PALATIN TECHNOLOGIES INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements filed as part of this Annual Report. Forward-Looking Statements The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws. You are urged to carefully review our description and examples of forward-looking statements included earlier in this Annual Report immediately prior to Part I, under the heading “Forward-Looking Statements.” Forward-looking statements are subject to risk that could cause actual results to differ materially from those expressed in the forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in Part I, Item 1A of this Annual Report, and any of those made in our other reports filed with the SEC. You are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as of the date of this document. We do not intend, and undertake no obligation, to publish revised forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 2 to the consolidated financial statements included in this Annual Report. We believe that our accounting policies and estimates relating to revenue recognition, the carrying value of inventory, purchase commitment liabilities, accrued expenses, and stock-based compensation are the most critical . Revenue Recognition We recognize product revenues in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers . The provisions of ASC Topic 606 require the following steps to determine revenue recognition: (1) Identify the contract(s) with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; and (5) Recognize revenue when (or as) the entity satisfies a performance obligation. 38 Table of Contents In accordance with ASC Topic 606, we recognize product revenue when our performance obligation is satisfied by transferring control of the product to a customer. Per our contracts with customers, control of the product is transferred upon the conveyance of title, which occurs when the product is sold to and received by a customer. Trade accounts receivable due to us from contracts with our customers are stated separately in the consolidated balance sheet, net of various allowances as described in the Trade Accounts Receivable policy in Note 2- Summary of Significant Accounting Policies in the accompanying consolidated financial statements. Product revenues consist of sales of Vyleesi in the United States. We sell Vyleesi to a specialty pharmacy at the wholesale acquisition cost and payment is currently made within approximately 30 days. In addition to distribution agreements with customers, we enter into arrangements with healthcare payers that provide for privately negotiated rebates, chargebacks, and discounts with respect to the purchase of our products. We record product revenues net of allowances for direct and indirect fees, discounts, co-pay assistance programs, estimated chargebacks, and rebates. Certain of these allowances represent estimates of the related obligations and, as such, knowledge and judgement are required when estimating the impact of these allowances on gross product sales for a reporting period. If any of our judgments made during a reporting period are not indicative or accurate estimates of our future experience, our results could be materially affected. Product sales are also subject to return rights, which have not been significant to date. Inventories Inventory is stated at the lower of cost or net realizable value, with cost being determined on a first-in, first-out basis. Our inventory, consisting of Vyleesi, has a shelf-life of three years from the date of manufacture. On a quarterly basis, we review inventory levels to determine whether any obsolete, expired, or excess inventory exists. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written down through a charge to operating expense. This analysis requires us to make estimates of forecasted future sales, which are inherently uncertain, and changes in demand, insurance coverages, economic conditions, and other factors could have a significant impact on our forecasts and therefore the estimated net realizable value of our inventory. Purchase Commitment Liabilities Losses on firm commitment contractual obligations are recognized based upon the terms of the respective agreement and similar factors considered for the write-down of inventory, including expected sales requirements as determined by internal sales forecasts Accrued Expenses Third parties perform a significant portion of our development activities. We review the activities performed under all contracts each quarter and accrue expenses and the amount of any reimbursement to be received from our collaborators based upon the estimated amount of work completed considering milestones achieved. Estimating the value or stage of completion of certain services requires judgment based on available information. If we do not identify services performed for us but not billed by the service-provider, or if we underestimate or overestimate the value of services performed as of a given date, reported expenses will be understated or overstated. Stock-Based Compensation We expense the fair value of stock options and other equity awards granted to employees and nonemployees for services. Compensation costs for stock-based awards with time-based vesting are determined using the quoted market price of our common stock on the grant date or for stock options, the value determined utilizing the Black-Scholes option pricing model, and are recognized on a straight-line basis, while awards containing a market condition are valued using multifactor Monte Carlo simulations and are recognized over the derived service period. Compensation costs for awards containing a performance condition are determined using the quoted price of our common stock on the grant date or for stock options, the value is determined utilizing the Black Scholes option pricing model and are recognized based on the probability of achievement of the performance condition over the service period. The Black-Scholes option pricing model requires us to make estimates of expected volatility and interest rates, which we estimate based on prior experience and public sources of information. The expected term of the option used is based upon the simplified method, which represents the average of the vesting and contractual term. Compensation expense is not adjusted