** **

**SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**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 September 30, 2001**           |
|                                                            |   |                                                                                          |
| **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**                      |

 

**PaligentInc.**

----

*(Exactname of registrant as specified 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)*        |

 

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 during thepreceding 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 |
|-----|--------|--------|--------|----|--------|---|

 

 

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

 
| Class                          |   | Outstanding  as of November 9, 2001 |
|--------------------------------|--------|-------------------------------------|
|                           |   |                                |
| Common  Stock, $0.01 par value |   | 32,490,948                          |

 

**PALIGENTINC.**

 

**INDEX**

 

 
|           |                                                                                                                  |   |   |
|----------------|-----------------------------------------------------------------------------------------------------------------------|--------|--------|
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                             |   |   |
|           |                                                                                                                  |   |   |
| **Item  1.**   | Financial Statements                                                                                                  |   |   |
|           |                                                                                                                  |   |   |
|           | Condensed  Consolidated Balance Sheets  September 30, 2001 (unaudited) and December 31, 2000                          |   |   |
|           |                                                                                                                  |   |   |
|           | Condensed  Consolidated Statements of Operations (unaudited)  Three and nine months ended September 30, 2001 and 2000 |   |   |
|           |                                                                                                                  |   |   |
|           | Condensed  Consolidated Statements of Cash Flows (unaudited)  Nine months ended September 30, 2001 and 2000           |   |   |
|           |                                                                                                                  |   |   |
|           | 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** |                                                                                                                  |   |   |

** **

 

**PALIGENT INC.****CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 

 
|                                                                                                                                               |   | **September  30, 2001  (unaudited)** |                   |         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------------------|--------------|--------|
|                                                                                                                                               |   |                                 | **December  31, 2000** |         |
|                                                                                                                                               |   |                                 |                   |         |   |
| ASSETS                                                                                                                                             |   |                                 |                   |         |   |
| Current assets:                                                                                                                                    |   |                                 |                   |         |   |
|                                                                                                                                               |   | $                                    | 1,593,938              |         | $      | 2,971,690 |   |
| Prepaid  expenses and other current assets                                                                                                         |   | 162,795                              |                   | 239,305      |   |
| Total  current assets                                                                                                                              |   | 1,756,733                            |                   | 3,210,995    |   |
|                                                                                                                                               |   |                                 |                   |         |   |
| Property  and equipment, net                                                                                                                       |   | 121,976                              |                   | 223,183      |   |
| Other  assets                                                                                                                                      |   | 77,582                               |                   | 77,582       |   |
| Total  assets                                                                                                                                      |   | $                                    | 1,956,291              |         | $      | 3,511,760 |   |
|                                                                                                                                               |   |                                 |                   |         |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                         |   |                                 |                   |         |   |
| Current  liabilities:                                                                                                                              |   |                                 |                   |         |   |
| Accounts  payable                                                                                                                                  |   | $                                    | 86,123                 |         | $      | 188,587 |   |
| Accrued  compensation                                                                                                                              |   | 4,239                                |                   | 178,613      |   |
| Accrued  professional services                                                                                                                     |   | 78,500                               |                   | 220,680      |   |
| Other  current liabilities                                                                                                                         |   | -                                    |                   | 36,814       |   |
| Current  portion of capital lease obligations                                                                                                      |   | 19,449                               |                   | 60,505       |   |
| Total  current liabilities                                                                                                                         |   | 188,311                              |                   | 685,199      |   |
|                                                                                                                                               |   |                                 |                   |         |   |
| Capital  lease obligations                                                                                                                         |   | 51,547                               |                   | 65,877       |   |
| Deferred  rent and other liabilities                                                                                                               |   | 33,118                               |                   | 5,811        |   |
|                                                                                                                                               |   |                                 |                   |         |   |
| Commitments and  contingencies                                                                                                                     |   |                                 |                   |         |   |
|                                                                                                                                               |   |                                 |                   |         |   |
| Stockholders’  equity:                                                                                                                        |   |                                 |                   |         |   |
| Common  stock, $.01 par value; 75,000,000 shares authorized; 32,490,948 shares issued  and outstanding at September 30, 2001 and December 31, 2000 |   | 324,910                              |                   | 324,910      |   |
| Additional  paid-in capital                                                                                                                        |   | 154,634,974                          |                   | 154,634,974  |   |
| Accumulated  deficit                                                                                                                               |   | (153,276,569                         | )                      | (152,205,011 | )      |
| Total  stockholders’ equity                                                                                                                   |   | 1,683,315                            |                   | 2,754,873    |   |
| Total  liabilities and stockholders’ equity                                                                                                   |   | $                                    | 1,956,291              |         | $      | 3,511,760 |   |

