ARENA PHARMACEUTICALS INC

the services are performed. Product sales are generally billed as completed. Payment terms on invoiced amounts are typically 30 days. Contract assets include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced and for which we do not yet have the right to payment. The current portion of contract asset is included in prepaid expenses and other current assets in the condensed consolidated balance sheet. The non-current portion of contract assets is included in other non-current assets in the condensed consolidated balance sheet. As of January 1, 2018, we recorded a contract asset of $4.1 million, of which $1.4 million is classified as current and $2.7 million is classified as non-current, related to future royalties associated with intellectual property patents previously sold to a customer which do not qualify for the royalty exception in ASC 606. We estimated the amount of the contract asset by applying the expected value method to our estimate of future royalty payments we will receive from this customer. Any future changes to this estimate will be recorded as an adjustment to revenue in the period in which the change in estimate is made.  

The new guidance requires a modified retrospective transition, with the cumulative effect of transition, including initial recognition by lessees of lease assets and liabilities for existing operating leases, as of either: (a) the effective date meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance for the year of implementation, or (b) the beginning of the earliest comparative period presented. We plan to adopt the new lease standard effective January 1, 2019, using the effective date method with the cumulative effect of the change reflected in retained earnings as of January 1, 2019, if any. We plan to elect the package of practical expedients available in the new lease standard, allowing us not to reassess: (a) whether expired or existing contracts contain leases under the new definition of a lease; (b) lease classification for expired or existing leases; and (c) whether previously capitalized initial direct costs would qualify for capitalization under the new lease standard.

We have continued to monitor FASB activity to assess certain interpretative issues and the associated implementation of the new standard. We are in the process of reviewing our lease arrangements, including our property leases and subleases, and are not yet able to estimate the anticipated impact to our consolidated financial statements from the implementation of the new standard as we continue to interpret the principles of the new standard.

The estimated total transaction price was allocated between satisfied and unsatisfied performance obligations based on the relative standalone selling prices of the identified performance obligations. The remaining manufacturing and supply obligations under the Supply Agreement was the only unsatisfied performance obligation. As a result of this allocation, on January 1, 2018, we reduced the balance of deferred revenues associated with the Eisai Agreement at the implementation date by $25.5 million, recognized a contract asset of $6.1 million related to future manufacturing support payments under the Supply Agreement and recognized a contract

asset of $4.1 million related to estimated future royalty payments from intellectual property sold to Eisai under the Transaction Agreement. In connection with the sale of the Manufacturing Operations on March 31, 2018, we derecognized the remaining portion of the contract asset associated with the Supply Agreement. During the third quarter of 2018, we adjusted our estimate of future royalty payments from intellectual property sold to Eisai under the Transaction Agreement based on the positive CVOT study results reported by Eisai and recorded associated royalty revenue of $2.5 million.

Beginning in September 2010, a number of complaints were filed in the US District Court for the Southern District of California, or District Court, against us and certain of our current and former employees and directors on behalf of certain purchasers of our common stock. The complaints were brought as purported stockholder class actions, and, in general, include allegations that we and certain of our current and former employees and directors violated federal securities laws by making materially false and misleading statements regarding our BELVIQ program, thereby artificially inflating the price of our common stock. The plaintiffs sought unspecified monetary damages and other relief. In August 2011, the District Court consolidated the actions and appointed a lead plaintiff and lead counsel. In November 2017, we and the lead plaintiff signed a stipulation and agreement of settlement, or Stipulation, to resolve the consolidated class action. Under the terms of the Stipulation, and in exchange for a release of all claims by class members and a dismissal of the consolidated class action with prejudice, we have agreed that (i) our insurers would pay class members and their attorneys a total of approximately $12.025 million and (ii) Arena would pay class members and their attorneys approximately $11.975 million in either shares of our common stock or cash at our election. Accordingly, in the third quarter of 2017, we recognized $11.975 million of net expense for the portion of the settlement that we agreed to pay in either common stock or cash. On April 12, 2018, the District Court entered its final approval order approving the settlement and the plan of allocation and request for attorneys’ fees and expense. In the second quarter of 2018, we and our insurer made settlement payments in cash to the class members and their attorneys to settle our liability under the Stipulation.

Revenues. We recognized revenues of $9.3 million for the nine months ended September 30, 2018, compared to $6.0 million for the nine months ended September 30, 2017. This increase was primarily due to a $2.5 million non-cash adjustment to our contract asset for an increase in estimated future royalty payments as a result of recent positive CVOT study results reported by Eisai and $2.8 million in upfront fee revenue from our license agreement with Outpost. This increase was partially offset by a decrease of $3.1 million in collaboration revenue from Boehringer Ingelheim and a decrease of $0.6 million in collaboration revenue from Axovant.