Seres Therapeutics(MCRB) - 2019 Q1 - Quarterly Report

FORM 10-Q This section provides basic registrant information for Seres Therapeutics, Inc.'s 10-Q quarterly report, including company details and filing status Registrant Information This chapter provides basic information about Seres Therapeutics, Inc. as the registrant, including company name, jurisdiction, principal executive offices, telephone number, SEC file number, and its status as an accelerated filer and smaller reporting company - Seres Therapeutics, Inc. is a Delaware-registered company with its principal executive offices located in Cambridge, Massachusetts[2] Registrant Information Summary | Indicator | Detail | | :--- | :--- | | Quarterly Report End Date | March 31, 2019 | | SEC File Number | 001-37465 | | Registrant Telephone Number | (617) 945-9626 | | Filing Status | Accelerated filer ☒, Small reporting company ☒, Emerging growth company ☒ | | Common Stock Trading Symbol | MCRB | | Registered Exchange | The Nasdaq Global Select Market | | Shares Outstanding as of April 24, 2019 | 41,094,832 shares | FORWARD-LOOKING STATEMENTS This chapter highlights forward-looking statements, outlining known and unknown risks that could cause actual results to differ materially from expectations - All non-historical statements in the report are forward-looking, covering future operating results, financial condition, business strategy, product approvals, R&D costs, and the timing and likelihood of success[10] - Forward-looking statements involve known and unknown risks, uncertainties, and other material factors that could cause actual results to differ materially from expectations[10] - Key risks include continuous losses as a clinical-stage company, future capital needs and financing ability (including going concern), product pipeline development, unproven therapeutic interventions, clinical trial patient enrollment, regulatory approvals, impact of ECOSPOR III trial size reduction, manufacturing capabilities, intellectual property protection, regulatory requirements, and ability to attract and retain key personnel[14] PART I – FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, accompanied by detailed notes on business nature, accounting policies, and financial position Item 1. Condensed Consolidated Financial Statements (unaudited) This chapter provides the company's unaudited condensed consolidated financial statements, including balance sheets, income statements, equity statements, cash flow statements, and explanatory notes Condensed Consolidated Balance Sheets As of March 31, 2019, total assets decreased to $107,042 thousand from $120,472 thousand on December 31, 2018, with cash and cash equivalents falling to $53,600 thousand, total liabilities increasing to $176,875 thousand, and stockholders' deficit expanding to $69,833 thousand Condensed Consolidated Balance Sheets | Indicator (in thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 53,600 | 85,820 | | Accounts receivable | 6,667 | — | | Prepaid expenses and other current assets | 7,488 | 6,845 | | Total current assets | 67,755 | 92,665 | | Property and equipment, net | 24,571 | 26,294 | | Operating lease assets | 13,202 | — | | Restricted investments | 1,400 | 1,400 | | Restricted cash | 114 | 113 | | Total assets | 107,042 | 120,472 | | Liabilities and Stockholders' Deficit | | | | Accounts payable | 3,918 | 6,415 | | Accrued expenses and other current liabilities | 11,789 | 15,207 | | Operating lease liabilities | 4,407 | — | | Deferred revenue - related party | 18,685 | 20,419 | | Deferred revenue | 2,770 | — | | Total current liabilities | 41,569 | 42,041 | | Operating lease liabilities, net of current portion | 19,066 | — | | Deferred revenue, net of current portion - related party | 111,959 | 116,840 | | Deferred revenue, net of current portion | 3,637 | — | | Total liabilities | 176,875 | 168,517 | | Stockholders' Deficit | | | | Accumulated deficit | (413,703) | (389,370) | | Total stockholders' deficit | (69,833) | (48,045) | Condensed Consolidated Statements of Operations and Comprehensive Loss For the three months ended March 31, 2019, total revenue increased to $7,321 thousand, but due to research and development expenses and restructuring costs, net loss was $24,333 thousand, a narrowing from $27,919 thousand in the prior year period Condensed Consolidated Statements of Operations and Comprehensive Loss | Indicator (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Revenue | | | | Collaboration revenue - related party | 6,615 | 3,766 | | Grant revenue | 446 | 205 | | Other revenue | 260 | — | | Total revenue | 7,321 | 3,971 | | Operating expenses | | | | Research and development expenses | 22,887 | 23,460 | | General and administrative expenses | 7,495 | 8,777 | | Restructuring expenses | 1,492 | — | | Total operating expenses | 31,874 | 32,237 | | Operating loss | (24,553) | (28,266) | | Other income (expense), net | 220 | 347 | | Net loss | (24,333) | (27,919) | | Net loss per share (basic and diluted) | (0.59) | (0.69) | | Weighted-average common shares (basic and diluted) | 41,027,824 | 40,628,434 | Condensed Consolidated Statement of Stockholders' Equity (Deficit) As of March 31, 2019, the company's stockholders' deficit expanded to $69,833 thousand from $48,045 thousand on December 31, 2018, primarily due to a net loss of $24,333 thousand, partially offset by share issuances from equity incentives and stock option exercises Condensed Consolidated Statement of Stockholders' Equity (Deficit) | Indicator (in thousands) | December 31, 2018 | March 31, 2019 | | :--- | :--- | :--- | | Common stock shares | 40,936,735 | 41,094,832 | | Common stock par value | 41 | 41 | | Additional paid-in capital | 341,284 | 343,829 | | Accumulated deficit | (389,370) | (413,703) | | Total stockholders' deficit | (48,045) | (69,833) | - Stockholders' equity changes for the period included $120 thousand from stock option exercises, $153 thousand from RSU vesting, $207 thousand from common stock issued under the ESPP, and $2,065 thousand in stock-based compensation expense[21] Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2019, the company experienced $32,393 thousand cash outflow from operating activities, $306 thousand cash outflow from investing activities, and $480 thousand cash inflow from financing activities, resulting in a net decrease of $32,219 thousand in cash and cash equivalents Condensed Consolidated Statements of Cash Flows | Cash Flow Category (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash (used in) operating activities | (32,393) | (26,763) | | Net cash (used in) provided by investing activities | (306) | 38,034 | | Net cash provided by (used in) financing activities | 480 | (165) | | Net (decrease) increase in cash and cash equivalents | (32,219) | 11,106 | | Cash, cash equivalents, and restricted cash at beginning of period | 85,933 | 37,601 | | Cash, cash equivalents, and restricted cash at end of period | 53,714 | 48,707 | - Operating cash outflow was primarily driven by a $24,333 thousand net loss and changes in working capital (e.g., $6,667 thousand increase in accounts receivable)[24] - Investing cash inflow in the prior year period was mainly from sales and maturities of investments, while in 2019 it was primarily for property and equipment purchases[24] Notes to Condensed Consolidated Financial Statements This chapter provides detailed notes to the condensed consolidated financial statements, covering business nature, accounting policies, and key financial items - The company prepares financial statements under GAAP, involving numerous estimates and assumptions for revenue recognition, R&D expenses, and stock-based compensation valuation[39] - The company adopted new lease accounting standards (Topic 842) on January 1, 2019, recognizing approximately $13,737 thousand in operating lease assets and $24,497 thousand in operating lease liabilities, with no impact on the statements of operations and comprehensive loss[47] - The company adopted ASU 2018-07 on January 1, 2019, simplifying accounting for non-employee share-based payment transactions, with no material impact[47] Note 1. Nature of the Business and Basis of Presentation The company is a microbiome therapeutics platform company developing novel biological drugs to treat diseases by restoring dysbiotic microbiome function, facing significant going concern doubts and having implemented a restructuring in February 2019 to focus resources - The company develops SER-287 for ulcerative colitis (UC), SER-109 to reduce C. difficile infection (CDI) recurrence, SER-301 for IBD, and SER-401 for checkpoint inhibitor treatment in metastatic melanoma patients[26] - As of March 31, 2019, the company had an accumulated deficit of $413.7 million and cash and cash equivalents of $53.6 million, with existing funds expected to sustain operations only until Q4 2019, raising substantial doubt about its ability to continue as a going concern[30][31] - In February 2019, the company implemented a corporate restructuring, reducing its workforce by approximately 30% to focus resources on advancing clinical-stage therapeutic candidates, including SER-287 Phase 2b, SER-109 Phase 3, SER-401 Phase 1b, and SER-301 clinical development[32] Note 2. Summary of Significant Accounting Policies This note outlines the significant accounting policies and estimates used in preparing the condensed consolidated financial statements, including revenue recognition, R&D expenses, and equity incentive valuation, with the adoption of new lease accounting standards (Topic 842) and simplified accounting for non-employee equity payments on January 1, 2019 Net Loss per Share This section explains the calculation of basic and diluted net loss per share, which are identical due to the company's net loss, as potential common shares (such as stock options and unvested restricted stock units) are anti-dilutive and excluded - Basic net loss per share is calculated using the weighted-average number of common shares outstanding, while diluted net loss per share is the same as basic during periods of net loss due to the anti-dilutive effect of potential common shares[40][41] Potential Common Shares | Potential Common Shares | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Stock options to purchase common stock | 8,908,432 | 7,498,791 | | Unvested restricted stock units | 150,400 | 302,665 | | Shares issuable under ESPP | 6,911 | — | | Total | 9,065,743 | 7,801,456 | Leases The company recognizes operating lease assets and liabilities at the lease commencement date, based on the present value of lease payments over the lease term, considering lease incentives and rent escalations, and using the incremental borrowing rate to determine present value - Operating lease assets and liabilities are recognized at the lease commencement date, based on the present value of lease payments over the lease term[43] - The company uses the incremental borrowing rate to determine the present value of lease payments, considering options to extend or terminate leases[43] - Operating lease assets are amortized as rent