SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and include the accounts of our wholly-owned subsidiaries. Our results of operations for 2015 include the results of CBR, subsequent to its August 17, 2015 acquisition date. See Note C, “Business Combinations,” for additional information. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates and Assumptions

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The most significant estimates and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product sales and services revenue; product sales allowances and accruals; allowance for doubtful accounts; marketable securities; inventory; acquisition date fair value and subsequent fair value estimates used to assess impairment of long-lived assets, including goodwill, in-process research and development (“IPR&D”) and other intangible assets; contingent consideration; debt obligations; certain accrued liabilities, including clinical trial accruals and restructuring liabilities; income taxes, inclusive of valuation allowances, and equity-based compensation expense. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist principally of cash held in commercial bank accounts, money market funds and U.S. Treasury securities having an original maturity of less than three months at the date of acquisition. We consider all highly liquid marketable securities with a maturity of three months or less as of the acquisition date to be cash equivalents. At December 31, 2017 and 2016, substantially all of our cash and cash equivalents were held in either commercial bank accounts or money market funds.

Marketable Securities

We account for and classify our marketable securities as either “available-for-sale,” “held-to-maturity,” or “trading debt securities,” in accordance with the accounting guidance related to the accounting and classification of certain investments in marketable securities. The determination of the appropriate classification by us is based primarily on management’s ability and intent to sell the debt security at the time of purchase. As of December 31, 2017 and 2016, all of our marketable securities were classified as available-for-sale.

Available-for-sale securities are those securities which we view as available for use in current operations, if needed. We generally classify our available-for-sale securities as short-term investments, even though the stated maturity date may be one year or more beyond the current balance sheet date. Available-for-sale marketable securities are stated at fair value with their unrealized gains and losses included in accumulated other comprehensive income (loss) within the consolidated statements of stockholders’ equity, until such gains and losses are realized in other income (expense) within the consolidated statements of operations or until an unrealized loss is considered other-than-temporary.

We recognize other-than-temporary impairments of our marketable securities when there is a decline in fair value below the amortized cost basis and if (a) we have the intent to sell the security or (b) it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis. If either of these conditions is met, we recognize the difference between the amortized cost of the security and its fair value at the impairment measurement date in our consolidated statements of operations. If neither of these conditions is met, we must perform additional analysis to evaluate whether the unrealized loss is associated with the creditworthiness of the issuer of the security rather than other factors, such as interest rates or market factors. If we determine from this analysis that we do not expect to receive cash flows sufficient to recover the entire amortized cost of the security, a credit loss exists, the impairment is considered other-than-temporary and is recognized in our consolidated statements of operations.

Inventory

Inventory is stated at the lower of cost or market (net realizable value), with approximate cost being determined on a first-in, first-out basis. Prior to initial approval from the U.S. Food and Drug Administration (the “FDA”) or other regulatory agencies, we expense costs relating to the production of inventory in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the product to be realized, at which point we capitalize the costs as inventory. We assess the costs capitalized prior to regulatory approval each quarter for indicators of impairment, such as a reduced likelihood of approval. We expense costs associated with clinical trial material as research and development expense.

On a quarterly basis, we analyze our inventory levels to determine whether we have any obsolete, expired, or excess inventory. If any inventory is expected to expire prior to being sold, has a cost basis in excess of its net realizable value, is in excess of expected sales requirements as determined by internal sales forecasts, or fails to meet commercial sale specifications, the inventory is written-down through a charge to cost of product sales. The determination of whether inventory costs will be realizable requires estimates by management of future expected inventory requirements, based on sales forecasts. Once packaged, our products have a shelf-life ranging from three to five years. As a result of comparison to internal sales forecasts, we expect to fully realize the carrying value of our finished goods inventory. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.

Restricted Cash

As of December 31, 2017 and 2016, we classified $0.7 million and $2.6 million of our cash as restricted cash, respectively. The December 31, 2016 balance included both $2.0 million held in a restricted fund previously established by Lumara Health, Inc. (“Lumara Health”) in connection with its Chapter 11 plan of reorganization to pay potential claims against its former directors and officers, as well as a $0.6 million security deposit delivered to the landlord of our Waltham, Massachusetts headquarters in the form of an irrevocable letter of credit. In December 2017, the $2.0 million previously established by Lumara in connection with its Chapter 11 plan of reorganization was unrestricted and the funds were moved into operating cash.

