3. Summary of Significant Accounting Policies

Basis of Presentation

The Company operates in one segment considering the nature of the Company’s products and services, class of customers, methods used to distribute the products and the regulatory environment in which the Company operates.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Kadmon Holdings, Inc. and its domestic and international subsidiaries, all of which are wholly owned.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates.

Company Valuation

To estimate certain expenses and record certain transactions, it was necessary for the Company to estimate the fair value of its membership units. Given the absence of a public trading market prior to the IPO, and in accordance with the American Institute of Certified Public Accountants’ Practice Guide, “Valuation of Privately‑Held‑Company Equity Securities Issued as Compensation”, the Company exercised reasonable judgment and considered numerous objective and subjective factors to determine its best estimate of the fair value of its membership units (Note 4).

Revenue Recognition

The Company recognizes sales when the risk of loss has been transferred to the customer. As is typical in the pharmaceutical industry, gross product sales are subject to a variety of deductions, primarily representing rebates, chargebacks, returns, and discounts to government agencies, wholesalers, and managed care organizations. These deductions represent management’s best estimates of the related reserves and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. If estimates are not representative of the actual future settlement, results could be materially affected. The Company’s product sales were substantially derived from the sale of its ribavirin portfolio of products during the years ended December 31, 2017, 2016 and 2015.

The Company accounts for revenue arrangements that contain multiple deliverables in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 605‑25, “Revenue Recognition for Arrangements with Multiple Elements”, which addresses the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. A delivered item within an arrangement is considered a separate unit of accounting only if both of the following criteria are met:

the delivered item has value to the customer on a stand‑alone basis; and

the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in control of the vendor.

In accordance with FASB ASC Topic 605‑25, if both of the criteria above are not met, then separate accounting for the individual deliverables is not appropriate. Revenue recognition for arrangements with multiple deliverables constituting a single unit of accounting is recognized generally over the greater of the term of the arrangement or the expected period of performance, either on a straight‑line basis or on a modified proportional performance method.

Non‑refundable license fees are recognized as revenue when the Company has a contractual right to receive such payment, the contract price is fixed or determinable, the collection of the receivable is reasonably assured and the Company has no future performance obligations under the license agreement.

The Company may earn contingent payments from third parties based on the achievement of certain clinical and commercial milestones. The Company recognizes milestone revenue as the underlying criteria is achieved in accordance with FASB ASC Topic 605‑28, “Revenue Recognition Milestone Method”.

The Company reassesses the period of performance over which the Company recognizes deferred upfront license fees and makes adjustments as appropriate in the period in which a change in the estimated period of performance is identified. In the event a licensee elects to discontinue development of a specific product candidate under a single target license, but retains its right to use the Company’s technology to develop an alternative product candidate to the same target or a target substitute, the Company would cease amortization of any remaining portion of the upfront fee until there is substantial pre‑clinical activity on another product candidate and its remaining period of substantial involvement can be estimated. In the event that a single target license were to be terminated, the Company would recognize as revenue any portion of the upfront fee that had not previously been recorded as revenue, but was classified as deferred revenue, at the date of such termination or through the remaining substantial involvement in the wind down of the agreement.

Foreign Revenue

Foreign product sales represented approximately 26.9%, 8.6% and 10% of total product sales for the years ended December 31, 2017, 2016 and 2015, respectively, the majority of which were to the Netherlands and Ireland.

Sales Returns Reserve

Revenue is recognized net of sales returns, which are estimated using the Company’s historical experience. The sales returns reserve was $0.6 million and $0.4 million at December 31, 2017 and 2016, respectively. Sales returns expense was $0.6 million, $0.9 million and $0.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. Actual results could differ from original estimates resulting in future adjustments to revenue.

