Note 2. Revenue

On January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (“Topic 605”) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. Due in large part to the change in accounting estimate made by the Company in the first quarter of 2017, revenue amounts as reported for the year ended December 31, 2017 under Topic 605 are approximately the same as they would have been under Topic 606, and the Company did not have or record a cumulative impact of adopting Topic 606 as of January 1, 2018.

Revenue Recognition

For all revenue transactions, the Company evaluates its contracts with its customers to determine revenue recognition using the following five-step model:

1)The Company identifies the contract(s) with a customer;

2)The Company identifies the performance obligations in the contract;

3)The Company determines the transaction price;

4)The Company allocates the transaction price to the identified performance obligations; and

5)The Company recognizes revenue when (or as) the entity satisfies a performance obligation.

Product Revenue

Product revenue is recognized at the time of shipment at which time the Company has satisfied its performance obligation. Product revenue is recognized net of consideration paid to the Company’s customers, wholesalers and certified pharmacies. Such consideration is for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers’ purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include a reserve for estimated product returns, certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue at the date at which the related revenue is recognized. The Company also offers discount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates or chargebacks. The Company reviews the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. See Note 9 for product reserve balances.

Change in Accounting Estimate in 2017

The Company ships units of Qsymia through a distribution network that includes certified retail pharmacies. The Company began shipping Qsymia in September 2012 and grants rights to its customers to return unsold product from six months prior to and up to 12 months subsequent to product expiration. This has resulted in a potential return period of from 24 to 36 months depending on the ship date of the product. As the Company had no previous experience in selling Qsymia and given its lengthy return period, the Company was not initially able to reliably estimate expected returns of Qsymia at the time of shipment, which was required by the accounting literature at the time, and therefore recognized revenue when units were dispensed to patients through prescriptions, at which point the product was not subject to return, or when the expiration period had ended.

Beginning in the first quarter of 2017, with 48 months of returns experience, the Company believed that it had sufficient data and experience from selling Qsymia to reliably estimate expected returns. Therefore, beginning in the first quarter of 2017, under the then relevant accounting literature, the Company began recognizing revenue from the sales of Qsymia upon shipment and recording reserves for expected returns, discounts and fees at the time of shipment.

In accordance with this change in accounting estimate, in the first quarter of 2017 the Company recognized a one-time adjustment relating to products that had been previously shipped, consisting of $17.9 million of gross revenues, adjusted for an expected returns reserve of $5.7 million and estimated gross-to-net charges of $4.9 million, for a net impact of $7.3 million in revenues. The Company also recorded increased cost of goods sold of $0.6 million and marketing expense of $0.7 million associated with the change in accounting estimate. The increase in net product revenue resulted in a decrease in net loss of $6.0 million or $0.57 per share for the year ended December 31, 2017.

Supply Revenue

The Company produces STENDRA/SPEDRA through a contract manufacturing partner and then sells it to the Company’s commercialization partners. The Company is the primary responsible party in the commercial supply arrangements and bears significant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, the Company recognizes supply revenue on a gross basis as the principal party in the arrangements. The Company recognizes supply revenue at the time of shipment and, in the unusual case where the product does not meet contractually-specified product dating criteria at the time of shipment to the partner, the Company records a reserve for estimated product returns. There are no such reserves as of December 31, 2019.

License and Milestone Revenue

License and milestone revenues related to arrangements, usually license and/or supply agreements, entered into by the Company are recognized by following the five-step process outlined above. The allocation and timing of recognition of such revenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differ and the timing of recognition of a significant performance obligation may predate the contractual date.

Royalty Revenue

The Company relies on data provided by its collaboration partner in determining its contractually-based royalty revenue. Such data includes accounting estimates and reports for various discounts and allowances, including product returns. The Company records royalty revenues based on the best data available and makes any adjustments to such revenues as such information becomes available.

Segment and Geographic Information

The Company operates in one business segment — the development and commercialization of novel therapeutic products. Therefore, results of operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Disclosures about product revenues by geographic area, revenues and accounts receivable from major customers, and major suppliers are presented below.