Concentrations and Significant Customer Information

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, and accounts receivable. We currently hold our excess cash primarily in institutional money market funds, corporate debt securities, U.S. treasury and government agency securities, commercial paper and certificates of deposit. As of December 31, 2017, we did not have a material concentration in any single investment.

Our operations are located entirely within the U.S. We focus primarily on developing, manufacturing, and commercializing Makena, Feraheme, Mugard, Intrarosa, bremelanotide, and marketing and selling the CBR Services. We perform ongoing credit evaluations of our product sales customers and generally do not require collateral. The following table sets forth customers or partners who represented 10% or more of our total revenues for 2017, 2016 and 2015:



	Years Ended December 31,
	2017		2016		2015
AmerisourceBergen Drug Corporation	21	%	22	%	25	%
McKesson Corporation	19	%	11	%	11	%
Takeda Pharmaceuticals Company Limited	—	%	—	%	12	%

Approximately 12% of our total revenues for 2015 were principally related to deferred Feraheme collaboration revenue recognized in connection with the termination of our license, development and commercialization agreement (the “Takeda Agreement”) with Takeda Pharmaceutical Company Limited (“Takeda”), which is headquartered in Japan, and which revenues were thus generated from outside the U.S. All of the revenues generated during 2017 and 2016 were generated within the U.S.

Our net accounts receivable primarily represented amounts due for products sold directly to wholesalers, distributors, and specialty pharmacies and amounts due for CBR Services sold to consumers who pay for the services directly. Accounts receivable for our products and services are recorded net of reserves for estimated chargeback obligations, prompt payment discounts and any allowance for doubtful accounts.

As part of our credit management policy, we perform ongoing credit evaluations of our product sales customers, and we have not required collateral from any customer. We maintain an allowance for doubtful accounts for estimated losses inherent in our CBR service revenues portfolio. In establishing the allowance, we consider historical losses adjusted to take into account current market conditions and customers’ financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all collection means have been exhausted and the potential for recovery is considered remote. If the financial condition of any of our significant product sales customers was to deteriorate and result in an impairment of its ability to make payments owed to us, an allowance for doubtful accounts may be required which could have a material effect on earnings in the period of any such adjustment. We did not experience any significant bad debts and have not established an allowance for doubtful accounts on our product sales at December 31, 2017 and 2016.

Customers which represented greater than 10% of our accounts receivable balance as of December 31, 2017 and 2016 were as follows:



	December 31,
	2017		2016
AmerisourceBergen Drug Corporation	27	%	13	%
McKesson Corporation	22	%	32	%

We are currently dependent on a single supplier for Feraheme drug substance (produced in two separate facilities) and finished drug product as well as for drug substance and fill finish services for Intrarosa. In addition, we rely on single sources for certain materials required to support the CBR Services. We would be exposed to a significant loss of revenue from the sale of our products and services if our suppliers and/or manufacturers could not fulfill demand for any reason.

Property, Plant and Equipment, Net

Property, plant and equipment are recorded at cost and depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:



	Useful Life
Buildings and improvements	15 - 40 Years
Computer equipment and software	5 Years
Furniture and fixtures	5 Years
Leasehold improvements	Lesser of Lease or Asset Life
Laboratory and production equipment	5 Years
Land improvements	10 Years

Costs for capital assets not yet placed in service are capitalized on our balance sheets and will be depreciated in accordance with the above guidelines once placed into service. Costs for maintenance and repairs are expensed as incurred. Upon sale or other disposition of property, plant and equipment, the cost and related depreciation are removed from the accounts and any resulting gain or loss is charged to our consolidated statements of operations. Long-lived assets to be held and used are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Assets classified as held for sale are no longer subject to depreciation and are recorded at the lower of carrying value or estimated net realizable value.