for subsequent changes in the estimates used to calculate fair value or for actual experience. Forfeitures are recognized as they occur. As the amount and timing of compensation expense to be recorded in future periods may be affected by the achievement of performance conditions and employee terminations, stock-based compensation may vary significantly period to period. See Note 3 to the consolidated financial statements included in this Annual Report for a description of recent accounting pronouncements that affect us. 39 Table of Contents Results of Operations Year Ended June 30, 2022 Compared to the Year Ended June 30, 2021: Revenue – For the fiscal year ended June 30, 2022 (“fiscal 2022”) we recognized $1,218,457 of product revenue, net of allowances, as the result of our regaining all North American development and commercialization rights to Vyleesi in July 2020 and $250,000 in license and contract revenue pursuant to our license agreement with Fosun. For the fiscal year ended June 30, 2021 (“fiscal 2021”) we recognized $283,286 of negative product revenue, net of allowances and $94,689 in license and contract revenue pursuant to our license agreement with Kwangdong. The increase in net revenue is a result of increased sales volume of 22% and reduced product sales allowances during fiscal 2022. Cost of Products Sold – Cost of products sold was $217,529 for fiscal 2022 compared to $147,840 for fiscal 2021. Research and Development – Total research and development expenses, including general research and development spending, were $21,327,434 for fiscal 2022 compared to $12,926,559 for fiscal 2021. The increase is a result of higher spending on our MCr programs. Research and development expenses related to our Vyleesi, MCr programs, and other preclinical programs were $15,867,511 for fiscal 2022 compared to $8,634,713 for fiscal 2021. The increase is primarily related to an increase in spending on our MCr programs. The amounts of program spending above exclude general research and development spending, which were $5,459,923 for fiscal 2022, compared to $4,291,846 for fiscal 2021. The increase in general research and development spending is primarily attributable to increased compensation costs due to an increase in the number of employees in fiscal 2022. Cumulative spending from inception to June 30, 2022 was approximately $311,900,000 on our Vyleesi program and approximately $188,400,000 on all our other programs (which include PL8177, PL9643, other melanocortin receptor agonists and terminated programs). Due to various risk factors described herein under “Risk Factors,” including the difficulty in currently estimating the costs and timing of future Phase 1 clinical trials and larger-scale Phase 2 and Phase 3 clinical trials for any product under development, we cannot predict with reasonable certainty when, if ever, a program will advance to the next stage of development or be successfully completed, or when, if ever, related net cash inflows will be generated. Selling, General and Administrative – Selling, general and administrative expenses, which consist of costs related to Vyleesi in addition to compensation and related costs, were $16,511,942 for fiscal 2022 compared to $17,336,913 for fiscal 2021. The decrease is primarily attributable to $4,737,426 of selling expenses related to Vyleesi in fiscal 2022 compared to $6,605,901 of selling expenses related to Vyleesi in fiscal 2021 partially offset by $1,135,438 of expenses incurred in fiscal 2022 related to the issuance of redeemable convertible preferred stock and warrants. Loss on License Termination Agreement – On July 27, 2020, Palatin and AMAG announced that they had mutually terminated the license agreement for Vyleesi effective July 24, 2020 pursuant to a termination agreement (the “Vyleesi Termination Agreement”). Under the terms of the Vyleesi Termination Agreement, we regained all North American development and commercialization rights for Vyleesi. AMAG made a $12,000,000 payment to us at closing and a $4,300,000 payment on March 31, 2021. We assumed all Vyleesi manufacturing agreements, for which we initially recorded a liability related to estimated losses of $18,194,000, as well as accrued expenses for an inventory production run, and AMAG transferred information, data, and assets related exclusively to Vyleesi, including, but not limited to, existing inventory. AMAG provided certain transitional services to us for a period of time to ensure continued patient access to Vyleesi during the transition back to us. We reimbursed AMAG for the costs of the transition services. During fiscal 2021, we recorded a loss of $2,784,192 as a result of the Vyleesi Termination Agreement. (See Note 4 of the accompanying consolidated financial statements). Other Income (Expense) – Total other income, net was $390,149 for fiscal 2022 compared to total other expense, net of $212,394 for fiscal 2021. For fiscal 2022, we recognized unrealized foreign currency gain of $389,868 and investment income of $29,963 offset by $29,682 of income expense. For fiscal 2021, we recognized $212,526 of unrealized foreign currency loss and $23,440 of interest expense offset by $23,572 of investment income. The increase in unrealized foreign currency gain is a result of increased unrealized foreign currency gains on our inventory purchase commitments. Income Taxes – For fiscal 2022 and fiscal 2021, the Company recorded no income tax benefit or expense as a result of the generation of and utilization of net operating losses that were subject to a full valuation allowance. 