** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

## **FORM10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                      |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                             |
| ** ** | **For the  quarterly period ended March 31, 2005**                                                                                                                                |
| ** ** |
| **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)      |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

YES     ý     NO     o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of 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 May 6, 2005** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
|                           |       |                              |       |
| Common Stock, $0.01 par  value |       | 32,490,948                        |       |

 

 

----

 

**PALIGENT INC.**

 

**INDEX**

 
| **PART I.**       | **FINANCIAL  INFORMATION**                                                                                    |   |
|-------------------|---------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                          |   |
| **Item  1.**      | Financial  Statements                                                                                         |   |
|              |                                                                                                          |   |
|              | Condensed  Consolidated Balance Sheets  March 31, 2005 (unaudited) and December 31, 2004            |   |
|              |                                                                                                          |   |
|              | Condensed  Consolidated Statements of Operations (unaudited)  Three months ended March 31, 2005 and 2004 |   |
|              |                                                                                                          |   |
|              | Condensed  Consolidated Statements of Cash Flows (unaudited)  Three months ended March 31, 2005 and 2004 |   |
|              |                                                                                                          |   |
|              | 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 Disclosures About Market Risk                                                   |   |
|              |                                                                                                          |   |
| **Item 4.**       | Controls and Procedures                                                                                       |   |
|              |                                                                                                          |   |
| **PART II.**      | **OTHER INFORMATION**                                                                                         |   |
|              |                                                                                                          |   |
| **Item 1.**       | Legal Proceedings                                                                                             |   |
|              |                                                                                                          |   |
| **Item  6.**      | Exhibits                                                                                                      |   |
|              |                                                                                                          |   |
| **SIGNATURES**    |                                                                                                          |
|              |                                                                                                          |
| **EXHIBIT INDEX** |                                                                                                          |

 

2

----

 

**PALIGENT INC.CONDENSED CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                               | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                               | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| ASSETS                                                                                                                                                   |       |                    |       |                       |       |
| Current assets:                                                                                                                                          |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                                                |       | $                       | 77,986     |                       | $          | 21,388 |   |
| Note receivable                                                                                                                                          |       | 75,000                  |       | —                     |       |
| Current portion of subtenant receivable, including  accrued interest                                                                                     |       | —                  |       | 30,000                     |       |
| Prepaid expenses and other current assets                                                                                                                |       | 12,573                  |       | —                     |       |
| Total current assets                                                                                                                                     |       | 165,559                 |       | 51,388                     |       |
|                                                                                                                                                     |       |                    |       |                       |       |
| Property and equipment, net                                                                                                                              |       | 473                     |       | 941                        |       |
| Total assets                                                                                                                                             |       | $                       | 166,032    |                       | $          | 52,329 |   |
|                                                                                                                                                     |       |                    |       |                       |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                               |       |                    |       |                       |       |
| Current liabilities:                                                                                                                                     |       |                    |       |                       |       |
| Accounts payable and accrued expenses                                                                                                                    |       | $                       | 45,119     |                       | $          | 54,639 |   |
| Accrued professional services                                                                                                                            |       | 19,900                  |       | 21,900                     |       |
| Due to related party                                                                                                                                     |       | 288,357                 |       | 203,290                    |       |
| Total current liabilities                                                                                                                                |       | 353,376                 |       | 279,829                    |       |
|                                                                                                                                                     |       |                    |       |                       |       |
| Stockholders’ deficit:                                                                                                                              |       |                    |       |                       |       |
| Common stock, $.01 par value; 75,000,000 shares  authorized; 32,490,948 shares issued and outstanding at March 31, 2005  and December 31, 2004 |       | 324,910                 |       | 324,910                    |       |
| Additional paid-in capital                                                                                                                               |       | 154,634,974             |       | 154,634,974                |       |
| Accumulated deficit                                                                                                                                      |       | (155,147,228            | )          | (155,187,384               | )          |
| Total stockholders’ deficit                                                                                                                         |       | (187,344                | )          | (227,500                   | )          |
| Total liabilities and stockholders’ deficit                                                                                                         |       | $                       | 166,032    |                       | $          | 52,329 |   |

 

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

 

3

----

 