Business Combinations and Asset Acquisitions

The purchase price allocation for business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. We early adopted ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”) as of January 1, 2017. Under ASU 2017-01, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is not a business.

We account for acquired businesses using the acquisition method of accounting, under which the total purchase price of an acquisition is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Acquisition-related costs are expensed as incurred. Any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.

The purchase price allocations are initially prepared on a preliminary basis and are subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocations are made as soon as practicable but no later than one year from the acquisition date.

Acquired inventory is recorded at its fair value, which may require a step-up adjustment to recognize the inventory at its expected net realizable value. The inventory step-up is recorded to cost of product sales in our consolidated statements of operations when related inventory is sold, and we record step-up costs associated with clinical trial material as research and development expense.

Acquisition-Related Contingent Consideration

Contingent consideration arising from a business combination is included as part of the purchase price and is recognized at its estimated fair value as of the acquisition date. Subsequent to the acquisition date, we measure contingent consideration arrangements at fair value for each period until the contingency is resolved. These changes in fair value are recognized in selling, general and administrative expenses in our consolidated statements of operations. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time.

Goodwill

We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to, an adverse change in current economic and market conditions, including a significant prolonged decline in market capitalization, a significant adverse change in legal factors, unexpected adverse business conditions, and an adverse action or assessment by a regulator. Our annual impairment test date is October 31. We have determined that we operate in a single operating segment and have a single reporting unit.

In performing our goodwill impairment tests during 2017, we utilized the approach prescribed under the Accounting Standards Codification (“ASC”) 350, as amended by Accounting Standards Update (“ASU”) 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which we adopted on January 1, 2017 (“ASU 2017-04”). ASU 2017-04 requires that an entity perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

Prior to our adoption of ASU 2017-04, we utilized the two-step approach prescribed under ASC 350 in performing our goodwill impairment tests. The first step required a comparison of the reporting unit’s carrying value to its fair value. If the carrying value of a reporting unit exceeded its estimated fair value, a second step was required to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of a reporting unit’s goodwill to its carrying value. The second step required us to perform a hypothetical purchase price allocation as of the measurement date and estimate the fair value of net tangible and intangible assets. The fair value of intangible assets is determined as described below and is subject to significant judgment.

Intangible Assets

We amortize our intangible assets that have finite lives based on either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. When such facts and circumstances exist, management compares the projected undiscounted future cash flows associated with the asset over its estimated useful life against the carrying amount. The impairment loss, if any, is measured as the excess of the carrying amount of the asset over its fair value.

If we acquire a business as defined under applicable accounting standards, then the acquired IPR&D is capitalized as an intangible asset. If we acquire an asset or a group of assets that do not meet the definition of a business, then the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred

Acquired IPR&D represents the fair value assigned to research and development assets that we acquire and have not been completed at the acquisition date. The fair value of IPR&D acquired in a business combination is capitalized on our consolidated balance sheets at the acquisition-date fair value and is determined by estimating the costs to develop the technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the projected net cash flows to present value. IPR&D is not amortized, but rather is reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed or abandoned. If we determine that IPR&D becomes impaired or is abandoned, the carrying value is written down to its fair value with the related impairment charge recognized in our consolidated statement of operations in the period in which the impairment occurs. Upon successful completion of each project and launch of the product, we will make a separate determination of the estimated useful life of the IPR&D intangible asset and the related amortization will be recorded as an expense prospectively over its estimated useful life.

Additionally, we have other indefinite-lived intangible assets which we acquired through our business combinations. These assets are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present. If we determine that the asset becomes impaired, the carrying value is written down to its fair value with the related impairment charge recognized in our consolidated statements of operations in the period in which the impairment occurs.

The projected discounted cash flow models used to estimate our IPR&D reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following:


•	Probability of successfully completing clinical trials and obtaining regulatory approval;


•	Market size, market growth projections, and market share;


•	Estimates regarding the timing of and the expected costs to advance our clinical programs to commercialization;


•	Estimates of future cash flows from potential product sales; and


•	A discount rate.

