Revenue from Contracts with Customers

CCP Co-development and License Agreement

On April 12, 2019, the Company entered into the CCP Agreement with CCP with respect to the development and commercialization of the Company’s lead gene therapy candidate, FCX-007, for the treatment of RDEB.

Under the terms of the CCP Agreement, CCP received an exclusive license to commercialize FCX-007 in the United States. CCP will be responsible for the first $20 million in development costs prior to the initial BLA filing with the FDA and manufacturing costs undertaken prior to commercial launch of FCX-007. If such spending exceeds $20 million, CCP will be responsible for 70% of the excess costs and the Company will be responsible for 30% of the remaining additional expenses. The Company will maintain responsibility for the development (including pre-launch manufacturing) of FCX-007 through initial BLA approval of FCX-007, and CCP will be responsible for all post-approval development and commercialization activities for FCX-007. The parties have agreed to negotiate the terms of a manufacturing and supply agreement that will set forth the terms under which the Company will supply CCP commercial quantities of FCX-007. A joint development committee consisting of representatives from the Company and CCP will oversee the development of FCX-007 pursuant to an agreed-upon development plan and budget.

The Company received an upfront payment of $7.5 million, and will receive an additional $2.5 million for the first patient enrolled in the Phase 3 clinical trial and $30 million upon BLA approval and commercial manufacturing readiness. The Company is also eligible to receive up to $75 million in sales milestones, consisting of $25 million upon the achievement of $250 million in cumulative FCX-007 net sales and an additional $50 million upon the achievement of $750 million in cumulative FCX-007 net sales. In addition, CCP will pay the Company a 30% share of the gross profits from FCX-007 sales.

As part of the Company’s existing exclusive channel collaboration agreement with Intrexon, the Company will pay Intrexon 50% of all upfront, milestone and profit share payments from CCP. Payments to Intrexon do not include funds received by the Company from CCP in connection with the development and manufacturing costs or payments for supply of FCX-007.

Unless earlier terminated, the CCP Agreement will expire on the later of (a) expiration of the last-to-expire valid claim of any FCX-007 patent rights in the United States and (b) forty years from the date of initial BLA approval of FCX-007.

CCP has the right to terminate the CCP Agreement at will upon 180 days’ prior written notice. If CCP elects to terminate the CCP Agreement at will, then, among other things, the license granted to CCP will terminate and all rights will revert in their entirety to the Company. In the event of such a termination, the Company shall upon first commercial sale by the Company, its affiliates or licensees in the territory pay to CCP an amount equal to five percent (5%) of FCX-007 gross profit in respect of sales of FCX-007 in the territory by the Company, its affiliates or licensees in the Initial Indication and any additional indications developed or commercialized by the parties as of the effective date of termination.

CCP may also terminate the CCP Agreement at any time, upon 180 days’ prior written notice to the Company, in the event (i) CCP determines, in its reasonable discretion, that further development or commercialization of FCX-007 is not commercially viable or (ii) CCP determines that development or commercialization of FCX-007 must be terminated because of safety issues outside of CCP’s reasonable control. If CCP elects to terminate the CCP Agreement due to either of the specified reasons set forth in the preceding sentence, then, among other things, the license granted to CCP will terminate and all rights will revert in their entirety to the Company. In the event of such a termination, the Company shall upon first commercial sale by the Company, its affiliates or licensees in the territory pay to CCP an amount equal to five percent (5%) of FCX-007 gross profit in respect of sales of FCX-007 in the territory by the Company, its affiliates or licensees in the initial indication and any additional indications developed or commercialized by the parties as of the effective date of termination. Either party may, subject to specified cure periods, terminate the CCP Agreement in the event of the other party’s uncured material breach, and either party may terminate the CCP Agreement under specified circumstances relating to the other party’s insolvency. The upfront payment and milestone payments are non-refundable; provided, however, that certain disputed payments may be refunded in accordance with the dispute resolutions procedures set forth in the CCP Agreement.

Note 4. Revenue from Contracts with Customers (continued)

The Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, CCP, is a customer. The Company identified the following distinct performance obligations under the contract: (1) an exclusive license to the Company’s know-how and patent rights to manufacture and market FCX-007 (IP); and (2) the provision of development services.

The Company determined that the initial upfront payment of $7.5 million and approximately $21.7 million of development services, totaling approximately $29.2 million, constituted all of the consideration to be included in the initial transaction price and to be allocated to the performance obligations based on their relative stand-alone selling prices. The initial transaction price also includes the $2.5 million milestone which the Company will receive with the first patient’s admission into the Phase 3 clinical trial. This milestone has been fully attributed to the development services, increasing the total transaction price at inception to approximately $31.7 million.

Revenue attributable to the sale of a right to use the exclusive license for IP was recognized at a point in time when the license transferred to CCP. The Company assessed the relative stand-alone selling price of each performance obligation, utilizing a discounted cash flow model for the license and a cost plus margin model for the research and development services, then allocated the transaction price to each performance obligation based upon their relative stand-alone selling prices. The relative stand-alone selling prices were approximately a 72% / 28% split between the license and research and development services, resulting in approximately $21.0 million, being assigned to the license and approximately $8.2 million being assigned to the research and development services. Therefore the $21.0 million assigned to the license was recognized as revenue in both the three and six months ended June 30, 2019. A contract asset of $13.5 million has been recorded for the excess of revenue recognized over the $7.5 million upfront payment received.

The remaining revenue of $10.7 million related to the development activities will be recognized over time as those services are delivered based on the cost-to-cost input method. The Company believes the cost-to-cost method provides the most faithful depiction of value transferred to the customer. At June 30, 2019, $9.9 million of this revenue remains unrecognized and is expected be recognized through the first half of 2021 as follows (in millions).



Time Period	Amount
Remainder of 2019	4.7
2020	4.3
2021	0.9
Total	9.9

The $30 million milestone for BLA approval has been excluded from the initial transaction price, as the Company could not conclude that it was probable a significant reversal of cumulative revenue would not occur. Event driven milestones are a form of variable consideration as the payments are variable based on the occurrence of future events. As part of its estimation of the amount, the Company considered numerous factors, including that the receipt of the milestones is outside of its control and contingent upon success in future clinical trials and the licensee’s efforts.

Milestones based on sales levels, will be treated as sales/use based royalties related to the license and will therefore, be earned as the sales thresholds are met and are not considered part of the transaction price..

Note 4. Revenue from Contracts with Customers (continued)

Disaggregation of Revenue

The following table presents revenue (in thousands) for the three and six-month periods ended June 30, 2019 disaggregated by revenue type.




	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Revenue Type
License revenue	$	20,979	$	20,979
Collaboration revenue		813		813
	$	21,792	$	21,792

Contract Balances

Contract assets primarily relate to our rights to consideration for the license delivered but not billed at the reporting date. The contract assets are transferred to the receivables when the rights become unconditional. At June 30, 2019 the Company had $12.7 million in contract assets, with $8.4 million classified in current assets and $4.3 classified in long-term assets. The Company had no asset impairment charges related to contract assets in the period. The following table provides information about contract assets from contracts with customers (in thousands):



Year ended December 31, 2018	Balance at beginning of period		Additions		Deductions			Balance at June 30, 2019
Contract assets:
Unbilled receivables from collaboration partners	$	—	$	13,479	$	(761	)	$	12,718

During the three and six-month periods ended June 30, 2019, the Company did not recognize any revenue from amounts included in the contract asset balances from performance obligations satisfied in previous periods. The Company has no costs to obtain or fulfill contracts that would qualify for capitalization.