**PALIGENT INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS(unaudited)**

 
| ** **                                                                | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                      |       |                                  |       |   |   |
| Interest income                                                           |       | $                                     | —     |   | $ | 1,125 |   |
|                                                                      |       |                                  |       |   |   |
| General and administrative expenses                                       |       | 101,094                               |       | 261,690 |   |
|                                                                      |       |                                  |       |   |   |
| Loss from operations                                                      |       | (101,094                              | )          | (260,565 | ) |
|                                                                      |       |                                  |       |   |   |
| Other income, net                                                         |       | 141,250                               |       | — |   |
|                                                                      |       |                                  |       |   |   |
| Net income (loss)                                                         |       | $                                     | 40,156     |   | $ | (260,565 | ) |
|                                                                      |       |                                  |       |   |   |
| Basic and diluted net income (loss) per common share                      |       | $                                     | 0.00       |   | $ | (0.01 | ) |
|                                                                      |       |                                  |       |   |   |
| Weighted average number of common shares outstanding  - basic and diluted |       | 32,490,948                            |       | 32,490,948 |   |

 

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

 

4

----

 

**PALIGENT INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(unaudited)**

 
| ** **                                                                            | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                 |       |                                  |       |   |   |
| Net income (loss)                                                                     |       | $                                     | 40,156     |   | $ | (260,565 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                         |       | 468                                   |       | 468 |   |
| Write-off of security deposits                                                        |       | —                                |       | 9,543 |   |
| Deferred rent                                                                         |       | —                                |       | (22,262 | ) |
| Changes in operating assets and liabilities:                                          |       |                                  |       |   |   |
| Note receivable                                                                       |       | (75,000                               | )          | — |   |
| Prepaid expenses and other current assets                                             |       | (12,573                               | )          | (30,409 | ) |
| Subtenant receivable                                                                  |       | 30,000                                |       | 50,000 |   |
| Accounts payable and accrued expenses                                                 |       | (6,453                                | )          | (23,940 | ) |
| Accrued rent                                                                          |       | —                                |       | 144,600 |   |
| Net cash used in operating activities                                                 |       | (23,402                               | )          | (132,565 | ) |
|                                                                                  |       |                                  |       |   |   |
| 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                                                      |       | 80,000                                |       | 125,000 |   |
| Principal payments on capital lease obligations                                       |       | —                                |       | (10,000 | ) |
| Net cash provided by financing activities                                             |       | 80,000                                |       | 115,000 |   |
|                                                                                  |       |                                  |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                  |       | 56,598                                |       | (7,565 | ) |
|                                                                                  |       |                                  |       |   |   |
| Cash and cash equivalents at beginning of period                                      |       | 21,388                                |       | 41,321 |   |
|                                                                                  |       |                                  |       |   |   |
| Cash and cash equivalents at end of period                                            |       | $                                     | 77,986     |   | $ | 33,756 |   |

 

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

 

5

----

 

**PALIGENT INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(unaudited)**

 

**NOTE 1 – BASISOF PRESENTATION**

 

**Interim Financial Statements and Going ConcernConsideration**

 

The condensedconsolidated financial statements included herein have been prepared byPaligent Inc. (“Paligent” or the “Company”) pursuant to the rules andregulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  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 March 31, 2005and the results of its operations and its cash flows for the interim periodsended March 31, 2005 and 2004. The condensed consolidated balance sheet asof December 31, 2004 was derived from audited financial statements butdoes not include 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 thenotes thereto included in the Company’s Form 10-K for the year ended December 31,2004.  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.

 

The accompanyingconsolidated financial statements have been prepared on a going concern basiswhich contemplates the realization of assets and the satisfaction of liabilitiesin the ordinary course of business.  TheCompany has incurred losses from operations since inception, has workingcapital and stockholders’ deficits and has limited cash to fund operations in2005.  The Company is presently relyingon borrowings from its principal stockholder to fund continuingoperations.  The principal stockholder hasmade no commitment to continue to make loans to the Company.

 

While the Company evaluatesstrategic alternatives, including potential business investments and relatedfinancing, the Company’s rate of spending could vary from its currentestimate.  No assurance can be given thatthe Company will be able to complete a business investment or that suchfinancing will be available to the Company. If the Company is unable to generate significant revenue from acquiredoperations, secure additional financing for its present operations, obtainfinancing from its principal stockholder or secure sufficient financing foroperations resulting from acquisition or merger, the Company will experience acash shortage in 2005, the effect of which could result in the discontinuanceof operations.  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.

 

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**

 

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

 

6

----

 

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

 

Basic earnings per share(“EPS”) excludes dilution and is computed by dividing income (loss) 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 sharesresult from the assumed exercises of outstanding stock options and warrants,the proceeds of which are then assumed to have been used to repurchaseoutstanding shares of common stock (the “treasury stock method”).  Common equivalent shares are not included inthe per share calculations where the effect of their inclusion would beanti-dilutive.  Inherently, stock optionsand warrants are deemed to be anti-dilutive when the average market price ofthe common stock during the period exceeds the exercise price of the stockoptions or warrants.