 

 

 

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

**PALIGENTINC.****CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS****(unaudited)**

 

 

 
|                                                                                        |    | **Three Months Ended September 30,** |      | **Nine Months Ended September 30,** |      |
|---------------------------------------------------------------------------------------------|---------|--------------------------------------|-----------|-------------------------------------|-----------|
|                                                                                        |    | **2001**                             |      | **2000**                            |      | **2001** |   | **2000** |   |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Revenue:                                                                                    |    |                                 |      |                                |      |   |   |   |   |
| Interest income                                                                             |    | $                                    | 13,055    |                                | $         | 69,540 |   | $ | 66,225 |   | $ | 201,941 |   |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Total revenue                                                                               |    | 13,055                               |      | 69,540                              |      | 66,225 |   | 201,941 |   |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Costs and operating expenses:                                                               |    |                                 |      |                                |      |   |   |   |   |
| Research and development (includes $3,746,836 of  non-cash compensation charges in 2000)    |    | -                                    |      | 126,169                             |      | - |   | 4,629,208 |   |
| Sales and marketing                                                                         |    | -                                    |      | 379,090                             |      | - |   | 757,146 |   |
| General and administrative (includes $15,435,688 of  non-cash compensation charges in 2000) |    | 340,440                              |      | 2,139,177                           |      | 1,117,972 |   | 21,604,314 |   |
| Total costs and operating  expenses                                                         | 340,440 |                                 | 2,644,436 |                                | 1,117,972 |   | 26,990,668 |   |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Loss from operations                                                                        |    | (327,385                             | )         | (2,574,896                          | )         | (1,051,747 | ) | (26,788,727 | ) |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Other (expense) income                                                                      |    | (6,686                               | )         | 56,891                              |      | (19,811 | ) | 932,266 |   |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Net loss                                                                                    |    | $                                    | (334,071  | )                                   | $         | (2,518,005 | ) | $ | (1,071,558 | ) | $ | (25,856,461 | ) |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Basic and diluted net loss per common share                                                 |    | $                                    | (0.01     | )                                   | $         | (0.08 | ) | $ | (0.03 | ) | $ | (0.85 | ) |
|                                                                                        |    |                                 |      |                                |      |   |   |   |   |
| Weighted-average  number of common shares outstanding – basic and diluted              |    | 32,490,948                           |      | 32,490,948                          |      | 32,490,948 |   | 30,388,614 |   |
|                                                                                             |         |                                      |           |                                     |           |  |  |  |  |  |  |  |  |  |

 

 

 

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

 

**PALIGENTINC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 

 

