** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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## **FORM 10-Q**

## ** **

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                   |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                     |
|       |       | **For the quarterly period ended  June 30, 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**                                                                                                                                                                                                                                                      |

 

**PaligentInc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                 | ** ** | **04-2893483**       |
|----------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of             |       | (I.R.S. Employer     |
| incorporation or  organization)              | * *   | 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 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

YES  ý  NO  o

 

Indicate by check markwhether 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 August 5, 2005** |
|--------------------------------|------------|-------------------------------------------|
|                           |       |                                      |
| Common  Stock, $0.01 par value |       | 32,490,948                                |

 

 

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**PALIGENTINC.**

 

**INDEX**

 
| **PART I.**       | ** ** | **FINANCIAL INFORMATION**                                                                                                 |   |
|------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|                   |       |                                                                                                                      |   |
| **Item  1.**           |       | Financial Statements                                                                                                      |   |
|                   |       |                                                                                                                      |   |
|                   |       | Condensed Consolidated Balance  Sheets  June 30, 2005 (unaudited) and December 31, 2004                         |   |
|                   |       |                                                                                                                      |   |
|                   |       | Condensed Consolidated  Statements of Operations (unaudited)  Three and six months ended June 30, 2005 and 2004 |   |
|                   |       |                                                                                                                      |   |
|                   |       | Condensed Consolidated Statements  of Cash Flows (unaudited)  Six months ended June 30, 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  Disclosure About Market Risk                                                                |   |
|                   |       |                                                                                                                      |   |
| **Item 4.**            | ** ** | Controls and Procedures                                                                                                   |   |
|                   |       |                                                                                                                      |   |
| **PART II.**      | ** ** | **OTHER INFORMATION**                                                                                                     |   |
|                   |       |                                                                                                                      |   |
| **Item 6.**            |       | Exhibits                                                                                                                  |   |
|                   |       |                                                                                                                      |   |
| **SIGNATURES**         |       |
|                   |       |                                                                                                                      |   |
| **EXHIBIT INDEX** |       |

 

2

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**PALIGENT INC.CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                           | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **(unaudited)**        | ** ** | ** **                      | ** ** |
| ASSETS                                                               |       |                   |       |                            |       |
| Current assets:                                                      |       |                   |       |                            |       |
| Cash and cash  equivalents                                           |       | $                      | 18,725     |                            | $          | 21,388 |   |
| Note receivable                                                      |       | 75,000                 |       | —                          |       |
| Current portion  of subtenant receivable, including accrued interest |       | —                 |       | 30,000                          |       |
| Prepaid expenses  and other current assets                           |       | 11,509                 |       | —                          |       |
| Total current  assets                                                |       | 105,234                |       | 51,388                          |       |
|                                                                 |       |                   |       |                            |       |
| Property and  equipment, net                                         |       | —                 |       | 941                             |       |
| Total assets                                                         |       | $                      | 105,234    |                            | $          | 52,329 |   |
|                                                                 |       |                   |       |                            |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                          |       |                   |       |                            |       |
| Current  liabilities:                                                |       |                   |       |                            |       |
| Accounts payable  and accrued expenses                               |       | $                      | 60,239     |                            | $          | 54,639 |   |
| Accrued  professional services                                       |       | 19,600                 |       | 21,900                          |       |
| Due to related  party                                                |       | 329,111                |       | 203,290                         |       |
| Total current  liabilities                                           |       | 408,950                |       | 279,829                         |       |
|                                                                 |       |                   |       |                            |       |
| Stockholders’  deficit:                                         |       |                   |       |                            |       |
| Common stock,  $.01 par value; 75,000,000 shares authorized;         |       |                   |       |                            |       |
| 32,490,948  shares issued and outstanding at                         |       |                   |       |                            |       |
| June 30,  2005 and December 31, 2004                       |       | 324,910                |       | 324,910                         |       |
| Additional  paid-in capital                                          |       | 154,634,974            |       | 154,634,974                     |       |
| Accumulated  deficit                                                 |       | (155,263,600           | )          | (155,187,384                    | )          |
| Total  stockholders’ deficit                                    |       | (303,716               | )          | (227,500                        | )          |
| Total  liabilities and stockholders’ deficit                    |       | $                      | 105,234    |                            | $          | 52,329 |   |

