Revenue Recognition

Product Sales

SUSTOL is distributed in the U.S. through a limited number of Customers that resell SUSTOL to healthcare providers, the end users of SUSTOL. CINVANTI is distributed in the U.S. through a limited number of Customers that resell CINVANTI to healthcare providers and hospitals, the end users of CINVANTI.

Adoption of Topic

606

January 1, 2018,

we adopted Topic

606

using the modified retrospective approach applied to those contracts that were

not

completed as of

January 1, 2018.

Results from reporting periods beginning after

January 1, 2018

are presented under Topic

606,

while prior period amounts are

not

adjusted and continue to be reported in accordance with our historical accounting under the FASB Accounting Standards Codification (“ASC”) Topic

605,

Revenue Recognition

(“Topic

605”

). Prior to the adoption of Topic

606,

we recognized product sales as revenue to the extent that our Customers had resold our products to end users (sell-through approach). With the adoption of Topic

606,

we recognize product sales as revenue when our products are sold to our Customers (sell-in approach). Product sales under both Topic

605

and

606

are reported net of product sales allowances, which include product returns.

Revenue is recognized in an amount that reflects the consideration we expect to receive in exchange for our products. To determine revenue recognition for contracts with customers within the scope of Topic

606,

we performed the following

five

steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations of the contract(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract(s); and (v) recognize revenue when (or as) we satisfy the performance obligations.

The following table shows the reconciliation of assets and liabilities disclosed in our Annual Report on Form

-K for the year ended

December 31, 2017,

as adjusted, due to the modified retrospective adoption of Topic

606

January 1, 2018 (

in thousands):

	As Reported U nder Topic 605			Effect of Change			As Adjusted U nder Topic 606

Inventory	$	10,108		$	(198	)	$	9,910
Other accrued liabilities		17,175			991			18,166
Deferred revenue		2,763			(2,763	)		—
Retained earnings		(783,455	)		1,574			(781,881	)

The following table shows the unaudited condensed consolidated financial statement line items as if revenue from contracts with customers had been accounted for under Topic

605

(in thousands, except per share data):

	As R eported U nder Topic 606			Effect of Change			As Revised Under Topic 605

Consolidated Balance Sheet as of June 30, 2018:
Inventory	$	27,197		$	1,626		$	28,823
Other accrued liabilities		19,702			(3,369	)		16,333
Deferred revenue		—			9,442			9,442
Retained earnings		(872,816	)		(4,447	)		(877,263	)

Consolidated Statement of Operations for the Three Months Ended June 30, 2018 :
Net product sales	$	17,277		$	(4,266	)	$	13,011
Cost of product sales		5,231			(1,016	)		4,215
Loss from operations		(38,853	)		(3,250	)		(42,103	)
Net loss		(38,670	)		(3,250	)		(41,920	)
Basic and diluted net loss per share		(0.54	)		(0.04	)		(0.58	)

Consolidated Statement of Operations for the Six Months Ended June 30, 2018 :
Net product sales	$	28,844		$	(4,301	)	$	24,543
Cost of product sales		8,364			(1,428	)		6,936
Loss from operations		(90,843	)		(2,873	)		(93,716	)
Net loss		(90,935	)		(2,873	)		(93,808	)
Basic and diluted net loss per share		(1.33	)		(0.04	)		(1.37	)

Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2018 :
Net loss	$	(90,935	)	$	(2,873	)	$	(93,808	)
Adjustments to reconcile net loss to net cash used in operating activities:
Inventory		(17,287	)		(1,428	)		(18,715	)
Other accrued liabilities		1,729			(2,378	)		(649	)
Deferred revenue		—			6,679			6,679

Product Sales Allowances

We recognize product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with Customers, historical product returns, rebates or discounts taken, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, we

may

need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Our product sales allowances include:

	●	Product Returns — We allow our Customers to return product for credit 12 months after its product expiration date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.

	●	Distributor Fees — We offer contractually determined discounts to our Customers. These discounts are paid no later than two months after the quarter in which product was shipped.

	●	Group Purchasing Organization (“GPO”) Discounts and Rebates — We offer cash discounts to GPO members. These discounts are taken when the GPO members purchase SUSTOL or CINVANTI from our Customers, who then charge back to us the discount amount. Additionally, we offer volume and contract-tier rebates to GPO members. Rebates are based on actual purchase levels during the quarterly rebate purchase period.

	●	GPO Administrative Fees — We pay administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the GPO’s members.

	●	Medicaid Rebates — We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which SUSTOL or CINVANTI was sold.

We believe our estimated allowance for product returns requires a high degree of judgment and is subject to change based on our experience and certain quantitative and qualitative factors. We believe our estimated allowances for distributor fees, GPO discounts, rebates and administrative fees and Medicaid rebates do

not

require a high degree of judgment because the amounts are settled within a relatively short period of time.

Our product sales allowances and related accruals are evaluated each reporting period and adjusted when trends or significant events indicate that a change in estimate is appropriate. Changes in sales allowance estimates could materially affect our results of operations and financial position.

The following table provides a summary of activity with respect to our product returns, distributor fees and discounts, rebates and administrative fees for the

six

months ended

June 30, 2018,

which are included in other accrued liabilities on the unaudited condensed consolidated balance sheets (in thousands):

	Product Returns		Distributor Fees			Discounts, Rebates and Administrative Fees			Total

Balance at December 31, 2017	$	521	$	580		$	8,218		$	9,319
Provision		461		2,483			20,201			23,145
Payments/credits		—		(1,774	)		(18,050	)		(19,824	)
Balance at June 30, 2018	$	982	$	1,289		$	10,369		$	12,640