expense, and operating lease liabilities accrue interest at the incremental borrowing rate, both recognized as operating expenses[44] Restructuring Restructuring costs primarily consist of severance benefits resulting from workforce reductions, with the company recognizing restructuring expenses when the liability is incurred and accruing employee termination benefits when management commits to a termination plan and notifies employees of the termination date and expected severance - Restructuring costs primarily consist of severance benefits related to workforce reductions[45] - The company recognizes restructuring expenses when the liability is incurred, and employee termination benefits are accrued when management commits to a termination plan and notifies employees of the termination date and expected severance[45] Recently Issued Accounting Standards The company adopted new lease accounting standards (Topic 842) on January 1, 2019, electing the transition practical expedient not to restate prior periods, also adopting ASU 2018-07 to simplify non-employee equity payment accounting, and is evaluating the impact of ASU 2018-13 and ASU 2018-18 - The company adopted ASU No. 2016-02 (Topic 842), the new lease accounting standard, on January 1, 2019, electing not to restate prior periods[47] - Upon adoption of the new lease standard, the company recognized approximately $13,737 thousand in operating lease assets and $24,497 thousand in operating lease liabilities, with no impact on the statements of operations and comprehensive loss[47] - The company adopted ASU 2018-07 on January 1, 2019, simplifying accounting for non-employee share-based payment transactions, with no material impact[47] Note 3. Fair Value Measurements This note describes the company's fair value measurement methods for certain assets and liabilities according to the fair value hierarchy, with cash equivalents primarily consisting of money market funds valued using the net asset value (NAV) practical expedient, not classified within the fair value hierarchy - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date[50] - The company's cash equivalents primarily consist of money market funds, valued using the net asset value (NAV) practical expedient, and are not classified within the fair value hierarchy[51][54] Cash Equivalents Fair Value | Asset Category (in thousands) | Fair Value as of March 31, 2019 | Fair Value as of December 31, 2018 | | :--- | :--- | :--- | | Cash equivalents (unclassified) | 40,187 | 39,982 | Note 4. Investments As of March 31, 2019, and December 31, 2018, the company held no other investments but maintained $1,400 thousand in restricted investments, primarily a certificate of deposit serving as a security deposit for a building lease - As of March 31, 2019, and December 31, 2018, the company held no other investments[55] - The company held $1,400 thousand in restricted investments, which is a certificate of deposit serving as a security deposit for a building lease at 200 Sidney Street, Cambridge[55] Note 5. Property and Equipment, Net As of March 31, 2019, the company's net property and equipment was $24,571 thousand, a decrease from $26,294 thousand on December 31, 2018, with laboratory equipment and leasehold improvements being major components, and depreciation and amortization expense for the period totaling $2,006 thousand Property and Equipment, Net | Category (in thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Laboratory equipment | 14,806 | 14,695 | | Computer equipment | 2,875 | 2,864 | | Furniture and office equipment | 1,033 | 1,033 | | Leasehold improvements | 27,977 | 27,977 | | Construction in progress | 26 | 26 | | Total | 46,717 | 46,595 | | Less: Accumulated depreciation and amortization | (22,146) | (20,301) | | Property and equipment, net | 24,571 | 26,294 | - Depreciation and amortization expense for the three months ended March 31, 2019, was $2,006 thousand, compared to $1,941 thousand for the same period in 2018[56] Note 6. Accrued Expenses and Other Current Liabilities As of March 31, 2019, total accrued expenses and other current liabilities were $11,789 thousand, a decrease from $15,207 thousand on December 31, 2018, primarily due to reductions in development and manufacturing expenses, payroll and related expenses, and facilities and other expenses Accrued Expenses and Other Current Liabilities | Category (in thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Development and manufacturing expenses | 6,779 | 7,046 | | Payroll and related expenses | 3,550 | 5,020 | | Facilities and other | 1,460 | 3,141 | | Total | 11,789 | 15,207 | Note 7. Stockholders' Equity This note details the company's stockholders' equity composition, including common stock, stock options, restricted stock units (RSUs), and Employee Stock Purchase Plan (ESPP) activities, with 41,094,832 shares of common stock outstanding as of March 31, 2019, and equity incentive expenses recognized due to grants, exercises, and vesting Common Stock As of March 31, 2019, the company had 41,094,832 shares of common stock outstanding with a par value of $0.001 per share, primarily serving as background information for stock options and restricted stock units - As of March 31, 2019, the company had 200,000,000 shares of common stock authorized, with 41,094,832 shares issued and outstanding[17] Stock Options As of March 31, 2019, the company had 8,908,432 stock options outstanding with a weighted-average exercise price of $10.79, with 2,148,250 options granted during the period, including 1.1 million