Outside the United States, the Company sells products principally in the EU, in addition to South Korea and Canada. The geographic classification of product sales was based on the location of the customer. The geographic classification of all other revenues was based on the domicile of the entity from which the revenues were earned

Revenue disaggregated by revenue source and by geographic region was as follows (in thousands):


	Years Ended December 31,
	2019
	U.S.		ROW			Total
Qsymia—Net product revenue	$	37,750	$	—		$	37,750
Qsymia—License revenue		—		2,500			2,500
Qsymia—Supply revenue		—		1,186			1,186
PANCREAZE - Net product revenue		20,302		997			21,299
PANCREAZE - Royalty revenue		—		1,557			1,557
STENDRA/SPEDRA—Supply revenue		—		3,448			3,448
STENDRA/SPEDRA—Royalty revenue		—		2,020			2,020
Total revenue	$	58,052	$	11,708	(1)	$	69,760


	2018
	U.S.		ROW			Total
Qsymia—Net product revenue	$	40,558	$	—		$	40,558
PANCREAZE - Net product revenue		16,226		—			16,226
PANCREAZE - Royalty revenue		—		1,108			1,108
STENDRA/SPEDRA—Supply revenue		1,646		3,217			4,863
STENDRA/SPEDRA—Royalty revenue		—		2,307			2,307
Total revenue	$	58,430	$	6,632	(2)	$	65,062

	2017
	U.S.		ROW			Total
Qsymia—Net product revenue	$	44,983	$	—		$	44,983
Qsymia—License revenue		5,000		2,500			7,500
STENDRA/SPEDRA—Supply revenue		5,909		4,498			10,407
STENDRA/SPEDRA—Royalty revenue		—		2,483			2,483
Total revenue	$	55,892	$	9,481	(3)	$	65,373

(1)

$5.5 million of which was attributable to Germany, $3.7 million of which was attributable to South Korea and $2.5 million of which was attributable to Canada.

(2)

$5.5 million of which was attributable to Germany and $1.1 million of which was attributable to Canada.

(3)

$7.0 million of which was attributable to Germany and $2.5 million of which was attributable to South Korea.

Revenue and cost of goods sold by source was as follows (in thousands):


	Year Ended December 31,
	2019
	Qsymia		PANCREAZE		STENDRA/ SPEDRA		Total
Net product revenue	$	37,750	$	21,299	$	—	$	59,049
License		2,500		—		—		2,500
Supply revenue		1,186		—		3,448		4,634
Royalty revenue		—		1,557		2,020		3,577
Total revenue	$	41,436	$	22,856	$	5,468	$	69,760

Cost of goods sold (excluding amortization)	$	5,775	$	6,460	$	3,436	$	15,671
Amortization of intangible assets	$	362	$	14,190	$	—	$	14,552


	2018
	Qsymia		PANCREAZE		STENDRA/ SPEDRA		Total
Net product revenue	$	40,558	$	16,226	$	—	$	56,784
Supply revenue		—		—		4,863		4,863
Royalty revenue		—		1,108		2,307		3,415
Total revenue	$	40,558	$	17,334	$	7,170	$	65,062

Cost of goods sold (excluding amortization)	$	4,693	$	5,156	$	4,764	$	14,613
Amortization of intangible assets	$	363		8,277	$	—	$	8,640

	2017
	Qsymia		PANCREAZE		STENDRA/ SPEDRA		Total
Net product revenue	$	44,983	$	—	$	—	$	44,983
License		7,500		—		—		7,500
Supply revenue		—		—		10,407		10,407
Royalty revenue		—		—		2,483		2,483
Total revenue	$	52,483	$	—	$	12,890	$	65,373

Cost of goods sold (excluding amortization)	$	6,993	$	—	$	9,650	$	16,643
Amortization of intangible assets	$	544		—	$	—	$	544

Major customers

Revenues from significant customers as a percentage of product revenues is as follows:


	2019		2018		2017
Amerisource Bergen	30	%	34	%	32	%
McKesson	29	%	30	%	37	%
Cardinal Health, Inc.	26	%	28	%	29	%

Accounts receivable by significant customer as a percentage of the total gross accounts receivable balance are as follows:


	2019		2018
Cardinal Health, Inc.	41	%	29	%
Amerisource Bergen	26	%	20	%
McKesson	24	%	5	%
Johnson & Johnson	—	%	40	%

Major suppliers

The Company does not have any manufacturing facilities and intends to continue to rely on third parties for the supply of the starting materials, API and tablets. Catalent Pharma Solutions, LLC (“Catalent”) is the Company’s sole source of clinical and commercial supplies for Qsymia. Nordmark Arzneimittel GmbH & Co. KG (“Nordmark”) is the Company’s sole source of clinical and commercial supplies for PANCREAZE. Sanofi Chimie manufactures and supplies the API for our drug avanafil on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU Member States, Latin America and other territories. Sanofi Winthrop Industrie manufactures and supplies the avanafil tablets on an exclusive basis in the United States and other territories and on a semi-exclusive basis in Europe, including the EU Member States, Latin America and other territories. Third‑party manufacturers may not be able to meet the Company’s needs with respect to timing, quantity or quality.

During the years ended December 31, 2019, 2018 and 2017, the Company incurred expenses for work performed by a third‑party clinical research organization that accounted for 31%, 30% and 0%, respectively, of total research and development expenses.