As a result of the August 19, 2020 approval by the Company’s stockholders to file for dissolution pursuant to a plan of dissolution, it was determined that liquidation was imminent and the Company’s basis of accounting transitioned, effective September 1, 2020, the beginning of the fiscal month following the approval (“Convenience Date”), from the going concern basis of accounting (“Going Concern Basis”) to the liquidation basis of accounting (“Liquidation Basis”) in accordance with GAAP. Under the Liquidation Basis, the remeasurement of the Company's assets and liabilities includes management's estimates and assumptions of: (i) income to be generated from the remaining assets until the anticipated date of sale; (ii) sales proceeds to be received for these assets at the time of sale; (iii) operating expenses to be incurred; and (iv) amounts required to settle liabilities.

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast a majority of votes at the meeting of the board of directors; or to govern the financial and operating policies of the investee under a statute or agreement among the stockholders or equity holders.

The Company applies the guidance codified in ASC 810, Consolidations, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity in which it has a controlling financial interest. The Company identifies an entity as a variable interest entity if either: (1) the entity does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the entity’s equity investors lack the essential characteristics of a controlling financial interest. The Company performs ongoing qualitative assessments of its variable interest entities to determine whether the Company has a controlling financial interest in any variable interest entity and therefore is the primary beneficiary, and if it has the power to direct activities that impact the activities of the entity.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements. While such estimates and assumptions are not always unique to the basis of accounting being followed under GAAP, some are more applicable to the accounting basis being followed.

Significant estimates under the Going Concern Basis include: the valuation of royalty rights; product revenue recognition and allowances for customer rebates; the valuation of notes receivable and inventory; the assessment of recoverability of intangible assets and their estimated useful lives; the valuation and recognition of stock-based compensation; the valuation of warrants to acquire shares of common stock and the discount rates used in fair value measurements.

Under ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the entity’s chief operating decision maker, in deciding how to allocate resources and in assessing performance. Under the Going Concern Basis, the Company evaluated its operating segments in accordance with ASC 280, and had identified four reportable segments: Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets.

After the Company announced its monetization strategy, it recognized that its ability to execute on its plan and optimize returns to its stockholders depended to a large extent on its ability to retain the necessary expertise to effectively transact with respect to its assets. On December 21, 2019, the Compensation Committee of the Board adopted a Wind Down Retention Plan in which the Company’s executive officers and other employees who were participants in the Company’s Severance Plan were eligible to participate. Under the Wind Down Retention Plan, participants have been eligible to earn a retention benefit in consideration for their continued employment with the Company. The Wind Down Retention benefits are equivalent to previously disclosed compensation payments contemplated in connection with a change in control under the Company’s existing Severance Plan. Under the Wind Down Retention Plan, the Company has been obligated to pay a retention benefit to each participant upon termination of the participant’s employment with the Company either by the Company without cause or by the participant for good reason. The retention benefits are in lieu of (and not in addition to) any other severance compensation that were payable to the participant under the Company’s Severance Plan. In connection with the adoption of the Wind Down Retention Plan, a severance liability was being recorded over the remaining service period for the participating employees under the Going Concern Basis. Upon the adoption of the Liquidation Basis on September 1, 2020, all remaining estimated severance and retention costs were accrued. As of December 31, 2020, the Company has a remaining severance liability of $0.3 million, which is included in Compensation and benefit costs on the Company’s Consolidated Statement of Net Assets. Expenses associated with severance payments and accruals under the Going Concern Basis are reflected in Severance and retention on the Company’s Consolidated Statements of Operations for the eight months ended August 31, 2020.

The Wind Down Retention Plan also provides that, consistent with the existing terms of the Company’s Amended and Restated 2005 Equity Incentive Plan (the “Equity Plan”), the vesting of all outstanding equity awards held by participants as of the date the Wind Down Retention Plan was adopted are accelerated upon the earlier of: (i) a termination of the participant’s employment with the Company either by the Company without cause or by the participant for good reason or (ii) the consummation of a change in control (as defined in the Equity Plan) of the Company. In addition, the post-termination exercise period for all outstanding stock options are extended until their expiration date. In connection with the Board adopting the Plan of Liquidation in the first quarter of 2020, all of the outstanding and unvested stock options and restricted stock granted to the Company’s employees and executive officers, with the exception of certain outstanding awards under the 2016/20 Long-Term Incentive Plan, accelerated and vested under the change in control definition in the Equity Plan. The expense associated with the accelerated vesting, totaling $15.7 million, is reported as Severance and retention on the Company’s Consolidated Statements of Operations for the eight months ended August 31, 2020 under the Going Concern Basis.

