6. Collaboration, Development and License Agreements

GlaxoSmithKline plc Collaboration and Option Agreement

In 2017, the Company entered into a collaborative research and development agreement with GlaxoSmithKline plc (“GSK”). In accordance with the agreement, the Company received an upfront fee and is due annual fees and amounts for development work to be performed as specifically outlined under the agreement. The work to be performed was delineated into three specific research projects. In assessing the appropriate revenue recognition related to a collaboration agreement, the Company determined that the arrangement was under ASC 605. As such, the Company determined whether the arrangement included multiple elements, such as the delivery of intellectual property rights and research and development services. Under ASC 605, the recognition of revenue was based on the terms of the contract and recognized under the proportional performance method derived from the completion of certain stages as defined within the contract.

For the year ended December 31, 2018, approximately $1.2 million was recorded as collaboration revenue related to the Company’s agreement with GSK. In December 2018, at a meeting of the joint steering committee it was agreed by both parties to terminate the collaboration agreement and the Company had no further commitments under the arrangement. As a result of the termination of the collaboration agreement, the Company recognized all previously deferred revenue and an additional $440,000 for additional work performed during the term of the agreement. No revenue related to this agreement was recognized in 2019.

Cystic Fibrosis Foundation Development Agreement

In December 2016, the Company received an award from the Cystic Fibrosis Foundation (“CFF”), or the Development Program Letter Agreement (the “CFF Agreement”), for approximately $2.9 million.Under the CFF Agreement, CFF made an upfront payment of $200,000 and will make milestone payments to the Company as certain milestones defined in the agreement are met. The milestones relate to pre-clinical and clinical research activities. The agreement also specifies that we are obligated to cumulatively spend on the development program at least an equal amount as it receives from the non-profit organization. In the event that we do not spend as much as we received under the agreement, we are obligated to return any overage to the non-profit organization. In November 2018, the CF Foundation increased the award to approximately $7.5 million.

The Company determined that the CFF Agreement is within the scope of ASC 606 and that the clinical research activities are considered one performance obligation. Hence, the entire estimated transaction price is allocated to this combined performance obligation and is recognized as revenue by measuring progress using the input (cost-to-cost) method, limited by the variable consideration attributed to the probable completion of certain milestones as defined in the CFF Agreement. The remaining milestones at December 31, 2019 of approximately $ 4.8 million related to clinical research activities are constrained and evaluated at every reporting period.

For the years ended December 31, 2019 and 2018, all grant revenue totaling approximately $1.0 million and $1.6 million, respectively, was derived from the CFF Agreement.

Serum License Agreement

In July 2019, the Company and Serum International B.V. (“SIBV”), an affiliate of Serum Institute of India Private Limited, entered into an option agreement which granted SIBV the option to license multiple programs from the Company and access the Company’s MabIgX® platform technology for asset identification and selection. The Company received an upfront cash payment of $5 million upon execution of this option agreement. In connection with the option agreement, SIBV made an equity investment whereby the Company issued 801,820 shares of its restricted common stock in a private placement to SIBV for total gross proceeds of $10 million. As a result of this transaction, SIBV and its affiliates, are considered related parties to the Company.

In September 2019, the Company and Serum AMR Products (“SAMR”), a party under common ownership of SIBV, entered into a License, Development and Commercialization Agreement (the “License Agreement”). Pursuant to the License Agreement, the Company granted to SAMR exclusive licenses, and rights to sublicense, certain patent rights and technology related know-how to the Company’s products AR-301, AR-105, AR-101 (i.e. exclusive rights to, among other things, develop, distribute, market, promote, sell, import and otherwise commercialize) in (a) the country of India, and (b) all other countries of the world except the USA, Canada, EU Territory, UK, China, Australia, South Korea, Brazil, New Zealand, and Japan (products AR-105 and AR-101 countries do not exclude South Korea and Brazil) (the “Limited Territory”); and AR-201 (i.e. exclusive rights to, among other things, develop, manufacture, make, distribute, market, promote, sell, import and otherwise commercialize) in all countries of the world except China, Hong Kong, Macau and Taiwan (the “Worldwide Territory”) (the “licenses and know-how”). Further, the License Agreement grants SAMR an option for the Company to provide research services using its MabIgX® platform technology for the identification of up to five (5) candidates including product development of these identified candidates and an exclusive license to develop, manufacture, make, distribute, market, promote, sell, import and otherwise commercialize these development products in the Worldwide Territory (the “research and development option”).

