e of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ materially from those estimates.

Business Combinations

The Company measures all assets acquired and liabilities assumed, including contingent consideration, at fair value as of the acquisition date. Contingent purchase considerations to be settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in operating expenses. In addition, the Company capitalizes in-process research and development (IPR&D) and either amortizes it over the life of the product upon commercialization, or impairs it if the carrying value exceeds the fair value or if the project is abandoned. Post-acquisition adjustments in deferred tax liabilities are recorded in current period income tax expense in the period of the adjustment.

Discontinued Operations

On April 24, 2015, the Company sold its Zohydro ER business. The operating results of the Zohydro ER business have been excluded from continuing operations for all periods herein and reported as discontinued operations. See Note 5, Sale of Zohydro ER business, for additional information on the divestiture.

Cash and Cash Equivalents

The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and have an original maturity of three months or less when purchased.

Restricted Cash

In connection with its sale of the Zohydro ER business in April 2015, the Company has $10.0 million of cash in escrow as of December 31, 2015 to fund potential indemnification claims for a period of 12 months from the closing date of the sale. The Company received the full amount from escrow in April 2016.

In connection with its sale of the Sumavel DosePro business in May 2014, the Company had $8.5 million of cash in escrow as of December 31, 2014 to fund potential indemnification claims for a period of 12 months from the closing date of the sale. The Company received the full amount from escrow in May 2015.

The Company classifies these cash flows as an investing activity in the consolidated statements of cash flows as the source of the restricted cash is related to divestitures of its businesses.

Short-term Investments

Short-term investments consisted of shares of Pernix Therapeutics common stock received as partial consideration for the sale of the Zohydro ER business in April 2015. Management classified these short-term investments as available-for-sale when acquired and evaluated such classification as of each balance sheet date until sold. Short-term investments were carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive loss, a component of stockholders’ equity. Realized gains and losses and declines in fair value considered to be other-than-temporary are included in loss on sale of short-term investments on the consolidated statements of operations and a new accounting cost basis for the investment is established.

The Company evaluated its short-term investments to assess whether any unrealized loss position is other than temporarily impaired. Factors considered in determining whether a loss was other-than-temporary included the length of time and extent to which fair value was less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. During 2015, the Company liquidated all of its short-term investments and recognized a loss totaling $5.7 million in the consolidated statements of operations. Also, the Company had a $0.5 million receivable from unsettled sales of the short-term investments which was included in other current assets at December 31, 2015 and received cash in 2016.

Accounts Receivable

Trade accounts receivable are recorded net of allowances for uncollectible accounts. The Company evaluates the collectability of its accounts receivable based on various factors including the length of time the receivables are past due, the financial health of the customer and historical experience. The Company reserves specific receivables if collectability is no longer reasonably assured. Based upon the assessment of these factors, the Company did not record an allowance for uncollectible accounts at December 31, 2016 and 2015.

Fair Value Measurements

Certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable are carried at cost, which approximates their fair value due to their short maturities. The carrying amount of the Company’s term debt approximates fair value because it has a variable interest rate. At December 31, 2016, the estimated fair value of the Company’s working capital advance note payable approximated its face amount due to its impending maturity upon finalization of a termination agreement with Endo (see Note 6).

Accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


Level 1:	Observable inputs such as quoted prices in active markets;


Level 2:	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and


Level 3:	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company classifies its cash equivalents within Level 1 of the fair value hierarchy because it values its cash equivalents using quoted market prices. The Company classifies its common stock warrant liabilities and contingent purchase consideration within Level 3 of the fair value hierarchy because they are valued using valuation models with significant unobservable inputs. Assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and 2015 were as follows (in thousands):



	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
At December 31, 2016
Assets
Cash equivalents (1)	$	87,792	$	—	$	—	$	87,792
Liabilities
Common stock warrant liabilities (2)	$	—	$	—	$	809	$	809
Contingent purchase consideration (3)	$	—	$	—	$	52,800	$	52,800

At December 31, 2015
Assets
Cash equivalents (1)	$	148,588	$	—	—		$	148,588
Liabilities
Common stock warrant liability (2)	$	—	$	—	$	6,196	$	6,196
Contingent purchase consideration (3)	$	—	$	—	$	51,000	$	51,000


(1)	Cash equivalents consists of investments in money market funds.