Under the Going Concern Basis, assets and liabilities are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets and liabilities are classified as held for sale in the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale. The assets and liabilities held for sale are recorded on the Company’s Consolidated Balance Sheet as of December 31, 2019 as Assets held for sale and Liabilities held for sale, respectively.

Under the Going Concern Basis, discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period, represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes and represent a strategic shift that has or will have a major effect on the Company’s operations and financial results. The profits and losses are presented on the Consolidated Statements of Operations as discontinued operations. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.

Under the Going Concern Basis, the Company’s investment in Evofem qualified for equity method accounting given its prior percentage ownership in Evofem and the ability to exercise significant influence. The Company elected the fair value method to account for its investment in Evofem as it believed it better reflected economic reality, the financial reporting of the investment and the current value of the asset. Changes in fair value of the Evofem equity investment are presented in the Consolidated Statements of Operations as discontinued operations. All shares of common stock of Evofem owned by PDL were distributed to the Company’s stockholders in May 2020. As of December 31, 2020, the Company held 3.3 million warrants convertible into Evofem common stock at an exercise price of $6.38 per share. Under the Going Concern Basis, the fair value of the warrants was estimated using recently quoted market prices of the underlying equity security and the Black-Scholes option pricing model. In addition to these inputs, under the Liquidation Basis, a discount is applied to the resulting value to reflect limited liquidity.

The Company’s equity security investment in AEON qualified to be measured at fair value under the Going Concern Basis, although the fair value of the investment was not readily determinable as AEON’s shares are not publicly traded. The Company evaluated the fair value of this investment by performing a qualitative assessment each reporting period. If the results of this qualitative assessment indicated that the fair value was less than the carrying value, the investment was written down to its fair value. This investment is included in Other assets on the Consolidated Statement of Net Assets as of December 31, 2020 and on the Company’s Consolidated Balance Sheet as Other long-term assets as of December 31, 2019.

Under the Going Concern Basis, the Company accounted for its notes receivable at amortized cost, net of unamortized origination fees, if any, and adjusted for any impairment losses. Interest was accreted or accrued to “Interest revenue” using the effective interest method. When and if supplemental payments were received from certain of these notes and other long-term receivables, an adjustment to the estimated effective interest rate was affected prospectively.

The Company evaluated the collectability of both interest and principal for each note receivable and loan to determine whether it is impaired. A note receivable or loan was considered to be impaired when, based on current information and events, the Company determines it is probable that it will be unable to collect amounts due according to the existing contractual terms. When a note receivable or loan was considered to be impaired, the amount of loss was calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the estimated fair value of the underlying collateral, less costs to sell, if the loan was collateralized and the Company expected repayment to be provided solely by the collateral. Impairment assessments required significant judgments and were based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.

The Company recorded interest on an accrual basis and recognized it was earned in accordance with the contractual terms of the credit agreement, to the extent that such amounts were expected to be collected. When a note receivable or loan became past due, or if management otherwise did not expect that principal, interest, and other obligations due would be collected in full, the Company generally placed the note receivable or loan on an impaired status and ceased recognizing interest income on that note receivable or loan. Any interest payments received for notes receivable or loans on an impaired status were recognized as interest income on a cash basis.

As of December 31, 2020, the Company had one note receivable investment with a Liquidation Basis value of approximately $0.7 million. At December 31, 2019, under the Going Concern Basis, the Company had two note receivable investments, which were determined to be impaired, with a cumulative investment cost and fair value of approximately $52.1 million and $57.3 million, respectively, as of this date. During the eight months ended August 31, 2020 and the years ended December 31, 2019, and 2018, the Company did not recognize any losses on extinguishment of notes receivable.

There were no impairment losses on notes receivable for the eight months ended August 31, 2020. During the years ended December 31, 2019 and 2018, the Company recorded an impairment loss of $10.8 million and $8.2 million, respectively, related to the CareView note receivable. For additional information about the impairment loss recorded on the CareView note receivable, see Note 9, Notes and Other Long-Term Receivables.

Under the Going Concern Basis, Inventory, which consisted of raw materials, work-in-process and finished goods, was stated at the lower of cost or net realizable value. The Company determined cost using the first-in, first-out method. Inventory levels were analyzed periodically and written down to their net realizable value if they had become obsolete, had a cost basis in excess of its expected net realizable value or were in excess of expected requirements. The Company analyzed current and future product demand relative to the remaining product shelf life to identify potential excess inventory. The Company built demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. The Company classified inventory as current on the Consolidated Balance Sheet when the Company expected inventory to be consumed for commercial use within the next twelve months.

