Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of Zogenix and its wholly owned subsidiaries. The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. All intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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. The Company believes significant judgment is involved in determining and in estimating the valuation of stock-based compensation, accrued clinical expenses, and contingent consideration liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources.

Business Combinations

The Company measures all assets acquired and liabilities assumed, including contingent consideration, at fair value as of the acquisition date. Contingent consideration obligations incurred in connection with a business combination are remeasured to their estimated fair values at each reporting period with the change in fair value recorded in operating expenses until the related contingencies are resolved. 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

In April 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.

Accounts Receivable

The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, the length of time the receivables are past due and the financial health of the customer.

Fair Value Measurements

Certain of the Company’s financial instruments, including cash and cash equivalents, other current assets, accounts payable and accrued liabilities approximates their fair value due to their short maturities. The carrying amount of the Company’s Term Loan (as defined in Note 8 below) at December 31, 2016 approximates fair value, considering Level 2 inputs, 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 Endo International plc (“Endo”) and the Company finalizing an agreement to terminate the supply agreement to manufacture and supply Sumavel DosePro to Endo (the “Endo Supply Agreement”).

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 fair value of cash equivalents was determined based on Level 1 inputs utilizing quoted prices in active markets. The fair value of the Company’s common stock warrant liabilities and contingent consideration liabilities were determined based on Level 3 inputs using valuation models with significant unobservable inputs. Assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and 2016 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, 2017
Assets
Cash equivalents (1)	$	289,782	$	—	$	—	$	289,782
Liabilities
Common stock warrant liabilities (2)	$	—	$	—	$	512	$	512
Contingent purchase consideration (3)	$	—	$	—	$	76,900	$	76,900

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


(1)	Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balance sheets.

(2)

Represents the fair value of common stock warrants outstanding that may require cash settlement under certain circumstances. The Company estimated the fair value of the warrant liabilities using the Black-Scholes valuation model. As of December 31, 2017, common stock warrant liabilities consisted of warrants issued in July 2011 in connection with a debt financing arrangement. The warrants entitle the holder to purchase up to 28,125 shares of common stock at an exercise price of $72.00 per share. The warrants will expire in July 2021. As of December 31, 2016, common stock warrant liabilities were primarily attributable to warrants sold as part of the Company’s July 2012 public offering. The warrants were exercisable into 1,901,918 shares of the Company’s common stock at an exercise price of $20.00 per share and had a contractual term of 5 years from the issuance date. In July 2017, these warrants expired unexercised.

(3)

In connection with the acquisition of ZX008 in 2014, the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. The Company estimates the fair value of contingent purchase consideration liabilities using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement is based on significant Level 3 inputs such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted at risk-adjusted rates. Subsequent to the acquisition date, at each reporting period prior to settlement, the Company revalues these liabilities by performing a review of the assumptions listed above and records an adjustment to reflect any changes in the estimated fair values of these contingent consideration liabilities. In the absence of any significant changes in key assumptions during a reporting period, the change in fair values of these contingent consideration liabilities would primarily reflect an increase in fair value from the passage of time. Significant judgment is used in determining Level 3 inputs and fair value measurements as of a reporting period. Updates to assumptions could have a significant impact on the Company’s results of operations in a reporting period and actual results may differ from estimates. For example, significant increases in the estimated probability of achieving a milestone or projected revenues would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone or projected revenues would result in a significantly lower fair value measurement. Significant increases in the discount rate or in the anticipated timelines would result in a significantly lower fair value measurement while significant decreases in the discount rate or anticipated timelines would result in a significantly higher fair value measurement. The potential contingent consideration payments required upon achievement of development, regulatory approval and sales-based milestones related to the Company’s acquisition of ZX008 range from zero if none of the milestones are achieved to a maximum of $95.0 million (undiscounted).

There were no transfers between levels for all periods presented.

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, 2017 and 2016 (in thousands):



	Contingent Purchase Consideration		Common Stock Warrant Liabilities
Balance at December 31, 2015	$	51,000	$	6,196
Additions	—		—
Settlements	—		—
Changes in fair value	1,800		(5,387		)
Balance at December 31, 2016	52,800		809
Additions	—		—
Settlements	—		—
Changes in fair value	24,100		(297		)
Balance at December 31, 2017	$	76,900	$	512

Changes in the estimated fair value of contingent purchase consideration are reflected as operating expenses in the consolidated statements of operations. Changes in the estimated fair value of common stock warrant liabilities are included within other income (expense) in the consolidated statements of operations.