(2)

Common stock warrant liabilities include liabilities associated with warrants issued in connection with the Company’s July 2012 public offering of common stock and warrants (see Note 10) and warrants issued in connection with the financing agreement entered into with Healthcare Royalty Partners, which are measured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuation model for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it will not pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) expected volatility based upon the Company’s historical volatility. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty Financing Agreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additional assumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 public offering: (a) management’s projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for the valuation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume the warrants, (b) an expected volatility rate using the Company’s historical volatility through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatility rate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction. The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 public offering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fair value measurement.

(3)

Contingent purchase consideration was measured at fair value using the income approach based on significant unobservable inputs including management’s estimates of the probabilities and timing of achieving specific net sales levels and development milestones and appropriate risk adjusted discount rates. Significant changes of any of the unobservable input could have a significant effect on the calculation of fair value of the contingent purchase consideration liability.

The following table provides a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2016 and 2015 (in thousands):



	Short-term investments			Contingent Purchase Consideration			Common Stock Warrant Liability
Balance at December 31, 2014	$	—		$	53,000		$	5,093
Additions	11,926			—			—
Dispositions	(6,180		)	—			—
Changes in fair value	(5,746		)	(2,000		)	1,103
Balance at December 31, 2015	—			51,000			6,196
Additions	—			—			—
Dispositions	—			—			—
Changes in fair value	—			1,800			(5,387		)
Balance at December 31, 2016	$	—		$	52,800		$	809

Realized changes in fair value of the short-term investments are shown as loss on sale of short-term investments in other income (expense) in the consolidated statements of operations. Changes in fair value of contingent purchase consideration are reflected as operating expenses in the consolidated statements of operations. Changes to the warrant liabilities are recorded through a change in fair value of warrant liabilities.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains accounts in federally insured financial institutions in excess of federally insured limits. The Company also maintains investments in money market funds that are not federally insured. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held and of the money market funds and other entities in which these investments are made. Additionally, the Company has established guidelines regarding the diversification of its investments and their maturities, which are designed to maintain safety and liquidity.

In 2016, substantially all of the Company’s revenue were derived from a contract manufacturing service agreement with its one customer, Endo. The Company and Endo have recently entered into a letter agreement acknowledging Endo’s decision to have the Company discontinue the manufacturing and supply of the Sumavel DosePro product under the supply agreement while the parties finalize termination of the supply agreement. The Company expects to fulfill current open orders during the first half of 2017 and not to supply Endo with additional Sumavel DosePro following such time (See Note 6). Once the termination agreement is finalized, the Company will no longer have a source of recurring revenue.

As of December 31, 2016, the trade accounts receivable balance of $12.6 million was due from the Company’s single customer, Endo. Subsequent to year-end, the Company has collected $10.1 million of the amounts outstanding at December 31, 2016.

Inventory

Inventory is stated at the lower of cost or market. Cost includes amounts related to materials, labor and overhead, and is determined in a manner which approximates the first-in, first-out method. The Company adjusts the carrying value of inventory for potentially excess, dated or product within one year of expiration and obsolete products based on an analysis of inventory on hand and compared to forecasts of future sales. As of December 31, 2016, the entire inventory balance consists of raw materials and work-in-process related to the fulfillment of Sumavel DosePro under the supply agreement with Endo. The Company expects the procured materials are subject to reimbursement under the supply agreement. Accordingly, no reserves were deemed necessary at December 31, 2016.

Property and Equipment, Net

Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets and primarily consists of the following:



Computer equipment and software		3 years
Furniture and fixtures		3-7 years
Leasehold improvements		Shorter of estimated useful life or lease term

Depreciation expense for property and equipment was $1.4 million in 2016, $1.6 million in 2015, and $1.6 million in 2014.

Goodwill and Indefinite-Lived Intangibles

Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually in the fourth quarter, and more frequently if events or other changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Impairment of goodwill and indefinite-lived intangibles is determined to exist when the fair value is less than the carrying value of the net assets being tested.

