8. Significant Contracts

Intellectual Property Agreements

CRISPR Therapeutics AG—Charpentier License Agreement

In April 2014, the Company entered into a technology license agreement with Dr. Charpentier pursuant to which the Company licensed certain intellectual property rights under joint ownership from Dr. Charpentier to develop and commercialize products for the treatment or prevention of human diseases other than hemoglobinopathies (“CRISPR—Charpentier License Agreement”). In consideration for the granting of the license, the Company paid Dr. Charpentier an upfront fee of CHF 0.1 million ($0.1 million), and agreed to pay an immaterial annual license maintenance fee if Dr. Charpentier is not otherwise engaged in a service arrangement with the Company. During the three and nine months ended September 30, 2015 and 2016, Dr. Charpentier has been in a consulting arrangement with the Company, as such, no annual payments have been made under this provision. Dr. Charpentier is entitled to receive nominal clinical milestone payments. The Company is also obligated to pay Dr. Charpentier a low single digit percentage of sublicensing payments received under any sublicense agreement with a third party. In addition, the Company is also obligated to pay to Dr. Charpentier a low single-digit percentage royalty based on annual net sales of licensed products and licensed services by the Company and its affiliates and sublicensees.

During the three and nine months ended September 30, 2016 and 2015, the Company recorded $0, $0, $0.3 million, and $0, respectively, of sublicensing fees due to Dr. Charpentier in research and development expense under the terms of the CRISPR—Charpentier License Agreement that was triggered by the execution of the Vertex collaboration agreement and the Bayer joint venture agreement.

TRACR Hematology Limited—Charpentier License Agreement

In April 2014, TRACR entered into a technology license agreement (“TRACR—Charpentier License Agreement”) with Dr. Charpentier pursuant to which TRACR licensed certain intellectual property rights under joint ownership from Dr. Charpentier to develop and commercialize products for the treatment or prevention of human diseases related to hemoglobinopathies. In consideration for the granting of the license, Dr. Charpentier is entitled to receive nominal clinical milestone payments. TRACR is also obligated to pay Dr. Charpentier a low single digit percentage of sublicensing payments received under any sublicense agreement with a third party. In addition, TRACR is obligated to pay to Dr. Charpentier low single digit percentage royalties based on annual net sales of licensed products and licensed services by the Company and its affiliates and sublicensees.

During the three months and nine months ended September 30, 2015 and 2016, no amounts were paid under the terms of the TRACR—Charpentier License Agreement.

Patent Assignment Agreement

In November 2014, the Company entered into a patent assignment agreement (“Patent Assignment Agreement”) with Dr. Charpentier, Dr. Ines Fonfara, and the University of Vienna (collectively, the “Assignors”), pursuant to which the Company was assigned all rights, title and interest in and to certain patent rights claimed in the U.S. Patent Application No.61/905,835. In consideration for the assignment of such rights, the Assignors are entitled to receive clinical milestone payments totaling up to €0.3 million (approximately $0.4 million) in the aggregate for the first human therapeutic product. The Company is also obligated to pay to the Assignors low single digit royalties based on annual net sales of licensed products and licensed services by the Company and its affiliates and sublicensees.

During the three months and nine months ended September 30, 2016 and 2015, the Company did not record any sublicensing fees due to the Assignors in research and development expense under the terms of the Patent Assignment Agreement that was triggered by the execution of the Vertex collaboration agreement and the Bayer joint venture agreement.

Collaboration Agreement with Vertex Pharmaceuticals, Incorporated

Summary of Agreement

On October 26, 2015, the Company entered into a strategic collaboration, option, and license agreement (“Collaboration Agreement”) with Vertex, focused on the use of CRISPR’s gene editing technology, known as CRISPR/Cas9, to discover and develop potential new treatments aimed at the underlying genetic causes of human disease. The collaboration will evaluate the use of CRISPR-Cas9 across multiple diseases where targets have been validated through human genetics. Vertex and CRISPR will focus their initial gene editing research on discovering treatments to address the mutations and genes known to cause and contribute to sickle cell disease, beta-thalessemia and cystic fibrosis. Vertex and CRISPR will also evaluate a specified number of other genetic targets as part of the collaboration. For up to six targets, Vertex has an exclusive option to obtain: (1) an exclusive license to commercialize CRISPR technology (“Exclusive License”) or (2) a co-exclusive license with respect to hemoglobinopathy and beta-globin targets (“Co-exclusive License”).

