2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries; Columbia Laboratories Bermuda Ltd., Columbia Laboratories France SA , Columbia Laboratories UK Ltd, and Molecular Profiles Ltd. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

For comparability purposes, certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year’s presentation within the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows.

Basis of Presentation

On July 26, 2013, Columbia’s Board of Directors set a ratio of 1-for-8 for its previously approved reverse stock split which took effect on August 9, 2013. The reverse stock split was approved by Columbia’s shareholders at its annual meeting of shareholders on May 1, 2013. All share and per share amounts relating to the common stock, stock options and common stock warrants included in the financial statements and accompanying footnotes have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an equal amount to the reduction in par value of common stock to additional paid-in capital. The reverse stock split did not result in a retroactive adjustment to the share amounts for any of the classes of the Company’s preferred stock.

Segments

The Company and its subsidiaries are engaged in two segments: product and service. The product segment includes supply chain management for CRINONE, the Company’s sole commercialized product. In certain foreign countries, these products may be classified as medical devices or cosmetics by those countries’ regulatory agencies. See Note 12 for information on foreign operations. The service segment includes pharmaceutical development, clinical trial manufacturing, and advanced analytical and consulting services for the Company’s customers as well as characterizing and developing pharmaceutical product candidates for the Company’s internal programs. In September 2013, the Company acquired Molecular Profiles, a U.K.-based provider of pharmaceutical development, clinical trial manufacturing, and advanced analytical and consulting services to the pharmaceutical industry. The Company has integrated its supply chain management for its sole commercialized product, CRINONE into those operations and have therefore sought to capture synergies by transferring all operational activities related to its historic business.

The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (CODM), currently manages the business based on the expansion of our revenues and as such the Company has concluded that it is two segments, which consists of product and service. Segment information is consistent with the financial information regularly reviewed by our chief operating decision maker, who we have determined to be the chief executive officer, for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting future periods. Our chief operating decision maker evaluates the performance of our product and service segments based on gross profit. Our chief operating decision maker does not review our assets, operating expenses or non-operating income and expenses by business segment at this time.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures at the date of the financial statements during the reporting period. Significant estimates are used for, but are not limited to revenue recognition, sales return reserves, allowance for doubtful accounts, inventory reserve, impairment analysis of goodwill and intangibles including their useful lives, deferred tax assets, liabilities and valuation allowances, common stock warrant valuations, and fair value of stock options. On an ongoing basis, management evaluates its estimates. Actual results could differ from those estimates.

Foreign Currency

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at current exchange rates and revenue and expense items are translated at average rates of exchange prevailing during the period. The functional currency of Columbia’s foreign subsidiaries is considered to be the local currency for each entity and, accordingly, translation adjustments for these subsidiaries are included in accumulated other comprehensive income within stockholders’ equity. Certain intercompany and third party foreign currency-denominated transactions generated foreign currency re-measurement losses of approximately $33,000, $47,000 and $0.1 million during the years ended December 31, 2014, 2013 and 2012, respectively, which are included in other expense, net in the consolidated statements of operations.

Cash Equivalents

The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets and liabilities.

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value of cash and cash equivalents are classified as Level 1 at December 31, 2014 and 2013.

The estimated fair value of the common stock warrant liability resulting from the October 2009 registered direct offering of 1,362,500 shares of the common stock and warrants to purchase 681,275 shares of common stock was $0.4 million as of December 31, 2013. There was no value associated with the common stock warrant liability as of December 31, 2014 as the Company nears the expiration of these warrants in April 2015. These values were determined by using the Black-Scholes option pricing model which is based on the Company’s stock price at measurement date, exercise price of this common stock warrant, risk-free rate and historical volatility, and are classified as a Level 2 measurement. During the years ended December 31, 2014, 2013 and 2012, the Company recorded income of $0.4 million, $0.8 million and $7.0 million, respectively, to adjust the value of the common stock warrant liability to market.