Goodwill

The Company determined it has only one operating segment and reporting unit under the criteria in ASC 280, Segment Reporting. Accordingly, the Company’s review of goodwill impairment indicators is performed at the entity-wide level. The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The Company uses its market capitalization as an indicator of fair value. The Company believes that since its reporting unit is publicly traded, the ability of a controlling shareholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of its reporting unit as a whole to exceed its market capitalization. However, the Company believes that the fair value measurement need not be based solely on the quoted market price of an individual share of our common stock, but also can consider the impact of a control premium in measuring the fair value of its reporting unit. Should the market capitalization be less than its total stockholder's equity as of the annual test date or as of any interim impairment testing date, the Company would also consider market comparables, recent trends in its stock price over a reasonable period and, if appropriate, use an income approach (discounted cash flow) to determine whether the fair value of its reporting unit is greater than its carrying amount. If the income approach is used, the Company would establish a fair value by estimating the present value of its projected future cash flows expected to be generated from its business. The discount rate applied to the projected future cash flows to arrive at the present value would be intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology would consider projections of financial performance for a period of several years combined with an estimated residual value. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. Based on its goodwill impairment tests for 2016, 2015 and 2014, the Company concluded that the fair value of the reporting unit exceeded the carrying value and no impairment existed.

Indefinite-Lived Intangibles

The Company’s indefinite-lived intangible asset consists of in-process research and development (IPR&D) acquired in a business combination (see Note 7) that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. the Company classifies in-process research and development acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon completion of the associated research and development efforts, the Company will determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, the Company would write-off the remaining carrying amount of the associated in-process research and development intangible asset. The Company uses the income approach to determine the fair value of its IPR&D. This approach calculates fair value by estimating the after-tax cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value. The Company’s revenue assumptions are based on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected levels of market share. In arriving at the value of the in-process projects, the Company considers, among other factors: the in-process projects’ stage of completion; the complexity of the work completed as of the acquisition date; the costs already incurred; the projected costs to complete; the contribution of other acquired assets; the expected regulatory path and introduction dates by region; and the estimated useful life of the technology. The Company applies a market-participant risk-adjusted discount rate to arrive at a present value as of the date of the impairment test. Based on its IPR&D impairment tests for 2016, 2015 and 2014, the Company concluded that the fair value of its IPR&D exceeded the carrying value and no impairment existed.

For asset purchases outside of business combinations, the Company expenses any purchased research and development assets as of the acquisition date if they have no alternative future uses.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets, consisting of property and equipment, periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (group) may not be recoverable. If the sum of our estimated undiscounted future cash flows is less than the asset’s (group) carrying value, the Company then estimated the fair value of the asset (group) to measure the impairment, if any.

In 2014, the Company recorded an impairment charge of $0.8 million upon divestiture of Sumavel DosePro business related to the disposal of construction in progress equipment that will no longer be placed into service.

The Company and Endo have recently entered into a letter agreement acknowledging Endo’s decision to have the Company discontinue the manufacturing and supply of the Sumavel DosePro product under the supply agreement while the parties finalize termination of the supply agreement. As a result, the Company performed an analysis to estimate cash flows from property and equipment used in the production of Sumavel DosePro. Based on this analysis, the Company determined its fair value exceeded the carrying value by $6.4 million and recognized an impairment charge for long-lived assets in the fourth quarter of 2016. See Note 6 for additional information.

Common Stock Warrants

In accordance with accounting guidance for warrants for shares in redeemable securities or warrants that could be settled for cash, the Company classifies warrants for common stock as current liabilities or equity on the consolidated balance sheet as appropriate. The Company adjusts the carrying value of warrants for common stock that can be settled in cash to their estimated fair value at each reporting date with the increases or decreases in the fair value of such warrants recorded as change in fair value of warrant liabilities in the consolidated statements of operations.