The collaborative program of research to be undertaken by the parties pursuant to the Collaboration Agreement will be conducted in accordance with a mutually agreed upon research plan which outlines each party’s research and development responsibilities across the three research areas. The Company’s research and development responsibilities under the research plan (“R&D Services”) are related to generating genome editing reagents that modify gene targets selected by Vertex. Except with respect to the Company’s obligations under the mutually agreed upon research plan, Vertex has sole responsibility, at its own costs, for the worldwide research, development, manufacturing and commercialization of products resulting from the exclusive licenses obtained.

The research collaboration will end on the earlier of the date on which Vertex has exercised six options to obtain exclusive/co-exclusive licenses with respect to a collaboration target, or the fourth anniversary of the effective date of the agreement. The research term may be extended as mutually agreed by the parties up to nine additional months to complete any research activities under the approved research plan that are incomplete on the fourth anniversary of the effective date.

The Collaboration Agreement will be managed on an overall basis by a project leader from each of the Company and Vertex. In addition, the activities under the collaboration agreement during the research term will be governed by a joint research committee (“JRC”) formed by an equal number of representatives from the Company and Vertex. Decisions by the JRC will be made by consensus of the group, however, Vertex will have final decision-making authority in the event of disagreement, provided it is in good faith and not contrary to any explicit clause of the agreement.

In connection with the agreement, Vertex made a nonrefundable upfront payment of $75.0 million. In addition, Vertex will fund all of the discovery activities conducted pursuant to the agreement. For potential hemoglobinopathy treatments, including treatments for sickle cell disease, the Company and Vertex will share equally all research and development costs and worldwide revenues. For other targets that Vertex elects to license, Vertex would lead all development and global commercialization activities. For each of up to six targets that Vertex elects to license, other than hemoglobinopathy and beta-globin targets, the Company has the potential to receive up to $420.0 million in development, regulatory and commercial milestones and royalties on net product sale.

Vertex is entitled to terminate the Collaboration Agreement as a whole, or terminate the Collaboration Agreement in part with respect to a particular collaboration program, for convenience by providing the Company 90 days’ written notice of such termination; provided, however, that if any termination applies to a product for which Vertex has received marketing approval, Vertex will provide CRISPR no less than 270 days’ notice of such termination. If Vertex is in material breach of this Collaboration Agreement, the Company has the right to terminate the Collaboration Agreement in full at its discretion 90 days after delivery of written notice to Vertex.

The Company evaluated the Collaboration Agreement in accordance with the provisions of ASC 605-25. The Company’s arrangement with Vertex contains the following initial deliverables: (i) a non-exclusive research license; (ii) the option to obtain an exclusive license for up to six Collaboration Targets; (iii) the option to obtain a co-exclusive license for hemoglobinopathy or beta-globin targets (which would be included within the maximum number of the aforementioned six collaboration targets); (iv) R&D Services; and (v) JRC participation.

Management considered whether any of these deliverables could be considered separate units of accounting. Regarding the non-exclusive research license, the Company concluded that it does not have stand-alone value separate from the option to exercise the exclusive or co-exclusive license since Vertex would not benefit from acquiring a research license without the ability to obtain the license to commercialize the results of that research. As a result, the Company concluded that the research license should be combined with those options.

Regarding the R&D Services, the Company concluded that there are other vendors in the market that could perform the related services. As such the Company concluded the R&D Services represent a separate unit of accounting.

Regarding the JRC obligations, the Company concluded that the JRC obligations deliverable has standalone value from the option to license because the services could be performed by an outside party. As such the Company concluded the JRC obligations represent a separate unit of accounting.

As a result, management concluded that there are four units of accounting at the inception of the agreement: (i) a combined unit of accounting representing the non-exclusive research license, and the option for up to six exclusive licenses to develop and commercialize the collaboration targets as these options do not have stand- alone value; (ii) a combined unit of accounting representing the non-exclusive research license, and the option for a co-exclusive license (subject to the aforementioned six license limit) to develop and commercialize the hemoglobinopathy or beta-globin targets as these options do not have stand-alone value; (iii) the performance of R&D Services; and (iv) the participation in the JRC.