Pursuant to the License Agreement, the Company will provide development support related to the licensed products above in order to assist SAMR in its efforts to develop, receive regulatory approval, and manufacture and sell the licensed products in SAMR’s authorized territories which will be performed under the direction of a Joint Steering Committee (“JSC”) which the Company will participate in (collectively “development support services”).

In addition, under the License Agreement, SAMR was granted an exclusive manufacturing license option as the initial license granted above for AR-301, AR-105 and AR-101 does not allow for manufacturing. This manufacturing option provides incremental rights related to these products beyond what is granted as part of the licensing discussed above (the “manufacturing rights option”). If this option is exercised, after SAMR has met certain requirements to exercise the option as defined in the License Agreement, it would provide for an exclusive license for use by SAMR to manufacture and supply the products for SAMR’s own use in the Limited Territory and to manufacture and supply these products to the Company, or their affiliates, for the Company’s use outside the Limited Territory. Should SAMR exercise the development and research option or the manufacturing rights option discussed above, SAMR and the Company shall negotiate in good faith the economic terms around these arrangements. If a third party sublicensee of AR-301, AR-105 and AR-101 wishes to manufacture these products by itself for the territory for which it has a license from the Company, then the Company shall have the right to buy back the manufacturing rights for all territories outside of the Limited Territory by paying to SAMR $5 million.

Under the License Agreement, the Company received upfront payments totaling $15 million, of which $5 million was received in July 2019 through the option agreement referred to above. The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of specified milestones related to completion of certain trials and regulatory approvals as defined in the License Agreement. Further, the Company may receive additional royalty-based payments from SAMR if certain sales levels on licensed products are achieved as defined in the License Agreement.

Given the equity investment by SIBV was negotiated in conjunction with the option agreement, which resulted in the execution of the License Agreement, all arrangements were evaluated as a single agreement and amounts were allocated to the elements of the arrangement based on their fair value. See Note 9. The Company allocated the proceeds received from the sale of the restricted common stock and upfront payment from the License Agreement, net of issuance and contract costs, of approximately $22.5 million accordingly:

the Company recorded approximately $5.0 million, which represented the fair value of the restricted common stock issued of $5.4 million, net of $441,000 of issuance costs, to stockholders’ equity within the Company’s consolidated balance sheet as of December 31, 2019;

the Company recorded approximately $19.6 million to deferred revenue based on the $15 million from upfront payments under the License Agreement and approximately $4.6 million from the equity allocation; and

the Company capitalized approximately $2.1 million to contract costs, which consists of approximately $376,000 issuance costs from the equity allocation and approximately $1.7 million in other direct costs to obtain the License Agreement.

The License Agreement is determined to be within the scope of ASC 606, as the transaction represents a contract with a customer where the participants function in a customer/vendor relationship and are not exposed equally to the risks and rewards of the activities contemplated under the License Agreement. Using the concepts of ASC 606, the Company identified the following performance obligations under the License Agreement: 1) the transfer of licenses of the intellectual property for AR-301, AR-101, AR-105 and AR-201, inclusive of the related technology know-how conveyance (referred to as the license and know-how above); and 2) the Company to deliver ongoing development support services related to the licensed products and the Company’s participation in the JSC (referred to as the development support services above); and identified the following material promises under the License Agreement: 3) SAMR was granted a research and development option of up to five identified product candidates for the Company to perform including specific development services (the research and development option referred to above); and 4) SAMR was granted an exclusive manufacturing license option which would provide for incremental manufacturing rights related to AR-301, AR-105 and AR-101 beyond what is granted in the License Agreement (the manufacturing rights option referred to above). The Company concluded that the performance obligations and material promises identified are separate and distinct from each other.

The ongoing development support services promised will not significantly change the intellectual property underlying the licenses. Further, the Company believes that SAMR can benefit from the license and know-how either on its own or together with other resources that are readily available, has the ability to sublicense these licensed products and these licenses are separately identifiable from the other promises in the License Agreement.

