Collaborative Arrangements and Revenue Recognition

Healios Collaboration

In 2016, we entered into a license agreement (the “First License Agreement”) with Healios to develop and commercialize MultiStem cell therapy for ischemic stroke in Japan and to provide Healios with access to our proprietary MAPC technology for use in Healios' organ bud program, initially for transplantation to treat liver disease or dysfunction. Under the terms of the First License Agreement, Healios also obtained a right to expand the scope of the collaboration to include the exclusive rights to develop and commercialize MultiStem for the treatment of two additional indications in Japan, which at that time included acute respiratory distress syndrome (“ARDS”) and another indication in the orthopedic area, and all indications for the organ bud program. In accordance with the First License Agreement, in addition to potential royalties and milestones, we received a nonrefundable up-front cash payment of $15 million, and if expanded at Healios’ election, Healios would pay an additional $10 million cash payment. Healios exercised its option to expand the collaboration in June 2018, as described below.

Under the collaboration, Healios is responsible for the development and commercialization of the MultiStem product in the licensed territories, and we provide manufacturing services to Healios, currently comprising the supply of product for its clinical trials and the transfer of technology to a contract manufacturer in Japan to produce product for Healios. We receive payments for these products and services provided to Healios.

In 2017, we signed a clinical trial supply agreement for delivering the planned manufacturing services for Healios’ clinical trial in Japan treating ischemic stroke patients. The clinical trial supply agreement was amended later that year to clarify the operational elements, terms and cost-sharing arrangement associated with our supply of clinical material and certain adjustments to potential milestone payments related to the clinical product supply for Healios’ TREASURE study in Japan. Healios’ cost-share payments may be creditable against milestone payments that may become due under the First License Agreement and a sales milestone would be increased, or such payments may be repaid by us at our election. Services to Healios under the clinical trial supply agreement are ongoing.

Also, in 2017, we entered into a technology transfer services agreement with Healios, in which Healios provides financial support to establish a contract manufacturer in Japan to produce product for Healios. At that time, we also amended the First License Agreement to confer to Healios a limited license to manufacture MultiStem if we are acquired by a third-party. Services to Healios under the technology transfer services agreement are ongoing.

In March 2018, we entered into a letter of intent (“LOI”), with Healios outlining the terms for a potential expansion of the relationship with Healios beyond that contemplated by the First License Agreement, to include, among other things, the exercise of its option to license the ARDS field in Japan and the organ bud program on a global basis, a worldwide exclusive license for use of MultiStem product to treat certain ophthalmological indications, and an exclusive option to a license to develop and commercialize certain MultiStem treatments in China. In connection with the LOI, in March 2018, Healios purchased 12,000,000 shares of our common stock and the Healios Warrant for $21.1 million, or approximately $1.76 per share.

In June 2018, Healios exercised its option to expand the collaboration to include ARDS and expand organ bud as contemplated by the First License Agreement, and entered into the Collaboration Expansion Agreement (“CEA”) that included new license agreements and rights that further broadened the collaboration. Under the CEA, Healios (i) expanded its First License Agreement to include ARDS in Japan, expanded the organ bud license to include all transplantation indications, and terminated Healios’ right to include a designated orthopedic indication per the First License Agreement; (ii) obtained a worldwide exclusive license, or the Ophthalmology License Agreement, for use of MultiStem product to treat certain ophthalmological indications; (iii) obtained an exclusive license in Japan (the "Combination Product License Agreement”), for use of the MultiStem product to treat diseases of the liver, kidney, pancreas and intestinal tissue through local administration of MultiStem in combination with iPSC-derived cells; (iv) obtained an exclusive, time-limited right of first negotiation (“ROFN Period”) to enter into an option for a license to develop and commercialize certain MultiStem treatments in China, which has since expired; and (v) an option for an additional non-therapeutic technology license. which has also expired. For all indications, Healios is responsible for the costs of clinical development in its licensed territories, and we provide manufacturing services to Healios.