Revenue Recognition

The Company generates revenue from contract manufacturing, service fees earned on collaborative arrangements and product revenue related to Sumavel DosePro prior to the sale of the business in May 2014. The Company also generates revenue from the sale of Zohydro ER, which is included in net income (loss) from discontinued operations in the consolidated statement of operations. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (c) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale has economic substance apart from that provided by the Company, (e) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (f) the amount of future returns can be reasonably estimated. The Company defers recognition of revenue on product shipments of Zohydro ER until the right of return no longer exists, as the Company was not able to reliably estimate expected returns of the product at the time of shipment given the limited sales history of Zohydro ER.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control. In determining the units of accounting, the Company evaluates certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement. In addition, the Company considers whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or management’s best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

Contract Manufacturing Revenue

The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. As part of the sale of the Company’s Sumavel DosePro business in May 2014 to Endo, the Company allocated a portion of the total consideration received as payments in advance of the delivery of product under a supply agreement with Endo that was concurrently entered into with the asset sale. The Company initially recorded $9.1 million of deferred revenue, which is being recognized as contract manufacturing revenue when earned on a “proportional performance” basis as product is delivered. As a result, a portion of our contract manufacturing revenue reported includes deferred revenue from this transaction being recognized when earned.

Under the proportional performance method, revenue recognition is based on total products delivered to date relative to the total expected products to be delivered over the performance period as this is considered to be representative of the delivery of service under the arrangement. The performance period under the supply agreement was initially estimated to be eight years, the minimum contractual term under the agreement. Changes in estimates to the total expected products to be delivered or service obligation time period are accounted for prospectively. In the fourth quarter of 2016, as a result of Endo’s intent to terminate the supply agreement by mid-2017, the performance period and the total expected products to be delivered under the arrangement were revised and revenue of $4.9 million was recognized for the inception-to-date effect of the change in estimate. See Note 6 for additional information.

In addition, the Company follows the authoritative accounting guidance when reporting revenue as gross when the Company acts as a principal versus reporting revenue as net when the Company acts as an agent. For transactions in which the Company acts as a principal, has discretion to choose suppliers, bears credit risk and performs a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Product Revenue, Net

The Company sold Sumavel DosePro through May 2014, and sold Zohydro ER through April 2015, in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively the Company’s customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. The Company recognized Sumavel DosePro product sales at the time title transferred to its customer, and reduced product sales for estimated future product returns and sales allowances in the same period the related revenue was recognized.

Given the limited sales history of Zohydro ER, the Company was not able to reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company deferred recognition of revenue on Zohydro ER product shipments until the right of return no longer exists, which occurs at the earlier of the time Zohydro ER is dispensed through patient prescriptions or expiration of the right of return. The Company estimates Zohydro ER patient prescriptions dispensed using an analysis of third-party syndicated data. Zohydro ER was launched in March 2014 and, accordingly, the Company did not have a significant history estimating the number of patient prescriptions dispensed. If the Company underestimated or overestimated patient prescriptions dispensed for a given period, adjustments to revenue from discontinued operations may be necessary in future periods. The deferred revenue balance does not have a direct correlation with future revenue recognition as the Company records sales deductions at the time the prescription unit was dispensed. In addition, the costs of Zohydro ER associated with the deferred revenue were recorded as deferred costs, which were included in inventory, until the time the related deferred revenue is recognized. The Company is responsible for returns for product sold prior to the sale of the business on April 24, 2015 and for rebates, chargebacks, and related fees for product sold until July 8, 2015 per the terms of the asset purchase agreement. Revenue for Zohydro ER is included in discontinued operations in the consolidated statement of operations.

The Company will continue to recognize Zohydro ER revenue upon the earlier to occur of prescription units dispensed or expiration of the right of return until it can reliably estimate product returns, at which time the Company will record a one-time increase in revenue related to the recognition of revenue previously deferred, net of estimated future product returns and sales allowances. In addition, the costs of Zohydro ER associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized, subject to future exchange or product returns.

Product Returns. The Company is responsible for product returns for Sumavel DosePro product distributed by the Company prior to the sale of Sumavel DosePro to Endo in May 2014 up to a maximum per unit amount, as specified in the asset purchase agreement. This estimate of returns requires a high degree of judgment and is subject to change based on the Company’s experience and certain quantitative and qualitative factors. Sumavel DosePro’s shelf life is determined by the shorter expiry date of its two subassemblies, which is currently approximately 30 months from the date of manufacture. The Company’s return policy allows for customers to return unused product that is within six months before and up to one year after its expiration date for a credit at the then-current wholesaler acquisition cost reduced by a nominal fee for processing the return.