	2014			2013			2012
Stock Price	$	5.60		$	6.61		$	5.12
Exercise Price	$	12.16		$	12.16		$	12.16
Risk free interest rate		0.030	%		0.20	%		0.25	%
Expected term		0.25 years			1.25 years			2.25 years
Dividend yield		—			—			—
Expected volatility		22.76	%		61.32	%		103.10	%

The fair value of accounts receivable and accounts payable approximate their carrying amount. The Company’s long-term debt is carried at amortized cost, which approximates fair value based on current market pricing of similar debt instruments and is categorized as a Level 2 measurement.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Components of inventory cost include materials, labor and manufacturing overhead. Inventories consist of the following (in thousands):


	December 31,
	2014		2013
Raw materials	$	761	$	771
Work in process		1,095		775
Finished goods		1,345		1,038

Total	$	3,201	$	2,584

Reserves for excess and obsolete inventory were $36,000 and $0.2 million at December 31, 2014 and 2013, respectively.

Columbia’s excess and obsolescence reserve policy is to establish inventory reserves when conditions exist which suggest that the inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for products and market conditions. Columbia only manufactures products to customer orders. Columbia regularly evaluates the ability to realize the value of inventory based upon a combination of factors. Assumptions used in determining management’s estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted in the future.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported at their outstanding unpaid principal balances reduced by allowances for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectable.

Accounts receivable allowance activity consisted of the following for the years ended December 31 (in thousands):


	2014		2013		2012
Balance at beginning of year	$	112	$	100	$	100
Additions		246		12		—
Deductions		—		—		—

Balance at end of year	$	358	$	112	$	100

Columbia’s accounts receivable balance, net of allowance for doubtful accounts, was $5.3 million as of December 31, 2014, compared with $8.1 million as of December 31, 2013. Included in the accounts receivable balance at December 31, 2014 and 2013 were $0.7 million and $2.8 million of unbilled accounts receivable, respectively. Columbia’s unbilled accounts receivable is derived from services performed that have not been billed as of the balance sheet date.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Leasehold improvements are amortized over the lesser of the useful life or the term of the leases. Depreciation is computed on the straight-line basis over the estimated useful lives of the respective assets, as follows:


		Years
Machinery and equipment		3-10
Furniture and fixtures		3-5
Computer equipment and software		3
Buildings		Up to 39
Land		Indefinite

Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs that do not extend the term of the assets are expensed. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation are eliminated from the accounts and any resultant gain or loss is credited or charged to operations.

Columbia continually evaluates whether events or circumstances have occurred that indicate that the remaining useful life of its long-lived assets may warrant revision or that the carrying value of these assets may be impaired. Columbia evaluates the realizability of its long-lived assets based on profitability and cash flow expectations for the related asset. Any write-downs are treated as permanent reductions in the carrying amount of the assets. Based on this evaluation, Columbia believes, as of each balance sheet date presented, none of Columbia’s long-lived assets were impaired.

In the fourth quarter of 2012, the Company recorded an impairment charge on the net carrying value of certain machinery and equipment that was acquired in anticipation of increased capacity requirements for Progesterone production in anticipation of the approval of the preterm birth indication. The company recorded a loss of $0.9 million, which was recorded in general and administrative expense in the consolidated statements of operations.

Concentration of Risk

The Company has two major customers – Actavis and Merck Serono. See Note 12 for customer and product concentrations.

The Company depends on one supplier for a key excipient (ingredient) used in its products and one supplier for one of the active pharmaceutical ingredients.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a business combination. The Company does not amortize its goodwill, but instead tests for impairment annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying value of the asset.

In accordance with Accounting Standards Codification, or ASC 350, Goodwill and Other Intangibles (“ASC 350”), we use the two step approach for each reporting unit. The first step compares the carrying amount of the reporting unit to its estimated fair value (Step 1) utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated using a risk-adjusted discount rate. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value is compared to the implied fair value (Step 2). To the extent that the carrying value of goodwill exceeds the implied fair value of goodwill, impairment exists and must be recognized.

We have concluded that our business represents two reporting units for goodwill impairment testing, which are product and service. Our goodwill is assigned to our service reporting unit. We have performed our annual test for impairment and have determined that our goodwill is not impaired as of December 31, 2014.

