2. Revenue from Contracts with Customers

Revenue

Nature of Goods and Services

The following is a description of principal activities - separated by reportable segments - from which the Company generates its revenue. For more detailed information about reportable segments, see Note 18, Segment Information.

Pharmaceutical

The Company’s Pharmaceutical segment consists of revenue derived from the branded prescription Noden Products, which were acquired by Noden Pharma DAC, a subsidiary of the Company (“Noden DAC”), from Novartis in July 2016 and the authorized generic launched in March 2019.

Prior to the transfer of the marketing authorization rights for the Noden Products, all of the Noden Products were distributed by Novartis and the Company presented revenue on a “net” basis and established a reserve for retroactive adjustment to the profit transfer with Novartis. Beginning on October 5, 2016, when the marketing authorization rights were transferred from Novartis to Noden Pharma USA, Inc., a wholly-owned subsidiary of the Company (“Noden USA”), Noden USA began to distribute the Noden Products in the United States and started to record revenue on a “gross” basis with a reserve for allowances at such time. Consequently, all revenue for the branded prescription Noden Products sold in the United States for all periods presented herein are on a gross basis.

Novartis continued to distribute the Noden Products in all countries outside of the United States until August 31, 2017. Beginning on September 1, 2017, Noden DAC began distributing the Noden Products to select countries outside the United States. The Company presented revenue for Noden Products sold by Novartis outside of the United States on a “net” basis. As of the second quarter of 2018, Noden DAC recognized all revenue on a gross basis. Consequently, sales of branded prescription Noden Products outside the United States are presented on a gross basis in 2019 and a combination of gross and net basis in 2018, depending on the country in which the revenue was recognized and the timing of the marketing transfer from Novartis to Noden DAC.

Noden USA launched an authorized generic of Tekturna in the United States in March 2019.

The Pharmaceutical segment principally generates revenue from products sold to wholesalers and distributors. Customer orders are generally fulfilled within a few days of receipt resulting in minimal order backlog. Contractual performance obligations are usually limited to transfer of the product to the customer. The transfer occurs either upon shipment or upon receipt of the product in certain countries outside the United States after considering when the customer obtains control of the product. In addition, for some non-U.S. countries, the Company sells product on a consignment basis where control is not transferred until the customer resells the product to an end user. At these points, customers are able to direct the use of and obtain substantially all of the remaining benefits of the product.

Sales to customers are initially invoiced at contractual list prices. Payment terms are typically 30 to 90 days based on customary practice in each country. Revenue is reduced from the list price at the time of recognition for expected chargebacks, discounts, rebates, sales allowances and product returns, which are referred to as gross-to-net adjustments. These reductions are attributed to various commercial agreements, managed healthcare organizations and government programs such as Medicare, Medicaid, and the 340B Drug Pricing Program containing various pricing implications such as mandatory discounts, pricing protection below wholesaler list price and other discounts when Medicare Part D beneficiaries are in the coverage gap. These various reductions in the transaction price have been estimated using either a most likely amount, in the case of prompt pay discounts, or expected value method for all other variable consideration and have been reflected as liabilities and are settled through cash payments, typically within time periods ranging from a few months to one year. Significant judgment is required in estimating gross-to-net adjustments considering legal interpretations of applicable laws and regulations, historical experience, payer channel mix, current contract prices under applicable programs, unbilled claims, processing time lags and inventory levels in the distribution channel.

For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Medical Devices

The Medical Devices segment principally generates revenue from the sale and lease of the LENSAR^®Laser System, which may include equipment, PIDs or consumables, procedure licenses, and training, installation, warranty and maintenance agreements.

For bundled packages, the Company accounts for individual products and services separately if they are distinct - i.e. if a product or service is separately identifiable from other items in the bundled package and if the customer can benefit from it on its own or with other resources that are readily available to the customer. The LENSAR^® Laser System, standard warranty training and installation services are one performance obligation. All other elements are separate performance obligations. PIDs, procedure licenses, warranty and maintenance services are also sold on a stand-alone basis.

As the Company both sells and leases the LENSAR^®Laser System, the consideration (including any discounts) is first allocated between lease and non-lease components and then allocated between the separate products and services based on their stand-alone selling prices. The stand-alone selling prices for the PIDs and procedure licenses are determined based on the prices at which the Company separately sells the PIDs and procedure licenses. The LENSAR^®Laser System and warranty stand-alone selling prices are determined using the expected cost plus a margin approach.