 

For the three monthsended March 31, 2005 and 2004, the Company had stock options and warrantsoutstanding that were anti-dilutive. These securities could potentially dilute basic EPS in the future butwere not included in the computation of diluted EPS for the periods presentedbecause to do so would have been anti-dilutive. Consequently, there were no differences between basic and diluted EPSfor these periods.

 

**NOTE 3 – SIGNIFICANTEVENT**

 

In February 2005, the Company’ssubsidiary, Procept, Inc. (“Procept”), and the United States Public HealthService (“PHS”), represented by the National Institutes of Health, executed athird amendment (the “Third Amendment”) to the Exclusive Patent LicenseAgreement (the “License Agreement”).  TheLicense Agreement affirmed and acknowledged Procept’s worldwide patent rightsto O6-Benzylguanine and acknowledges Procept’s sublicensing of such rights toAOI Pharmaceuticals Inc. (“AOI”).  The ThirdAmendment revised the provision for payment of an additional royalty to PHSupon the occurrence of an assignment by Procept of the License Agreement,decreasing such additional royalty to $17,500 from $20,000.

 

Subsequently, in March 2005, pursuant toan agreement by and between Procept, Keryx Biopharmaceuticals, Inc., the parentof AOI (“Keryx”) and PHS (the “Assignment Agreement”), Procept assigned all ofits rights, interests and obligations under the License Agreement to Keryx; inexchange, Keryx agreed to pay Procept a total of $158,750, in twoinstallments.  The first installment of$83,750 was paid on March 30, 2005. The second installment of $75,000 is payable on December 31, 2005and is evidenced by a promissory note from Keryx payable to Procept, whichbears no interest until after the maturity date.  In connection with the Assignment Agreement,Procept paid to PHS the additional royalty of $17,500, as provided for underthe License Agreement, as amended in February 2005.

 

**NOTE 4 –SUBTENANT RECEIVABLE**

 

OnDecember 31, 2003, the Company executed a Surrender Agreement andPromissory Note with its former subtenant (the “Subtenant”) pursuant to whichthe Company received cash and a promissory note in exchange for the terminationof a sublease.  The Promissory Note, inthe face amount of $75,000, bore interest at the rate of 6% per annum and wasto be payable in three installments of $25,000, plus accrued interest, on June 30,2004, December 31, 2004 and June 30, 2005.  The cash portion of the settlement, in theamount of $50,000, was received by the Company in January 2004.

 

7

----

 

TheCompany did not receive from the Subtenant the installment payment that was dueon June 30, 2004. On September 14, 2004, the Company filed an actionin the Supreme Court of the State of New York, New York County, alleging thatthe Subtenant had defaulted on its obligations under the Promissory Note dated December 31,2003 and, accordingly, discontinued accruing interest income as of June 30,2004.  In February 2005, the Companyand the Subtenant reached a settlement of the Company’s claim pursuant to whichthe Company received a one-time payment of $30,000 in exchange for withdrawingits action.

 

**NOTE 5 –RELATED PARTIES**

 

OnOctober 8, 2003, in anticipation of completing a business combination withDigital Products of Delaware, Inc. (“Digital”) or another entity, the Company executeda promissory note (the “Promissory Note”) with Richard J. Kurtz, the principalstockholder of the Company and of Digital. Under the Promissory Note, the Company received, and expects to continueto receive, loans that will enable it to meet its anticipated cash operatingneeds.  The Promissory Note bearsinterest at 8% per annum and contemplated repayment upon the occurrence of theearlier of (i) the first anniversary of the making of the first loan; and (ii)the first funding of debt and/or equity capital subsequent to the completion ofthe proposed business combination between the Company and Digital that resultsin aggregate net proceeds to the Company of not less than $1 million.  As the first anniversary of the PromissoryNote has occurred, the amount due under the Promissory Note is payable ondemand. During the first quarter of 2005, Mr. Kurtz loaned the Company anaggregate of $80,000 to fund its continuing operations, increasing theprincipal balance due under the Promissory Note to $280,000 at March 31,2005.

 

**NOTE 6 – STOCK-BASEDCOMPENSATION**

 

TheCompany complies with Statement of Financial Accounting Standards No. (“FAS”) 148,“Accounting for Stock-Based Compensation - Transition and Disclosure, anAmendment of FAS 123.”  This statement providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosurerequirements of FAS 123 to require more prominent and more frequent disclosuresin financial statements about the effects of stock-based compensation.