 

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

 

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**PALIGENT INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                                |       |                                 |       |                               |       |   |   |   |   |
| Interest income                                                         |       | $                                    | —     |                               | $          | 1,125 |   | $ | — |   | $ | 2,250 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Costs and  expenses:                                                    |       |                                 |       |                               |       |   |   |   |   |
| General and  administrative                                             |       | 116,372                              |       | 62,055                             |       | 217,466 |   | 323,745 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Loss from  operations                                                   |       | (116,372                             | )          | (60,930                            | )          | (217,466 | ) | (321,495 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Other income                                                            |       | —                               |       | —                             |       | 141,250 |   | — |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                                                |       | $                                    | (116,372   | )                                  | $          | (60,930 | ) | $ | (76,216 | ) | $ | (321,495 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Basic and  diluted net loss income per common share                     |       | $                                    | (0.00      | )                                  | $          | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Weighted average  number of common shares outstanding Basic and diluted |       | 32,490,948                           |       | 32,490,948                         |       | 32,490,948 |   | 32,490,948 |   |

 

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

 

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

 
| ** **                                                                   | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                       |       |                               |       |   |   |
| Net loss                                                                     |       | $                                  | (76,216    | ) | $ | (321,495 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                               |       |   |   |
| Depreciation and  amortization                                               |       | 941                                |       | 936 |   |
| Write-off of  security deposits                                              |       | —                             |       | 9,543 |   |
| Write-down of  accrued rent                                                  |       | —                             |       | (81,185 | ) |
| Deferred rent                                                                |       | —                             |       | (22,262 | ) |
| Changes in  operating assets and liabilities:                                |       |                               |       |   |   |
| Note receivable                                                              |       | (75,000                            | )          | — |   |
| Prepaid expenses  and other current assets                                   |       | (11,509                            | )          | (30,463 | ) |
| Subtenant  receivable                                                        |       | 30,000                             |       | 50,000 |   |
| Accounts payable  and accrued expenses                                       |       | 14,121                             |       | (31,413 | ) |
| Accrued rent                                                                 |       | —                             |       | 144,600 |   |
| Net cash used in  operating activities                                       |       | (117,663                           | )          | (281,739 | ) |
|                                                                         |       |                               |       |   |   |
| 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                                            |       | 115,000                            |       | 275,000 |   |
| Principal  payments on capital lease obligations                             |       | —                             |       | (10,000 | ) |
| Net cash  provided by financing activities                                   |       | 115,000                            |       | 265,000 |   |
|                                                                         |       |                               |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (2,663                             | )          | (6,739 | ) |
|                                                                         |       |                               |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 21,388                             |       | 41,321 |   |
|                                                                         |       |                               |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                                  | 18,725     |   | $ | 34,582 |   |

 

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

 

5

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** **

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

 

**NOTE 1 – BASIS OF PRESENTATION**

 

**Interim Financial Statements**

 

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 June 30, 2005 andthe results of its operations and its cash flows for the interim periods ended June 30,2005 and 2004. The condensed consolidated balance sheet as of December 31,2004 was derived from audited financial statements but does not include alldisclosures required by generally accepted accounting principles.  The accompanying condensed consolidatedfinancial statements have been prepared in accordance with accounting standardsfor interim financial statements and should be read in conjunction with theaudited consolidated financial statements and the notes thereto includedin the Company’s Form 10-K for the year ended December 31, 2004.  Theresults 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 accompanying consolidated financial statementshave been prepared on a going concern basis which contemplates the realizationof assets and the satisfaction of liabilities in the ordinary course ofbusiness.  The Company has incurredlosses from operations since inception, has working capital and stockholders’deficits and has limited cash to fund operations in 2005.  The Company is presently relying onborrowings from its principal stockholder to fund continuing operations.  The principal stockholder has made nocommitment to continue to make loans to the Company.