Under the Going Concern Basis, intangible assets with finite useful lives consisted primarily of customer relationships, acquired technology and trademarks. They were amortized on a straight-line basis over their estimated useful lives, ranging from five years to 20 years, which was consistent with the estimated lives of the associated products. Such assets were reviewed for impairment when events or circumstances indicated that the carrying value of an asset was not recoverable. An impairment loss was recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition were less than its carrying amount. The amount of any impairment was measured as the difference between the carrying amount and the fair value of the impaired asset.

The Company has previously issued convertible notes with settlement features that allow the Company to settle the notes by paying or delivering, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of its common stock, at the Company’s election. In accordance with accounting guidance under the Going Concern Basis for convertible debt instruments that may be settled in cash or other assets on conversion, the Company separated the principal balance between the fair value of the liability component and the common stock conversion feature using a market interest rate for a similar nonconvertible instrument at the date of issuance.

In accordance with ASC 606, revenue was recognized from the sale of products when a customer obtained control of promised products and services. The amount of revenue recognized reflects the consideration to which the Company expected to be entitled to receive in exchange for products and services. A five-step model was utilized to achieve the core principle and included the following steps: (1) identify the customer contract; (2) identify the contract’s performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when the performance obligations are satisfied.

The agreement between Novartis and Noden DAC provided for various transition periods for development and commercialization activities relating to the Noden Products. For the period from July 1, 2016 through October 4, 2016, all of the Noden Products were distributed by Novartis under the terms of the Noden Purchase Agreement while transfers of the marketing authorization rights were pending. During this time, the Company presented revenue under the Novartis transition arrangement on a “net” basis and established a reserve for retroactive adjustment to the profit transfer with Novartis. As of the third quarter of 2018, Noden Pharma DAC completed the marketing authorization transfers for all territories.

In the United States, the duration of the profit transfer ran from July 1, 2016 through October 4, 2016. Beginning on October 5, 2016, Noden Pharma USA, Inc. distributed the Noden Products in the United States. At such time, the Company presented revenue for all sales in the United States on a “gross” basis, meaning product costs were reported separately and there was no fee to Novartis, and established a reserve for discounts and allowances further described below.

Initially, Novartis distributed the Noden Products on behalf of Noden DAC worldwide and Noden DAC received a profit transfer on such sales. Generally, the profit transfer to Noden DAC was defined as gross revenues less product cost and a low single-digit percentage fee to Novartis. The profit transfer terminated upon the transfer of the marketing authorization from Novartis to Noden DAC in each country. For the period from October 5, 2016 to August 31, 2017, Novartis continued to distribute the Noden Products outside of the United States. Beginning on September 1, 2017, Noden Pharma DAC began distributing the Noden Products to select countries outside the United States. Outside the United States, the profit transfer ended in the first quarter of 2018.

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

Sales to customers were initially invoiced at contractual list prices. Payment terms were typically 30 to 90 days based on customary practice in each country. Revenue was reduced from the list price at the time of recognition for expected chargebacks, discounts, rebates, sales allowances and product returns, which were collectively referred to as gross-to-net adjustments. These reductions were 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 were in the coverage gap. These various reductions in the transaction price were estimated using either a most likely amount, in the case of prompt pay discounts, or expected value method for all other variable consideration and were reflected as liabilities and was 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.

Customer Credits: The Company’s customers were offered various forms of consideration, including allowances, service fees and prompt payment discounts. The Company expected customers would earn prompt payment discounts and, therefore, the Company deducted the full amount of these discounts from total product sales when revenues were recognized. Service fees were also deducted from total product sales as they were earned.

Rebates and Discounts: Allowances for rebates included mandated discounts under the Medicaid Drug Rebate Program in the United States and mandated discounts in the European Union (“EU”) in markets where government-sponsored healthcare systems are the primary payers for healthcare. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The accrual for rebates was based on negotiated discount rates and expected utilization as well as historical data. Estimates for expected utilization of rebates were based on data received from the customers. Rebates were generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates.

Chargebacks: Chargebacks are discounts that occur when certain contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, purchased directly from the Company’s wholesalers. Contracted customers generally purchased the product at a discounted price. The wholesalers, in turn, charged back to the Company the difference between the price initially paid by the wholesalers to the Company and the discounted price paid by the contracted customers. In addition to actual chargebacks received, the Company maintained an accrual for chargebacks based on the estimated contractual discounts on products sold for which the chargeback had not been billed.

Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 70% in 2020 and 2019 and 50% in 2018 of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Estimates for the expected Medicare Part D coverage gap were based on historical invoices received and in part from data received from the Company’s customers. Funding of the coverage gap was generally invoiced and paid in arrears.

For licenses that were bundled with other promises, the Company utilized 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 evaluated the measure of progress each reporting period and, if necessary, adjusted the measure of performance and related revenue recognition.

For bundled packages, which included the sale or lease of a LENSAR® Laser System and provision of other products and services, the Company accounted for individual products and services separately if they were distinct—i.e. if a product or service was separately identifiable from other items in the bundled package and if the customer could benefit from it on its own or with other resources that are readily available to the customer. The LENSAR Laser System, training and installation services were one performance obligation. The other products and services, including PIDs, procedure licenses, and extended warranty services, which were either sold together with the LENSAR Laser System or on a standalone basis, were all accounted for as separate performance obligations. The transaction price of bundled packages was allocated to each performance obligation on a relative standalone selling price basis. Standalone selling prices were based on observable prices at which the Company separately sold the products or services. If a standalone selling price was not directly observable, the Company estimated the selling price using available observable information.

Equipment. The Company’s LENSAR Laser System sales were recognized as Product revenue when the Company transferred control of the system. This usually occurred after the customer signed a contract, LENSAR installed the system, and LENSAR performed the requisite training for use of the system for direct customers. LENSAR Laser System sales to distributors were recognized as revenue upon shipment as they did not require training and installation.

PID and Procedure Licenses. The LENSAR Laser System requires both a PID and a procedure license to perform each procedure. The Company recognized Product revenue for PIDs when the Company transferred control of the PID. The Company recognized Product revenue for procedure licenses at the point in time when control of the procedure license was transferred to the customer. A procedure license represents a one-time right to utilize the LENSAR Laser System surgical application in connection with a surgery procedure. For the sale of PIDs and procedure licenses, the Company had the option to offer volume discounts to certain customers. To determine the amount of revenue that should be recognized at the time control over these products transferred to the customer, the Company estimated the average per unit price, net of discounts.

Service Revenue. The Company offered an extended warranty that provided additional maintenance services beyond the standard limited warranty. The Company recognized Service revenue from the sale of extended warranties over the warranty period on a ratable basis as the Company stood ready to provide services as needed. Customers had the option of renewing the warranty period, which was considered a new and separate contract.

Lease Revenue. For LENSAR Laser System operating leases, the Company recognized lease revenue over the length of the lease in accordance with ASC Topic 840, Leases, through December 31, 2018 and recognized lease revenue in accordance with ASC Topic 842, Leases, after January 1, 2019. For additional information regarding accounting for leases, see the Leases section within this footnote below and Note 10, Leases.

The Company offered a variety of commission plans to the Company’s salesforce. Certain compensation under these plans was earned by sales representatives solely as a result of obtaining a customer contract. These are considered incremental costs of obtaining a contract and were eligible for capitalization under ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers, to the extent they were recoverable. For goods or services that were to be delivered over a period that was longer than one year, incremental costs of obtaining a contract were capitalized and expensed over the period the related revenue was recognized. The Company elected not to defer costs related to goods or services that were to be delivered over a period that was one year or less.

The Company offered limited warranties on the Company’s products which provided the customer assurance that the product would function as the parties intended because it complied with agreed-upon specifications; therefore, these assurance-type warranties were not treated as a separate revenue performance obligation and were accounted for as guarantees under U.S. GAAP. The Company regularly reviewed its warranty liability and updated those balances based on historical warranty cost trends.

Under the Going Concern Basis, for licenses of intellectual property, if the license to the Company’s intellectual property was determined to be distinct from the other performance obligations identified in the arrangement, the Company recognized revenues from non-refundable, up-front fees allocated to the license when the license was transferred to the customer and the customer was able to use and benefit from the license.

