** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

## **FORM 10-Q**

## ** **

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                       |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | **For the  quarterly period ended September 30, 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 53****rd 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

YES  o  NO  ý

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

YES  ý  NO  o

 

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

 
| **Class**                     | ** ** | **Outstanding as of November 4,  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 September 30, 2005 (unaudited) and December 31, 2004                      |   |
|                   |                                                                                                                       |   |
|                   | Condensed  Consolidated Statements of Operations (unaudited) Three and nine months ended  September 30, 2005 and 2004 |   |
|                   |                                                                                                                       |   |
|                   | Condensed  Consolidated Statements of Cash Flows (unaudited) Nine months ended September 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

----

 

**PALIGENT INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                                   | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| ASSETS                                                                                                                                                       |       |                        |       |                       |       |
| Current assets:                                                                                                                                              |       |                        |       |                       |       |
| Cash and cash equivalents                                                                                                                                    |       | $                           | 15,087     |                       | $          | 21,388 |   |
| Note receivable                                                                                                                                              |       | 75,000                      |       | —                     |       |
| Current portion of subtenant receivable, including  accrued interest                                                                                         |       | —                      |       | 30,000                     |       |
| Prepaid expenses and other current assets                                                                                                                    |       | 10,882                      |       | —                     |       |
| Total current assets                                                                                                                                         |       | 100,969                     |       | 51,388                     |       |
|                                                                                                                                                         |       |                        |       |                       |       |
| Property and  equipment, net                                                                                                                                 |       | —                      |       | 941                        |       |
| Total assets                                                                                                                                                 |       | $                           | 100,969    |                       | $          | 52,329 |   |
|                                                                                                                                                         |       |                        |       |                       |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                  |       |                        |       |                       |       |
| Current  liabilities:                                                                                                                                        |       |                        |       |                       |       |
| Accounts payable and accrued expenses                                                                                                                        |       | $                           | 59,539     |                       | $          | 54,639 |   |
| Accrued professional services                                                                                                                                |       | 26,100                      |       | 21,900                     |       |
| Due to related party                                                                                                                                         |       | 441,713                     |       | 203,290                    |       |
| Total current liabilities                                                                                                                                    |       | 527,352                     |       | 279,829                    |       |
|                                                                                                                                                         |       |                        |       |                       |       |
| Stockholders’  deficit:                                                                                                                                 |       |                        |       |                       |       |
| Common stock, $.01 par value; 75,000,000 shares  authorized; 32,490,948 shares issued and outstanding at September 30,  2005 and December 31, 2004 |       | 324,910                     |       | 324,910                    |       |
| Additional paid-in capital                                                                                                                                   |       | 154,634,974                 |       | 154,634,974                |       |
| Accumulated deficit                                                                                                                                          |       | (155,386,267                | )          | (155,187,384               | )          |
| Total stockholders’ deficit                                                                                                                             |       | (426,383                    | )          | (227,500                   | )          |
| Total liabilities and stockholders’ deficit                                                                                                             |       | $                           | 100,969    |                       | $          | 52,329 |   |

 

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

 

3

----

 

**PALIGENT INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(unaudited)**

 
| ** **                                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Revenue:                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Interest income                                                         |       | $                                         | —     |                                     | $          | — |   | $ | — |   | $ | 2,250 |   |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Costs and  expenses:                                                    |       |                                      |       |                                     |       |   |   |   |   |
| General and administrative                                              |       | 122,667                                   |       | 214,137                                  |       | 340,133 |   | 537,882 |   |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Loss from  operations                                                   |       | (122,667                                  | )          | (214,137                                 | )          | (340,133 | ) | (535,632 | ) |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Other income                                                            |       | —                                    |       | 500,000                                  |       | 141,250 |   | 500,000 |   |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Net (loss)  income                                                      |       | $                                         | (122,667   | )                                        | $          | 285,863 |   | $ | (198,883 | ) | $ | (35,632 | ) |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Basic and  diluted net (loss) income per common share                   |       | $                                         | (0.00      | )                                        | $          | 0.01 |   | $ | (0.01 | ) | $ | (0.00 | ) |
|                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| 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 ofthe condensed consolidated financial statements.