 
|                                                                                |   | **Nine  months ended September 30,** |       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                |   | **2001**                             |       | **2000** |   |
| Cash flows from  operating activities:                                              |   |                                 |       |   |   |
| Net  loss                                                                           |   | $                                    | (1,071,558 | ) | $ | (25,856,461 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:        |   |                                 |       |   |   |
| Depreciation  and amortization                                                      |   | 54,296                               |       | 3,348,702 |   |
| Loss  (gain) on sale of property and equipment                                      |   | 19,811                               |       | (42,594 | ) |
| Gain  on sale of investment                                                         |   | —                               |       | (234,100 | ) |
| Compensation  charge associated with variable stock options                         |   | —                               |       | 14,729,024 |   |
| Compensatory  stock and stock option expense                                        |   | —                               |       | 4,472,975 |   |
| Deferred  rent                                                                      |   | 7,307                                |       | (67,317 | ) |
| Changes  in operating assets and liabilities, net of acquisition:                   |   |                                 |       |   |   |
| Prepaid expenses and  other current assets                                          |   | (13,490                              | )          | 150,828 |   |
| Other assets                                                                        |   | —                               |       | (62,166 | ) |
| Accounts  payable                                                                   |   | (102,464                             | )          | 192,586 |   |
| Accrued  expenses and other current liabilities                                     |   | (353,368                             | )          | (297,434 | ) |
| Other  liabilities                                                                  |   | 20,000                               |       | — |   |
| Net  cash used in operating activities                                              |   | (1,439,466                           | )          | (3,665,957 | ) |
|                                                                                |   |                                 |       |   |   |
| Cash  flows from investing activities:                                              |   |                                 |       |   |   |
| Capital  expenditures                                                               |   | —                               |       | (176,179 | ) |
| Proceeds  from sales of assets                                                      |   | 117,100                              |       | 148,166 |   |
| Proceeds  from sale of investment                                                   |   | —                               |       | 405,753 |   |
| Cash  acquired in acquisition                                                       |   | —                               |       | 17,831 |   |
| Net  cash provided by investing activities                                          |   | 117,100                              |       | 395,571 |   |
|                                                                                |   |                                 |       |   |   |
| Cash  flows from financing activities:                                              |   |                                 |       |   |   |
| Proceeds  from exercise of common stock options                                     |   | —                               |       | 153,888 |   |
| Proceeds  from exercise of common stock warrants                                    |   | —                               |       | 3,292,790 |   |
| Principal  payments on notes payable                                                |   | —                               |       | (290,019 | ) |
| Principal  payments on capital lease obligations                                    |   | (55,386                              | )          | (16,079 | ) |
| Net  cash (used in) provided by financing activities                                |   | (55,386                              | )          | 3,140,580 |   |
|                                                                                |   |                                 |       |   |   |
| Net  change in cash and cash equivalents                                            |   | (1,377,752                           | )          | (129,806 | ) |
| Cash  and cash equivalents at beginning of period                                   |   | 2,971,690                            |       | 4,074,525 |   |
| Cash  and cash equivalents at end of period                                         |   | $                                    | 1,593,938  |   | $ | 3,944,719 |   |
|                                                                                |   |                                 |       |   |   |
|                                                                                |   |                                 |       |   |   |
| Supplemental  disclosure of cash flow information:                                  |   |                                 |       |   |   |
| Interest  paid                                                                      |   | $                                    | 13,601     |   | $ | 17,390 |   |
|                                                                                |   |                                 |       |   |   |
| Supplemental  disclosure of non-cash investing and financing activities:            |   |                                 |       |   |   |
| Fair  value of common stock issued to acquire Heaven’s Door Corporation        |   |                                 |       | $ | 23,935,275 |   |
| Debt  assumed from the acquisition of Heaven’s Door Corporation                |   |                                 |       | $ | 290,019 |   |
| Fair  value of common stock issued in exchange for certain contractual  obligations |   |                                 |       | $ | 23,020,955 |   |
| Fair  value of common stock issued to consultants                                   |   |                                 |       | $ | 4,453,500 |   |
| Capital  lease obligation incurred for the acquisition of equipment                 |   |                                 |       | $ | 145,072 |   |

 

Theaccompanying notes are an integral part of the condensed consolidated financialstatements

 

**PALIGENTINC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1– BASIS OF PRESENTATION**

 

**InterimFinancial Statements**

 

The condensed consolidated financialstatements included herein have been prepared by Paligent Inc. (“Paligent” orthe “Company”) without audit 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 accompanyingunaudited condensed consolidated financial statements reflect all adjustments(consisting only of normal recurring accruals) necessary for a fairpresentation of the financial position of the Company at September 30, 2001 andthe results of its operations and its cash flows for the interim periods endedSeptember 30, 2001 and 2000. The condensed consolidated balance sheet as ofDecember 31, 2000 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 financialstatements and the notes thereto included in the Company’s Form 10-K for theyear ended December 31, 2000.  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.

 

**Reclassifications**

 

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

 

**NOTE 2– BASIC AND DILUTED NET LOSS PER SHARE**

 

Basicearnings per share (“EPS”) excludes dilution and is computed by dividing (loss)income 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 common equivalentshares during the period.  Commonequivalent shares are not included in the per share calculations where theeffect of their inclusion 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“treasury stock method”).

 

Forthe three and nine months ended September 30, 2001 and 2000, the Company hadstock options and warrants outstanding that were anti-dilutive.  These securities could potentially dilutebasic EPS in the future and were not included in the computation of diluted EPSbecause to do so would have been anti-dilutive for the periods presented.  Consequently, there were no differencesbetween basic and diluted EPS for these periods.