 

While the Company evaluates strategic alternatives,including potential business investments and related financing, the Company’srate of spending could vary from its current estimate.  No assurance can be given that the Companywill be able to complete a business investment or that such financing will beavailable to the Company.  If the Companyis unable to generate significant revenue from acquired 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.

 

**NOTE 2 – BASIC AND DILUTED NETINCOME (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.

 

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Diluted EPS is based uponthe weighted average number of common shares outstanding during the period plusthe additional weighted average common equivalent shares during theperiod.  Common equivalent shares resultfrom the assumed exercises of outstanding stock options and warrants, theproceeds of which are then assumed to have been used to repurchase outstandingshares 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 and sixmonths ended June 30, 2005 and 2004, the Company had stock options andwarrants outstanding 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 – SIGNIFICANT EVENT**

 

In February 2005, the Company’s subsidiary, Procept, Inc. (“Procept”),and the United States Public Health Service (“PHS”), represented by theNational Institutes of Health, executed a third amendment (the “Third Amendment”)to the Exclusive Patent License Agreement (the “License Agreement”).  The License Agreement affirmed andacknowledged Procept’s worldwide patent rights to O6-Benzylguanine andacknowledges Procept’s sublicensing of such rights to AOI Pharmaceuticals Inc.(“AOI”).  The Third Amendment revised theprovision for payment of an additional royalty to PHS upon the occurrence of anassignment by Procept of the License Agreement, decreasing such additionalroyalty to $17,500 from $20,000.

 

Subsequently, in March 2005, pursuant to an agreement by andbetween Procept, Keryx Biopharmaceuticals, Inc., the parent of AOI (“Keryx”)and PHS (the “Assignment Agreement”), Procept assigned all of its rights,interests and obligations under the License Agreement to Keryx; in exchange,Keryx agreed to pay Procept a total of $158,750, in two installments.  The first installment of $83,750 was paid on March 30,2005.  The second installment of $75,000is payable on December 31, 2005 and is evidenced by a promissory note fromKeryx payable to Procept, which bears no interest until after the maturitydate.  In connection with the AssignmentAgreement, Procept paid to PHS the additional royalty of $17,500, as providedfor under the 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 was tobe 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.  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 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.

 

7

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**NOTE 5 – RELATED PARTIES**

 

OnOctober 8, 2003, in anticipation of completing a business combination withDigital Products of Delaware, Inc. (“Digital”) or another entity, theCompany executed a promissory note (the “Promissory Note”) with Richard J.Kurtz, the principal stockholder of the Company and of Digital.  Under the Promissory Note, the Companyreceived, and expects to continue to receive, loans that will enable it to meetits anticipated cash operating needs. The Promissory Note bears interest at 8% per annum and contemplatedrepayment upon the occurrence of the earlier of (i) the first anniversaryof the making of the first loan; and (ii) the first funding of debt and/orequity capital subsequent to the completion of the proposed businesscombination between the Company and Digital that results in aggregate netproceeds 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 six months ended June 30, 2005, Mr. Kurtz loanedthe Company an aggregate of $115,000 to fund its continuing operations,increasing the principal balance due under the Promissory Note to $315,000 at June 30,2005.

 

**NOTE 6 – STOCK-BASED COMPENSATION**

 

TheCompany complies with Statement of Financial Accounting Standards No. (“FAS”)148, “Accounting for Stock-Based Compensation - Transition and Disclosure, anAmendment of FAS 123.”  This statementprovides alternative methods of transition for a voluntary change to the fairvalue based 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 loss and net loss per share would have been adjusted to thepro forma amounts indicated below:

 
| ** **                                                             | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Net loss – as  reported                                           |       | $                                    | (116,372   | )                                  | $          | (60,930 | ) | $ | (76,216 | ) | $ | (321,495 | ) |
| Adjustment to  net loss for pro forma stock-based compensation expense |       | —                               |       | (10,059                            | )          | — |   | (27,089 | ) |
| Net loss – pro  forma                                             |       | $                                    | (116,372   | )                                  | $          | (70,989 | ) | $ | (76,216 | ) | $ | (348,584 | ) |
|                                                                   |       |                                 |       |                               |       |   |   |   |   |
| Basic and  diluted net loss per common share – as reported        |       | $                                    | (0.00      | )                                  | $          | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) |
| Basic and  diluted net loss per common share – pro forma          |       | $                                    | (0.00      | )                                  | $          | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) |