 

4

----

 

**PALIGENT INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                       |       |                                     |       |   |   |
| Net loss                                                                     |       | $                                        | (198,883   | ) | $ | (35,632 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                |       | 941                                      |       | 1,404 |   |
| Write-off of security deposits                                               |       | —                                   |       | 9,543 |   |
| Write-down of accrued rent                                                   |       | —                                   |       | (81,185 | ) |
| Deferred rent                                                                |       | —                                   |       | (22,262 | ) |
| Reserve for subtenant receivable                                             |       | —                                   |       | 77,250 |   |
| Changes in operating assets and liabilities:                                 |       |                                     |       |   |   |
| Note receivable                                                              |       | (75,000                                  | )          | — |   |
| Prepaid expenses and other current assets                                    |       | (10,882                                  | )          | (29,996 | ) |
| Subtenant receivable                                                         |       | 30,000                                   |       | 50,000 |   |
| Accounts payable and accrued expenses                                        |       | 9,100                                    |       | (107,689 | ) |
| Interest payable to related party                                            |       | 18,423                                   |       | (1,189 | ) |
| Accrued rent                                                                 |       | —                                   |       | 114,600 |   |
| Net cash used in operating activities                                        |       | (226,301                                 | )          | (25,156 | ) |
|                                                                         |       |                                     |       |   |   |
| 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                                             |       | 220,000                                  |       | 405,000 |   |
| Repayment of related party loan                                              |       | —                                   |       | (375,000 | ) |
| Principal payments on capital lease obligations                              |       | —                                   |       | (10,000 | ) |
| Net cash provided by financing activities                                    |       | 220,000                                  |       | 20,000 |   |
|                                                                         |       |                                     |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                        |       | (6,301                                   | )          | 4,844 |   |
|                                                                         |       |                                     |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 21,388                                   |       | 41,321 |   |
|                                                                         |       |                                     |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                                        | 15,087     |   | $ | 46,165 |   |

 

The accompanying notes are an integral part of the condensed consolidatedfinancial statements.

 

5

----

 

**PALIGENT INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(unaudited)**

 

**NOTE 1 –BASIS OF PRESENTATION**

 

# **InterimFinancial 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 September 30,2005 and the results of its operations and its cash flows for the interim periodsended September 30, 2005 and 2004. The condensed consolidated balancesheet as of December 31, 2004 was derived from audited financialstatements but does not include all disclosures required by generally acceptedaccounting principles.  The accompanyingcondensed consolidated financial statements have been prepared in accordancewith accounting standards for interim financial statements and should be readin conjunction with the audited consolidated financial statements andthe notes 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 ofliabilities in the ordinary course of business. The Company has incurred losses from operations since inception, hasworking capital and stockholders’ deficits and has limited cash to fundoperations in 2005.  The Company ispresently relying on borrowings from its principal stockholder to fundcontinuing operations.  The principalstockholder has made 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, obtain financing from its principal stockholder or securesufficient financing for operations resulting from acquisition or merger, theCompany will experience a cash shortage in 2005, the effect of which couldresult in the discontinuance of operations. If additional funds are raised by issuing equity securities, furtherdilution to existing stockholders will result and future investors may begranted rights superior to those of existing stockholders.

 

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

 

# **Reclassification**

 

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

 

**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.

 

6

----

 

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 ninemonths ended September 30, 2005 and 2004, the Company had stock optionsand warrants outstanding that were anti-dilutive.  These securities could potentially dilutebasic EPS in the future but were not included in the computation of diluted EPSfor the periods presented because to do so would have been anti-dilutive.  Consequently, there were no differencesbetween basic and diluted EPS for these periods.

 

**NOTE 3 –SIGNIFICANT EVENT**

 

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”).  TheThird Amendment revised the provision for payment of an additional royalty toPHS upon 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., theparent of AOI (“Keryx”) and PHS (the “Assignment Agreement”), Procept assignedall of its rights, interests and obligations under the License Agreement toKeryx; in exchange, 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.  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

----

 

**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 nine months ended September 30, 2005, Mr. Kurtzloaned the Company an aggregate of $220,000 to fund its continuing operations,increasing the principal balance due under the Promissory Note to $420,000 at September 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) income and net (loss) income per share would have beenadjusted to the pro forma amounts indicated below:

 
| ** **                                                                      | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                            |       |                                      |       |                                     |       |   |   |   |   |
| Net (loss)  income – as reported                                           |       | $                                         | (122,667   | )                                        | $          | 285,863 |   | $ | (198,883 | ) | $ | (35,632 | ) |
| Adjustment to net (loss) income for pro forma stock-based  compensation expense |       | —                                    |       | —                                   |       | — |   | (27,089 | ) |
| Net (loss)  income – pro forma                                             |       | $                                         | (122,667   | )                                        | $          | 285,863 |   | $ | (198,883 | ) | $ | (62,721 | ) |
|                                                                            |       |                                      |       |                                     |       |   |   |   |   |
| Basic and diluted net (loss) income per common share  – as reported        |       | $                                         | (0.00      | )                                        | $          | 0.01 |   | $ | (0.01 | ) | $ | (0.00 | ) |
| Basis and diluted net (loss) income per common share  – pro forma          |       | $                                         | (0.00      | )                                        | $          | 0.01 |   | $ | (0.01 | ) | $ | (0.00 | ) |

 

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

 

8

----

 

“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 inperiods after the effective date. These future amounts cannot be estimated,because they depend on, among other things, when employees exercise stockoptions.

