1.	Nature of business and summary of significant accounting policies:

Organization

BioDelivery Sciences International, Inc. and subsidiaries (the “Company”) was incorporated in the State of Indiana on January 6, 1997 and reincorporated as a Delaware corporation in 2002. The Company’s subsidiaries are Arius Pharmaceuticals, Inc., a Delaware corporation (“Arius One”) and Arius Two, Inc., a Delaware corporation (“Arius Two”), each of which are wholly-owned, and its majority-owned subsidiary, Bioral Nutrient Delivery, LLC, a Delaware limited liability company (“BND”).

The Company is a specialty pharmaceutical company with a focus in the areas of pain management and addiction medicine. The Company is utilizing its novel and proprietary BioErodible MucoAdhesive (BEMA^®) technology and other drug delivery technologies to develop and commercialize, either on its own or in partnership with third parties, new applications of proven therapies aimed at addressing important unmet medical needs. The Company’s development strategy has focused on utilization of the U.S. Food and Drug Administration’s (“FDA”) 505(b)(2) approval process to obtain more timely and efficient approval of new formulations of previously approved therapeutics.

As used herein, the Company’s common stock, par value $.001 per share, is referred to as the “Common Stock”.

Principles of consolidation

The consolidated financial statements include the accounts of the Company, Arius One, Arius Two and BND. For each period presented BND has been an inactive subsidiary. All significant inter-company balances and transactions have been eliminated.

Significant accounting policies:

Use of estimates in financial statements

The preparation of the accompanying consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates of the Company include: revenue recognition, sales allowances such as returns of product sold, government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates and chargebacks, sales bonuses, stock-based compensation, determination of fair values of assets and liabilities relating to business combinations, and deferred income taxes.

Reacquisition of BELBUCA^®

On December 7, 2016, the Company entered into an agreement (the “Termination Agreement”) with Endo Pharmaceuticals, Inc. (“Endo”) terminating Endo’s licensing of rights to the Company’s BELBUCA^® (buprenorphine) buccal film product (“BELBUCA^®”). The closing of the Termination Agreement, and the formal termination of the BELBUCA^® license to Endo and closing of the transactions further described below occurred on January 6, 2017 (see note 7, Business Combinations and BELBUCA^® Acquisition).

Reclassification

Certain amounts were reclassified between Accounts Receivable and Accounts Payable and Accrued Expenses for the year ended December 31, 2016 Consolidated Balance Sheet and in the Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015 to conform to current year presentation to reflect the right of offset and practice of settling certain liabilities with our wholesale customers. Certain amounts were also reclassified between Accounts Payable and Accrued Liabilities in note 3, for the year ended December 31, 2016 to conform to current year presentation. The Company also reclassified certain amounts between Machinery & Equipment and Idle Equipment in note 4, for the year ended December 31, 2016. These reclassifications had no effect on the previously reported net cash flows from operations, activities or net losses.

Certain risks, concentrations and uncertainties

The Company relies on certain materials used in its development and third-party manufacturing processes, most of which are procured from three contract manufacturers and two active pharmaceutical ingredient (“API”) suppliers for BELBUCA^® and BUNAVAIL^®. The Company purchases its pharmaceutical ingredients pursuant to long-term supply agreements with a limited number of suppliers. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the development or commercialization process and thereby adversely affect the Company’s operating results. In addition, a disruption in the commercial supply of or a significant increase in the cost of the API from any of these sources could have a material adverse effect on the Company’s BELBUCA^® and BUNAVAIL^® business, which would affect the Company’s financial position and results of operations.

In addition, the Company utilizes only two contract manufacturers to create the BELBUCA^® and BUNAVAIL^® laminates and only one contract manufacturer to package the laminates into final product. Although the Company has long term supply agreements with these two vendors, any problems or regulatory issues at either of these vendors could create significant BELBUCA^® and BUNAVAIL^® supply delays. Amounts due to these vendors represented approximately 22.8% and 5.6% of total accounts payable as of December 31, 2017 and 2016, respectively.

Key components used in the manufacture of ONSOLIS^® are currently provided by a limited number of suppliers. This could result in the Company’s inability to timely obtain an adequate supply of required components and reduce control over pricing, quality and timely delivery. Also, if the supply of any components is interrupted, components from alternative suppliers may not be available in sufficient volumes within required time frames, if at all, to meet the Company’s obligations under certain supply agreements. This could delay timely commercialization efforts causing the Company’s obligations to not be fulfilled.