 

InDecember 2004, the Financial Accounting Standards Board issued FAS 123R, “Share-BasedPayment.”  FAS 123R is a revision of FAS123, “Accounting for 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

 

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“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 currently utilizes the Black-Scholesoption pricing model to measure the fair value of stock options granted toemployees. While FAS 123R permits entities to continue to use such a model, italso permits the use of a “lattice” model. The Company expects to continueusing the Black-Scholes option pricing model upon adoption of FAS 123R tomeasure the fair value of stock options.

 

The adoption of this statement will have the effect ofreducing net income and income per share as compared to what would be reportedunder the current requirements. These future amounts cannot be preciselyestimated because they depend on, among other things, the number of optionsissued in the future, and accordingly, the Company has not determined theimpact of adoption of this statement on its results of operations.

 

FAS 123R also requires that the benefits associatedwith the tax deductions in excess of recognized compensation cost be reportedas a financing cash flow, rather than as an operating cash flow as requiredunder current literature. This requirement will reduce net operating cash flowsand increase net financing cash flows in periods after the effective date.These future amounts cannot be estimated, because they depend on, among otherthings, when employees exercise stock options.

 

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

 

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

 

*Statements in this Form 10-Qthat are not statements or descriptions of historical facts are “forward-looking”statements under Section 21E of the Securities Exchange Act of 1934, asamended, and the Private Securities Litigation Reform Act of 1995 and aresubject to numerous risks and uncertainties. These forward-looking statements can generally be identified by the useof such terms as “anticipate,” “believe,” “continue,” “expect,” “may,” “should,”or similar variations or the negative thereof. These forward looking statements involve risks and uncertainties, manyof which are out of the Company’s control and which may affect its futurebusiness plans.  Factors that may affectthe Company’s future business plans include: (i) its ability to identify,complete and integrate an acquisition of an operating business; (ii) theviability of the Company’s business strategy in connection with an acquisitionand its ability to implement such strategy; and (iii) its ability tosecure financing for its current costs and potential future operations.  Such statements reflect the current view ofthe Company with respect to future events and are subject to certain risks,uncertainties and assumptions.  Inaddition, the Company’s business, operations and financial condition aresubject to the risks, uncertainties and assumptions that are described in theCompany’s reports and statements filed from time to time with the Securitiesand Exchange Commission.  Should one ormore of those risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual results may vary materially from thosediscussed herein.  The descriptions ofthe risks, uncertainties and assumptions to which the Company’s business,operations and financial condition are subject are as of the date of thisreport.  The Company assumes noobligation to update any such forward-looking statements.*

 

**Overview**

 

Since 2001,Paligent Inc., together with its subsidiaries (collectively, the “Company”),has been engaged in seeking business opportunities to maximize value for itsstockholders.  The Company has evaluatedvarious strategic alternatives, including acquisitions of new operatingbusinesses and technologies as well as potential merger opportunities.

 

From its inceptionin 1985 through 1999, the Company operated as a biotechnology company engagedin the development and commercialization of novel drugs with a productportfolio focused on infectious diseases and oncology.  During 1999, the Company’s principal effortswere devoted to drug development and human clinical trials focusing on twobiotechnology compounds, PRO 2000 Gel and O6-Benzylguanine (“O6-BG”).  During fiscal 2000, the Company closed itsresearch facilities and out-licensed PRO 2000 Gel and O6-BG.  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.

 

**Resultsof Operations**

 

From inception through June 30,2005, 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.

 

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## ***Three and six months ended June 30,2005 as compared to the three and six months ended June 30, 2004***

## ** **

During the three monthsended June 30, 2005, the Company reported a net loss of $116,000, or $0.00per share, as compared to a net loss of $61,000, or $0.00 per share, in thecomparable period in 2004.  For the sixmonths ended June 30, 2005, the Company reported a net loss of $76,000, or$0.00 per share, as compared to a net loss of $321,000, or $0.01 per share, forthe similar period in 2004.

