REVENUE

Revenue from Contracts with Customers

The Company’s sources of revenue include (i) sales of EXPAREL in the U.S.; (ii) sales of its bupivacaine liposome injectable suspension product for use in animal health indications in the U.S.; (iii) royalties based on sales of its bupivacaine liposome injectable suspension product for use in animal health indications and (iv) license fees and milestone payments. The majority of the Company’s revenue is derived from sales of EXPAREL. The Company does not consider revenue from other product sales, collaborative licensing, milestones and royalties to be material sources of its consolidated revenue. As such, the following disclosure only relates to revenue associated with net EXPAREL product sales.

Net Product Sales

The Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the product placed by end-users which include hospitals, ambulatory surgery centers and doctors. EXPAREL is delivered directly to the end-user without the wholesaler ever taking physical possession of the product. Product revenue is recognized when control of the promised goods are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods. EXPAREL revenue is recorded at the time the product is delivered to the end-user.

Revenues from sales of products are recorded net of returns allowances, prompt payment discounts, wholesaler service fees, volume rebates and chargebacks. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. These amounts are treated as variable consideration, estimated and recognized as a reduction of the transaction price at the time of the sale, using the most likely amount method for the gross to net adjustments, except for returns, which is based on the expected value method. The Company includes these estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. The calculation of some of these items requires management to make estimates based on sales data, historical return data, contracts and other related information that may become known in the future. The adequacy of these provisions is reviewed on a quarterly basis. The following table provides a summary of activity with respect to the Company’s sales related allowances and accruals for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	Returns Allowances			Prompt Payment Discounts			Wholesaler Service Fees			Volume Rebates and Chargebacks			Total
Balance at December 31, 2015	$	1,733		$	625		$	745		$	797		$	3,900
Provision	694			5,448			4,118			2,611			12,871
Payments/Adjustments	(1,081		)	(5,478		)	(4,128		)	(2,284		)	(12,971		)
Balance at December 31, 2016	1,346			595			735			1,124			3,800
Provision	716			5,806			4,403			4,656			15,581
Payments/Adjustments	(1,241		)	(5,744		)	(4,299		)	(5,084		)	(16,368		)
Balance at December 31, 2017	821			657			839			696			3,013
Provision	680			6,802			5,194			6,645			19,321
Payments/Adjustments	(1,157		)	(6,680		)	(4,866		)	(6,331		)	(19,034		)
Balance at December 31, 2018	$	344		$	779		$	1,167		$	1,010		$	3,300

Accounts Receivable

The majority of accounts receivable arise from product sales and represent amounts due from wholesalers, hospitals, ambulatory surgery centers and doctors. Payment terms generally range from zero to 37 days from the date of the transaction, and accordingly, there is no significant financing component.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. At contract inception, the Company assesses the goods promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying individual performance obligations, the Company considers all goods promised in the contract regardless of whether explicitly stated in the customer contract or implied by customary business practices. The Company’s contracts with customers require it to transfer an individual distinct product, which represents a single performance obligation. The Company’s performance obligation with respect to its product sales are satisfied at a point in time, which transfers control upon delivery of EXPAREL to its customers. The Company considers control to have transferred upon delivery because the customer has legal title to the asset, physical possession of the asset has been transferred, the customer has significant risks and rewards of ownership of the asset, and the Company has a present right to payment at that time.

Disaggregated Revenue

The following table represents disaggregated net product sales in the periods presented (in thousands):



	Year Ended December 31,
	2018		2017		2016
Net product sales:
EXPAREL	$	331,112	$	282,905	$	265,802
Other product sales	1,315		1,437		4,271
Total net product sales	$	332,427	$	284,342	$	270,073