40 Table of Contents Effects of Inflation We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented. Liquidity and Capital Resources Since inception, we have generally incurred net operating losses, primarily related to spending on our research and development programs. We have financed our net operating losses primarily through debt and equity financings and amounts received under collaborative and license agreements. Our product candidates are at various stages of development and will require significant further research, development, and testing and some may never be successfully developed or commercialized. We may experience uncertainties, delays, difficulties, and expenses commonly experienced by early-stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to: · the development and testing of products in animals and humans; · dependance on third party contractors and collaborators for part of our research and development; · ability to attract and retain experienced personnel; · product approval or clearance; · regulatory compliance; · good manufacturing practices (“GMP”) compliance; · intellectual property rights; · product introduction; · marketing, sales, and competition; and · obtaining sufficient capital. Failure to enter into or successfully perform under collaboration agreements and obtain timely regulatory approval for our product candidates and indications would impact our ability to generate revenues and could make it more difficult to attract investment capital for funding our operations. Any of these possibilities could materially and adversely affect our operations and require us to curtail or cease certain programs. During fiscal 2022, net cash used in operating activities was $29,922,749 compared to net cash used in operating activities of $22,647,991 in fiscal 2021. The difference in cash used in operations in fiscal 2022 compared with fiscal 2021 was primarily related to cash received related to the termination agreement for Vyleesi in fiscal 2021, partially offset by lower payments made related to inventory purchase commitments, an increase in accounts payable and accrued expenses, and other working capital changes. During fiscal 2022, net cash used in investing activities was $261,374 compared to $5,722 during fiscal 2021, which consisted of leasehold improvements and the acquisition of equipment. During fiscal 2022, net cash provided by financing activities was $18,358 which consisted of proceeds from the exercise of outstanding warrants of $280,000 and proceeds from exercise of stock options of $16,132 offset by payment of withholding taxes related to restricted stock units of $221,311, and payment of finance lease obligations of $56,463. During fiscal 2021, net cash used in financing activities was $93,638 which consisted of payment of withholding taxes related to restricted stock units. We had a net loss for fiscal 2022 of $36,198,299. We may not attain profitability in future years, which is dependent on numerous factors, including, but not limited to whether and when development and sales milestones are met, regulatory actions by the FDA and other regulatory bodies, the performance of our licensees, and market acceptance of our products. We expect to incur significant expenses as we continue to develop marketing and distribution capability for Vyleesi in the United States and continue to develop our MC1r MCr product candidates. These expenses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets, and working capital. 41 Table of Contents We have incurred cumulative negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to develop the capability to market and distribute Vyleesi in the United States and to complete our planned product development efforts. Continued operations are dependent upon our ability to generate future income from sales of Vyleesi in the United States and from existing licenses, including royalties and milestones, to complete equity or debt financing activities and enter into additional licensing or collaboration arrangements. As of June 30, 2022, our cash and cash equivalents were $29,939,154 with current liabilities of $16,259,864. Our long-term obligations include aggregate lease obligations of $521,337 for the year ending June 30, 2023, and $746,564 for the years ending June 30, 2024 and 2025, and aggregate inventory purchase commitments of $6,174,986 for the year ending June 30, 2023, of which $5,754,986 is included in current liabilities as of June 30, 2022 and $3,349,500 for the years ending June 30, 2024 through June 30, 2026. We intend to utilize existing capital resources for general corporate purposes and working capital, including establishing marketing and distribution capabilities for Vyleesi in the United States and preclinical and clinical development of our MC1r and MC4r programs, and development of other portfolio products. Based on our available cash and cash equivalents, we have concluded that substantial doubt exists about our ability to continue as a going concern for one year from the date our consolidated financial statements are issued. We are evaluating strategies to obtain additional funding for future operations which include but are not limited to obtaining equity financing, issuing debt, or reducing planned expenses. A failure to raise additional funding or to effectively implement cost reductions could harm our business, results of operations, and future prospects. If we are not able to secure adequate additional funding in future periods, we would be forced to make additional reductions in certain expenditures. This may include liquidating assets and suspending or curtailing planned programs. We may also have to delay, reduce the scope of, suspend, or eliminate one or more research and development programs or its commercialization efforts or pursue a strategic transaction. If we are unable to raise capital when needed or enter into a strategic transaction, then we may be required to cease operations, which could cause our stockholders to lose all or part of their investment. Assuming no additional funding and based on our current operating and development plans, we expect that our existing cash and cash equivalents as of the date of this filing will be sufficient to enable the company to fund its operations into the second half of its fiscal year ending June 30, 2023. We will need additional funding to complete required clinical trials for our product candidates and development programs and, if those clinical trials are successful (which we cannot predict), to complete submission of required regulatory applications to the FDA. However, the COVID-19 pandemic and its resulting impact to economic conditions may negatively impact our operations, including possible effects on our financial condition, ability to access the capital markets on attractive terms or at all, liquidity, operations, suppliers, industry, and workforce. We will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2023 and beyond. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 42 Table of Contents