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 consisted of raw materials and work-in-process related to the fulfillment of Sumavel DosePro under the supply agreement with Endo. Upon the termination of Endo Supply Agreement in September 2017, the Company no longer engages in contract manufacturing and therefore no longer carries inventory.

Concentration of Risk

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 holds 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.

Certain materials and key components that the Company utilizes in its operations are obtained through single suppliers. Since the suppliers of key components and materials must be named in a new drug application (NDA) filed with the U.S. Food and Drug Administration (FDA) for a product, significant delays can occur if the qualification of a new supplier is required. If delivery of material from the Company’s suppliers were interrupted for any reason, the Company may be unable to supply any of its product candidates for clinical trials.

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 2017, 2016 and 2015 was $0.4 million, $1.4 million and $1.6 million, respectively.

Goodwill and Indefinite-Lived Intangible Assets

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 difference between the purchase price and the fair value of assets acquired and liabilities assumed in a business combination is allocated to goodwill. Goodwill is evaluated for impairment on an annual basis as of October 1, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist.

As of October 1, 2017, the Company has determined through its quantitative test that the fair value significantly exceeded the carrying value of our single reporting unit, and concluded that goodwill was not impaired. The Company has not recognized any goodwill impairment in any of the years presented.

Indefinite-Lived Intangible Asset

The Company’s indefinite-lived intangible asset consists of IPR&D acquired in a business combination 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 IPR&D 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 performed a final test for impairment and 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 IPR&D intangible asset.

In performing each annual impairment assessment and any interim impairment assessment, the Company determines if it should qualitatively assess whether it is more likely than not that the fair value of its IPR&D asset is less than its carrying amount (the qualitative impairment test). If the Company concludes that is the case, or elect not to use qualitative impairment test, the Company would proceed with quantitatively determining the fair value of the IPR&D asset and comparing its fair value to its carrying value to determine the amount of impairment, if any (the quantitative impairment test).

In performing the qualitative impairment test, the Company considers the results of the most recent quantitative impairment test and identifies the most relevant drivers of the fair value for the IPR&D asset. The most relevant drivers of fair value identified are consistent with the assumptions used in the quantitative estimate of the IPR&D asset discussed below. Using these drivers of fair value, the Company identifies events and circumstances that may have an effect on the fair value of the IPR&D asset since the last time the IPR&D’s fair value was quantitatively determined. The Company then weighs these factors to determine and conclude if it is not more likely than not that the IPR&D asset is impaired. If it is more likely than not that the IPR&D asset is impaired, the Company proceeds with quantitatively determining the fair value of the IPR&D asset. For 2017, the Company performed a qualitative test and concluded that it is more likely than not that the fair value of its IPR&D asset exceeded its carrying value and no further testing was required.

The Company uses the income approach to determine the fair value of its IPR&D asset. 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. This estimate includes significant assumptions regarding the estimates that market participants would make in evaluating the IPR&D asset, including the probability of successfully completing clinical trials and obtaining regulatory approval to market the IPR&D asset, the timing of and the expected costs to complete IPR&D projects, future net cash flows from potential drug sales, which are based on estimates of the sales price of the drug, the number of patients who will be diagnosed and treated and our competitive position in the marketplace, and appropriate discount and tax rates. Any impairment to be recorded is calculated as the difference between the fair value of the IPR&D asset as of the date of the assessment with the carrying value of the IPR&D asset on its consolidated balance sheet.

For 2017, the Company performed a qualitative test and concluded that it is more-likely-than-not that the fair value of our IPR&D asset exceeded the carrying value and no further testing was required. The Company did not recognize any IPR&D impairment in any of the years presented.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (group) may not be recoverable. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value.