The Company has determined that neither VSOE of selling price nor TPE of selling price is available for any of the units of accounting identified at inception of the arrangement. Accordingly, the selling price of each unit of accounting was determined based on the Company’s BESP. The Company developed the BESP for all of the units of accounting included in the collaboration agreement with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis.

The Company developed the BESP for the R&D Services and the JRC participation primarily based on the nature of the services to be performed and estimates of the associated effort and cost of the services, adjusted for a reasonable profit margin that would be expected to be realized under similar contracts. The Company’s BESP for the R&D Services was $26.7 million. The Company’s BESP for the JRC participation services was de minimis based on an estimate of time spent on preparation, participation, review and travel for the meetings.

The Company’s BESP for each combined unit of the non-exclusive research license and the option for an exclusive license to develop and commercialize a single collaboration target is $37.7 million. As the Company expects Vertex to exercise five of these options, the total BESP is $188.5 million. BESP for this item was determined based on probability and present value adjusted cash flows from the royalties and milestones outlined in the Collaboration Agreement. BESP reflects the level of risk and expected probability of success inherent in the nature of the associated research area.

The Company’s BESP for a non-exclusive research license and the option for a co-exclusive license to develop and commercialize a single hemoglobinopathy or beta-globin collaboration target is $12.5 million. As the Company expects Vertex to exercise one of these options, the total BESP is $12.5 million. BESP for this item was determined based on probability and present value adjusted cash flows from the equal sharing of project worldwide net profit or net loss. BESP reflects the level of risk and expected probability of success inherent in the nature of the associated research area.

Allocable arrangement consideration at inception is comprised of: (i) the up-front payment of $75.0 million, (ii) the estimated R&D services of $26.7 million and (iii) payments related to the estimated exercise of options on future exclusive licenses for five targets of $50.0 million. The aggregate allocable arrangement consideration of $151.7 million was allocated among the separate units of accounting using the relative selling price method as follows: (i) R&D Services: $17.8 million, (ii) non-exclusive research license, and the option for an Exclusive License to develop and commercialize the five collaboration targets: $125.5 million, (iii) non-exclusive research license, and the option for one Co-exclusive License to develop and commercialize one hematology target: $8.4 million.

The amount allocated to R&D Services will be recognized as the R&D Services are performed. The Company will recognize as license revenue an equal amount of the total arrangement consideration allocated to the exclusive licenses as each individual license is delivered to Vertex upon Vertex’s exercise of its options to such licenses. The Company will recognize $8.4 million as license revenue when the Co-exclusive License is delivered to Vertex upon Vertex’s exercise of its options to such license.

The Company has evaluated all of the milestones that may be received in connection with the Collaboration Agreement. In evaluating if a milestone is substantive, the Company assesses whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company notes that the $10.0 million due upon the exercise of each option for an Exclusive License was determined to be part of the fixed and determinable consideration allocable at contract inception and is not subject to milestone method accounting.

The first potential milestone the Company will be entitled to receive is the $10.0 million milestone due upon the filing of an Investigational New Drug Application (“IND”) for a selected Exclusive License. As the first developmental milestone of the agreement relates to the filing of an IND, the Company has considered it to be substantive. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. There are no other substantive milestones. As such the total amount of substantive milestones subject to milestone method accounting treatment is $10.0 million for each selected Exclusive License.

The remaining milestones are predominately related to the development and commercialization of a product resulting from the arrangement and are payable with respect to each selected Exclusive License. Each milestone is payable only once per collaboration target, regardless of the number of products directed to such collaboration target that achieve the relevant milestone event. There are nine remaining clinical development and regulatory approval milestones which may trigger proceeds of up to $90.0 million and $235.0 million, respectively, for each selected Exclusive License, and two commercial milestones which may trigger proceeds of up to $75.0 million for each selected Exclusive License (which, when combined with the $10.0 million due upon exercise of the exclusive option and the $10.0 million development milestone associated with an IND, total $420.0 million for each selected Exclusive License), as follows:

Developmental Milestone Events

Initiation of the first Clinical Trial of a Product

Establishment of POC for a Product

Initiation of the first Phase 3 Clinical Trial of a Product

Acceptance of Approval Application by the FDA for a Product

Acceptance of Approval Application by the EMA for a Product

Acceptance of Approval Application by a Regulatory Authority in Japan for a Product

