SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2013

Basis of Presentation

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of our wholly-owned subsidiary, Acura Pharmaceutical Technologies Inc., after elimination of intercompany accounts and transactions.

Use of Estimates

Use of Estimates

Management is required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with GAAP. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers cash and cash equivalents to include cash in banks, U.S. Treasury Bills and money market funds. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Our cash and cash equivalents are governed by our investment policy as approved by our Board of Directors. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term nature.

Fair Value of Other Financial Instruments

Fair Value of Other Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts and other receivables, trade accounts payable and our notes payable. The carrying amounts of these financial instruments, other than marketable securities and our promissory notes, are representative of their respective fair values due to their relatively short maturities. We estimate the fair value of our notes payable to be its carrying value due to its recent funding. As discussed below, marketable securities are recorded at fair value.

Marketable Securities

Marketable Securities

The Company’s marketable securities primarily consist of corporate bonds and other instruments that invest in U.S. Treasury, U.S. agency securities and agency mortgage-backed securities. Our marketable securities are governed by our investment policy as approved by our Board of Directors. The Company’s marketable securities are classified as available-for-sale and are recorded at fair value, based upon quoted market prices or net asset value. Unrealized temporary adjustments to fair value are included in a separate component of stockholders’ equity as unrealized gains and losses and reported as a component of accumulated other comprehensive income (loss). No gains or losses on marketable securities are realized until shares are sold or a decline in fair value is determined to be other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Concentration of Credit Risk

Concentration of Credit Risk

We invest our excess cash in accordance with the investment policy approved by our Board of Directors that seeks a combination of both liquidity and safety of principal, such as investments in instruments issued by the United States government and investment grade corporate bonds.

Our accounts receivable arise from our product sales of Nexafed® and represents amounts due from wholesalers in the health care and pharmaceuticals industries and from chain drug stores. The Company has performed a credit evaluation of its customers and may maintain an allowance for potentially uncollectable accounts. We have not experienced any losses on uncollectable accounts.

Sales to certain of our customers accounted for 10% or more of our annual net revenues, whether recognized or deferred, during 2013 as illustrated below:

Customer	2013
Rite Aid Corporation	52	%
Cardinal Health, Inc.	15	%

Inventories

Inventories

Inventories consist of finished goods held for sale and distribution on our Nexafed® product. Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). The Company writes down inventories to net realizable value based on forecasted demand and market conditions, which may differ from actual results. Our gross inventory is valued at $0.5 million and $0.2 million at December 31, 2013 and 2012, respectively. We have recorded inventory reserves of $0.25 million which results in a net reported inventory value of $0.25 million at December 31, 2013. We did not have an inventory reserve at December 31, 2012.

The related cost of sales on deferred revenue of $0.3 million from Nexafed® shipments is excluded from the value of the December 31, 2013 inventory and is reported in our Balance Sheet in the other current deferred assets account. We will recognize the revenue and cost of sales on these Nexafed® shipments once the right of return no longer exists or adequate history and information becomes available to estimate product returns.

Our purchases of active pharmaceutical ingredients and raw materials required for our development and clinical trial manufacture of product candidates utilizing our Aversion® or Impede® Technologies are expensed as incurred.

Property, Plant and Equipment

Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation. We have no leasehold improvements. Betterments are capitalized and maintenance and repairs are charged to operations as incurred. When a depreciable asset is retired from service, the cost and accumulated depreciation is removed from the respective accounts.

Depreciation expense is recorded on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives of the major classification of depreciable assets are:

Building and improvements		10 - 40 years
Land improvements		20 - 40 years
Machinery and equipment		7 - 10 years
Scientific equipment		5 - 10 years
Computer hardware and software		3 - 10 years
Office equipment		5 - 10 years

Debt Issuance Costs and Debt Discount

Debt Issuance Costs and Debt Discount

Deferred debt issuance costs include costs of debt financing undertaken by the Company, including legal fees, placement fees and other direct costs of the financing. Debt discount is the value attributable to warrants issued in conjunction with the financing. Debt issuance costs and debt discount are amortized into interest expense over the term of the related debt using the effective interest method.