The Company sells its BELBUCA^® and BUNAVAIL^® products primarily to large national wholesalers, which in turn may resell the products to smaller or regional wholesalers, retail pharmacies, chain drug stores, government agencies and other third parties. The following table lists the Company’s customers that individually comprise greater than 10% of total accounts receivable:


	December 31,
Customers	2017			2016
Customer A		47	%		36	%
Customer B		22	%		28	%
Customer C		26	%		28	%

Total		95	%		92	%

These three customers accounted for 92%, 91% and 90% of total annual sales during the years ended December 31, 2017, 2016 and 2015 respectively.

Cash

The Company places cash on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation covers $0.25 million for substantially all depository accounts. As of December 31, 2017, the Company had approximately $21.2 million, which exceeded these insured limits. As of December 31, 2016, the Company had approximately $32.0 million, which exceeded these insured limits.

Accounts receivable

The Company typically requires its customers to remit payments within the first 30 to 37 days, depending on the customer and the products purchased. In addition, the Company offers wholesale distributors a prompt payment discount if they make payments within these deadlines. This discount is generally 2% but may be higher in some instances due to product launches or customer and/or industry expectations. Because the Company’s wholesale distributors typically take the prompt payment discount, the Company accrues 100% of the prompt payment discounts, based on the gross amount of each invoice, at the time

of sale, and the Company applies earned discounts at the time of payment. The allowance for prompt payment discounts was $0.2 million and $0.05 million as of December 31, 2017 and 2016, respectively.

The Company performs ongoing credit evaluations and does not require collateral. As appropriate, the Company establishes provisions for potential credit losses. As such, there were no allowances for doubtful accounts as of December 31, 2017 or 2016. The Company writes off accounts receivable when management determines they are uncollectible and credits payments subsequently received on such receivables to bad debt expense in the period received. Write-offs during the years ending December 31, 2017, 2016 and 2015 were $0, $0.02 million and $0, respectively.

Inventory

Inventories are stated at the lower of cost or net realizable value with costs determined for each batch under the first-in, first-out method and specifically allocated to remaining inventory. Inventory consists of raw materials, work in process and finished goods. Raw materials include amounts of active pharmaceutical ingredient for a product to be manufactured, work in process includes the bulk inventory of laminate (the Company’s drug delivery film) prior to being packaged for sale, and finished goods include pharmaceutical products ready for commercial sale.

On a quarterly basis, the Company analyzes its inventory levels and records allowances for inventory that has become obsolete, inventory that has a cost basis more than the expected net realizable value and inventory that is more than expected demand based upon projected product sales. The Company recorded $0.2 million in inventory obsolescence as of December 31, 2017. There were no allowances recorded as of December 31, 2016.

Inventory is composed of the following at December 31:


	2017			2016
Raw Materials & Supplies	$	1,338		$	978
Work-in-process		3,135			1,660
Finished Goods		1,861			730
Finished Goods Reserve		(243	)		—

Total Inventories	$	6,091		$	3,368

Property and equipment

The Company records property and equipment at cost less accumulated depreciation, which is computed on a straight-line basis over its estimated useful lives, generally 3 to 10 years.

The Company evaluates the carrying value of the idle equipment when events or changes in circumstances indicate the related carrying amount may not be recoverable. During the year ended December 31, 2017, $0.7 million of idle equipment was placed back into production to support manufacturing of BELBUCA^®. During the year ended December 31, 2016, $3.7 million of idle equipment related to the postponement of the U.S. relaunch of ONSOLIS^® (see note 6) was re-tooled, put into production and prepared to manufacture BUNAVAIL^® to meet product demand in 2016. There was no impairment of equipment recorded during the year ended December 31, 2017 or 2016.

Intangibles and goodwill

The Company reviews intangible assets with finite lives (“other intangible assets”) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its other intangible assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.

There were no impairment charges recognized on finite lived intangibles in 2017, 2016 or 2015.

Intangible assets with finite useful lives are amortized over the estimated useful lives as follows:


		Estimated Useful Lives

Licenses		15 years
BELBUCA^® license and distribution rights		10 years
U.S. product rights		8-12 years
EU product rights		7-11 years

Goodwill is evaluated for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. During the evaluation of the potential impairment of goodwill, either a qualitative or a quantitative assessment may be performed. If a qualitative evaluation determines that it is more likely than not that no impairment exists, then no further analysis is performed. If a qualitative evaluation is unable to determine whether it is more likely than not that impairment has occurred, a quantitative evaluation is performed. If the carrying value exceeds the fair value, an impairment charge is recorded based on that difference. There were no goodwill impairment charges in 2017, 2016 or 2015.