The Company has monitored and analyzed actual return history of Sumavel DosePro since product launch. The Company’s analysis of actual product return history considers actual product returns on an individual product lot basis since product launch, the dating of the product at the time of shipment into the distribution channel, prescription trends, trends in customer purchases and their inventory management practices, and changes in the estimated levels of inventory within the distribution channel to estimate its exposure for returned product. Because of the shelf life of Sumavel DosePro and the duration of time under which the Company’s customers may return product through the Company’s return policy, there may be a significant period of time between when the product is shipped and when the Company issues credits on returned product.

Service and Other Product Revenue

Service and other product revenue primarily consists of payments received for the Company’s sales efforts under a co-promotion agreement with Valeant Pharmaceuticals North America LLC (Valeant) which was terminated in July 2015, and adjustments to Sumavel returns reserves subsequent to the sale of the business in May 2014. The Company recognizes service and other product revenue at the time services have been rendered or return rights have expired.

Collaborative Arrangements

The Company records certain transactions between collaborators in the consolidated statement of operations on either a gross or net basis within revenues or operating expenses, depending on the characteristics of the collaboration relationship, and provides for enhanced disclosure of collaborative relationships. The Company evaluates its collaborative agreements for proper classification of shared expenses, license fees, milestone payments and any reimbursed costs within the consolidated statement of operations based on the nature of the underlying activity. If payments to and from collaborative partners are not within the scope of other authoritative accounting literature, the statement of operations classification for the payments is based on a reasonable, rational analogy to authoritative accounting literature that is applied in a consistent manner. For collaborations relating to commercialized products, if the Company acts as the principal in the sale of goods or services, the Company records revenue and the corresponding operating costs in its respective line items within the consolidated statement of operations based on the nature of the shared expenses. Per authoritative accounting guidance, the principal is the party who is responsible for delivering the product to the customer, has latitude with establishing price and has the risks and rewards of providing product to the customer, including inventory and credit risk.

Research and Development Expense and Accruals

Research and development costs are expensed as incurred unless there is an alternative future use in other research and development projects. Research and development costs include personnel-related costs, outside contracted services including clinical trial costs, facilities costs, fees paid to consultants, milestone payments prior to FDA approval, license fees prior to FDA approval, professional services, travel costs, dues and subscriptions, depreciation and materials used in clinical trials and research and development. The Company expenses costs relating to the purchase and production of pre-approval inventories as research and development expense in the period incurred until FDA approval is received.

The Company’s expense accruals for clinical trials are based on estimates of the services received from clinical trial investigational sites and contract research organizations, or CROs. Payments under some of the Company’s contracts with such parties depend on factors such as the milestones accomplished, successful enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If possible, the Company obtains information regarding unbilled services directly from these service providers. However, the Company may be required to estimate these services based on information available to its product development or administrative staff. If the Company underestimates or overestimates the activity associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary in future periods.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates which will be in effect when the differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax asset will be realized. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

Foreign Currency Transactions

Gains or losses resulting from transactions denominated in foreign currencies are included in other expense, net in the consolidated statements of operations and were not material for all periods presented.

Stock-Based Compensation

For stock options and restricted stock units, the Company recognizes compensation cost on a straight-line basis over the awards’ vesting periods for awards which contain only a service vesting feature. For awards with a performance condition vesting feature, when achievement of the performance condition is deemed probable, the Company recognizes compensation cost on a graded-vesting basis over the awards’ expected vesting periods.