Revenue Recognition

Revenue Recognition

Revenue is generally realized or realizable and earned when there is persuasive evidence an arrangement exists, delivery has occurred or services rendered, the price is fixed and determinable, and collection is reasonably assured. The Company records revenue from its Nexafed® product sales when the price is fixed and determinable at the date of sale, title and risk of ownership have been transferred to the customer, and returns can be reasonably estimated.

Nexafed® was launched in mid-December 2012. The Company sells Nexafed® in the United States to wholesale pharmaceutical distributors as well as directly to chain drug stores. Nexafed® is sold subject to the right of return for a period of up to twelve months after the product expiration. Nexafed® currently has a shelf life of twenty-four months from the date of manufacture. Given the limited sales history of Nexafed®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment to certain customers. Accordingly, the Company has deferred the recognition of revenue on $0.3 million of Nexafed® shipments to these customers until the right of return no longer exists or adequate history and information becomes available to estimate product returns.

In connection with our License, Development, and Commercialization Agreement dated October 30, 2007 with King Pharmaceuticals Research and Development, Inc., now a subsidiary of Pfizer Inc. (the “Pfizer Agreement”), we recognize program fee revenue, collaboration revenue and milestone revenue. Commencing in February 2013, we began earning royalties based on net sales of Oxecta® by Pfizer. Such royalties are paid to us within 45 days after the end of each calendar quarter. We have recorded royalties of approximately $10 thousand for the year ended December 31, 2013 on net sales of Oxecta® by Pfizer of approximately $0.2 million.

Program fee revenue is derived from amortized upfront payments, such as the $30.0 million upfront payment from Pfizer received in December 2007, and license fees, such as the $3.0 million option exercise fee paid by Pfizer to us in each of May 2008 and December 2008 upon the exercise of its option to license a third and fourth opioid analgesic product candidate under the Pfizer Agreement. We assigned an equal portion of Pfizer’s $30.0 million upfront payment to each of three product candidates identified in the Pfizer Agreement and recognize the upfront payment as program fee revenue ratably over our estimate of the development period for each identified product candidate. We recognized no program fee revenue in either 2013 or 2012, and recognized $0.5 million of program fee revenue in 2011.

Collaboration revenue is derived from reimbursement of development expenses, which are invoiced quarterly in arrears, and are recognized when costs are incurred pursuant to the Pfizer Agreement. The research and development services provided to Pfizer under the collaboration are priced at fair value based upon the reimbursement of expenses incurred pursuant to the collaboration with Pfizer. There are no ongoing research and development services being provided to Pfizer and we had no collaboration revenue in 2013, 2012 or 2011.

Milestone revenue is contingent upon the achievement of certain pre-defined events in the development of Oxecta® Tablets and other product candidates licensed to Pfizer under the Pfizer Agreement. Milestone payments from Pfizer are recognized as revenue upon achievement of the “at risk” milestone events, which represent the culmination of the earnings process related to that milestone. Milestone payments are triggered either by the results of our research and development efforts or by events external to us, such as regulatory approval to market a product. As such, the milestones are substantially at risk at the inception of the Pfizer Agreement, and the amounts of the payments assigned thereto are commensurate with the milestone achieved. In addition, upon the achievement of a milestone event, we have no future performance obligations related to that milestone payment. Each milestone payment is non-refundable and non-creditable when made. In June 2011, Pfizer paid us a $20.0 million milestone relating to the receipt of FDA approval of the NDA for Oxecta®.

Shipping and Handling Costs

Shipping and Handling Costs

The Company records shipping and handling costs in selling expenses. The amounts recorded from the sales of Nexafed® were not material.

Research and Development Activities

Research and Development Activities

Research and Development (“R&D”) expenses include internal R&D activities, external Contract Research Organization (“CRO”) services and their clinical research sites, and other activities. Internal R&D activity expenses include facility overhead, equipment and facility maintenance and repairs, laboratory supplies, pre-clinical laboratory experiments, depreciation, salaries, benefits, and share-based compensation expenses. CRO activity expenses include preclinical laboratory experiments and clinical trial studies. Other activity expenses include regulatory consulting, and regulatory legal counsel. Internal R&D activities and other activity expenses are charged to operations as incurred. We make payments to the CRO's based on agreed upon terms and may include payments in advance of a study starting date. We review and accrue CRO expenses and clinical trial study expenses based on services performed and rely on estimates of those costs applicable to the stage of completion of a study as provided by the CRO. Accrued CRO costs are subject to revisions as such studies progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. We did not have any accrued CRO costs and clinical trial study expenses at either December 31, 2013 or 2012. At December 31, 2013 we had $0.36 million in prepaid CRO costs and clinical trial study expenses. We had no prepaid CRO costs and clinical trial study expenses at December 31, 2012.