Intangible Assets

The Company capitalizes and includes in intangible assets the costs of trademark, developed technology and customer relationships. Intangible assets are recorded at fair value and stated net of accumulated amortization. The Company amortizes its intangible assets that have finite lives using either the straight-line or accelerated method, based on the useful life of the asset over which it is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from 3 to 7 years. The Company evaluates the realizability of its definite lived intangible assets whenever events or changes in circumstances or business conditions indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each asset group. If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated by the assets using a risk-adjusted discount rate. To estimate the fair value of the assets, the Company uses market participant assumptions pursuant to ASC 820, Fair Value Measurements. If the estimate of an intangible asset’s remaining useful life is changed, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised useful life.

Income Taxes

Deferred tax assets or liabilities are determined based on timing differences between when income and expense items are recognized for financial statement purposes versus when they’re recognized for tax purposes, as measured by enacted tax rates. A valuation allowance is provided against deferred tax assets in circumstances where management believes it is more likely than not that all or a portion of the assets will not be realized. The Company has provided a full valuation allowance against its net domestic deferred tax assets as of December 31, 2014 and 2013. The Company has provided a full valuation allowance against its net foreign deferred tax assets as of December 31, 2014.

Accumulated Other Comprehensive (Loss) Income

Changes to accumulated other comprehensive income during the year ended December 31, 2014 were as follows (in thousands):


	Translation Adjustment			Accumulated Other Comprehensive Income
Balance – December 31, 2013	$	1,370		$	1,370
Current period other comprehensive income		(1,433	)		(1,433	)

Balance – December 31, 2014	$	(63	)	$	(63	)

Revenue Recognition and Sales Returns Reserves

Revenues include product revenues, which primarily consist of sales of CRINONE to Merck Serono, royalty revenues, which primarily consist of royalty revenues from Actavis on sales of CRINONE, service revenues, which primarily consist of analytical and consulting services, pharmaceutical development and clinical trial manufacturing services and other revenues.

Revenues from the sale of products are recorded at the time goods are shipped to customers, except in the case of product shipments to Actavis, which were recognized when received at Actavis’ warehouse. Sales to Merck Serono for CRINONE (progesterone gel) are determined on a country-by-country basis and are the greater of (i) a percentage of Merck Serono’s net selling price, or (ii) Columbia’s direct manufacturing cost plus 20%. Columbia estimates net selling prices based on historical experience and other current information from Merck Serono; the amounts are reconciled on a quarterly basis when information is received from Merck Serono. In 2012 and 2013 certain quantity discounts applied to annual purchases over 10 million, 20 million, and 30 million units. Columbia accrues an estimated volume discount on a quarterly basis and reconciles it on an annual basis. Under the terms of the amended license and supply agreement, the Company continues to sell CRINONE to Merck Serono on a country-by-country basis at the greater of (i) cost plus 20% or (ii) a percentage of Merck Serono’s net selling price. From 2014 through 2020, the percentage of net selling price will be determined based on a tiered structure, which is based on volume sold. As sales volumes increase the Company’s percentage share of each incremental tier will decrease. These sales thresholds have been agreed to as an incentive for Merck Serono to continue to develop existing markets and to enter new markets.

Revenues associated with pharmaceutical services may include multiple-element arrangements, which are evaluated in accordance with the principles of Accounting Standards update (“ASU”) 2009-13, (Revenue Recognition Topic – Multiple Element Arrangements) and Columbia allocates revenue among the elements based upon each element’s relative fair value. These elements are recognized as revenue as the service for each element is performed.

Accordingly, when a sale combines multiple elements upon performance of multiple services, the Company allocates revenue for transactions that include multiple elements to each unit of accounting based on its relative selling price, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The Company follows the selling price hierarchy as outlined in the guidance Revenue Recognition (ASC Topic 605) – Multiple-Deliverable Revenue Arrangements. The guidance provides a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence (“VSOE”), (ii) third-party evidence (“TPE”) if available and when VSOE is not available, and (iii) best estimate of the selling price (“BESP”) if neither VSOE nor TPE is available. The Company uses BESP to determine the standalone selling price for such deliverables. The Company has a process for developing BESP, which incorporates, pricing practices, historical selling prices, the effect of market conditions as well as entity-specific factors. Estimated selling prices are monitored and evaluated on a regular basis to ensure that changes in circumstances are accounted for in a timely manner.

