CytomX Therapeutics, Inc.

The Company determines if an arrangement is or contains a lease at inception. Operating leases are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities in the Company’s balance sheet.  ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  The Company uses an implicit rate when readily available, or its incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.  The operating lease ROU assets also include any lease prepayments made and reduced by lease incentives. The Company’s lease terms may include options to extend the lease when it is reasonably certain that such option will be exercised. Lease expenses are recognized on a straight-line basis over the lease term.  The Company’s operating lease arrangement includes lease and non-lease components which are generally accounted for separately. See Note 9, Leases

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements.  The amendments in this ASU provides clarifications to: 1) determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers; 2) presentation on statement of cash flows for sales-type and direct financing leases specifically for lessors that are depository and lending institutions; 3) certain exceptions to the transition disclosures requirements related to Topic 250, Accounting Changes and Error Corrections upon adoption of Topic 842.  The Company does not expect the transition guidance in (1) and (2) above to have a material impact on its financial statements.  Also, the adoption of transition guidance (3) did not have a material impact on its current period financial statements.

During the first quarter of 2019, BMS terminated pre-clinical activities on three of the first four collaboration targets selected under the BMS Agreement.  The first and second targets under the BMS Agreement were combined into a single performance obligation. The Company determined that termination of pre-clinical activities on the second target does not impact the Company’s continuing obligation to BMS for the first target, CTLA-4, as it is still being actively developed by BMS.  Therefore, the Company concluded that it will continue to amortize the related deferred revenue over the original performance period. The Company has determined that upon the termination of pre-clinical activities on the third and the fourth collaboration targets selected by BMS in January and December of 2016, respectively, under the BMS Agreement, it has no further obligations and is no longer eligible to receive any further proceeds from milestones, royalties or research and development fees for such targets.  As a result, the Company accelerated recognition of all of the related deferred revenue of the third and the fourth targets upon the effective date of termination and recognized $17.4 million in the first quarter of 2019.  

Under the terms of the Amendment No.3, the Company and UCSB agreed to modify the Company’s obligation to pay UCSB a percentage of sublicense revenues to be earned in the future on existing and new collaboration agreements. In particular, the Amendment No.3 adjusts the definition of sublicense revenues, which includes up-front fees, sublicense maintenance fees, milestone payments or other sublicense revenues (other than royalties) and modifies the Company’s payment obligation for pre-clinical stage sublicenses going forward by potentially lowering the sublicense revenue payment to UCSB based on the contribution of intellectual property from each party. In exchange, the Company agreed to make an upfront payment of $1,000,000 as well as additional annual license maintenance fees of $750,000 through 2031.

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), using the modified retrospective approach. We determine if an arrangement is or contains a lease at inception. Operating leases are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities in our balance sheet.  ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  We use an implicit rate when readily available, or our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.  The operating lease ROU assets also include any lease prepayments made and exclude lease incentives. Our lease terms may include options to extend the lease when it is reasonably certain that such option will be exercised. Lease expenses are recognized on a straight-line basis over the lease term.  Our operating lease arrangement includes lease and non-lease components which are generally accounted for separately. See Note 9, Lease.