Patents

We expense all patent-related costs in selling, general and administrative expenses as incurred.

Revenue Recognition and Related Sales Allowances and Accruals

Our primary sources of revenue during the reporting periods were: (a) product revenues from Makena, Feraheme, and Intrarosa; (b) service revenues associated with the CBR Services; and (c) license fees, collaboration and other revenues, which primarily included revenue recognized under our collaboration agreements, royalties received from our license agreements, and international product revenues of Feraheme derived from our collaboration agreement with Takeda, which was terminated in 2015. Revenue is recognized when the following criteria are met:


•	Persuasive evidence of an arrangement exists;


•	Delivery of product has occurred or services have been rendered;


•	The sales price charged is fixed or determinable; and


•	Collection is reasonably assured.

Product Revenue

We recognize product revenues net of certain allowances and accruals in our consolidated statements of operations at the time of sale. Our contractual adjustments include provisions for returns, pricing and prompt payment discounts, as well as wholesaler distribution fees, rebates to hospitals that qualify for 340B pricing and volume-based and other commercial rebates. Governmental rebates relate to our reimbursement arrangements with state Medicaid programs. In addition, we also monitor our distribution channel to determine whether additional allowances or accruals are required based on inventory in our sales channel. Calculating these gross to net sales adjustments involves estimates and judgments based primarily on actual product sales data, forecasted customer buying patterns, and market research data related to utilization rates by various end-users. If we determine in future periods that our actual experience is not indicative of our expectations, if our actual experience changes, or if other factors affect our estimates, we may be required to adjust our allowances and accruals estimates, which would affect our net product sales in the period of the adjustment and could be significant.

Our product sales, which primarily represented revenues from Makena and Feraheme for 2017, 2016 and 2015 were offset by provisions for allowances and accruals as follows (in thousands):



	Years Ended December 31,
	2017		2016		2015
Gross product sales	$	920,061	$	748,839	$	561,255
Provision for product sales allowances and accruals:
Contractual adjustments	310,588		229,686		161,665
Governmental rebates	113,828		86,983		57,774
Total provision for product sales allowances and accruals	424,416		316,669		219,439
Product sales, net	$	495,645	$	432,170	$	341,816

Product Sales Allowances and Accruals

Product sales allowances and accruals are primarily comprised of both direct and indirect fees, discounts and rebates and provisions for estimated product returns. Direct fees, discounts and rebates are contractual fees and price adjustments payable to wholesalers, specialty distributors and other customers that purchase products directly from us. Indirect fees, discounts and rebates are contractual price adjustments payable to healthcare providers and organizations, such as certain physicians, clinics, hospitals, group purchasing organizations (“GPOs”), and dialysis organizations that typically do not purchase products directly from us but rather from wholesalers and specialty distributors. In accordance with guidance related to accounting for fees and consideration given by a vendor to a customer, including a reseller of a vendor’s products, these fees, discounts and rebates are presumed to be a reduction of the selling price. Product sales allowances and accruals are based on definitive contractual agreements or legal requirements (such as Medicaid laws and regulations) related to the purchase and/or utilization of the product by these entities and are recorded in the same period that the related revenue is recognized. We estimate product sales allowances and accruals using either historical, actual and/or other data, including estimated patient usage, applicable contractual rebate rates, contract performance by the benefit providers, other current contractual and statutory requirements, historical market data based upon experience of our products and other products similar to them, specific known market events and trends such as competitive pricing and new product introductions, current and forecasted customer buying patterns and inventory levels, and the shelf life of our products. As part of this evaluation, we also review changes to federal and other legislation, changes to rebate contracts, changes in the level of discounts, and changes in product sales trends. Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to three months or longer after the sale.

Allowances against receivable balances primarily relate to prompt payment discounts, provider chargebacks and certain government agency rebates and are recorded at the time of sale, resulting in a reduction in product sales revenue and the reporting of product sales receivables net of allowances. Accruals related to Medicaid and provider volume rebates, wholesaler and distributor fees, GPO fees, other discounts to healthcare providers and product returns are recorded at the time of sale, resulting in a reduction in product sales and the recording of an increase in accrued expenses.

