| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Principles
of Consolidation Use
of Estimates Cash
and Cash Equivalents Fair
Value of Financial Instruments Credit
Risk Property
and Equipment Impairment
of Long-Lived Assets Revenue
Recognition Revenue from Contracts with Customers On
July 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective approach, a practical expedient permitted under
ASC Topic 606, and applied this approach only to contracts that were not completed as of July 1, 2018. The Company calculated
a one-time cumulative transition adjustment of $500,000 which was recorded on July 1, 2018 to the opening balance of accumulated
deficit related to its license agreement with Kwangdong (the “Kwangdong License Agreement”) as the Company determined
a significant revenue reversal would not occur in a future period. The one-time adjustment consisted of the recognition of $500,000
of deferred revenue. Revenue
recognition for periods prior to July 1, 2018 The
Company has generated revenue solely through license and collaboration agreements. Prior to July 1, 2018, the Company recognized
revenue in accordance with FASB ASC Topic 605-25, Revenue Recognition for Arrangements with Multiple Elements
● the
delivered item had value to the customer on a stand-alone basis; and
● if
the arrangement included a general right of return relative to the delivered item, delivery or performance of the undelivered
item was considered probable and substantially in control of the vendor. Under
FASB ASC Topic 605-25, if both of the criteria above were not met, then separate accounting for the individual deliverables was
not appropriate. The
Company determined that it was appropriate to recognize such revenue using the input-based proportional method during the period
of Palatin’s development obligations as defined in the AMAG License Agreement. Refer to Note 5 for additional information. Under
the Fosun License Agreement (Note 6), the Company received consideration in the form of an upfront license fee payment and determined
that it was appropriate to recognize such consideration as revenue in the first quarter of fiscal year 2018, which was the quarter
in which the license was granted, since the license had stand-alone value and the upfront payment received by the Company was
non-refundable. Under
the Kwangdong License Agreement (Note 7), the Company received consideration in the form of an upfront license fee payment and
determined that it was appropriate to record such consideration as deferred revenue because the upfront payment received by the
Company is subject to certain refund provisions. Revenue
resulting from the achievement of development milestones was recorded in accordance with the accounting guidance for the milestone
method of revenue recognition. Amounts received prior to satisfying the revenue recognition criteria were recorded as deferred
revenue on the Company’s consolidated balance sheet. Revenue
recognition for periods commencing July 1, 2018 For
licenses of intellectual property, the Company assesses, at contract inception, whether the intellectual property is distinct
from other performance obligations identified in the arrangement. If the licensing of intellectual property is determined to be
distinct, revenue is recognized for nonrefundable, upfront license fees when the license is transferred to the customer and the
customer can use and benefit from the license. If the licensing of intellectual property is determined not to be distinct, then
the license will be bundled with other promises in the arrangement into one performance obligation. The Company needs to determine
if the bundled performance obligation is satisfied over time or at a point in time. If the Company concludes that the nonrefundable,
upfront license fees will be recognized over time, the Company will need to assess the appropriate method of measuring proportional
performance. Regulatory
milestone payments are excluded from the transaction price due to the inability to estimate the probability of reversal. Revenue
relating to achievement of these milestones will be recognized in the period in which the milestone is achieved. Sales-based
royalty and milestone payments resulting from customer contracts solely or predominately for the license of intellectual property
will only be recognized upon occurrence of the underlying sale or achievement of the sales milestone in the future and such sales-based
royalties and milestone payments will be recognized in the same period earned. The
Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services
are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses
as the Company is the principal in the research and development activities based upon its control of such activities, which is
considered part of its ordinary activities. Development
milestone payments are generally due 30 business days after the milestone is achieved. Sales milestone payments are generally
due 45 business days after the calendar year in which the sales milestone is achieved. Royalty payments are generally due on a
quarterly basis 20 business days after being invoiced. The
cumulative effect of applying ASC Topic 606 to the Company’s consolidated balance sheet was as follows:
Balance
at June 30, 2018 Net
Adjustment Balance
at July 1, 2018
Deferred
revenue $ 500,000 $ (500,000 ) $ -
Accumulated
deficit (332,045,906 ) 500,000 (331,545,906 ) The
impact of adoption of ASC Topic 606 on the Company’s consolidated balance sheet as of September 30, 2018 is as follows:
PALATIN
TECHNOLOGIES, INC
and
Subsidiary
Consolidated
Balance Sheets
(unaudited)
Impact
of change in accounting policies
As
reported September 30, 2018 Adjustments As
reported without adoption of ASC Topic 606
ASSETS
Current
assets:
Cash
and cash equivalents $ 32,619,064 $ - $ 32,619,064
Accounts
receivable 104,189 - 104,189
Prepaid
expenses and other current assets 420,639 - 420,639
Total
current assets 33,143,892 - 33,143,892
-
Property
and equipment, net 149,990 - 149,990
Other
assets 338,916 - 338,916
Total
assets $ 33,632,798 $ - $ 33,632,798
-
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current
liabilities:
Accounts
payable $ 1,165,151 $ - $ 1,165,151
Accrued
expenses 2,020,333 - 2,020,333
Notes
payable, net of discount 4,305,242 - 4,305,242
Other
current liabilities 969,179 - 969,179
Total
current liabilities 8,459,905 - 8,459,905
-
Notes
payable, net of discount - - -
Deferred
revenue - 500,000 500,000
Other
non-current liabilities - - -
Total
liabilities 8,459,905 500,000 8,959,905
Stockholders’
equity:
Preferred
stock 40 - 40
Common
stock 2,030,321 - 2,030,321
Additional
paid-in capital 360,370,494 - 360,370,494
Accumulated
deficit (337,227,962 ) (500,000 ) (337,727,962 )
Total
stockholders’ equity 25,172,893 (500,000 ) 24,672,893
Total liabilities and stockholders’ equity $ 33,632,798 $ - $ 33,632,798 ASC
Topic 606 did not have an impact on the Company’s consolidated statements of operations or cash flows. Research
and Development Costs Accrued
Expenses – Stock-Based
Compensation – Income
Taxes On
December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”).
The 2017 Tax Act significantly revises U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory
corporate income tax rate from 35% to 21%, (b) eliminating or reducing certain income tax deductions, such as deductions for interest
expense, executive compensation expenses and certain employee expenses, and (c) repealing the federal alternative minimum tax
(“AMT”) and providing for the refund of existing AMT credits. The
Company continues to maintain a full valuation allowance against its net deferred tax assets. Other provisions enacted include
a new provision designed to tax low-taxed income of foreign subsidiaries (i.e., “GILTI”) and a one-time transition
tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) from
controlled foreign corporations (“CFC”). The Company does not have any foreign subsidiaries, and thus these provisions
do not apply. During
the year ended June 30, 2018, the Company recorded income tax expense of $82,500, which consisted of $500,000 that was withheld
in accordance with tax withholding requirements in the Chinese Territories related to the Fosun License Agreement (Note 6) and
$82,500, which was withheld in accordance with tax withholding requirements in Korea related to the Kwangdong License Agreement
(Note 7). The total income tax expense related to withholding requirements of $582,500 was offset by an income tax benefit of
$500,000, which resulted from the 2017 Tax Act, under which AMT credits became refundable, and therefore a $500,000 benefit related
to the release of a valuation allowance against an AMT credit was recorded during the three months ended December 2017. The Company’s
June 30, 2017 tax return was filed during the three months ended March 31, 2018 and the Company did not incur an AMT liability.
As a result, as of September 30, 2018 and June 30, 2018, the Company has a current income tax receivable of $218,000 and a long-term
income tax receivable of $282,000 from estimated AMT that can be refunded in the future. Net
Income (Loss) per Common Share - Earnings per Share The
following table is a reconciliation of net (loss) income and the shares used in calculating basic and diluted net (loss) income
per common share for the three months ended September 30, 2018 and 2017:
Three
Months Ended September 30,
2018 2017
Net
(loss) income $ (5,682,056 ) $ 10,603,630
Denominator:
Weighted
average common shares - Basic 205,009,278 197,112,400
Effect
of dilutive shares:
Common
stock equivalents arising from stock options,
warrants
and conversion of preferred stock - 1,413,791
Restricted
stock units - 2,834,545
Weighted
average common shares - Diluted 205,009,278 201,360,736
Net
(loss) income per common share:
Basic $ (0.03 ) $ 0.05
Diluted $ (0.03 ) $ 0.05 As
of September 30, 2017, common shares issuable upon the exercise of outstanding options and warrants, excluding outstanding warrants
exercisable for nominal consideration, and the vesting of restricted stock units amounted in an aggregate of 11,116,667 shares
being excluded from the weighted average number of common shares used in computing diluted net income per common share because
they were anti-dilutive during the period or the minimum performance requirements or market conditions had not been met. For the
three months ended September 30, 2018, no additional common shares were added to the computation of diluted EPS because to do
so would have been anti-dilutive. The potential number of common shares excluded from diluted EPS during the three months ended
September 30, 2018 was 44,454,308. Included
in the weighted average common shares used in computing basic and diluted net income (loss) per common share are 3,347,999 and
1,729,250 vested RSUs that have not been issued as of September 30, 2018 and 2017, respectively, due to a provision in the RSU
agreements to delay delivery. |
