2002, the Company’s subsidiary, Procept, Inc. (“Procept”), and the UnitedStates Public Health Service (“PHS”) executed an exclusive Patent LicenseAgreement (the “New License Agreement”), which superceded the license agreementdated February 6, 1998 between Procept and The Penn State ResearchFoundation.  The New License Agreementaffirms Procept’s worldwide patent rights to O6-Benzylguanine (“O6-BG”) andrelated compounds, and acknowledges Procept’s sublicense agreement with AOIPharmaceuticals, Inc. (“AOI”) dated October 13, 2000 (the “SublicenseAgreement”), as of the date executed by Procept and AOI.  At the time of executing the New LicenseAgreement, Procept paid to PHS a one-time license issue royalty fee of $86,000for outstanding patent prosecution costs accrued at December 31, 2001.  In connection with the execution of the NewLicense Agreement, Procept, together with the National Cancer Institute (“NCI”)and AOI, also executed an amendment to the Cooperative Research and DevelopmentAgreement (“CRADA”), originally executed with the NCI in August 1998 (the“Amended CRADA”), pursuant to which AOI replaced Procept as Collaborator *(i.e.,* the research and developmentpartner).  Under terms of the AmendedCRADA, AOI assumed direct responsibility for all remaining research and paymentobligations, effective as of February 28, 2002.  As part of the Amended CRADA, Procept made a final payment of$200,000 to NCI for production and clinical distribution costs relating toO6-BG, which costs were accrued at December 31, 2001.  Prior to executing the Amended CRADA, AOI was obligated toreimburse Procept for costs that Procept paid, pursuant to, and subsequent tothe effective date of, the Sublicense Agreement.  Shortly thereafter, Procept and AOI agreed that AOI would deferits reimbursement to Procept for costs that Procept had paid relating to itsmaintenance of patent rights and CRADA obligations until the execution of theNew License Agreement and the Amended CRADA. As of December 31, 2001, such reimbursable costs amounted to$137,000.  On February 28, 2002, AOIpaid to the Company the total balance of deferred reimbursable costs.  Mr. Michael S. Weiss, Chairman of the Boardof the Company from July 1997 to May 7, 2002, is the Chairman of the Board ofAOI.  In addition, the principalstockholder of the Company is a stockholder of an affiliate of AOI.

 

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

**Note Regarding Forward-LookingStatements**

 

Statements in this Form 10-Q that are not statements or descriptions ofhistorical facts are “forward-looking” statements under Section 21E of theSecurities Exchange Act of 1934, as amended, and the Private SecuritiesLitigation Reform Act of 1995 and are subject to numerous risks anduncertainties.  These forward-lookingstatements can generally be identified by the use of such terms as“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 operations; and (iv) its ability to generate revenuessufficient to meet its operating costs. Such statements reflect the current view of the Company with respect tofuture 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 Exchange Commission.  Should one or more of those risks oruncertainties materialize, or should underlying assumptions prove incorrect,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**

 

Paligent Inc., togetherwith its subsidiaries (collectively, “Paligent” or the “Company”), is presentlyseeking business opportunities to maximize value for its shareholders.  In 2001, the Company significantly reducedits operating costs following the disposition of its Internet business and theout-licensing of its remaining biotechnology assets in 2000. All employees werereleased, except for the Company’s chief executive officer and an executiveassistant, and the Company subleased a substantial portion of its officefacility and related equipment.  TheCompany is continuing to evaluate various strategic alternatives, includingacquisitions of new operating businesses and technologies as well as potentialmerger opportunities.

 

From its inception in1985 through 1999, Paligent operated as a biotechnology company engaged in thedevelopment and commercialization of novel drugs with a product portfoliofocused on infectious diseases and oncology. During 1999, the Company’s principal efforts were devoted to drugdevelopment, human clinical trials and partnership commercialization focusingon two biotechnology compounds, PRO 2000 Gel and O6-Benzylguanine(“O6-BG”).  Beginning in fiscal 2000,the Company pursued an Internet strategy that focused on promoting andfacilitating transactions between consumers, funeral industry service providersand financing institutions.  Duringfiscal 2000, the Company also closed its research facilities and out-licensedPRO 2000 Gel and O6-BG.  Under the termsof the out-licensing agreements, the Company retains certain future rights,including the receipt of payments based on the achievement of certainmilestones 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.