Discounts

We typically offer a 2% prompt payment discount to our customers as an incentive to remit payment in accordance with the stated terms of the invoice, generally thirty days. Because we anticipate that those customers who are offered this discount will take advantage of the discount, we accrue 100% of the prompt payment discount at the time of sale, based on the gross amount of each invoice. We adjust the accrual quarterly to reflect actual experience.

Chargebacks

Chargeback reserves represent our estimated obligations resulting from the difference between the prices at which we sell our products to wholesalers and the sales price ultimately paid to wholesalers under fixed price contracts by third-party payers, including governmental agencies. We determine our chargeback estimates based on actual product sales data and forecasted customer buying patterns. Actual chargeback amounts are determined at the time of resale to the qualified healthcare provider, and we generally issue credits for such amounts within several weeks of receiving notification from the wholesaler. Estimated chargeback amounts are recorded at the time of sale, and we adjust the allowance quarterly to reflect actual experience.

Distributor/Wholesaler and Group Purchasing Organization Fees

Fees under our arrangements with distributors and wholesalers are usually based upon units of product purchased during the prior month or quarter and are usually paid by us within several weeks of our receipt of an invoice from the wholesaler or distributor, as the case may be. Fees under our arrangements with GPOs are usually based upon member purchases during the prior quarter and are generally billed by the GPO within 30 days after period end. Current accounting standards related to consideration given by a vendor to a customer, including a reseller of a vendor’s products, specify that cash consideration given by a vendor to a customer is presumed to be a reduction of the selling price of the vendor’s products or services and therefore should be characterized as a reduction of product sales. Consideration should be characterized as a cost incurred if we receive, or will receive, an identifiable benefit (goods or services) in exchange for the consideration and we can reasonably estimate the fair value of the benefit received. Because the fees we pay to wholesalers do not meet the foregoing conditions to be characterized as a cost, we have characterized these fees as a reduction of product sales and have included them in contractual adjustments or governmental rebates in the table above. We generally pay such amounts within several weeks of our receipt of an invoice from the distributor, wholesaler or GPO. Accordingly, we accrue the estimated fee due at the time of sale, based on the contracted price invoiced to the customer. We adjust the accrual quarterly to reflect actual experience.

Product Returns

Consistent with industry practice, we generally offer our wholesalers, specialty distributors and other customers a limited right to return our products based on the product’s expiration date. Currently the expiration dates for our products have a range of three years to five years. We estimate product returns based on the historical return patterns and known or expected changes in the marketplace. We track actual returns by individual production lots. Returns on lots eligible for credits under our returned goods policy are monitored and compared with historical return trends and rates.

We expect that wholesalers and healthcare providers will not stock significant inventory due to the cost of the products, the expense to store our products, and/or that our products are readily available for distribution. We record an estimate of returns at the time of sale. If necessary, our estimated rate of returns may be adjusted for actual return experience as it becomes available and for known or expected changes in the marketplace. We did not significantly adjust our reserve for product returns during 2017, 2016, or 2015. To date, our product returns have been relatively limited; however, returns experience may change over time. We may be required to make future adjustments to our product returns estimate, which would result in a corresponding change to our net product sales in the period of adjustment and could be significant.

Governmental Rebates

Governmental rebate reserves relate to our reimbursement arrangements with state Medicaid programs. We determine our estimates for Medicaid rebates, if applicable, based on actual product sales data and our historical product claims experience. In estimating these reserves, we provide for a Medicaid rebate associated with both those expected instances where Medicaid will act as the primary insurer as well as in those instances where we expect Medicaid will act as the secondary insurer. Rebate amounts generally are invoiced quarterly and are paid in arrears, and we expect to pay such amounts within several weeks of notification by the Medicaid or provider entity. Estimated governmental rebates are recorded at the time of sale. During 2017 and 2016, we refined our estimated Medicaid reserve based on actual claims received since the 2011 launch of Makena, our expectations of state level utilization, and estimated rebate claims not yet submitted. This refinement resulted in a $1.2 million increase and a $6.1 million reduction of our estimated Medicaid rebate reserve related to prior period Makena sales in 2017 and 2016, respectively. We regularly assess our Medicaid reserve balance and the rate at which we accrue for claims against product sales. If we determine in future periods that our actual rebate experience is not indicative of expected claims, if actual claims experience changes, or if other factors affect estimated claims rates, we may be required to adjust our current Medicaid accumulated reserve estimate, which would affect net product sales in the period of the adjustment and could be significant.