Reserve for Wholesaler Chargebacks and Rebates

The Company maintains a reserve for wholesaler chargebacks and rebates to properly reflect the realizable value of accounts receivable. A chargeback represents a contractual allowance provided by the Company to its wholesalers for any variances between wholesale and lower retail prices of the Company’s pharmaceutical products. The Company estimates the reserve for wholesaler chargebacks based on wholesaler inventory levels, contract prices and historical experience. Rebate reserves represent contractual allowances based on specific customer contracts. The rebate allowance is estimated as a percentage of specific customer sales. The reserve for wholesaler chargebacks and rebates was $0.2 million and $0.1 million at December 31, 2017 and 2016, respectively. Wholesaler chargebacks and rebates expense was $0.3 million, $0.5 million and $1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Rebates Payable

The Company issues rebates related to various government programs and buying groups. In these instances, the rebates are paid in cash to the party managing the discount buying program. The estimated rebates earned but unpaid was $0.3 million and $0.4 million at December 31, 2017 and 2016, respectively. Such amounts have been included in accounts payable on the Company’s consolidated balance sheets. Rebates expense was $0.7 million, $0.8 million and $1.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Shipping and Handling Costs

Shipping and handling costs for raw materials and finished goods prior to their sale are classified in cost of sales. Freight charges for shipments to customers are not billed to customers and are included in selling, general and administrative expenses when incurred and were $0.1 million, $0.2 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Foreign Currencies

The consolidated financial statements are presented in U.S. dollars, the reporting currency of the Company. Gains or losses on transactions denominated in a currency other than the Company’s functional currency, which arise as a result of changes in foreign currency exchange rates, are recorded in other income on the consolidated statements of operations. The transaction gains (loss) were ($25,000), $9,000 and $124,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

Share‑based Compensation Expense

The Company recognizes share‑based compensation expense in accordance with FASB ASC Topic 718, “Stock Compensation” (“ASC 718”), for all share‑based awards made to employees and board members based on estimated fair values.

ASC 718 requires companies to measure the cost of employee services incurred in exchange for the award of equity instruments based on the estimated fair value of the share‑based award on the grant date. The expense is recognized over the requisite service period.

All share‑based awards to non‑employees are accounted for in accordance with FASB ASC Topic 505‑50, “Equity Based Payments to Non‑Employees,” where the value of unit compensation is based on the measurement date, as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete.

The Company uses a Black‑Scholes option‑pricing model to value the Company’s option awards. Using this option‑pricing model, the fair value of each employee and board member award is estimated on the grant date. The fair value is expensed on a straight‑line basis over the vesting period. The option awards generally vest pro‑rata annually. The expected volatility assumption is based on the volatility of the share price of comparable public companies. The expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin Numbers 107 and 110 (the midpoint between the term of the agreement and the weighted average vesting term). The risk‑free interest rate is based on the implied yield on a U.S. Treasury security at a constant maturity with a remaining term equal to the expected term of the option granted. The dividend yield is zero, as the Company has never declared a cash dividend.

In the fourth quarter of 2016, the Company adopted ASU 2016‑09, “Compensation—Stock Compensation”. ASU 2016-09 requires that certain other amendments relevant to the Company be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the period in which the guidance is adopted. As a result of adopting ASU 2016-09 during the three months ended December 31, 2016, the Company adjusted accumulated deficit for amendments related to an entity-wide accounting policy election to recognize share-based award forfeitures only as they occur rather than an estimate by applying a forfeiture rate. The Company recorded a $2.0 million charge to accumulated deficit as of January 1, 2016 and an associated credit to additional paid-in capital for previously unrecognized share-based compensation expense as a result of applying this policy election. The Company also recorded $0.8 million in additional share-based compensation expense during the fourth quarter of 2016 as a result of applying estimated forfeitures recorded during the nine months ended September 30, 2016.

ASU 2016-09 also requires the recognition of the income tax effects of awards in the consolidated statement of operations when the awards vest or are settled, thus eliminating addition paid-in capital pools. The Company elected to adopt the amendments related to the presentation of excess tax benefits on the condensed consolidated statement of cash flows using a prospective transition method.

Modification of Awards

A change in any of the terms or conditions of the awards is accounted for as a modification of the award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the fair value of the awards and other pertinent factors at the modification date. For vested awards, the Company recognizes incremental compensation cost in the period the modification occurs. For unvested awards, if the award is probable of vesting both before and after the change, the Company recognizes the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date over the remaining requisite service period. If the fair value of the modified award is lower than the fair value of the original award immediately before modification, the minimum compensation cost the Company recognizes is the cost of the original award.

