(3) Revenue Recognition and Sales Returns Reserves

Net revenues include net product revenues associated with sales of Progesterone Products to Actavis and Merck Serono S.A. (“Merck Serono”), royalty revenues (primarily royalty revenues from Actavis on sales of Progesterone Products), and other revenues (primarily deferred revenues).

Net product revenues are recognized when shipped, except in the case of product shipments to Actavis, which are recognized when received at Actavis’s warehouse. Royalty revenues, based on sales by licensees, are recorded as revenues as those sales are made by the licensees.

Sales to Merck Serono for CRINONE^® (progesterone gel) are determined on a country-by-country basis and are the greater of (i) thirty percent (30%) of the net selling price in the country, or (ii) Columbia’s direct manufacturing cost plus 20%. Columbia estimates net selling prices based on historical experience and other current information from Merck Serono; the amounts are reconciled on a quarterly basis when information is received from Merck-Serono. Certain quantity discounts apply to annual purchases over 10 million, 20 million, and 30 million units. Columbia accrues an estimated volume discount on a quarterly basis and reconciles it on an annual basis.

Columbia is not responsible for returns on international sales. Sales adjustments for international sales are estimated to recognize changes in foreign exchange rates and changes in market prices that may fluctuate within a year. Columbia is responsible for sales returns for products sold to domestic customers prior to both the Actavis Transactions and the sale in April 2011 of STRIANT^® (testosterone buccal system) to Actient Pharmaceuticals LLC (“Actient”). Revenues from the sale of products to domestic customers were recorded at the time goods were shipped to customers. Except for sales to licensees, Columbia’s return policy allows product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Products sold to Merck Serono and Actavis are not returnable to Columbia. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated based on a percentage of sales, using such factors as historical sales information, distributor inventory levels and product prescription data, and were recorded as a reduction to sales in the same period as the related sales were recognized. Columbia evaluates its remaining provision for returns on a quarterly basis based on the rate of returns processed and adjusts the provision if its analysis indicates that the provision needs to be adjusted.

An analysis of the reserve for sales returns is as follows:


	Six Months Ended June 30,
	2013			2012
Balance at beginning of year	$	483,865		$	1,429,598
Provision:
Related to current period sales		—			—
Related to prior period sales		(73,303	)		(100,000	)

		(73,303	)		(100,000	)

Returns:
Related to current period sales		—			—
Related to prior period sales		—			(109,787	)

		—			(109,787	)

Balance at end of period	$	410,562		$	1,219,811