The development support services, the research and development option, and the manufacturing rights option are not integrated or dependent upon each other and are provided by the Company separately from each other. The Company determined that the intellectual property licensed under the License Agreement represents functional intellectual property and it has significant standalone functionality and therefore should be recognized at a point in time as opposed to over time.

The on-going development support services are to be transferred ratably over the period that the Company expects to assist SAMR in its efforts around the licensed products in SAMR’s authorized territories. These development support services will begin with the formation and first formal meeting of the JSC.

To allocate the transaction price among the performance obligations and the material promises, the Company estimated the standalone selling prices (“SSP”) for each. For the licenses and knowhow related to AR-301, AR-105, AR-101 and the manufacturing rights option, the SSP was estimated using the income approach based on assumptions regarding SAMR’s future revenues from the licensed intellectual property, projected costs of research and development, manufacturing and commercialization expenses, as well as the discount rate, the development timeline, and probabilities of technical and regulatory success. To estimate the SSP of AR-201, due to this product is in a pre-clinical stage, development support services, and the research and development option, the Company used a cost-plus margin approach which included the actual costs the Company has incurred for the product technology through the date of the License Agreement and estimating the costs the Company expects to incur and applying a margin, if necessary. The Company believes that a change in the assumptions used to determine its best estimate of SSP for the performance obligations and material promises would not have a significant effect on the allocation of consideration received to the performance obligations and material promises.

Under ASC 606 an option to acquire additional goods or services gives rise to a material promise if the option provides a material right to the customer. The research and development option allows SAMR to receive additional services from the Company, for cost reimbursement. In addition to the cost reimbursement, the Company could potentially receive milestone and royalty payments depending on the ultimate success of the research and development activities. Furthermore, a portion of the upfront fee incentivizes SAMR to exercise the options. The manufacturing rights option grants an additional license to SAMR for no additional consideration after it has met the requirements to exercise the option. The Company considers this license valuable and would expect to be compensated accordingly in a standalone transaction. Furthermore, the Company’s valuation of these options indicate they had significant value on the agreement date. The Company determined that the above described research and development option and manufacturing rights options do constitute material rights to the customer.

The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of specified milestones related to the completion of certain trials and regulatory approvals as defined in the License Agreement. Further, SAMR will pay the Company royalty payments ranging between 4% to 6% on net sales of licensed products, except for AR-301, AR-105 and AR-101 products in the EU, should such be authorized at a later date, which would require payment of 20% royalties on the net sales of those products, as defined in the License Agreement. The Company concluded that these milestones and royalty payments each contain a significant uncertainty associated with a future event. As such, these milestone and royalty payments are constrained at contract inception and are not included in the transaction price as the Company could not conclude that it is probable a significant reversal in the amount of cumulative revenue recognized will not occur surrounding these payments. At the end of each reporting period, the Company will update its assessment of whether the milestone and royalty payments are constrained by considering both the likelihood and magnitude of the potential revenue reversal. At December 31, 2019, the Company performed an assessment and determined that these milestone and royalty payments are constrained.

The Company determined that the transaction price under the License Agreement was $19.6 million, consisting of the $15 million from upfront payments under the License Agreement and approximately $4.6 million from the equity allocation as noted above, which was allocated among the performance obligations and material promises based on their respective related SSP. The Company allocated the $19.6 million transaction price to the following: approximately $14.5 million to the licenses and know-how; approximately $79,000 to the development support services; approximately $892,000 to the research and development option; and approximately $4.1 million to the manufacturing rights option.

The Company determined that no performance obligations or material promises were satisfied as of December 31, 2019, and therefore, no revenue related to the License Agreement was recognized for the year ended December 31, 2019. The Company has recorded contract liabilities resulting from the License Agreement of approximately $14.6 million to deferred revenue, current, and approximately $5.0 million to deferred revenue, noncurrent, on its consolidated balance sheet at December 31, 2019. The Company capitalized a contract asset resulting from the License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License Agreement on its consolidated balance sheet, of which approximately $1.5 million is classified as current, and approximately $526,000 is classified as noncurrent, as of December 31, 2019.