Share-based Compensation

Share-based Compensation

We have three share-based compensation plans covering stock options and RSUs for our employees and directors, which are described more fully in Note 10.

We measure our compensation cost related to share-based payment transactions based on fair value of the equity or liability instrument issued. For purposes of estimating the fair value of each stock option unit on the date of grant, we utilize the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected volatility factor of the market price of our common stock (as determined by reviewing our historical public market closing prices). Our accounting for share-based compensation for RSUs is based on the fair-value method. The fair value of the RSUs is the market price of our common stock on the date of grant, less its exercise cost.

Our share-based compensation expense recognized in the Company’s results of operations comprised the following:

	Year Ended December 31,
	2013		2012		2011
	(in thousands)
Research and development:
Stock option awards	$	315	$	375	$	457
RSU awards		-		-		75
		315		375		532
Selling, general and administrative:
Stock option awards		900		1,358		1,698
RSU awards		-		-		228
		900		1,358		1,926
Total	$	1,215	$	1,733	$	2,458

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that, under GAAP, are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Acura’s other comprehensive income (loss) is composed of unrealized gains (losses) on certain holdings of marketable securities, net of any realized gains (losses) included in net income (loss).

Income Taxes

Income Taxes

We account for income taxes under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and the income tax basis of assets and liabilities and are measured using the enacted income tax rates and laws that will be in effect when the differences are expected to reverse. Additionally, net operating loss and tax credit carryforwards are reported as deferred income tax assets. The realization of deferred income tax assets is dependent upon future earnings. A valuation allowance is required against deferred income tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets may not be realized. At both December 31, 2013 and 2012, 100% of all remaining net deferred income tax assets were offset by a valuation allowance due to uncertainties with respect to future utilization of net operating loss carryforwards. If in the future it is determined that additional amounts of our deferred income tax assets would likely be realized, the valuation allowance would be reduced in the period in which such determination is made and an additional benefit from income taxes in such period would be recognized.

Earnings Per Share (“EPS”)

Earnings Per Share (“EPS”)

Basic EPS is computed by dividing net income or loss by the weighted average common shares outstanding during a period, including shares weighted related to vested Restricted Stock Units (“RSUs”) (See Note 10). Diluted EPS is based on the treasury stock method and computed based on the same number of shares used in the basic share calculation and includes the effect from potential issuance of common stock, such as shares issuable pursuant to the exercise of stock options and stock warrants, assuming the exercise of all in-the-money stock options and warrants. Common stock equivalents are excluded from the computation where their inclusion would be anti-dilutive. No such adjustments were made for either 2013 or 2012 as the Company reported a net loss for the years and including the effects of common stock equivalents in the diluted EPS calculation would have been antidilutive. In 2011, stock awards to purchase 2.8 million common shares were outstanding but not included in the computation of diluted EPS as the awards were anti-dilutive.

A reconciliation of the numerators and denominators of basic and diluted EPS consisted of the following:

	Years ended December 31,
	2013		2012		2011

	(in thousands except per share data)
EPS - basic
Numerator: net income (loss)	$	(13,901)	$	(9,668)	$	10,385
Denominator:
Common shares		46,935		45,863		45,016
Vested RSUs		829		1,658		2,489
Basic weighted average shares outstanding		47,764		47,521		47,505
EPS - basic	$	(0.29)	$	(0.20)	$	0.22

EPS – assuming dilution
Numerator: net income (loss)	$	(13,901)	$	(9,668)	$	10,385
Denominator:
Common shares		46,935		45,863		45,016
Vested RSUs		829		1,658		2,489
Stock options		-		-		366
Common stock warrants		-		-		136
Diluted weighted average shares outstanding		47,764		47,521		48,007
EPS - diluted	$	(0.29)	$	(0.20)	$	0.22

Excluded dilutive securities:
Common stock issuable:
Stock options		3,738		3,296		2,805
Common stock warrants		2,154		1,856		-
Total excluded potentially dilutive shares		5,892		5,152		2,805