Under the Company’s license agreements related to the Queen et al. patents, the Company received royalty payments based upon its licensees’ net sales of covered products. Under the Going Concern Basis, royalties qualify for the sales-and-usage exemption under ASC 606 as (i) royalties are based strictly on the sales-and-usage by the licensee; and (ii) a license of intellectual property is the sole or predominant item to which such royalties relate. Based on this exemption, these royalties were earned under the terms of a license agreement in the period the products were sold by the Company's partner and the Company had a present right to payment. Generally, under these agreements, the Company received royalty reports from its licensees approximately one quarter in arrears; that is, generally in the second month of the quarter after the licensee has sold the royalty-bearing product. The Company recognized royalty revenues when it could reliably estimate such amounts and collectability was reasonably assured. Under this accounting policy, the royalty revenues the Company reported were not based upon estimates, and such royalty revenues were typically reported in the same period in which the Company received payment from its licensees.

Although the last of the Queen et al. patents expired in December 2014, the Company has received royalties beyond expiration based on the terms of its licenses and its legal settlement. Under the terms of the legal settlement between Genentech, Inc. (“Genentech”) and the Company, the first quarter of 2016 was the last period for which Genentech paid royalties to the Company for Avastin®, Herceptin®, Xolair®, Perjeta® and Kadcyla®. Other products from the Queen et al. patent licenses, such as Tysabri®, entitled the Company to royalties following the expiration of its patents with respect to sales of licensed product manufactured prior to patent expiry in jurisdictions providing patent protection licenses. In November 2017, the Company was notified by Biogen, Inc. that product supply for Tysabri® that was manufactured prior to patent expiry and for which the Company would receive royalties, had been extinguished in the United States and was rapidly being reduced in other countries. As a result, royalties from product sales of Tysabri were consecutively lower in 2018 and 2019 during which time they ceased.

Under the Going Concern Basis, the Company accounted for its investments in royalty rights at fair value with changes in fair value presented in earnings. The fair value of the investments in royalty rights was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. These assets were classified as Level 3 assets within the fair value hierarchy, as the Company’s valuation estimates utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products. Transaction-related fees and costs were expensed as incurred.

Under the Going Concern Basis, realized gains and losses on royalty rights were recognized as they were earned and when collection was reasonably assured. Royalty Rights revenue was recognized over the respective contractual arrangement period. Critical estimates included product demand and market growth assumptions, inventory target levels, product approval, pricing assumptions and the impact of competition from other branded or generic products. Factors that could cause a change in estimates of future cash flows included a change in estimated market size, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, a change in dosage of the product a change in the number of treatments and the entrants of new competitors or generic products.

Under the Going Concern Basis, the Company expensed research and development costs as incurred. Research and development expenses consisted primarily of engineering, product development, clinical studies to develop and support the Company’s products, regulatory expenses, and other costs associated with products and technologies that were in development. Research and development expenses included employee compensation, including stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, and depreciation.

Under the Going Concern Basis, the Company used the U.S. dollar predominately as the functional currency of its foreign subsidiaries. For foreign subsidiaries where the U.S. dollar was the functional currency, gains and losses from remeasurement of foreign currency balances into U.S. dollars are included in the Consolidated Statements of Operations. The aggregate net (losses) gains resulting from foreign currency transactions and remeasurement of foreign currency balances into U.S. dollars that were included in the Consolidated Statements of Operations amounted to a gain of $0.2 million and a loss of $0.5 million and $0.7 million for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, respectively.

The provision for income taxes is determined using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items are reflected in the Consolidated Financial Statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision.

In February 2016, the FASB issued ASU No. 2016-02, Leases, that supersedes ASC 840, Leases. Subsequently, the FASB issued several updates to ASU No. 2016-02, codified in ASC Topic 842 (“ASC 842”). The Company adopted ASC 842, Leases, on January 1, 2019 using the modified retrospective method for all leases not substantially completed as of the date of adoption. The reported results for the eight months ended August 31, 2020 and the year ended December 31, 2019 reflect the application of ASC 842 guidance while the reported results for the year ended December 31, 2018 was prepared under the guidance of ASC 840, which is also referred to herein as “legacy GAAP” or the “previous guidance”. The cumulative impact of the adoption of ASC 842 was not material, therefore, the Company did not record any adjustments to retained earnings. As a result of adopting ASC 842, the Company recorded operating lease right-of-use (“ROU”) assets of $2.1 million and operating lease liabilities of $2.1 million, primarily related to corporate office leases, based on the present value of the future lease payments on the date of adoption. Changes to lessor accounting focused on conforming with certain changes made to lessee accounting and the recently adopted revenue recognition guidance. The adoption of ASC 842 did not materially change how the Company accounted for lessor arrangements.