Marketing Approval in the US for a Product

Marketing Approval in the EU for a Product

Marketing Approval in Japan for a Product

Commercial Milestone Events

Annual Net Sales for Products with respect to a Collaboration Target exceed $500 million

Annual Net Sales for Products with respect to a Collaboration Target exceed $1,000 million

After Vertex has exercised an Exclusive License option, Vertex will be solely responsible for all research, development, manufacturing, and commercialization of licensed agents and products for the relevant target. As the Company’s involvement in this process is limited to observer status, management determined that milestones are not considered substantive because they do not relate solely to the past performance of the Company. Upon the achievement of a milestone, management will evaluate whether the triggering event occurs during or after the research term. If the triggering event occurs during the research term, management has elected to treat the milestone similar to an up-front payment. In these cases, if and when any of these milestones are received, the amount will be included in the overall arrangement consideration and allocated to the remaining identified deliverables. To the extent all deliverables have been satisfied, any additional consideration allocated to them could be immediately recognized. If the triggering event occurs after the research term, the Company will recognize the associated revenue in the period in which the event occurs. The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.

During the three and nine months ended September 30, 2016 and 2015, the Company recognized $1.2 million, $0, $2.4 million, and $0 of revenue with respect to the collaboration with Vertex. Research and development expense incurred by the Company in relation to its performance under the Collaboration Agreement for the three and nine months ended September 30, 2016 and 2015, was $1.7 million, $0, $4.5 million, and $0, respectively. As of September 30, 2016, and December 31, 2015, there is $76.3 million and $75.1 million of non-current deferred revenue related to the Company’s collaboration with Vertex.

Joint Venture with Bayer Healthcare LLC

On December 19, 2015, the Company entered into an agreement to establish a joint venture (“Bayer Joint Venture”) with Bayer to research the development of new therapeutics to cure blood disorders, blindness, and congenital heart disease. On February 12, 2016, the Company and Bayer completed the formation of the joint venture entity, Casebia Therapeutics LLP (“Casebia”), a limited liability partnership formed in the United Kingdom. Bayer and the Company each received a 50% equity interest in the entity in exchange for their contributions to the entity. The Company contributed $0.1 million in cash and licensed its proprietary CRISPR/Cas9 gene editing technology and intellectual property for selected disease indications. Bayer contributed its protein engineering expertise and relevant disease know-how.

Bayer will provide up to $300.0 million in research and development funding to Casebia over the first five years, subject to certain conditions, of which the first $45.0 million was contributed upon formation in the first quarter of 2016. Under the joint venture agreement, the Company has no obligation to provide any additional funding and the Company’s ownership interest will not be diluted from future contributions from Bayer. The activities of Casebia are controlled by a management board under the joint control of the Company and Bayer. As Casebia is jointly controlled by the Company and Bayer, the Company accounts for its 50% interest using the equity method of accounting.

Under the agreement, Casebia will pay the Company up to $35.0 million in exchange for a worldwide, exclusive license to commercialize the Company’s CRISPR/Cas9 technology specifically for the indications designated by Casebia. In March 2016, the Company received a non-refundable up-front payment of $20.0 million as a technology access fee. The remaining $15.0 million will be paid upon the delivery of the consent necessary from the patent holders of the Company’s intellectual property. There are no milestone, royalties or other payments due to the Company under this aspect of the agreement. The Company determined that the contribution of the CRISPR/Cas9 technology by license to Casebia did not meet the definition of a business under ASC 805.

The Company will also provide to Casebia compensated research and development services through a separate agreement. Revenue related to research and development services rendered by the Company was $0.5 million, $0, $0.5 million, and $0 during the three months ended September 30, 2016 and 2015, and the nine months ended September 30, 2016 and 2015, respectively.

Concurrent with the execution of the Bayer Joint Venture agreement, the Company also entered into the Bayer Convertible Loan for $35.0 million.

As the Bayer Joint Venture (including the CRISPR/Cas9 technology license and the research and development services) and the Bayer Convertible Loan were executed at the same time, the Company determined that they should be evaluated as one multiple-element arrangement. Additionally, the Company also determined that ASC 845, Nonmonetary Transactions (“ASC 845”) did not apply to this arrangement given the Company’s significant continuing involvement with Casebia and the amount of cash involved in the arrangement. As a result, the Company analogized to ASC 605-25 in allocating the relative fair value of the consideration received to the different elements of the arrangement.