Research and Development

Innovation is critical to the success of the Company, and drug discovery and development are time‑consuming, expensive and unpredictable. The Company has built a pipeline of therapeutic candidates in all stages of development. The focus is on serious diseases where there is a great need and opportunity for innovative medicines. Product candidates and development strategies contemplate both immediate possibilities in medicine, such as reducing toxicity or addressing certain disease resistance and mutation, and future possibilities and medical needs. Included in research and development expense are personnel related costs, expenditures for laboratory equipment and consumables, payments made pursuant to licensing and acquisition agreements, and the cost of conducting clinical trials. Expenses incurred associated with conducting clinical trials include, but are not limited to, dosing of patients with clinical drug candidates, assistance from third party consultants and other industry experts, accumulation and interpretation of data on drug safety and efficacy, and manufacturing of active pharmaceutical ingredients and placebos for use within the clinical trial.

The Company has entered into agreements with third parties to acquire technologies and pharmaceutical product candidates for development (Note 12). Such agreements generally require an initial payment by the Company when the contract is executed, and additional payments upon the achievement of certain milestones. Additionally, the Company may be obligated to make future royalty payments in the event the Company commercializes the pharmaceutical product candidate and achieves a certain sales volume. In accordance with FASB ASC Topic 730‑10‑55, “Research and Development”, expenditures for research and development, including upfront licensing fees and milestone payments associated with products that have not yet been approved by the FDA, are charged to research and development expense as incurred. Future contract milestone payments will be recognized as expense when achievement of the milestone is determined to be probable. Once a product candidate receives regulatory approval, subsequent license payments are recorded as an intangible asset.

Research and development expense was $40.8 million, $35.8 million and $33.6 million during the years ended December 31, 2017, 2016 and 2015, respectively.

Income Taxes

The Company accounts for income taxes in accordance with the asset and liability method of accounting for income taxes prescribed by FASB ASC Topic 740, “Accounting for Income Taxes” (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates.

The Company follows FASB ASC Topic 740‑10, “Accounting for Uncertainty in Income Taxes”, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. At December 31, 2017 and 2016, the Company had no material uncertain tax positions to be accounted for in the financial statements. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense.

Under ASU 2016-09, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the statement of operations. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefits reduce tax payable in the current period. The Company made an early adoption on the ASU 2016-09 effect in the fourth quarter of 2016. There was no cumulative impact as the federal and state excess deductions would be offset by a corresponding change to the valuation allowance.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of deposits at major financial banking institutions and highly liquid investments with an original maturity of three months or less at the date of purchase. At times, cash balances deposited at major financial banking institutions exceed the federally insured limit. The Company regularly monitors the financial condition of the institutions in which it has depository accounts and believes the risk of loss is minimal.

Restricted Cash

The Company has a lease agreement for the premises it occupies in New York. A secured letter of credit in lieu of a lease deposit totaling $2.0 million is secured by restricted cash in the same amount at December 31, 2017 and 2016. The secured letter of credit will remain in place for the life of the related lease, expiring in October 2024 (Note 16). The Company also has a lease agreement for the premises it occupies in Massachusetts. A secured letter of credit in lieu of a lease deposit totaling $91,000 was established during the third quarter of 2015 and is secured by restricted cash in the same amount at December 31, 2017 and 2016. The secured letter of credit will remain in place for the life of the related lease, expiring in April 2023 (Note 16).

Allowance for Doubtful Accounts

The Company reviews the collectability of accounts receivable based on an assessment of historical experience, current economic conditions, and other collection indicators. The Company has recorded an allowance for doubtful accounts of $0.7 million at both December 31, 2017 and 2016. Adjustments to the allowance for doubtful accounts are recorded to selling, general and administrative expenses, and amounted to $3,000, $6,000, and $5,000 for the years ended December 31, 2017, 2016 and 2015, respectively. When accounts are determined to be uncollectible they are written off against the reserve balance and the reserve is reassessed. When payments are received on reserved accounts they are applied to the customer’s account and the reserve is reassessed.

Inventories

Inventories are stated at the lower of cost or market (on a first‑in, first‑out basis) using standard costs. Standard costs include an allocation of overhead rates, which include those costs attributable to managing the supply chain and are evaluated regularly. Variances are expensed as incurred.