Revenues from the sales of consulting services are recognized on a time and materials basis over the contract period as services are provided. Payments received by Columbia in advance of performance for services are deferred until earned.

Royalty revenues, based on sales by licensees, are recorded as revenues as those sales are made by the licensees.

License revenue consists of up-front, milestone and similar payments under license agreements and is recognized when earned under the terms of the applicable agreements. Milestone payments represent payments for the occurrence of contract-specified events and coincide with the achievement of a substantive element in a multi-element arrangement. License revenue, including milestone payments, is deferred and recognized in revenues over the estimated product life cycle or the length of relevant patents, whichever is shorter.

In accordance with the provisions of ASC 605-45, Revenue Recognitions Topic – Principal Agent Considerations, Columbia records shipping and handling costs billed to its customers as a component of revenue, and the underlying expense as a component of cost of revenue.

Columbia collects value added tax from its customers for revenues generated out of the United Kingdom for which the customer is not tax exempt and remits such taxes to the appropriate governmental authorities. Columbia presents its value added tax on a net basis; therefore, these taxes are excluded from revenues.

As of December 31, 2014 there is no sales returns reserve as the return rights obligation has elapsed for all products for which Columbia provided a right of return. Columbia is not responsible for returns on international sales. Sales adjustments for international sales were estimated to recognize changes in foreign exchange rates and changes in market prices that may fluctuate within a year. Columbia was responsible for sales returns for products sold to domestic customers prior to both the Actavis Transactions and the sale in April 2011 of STRIANT^®(testosterone buccal system) to Auxilium Pharmaceuticals LLC (“Auxilium”). Revenues from the sale of products to domestic customers were recorded at the time goods were shipped to customers. Except for sales to licensees, Columbia’s return policy allowed product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Products sold to Merck Serono and Actavis are not returnable to Columbia. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated based on a percentage of sales, using such factors as historical sales information, distributor inventory levels and product prescription data, and were recorded as a reduction to sales in the same period as the related sales were recognized.

An analysis of the reserve for sales returns at December 31, 2013 and 2014 is as follows (in thousands):


	Total
Balance – December 31, 2012	$	484
Provision:
Related to current period sales		—
Related to prior period sales		(26	)

		(26	)

Returns:
Related to prior period sales		(320	)

		(320	)

Balance – December 31, 2013	$	138
Provision:
Related to current period sales		—
Related to prior period sales		(136	)

		(136	)

Returns:
Related to prior period sales		(2	)

		(2	)

Balance – December 31, 2014	$	—

Deferred Revenue

As part of the acquisition of Molecular Profiles, Columbia assumed a $2.5 million obligation under a grant arrangement with the Regional Growth Fund on behalf of the Secretary of State for Business, Innovation, and Skills in the United Kingdom. Molecular Profiles used this grant to fund the building of its second facility, which includes analytical labs, office space, and a manufacturing facility. As a part of the arrangement, Molecular Profiles is required to create and maintain certain full-time equivalent personnel levels through October 2017. As of December 31, 2014, the Company is in compliance with the covenants of the arrangement.

The income from the Regional Growth Fund will be recognized on a decelerated basis through September 30, 2017. As of December 31, 2014, and 2013 the obligation is valued at $2.1 million and $2.6 million, respectively, due to foreign currency revaluation and is recorded in deferred revenue on the consolidated balance sheets.

Amounts paid but not yet earned on a sale are recorded as deferred revenue until such time as performance is rendered or the obligation to perform the service is completed.

Research and Development Costs

Research and development consist of consultants, material costs, salaries and other personnel related expenses including stock-based compensation of employees primarily engaged in research and development activities and materials used and other overhead expenses incurred. All research and development costs are expensed as incurred.