 

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**Resultsof Operations**

 

From inception through March 31, 2002, the Company has generated norevenues from 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.

 

## ***Three months ended March 31, 2002 as compared to the threemonths ended March 31, 2001***

 

For the three months ended March 31, 2002, the Company reported a netloss of $269,000, or $0.01 per share, as compared to a net loss of $345,000, or$0.01 per share, for the similar period in 2001.

 

The Company’s total revenue, which is derived from interest income, was$4,000 for the three months ended March 31, 2002 as compared to $33,000 for thecomparable period in 2001.  Thereduction in interest income is primarily attributable to a decrease in averagecash balances available for investment during the respective periods.

 

The Company’s total operatingexpenses consists of general and administrative costs.  General and administrative costs decreasedby $92,000, to $273,000, for the first quarter of 2002 from $365,000 for thecomparable period of 2001.  The decreasein general and administrative costs in the first quarter of fiscal 2002 isprimarily related to the Company’s subleasing of a substantial portion of itsoffice space.

 

During the first quarterof fiscal 2001, the Company recorded a loss of $13,000 from the sale of officeequipment.  This loss was recorded toother expense.  There were no comparableitems of gain or loss in the current period.

 

### **Liquidityand Capital Resources**

 

Since disposing of its Internet assets and related operations inDecember 2000, the Company has significantly reduced its operating costs.  At its present rate of spending, the Companyexpects that its existing funds and interest income will be sufficient to fundthe Company’s current operations over the next twelve months while the Companyevaluates strategic alternatives, including potential business investments andrelated financing.  No assurance can begiven that the Company will be able to complete a business investment or thatsuch financing will be available to the Company.  If the Company is unable to generate significant revenue fromacquired operations, obtain additional revenue from its out-licensingarrangements in connection with the existing licenses of the Company’sbiotechnology assets, or secure additional financing, the Company willexperience a cash shortage in 2003, the effect of which could result in thediscontinuance of operations. Further, any potential strategic alignment and/orpotential acquisition could affect the Company’s liquidity and financingrequirements.  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.

 

The Company’sexpectations regarding its rate of spending and the sufficiency of its cashresources over future periods are forward-looking statements. The rate ofspending and sufficiency of such resources will be affected by numerous factorsincluding the rate of planned and unplanned expenditures by the Company and thetiming of payments received, if any, under the sublicenses of the biotechnologyassets.

 

For the three monthsended March 31, 2002, the Company incurred a net loss of $269,000.  The Company used $433,000 to fund operatingactivities during the three-month period in 2002, as compared to $766,000 ofcash used during the comparable period in fiscal 2001.

 

9

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At March 31, 2002,the Company’s aggregate cash and cash equivalents were $860,000, a net decreaseof $438,000 from the end of the prior year. This decrease is primarily attributable to the $433,000 of cash used tofund operations, including $149,000 of net patent and research costsoutstanding as of December 31, 2001 (*i.e.,* total expenditures of $286,000 lessthe receipt of $137,000 from the collection of the related party receivable).

 

 

10

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**Item 3.  Quantitative and QualitativeDisclosure About Market Risk.**

 

In January 1997, theSecurities and Exchange Commission issued Financial Reporting Release 48 (“FRR48”), “Disclosure of Accounting Policies for Derivative Financial Instrumentsand Derivative Commodity Instruments, and Disclosure of Quantitative andQualitative Information About Market Risk Inherent in Derivative FinancialInstruments, Other Financial Instruments and Derivative CommodityInstruments.”  FRR 48 requireddisclosure of qualitative and quantitative information about market riskinherent in derivative financial instruments, other financial instruments, and derivativecommodity instruments beyond those already required under generally acceptedaccounting principles.  The Company isnot a party to any of the instruments discussed in FRR 48 and considers itsmarket risk to be minimal.

 

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

 

**Item 6.****    Exhibits and Reportson Form 8-K.**

 

                                                (a)                                  Exhibits.

 

                                                                                                None.

 

                                                (b)                                 Reports on Form 8-K.

 

None.

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                      | PALIGENT INC. |
|---------------------------|---------------|
|                      | (Registrant)  |
|                      |          |   |
| Date:  May  10, 2002 | by:           | /s/ Salvatore A. Bucci |
|                      |          | Salvatore A. Bucci |
|                      |          | President and Chief Executive Officer |

 

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