 

9

----

 

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

 

***Note Regarding Forward-LookingStatements***

 

*Statementsin this Form 10-Q that are not statements or descriptions of historicalfacts are “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 and whichmay affect its future business plans. Factors that may affect the Company’s future business plans include: (i) itsability to identify, complete and integrate an acquisition of an operatingbusiness; (ii) the viability of the Company’s business strategy inconnection with an acquisition and its ability to implement such strategy; and (iii) itsability to secure financing for its current costs and potential futureoperations.  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 vary materiallyfrom those discussed herein.  Thedescriptions of the risks, uncertainties and assumptions to which the Company’sbusiness, operations and financial condition are subject are as of the date ofthis report.  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 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 trialsfocusing on 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 September 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.

 

10

----

 

## ***Three and nine months ended September 30,2005 as compared to the three and nine months ended September 30, 2004***

 

During the three monthsended September 30, 2005, the Company reported a net loss of $123,000, or$0.00 per share, as compared to net income of $286,000, or $0.01 per share, inthe comparable period in 2004.  For the ninemonths ended September 30, 2005, the Company reported a net loss of $199,000,or $0.01 per share, as compared to a net loss of $36,000, or $0.00 per share,for the similar period in 2004.

 

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

 

The Company’s total operating expenses, consisting ofgeneral and administrative costs, were $123,000 and $340,000, respectively, forthe three and nine month periods ended September 30, 2005 as compared to $214,000and $538,000, respectively, for the comparable periods in 2004.  General and administrative costs for thethree months ended September 30, 2004 included a reserve recorded againstthe subtenant receivable of $77,000 (“Reserve”).  Excluding the Reserve, general andadministrative costs for the three month period ended September 30, 2004were $137,000, resulting in a net decrease of $14,000 during the comparablethree month period in 2005.  For the ninemonths ended September 30, 2004, general and administrative costs includesthe Reserve and a charge of $51,000 relating to the fair value of costs thatwere expected to be incurred under the Company’s former office lease (“LeaseEnd Costs”).  Excluding the charges forthe Reserve and Lease End Costs, general and administrative costs were $410,000for the nine month period ended September 30, 2004, resulting in a netdecrease of $70,000 during the comparable nine month period in 2005.  The decreases of $14,000 and $70,000 for thecomparable three and nine month periods ended September 30, 2005 and 2004,respectively, are principally attributable to reductions in professional feesand insurance premiums.

 

During the nine months ended September 30, 2005,the Company assigned all of its rights, interest and obligations in O6-BG toits sublicensee 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 nine month period ended September 30,2005.  During the three and nine monthsended September 30, 2004, the Company received proceeds of $500,000 inconnection with the exercise of an option by its sublicense, upon whichexercise, its sublicensee acquired all of the Company’s rights, title andinterest to PRO 2000 Gel.  This transactionwas recorded as other income for the three and nine month periods ended September 30,2004.

 

### **Liquidity and CapitalResources**

### ** **

At September 30, 2005, the Company’s aggregate cash and cashequivalents were $15,000, a net decrease of $6,000 from the end of the prioryear.  Cash receipts during the ninemonths ended September 30, 2005 include net receipts of $66,000 under theO6-BG assignment agreement, related party loans of $220,000 and $30,000 fromthe settlement of the subtenant receivable, offset by cash payments aggregating$322,000 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 theCompany pursues strategic alternatives, including potential businesscombinations and related financing, the Company expects to finance itscontinuing operations through further borrowings from its principalstockholder.  The stockholder has made no

 

11

----

 

commitment to continue tomake loans to the Company.  No assurancecan be given that the Company will be able to complete a business combinationor that such financing from its principal stockholder will continue to beavailable to the Company.  If the Companyis unable to generate significant revenue from acquired operations, obtainfinancing from its principal stockholder or secure sufficient financing for operationsresulting from acquisition or merger, the Company will experience a cashshortage, 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.

 

12

----

 

**Item 3.****                    ****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 andProcedures**

 

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 September 30, 2005 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

13

----

 

**PART II.  OTHER INFORMATION**

 

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

 
| 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. Filed  herewith. |
|                                                                                                                                                          |   |                                                                                                                  |
| 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. Filed herewith.                                                                      |

 

14

----

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                          | PALIGENT INC. |
|-------------------------------|---------------|
|                          | (Registrant)  |
|                          |          |   |
|                          |          |   |
| Date: November 10,  2005 | by:           | /s/ Salvatore A.  Bucci |   |
|                          |          | Salvatore A.  Bucci |
|                          |          | President and Chief Executive Officer |

 

15

----

 

**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.                                                                  |

 

16

----