Columbia entered into an agreement with Actavis to collaborate on the development of progesterone products, specifically the PREGNANT study. The PREGNANT study expenses consisted of fees for preparation, filing and approval process of the related drug application. Under the terms of the agreement, Columbia performed certain research and development activities, the cost of which was partially funded by Actavis. Columbia recorded $0.4 million of reimbursements from Actavis as a reduction to research and development expenses in the years ended December 31, 2012.

In 2013, there were no research and development expenses or reimbursements from Actavis.

In 2014, the Company completed its commercial and intellectual property assessment and clinical and regulatory diligence on COL-1077, extended-release lidocaine vaginal gel in addition to performing initial assessments of other potential proprietary product candidates. The target indication for COL-1077 is an acute use anesthetic for minimally invasive gynecological procedures. The Company is leveraging the technical capabilities of its Nottingham site to advance the COL-1077 development program.

Stock-based compensation

Columbia follows the fair value recognition provisions of ASC 718, Stock Compensation Topic (ASC 718). Columbia expenses the fair value of stock options over the requisite service period. Columbia records its stock-based compensation expense without a forfeiture rate. Accordingly, Columbia reviews its actual forfeitures and aligns its stock compensation expense with the options that are vesting. In December 2012, $0.2 million was credited to stock compensation related to the forfeiture of unvested options.

Columbia recorded stock-based compensation expense of $0.6 million, $0.5 million and $0.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Total stock-based compensation expense was recorded to cost of revenues, and operating expenses based upon the functional responsibilities of the individuals holding the respective options as follows (in thousands):


	Years Ended December 31,
	2014		2013		2012
Cost of revenues	$	44	$	14	$	23
Sales and marketing		28		—		—
Research and development		2		—		40
General and administrative		533		461		605

Total employee stock-based compensation	$	607	$	475	$	668

As of December 31, 2014, total unamortized share-based compensation cost related to non-vested stock options was $1.1 million, which is expected to be recognized on a straight-line basis over a weighted average period of 3.1 years.

Cash received from option exercises was $33,000 and $11,000 during the years ending December 31, 2014 and 2013, respectively. There were no option exercises in the year ended December 31, 2012.

Columbia granted 312,000, 88,749 and 104,375 stock options during the years ended December 31, 2014, 2013 and 2012, respectively.

Stock based compensation for consultants amounted to $0.1 million in the year ended December 31, 2012. There was no stock-based compensation expense recorded for consultants in both years ended December 31, 2014 and 2013, respectively. No tax benefit has been recognized due to the net tax losses during the periods presented.

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Accordingly the weighted-average fair value of the options granted during the years ended December 31, 2014, 2013 and 2012 was $4.27, $3.52 and $3.68, respectively based on the following assumptions:


	Years Ended December 31,
	2014	2013	2012
Risk free interest rate	0.93%-1.64%	0.71%-0.76%	0.82%
Expected term	4.75 years	4.75 years	4.75 years
Dividend yield	—	—	—
Expected volatility	78.27%-81.36%	96.52%-97.02%	93.57%

Columbia’s estimated expected stock price volatility is based on its own historical volatility. Columbia’s expected term of options granted in the years ended December 31, 2014, 2013 and 2012 was derived from the simplified method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Net Income Per Common Share

The calculation of basic and diluted income per common and common equivalent share is as follows (in thousands except for per share data):


	Years Ended December 31,
	2014			2013			2012
Basic net income per common share
Net income	$	3,390		$	6,704		$	9,917
Less: Preferred stock dividends		(28	)		(28	)		(29	)

Net income applicable to common stock	$	3,362		$	6,676		$	9,888

Basic weighted average number of common shares outstanding		10,992			11,259			10,914

Basic net income per common share	$	0.31		$	0.59		$	0.91

Diluted net income per common share
Net income applicable to common stock	$	3,362		$	6,676		$	9,888
Add: Preferred stock dividends		28			28			29
Less: Fair value of stock warrants for dilutive warrants		(380	)		(794	)		(6,995	)