In the fourth quarter of 2016, the Company was informed by Endo of their decision to discontinue Sumavel DosePro and the Company commenced the wind down of our manufacturing operations related to the supply of Sumavel DosePro to Endo (see Note 6). As a result, the Company performed an analysis to estimate cash flows from property and equipment used in the production of Sumavel DosePro in the fourth quarter of 2016. Based on this analysis, the Company recognized an impairment charge for long-lived assets of $6.4 million. In the first quarter of 2017, the Company recorded an additional asset impairment charge of $0.8 million for long-lived manufacturing assets associated with the production of Sumavel DosePro. There was no impairment to long-lived assets in 2015.

Common Stock Warrant Liabilities

In accordance with accounting guidance for common stock warrants that may potentially require cash settlement under certain circumstances, the Company classifies such common stock warrants as current liabilities on the consolidated balance sheet. The Company adjusts the carrying value of these common stock warrants 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 statement of operations.

Revenue Recognition

The Company historically generated 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. Until April 2015, the Company generated revenue from the sale of Zohydro ER, which is included in net income (loss) from discontinued operations in the consolidated statement of operations and comprehensive income (loss). Revenue was recognized when (i) persuasive evidence of an arrangement existed, (ii) delivery had occurred and title had passed, (iii) the price was fixed or determinable and (iv) collectability was reasonably assured. Revenue from sales transactions where the buyer has the right to return the product was recognized at the time of sale only if (a) our price to the buyer was substantially fixed or determinable at the date of sale, (b) the buyer had paid us, or the buyer was obligated to pay us and the obligation was not contingent on resale of the product, (c) the buyer’s obligation to us 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 had economic substance apart from that provided by us, (e) the Company did 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 could be reasonably estimated. The Company deferred recognition of revenue on product shipments of Zohydro ER until the right of return lapsed, as the Company was not able to reliably estimate expected returns of the product at the time of shipment given the limited sales and return history of Zohydro ER.

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

Arrangement consideration that is fixed or determinable was allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, was applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. The Company determined 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 considered 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 recorded deferred revenue when payments are received in advance of the delivery of products or the performance of services. As part of the sale of our 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 the Endo Supply Agreement that was concurrently entered into with the asset sale. The Company initially recorded $9.1 million of deferred revenue, which was being recognized as contract manufacturing revenue when earned on a “proportional performance” basis as product was delivered. As a result, a portion of contract manufacturing revenue reported included deferred revenue from this transaction being recognized when earned.

Under the proportional performance method, revenue recognition is based on 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. Management exercises judgment to estimate the total expected products to be delivered under the Endo Supply Agreement and actual results may differ from these estimates. The performance period under the Endo Supply Agreement was initially estimated to be 8 years, the minimum contractual term under the agreement. Changes in estimates of total expected products to be delivered or service obligation time period were accounted for prospectively as a change in estimate. In the fourth quarter of 2016, as a result of Endo’s intent to terminate the supply agreement by the first half of 2017, we revised our estimates of total expected products to be delivered under the arrangement and recognized revenue for the inception-to-date effect of the change in estimate. The effect of this change in estimate resulted in an increase to 2016 revenue by $4.9 million. All remaining deferred revenue related to the Endo Supply Agreement was recognized in 2017 concurrent with the shipment of final product and termination of this agreement.

After the termination of the agreements with Durect related to Relday and Endo related to Sumavel DosePro, respectively, the Company no longer has a source of recurring revenue.

The Company generated service revenue under a co-promotion agreement with Valeant Pharmaceuticals North America LLC (Valeant), which was terminated in July 2015, and other product revenue upon expiration of return rights for Sumavel DosePro products sold prior to the Company’s divestiture.

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. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Such payments are evaluated for current or long-term classification based on when they will be realized.

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 (“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.

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.

Income Taxes

Income taxes are accounted for under the asset and liability method of accounting. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for 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 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 results of operations in the period that includes the enactment date. 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.

On December 22, 2017, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the accounting implications of the U.S. federal tax reform enacted on December 22, 2017. SAB 118 allows a company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

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

The Company recognizes stock-based compensation for all equity awards made to employees based upon the awards’ estimated grant date fair value. For equity awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis over the requisite service period. For stock awards which have a performance component, compensation cost is measured based on the fair value on the grant date (the date performance targets are established) and is expensed over the service period for each separately vesting tranche when the achievement of the performance objective becomes probable. The Company has elected to recognize forfeitures as they occur.