 

The Company’s totalrevenue, which is derived from interest income, was $0 for the three and sixmonth periods ended June 30, 2005, as compared to $1,125 and $2,250,respectively, for the comparable three and six month periods in 2004.  Interest income in 2004 was attributable tothe accrual of interest earnings on the subtenant note receivable.

 

TheCompany’s total operating expenses, consisting of general and administrativecosts, were $116,000 and $217,000, respectively, for the three and six monthperiods ended June 30, 2005 as compared to $62,000 and $324,000,respectively, for the comparable periods in 2004.  General and administrative costs for the threemonths ended June 30, 2004 included a write-down of $81,000 in accruedrent resulting from a change in estimate relating to the fair value of costs thatwere expected to be incurred under the Company’s former office lease (“LeaseEnd Costs”).  Excluding this write-downof Lease End Costs, general and administrative costs for the three month periodended June 30, 2004 were $143,000, resulting in a net decrease of $27,000 duringthe comparable three month period in 2005. For the six months ended June 30, 2004, general and administrativecosts includes a charge of $51,000 relating to Lease End Costs.  Excluding the charge for Lease End Costs,general and administrative costs were $273,000 for the six month period ended June 30,2004, resulting in a net decrease of $56,000 during the comparable six monthperiod in 2005.  The decreases of $27,000and $56,000 for the comparable three and six month periods ended June 30,2005 and 2004, respectively, are principally attributable to reductions inprofessional fees and insurance premiums.

 

Duringthe six months ended June 30, 2005, the Company assigned all of itsrights, interest and obligations in O6-BG to its sublicensee for the contractamount of $158,750.  In connection withthe assignment, the Company paid a royalty in the amount of $17,500 to theUnited States Public Health Service.  Thenet amount of this transaction is reflected as other income in the six monthsended June 30, 2005.  There were no reportabletransactions in the comparable period of 2004.

 

### **Liquidity and Capital Resources**

### ** **

At June 30,2005, the Company’s aggregate cash and cash equivalents were $19,000, a net decreaseof $2,000 from the end of the prior year. Cash receipts during the six months ended June 30, 2005 include netreceipts of $66,000 under the O6-BG assignment agreement, related party loansof $115,000 and $30,000 from the settlement of the subtenant receivable, offsetby cash payments aggregating $213,000 for operating activities.

 

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 the Companypursues strategic alternatives, including potential business combinations andrelated financing, the Company expects to finance its continuing operationsthrough 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, obtain financing from its principal stockholder or securesufficient financing for operations resulting from acquisition or merger, theCompany will experience a cash shortage, the effect

 

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of which could result inthe discontinuance of operations.  Ifadditional funds are raised by issuing equity securities, further dilution toexisting stockholders will result and future investors may be granted rightssuperior to those of existing stockholders.

 

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

 

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

 

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

 

**Item4.  Controls and Procedures**

 

As of the end of the period covered by this QuarterlyReport on Form 10-Q, an evaluation was performed under the supervision ofthe Company’s Chief Executive Officer and Principal Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’s ChiefExecutive Officer and Principal Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the end of the periodcovered by this report.  In addition,there were no changes in the Company’s internal control over financialreporting during the quarter ended June 30, 2005 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 6.****                     Exhibits.**

 

31.1      Certificationof Chief Executive Officer and Principal Financial Officer Required by Rule 13a-14(a) orRule 15d-14(a) of the Securities Exchange Act of 1934, as AdoptedPursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

 

32.1      Certification of Chief Executive Officerand Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.

 

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**SIGNATURES**

 

 

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

 
|                        | PALIGENT INC. |
|-----------------------------|---------------|
|                        | (Registrant)  |
|                        |          |   |
|                        |          |   |
| Date: August 12,  2005 | by:           | /s/ Salvatore A. Bucci |   |
|                        |          | Salvatore A. Bucci |
|                        |          | President  and Chief Executive Officer |

 

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**EXHIBIT INDEX**

 
| 31.1   |   | Certification of Chief Executive Officer and  Principal 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 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer and  Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                  |

 

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