 

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

 
| ** **                                                                     | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net income (loss) - as reported                                                |       | $                                     | 40,156     |   | $ | (260,565 | ) |
| Adjustment to net income (loss) for proforma  stock-based compensation expense |       | —                                |       | (17,030 | ) |
| Net income (loss) - pro forma                                                  |       | $                                     | 40,156     |   | $ | (277,595 | ) |
| Basic and diluted net income (loss) per common share  - as reported            |       | $                                     | 0.00       |   | $ | (0.01 | ) |
| Basic and diluted net income (loss) per common share  - pro forma              |       | $                                     | 0.00       |   | $ | (0.01 | ) |

 

InDecember 2004, the Financial Accounting Standards Board issued FAS 123R, “Share-Based

 

8

----

 

Payment.”  FAS 123R is a revision of FAS 123, “Accountingfor Stock Based Compensation,” and supersedes APB 25.  Among other items, FAS 123R eliminates theuse of APB 25 and the intrinsic value method of accounting, and requirescompanies to recognize the cost of employee services received in exchange forawards of equity instruments in the financial statements, based on the grantdate fair value of those awards.  Theeffective date of FAS 123R for the Company is January 1, 2006.  FAS 123R permits companies to adopt itsrequirements using either a “modified prospective” method, or a “modifiedretrospective” method.  Under the “modifiedprospective” method, compensation cost is recognized in the financialstatements beginning with the effective date, based on the requirements of FAS123R for all share-based payments granted after that date, and based on therequirements of FAS 123 for all unvested awards granted prior to the effectivedate of FAS 123R. Under the “modified retrospective” method, the requirementsare the same as under the “modified prospective” method, but also permitsentities to restate financial statements of previous periods, either for allprior periods presented or to the beginning of the fiscal year in which thestatement is adopted, based on previous pro forma disclosures made inaccordance with FAS 123. The Company has not yet determined which of themethods it will use upon adoption.

 

The Company currentlyutilizes the Black-Scholes option pricing model to measure the fair value ofstock options granted to employees. While FAS 123R permits entities to continueto use such a model, it also permits the use of a “lattice” model. The Companyexpects to continue using the Black-Scholes option pricing model upon adoptionof FAS 123R to measure the fair value of stock options.

 

The adoption of thisstatement will have the effect of reducing net income and income per share ascompared to what would be reported under the current requirements. These futureamounts cannot be precisely estimated because they depend on, among otherthings, the number of options issued in the future, and accordingly, theCompany has not determined the impact of adoption of this statement on itsresults of operations.

 

FAS 123R also requires thatthe benefits associated with the tax deductions in excess of recognizedcompensation cost be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature. This requirement willreduce net operating cash flows and increase net financing cash flows in periodsafter the effective date. These future amounts cannot be estimated, becausethey depend on, among other things, when employees exercise stock options.

 

9

----

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

***Note Regarding 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 SecuritiesExchange Act of 1934, as amended, and the Private Securities Litigation ReformAct of 1995 and are subject to numerous risks and uncertainties.  These forward-looking statements cangenerally be identified by the use of such terms as “anticipate,” “believe,” “continue,”“expect,” “may,” “should,” or similar variations or the negative thereof.  These forward looking statements involverisks and uncertainties, many of which are out of the Company’s control andwhich may affect its future business plans. Factors that may affect the Company’s future business plans include: (i)its ability to identify, complete and integrate an acquisition of an operatingbusiness; (ii) the viability of the Company’s business strategy in connectionwith an acquisition and its ability to implement such strategy; (iii) itsability to secure financing for its current and potential future operations;and (iv) its ability to generate revenues sufficient to meet its operatingcosts.  Such statements reflect thecurrent view of the Company with respect to future events and are subject tocertain risks, uncertainties and assumptions. In addition, the Company’s business, operations and financial conditionare subject to the risks, uncertainties and assumptions that are described inthe Company’s reports and statements filed from time to time with theSecurities and Exchange Commission. Should one or more of those risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those discussed herein. The descriptions of the risks, uncertainties and assumptions to whichthe Company’s business, operations and financial condition are subject are asof the date of this report.  The Companyassumes no obligation to update any such forward-looking statements.*

 

**Overview**

 

Since 2001, Paligent Inc., together with its subsidiaries(collectively, the “Company”), has been engaged in seeking businessopportunities to maximize value for its stockholders.  The Company has evaluated various strategicalternatives, including acquisitions of new operating businesses andtechnologies as well as potential merger opportunities.