Net (Loss) Income per Share

Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted average number of common shares outstanding for the period reduced by weighted average shares subject to repurchase, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and as-if converted method, as applicable. For purposes of this calculation, stock options, restricted stock units, warrants and common stock subject to repurchase are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following table presents the computation of basic and diluted net (loss) income per share (in thousands, except per share amounts):



	Year Ended December 31,
	2016						2015					2014
	Continuing operations			Discontinued operations			Continuing operations			Discontinued operations		Continuing operations		Discontinued operations
Numerator
Net (loss) income, basic and diluted	$	(68,686	)	$	(1,021	)	$	(41,704	)	$	67,848	$	61,487	$	(52,900	)
Denominator
Weighted average common shares outstanding, basic	24,785			24,785			21,449			21,449		17,825		17,825
Effect of dilutive securities:
Common stock warrants	—			—			—			—		30		30
Weighted average common shares outstanding, diluted	24,785			24,785			21,449			21,449		17,855		17,855
Net (loss) income per share, basic	$	(2.77	)	$	(0.04	)	$	(1.94	)	$	3.16	$	3.45	$	(2.97	)
Net (loss) income per share, diluted	$	(2.77	)	$	(0.04	)	$	(1.94	)	$	3.16	$	3.44	$	(2.96	)

In 2015 and 2014, the Company excluded 0.5 million and 1.2 million, respectively, of potential common shares outstanding from the calculation of diluted net income per share because their effect would have been antidilutive. In 2016, all potential common shares were excluded from the diluted net loss per share calculation as their effect is antidilutive since the Company generated a net loss. The following table summarizes the potential common shares excluded from the diluted calculation (in thousands):



	Year Ended December 31,
	2016	2015	2014
Common stock options and restricted stock units	3,256	529	1,244
Common stock warrants	1,975	—	—
	5,231	529	1,244

Segment Reporting

Management has determined that the Company operates in one business segment, which is the development and commercialization of pharmaceutical products.

Reclassifications

Interest income balances for prior years, which were previously combined as part of interest expense, net have been separately presented in the consolidated statements of operations to conform to current year’s presentation.

Accounting Pronouncements Recently Adopted

Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability instead of as an asset. The Company adopted the guidance in the first quarter of 2016. The effect of adopting the guidance retrospectively was 1) to decrease amounts previously reported on the Company’s consolidated balance sheet at December 31, 2015 for prepaid expenses and other current assets and decrease current portion of long-term debt by $0.1 million and 2) to decrease other assets, noncurrent and long term debt by $0.1 million. The balances for December 31, 2015 reflected in the Company’s consolidated balance sheet in this Form 10-K reflect these reclassifications.

ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s ability to Continue as a Going Concern provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company adopted the provisions of ASU 2014-15 as of December 31, 2016 and has included the disclosures required by ASU 2014-15 in Note 1 to the consolidated financial statements.

Accounting Pronouncements Issued But Not Yet Effective

ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting changes how companies account for certain aspects of stock-based awards to employees. Under the guidance, entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (APIC). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. In addition, entities will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current guidance, excess tax benefits are not recognized until the deduction reduces taxes payable. The new standard became effective for the Company on January 1, 2017. The Company has excess tax benefits for which a benefit could not be previously recognized of approximately $0.2 million. Upon adoption, the balance of the unrecognized excess tax benefits will be reversed with the impact recorded to accumulated deficit, including any change to the valuation allowance as a result of the adoption. Additionally, as permitted under the new ASU, the Company has elected to change its policy on accounting for forfeitures and recognize them as they occur. Both of these changes will be adopted using the modified retrospective transition method, which will result in a cumulative-effect adjustment to the January 1, 2017 opening accumulated deficit balance. The Company does not expect the pending adoption of this ASU to have a material impact on its consolidated financial statements.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance, collectively, Topic 606, will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. This guidance will be effective for the Company January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). In 2016, the Company generated substantially all its revenue from a single contract, the manufacturing supply agreement with Endo, which is currently undergoing termination discussions and is expected to be terminated by mid-2017. The Company cannot predict whether it will have any revenue generating contracts with customers on the date of adoption. Therefore, the Company has not yet determined the transition method by which it will adopt the standard. The Company will continue to monitor any new contracts it enters into with customers for evaluation under ASU 2014-09.

ASU 2016-02, Leases (Topic 842) requires lessees to recognize the lease assets and lease liabilities that arise from both capital and operating leases with lease terms of more than 12 months and to disclose qualitative and quantitative information about lease transactions. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the timing and impact of adopting this new accounting standard on its financial statements and related disclosures.