Multiple Element Arrangements

We evaluate revenue from arrangements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in the accounting guidance related to revenue arrangements with multiple deliverables. Under current accounting guidance, companies are required to establish the selling price of its products and services based on a separate revenue recognition process using management’s best estimate of the selling price when there is no vendor-specific objective evidence or third-party evidence to determine the selling price of that item. If a delivered element is not considered to have standalone value, all elements of the arrangement are recognized as revenue as a single unit of accounting over the period of performance for the last such undelivered item or services. Significant management judgment is required in determining what elements constitute deliverables and what deliverables or combination of deliverables should be considered units of accounting.

When multiple deliverables are combined and accounted for as a single unit of accounting, we base our revenue recognition pattern on the last to be delivered element. Revenue is recognized using either a proportional performance or straight-line method, depending on whether we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and whether such performance obligations are provided on a best-efforts basis. To the extent we cannot reasonably estimate our performance obligations, we recognize revenue on a straight-line basis over the period we expect to complete our performance obligations. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. We may have to revise our estimates based on changes in the expected level of effort or the period we expect to complete our performance obligations.

For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. We determine the selling price to be used for allocating revenue to deliverables as follows: (a) vendor specific objective evidence; (b) third-party evidence of selling price and (c) the best estimate of the selling price. Vendor specific objective evidence generally exists only when we sell the deliverable separately and it is the price actually charged by us for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.

Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets. Deferred revenue associated with our CBR service revenues includes (a) amounts collected in advance of unit processing and (b) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenues.

Service Revenue

Our service revenues for the CBR Services include the following two deliverables: (a) enrollment, including the provision of a collection kit and cord blood and cord tissue unit processing, which are delivered at the beginning of the relationship (the “processing services”), with revenue for this deliverable recognized after the collection and successful processing of the cord blood and cord tissue; and (b) the storage of newborn cord blood and cord tissue units (the “storage services”), for either an annual fee or a prepayment of 18 years or the lifetime of the newborn donor (the “lifetime option”), with revenue for this deliverable recognized ratably over the applicable storage period. For the lifetime option, storage fees are not charged during the lifetime of the newborn donor. However, revenue is recognized based on the average of male and female life expectancies using lifetime actuarial tables published by the Social Security Administration in effect at the time of the newborn’s birth. As there are other vendors who provide processing services and storage services at separately stated list prices, the processing services and storage services, including the first year storage, each have standalone value to the customer, and therefore represent separate deliverables. The selling price for the processing services, 18 year and lifetime storage options are estimated based on the best estimate of selling price because we do not have vendor specific objective evidence or third-party evidence of selling price for these elements. The selling price for the annual storage services is determined based on vendor specific objective evidence as we have standalone renewals to support the selling price.

License Fee, Collaboration and Other Revenues

The terms of product development and commercialization agreements entered into between us and our collaborative licensees may include non-refundable license fees, payments based on the achievement of certain milestones and performance goals, reimbursement of certain out-of-pocket costs, including research and development expenses, payment for manufacturing services, and royalties on product sales. We recognize license fee and research and development revenue under collaborative arrangements over the term of the applicable agreements using a proportional performance model, if practical. Otherwise, we recognize such revenue on a straight-line basis. Under this model, revenue is generally recognized in an amount equal to the lesser of the amount due under the agreements or an amount based on the proportional performance to date. In cases where project costs or other performance metrics are not estimable but there is an established contract period, revenues are recognized on a straight-line basis over the term of the relevant agreement. In cases where we are reimbursed for certain research and development costs associated with our collaboration agreements and where we are acting as the principal in carrying out these services, any reimbursement payments are recorded in license fee, collaboration and other revenues in our consolidated statement of operations to match the costs that we incur during the period in which we perform those services. Nonrefundable payments and fees are recorded as deferred revenue upon receipt and may require deferral of revenue recognition to future periods.

