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CONTRACT WITH CUSTOMER
 9 Months Ended
Sep. 30, 2023
CONTRACT WITH CUSTOMER [Abstract]  
CONTRACT WITH CUSTOMER
4)
CONTRACT WITH CUSTOMER



On February 21, 2023, the Company and Lineage Cell Therapeutics, Inc. (“Lineage”) entered into an exclusive option and license agreement (the “Agreement”), which provided Lineage with the option (the “Option Right”) to obtain an exclusive sublicense to certain related technology for preclinical, clinical and commercial purposes, which would permit Lineage to further sublicense such intellectual property, subject to payment of certain sublicense royalty fees. Lineage paid the Company a $0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right.



Under the Agreement, Lineage could also request that the Company develop for, and deliver to, Lineage certain induced pluripotent stem cell lines, which Lineage would use to evaluate the possible development of cell transplant therapies for treatment of diseases of the central nervous system in humans, excluding certain indications.  Lineage had until August 22, 2023 to request that the Company develop the customized cell line, at which point, the Company would be entitled to certain cell line customization fees.


Upon Lineage’s request for the Company to develop the customized cell line, Lineage would then have six months from delivery to Lineage of such induced pluripotent stem cell lines to exercise the Option Right and obtain the sublicense. If Lineage obtains the sublicense, the Company would be entitled to receive additional license fees, including milestone payments and royalties.


The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”), which requires the Company to perform the following five steps in order to recognize revenue:


 
1.
Identify the contract with a customer;
 
2.
Identify the performance obligations in the contracts;
 
3.
Determine the transaction price;
 
4.
Allocate the transaction price to the performance obligations; and
 
5.
Recognize revenue when (or as) the performance obligations are satisfied.


Pursuant to ASC 606 the Company determined that the Option Right was an unexercised right held by Lineage under the Agreement at contract inception, as the cell line customization activities and the sublicense were optional purchases at contract inception. These optional purchases of goods and services would be treated as separate contracts if and when Lineage determines that it will make such purchases. Therefore, 100% of the Option Fee was allocated to the Option Right.  The Option Fee will remain in deferred revenue until such time that Lineage enters into the sublicense or when the Option Right expires.



On August 21, 2023, Lineage requested that the Company begin developing certain induced pluripotent stem cell lines in exchange for a fixed fee, subject to certain constraints as discussed further below.  Also on August 21, 2023, the Company and Lineage entered into an amendment of the Agreement, which provided for changes specifically related to the cell line customization activities such as (i) payment terms, (ii) certain definitions, (iii) certain courses of action if the customized cell line selected by Lineage is not successful and (iv) documentation requirements. 


As previously concluded, the Option Right and the cell line customization activities are accounted for as separate contracts, and the Company has determined that the amended terms discussed above represent a modification to the cell line customization contract.  Because there were no goods or services transferred to Lineage before entering into the amendment, and therefore, no previously recognized revenue, there was no catch-up adjustment to revenue required during the three and nine months ended September 30, 2023.



Lineage will make payments to the Company for the cell line customization activities over the development period. During the three months ended September 30, 2023, the Company received an initial payment of $0.4 million to commence the cell line customization activities, per the amended payment terms. The Company will only earn the remaining full amount of the cell line customization fee if it makes certain progress towards delivery of the customized cell line.  The Company estimates the amount of consideration it expects to recognize as revenue that is not probable of having a significant reversal of such recognized revenue, and it places a constraint on the remaining contractual consideration. The Company has determined that $0.4 million of consideration could be recognized without the probability of being reversed, and it has placed a constraint on the remaining contractual customization fee.  The $0.4 million is being recognized equally over ten months (which is the expected development period), as the level of effort to perform the services is happening at the same rate over time.  As it becomes evident that the constrained amounts are no longer at risk of a significant reversal of revenue, the Company will remove the constraint from the related revenue and recognize a cumulative catch-up adjustment to revenue in the period in which the constraint was removed, with the remaining unconstrained revenue being recognized over the remaining development time.  For the three and nine months ended September 30, 2023, the Company recognized less than $0.1 million of revenue for the customization activities.


The granting of the license that the Company may provide to Lineage if Lineage exercises the Option Right is not considered a performance obligation at this time, as it is an optional request that the customer may make in the future and will be accounted for as a separate contract when the customer exercises the Option Right.



The Company recognizes direct labor and supplies used in the customization activities as incurred and are recorded as a cost of revenue.  As provided for in the Exclusive Factor License Agreement discussed in Note 9, the Company is obligated to pay Factor Limited 20% of any amounts the Company receives from a customer that is related to the licensed technology under the Exclusive Factor License Agreement, which is also recorded as a cost of revenue.