For the rights granted to Healios under the CEA, Healios paid us a nonrefundable, up-front cash payment of $10.0 million to exercise its option to license ARDS and expand its license for organ bud, as contemplated by the First License Agreement, and paid an additional $10.0 million for the new license rights, which has been paid in full in four quarterly installment payments of $2.5 million. The payments were received in the second, third and fourth quarters of 2018 with the final payment received in the first quarter of 2019. Healios may elect to credit up to $10.0 million against milestone payments that may become due under the First License Agreement, as expanded to include ARDS, with limitations on amounts that may be credited to earlier milestone payments versus later milestone payments.

For each of the ischemic stroke indication and the ARDS indication, we may receive success-based regulatory filing and approval and sales milestones aggregating up to $225 million in aggregate for each indication, subject to potential milestone credits. Milestone payments are non-refundable and non-creditable towards future royalties or any other payment due from Healios. We may also receive tiered royalties on net product sales, starting in the low double digits and increasing incrementally into the high teens depending on net sales levels.

For standalone products sold by Healios under the Ophthalmology License Agreement, we are entitled to receive success-based regulatory filing and approval and sales milestones aggregating up to $135.6 million and tiered royalties on net product sales in the single digits depending on net sales levels. For the combination products under the Ophthalmology License Agreement, we will be entitled to receive a low single-digit royalty, but no milestone payments. Under the Combination Product License Agreement, we are entitled to receive a low single-digit royalty on net sales of the combination product treatments, but no milestone payments. For the organ bud product, we are entitled to receive a fractional royalty percentage on net sales of the organ bud products; and we have a time-limited right of first negotiation for commercialization of an organ bud product in North America.

Under the CEA, the ROFN Period with respect to the option for a license in China was extended to June 30, 2019 in exchange for a $2.0 million payment from Healios that we received in December 2018. The extension payment will be applied as a credit against any potential milestone payments under the current licenses, subject to certain limitations. The ROFN Period expired on June 30, 2019.

In connection with the entry into the CEA, we amended the terms of the Healios Warrant as addressed in Note F.

Healios Revenue Recognition

At the inception of the Healios arrangement and again each time that the arrangement has been modified, all material performance obligations were identified, which include (i) licenses to our technology, (ii) product supply services, and (iii) services to transfer technology to a contract manufacturer on Healios’ behalf. It was determined that these performance obligations were both capable of being distinct and distinct within the context of the contract. We develop assumptions that require judgment to determine the standalone selling price in order to account for our collaborative agreements, as these assumptions typically include probabilities of obtaining marketing approval for the product candidates, estimated timing of commercialization, estimated future cash flows from potential product sales of our product candidates, estimating the cost and markup of providing product supply and technical services, and appropriate discount rates.

In order to determine the transaction price, in addition to the fixed payments, we estimate the amount of variable consideration utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract, and the estimates for variable consideration are reassessed each reporting period. We constrain, or reduce, the estimates of variable consideration if it is probable that a significant reversal of previously recognized revenue could occur throughout the life of the contract, and both the likelihood and magnitude of a potential reversal of revenue are taken into consideration.

The pricing for certain product supply provided to Healios is driven off the underlying cost per dose over the entire life of the agreement and is subject to variability as those costs change. During our evaluation of variable consideration in the third and fourth quarters of 2019, we revised our estimated transaction price due to changes in the underlying cost per dose of the product supply occurring during the respective quarter. We estimate the cost per dose for the life of the contract taking into consideration historical experience of our contract manufacturers and anticipated changes to production yields and other factors. During the third quarter of 2019, the price per dose from our contract manufacturers decreased for the first time under this arrangement. As such, we reduced the expected transaction price to the current estimated value and applied the reduction to the undelivered elements of the overall arrangement at the time this product supply performance obligation originated. Furthermore, unrelated to the cost per dose changes, the number of doses of clinical product requested by Healios was amended in the third quarter of 2019, and our revenues were further reduced during the period. Similarly, during the third and fourth quarters of 2019, certain services related to technology transfer activities were determined to be constrained since the activity may no longer be required under the arrangement.