For LENSAR^®Laser System sales, the Company recognizes Product revenue when a customer takes possession of the system. This usually occurs after the customer signs a contract, LENSAR installs the system, and LENSAR performs the requisite training for use of the system. For LENSAR^®Laser System leases, the Company recognizes Product revenue over the length of the lease in accordance with ASC Topic 840, Leases, through December 31, 2018 and in accordance with ASC Topic 842, Leases, after January 1, 2019. For additional information regarding accounting for leases, see Note 11, Leases.

The LENSAR^®Laser System requires both a consumable and a procedure license to perform each procedure. The Company recognizes Product revenue for PIDs when the customer takes possession of the PID. PIDs are sold by the case. The Company recognizes Product revenue for procedure licenses when a customer purchases a procedure license from the web portal. Typically, consideration for PIDs and procedure licenses is considered fixed consideration except for certain customer agreements that provide for tiered volume discount pricing which is considered variable consideration.

The Company offers an extended warranty that provides additional services beyond the standard warranty. The Company recognizes Product revenue from the sale of extended warranties over the warranty period. Customers have the option of renewing the warranty period, which is considered a new and separate contract.

Income Generating Assets

For licenses of intellectual property, if the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

In January 2018, DFM, LLC, a wholly-owned subsidiary of the Company, granted an exclusive license related to certain Direct Flow Medical, Inc. assets in exchange for $0.5 million in cash and up to $2.0 million in royalty payments. The $0.5 million payment was accounted for in accordance with ASC 606 under which the full cash payment was recognized as revenue in the first quarter of 2018 as DFM, LLC had fulfilled its performance obligation under the agreement.

Disaggregation of Revenue

The Company disaggregates its revenue from contracts with customers by segment and geographic location as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. In the following table, revenue is disaggregated by segment and primary geographical market for the three months ended March 31, 2019 and 2018:



	Three Months Ended				Three Months Ended
	March 31, 2019				March 31, 2018
(in thousands)	Medical Devices		Pharmaceutical		Medical Devices		Pharmaceutical

Primary geographical markets:
North America	$	2,084	$	12,138	$	1,704	$	10,931
Europe	1,017		5,582		615		5,991
Asia	2,269		2,241		1,114		1,420
Other	119		—		113		—
Total revenue from contracts with customers¹	$	5,489	$	19,961	$	3,546	$	18,342

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¹ The table above does not include lease revenue from the Company’s Medical Devices segment. For the three-month periods ended March 31, 2019 and 2018, revenue accounted for under Topic 842 and 840, Leases, was $1.2 million and $1.4 million, respectively. For additional information, see Note 11, Leases.

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:



(in thousands)	March 31, 2019		December 31, 2018

Receivables, current and noncurrent, net	$	15,867	$	20,655
Contract assets	$	5,360	$	2,595
Contract liabilities	$	5,452	$	8,938

Receivables, Net—Receivables, net, include amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.

Contract assets—The Company’s contract assets represent revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. The Company classifies contract assets in Prepaid and other current assets in the Company’s Condensed Consolidated Balance Sheets based on the timing of when it expects to receive payment.



(in thousands)	Medical Devices		Pharmaceutical			Total

Contract assets at December 31, 2018	$	—	$	2,595		$	2,595
Payments received	—		(26		)	(26		)
Contract assets recognized	—		2,791			2,791
Contract assets at March 31, 2019	$	—	$	5,360		$	5,360

Contract Liabilities—The Company’s contract liabilities consist of deferred revenue for products sold to customers for which the performance obligation has not been completed by the Company. The Company classifies deferred revenue as current or noncurrent based on the timing of when it expects to recognize revenue. The noncurrent portion of deferred revenue is included in Other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets.



(in thousands)	Medical Devices			Pharmaceutical			Total

Contract liabilities at December 31, 2018	$	1,167		$	7,771		$	8,938
Additions	282			3,347			3,629
Amounts recognized into revenue	(344		)	(6,771		)	(7,115		)
Contract liabilities at March 31, 2019	$	1,105		$	4,347		$	5,452

Transaction Price Allocated to Future Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.



	Nine Months Ended
(in thousands)	December 31, 2019		Thereafter		Total

Pharmaceutical product sales	$	2,500	$	—	$	2,500
Medical device sales	$	2,942	$	2,269	$	5,211

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with original expected lengths of one year or less or (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for the products delivered or services performed.