**NOTE 3– COMPREHENSIVE (LOSS) INCOME**

 

Comprehensive (loss) income includes the net loss and accumulated othercomprehensive (loss) income, which consists of the change in unrealized gain oninvestments.  Comprehensive (loss)income is calculated as follows:

 
|                                      |   | **Three Months Ended September 30,** |     | **Nine Months Ended September 30,** |   |
|-------------------------------------------|--------|--------------------------------------|----------|-------------------------------------|--------|
|                                      |   | **2001**                             |     | **2000**                            |   | **2001** |   | **2000** |   |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Net loss                                  |   | $                                    | (334,071 | )                                   | $      | (2,518,005 | ) | $ | (1,071,558 | ) | $ | (25,856,461 | ) |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Change in unrealized gain  on investments |   | -                                    |     | -                                   |   | - |   | (98,323 | ) |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Comprehensive loss                        |   | $                                    | (334,071 | )                                   | $      | (2,518,005 | ) | $ | (1,071,558 | ) | $ | (25,954,784 | ) |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Unrealized gain on  investments:          |   |                                 |     |                                |   |   |   |   |   |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Balance, beginning of  period             |   |                                 |     |                                |   |   |   | $ | 98,323 |   |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Change during the  period                 |   |                                 |     |                                |   |   |   | (98,323 | ) |
|                                      |   |                                 |     |                                |   |   |   |   |   |
| Balance, end of period                    |   |                                 |     |                                |   |   |   | $ | - |   |

 

** **

**NOTE 4– RELATED PARTIES**

 

OnOctober 13, 2000, the Company’s subsidiary, Procept, Inc., formerly PacificPharmaceuticals, Inc., (“Procept”) entered into an agreement with AOIPharmaceuticals, Inc. (“AOI”) to sublicense its exclusive worldwide patentrights and know-how relating to O6-Benzylguanine (“O6-BG”), a chemosensitizerthat had been under development by the Company for several years.  Michael S. Weiss, the Chairman of the Boardof the Company is the Chairman and Chief Executive Officer of AOI.  In addition, the principal stockholder ofthe Company is a stockholder of an affiliate of AOI.  Pursuant to this agreement, Procept sublicensed all developmentand licensing rights to AOI in exchange for future royalties on net sales ofO6-BG.  The agreement also provides forcash payments to Procept based upon the achievement of certain developmentalmilestones.  In addition, AOI assumed allfinancial obligations of Procept relating to its licensing of worldwide patentrights as of the effective date of the agreement.  On November 22, 2000, the Company was notified by The Penn StateResearch Foundation (“PSRF”) that the Company was in default of its materialobligations under the License Agreement between Procept and PSRF and that suchdefault invalidates the Company’s sublicensing agreement with AOI.  

 

Sincereceiving PSRF’s notice, the Company has vigorously maintained that PSRF’sclaims are without merit.  Accordingly,the Company has engaged in active negotiations with the National Institutes ofHealth (“NIH”) and the National Cancer Institute (“NCI”), which is conductingresearch under a Cooperative Research and Development Agreement (“CRADA”) withthe Company, in an effort to achieve a satisfactory resolution to thismatter.  At this juncture, the Companyhas reached agreement on a proposed amendment to the CRADA, in connection withand subject to the resolution of the licensing issue with NIH and PSRF.

 

Untilthis matter is resolved, the Company and AOI have agreed to defer thereimbursement of costs that the Company has paid on behalf of AOI.  As of September 30, 2001, such reimbursablecosts amounted to $135,000 and are included in prepaid expenses and othercurrent assets.

**Item 2.****  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

**NoteRegarding Forward-Looking Statements**

 

Statementsin this Form 10-Q that are not statements or descriptions of historical factsare “forward-looking” statements under Section 21E of the Securities ExchangeAct of 1934, as amended, and the Private Securities Litigation Reform Act of1995 and are subject to numerous risks and uncertainties.  These forward-looking statements can generallybe identified by the use of such terms as “anticipate,” “believe,” “continue,”“expect,” "may," "should," or similar variations or thenegative thereof.  These forward lookingstatements involve risks and uncertainties, many of which are out of theCompany's control and which may affect its future business plans.  Factors that may affect the Company's futurebusiness plans include: (i) its ability to identify, complete and integrate anacquisition of an operating business; (ii) the viability of the Company’sbusiness strategy in connection with an acquisition and its ability toimplement such strategy; (iii) its ability to secure financing for itsoperations; and (iv) its ability to generate revenues sufficient to meet itsoperating costs.  Such statementsreflect the current view of the Company with respect to future events and aresubject to certain risks, uncertainties and assumptions.  In addition, the Company’s business,operations and financial condition are subject to the risks, uncertainties andassumptions that are described in the Company’s reports and statements filedfrom 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**