Net income applicable to dilutive common stock	$	3,010		$	5,910		$	2,922

Basic weighted average number of common shares outstanding		10,992			11,259			10,914
Effect of dilutive securities
Dilutive stock awards		15			14			6
Dilutive warrants		—			—			—
Dilutive preferred share conversions		—			—			143

		15			14			149
Diluted weighted average number of common shares outstanding		11,007			11,273			11,063

Diluted net income per common share	$	0.27		$	0.52		$	0.26

Basic income per common share is computed by dividing the net income, plus preferred dividends by the weighted-average number of shares of common stock outstanding during a period. The diluted income per common share calculation gives effect to dilutive options, warrants, convertible notes, convertible preferred stock, and other potential dilutive common stock including selected restricted shares of common stock outstanding during the period. Diluted income per common share is based on the treasury stock method and includes the effect from potential issuance of common stock, such as shares issuable pursuant to the exercise of stock options, assuming the exercise of all in-the-money stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive.

Shares to be issued upon the exercise of the outstanding options and warrants, convertible preferred stock and selected restricted shares of common stock excluded from the income per share calculation amounted to 1,692,180, 1,599,551 and 1,841,857 for the years ended December 31, 2014, 2013 and 2012, respectively, because the awards were anti-dilutive.

Acquisition-Related Expenses

The Company’s acquisition-related expenses for 2013 were costs associated with the acquisition of Molecular Profiles and a failed transaction in the 2013 period. There were no acquisition-related expenses during the 2014 or 2012 periods.

Revision of Prior Interim Period Financial Statements

During the fourth quarter of 2014, the Company identified errors relating to the recognition of revenue for certain services transactions and contractual arrangements during 2014. Specifically, the Company determined that certain service revenues were recorded in the incorrect periods within 2014 and other services transactions for which revenue was recognized outside the conditions required under the Company’s accounting policies. The Company determined that, under U.S. GAAP rules, a net $0.2 million of its first quarter revenues and $0.2 million of second quarter revenues should not have been recognized. These errors had the cumulative effect of reducing the Company’s previously reported total revenues for the first three quarters of 2014 by $0.4 million, from $25.6 million to $25.2 million.

The Company assessed the effect of the revisions, individually and in the aggregate, on its prior interim periods financial statements in accordance with the SEC’s Staff Accounting Bulletins No. 99 – Materiality and 108 – Considering the Effects of Prior Period Misstatements when Quantifying Misstatements in Current Year Financial Statements. Based on an analysis of quantitative and qualitative factors, the Company determined that its prior interim period financial statements for 2014 needed to be revised and are included below in this Annual Report on Form 10-K. The Company concluded that the previously issued interim period financial statements were not misleading and could continue to be relied upon. The Company plans to include the revised financial information for the 2014 interim periods in its future filings containing such financial information to facilitate period-over-period comparisons.

The following table presents the impact of these corrections on its consolidated statements of operations and comprehensive income for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014 (in thousands, except per share data):


	2014
	1st Quarter								2nd Quarter								3rd Quarter
	As Previously Reported		Adjustment			As Revised			As Previously Reported		Adjustment			As Revised			As Previously Reported		Adjustment		As Revised
Service revenues	$	2,710	$	(232	)	$	2,478		$	2,313	$	(203	)	$	2,110		$	2,304	$	74	$	2,378
Total revenues		7,248		(232	)		7,016			6,857		(203	)		6,654			11,463		74		11,537
Gross profit		2,976		(232	)		2,744			2,988		(203	)		2,785			6,363		74		6,437
Income (loss) from operations		124		(232	)		(108	)		282		(203	)		79			3,512		74		3,586
Other income (expense)		42		(45	)		(3	)		36		—			36			76		—		76
Income before provision for income taxes		441		(277	)		164			359		(203	)		156			3,560		74		3,634
Net income (loss)		429		(277	)		152			193		(203	)		(10	)		3,670		74		3,744
Basic net income (loss) per share	$	0.04	$	(0.02	)	$	0.02		$	0.02	$	(0.02	)	$	(0.00	)	$	0.34	$	0.01	$	0.35

