The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company’s financial instruments consist primarily of cash equivalents, accounts receivable, accounts payable and notes payable. Management believes that the carrying values of cash equivalents, accounts receivable and accounts payable are representative of their respective fair values based on the short-term nature of these instruments. Management believes that the carrying amount of its notes payable approximates fair value based on terms of the notes.

Property and Equipment

Property and equipment consists of office and laboratory equipment, office furniture and leasehold improvements and includes assets acquired under capital leases. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets, generally five years for laboratory and computer equipment, seven years for office furniture and equipment and the lesser of the term of the lease or the useful life for leasehold improvements. Amortization of assets acquired under capital leases is included in depreciation expense. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized. Accumulated depreciation and amortization was $2,352,603 and $2,338,558 as of September 30, 2018 and June 30, 2018, respectively.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), which, along with amendments from 2015 and 2016 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC Topic 606 replaced most existing revenue recognition guidance in U.S. GAAP when it became effective.

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, which addressed the determination of whether an arrangement involving multiple deliverables contained more than one unit of accounting. A delivered item within an arrangement was considered a separate unit of accounting only if both of the following criteria were met:

●	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.

Accrued Expenses

Third parties perform a significant portion of the Company’s development activities. The Company reviews the activities performed under all contracts each quarter and accrues expenses and the amount of any reimbursement to be received from its collaborators based upon the estimated amount of work completed. Estimating the value or stage of completion of certain services requires judgment based on available information. If the Company does not identify services performed for it but not billed by the service-provider, or if it underestimates or overestimates the value of services performed as of a given date, reported expenses will be understated or overstated.

Income Taxes

The Company and its subsidiary file consolidated federal and separate-company state income tax returns. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences or operating loss and tax credit carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company has recorded a valuation allowance against its deferred tax assets based on the history of losses incurred.

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.