 

Fromits inception in 1985 through 1999, Paligent Inc., together with itssubsidiaries (collectively, “Paligent” or the “Company”), operated as abiopharmaceutical company engaged in the development and commercialization ofnovel drugs with a product portfolio focused on infectious diseases andoncology.  In March 1999, the Companycompleted its merger with Pacific Pharmaceuticals, Inc. (“Pacific”), a companyengaged in the development of cancer therapies.  In January 2000, the Company consummated a major strategic changein its business by acquiring Heaven’s Door Corporation (“HDC”), a company thatprovided business-to-business and business-to-consumer products and servicesfor the funeral service industry over the Internet.  Effective with the acquisition of HDC, the Company’s name waschanged from Procept, Inc. to HeavenlyDoor.com, Inc. and the name of theCompany’s subsidiary, Pacific, was changed to Procept, Inc. (“Procept”).

 

Beginning in 2000,effective with the merger with HDC, the Company pursued an Internet strategythat focused on promoting and facilitating transactions between consumers,funeral industry providers and financing institutions.  In this regard, the Company developed aWeb-based presence that provided consumers access to information pertaining tothe arrangement and handling of pre-arranged funeral contracts.  The Company’s services to funeral industryproviders included the development of customized Web sites that were linked tothe Company’s Web site, call center capabilities and marketing support.

 

Duringthe fourth quarter of 2000, the Company decided to discontinue the pursuit ofits Internet strategy after a sustained period of deterioration in thetechnology sector and related capital markets. Shortly thereafter, the Company entered into an agreement to sell all ofits Web-based assets and Internet funeral service operations, including thename “HeavenlyDoor.com.”  On December31, 2000, the Company changed its name from HeavenlyDoor.com, Inc. to PaligentInc.  The Company is currently engagedin evaluating strategic alternatives to maximize value to existingstockholders.

**Resultsof Operations**

 

From inception through September 30,2001, the Company has generated no revenues from product sales or services andhas not been profitable.  As the Companyevaluates various strategic alternatives in its quest for new growth areas thatwill maximize value to existing stockholders, the Company expects to incuradditional losses.

 

*Threeand nine months ended September 30, 2001 as compared to the three and ninemonths ended September 30, 2000*

 

During the three months ended September30, 2001, the Company reported a net loss of $300,000, or $0.01 per share, ascompared to a net loss of $2.5 million, or $0.08 per share, in the comparableperiod in 2000.  For the nine monthsended September 30, 2001, Paligent reported a net loss of $1.1 million, or$0.03 per share, as compared to a net loss of $25.9 million, or $0.85 pershare, for the similar period in 2000. The fiscal 2000 net loss includes non-cash charges of $22.5 million;which, if excluded, results in a net loss of $3.4 million, or $0.11 per share,for the nine-month period ended September 30, 2000.

 

TheCompany's total revenue, which is derived from interest income, was $13,000 and$70,000, respectively, for the three and nine months ended September 30, 2001,as compared to $66,000 and $202,000, respectively, for the comparable three andnine month periods in 2000.  The reduction in interest income isattributable to a decrease in average cash balances available for investmentduring the respective periods.

 

Total operating expenses were $300,000for the quarter ended September 30, 2001 as compared to $2.6 million for thecomparable quarter in 2000, a decrease of $2.3 million.  The Company's total operating expensesdecreased by $25.9 million, to $1.1 million, for the nine months endedSeptember 30, 2001, from $27.0 million for the comparable period of 2000.  Total operating expenses for the nine monthperiod ended September 30, 2000 include non-cash charges of $22.5 million, ofwhich $19.2 million relates to non-cash stock-based compensation charges and$3.3 million reflects amortization of goodwill.  These non-cash charges excluded, total operating expensesdecreased by $3.4 million in the nine month period ended September 30, 2001from $4.5 million in the comparative period in fiscal 2000.

 

During fiscal 2000, the Company sold itsbiopharmaceutical equipment and closed its Cambridge, Massachusetts researchand development facility.  The Companyalso discontinued the pursuit of its Internet strategy and sold its Web-basedassets and Internet operations in December 2000.  Accordingly, there were no research and development costs orsales and marketing expenses in the nine months ended September 30, 2001.