Deferred revenue

Consistent with the Company’s revenue recognition policy, deferred revenue represents cash received in advance for licensing fees, consulting, research and development services and related supply agreements. Such payments are reflected as deferred revenue until recognized under the Company’s revenue recognition policy. Deferred revenue is classified as current if management believes the Company will be able to recognize the deferred amount as revenue within twelve months of the balance sheet date.

Deferred revenue is recognized when the product is sold to the end user, based upon prescriptions filled. To estimate product sold to end users, the Company relies on third-party information, including prescription data and information obtained from significant distributors with respect to their inventory levels and sales to customers. Deferred revenue is recorded net of estimated allowances for rebates, price adjustments, chargebacks, prompt payment and other discounts. Estimated allowances are recorded and classified as accrued expenses in the accompanying balance sheets as of December 31, 2017 and 2016 (see note 3).

The Company deferred sales, until January 1, 2017, of BUNAVAIL^® and recognized such revenue when the product was sold through to the end user. There were no product sales by the Company of BELBUCA^® before January 2017. As of December 31, 2016, the Company had $1.7 million of deferred revenue related to sales to wholesalers for which future returns could not be reasonably estimated at the time of sale. There were no deferred sales as of December 31, 2017.

Revenue recognition

Net product sales

Beginning in the first quarter of 2017, the Company had determined that it had sufficient experience with BELBUCA^® and BUNAVAIL^® to estimate its returns at time of ex-factory sales. The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when all the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been rendered; (c) the Company’s price to the buyer is fixed or determinable; and (d) collectability is reasonably assured. The Company sells its products primarily to large national wholesalers, which have the right to return the products they purchase. The Company recognizes revenue from sales transactions where the buyer has the right to return the product at the time of sale only if (1) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from any provided by the Company, (5) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes product sales net of estimated allowances for rebates, price adjustments, returns, chargebacks and prompt payment discounts. Given the sufficient experience with BELBUCA^® and BUNAVAIL^®, the Company

can reasonably estimate the amount of future product returns, and therefore, the risk of estimating product returns has been substantially eliminated. The effect in income from operations and on net income is that the Company can recognize revenue earlier on the sell-in method, net of a provision for estimated returns, since the Company can record revenue once sold to the wholesaler rather than waiting until the product is sold to the end user on a sell-through basis.

The Company establishes allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:

•

the number of and specific contractual terms of agreements with customers;

•

estimated levels of inventory in the distribution channel;

•

historical rebates, chargebacks and returns of products;

•

direct communication with customers;

•

anticipated introduction of competitive products or generics;

•

anticipated pricing strategy changes by the Company and/or its competitors;

•

analysis of prescription data gathered by a third-party prescription data provider;

•

the impact of changes in state and federal regulations; and

•

the estimated remaining shelf life of products.

In its analyses, the Company uses prescription data purchased from a third-party data provider to develop estimates of historical inventory channel sell-through. The Company utilizes an internal analysis to compare historical net product shipments to estimated historical prescriptions written. Based on that analysis, management develops an estimate of the quantity of product in the channel which may be subject to various rebate, chargeback and product return exposures. To estimate months of ending inventory in the Company’s distribution channel, the Company divides estimated ending inventory in the distribution channel by the Company’s recent prescription data, not considering any future anticipated demand growth beyond the succeeding quarter. Monthly for each product line, the Company prepares an internal estimate of ending inventory units in the distribution channel by adding estimated inventory in the channel at the beginning of the period, plus net product shipments for the period, less estimated prescriptions written for the period. This is done for each product line by applying a rate of historical activity for rebates, chargebacks and product returns, adjusted for relevant quantitative and qualitative factors discussed above, to the potential exposed product estimated to be in the distribution channel.

Product returns-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an 18-month period that begins six months prior to and ends twelve months after expiration of the products.

Rebates- The liability for government program rebates is calculated based on historical and current rebate redemption and utilization rates contractually submitted by each program’s administrator.