 

From its inception in 1985 through 1999, the Company operated as abiotechnology company engaged in the development and commercialization of noveldrugs with a product portfolio focused on infectious diseases andoncology.  During 1999, the Company’sprincipal efforts were devoted to drug development and human clinical trials focusingon two biotechnology 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.  In September 2004, the Companytransferred all of its rights, title and interest in PRO 2000 Gel pursuant toan option duly exercised by its sublicense and in March 2005, the Companyassigned all of its rights, interests and obligations in O6-BG to an affiliateof its sublicensee.

 

**Results of Operations**

 

From inception through March 31,2005, 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.

 

10

----

 

## ***Three months ended March 31,2005 as compared to the three months ended March 31, 2004***

 

During the three monthsended March 31, 2005, the Company reported net income of $40,000, or $0.00per share, as compared to a net loss of $261,000, or $0.01 per share, in thecomparable period in 2004.

 

The Company’s totalrevenue, which is derived from interest income, was $0 for the three monthsended March 31, 2005, as compared to $1,125 for the comparable period in 2004.  Interest income in 2004 is attributable to theaccrual of interest earnings on the subtenant note receivable.

 

The Company’s total operating expenses, consisting ofgeneral and administrative costs, were $101,000 for the quarter ended March 31,2005 as compared to $262,000 for the comparable quarter in 2004, a decrease of$161,000.  This decrease is attributableto a non-recurring charge of $131,000 recorded during the first quarter of 2004relating to the fair value of costs to be incurred under its former officelease and expense reductions of $30,000 in professional fees and insurancecosts.

 

During the three months ended March 31, 2005, theCompany assigned all of its rights, interest and obligations in O6-BG to itssublicensee for the contract amount of $158,750.  In connection with the assignment, theCompany paid a royalty in the amount of $17,500 to the United States PublicHealth Service.  The net amount of thistransaction is reflected as other income in the first quarter 2005.  There were no comparable transactions in thefirst quarter of 2004.

 

### **Liquidity and CapitalResources**

### ** **

At March 31, 2005, the Company’s aggregate cash and cashequivalents were $78,000, a net increase of $57,000 from the end of the prioryear.  Cash receipts during the firstquarter of 2005 include net receipts of $66,000 under the O6-BG assignmentagreement, related party loans of $80,000 and $30,000 from the settlement ofthe subtenant receivable, offset by cash payments aggregating $119,000 for operatingactivities.

 

The Company has incurredlosses since inception, has working capital and stockholders’ deficits and haslimited cash to fund its operations.  TheCompany is presently relying on borrowings from its principal stockholder tofund continuing operations.  While theCompany pursues strategic alternatives, including potential businesscombinations and related financing, the Company expects to finance itscontinuing operations through further borrowings from its principal stockholder.  The stockholder has made no commitment tocontinue to make loans to the Company. No assurance can be given that the Company will be able to complete abusiness combination or that such financing from its principal stockholder willcontinue to be available to the Company. If the Company is unable to generate significant revenue from acquiredoperations, secure additional financing for its present operations, obtainfinancing from its principal stockholder or secure sufficient financing foroperations resulting from acquisition or merger, the Company will experience acash shortage, the effect of which could result in the discontinuance ofoperations.  If additional funds areraised by issuing equity securities, further dilution to existing stockholderswill result and future investors may be granted rights superior to those ofexisting stockholders.

 

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

 

11

----

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk.**

 

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

 

**Item 4. Controls and Procedures**

 

As ofthe 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 no changes in the Company’s internal controlover financial reporting during the quarter ended March 31, 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

12

----

 

**PART II.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

OnDecember 31, 2003, the Company executed a Surrender Agreement andPromissory Note with its former subtenant (the “Subtenant”) pursuant to whichthe Company received cash and a promissory note in exchange for the terminationof a sublease.  The Promissory Note, inthe face amount of $75,000, bore interest at the rate of 6% per annum and wasto be payable in three installments of $25,000, plus accrued interest, on June 30,2004, December 31, 2004 and June 30, 2005.  The Company did not receive from theSubtenant the installment payment that was due on June 30, 2004. On September 14,2004, the Company filed an action in the Supreme Court of the State of NewYork, New York County, alleging that the Subtenant had defaulted on itsobligations under the Promissory Note. In February 2005, the Company and the Subtenant reached asettlement of the Company’s claim pursuant to which the Company received aone-time payment of $30,000 in exchange for withdrawing its action.

 

**Item 6.  Exhibits.**

 

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

 

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.  Filed herewith.

 

13

----

 

**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 13,  2005 | by:           | /s/ Salvatore A.  Bucci |   |
|                |          | Salvatore A.  Bucci |
|                |          | President and  Chief Executive Officer |

 

14

----

 

**EXHIBIT INDEX**

 

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

 

15

----