Under the Going Concern Basis, the Company determined if an arrangement was a lease or contained an embedded lease at inception if it contained the right to control the use of an identified asset under a leasing arrangement with an initial term greater than 12 months. The Company determined whether a contract conveyed the right to control the use of an identified asset for a period of time if the contract contained both the right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. The Company has lease arrangements with lease and non-lease components, which were accounted for separately.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Under the Going Concern Basis, operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company used the implicit rate when readily determinable at lease inception. As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s remaining lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments was recognized on a straight-line basis as operating expense in the Consolidated Statements of Operations over the lease term.

For lease arrangements with lease and non-lease components where the Company was the lessor, the Company allocated the contract’s transaction price (including discounts) to the lease and non-lease components on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. Lease elements generally included a LENSAR Laser System, while non-lease elements generally included extended warranty services, PIDs and procedure licenses. The stand-alone selling prices for the extended warranty services, PIDs and procedure licenses were determined based on the prices at which the Company separately sold such products and services. The LENSAR Laser System stand-alone selling prices were determined using the expected cost plus a margin approach. Allocation of the transaction price was determined at the inception of the lease arrangement. The Company’s leases primarily consisted of leases with fixed lease payments. For those leases with variable lease payments, the variable lease payment was typically based upon use of the leased equipment or the purchase of procedure licenses and PIDs used with the leased equipment. Non-lease components were accounted for under ASC 606. For additional information regarding ASC 606, see Note 20, Revenue from Contracts with Customers.

Some leases included options to extend the leases on a month-to-month basis if the customer does not notify the Company of the intention to return the equipment at the end of the lease term. The Company typically did not offer options to terminate the leases before the end of the lease term. A new contract was generated if a customer intended to continue using the equipment under the initial term and the new contract term was not included in the initial lease term.

In determining whether a transaction should be classified as a sales-type or operating lease, the Company considered the following criteria at lease commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3) whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to purchase the leased system that the lessee is reasonably certain to exercise, and (5)

For operating leases, rental income was recognized on a straight-line basis over the lease term. The cost of customer-leased equipment was recorded within Property and equipment, net in the accompanying Consolidated Balance Sheet and depreciated over the equipment’s estimated useful life. Depreciation expense associated with the leased equipment under operating lease arrangements was reflected in Cost of product revenue in the accompanying Consolidated Statements of Operations for the eight months ended August 31, 2020 and the year ended December 31, 2019. Some of the Company’s operating leases included a purchase option for the customer to purchase the leased asset at the end of the lease arrangement. The purchase price did not qualify as a bargain purchase option. The Company managed its risk on its investment in the equipment through pricing and the term of the leases. Lessees did not provide residual value guarantees on leased equipment. Equipment returned to the Company could be leased or sold to other customers. Initial direct costs were deferred and recognized over the lease term.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The guidance amended the impairment model to utilize an expected loss methodology in place of the incurred loss methodology, resulting in more timely recognition of losses. The Company adopted ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. As a consequence of adopting ASU 2016-13, the Company’s accounts receivable accounting policy under the Going Concern Basis was updated, as follows:

The Company makes estimates of the collectability of accounts receivable. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for credit losses. Amounts are charged off against the allowance for credit losses when the Company determines that recovery is unlikely and the Company ceases collection efforts. The Company applies the practical expedient for its collateral-dependent notes receivable. Estimated credit losses are based on the fair value of the collateral (less costs to sell, as applicable).

In April 2020, the FASB issued a staff question-and-answer document, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic” (the “COVID-19 Q&A”), to address certain frequently asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the lessee (which would be addressed under the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (which would not fall under the lease modification framework). The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease or obligations of the lease. This election is available for concessions that result in the total payments required by the modified contract being substantially the same or less than the total payments required by the original contract.

As a result of the COVID-19 pandemic, LENSAR entered into agreements with 23 customers through which LENSAR agreed to waive monthly rental and minimum monthly license fees ranging from one to four months for an aggregate of $0.9 million of revenue for the eight months ended August 31, 2020, consisting of $0.5 million in Product revenue, $0.3 million in Lease revenue and $0.1 million in Service revenue. In return for these concessions the related contracts were extended by the same number of months waived. No accounts receivable or notes receivable amounts were deemed uncollectible due to COVID-19 during the 2020 periods presented herein; however, the Company considered the effects of COVID-19 in estimating its credit losses for the period.

requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The Company adopted ASU No. 2018-15 on January 1, 2020 using the prospective transition option. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective for public companies for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings/(deficit) in the period of adoption. The Company does not expect this guidance to have a significant impact on its financial statements.