Price adjustments and chargebacks-The Company’s estimates of price adjustments and chargebacks are based on its estimated mix of sales to various third-party payers, which are entitled either contractually or statutorily to discounts from the Company’s listed prices of its products. If the sales mix to third-party payers is different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated, and such differences may be significant.

The Company, from time to time, offers certain promotional product-related incentives to its customers. These programs include certain product incentives to pharmacy customers and other sales stocking allowances. The Company has voucher programs for BELBUCA^® and BUNAVAIL^® whereby the Company offers a point-of-sale subsidy to retail consumers. The Company estimates its liabilities for these voucher programs based on the actual redemption rates as reported to the Company by a third-party claims processing organization. The Company accounts for the costs of these special promotional programs as price adjustments, which are a reduction of gross revenue.

Prompt payment discounts-The Company typically offers its wholesale customers a prompt payment discount of 2% as an incentive to remit payments within the first 30 to 37 days after the invoice date depending on the customer and the products purchased.

Gross to net accruals-A significant majority of the Company’s gross to net adjustments to gross product revenues are the result of accruals for its voucher program and Medicaid rebates, with most of those programs having an accrual to payment cycle of anywhere from one to three months. In addition to this relatively short accrual to payment cycle, the Company receives daily information from the wholesalers regarding their sales of the Company’s products and actual on hand inventory levels of its products. This enables the Company to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.

License and development agreements

The Company periodically enters into license and development agreements to develop and commercialize its products. The arrangements typically are multi-deliverable arrangements that are funded through upfront payments, milestone payments and other forms of payment. The Company currently has multiple license and development agreements that are described in notes 6, 8 and 9. Depending on the nature of the contract these revenues are classified as research and development reimbursements or contract revenue.

Deferred cost of sales

Prior to January 1, 2017, the Company deferred its cost of sales relating to BUNAVAIL^® sales at time of ex-factory sales. These costs were recognized when the product was sold through to the end user. Beginning January 1, 2017, cost of sales for BELBUCA^® and BUNAVAIL^® are recognized when sold to the wholesaler from our distribution center.

The Company incurred $1.7 million of deferred costs of sales for the year ended December 31, 2016, which is included in other current assets in the accompanying balance sheets. There was no deferred cost of sales for the year ended December 31, 2017.

Cost of sales

Cost of sales includes the direct costs attributable to the production of BELBUCA^® and BUNAVAIL^®. It includes raw materials, production costs at the Company’s three contract manufacturing sites, quality testing directly related to the products, and depreciation on equipment that the Company has purchased to produce BELBUCA^® and BUNAVAIL^®. It also includes any batches not meeting specifications and raw material yield losses. Yield losses and batches not meeting specifications are expensed as incurred. Prior to January 1, 2017, cost of sales was recognized as actual product was sold through to the end user. Beginning January 1, 2017, cost of sales is recognized when sold to the wholesaler from our distribution center.

For BREAKYL^™ and PAINKYL^™ (the Company’s out-licensed breakthrough cancer pain therapies), cost of sales includes all costs related to creating the product at the Company’s contract manufacturing location in Germany. The Company’s contract manufacturer bills the Company for the final product, which includes materials, direct labor costs, and certain overhead costs as outlined in applicable supply agreements. Cost of sales also includes royalty expenses that the Company owes to third parties.

Research and development expenses

Research and development expenses consist of product development expenses incurred in identifying, developing and testing product candidates. Product development expenses consist primarily of labor, benefits and related employee expenses for personnel directly involved in product development activities; fees paid to professional service providers for monitoring and analyzing clinical trials; expenses incurred under joint development agreements; regulatory costs; costs of contract research and manufacturing of inventory used in testing and clinical trials; and the cost of facilities used by the Company’s product development personnel.

Product development expenses are expensed as incurred and reflect costs directly attributable to product candidates in development during the applicable period and to product candidates for which the Company has discontinued development. Additionally, product development expenses include the cost of qualifying new current Good Manufacturing Practice (“cGMP”) third-party manufacturers for the Company’s product candidates, including expenses associated with any related technology transfer. All indirect costs (such as salaries, benefits or other costs related to the Company’s accounting, legal, human resources, purchasing, information technology and other general corporate functions) associated with individual product candidates are included in general and administrative expenses. Research and development expenses were $13.0 million, $18.9 million and $20.6 million for the years ended December 31, 2017, 2016 and 2016 respectively.