Valuation of Stock Options

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

•

Expected term—The expected term of the option awards represents the period of time between the grant date of the option awards and the date the option awards are either exercised, converted or canceled, including an estimate for those option awards still outstanding. The Company used the simplified method, as permitted by the SEC for companies with a limited history of relevant stock option exercise activity, to determine the expected term for its option grants.


•	Expected volatility—The expected volatility was calculated based on the Company’s historical stock prices, supplemented as necessary with historical volatility of the common stock of several peer companies with characteristics similar to those of the Company.


•	Risk-free interest rate—The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximated the Company’s expected term.


•	Dividend yield—The dividend yield was based on the Company’s dividend history and the anticipated dividend payout over its expected term.

Valuation of Restricted Stock Units

The fair value of each restricted stock unit was based on the Company’s closing stock price on the date of grant. The Company is also required to make estimates as to the probability of achieving the specific performance criteria. If actual results are not consistent with the Company’s assumptions and judgments used in making these estimates, the Company may be required to increase or decrease compensation expense, which could be material to the Company’s results of operations.

Loss from Continuing Operations per Share

Basic net loss from continuing operations per share is calculated by dividing the net loss from continuing operations 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 loss from continuing operations per share is computed by dividing the net loss from continuing operations 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 and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss from continuing operations per share when their effect is dilutive.

The calculation of diluted loss per share also requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the common stock warrants and the presumed exercise of such securities are dilutive to loss per share for the period, adjustments to net income or net loss used in the calculation are required to remove the change in fair value of the common stock warrant liability for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares.

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



	2017			2016			2015
Numerator
Net loss from continuing operations	$	(126,022	)	$	(68,686	)	$	(41,704	)
Denominator
Weighted average common shares outstanding, basic and diluted	27,301			24,785			21,449
Loss from continuing operations per share, basic and diluted	$	(4.62	)	$	(2.77	)	$	(1.94	)

The following table presents the potential common shares outstanding that were excluded from the computation of diluted loss from continuing operations per share of common stock for the periods presented because including them would have been antidilutive (in thousands):



	Year Ended December 31,
	2017	2016	2015
Shares subject to outstanding common stock options	3,865	3,171	529
Shares subject to outstanding restricted stock units	237	85	—
Shares subject to outstanding warrants to purchase common stock	282	1,975	1,975
	4,384	5,231	2,504

Accounting Pronouncements Recently Adopted

Accounting Standards Update (“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. 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. Further, the new guidance allows entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to retained earnings or accumulated deficit.

The Company adopted ASU 2016-09 on January 1, 2017. Upon adoption, the Company recorded a deferred tax asset of $0.2 million for previously unrecognized excess tax benefits from stock-based compensation, which was fully offset by an equal increase to its valuation allowance resulting in no impact to opening accumulated deficit. In addition and as provided for under this guidance, the Company made an accounting policy election to recognize forfeitures as they occur. The adoption of this aspect of the guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory simplifies current accounting treatments by requiring entities to measure most inventories at “the lower of cost and net realizable value” rather than using lower of cost or market. This guidance does not apply to inventories measured using the last-in, first-out method or the retail inventory method. The Company adopted ASU 2015-11 on January 1, 2017. The adoption of this new guidance did not have any impact on the Company’s consolidated financial statements and related disclosures.

Accounting Pronouncements Issued But Not Yet Effective

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 beginning 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). The Company will implement the standard on January 1, 2018 to contracts which are not completed as of this date using the modified retrospective method. This standard will not have a material impact on the Company’s consolidated financial statements as the Company does not have any contracts with customers in effect as of the initial adoption date.

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 consolidated financial statements and related disclosures.

ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business without outputs, there will need to be an organized workforce. The ASU also narrows the definition of the term “outputs” to be consistent with how it is described in Topic 606. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods on a prospective basis, and may be early adopted. The Company is currently evaluating the timing and impact of adopting this new accounting standard on its consolidated financial statements and related disclosures.

ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the timing and impact of adopting this new accounting standard on its consolidated financial statements and related disclosures.

ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting provides guidance on determining changes to the terms and conditions of share-based payment awards and require an entity to apply modification accounting under Topic 718 unless all of the following conditions are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the timing and impact of adopting this new accounting standard on its consolidated financial statements.