 

General and administrative expenses were$300,000 during the quarter ended September 30, 2001, a decrease of $1.8million from $2.1 million in the same quarter in fiscal 2000.  For the nine months ended September 30,2001, general and administrative expenses decreased by $20.5 million, to $1.1million, from $21.6 million during thecomparable period in 2000.  Theprior year nine-month period includes $18.8 million of non-cash charges, ofwhich $15.5 million pertains to stock-based compensation charges and $3.3million relates to amortization of goodwill. Excluding the prior year non-cash charges, general and administrativeexpenses decreased by $1.8 million in the nine-month period ended September 30,2001.  The decrease is attributable tostaffing reductions and the elimination of other expenses that were incurred bythe Company in connection with its previous biopharmaceutical and Internetoperations.

 

During the nine months ended September30, 2000, the Company received proceeds (and recorded gains) of $500,000 and$50,000, respectively, in connection with its out-licensing of PRO 2000 Gel andthe assignment of Procept’s licensing rights (including intellectual propertyrights and assets related to dental technology) for Periodontal TissueMonitor.  The Company also recorded anon-recurring gain of $200,000 from the disposition of its investment in AquilaBiopharmaceuticals, Inc. and a gain of $150,000 from the sale ofequipment.  These gains were recorded toother income.  There were no comparableitems of gain in the three and nine months ended September 30, 2001.  Other expense for the nine months endedSeptember 30, 2001 reflects losses recognized on the sale of equipment.

**Liquidityand Capital Resources**

 

Sincedisposing of its Internet assets and related operations in December 2000, theCompany has significantly reduced its operating costs.  At its current rate of spending, the Companyexpects that its current funds and interest income will be sufficient to fundthe Company's current operations beyond the next twelve months while theCompany evaluates strategic alternatives, including potential businessinvestments and related financing.  Noassurance can be given that such financing will be available to theCompany.  If the Company is unable togenerate significant revenue from future operations, or obtain additionalrevenue in connection with the existing licenses of the Company’s biotechnologyassets, or secure additional financing, the Company's financial condition willbe adversely affected. Further, any potential strategic alignment and/orpotential acquisition could affect the Company’s liquidity and financingrequirements.  If additional funds are raisedby issuing equity securities, further dilution to existing stockholders willresult and future investors may be granted rights superior to those of existingstockholders.

 

TheCompany's expectations regarding its rate of spending and the sufficiency ofits cash resources over future periods are forward-looking statements. The rateof spending and sufficiency of such resources will be affected by numerousfactors including the rate of planned and unplanned expenditures by the Companyand the timing of payments received, if any, under the sublicenses of thebiotechnology assets.

 

Forthe nine months ended September 30, 2001, the Company incurred a net loss of$1.1 million.  The Company used $1.4million to fund operating activities during the nine-month period in 2001, ascompared to $3.7 million of cash used during the similar period in fiscal 2000.

 

At September 30, 2001, the Company’saggregate cash and cash equivalents were $1.6 million, a net decrease of $1.4million from the end of the prior year.  This decrease is attributable to the $1.4 million of cash used tofund operations, $500,000 of which was used to satisfy current liabilitiesoutstanding as of December 31, 2000. During the nine months ended September 30, 2001, the Company alsoreceived proceeds of $100,000 relating to the sale of assets.

 

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

 

In January 1997, the Securities andExchange Commission issued Financial Reporting Release 48 (“FRR 48”),“Disclosure of Accounting Policies for Derivative Financial Instruments andDerivative 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, andderivative commodity instruments beyond those already required under generallyaccepted accounting principles.  TheCompany is not a party to any of the instruments discussed in FRR 48 andconsiders its market risk to be minimal.

**PART II.  OTHERINFORMATION**

 
| **Item  6.** | **Exhibits and Reports on Form 8-K.** |
|--------------|---------------------------------------|
|         |                                  |   |
|         | (a)                                   | Exhibits. |
|         |                                  |   |
|         |                                  | None. |
|         |                                  |   |
|         | (b)                                   | Reports on Form 8-K. |
|         |                                  |   |
|         |                                  | None. |

**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:  November 14, 2001 | by:           | /s/ Salvatore A. Bucci |   |
|                          |          | Salvatore A. Bucci |
|                          |          | President and Chief  Executive Officer |