Investments

The Company follows FASB ASC Topic 323, “Investments—Equity Method and Joint Ventures” (“ASC 323”), in accounting for its investment in a joint venture. In the event the Company’s share of the joint venture’s net losses reduces the Company’s investment to zero, the Company will discontinue applying the equity method and will not provide for additional losses unless the Company has guaranteed obligations of the joint venture or is otherwise committed to provide further financial support for the joint venture. If the joint venture subsequently reports net income, the Company will resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

The Company follows FASB ASC Topic 325, “Investments—Other” (“ASC 325”), in accounting for its investment in the stock of another company. In the event further contributions or additional shares are purchased, the Company will increase the basis in the investment. In the event distributions are made or indications exist that the fair value of the investment has decreased below the carrying amount, the Company will decrease the value of the investment as considered appropriate.

The Company’s total investment balance totaled $3.5 million and $11.1 million at December 31, 2017 and 2016, respectively.

For all non‑consolidated investments, the Company will continually assess the applicability of FASB ASC Topic 810, “Consolidation” (“ASC 810”), to determine if the investments qualify for consolidation. At December 31, 2017 and 2016, no such investments qualified for consolidation (Note 12).

Fixed Assets

Fixed assets are recorded at cost and depreciated over their estimated useful lives. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term, using the straight‑line method. Construction‑in‑progress and software under development are stated at cost and not depreciated. These items are transferred to fixed assets when the assets are placed into service.

Intangible Assets

Intangible assets are stated at cost, less accumulated amortization. The Company accounts for the purchases of intangible assets in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other”. Intangible assets are recognized based on their acquisition cost. The assets will be tested for impairment at least once annually, if determined to have an indefinite life, or whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable. If any of the Company’s intangible or long‑lived assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value. Applicable long‑lived assets, including intangible assets with definitive lives, are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment.

Goodwill

The Company’s goodwill relates to the 2010 acquisition of Kadmon Pharmaceuticals, a Pennsylvania limited liability company that was formed in April 2000. Goodwill is not amortized, but rather is assessed for impairment annually or upon the occurrence of an event that indicates impairment may have occurred, in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other”. No impairment to goodwill was recorded during the years ended December 31, 2017, 2016 and 2015.

Impairment of Long‑Lived Assets

Long‑lived assets, such as intangible assets (other than goodwill) and fixed assets, are evaluated for impairment periodically, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When any such impairment exists, a charge is recorded in the statement of operations to adjust the carrying value of the related assets.

The Company performed a trigger analysis over all other long‑lived assets at the lowest identifiable level of cash flows and determined that an impairment existed during the year ended December 31, 2015 (Note 11) and no impairment triggers existed during the years ended December 31, 2017 and 2016. An impairment of $31.3 million was recognized during the year ended December 31, 2015, while no such impairment was recognized during the years ended December 31, 2017 and 2016 (Note 11).

Accounting for Leases

The Company recognizes rent expense for operating leases as of the earlier of the possession date or the lease commencement date. Rental expense, inclusive of rent escalations, rent holidays, concessions and tenant allowances are recognized over the lease term on a straight‑line basis. See Note 16 for a further discussion of operating leases.

The Company has entered into capital lease agreements for information technology and laboratory equipment. Amortization expense for capital lease agreements is included in depreciation and amortization of fixed assets. As a result of these leases, the Company capitalized $208,000, $230,000 and $20,000 as office equipment and furniture during the years ended December 31, 2017, 2016 and 2015, respectively. The unamortized portion of capital leases totaled $270,000 and $191,000 at December 31, 2017 and 2016, respectively.

Accounting for Contingencies

The Company follows the guidance of FASB ASC Topic 450, “Contingencies” (“ASC 450”), in accounting for contingencies. If some amount within a range of loss is probable and appears at the time to be a better estimate than any other amount within the range, that amount shall be expensed. If a loss is probable, and no amount within the range is a better estimate than any other amount, the estimated minimum amount in the range shall be expensed.

Fair Value of Financial Instruments

The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). This pronouncement defines fair value, establishes a framework for measuring fair value under GAAP and requires expanded disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market‑based measurement, not an entity‑specific measurement, and defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. ASC 820 utilizes a fair value hierarchy that prioritizes inputs to fair value measurement techniques into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The fair value of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short term nature (Note 8).

