7. Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the years ended December 31, 2021 and 2020 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (in thousands):

For additional detail on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant Accounting Policies - Revenue from Contracts with Customers.”

Product Sales

The Company’s commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. Zalviso was sold in Europe by Grünenthal through May 12, 2021. DZUVEO sales in Europe by the Company’s collaboration partner, Aguettant, have not commenced as of December 31, 2021.

Contract and Other Collaboration

Contract and other collaboration revenue includes revenue under the Grünenthal Agreements related to research and development services, non-cash royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso in Europe and license revenue recognized under the DZUVEO Agreement.

The Company concluded that Aguettant is a customer and therefore revenue recognition for the DZUVEO Agreement in Europe should be accounted for in accordance with FASB Accounting Standards Codification, or ASC, Topic 606, “Revenue from Contracts with Customers”, because the Company granted to Aguettant licenses and will provide the supply of product, as defined below, all of which are outputs of the Company’s ongoing activities, in exchange for consideration.

The Company identified the following promises under the DZUVEO Agreement at inception, namely: (a) granting of the licenses, (b) manufacturing services inclusive of quality control testing and stability testing which are options in the initial arrangement, and (c) a material right associated with the discounted price for future optional orders of DZUVEO commercial product supply.

The licenses are considered to be functional intellectual property. The Company determined that the licenses are capable of being distinct because Aguettant can benefit from the license on its own by commercializing the underlying product using its own resources. The Company manufacturing services are not highly specialized in nature and can be performed by third party contract manufacturing organizations. There are no binding commitments for manufacturing purchase orders at inception of the arrangement. Therefore, the manufacturing services are considered to be an option and not a performance obligation in the initial arrangement. However, the Company has determined that the discounted price per unit on future optional product orders constitutes a material right and is a performance obligation. The right to purchase at a discount is capable of being used by the customer on a standalone basis, because this relates to future product purchases and occur after the licenses’ performance obligations are transferred.

The Company evaluated if there is an interdependence between the performance obligations and determined that the licenses are a combined solution and the predominant performance obligation. The material right is separately identifiable in the context of the contract and is not modified by, and does not modify, the license performance obligation and is not highly interdependent or interrelated with the material right performance obligations in the contract.

The transaction price at the inception of the DZUVEO Agreement consisted of the upfront fee of €2.5 million, or approximately $2.9 million. The variable consideration related to product supply and reimbursables has been constrained as of December 31, 2021 as there has been no forecast provided by Aguettant. The Company will re-evaluate the transaction price each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The Company determined that the $52.2 million sales-based milestone payments and revenue share payments were probable of significant revenue reversal, as their achievement was highly dependent on factors outside the Company’s control. As a result, these payments were fully constrained and were not included in the transaction price. Any variable consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur, as they were determined to relate predominantly to the licenses granted to Aguettant and the optional manufacturing services provided by the Company.

The transaction price is allocated to the performance obligations based on relative standalone selling price which were determined for the licenses using the adjusted market approach, and for the manufacturing services and the material right associated with discounted DZUVEO product supply using the cost-plus reasonable margin approach. Variable consideration is allocated to the specific performance obligations to which it relates.

For revenue recognition purposes, the Company determined that the duration of the contract began on the effective date in July 2021 and ends after an initial term of 10 marketing years, unless it automatically renews for a successive five marketing years. The Company also analyzed the impact if Aguettant terminated the agreement prior to the end of the term and determined, considering both quantitative and qualitative factors, that there were substantive non-monetary penalties to Aguettant for doing so.

Revenue for the granting of the licenses was recognized on the effective date of the DZUVEO Agreement at the point in time that the licenses are effective. The manufacturing services inclusive of quality control testing and stability testing will be recognized at a point in time when, or as, the Company transfers the associated promised goods and services to Aguettant. The material right for the discounted price per unit on future optional orders will be recognized over time with the measure of progress being straight-line over the period in which the Company stands ready to provide the discounted price per unit on the manufacturing services.

For the year ended December 31, 2021, the Company recorded $1.7 million in contract and other collaboration revenue as a result of satisfying its licenses performance obligation by transferring the license rights to Aguettant.

Contract Liabilities

A contract liability of $1.2 million was recorded on the Consolidated Balance Sheets as deferred revenue as of December 31, 2021, $0.1 million of which represented the current portion, for the portion of the upfront fee received under the DZUVEO Agreement allocated to the material right for discounted price on future optional product supply which has not yet been satisfied. The material right contract liability will be recognized over the period the discount on future product supply is made available. There was no contract asset as of December 31, 2021 associated with the DZUVEO Agreement.

As of December 31, 2021, deferred contract acquisition costs were negligible and deferred contract acquisition costs amortized during the year ended December 31, 2021 were $0.3 million.

The following table presents changes in the Company’s contract liability for the years ended December 31, 2021 and 2020 (in thousands):

⁽¹⁾ In May 2020, upon notification of early termination by Grünenthal, the Company recognized approximately $2.6 million of deferred revenue under the Grünenthal Agreements.

⁽²⁾ Deferred revenue under the DZUVEO Agreement with Aguettant.