8.	Collaboration Agreement

Astellas

In November 2014, the Company entered into the Collaborative Research, Development, Commercialization and License Agreement (the “Astellas Agreement”) with Astellas Pharma Inc. (“Astellas”). The focus of the Astellas Agreement is to identify, develop and commercialize therapeutic candidates relating to the Unfolded Protein Response (“UPR”) pathway.

Financial Terms

Under terms of the Astellas Agreement, Astellas purchased from the Company convertible promissory notes totaling $5.0 million with terms consistent with those of other investors that purchased convertible promissory notes issued during 2014. In addition, the Company will be eligible to receive research funding support, based on the establishment of an annual research budget, and future research, development and sales milestone payments of up to $398.5 million, as well as tiered royalty payments ranging in the mid-single-digit to low double-digit percentages of net sales, as defined in the agreement. Under the agreement, the companies will conduct research during the initial research term, which is approximately 3½ years, to identify lead compounds for clinical development. The Company will provide Astellas with a report of the actual expenses incurred within 30 days after the end of the quarter, which Astellas will provide payment to the Company within 30 days of receiving of the report. At the end of the research term, Astellas, in its sole discretion, may designate a development compound and make a milestone payment to the Company. The Company has the right, but not the obligation, to co-develop the compound. If the Company does not exercise its option to co-develop the compound, Astellas will have an exclusive right to the compound and sole right and responsibility for the development of the compound.

Term and Termination

The term of the Astellas Agreement commenced in November 2014 and will continue in full force and effect, unless terminated under the conditions described below, until expiration of all applicable royalty terms with respect to all licensed products in all countries in the territory defined as per the agreement.

The agreement was set to automatically terminate at the end of the 3 ½-year research term, in the second quarter of 2018, if Astellas had not designated at least one development compound, unless mutually agreed to be extended. In April 2018, the Company and Astellas entered into Amendment No. 6 (“Amendment No. 6”) to the Astellas Agreement. Amendment No. 6 is effective beginning in April 2018 and extends the research term for the initial project under the Astellas Agreement to December 2018. As of September 30, 2018, all of the Company’s performance obligations under the contract have been satisfied. Astellas has the unilateral right to terminate the agreement on a project-by-project basis by providing written notice to the Company. Reciprocal termination rights under the agreement include termination for breach and termination for bankruptcy.

Accounting Analysis

The Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Astellas, is a customer. The Company identified the following material promises as of the most recent amendment in April 2018: (1) the research license; (2) the research services to be provided over the research term; and (3) participation in the Joint Research Committee (the “Committee”) to be provided over the research term of the agreement. The Company determined that the license and research services were not distinct from one another, as the license has limited value without the performance of the research and development activities. Participation in the Committee to oversee the research activities was determined to be quantitatively and qualitatively immaterial and therefore is excluded from performance obligations. As such, the Company determined that these promises should be combined into a single performance obligation.

The Company evaluated the Astellas option right to designate a development compound, as described above, to determine whether it provides Astellas with a material right. The Company concluded that the option was not issued at a significant and incremental discount and Astellas has only the right to pursue negotiations for additional projects, and therefore does not provide a material right. As such, they are excluded from performance obligations at the inception of the arrangement.

Under the Astellas Agreement, in order to evaluate the appropriate transaction price as of the adoption of ASC 606, the Company determined that the payments received to date for research funding support and reimbursement of third-party costs, the estimated payments that will be received for research funding support and reimbursement of third-party costs over the remaining research term, and the milestone payments received to date represent the transaction price, which was allocated to the single performance obligation. The transaction price as of the adoption of ASC 606 and September 30, 2018 was $13.7 million. The option exercise fee that may be received is excluded from the transaction price until the customer option is exercised. Future potential milestone payments were excluded from the transaction price, as all milestone amounts were fully constrained due to Astellas having only the right to pursue negotiations for additional projects. The Company will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust its estimate of the transaction price.

Revenue associated with the performance obligation is being recognized as the research and development services were provided using an input method, according to the costs incurred as related to the research and development activities and the costs expected to be incurred in the future to satisfy the performance obligation. The transfer of control occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance obligation. Any amounts received that had not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed balance sheet. As of September 30, 2018, the research and development services related to this performance obligation are complete.

The Company recognized revenue of $1.1 million and $1.6 million for the three months ended September 30, 2018 and 2017, respectively, and $2.8 million and $3.7 million for the nine months ended September 30, 2018 and 2017, respectively. There was $0.1 million recorded as a contract asset under the Astellas Agreement as of September 30, 2018. Amounts recorded as deferred revenue under the Astellas Agreement totaled $1.1 million as of December 31, 2017.