Loan Modifications and Extinguishments

The Company follows the provisions of FASB ASC Subtopic 470‑50 “Debt Modifications and Extinguishments” (“ASC 470‑60”) and ASC Subtopic 470‑60, “Troubled Debt Restructurings by Debtors” (“ASC 470‑60”). Under ASC 470‑50, an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a present value basis is less than 10 percent, the debt instruments are not considered to be substantially different, except in the following two circumstances:

A modification or an exchange affects the terms of an embedded conversion option, from which the change in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying amount of the original debt instrument immediately before the modification or exchange.

A modification or an exchange of debt instruments adds a substantive conversion option or eliminates a conversion option that was substantive at the date of the modification or exchange.

Under ASC 470‑60, a restructuring of a debt constitutes a troubled debt restructuring for purposes of this Subtopic if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.

Warrants and Derivative Liabilities

The Company accounts for its derivative financial instruments in accordance with FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company does not have derivative financial instruments that are hedges. ASC 815 establishes accounting and reporting standards requiring that derivative instruments, both freestanding and embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value each reporting period. ASC 815 also requires that changes in the fair value of derivative instruments be recognized currently in the results of operations unless specific criteria are met. For embedded features that are not clearly and closely related to the host instrument, are not carried at fair value, and are derivatives, the feature will be bifurcated and recorded as an asset or liability as noted above, unless the exceptions below are not met. Freestanding instruments that do not meet these exceptions will be accounted for in the same manner.

ASC 815 provides an exception—if an embedded derivative or freestanding instrument is both indexed to the company’s own units and classified in members’ units, it can be accounted for in members’ unit. If at least one of the criteria is not met, the embedded derivative or warrant is classified as an asset or liability and recorded to fair value each reporting period through the income statement.

The Company assesses classification of our warrants, other freestanding derivatives, and embedded features at each reporting date to determine whether a change in classification is required. The Company’s accounting for its embedded features, the warrants and the success fee, are explained further in Note 8.

Recent Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation – Stock Compensation, which clarifies the guidance about which changes to the terms and conditions of a share-based payments award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual or any interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not expect the standard to have a significant impact on its consolidated financial statements as the fair value of the Company’s modified awards is immaterial.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead of performing Step 2 to determine the amount of an impairment charge, the fair value of a reporting unit will be compared with its carrying amount and an impairment charge will be recognized for the value by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the standard to have a significant impact on its consolidated financial statements as the Company’s goodwill balance is immaterial.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. This ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total amounts on the balance sheet and disclose the nature of the restrictions. The Company will adopt this standard on January 1, 2018 and it is not expected to have a significant impact on its consolidated financial statements as the Company’s restricted cash balances are immaterial.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB has continued to issue accounting standards updates to clarify and provide implementation guidance related to Revenue from Contracts with Customers, including ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These amendments address a number of areas, including the entity’s identification of its performance obligations in a contract, collectability, non-cash consideration, presentation of sales tax and an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. The Company has adopted the standard effective January 1, 2018 using the modified retrospective method applied to all contracts applying the practical expedient for contract modifications, which allows a company to aggregate the impact of all modifications entered into prior to the earliest period presented. In preparation for adoption of the standard, the Company has implemented internal controls to enable the preparation of financial information including the assessment of the impact of the standard. Adoption of the standard is expected to result in a decrease to deferred revenues of approximately $24.0 million along with a cumulative adjustment to the Company's accumulated deficit of $24.0 million as of January 1, 2018.

In March 2016, the FASB issued ASU No. 2016‑06, “Derivatives and Hedging”. This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016, with early adoption permitted. An entity should apply the amendments in this ASU on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company adopted this standard on January 1, 2017, which did not impact the consolidated financial statements of the Company.

In February 2016, the FASB issued ASU No. 2016‑02, “Leases”. This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company evaluated the impact of adopting the standard on its consolidated financial statements and determined that upon adoption it will have to record a right of use asset and offsetting liability on the Company’s balance sheet.

In July 2015, the FASB issued ASU No. 2015‑11, “Inventory (Topic 330)” which simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with a lower of cost or net realizable value test. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The new guidance must be applied prospectively. The Company adopted this standard on January 1, 2017, which did not impact the consolidated financial statements of the Company.