Diluted net income (loss) per share	$	0.01	$	(0.02	)	$	(0.01	)	$	0.01	$	(0.02	)	$	(0.01	)	$	0.34	$	0.01	$	0.35
Comprehensive income	$	635	$	(277	)	$	358		$	804	$	(203	)	$	601		$	2,479	$	74	$	2,553

The following table presents the impact of these corrections on the Company’s consolidated statements of operations and comprehensive income for the year-to-date periods ending June 30, 2014 and September 30, 2014 (in thousands, except per share data):


	6 Months Ended June 30, 2014								9 Months Ended September 30, 2014
	As Previously Reported		Adjustment			As Revised			As Previously Reported		Adjustment			As Revised
Service revenues	$	5,023	$	(435	)	$	4,588		$	7,327	$	(361	)	$	6,966
Total revenues		14,105		(435	)		13,670			25,568		(361	)		25,207
Gross profit		5,964		(435	)		5,529			12,327		(361	)		11,966
Income (loss) from operations		406		(435	)		(29	)		3,918		(361	)		3,557
Other income (expense)		78		(45	)		33			154		(45	)		109
Income before provision for income taxes		800		(480	)		320			4,360		(406	)		3,954
Net income		622		(480	)		142			4,292		(406	)		3,886
Basic net income per share	$	0.05	$	(0.04	)	$	0.01		$	0.38	$	(0.04	)	$	0.34

Diluted net income (loss) per share	$	0.02	$	(0.04	)	$	(0.02	)	$	0.34	$	(0.04	)	$	0.31
Comprehensive income	$	1,439	$	(480	)	$	959		$	3,918	$	(406	)	$	3,512

The following table presents the impact of these corrections on the Company’s consolidated balance sheet items as of the end of each interim period (in thousands):


	2014
	March 31,									June 30,									September 30,
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Accounts receivable	$	7,258		$	(241	)	$	7,017		$	7,209		$	(241	)	$	6,968		$	5,252		$	(331	)	$	4,921
Total Current Assets		23,165			(241	)		22,924			24,024			(241	)		23,783			25,834			(331	)		25,503
Total Assets		51,613			(241	)		51,372			53,246			(241	)		53,005			53,722			(331	)		53,391

Deferred revenue		637			36			673			764			239			1,003			904			75			979
Total Current Liabilities		5,971			36			6,007			6,825			239			7,064			5,181			75			5,256
Total Liabilities		11,890			36			11,926			12,609			239			12,848			10,502			75			10,577

Accumulated deficit		(241,233	)		(277	)		(241,510	)		(241,040	)		(480	)		(241,520	)		(237,370	)		(406	)		(237,776	)
Total Shareholders’ Equity		39,173			(277	)		38,896			40,087			(480	)		39,607			42,670			(406	)		42,264
Total Liabilities & Shareholders’ Equity	$	51,613		$	(241	)	$	51,372		$	53,246		$	(241	)	$	53,005		$	53,722		$	(331	)	$	53,391

The following table presents the impact of these corrections on the Company’s consolidated statement of cash flows as of the end of each interim period (in thousands):


	2014
	March 31,									June 30,									September 30,
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Net income	$	429		$	(277	)	$	152		$	622		$	(480	)	$	142		$	4,292		$	(406	)	$	3,886
Changes in accounts receivable		(17	)		241			224			149			241			390			1,888			331			2,219
Changes in deferred revenue		(254	)		36			(218	)		(279	)		239			(40	)		(236	)		75			(161	)

There was no change to the total net cash provided by operating activities for any periods corrected.

The errors had the cumulative effect of reducing the Company’s previously reported total revenues during the first three quarters of 2014 by $0.4 million, from $25.6 million to $25.2 million. In addition, the Company has determined that $0.1 million of service revenues that were recognized in the first three quarters of 2014 will be recognized in 2015; and $0.2 million of revenues which were recognized during the second quarter of 2014 should have been recognized in the third quarter of 2014.