Revenue Recognition

3 Months Ended

Sep. 30, 2019

Note

Revenue Recognition

Payments received under commercial arrangements, such as licensing technology rights, may include

non-refundable

fees at the inception of the arrangements, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. At the inception of arrangements that include milestone payments, we use judgment to evaluate whether the milestones are probable of being achieved and we estimate the amount to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will not occur, the estimated amount is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not included in the transaction price until those approvals are received. At the end of each reporting period, we

re-evaluate

the probability of achievement of development milestones and any related constraint and, as necessary, we adjust our estimate of the overall transaction price. Any adjustments are recorded on a cumulative

catch-up

basis, which would affect revenues and earnings in the period of adjustment. To date, we have not recognized any material cumulative

catch-up

adjustments from changes in our estimate of the transaction price.

We develop estimates of the stand-alone selling price for each distinct performance obligation and allocate the overall transaction price to each accounting unit based on a relative stand-alone selling price approach. We develop assumptions that require judgment to determine the stand-alone selling price for license-related performance obligations, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical, regulatory and commercial success. We estimate stand-alone selling price for research and development performance obligations by forecasting the expected costs of satisfying a performance obligation plus an appropriate margin.

In the case of a license that is a distinct performance obligation, we recognize revenue from

non-refundable,

up-front

fees at the point in time when the license is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other obligations, we use judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. If the performance obligation is satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Revenue is recorded proportionally as costs are incurred. We generally use the

cost-to-cost

measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs. Under the

cost-to-cost

measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation (an “input method” under ASC 606). We use judgment to estimate the total cost expected to complete the research and development performance obligations, which include subcontractors’ costs, labor, materials, other direct costs and an allocation of indirect costs. We evaluate these cost estimates and the progress each reporting period and, as necessary, we adjust the measure of progress and related revenue recognition. To date, we have not recognized any material cumulative

catch-up

adjustments from changes in our estimate of the measure of progress.

For arrangements that include sales-based or usage-based royalties, we recognize revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based royalty revenue from license agreements.

We recognized revenue associated with the following license agreements (in thousands):


	Three Months Ended September 30,
	2019		2018
KKC License Agreement	$	797	$	—
Helsinn License Agreement		360		488

	$	1,157	$	488

Revenue for the three months ended September 30, 2019 included revenue related to the KKC License Agreement (Note

). The KKC License Agreement included distinct performance obligations that will be satisfied over time, and accordingly we recognized $0.8 million related to our progress toward satisfying those obligations during the three months ended September 30, 2019.

Revenue for the three months ended September 30, 2019 and 2018 included revenue related to the Helsinn License Agreement (Note

). The Helsinn License Agreement included distinct performance obligations that will be satisfied over time, and accordingly we recognized $0.4 million and $0.5 million related to our progress toward satisfying those obligations during the three months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, we had $6.9 million of deferred revenue associated with our remaining performance obligations under the KKC and Helsinn License Agreements. We expect to recognize approximately $3.7 million of deferred revenue in the next 12 months, and an additional $3.2 million thereafter.

Contract Balances

The following table presents changes in contract assets and contract liabilities during the three months ended September 30, 2019 (in thousands):


	As of June 30, 2019		Net Change			As of September 30, 2019
Receivables	$	—	$	326		$	326
Contract Assets	$	686	$	(217	)	$	469
Contract Liabilities	$	7,774	$	(868	)	$	6,906

The timing of revenue recognition, invoicing and cash collections results in billed accounts receivable and unbilled receivables (contract assets), which are classified as “prepaid expenses and other current assets” on our Condensed Balance Sheet, and deferred revenue (contract liabilities). We invoice our customers in accordance with agreed-upon contractual terms, typically at periodic intervals or upon achievement of contractual milestones. Invoicing may occur subsequent to revenue recognition, resulting in contract assets. We may receive advance payments from our customers before revenue is recognized, resulting in contract liabilities. The contract assets and liabilities reported on the Condensed Balance Sheet relate to the KKC and Helsinn License Agreements.