Collaborations

9 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

6. Collaborations

On April 15, 2019 (“Effective Date”), the Company entered into a Development and Commercialization Agreement (the “Cipla Agreement”) with Cipla Technologies, LLC. for the worldwide development and commercialization of Pulmazole (the “Product”), an inhaled formulation of the anti-fungal drug itraconazole, developed using iSPERSE technology designed to treat allergic bronchopulmonary aspergillosis (“ABPA”) in patients with asthma.

Pursuant to the Cipla Agreement, the Company is responsible for the development of the Product in accordance with the development plan, which includes completion of the Phase 2 ABPA study, as well as any additional Phase 2/2b and/or Phase 3 clinical studies that may be required for regulatory approval. In addition, the Company will be responsible for submission of investigational new drug (“IND”) applications, annual reports and other regulatory filings to the extent required to conduct the development activities, including any clinical studies. Subsequent to regulatory approval of the Product for marketing in the U.S. or in any other country, Cipla will be responsible for the implementation of the commercialization plan, including all activities, arrangements and other matters related to commercialization.

The Company received a

non-refundable

upfront payment of $22,000 under the Cipla Agreement (the “Upfront Payment”). Upon receipt of the Upfront Payment, the Company irrevocably assigned to Cipla the following assets, solely to the extent that each covers the Product in connection with any treatment, prevention, and/or diagnosis of diseases of the pulmonary system (“Pulmonary Indications”): all existing and future technologies, current and future drug master files, dossiers, third-party contracts, regulatory filings, regulatory materials and regulatory approvals, patents, and intellectual property rights, as well as any other associated rights and assets directly related to the Product, specifically in relation to Pulmonary Indications (collectively, the “Assigned Assets”), excluding most specifically the Company’s iSPERSE technology. A portion of the Upfront Payment was deposited by the Company into a bank account, along with an equal amount from the Company, and will be dedicated to the development of the Product (the “Initial Development Funding”). After the Initial Development Funding is depleted, the Company and Cipla will each be responsible for 50% of the development costs actually incurred (the

“Co-Development

Phase”).

The Company and Cipla have established a joint steering committee (the “JSC”). The JSC will, among other powers and responsibilities, direct the further development and commercialization activities, including all budgetary activities in relation to the Product. The JSC will oversee the performance of the Company and Cipla under the Cipla Agreement and will provide a forum for sharing advice, progress and results relating to such activities. The JSC is also responsible for reviewing and approving the development plan developed by the Company, and the commercialization plan developed by Cipla.

The Cipla Agreement will remain in effect in perpetuity, unless otherwise earlier terminated in accordance with its terms. In the event of circumstances affecting the continuity of development of the Product in line with the Cipla Agreement, the JSC will evaluate the cause and effect and make a recommendation as to the most optimal option available to Cipla and the Company. In any event, either the Company or Cipla may elect to terminate (a “Terminating Party”) its obligation to fund additional costs and expenses for the development and/or commercialization of the Product. If the

non-Terminating

Party wishes to continue the development of the Product, it will have the right to purchase the rights of the Terminating Party in the Product at fair market value. If both the Company and Cipla abandon the development program, the Company and Cipla shall make commercially reasonable efforts to monetize the Product and development program in connection with the Pulmonary Indications. The Company and Cipla will equally share the proceeds.

The Cipla Agreement also contains customary representations, warranties and covenants by both parties, as well as customary provisions relating to indemnification, confidentiality and other matters.

Accounting Treatment

The Company concluded that because both it and Cipla are active participants in the arrangement and are exposed to the significant risks and rewards of the collaboration, the Company’s collaboration with Cipla is within the scope of ASC 808 Collaborative Arrangements (“ASC 808”) for accounting purposes. Contemplating the guidance of ASU

2018-18,

the Company concluded that because Cipla contracted with the Company to obtain research and development services and an irrevocable license to the Assigned Assets, each of which is an output of the Company’s ordinary activities in exchange for consideration, Cipla is a customer. Therefore, in order to determine the appropriate treatment for the research and development services and the license grant, the Company has applied the guidance in ASC 606 Revenue from Contracts with Customers (“ASC 606”) to account for and present consideration received from Cipla. Accordingly, the Company identified the following material promises under the arrangement: (1) the research and development services for the Product and (2) an irrevocable license to the Assigned Assets. The Company determined that the research and development services and license to the Assigned Assets are considered highly interdependent and highly interrelated and combined into a single performance obligation because it is impossible for Cipla to benefit from the license to the Assigned Assets without the performance by Pulmatrix of the research and development services. Such research and development services are highly specialized and proprietary to Pulmatrix and therefore not available to Cipla from any other third party.

The Company determined the total transaction price to be $22,000

– comprised of $12,000 for research and development services for the Product and $10,000 for the irrevocable license to the Assigned Assets

. Any consideration related to the

Co-Development

Phase has not been included in the transaction price as such amounts are subject to the variable consideration constraint. Additionally, upon Commercialization, Cipla and the Company will share equally, both positive and negative total free cash-flows earned by Cipla in respect of the Product. However, the Company has not included such free cash-flows in the transaction price as these milestones are constrained until after the commercialization of the Product.

Revenue associated with the combined research and development services for the Product and the irrevocable license to the Assigned Assets is recognized as revenue as the research and development services are provided using an input method, according to the ratio of costs incurred to the total costs expected to be incurred in the future to satisfy the performance obligation. In management’s judgment, this input method is the best measure of the transfer of control of the performance obligation. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s condensed consolidated balance sheet.

None of the performance obligations have been fully satisfied as of September 30, 2019. The Company received the $22,000

Upfront Payment in May 2019. During the three months that ended September 30, 2019, the Company recognized revenue of $1,154 that related to the portion of the performance obligations delivered for research and development services and $252 that related to the portion of the performance obligations delivered for the irrevocable license to the Assigned Assets. During the nine months that ended September 30, 2019, the Company recognized revenue of

$4,929

that related to the portion of the performance obligations delivered for research and development services and

$1,296

that related to the portion of the performance obligations delivered for the irrevocable license to the Assigned Assets. The aggregate amount of the transaction price related to the Company’s unsatisfied performance obligations and at September 30, 2019 the Company recorded

$15,775 in deferred revenue, of which $9,304

is current. The Company expects to recognize the deferred revenue according to costs incurred, over the remaining research term, which is expected to be up

to three years as of

September

2019.