Research and Development Expenses

Research and development expenses include external expenses, such as costs of clinical trials, contract research and development expenses, certain manufacturing research and development costs, regulatory filing fees, consulting and professional fees and expenses, and internal expenses, such as compensation of employees engaged in research and development activities, the manufacture of product needed to support research and development efforts, related costs of facilities, and other general costs related to research and development. Manufacturing costs are generally expensed as incurred until a product has received the necessary initial regulatory approval.

Advertising Costs

Advertising costs are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Advertising costs, including promotional expenses, costs related to trade shows and print media advertising space were $22.7 million, $16.4 million and $8.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Shipping and Handling Costs

We bill customers of our CBR Services a fee for the shipping of the collection kits to CBR. Shipping and handling revenues are reported in services revenues, with the associated costs reported in costs of services.

Equity-Based Compensation

Equity-based compensation cost is generally measured at the estimated grant date fair value and recorded to expense over the requisite service period, which is generally the vesting period. Because equity-based compensation expense is based on awards ultimately expected to vest, we must make certain judgments about whether employees, officers, directors, consultants and advisers will complete the requisite service period, and reduce the compensation expense being recognized for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based upon historical experience and adjusted for unusual events such as corporate restructurings, which can result in higher than expected turnover and forfeitures. If factors change and we employ different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period.

We estimate the fair value of equity-based compensation involving stock options based on the Black-Scholes option pricing model. This model requires the input of several factors such as the expected option term, the expected risk-free interest rate over the expected option term, the expected volatility of our stock price over the expected option term, and the expected dividend yield over the expected option term and are subject to various assumptions. The fair value of awards calculated using the Black-Scholes option pricing model is generally amortized on a straight-line basis over the requisite service period, and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period.

We estimate the fair value of our restricted stock units (“RSUs”) whose vesting is contingent upon market conditions, such as total shareholder return, using the Monte-Carlo simulation model. The fair value of RSUs where vesting is contingent upon market conditions is amortized based upon the estimated derived service period. The fair value of RSUs granted to our employees and directors whose vesting is dependent on future service is determined based upon the quoted closing market price per share on the date of grant, adjusted for estimated forfeitures.

We believe our valuation methodologies are appropriate for estimating the fair value of the equity awards we grant to our employees and directors. Our equity award valuations are estimates and may not be reflective of actual future results or amounts ultimately realized by recipients of these grants. These amounts are subject to future quarterly adjustments based upon a variety of factors, which include, but are not limited to, changes in estimated forfeiture rates and the issuance of new equity-based awards.

Income Taxes

We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A deferred tax asset is established for the expected future benefit of net operating loss (“NOL”) and credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance against net deferred tax assets is required if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Significant judgments, estimates and assumptions regarding future events, such as the amount, timing and character of income, deductions and tax credits, are required in the determination of our provision for income taxes and whether valuation allowances are required against deferred tax assets. In evaluating our ability to recover our deferred tax assets, we consider all available evidence, both positive and negative, including the existence of taxable temporary differences, our past operating results, the existence of cumulative income in the most recent fiscal years, changes in the business in which we operate and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state and federal operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying business. As of December 31, 2017, we maintained a valuation allowance on certain of our state NOL and credit carryforwards.

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. We evaluate uncertain tax positions on a quarterly basis and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could impact our income tax provision in future periods. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as a provision for income tax in our consolidated statement of operations.

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”), was enacted. The 2017 Tax Act includes significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. We have recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 31, 2017. While we believe these estimates are reasonable, the ultimate impact may differ from these provisional amounts due to further review of the enacted legislation, changes in interpretations and assumptions we have made, and additional accounting and regulatory guidance that may be issued.