The Company allocated the fair value of the consideration received using a relative fair value allocation. The allocable arrangement consideration included (i) the total cash payment by Casebia for the technology access fee, net of the Company’s $0.1 million contribution, of $34.9 million, (ii) the fair value of the equity interest in the Joint Venture of $36.4 million, (iii) the $35.0 million received from the issuance of the Convertible Debt, and (iv) $6.3 million of estimated cash consideration to be received under the research and development service arrangement, accumulating to $112.6 million.

The Company identified the following elements under the transaction:

(i)

Combined element of an exclusive, worldwide, royalty free, license to the CRISPR/Cas9 technology specifically for the indications designated by Casebia, and delivery of the consents of the assignors of the underlying patents to the technology to develop, manufacture, and commercialize licensed products under that license,

(ii)

Research and development services, and

(iii)

The issuance of the Bayer Convertible Loan.

The Company determined the fair value of the license was $71.4 million based on the consideration paid and the fair value of the 50% interest in Casebia, which was determined utilizing discounted cash flows based on reasonable estimates and assumptions of cash flows expected from Casebia. The fair value of the separate research and development services was determined to be $6.3 million. The fair value of the Bayer Convertible Loan was determined to be $24.5 million, based on the fair value of the underlying preferred shares that were exchanged as part of the immediate conversion. Using a relative fair value allocation, the Company allocated the aggregate arrangement consideration paid as follows:

(i)

$63.6 million was allocated to the license and patent holder consent combined element,

(ii)

$0.6 million was allocated to the future research and development services, and

(iii)

$27.0 million was allocated to the Bayer Convertible Loan.

The difference between combined above amounts of $91.2 million and the total allocable arrangement consideration of $112.6 million is due to allocable arrangement consideration which is not yet due associated with the $6.3 million of estimated cash consideration to be received under the research and development service arrangement and the remaining $15.0 million of the license fee which will be paid upon the delivery of the consent necessary from the patent holders of the Company’s intellectual property.

Upon the delivery of the patent holders’ consent, the combined amount attributed to the license element will be recognized as other income. Until such time, it will be reflected as a Deferred Gain on the consolidated balance sheet. The Company determined that this amount did not meet the definition of revenue because the licensing of its technology in connection with the formation of a joint venture is not part of the Company’s major ongoing or central operations.

The amount attributed to future research and development services is recorded as deferred revenue as of September 30, 2016, net of the $35,000 recognized for services performed to date, and will be recognized in future periods as the research and development services are provided.

As the amount allocated to the Bayer Convertible Loan represents a $8.0 million discount to its $35 million face value, the Company recognized interest expense during the nine months ended September 30, 2016 equal to the discount. The Convertible Loan automatically converted into Series B preferred shares on its January 29, 2016 maturity date.

As of September 30, 2016, the Company has recorded an equity method investment of $35.7 million equal to the fair value of the Company’s interest in Casebia of $36.4 million (which was included in the allocable arrangement consideration described above) less equity method losses of $0.7 million for the nine months ended September 30, 2016.

Total operating expenses, and net loss of Casebia for the three and nine months ended September 30, 2016 was $3.0 million and $77.1 million, which included research and development expenses equal to $71.4 million for the fair value of the CRISPR license acquired. During the three and nine months ended September 30, 2016, the Company recorded equity method losses of $0 and $0.7 million. The Company has not recorded unrealized losses of $35.7 million from its accounting of the equity in the losses of Casebia until such time that the deferred gain allocated to the license and patent holder consent combined element is realized.

Subscription Agreement with Bayer Global Investments B.V.

On December 19, 2015, the Company entered into a subscription agreement, (“Subscription Agreement”), with Bayer Global Investments B.V., (“Bayer BV”). Pursuant to the Subscription Agreement, Bayer BV was given the option, at its election, to purchase $35.0 million of the Company’s Common Shares in a private placement concurrent with the Company’s IPO at a per share price equal to the public offering price. In October 2016, concurrent with the IPO, the Company issued and sold 2,500,000 Common Shares to Bayer BV, at the IPO price of $14.00 per share (the “Concurrent Private Placement”) resulting in aggregate net proceeds of $35.0 million in accordance with the terms of the Company’s subscription agreement with Bayer BV.