Advertising

Advertising costs, which include promotional expenses and the cost of placebo samples, are expensed as incurred. Advertising expenses were $3.8 million, $4.2 million and $4.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Shipping and handling costs

Shipping and handling costs, which include expenses from our wholesalers, are expensed as incurred. Shipping and handling costs were $0.2 million, $0.05 and $0.05 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Stock-based compensation

The Company has a stock-based compensation plan under which various types of equity-based awards are granted, including stock options, restricted stock units (RSUs) and performance-based RSUs. The fair value of stock option and RSUs, which are subject only to service conditions with graded vesting, are recognized as compensation expense, generally on a straight-line basis over the service period, net of estimated forfeitures. Forfeitures are recognized as they occur. The fair values of performance-based RSUs are recognized as compensation expense from the grant date to the end of the performance period. The Company uses the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants and options). The grant date fair value of an RSU equals the closing price of our common stock on the trading day preceding the grant date. The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatility is based on historical volatility of the Company’s Common Stock and other factors estimated over the expected term of the options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield.

In applying the Black-Scholes options-pricing model, assumptions are as follows:


	2017	2016	2015
Expected price volatility	68.76%-78.79%	62.65%-80.78%	73.00%-76.78%
Risk-free interest rate	1.77%-2.05%	0.56%-1.70%	1.25%-1.68%
Weighted average expected life in years	6 years	6 years	6 years
Dividend yield	—	—	—

The Company estimated fair values of derivative financial instruments using the Black-Scholes option valuation technique because it embodied all of the requisite assumptions (including trading volatility, estimated terms and risk-free rates) necessary to fairly value these instruments. In addition, option-based techniques were highly volatile and sensitive to changes in the Company’s trading market price which was high-historical volatility. Since derivative financial instruments were initially and subsequently carried at fair values, the Company’s operating results reflected the volatility in these estimates and assumption changes.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year. Accordingly, public business entities should apply the guidance in ASU 2014-09 to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. The standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method).

The Company used the modified retrospective approach upon adoption of this guidance effective January 1, 2018 using a cumulative effect adjustment to accumulated deficit. The Company utilized a comprehensive approach to assess the impact of the guidance on its contract portfolio. The Company reviewed its current accounting policies and practices to identify potential differences resulting from the application of the new requirements to its revenue contracts, including evaluation of performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. In addition, the Company will update certain disclosures, as applicable, included in our financial statements to meet the requirements of the new guidance beginning in January 1, 2018. Under the new guidance, the Company is required to evaluate the impact of estimating variable consideration related to our product sales and licensing contracts. The Company will use the expected value method to estimate the total revenue of the contract, constrained by the probability that there would not be a significant revenue reversal in a future period. The Company will continue to evaluate the expected value of revenue over the term of the contract and adjust revenue recognition as appropriate. Based on this evaluation, the adoption will not have a material impact on the Company’s financial position, results of operations, cash flows, accounting policies, business processes, internal controls or disclosures.

The FASB’s new leases standard, ASU 2016-02 Leases (Topic 842), was issued on February 25, 2016. ASU 2016-02 is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The new standard requires a modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019, but may be adopted earlier. The Company expects to adopt this standard beginning in 2019. The Company does not expect that this standard will have a material impact on its consolidated statements of operations, but the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its consolidated balance sheets as a result of the requirement to record right-of-use assets and corresponding lease obligations for current operating leases. In addition, the standard will require that the Company update its systems, processes and controls it uses to track, record and account for its lease portfolio.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a screen to determine when an integrated set of assets and activities (a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new standard also requires that a business include at least one substantive process and narrows the definition of outputs. The new guidance will be applied prospectively and is effective for the Company for interim and annual periods beginning on January 1, 2018 and early adoption is permitted. The Company expects to adopt this standard beginning in 2018. Adoption of this new standard may result in more transactions being accounted for as asset acquisitions versus business combinations; however, the impact to the Company’s consolidated financial statements will depend on the facts and circumstances of future transactions.

In January 2017, the FASB issued ASU Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of the goodwill impairment test under ASC 350. Under previous guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate the fair value of any unrecognized intangible assets (including in-process research and development) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1. Under this new guidance if a reporting unit’s carrying value exceeds its fair value, an entity will record an impairment charge based on that difference with such impairment charge limited to the amount of goodwill in the reporting unit. This ASU does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This ASU will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 for public business enterprises. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company adopted this guidance during the year ended December 31, 2017 and determined that ASU 2017-04 did not have any impact on its consolidated financial statements.