Comprehensive (Loss) Income

Our comprehensive (loss) income consists of net (loss) income and other comprehensive (loss) income. Other comprehensive (loss) income includes changes in equity that are excluded from net (loss) income, which for all periods presented in these consolidated financial statements related to unrealized holding gains and losses on available-for-sale marketable securities, net of tax.

Basic and Diluted Net (Loss) Income per Share

We compute basic net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the relevant period. Diluted net income (loss) per common share has been computed by dividing net income (loss) by the diluted number of common shares outstanding during the period. Except where the result would be antidilutive to net income, diluted net income per common share would be computed assuming the impact of the conversion of the 2.5% convertible senior notes due in 2019 (the “2019 Convertible Notes”) and the 3.25% convertible senior notes due in 2022 (the “2022 Convertible Notes”), the exercise of outstanding stock options, the vesting of RSUs, and the exercise of warrants.

We have a choice to settle the conversion obligation of our 2022 Convertible Notes and the 2019 Convertible Notes (together, the “Convertible Notes”) in cash, shares or any combination of the two. Prior to May 2017, and pursuant to certain covenants in our six-year $350.0 million term loan facility (the “2015 Term Loan Facility”), which was repaid in full in May 2017, we were restricted from settling the conversion obligation in whole or in part with cash unless certain conditions in the 2015 Term Loan Facility were satisfied. Prior to the repayment of the 2015 Term Loan Facility, we utilized the if-converted method to reflect the impact of the conversion of the Convertible Notes. Our current policy is to settle the principal balance of the Convertible Notes in cash. As such, subsequent to the repayment of the 2015 Term Loan Facility, we apply the treasury stock method to these securities and the dilution related to the conversion premium, if any, of the Convertible Notes is included in the calculation of diluted weighted-average shares outstanding to the extent each issuance is dilutive based on the average stock price during each reporting period being greater than the conversion price of the respective Convertible Notes.

The dilutive effect of the warrants, stock options and RSUs has been calculated using the treasury stock method.

The components of basic and diluted net income (loss) per share for 2017, 2016 and 2015 were as follows (in thousands, except per share data):



	Years Ended December 31,
	2017			2016			2015
Net (loss) income	$	(199,228	)	$	(2,483	)	$	32,779

Weighted average common shares outstanding	34,907			34,346			31,471
Effect of dilutive securities:
Warrants	—			—			2,466
Stock options and RSUs	—			—			1,371
Shares used in calculating dilutive net (loss) income per share	34,907			34,346			35,308

Net (loss) income per share:
Basic	$	(5.71	)	$	(0.07	)	$	1.04
Diluted	$	(5.71	)	$	(0.07	)	$	0.93

The following table sets forth the potential common shares issuable upon the exercise of outstanding options, the vesting of RSUs, the exercise of warrants (prior to consideration of the treasury stock method), and the conversion of the Convertible Notes, which were excluded from our computation of diluted net (loss) income per share because their inclusion would have been anti-dilutive (in thousands):



	Years Ended December 31,
	2017	2016	2015
Options to purchase shares of common stock	3,531	2,590	1,619
Shares of common stock issuable upon the vesting of RSUs	1,070	613	167
Warrants	1,008	7,382	—
2022 Convertible Notes	11,695	—	—
2019 Convertible Notes	790	7,382	7,382
Total	18,094	17,967	9,168

In connection with the issuance of the 2019 Convertible Notes, in February 2014, we entered into convertible bond hedges. The convertible bond hedges are not included for purposes of calculating the number of diluted shares outstanding, as their effect would be anti-dilutive. The convertible bond hedges are generally expected, but not guaranteed, to reduce the potential dilution and/or offset the cash payments we are required to make upon conversion of the remaining 2019 Convertible Notes. During 2017 and 2015, the average common stock price was below the exercise price of the warrants and during 2016, the average common stock price was above the exercise price of the warrants.

Business Segments

We have determined that we conduct our operations in one business segment: the manufacture, development and commercialization of products and services for use in treating various conditions, with a focus on women’s health, anemia management and cancer supportive care. Long-lived assets consist entirely of property, plant and equipment and are located in the U.S. for all periods presented.