2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Principles of Consolidation

The consolidated financial statements include the accounts of Palatin and its wholly-owned inactive subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a purchased maturity of less than three months. Cash equivalents consist of $43,381,556 and $37,808,099 in a money market account at June 30, 2019 and 2018, respectively.

Investments

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the intent and ability to hold the securities to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Held-to-maturity securities are recorded as either short-term or long-term on the balance sheet, based on the contractual maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt and marketable equity securities not classified as held-to-maturity or as trading are classified as available-for-sale and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of other comprehensive income (loss).

The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.

Fair Value of Financial Instruments

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 the terms of the notes.

Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Total cash and cash equivalent balances have exceeded balances insured by the Federal Depository Insurance Company (“FDIC”). The Company’s accounts receivable balance at June 30, 2019 has arisen from a milestone payment due from AMAG as it related to the FDA’s approval of Vyleesi and was subsequently collected in July 2019.

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.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future cash flows based on reasonable and supportable assumptions.

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 (the “Kwangdong License Agreement”) with Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) 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 4 for additional information.

Under the Fosun License Agreement (Note 5), 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 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 6), 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 is 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 June 30, 2019 is as follows:

	Impact of change in accounting policies
	As reported June 30, 2019			Adjustments			As reported without adoption of ASC Topic 606
ASSETS
Current assets:
Cash and cash equivalents	$	43,510,422		$	-		$	43,510,422
Accounts Receiveable		60,265,970			-			60,265,970
Prepaid expenses and other current assets		637,289			-			637,289
Total current assets		104,413,681			-			104,413,681
		-						-
Property and equipment, net		141,539			-			141,539
Other assets		179,916			-			179,916
Total assets	$	104,735,136		$	-		$	104,735,136
								-
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	504,787		$	-		$	504,787
Accrued expenses		2,848,692			-			2,848,692
Notes payable, net of discount		332,896			-			332,896
Other current liabilities		499,517			-			499,517
Total current liabilities		4,185,892			-			4,185,892
		-						-
Deferred revenue		-			500,000			500,000
Total liabilities		4,185,892			500,000			4,685,892
Stockholders’ equity:
Preferred stock		40			-			40
Common stock		2,268,154			-			2,268,154
Additional paid-in capital		394,053,929			-			394,053,929
Accumulated deficit		(295,772,879	)		(500,000	)		(296,272,879	)
Total stockholders’ equity		100,549,244			(500,000	)		100,049,244
Total liabilities and stockholders’ equity	$	104,735,136		$	-		$	104,735,136

ASC Topic 606 did not have an impact on the Company’s consolidated statements of operations or cash flows.

Research and Development Costs

The costs of research and development activities are charged to expense as incurred, including the cost of equipment for which there is no alternative future use.

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.

Stock-Based Compensation

The Company charges to expense the fair value of stock options and other equity awards granted. Compensation costs for stock-based awards with time-based vesting are determined using the quoted market price of the Company’s common stock on the date of grant 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. Compensation costs for awards containing a performance condition are determined using the quoted price of the Company’s common stock on the date of grant 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. Forfeitures are recognized as they occur.

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 and continues to maintain a full valuation allowance against its deferred tax assets based on the history of losses incurred and lack of experience projecting future sales-based royalty and milestone payments.

On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the 2017 Tax Act. The 2017 Tax Act significantly revised 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 Alternate Minimum Tax (“AMT”) and providing for the refund of existing AMT credits.

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 from controlled foreign corporations. The Company does not have any foreign subsidiaries, and thus these provisions do not apply.

Net Income (Loss) per Common Share

Basic and diluted earnings per common share (“EPS”) are calculated in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, which includes guidance pertaining to the warrants issued in connection with the Company’s July 3, 2012, December 23, 2014, and July 2, 2015 private placement offerings and the August 4, 2016 underwritten offering, that were exercisable for nominal consideration and, therefore, to the extent not yet exercised were considered in the computation of basic and diluted net income (loss) per common share. As of November 21, 2017, all warrants exercisable for nominal value had been converted into common stock.

The following table is a reconciliation of net income (loss) and the shares used in calculating basic and diluted net income (loss) per common share for the years ended June 30, 2019, 2018 and 2017:

	Year Ended June 30,
	2019	2018	2017
Net income (loss)	$       35,773,027	$       24,702,714	$      (13,331,533)
Denominator:
Weighted average common shares outstanding - Basic	207,670,607	198,101,060	184,087,719
Effect of dilutive shares:
Common stock equivalents arising from stock options,
warrants and conversion of preferred stock	7,142,309	6,752,604	-
Restricted stock units	2,320,458	2,153,894	-
Weighted average common shares outstanding - Diluted	217,133,374	207,007,558	184,087,719
Net income (loss) per common share:
Basic	$                  0.17	$                  0.12	$                 (0.07)
Diluted	$                  0.16	$                  0.12	$                 (0.07)

As of June 30, 2019, 2018 and 2017 common shares issuable upon conversion of Series A Convertible Preferred Stock, 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 6,130,876, 5,197,592, and 40,597,194 shares, respectively, being excluded from the weighted average number of common shares outstanding used in computing diluted net income (loss) per common share because they were anti-dilutive during the period or the minimum performance requirements or market conditions had not been met.

Included in the weighted average common shares used in computing basic and diluted net income (loss) per common share are 6,138,166, 3,140,499 and 1,378,750 vested restricted stock units that had not been issued as of June 30, 2019, 2018 and 2017, respectively, due to a provision in the restricted stock unit agreements to delay delivery