At inception and upon each modification date, once the estimated transaction price is established, amounts are allocated to each separate performance obligation on a relative standalone selling price basis. These performance obligations include any remaining, undelivered elements at the time of modifications and any new elements from a modification to the arrangement if the conditions are not met for being treated as a separate agreement. Following the June 2018 modification, the specific performance obligations that had been delivered included the licenses, and the performance obligations that were not yet fully delivered included clinical product manufacturing services and technology transfer services that we provide to a contract manufacturer in Japan. In the third quarter of 2018, an additional modification was executed to add clinical product manufacturing services for Healios’ planned ARDS study, which resulted in a new performance obligation, creating a modification to the arrangement and remeasurement of the transaction and standalone selling prices for the undelivered elements on the modification date.

For performance obligations satisfied over time, we apply an appropriate method of measuring progress each reporting period and, if necessary, adjust the estimates of performance and the related revenue recognition. Our technology transfer services are satisfied over time, and we recognize revenue in proportion to the contractual services provided. For performance obligations satisfied at a point in time (i.e., product supply), we recognize revenue upon delivery.

The remaining transaction price for the performance obligations that were not yet delivered is not significant at December 31, 2019. At December 31, 2019, the contract liability included in Deferred Revenue - Healios on the consolidated balance sheets, is properly classified as a current liability since the rights to consideration are expected to be satisfied, in all material respects, within one year.

We included as a reduction of the transaction price of the licenses granted in the June 2018 expansion, the value of a portion of the Healios Warrant that was issued in March 2018 in connection with the then-proposed expansion under a letter of intent. Under the agreements in the June 2018 expansion that included an amendment to the Healios Warrant, 4,000,000 shares (“Warrant Shares”) became exercisable, and as a result, $1.1 million of the $5.3 million initial warrant valuation was recorded in June 2018 as a reduction of revenue. In accordance with the June 2018 amendment to the Healios Warrant, the remaining 16,000,000 shares would not be exercisable until the execution of an option for a license in China, and the remaining $4.2 million of the Healios Warrant was reversed against additional paid-in-capital. See Note F.

Also, see Note B regarding our revenue recognition policies.

Advance from Healios

In 2017, we amended the clinical trial supply agreement for the manufacturing of investigational product for Healios for its Japan stroke clinical study to clarify a cost-sharing arrangement. The proceeds from Healios that relate specifically to the cost-sharing arrangement may either (i) result in a reduction in the proceeds we receive from Healios upon the achievement of two potential milestones and an increase to a commercial milestone under the First License Agreement for stroke or (ii) be repaid to Healios at our election, as defined. The cost-sharing proceeds received are recognized on the balance sheet as a non-current advance from customer until the related milestone is achieved, unless such amounts are repaid to Healios at our election, at which time, the culmination of the earnings process will be complete and revenue will be recognized.

Disaggregation of Revenues

We recognize license-related amounts, including upfront payments, exclusivity fees, additional disease indication fees, and development, regulatory and sales-based milestones, at a point in time when earned. Similarly, product supply revenue is recognized at a point in time, while service revenue is recognized when earned over time. The following table presents our contract revenues disaggregated by timing of revenue recognition and excludes royalty revenue (in thousands):



	Twelve months ended December 31, 2019				Twelve months ended December 31, 2018
	Point in Time		Over Time		Point in Time		Over Time
Contract revenue from Healios:
License fee revenue	$	1,624	$	—	$	17,682	$	—
Product supply revenue	2,167		—		1,445		—
Service revenue	—		1,726		—		3,149
Other contract revenue	—		—		251		—
Total disaggregated revenues	$	3,791	$	1,726	$	19,378	$	3,149