performance-based options for which no expense was recognized due to unmet performance goals Stock Option Activity | Indicator | As of December 31, 2018 | As of March 31, 2019 | | :--- | :--- | :--- | | Number of options | 7,561,719 | 8,908,432 | | Weighted-average exercise price | $12.26 | $10.79 | | Weighted-average remaining contractual term (years) | 7.23 | 7.57 | | Options granted | — | 2,148,250 | | Options exercised | — | (38,125) | | Options forfeited | — | (763,412) | - The weighted-average grant date fair value of stock options granted for the three months ended March 31, 2019, was $4.60 per share[58] - 1.1 million performance-based stock options were granted during the period, but no related expense was recognized as performance goals were not met[59] Restricted Stock Units As of March 31, 2019, the company had 150,400 unvested restricted stock units (RSUs) with a weighted-average grant date fair value of $9.51, with 73,500 RSUs vesting and 3,000 forfeited during the period Restricted Stock Unit Activity | Indicator | As of December 31, 2018 | As of March 31, 2019 | | :--- | :--- | :--- | | Number of unvested restricted stock units | 226,900 | 150,400 | | Weighted-average grant date fair value | $9.64 | $9.51 | | Number vested | — | (73,500) | | Number forfeited | — | (3,000) | Stock-based Compensation Expense For the three months ended March 31, 2019, the company recognized total stock-based compensation expense of $2,065 thousand, primarily allocated to research and development and general and administrative expenses, a decrease from $4,236 thousand in the prior year period Stock-based Compensation Expense Allocation | Expense Category (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Research and development expenses | 1,448 | 1,928 | | General and administrative expenses | 617 | 2,308 | | Total | 2,065 | 4,236 | Employee Stock Purchase Plan The company's ESPP allows eligible employees to purchase common stock at a discount, with the purchase price being the lower of 85% of the stock price at the beginning or end of the six-month offering period, and 1.9 million shares reserved for issuance under the plan as of March 31, 2019, with immaterial stock-based compensation expense recognized for the period - The ESPP allows employees to purchase common stock at the lower of 85% of the stock price at the beginning or end of the offering period[62] - As of March 31, 2019, a total of 1.9 million shares were reserved for issuance under the ESPP[63] - Stock-based compensation expense under the ESPP for the three months ended March 31, 2019, was immaterial[62] Note 8. Collaboration Revenue This note details the company's collaboration agreements with NHS and AstraZeneca, outlining revenue recognition from CDI, IBD, and cancer immunotherapy product candidates - For the three months ended March 31, 2019, the company recognized $6,615 thousand in related party collaboration revenue and $260 thousand in AstraZeneca collaboration revenue[70][80] - As of March 31, 2019, deferred revenue related to the NHS agreement was $130,644 thousand, and deferred revenue related to the AstraZeneca agreement was $6,407 thousand[71][81] NHS Collaboration Agreement The company's January 2016 collaboration and license agreement with NHS grants NHS exclusive rights to develop and commercialize CDI and IBD product candidates outside the US and Canada, with the company having received $120 million upfront and eligible for up to $285 million in development milestones, $375 million in regulatory payments, $1.125 billion in commercial milestones, and high single-digit to high double-digit percentage sales royalties - The company's collaboration agreement with NHS grants NHS exclusive rights to develop and commercialize CDI and IBD product candidates outside the US and Canada[64][65] - The company has received $120 million upfront and is eligible for up to $285 million in development milestones, $375 million in regulatory payments, and $1.125 billion in commercial milestones[66] - In December 2018, the company received a $40 million milestone payment related to the initiation of the SER-287 Phase 2b study[67] AstraZeneca Research Collaboration and Option Agreement The company's March 2019 research collaboration and option agreement with AstraZeneca aims to advance the mechanistic understanding of the microbiome in enhancing cancer immunotherapy efficacy, with AstraZeneca paying $20 million in three tranches and reimbursing certain company costs incurred under the research plan, and the company granting AstraZeneca an exclusive option to negotiate a license agreement for microbiome oncology products and AstraZeneca oncology assets - The company's collaboration with AstraZeneca aims to advance the mechanistic understanding of the microbiome in enhancing cancer immunotherapy efficacy[72] - AstraZeneca will pay $20 million in three tranches, with the first tranche received in April 2019, and will reimburse certain company costs incurred under the research plan[73][108] - The company granted AstraZeneca an exclusive option to negotiate a license agreement for microbiome oncology products and AstraZeneca oncology assets[74] Contract Balances from Contracts with Customers This section presents changes in the company's contract liabilities related to customer contracts, with related party deferred revenue at $130,644 thousand and deferred revenue at $6,407 thousand as of March 31, 2019, and the company recognizing revenue using the cost-to-cost method Contract Balances from Customers | Contract Liability Category (in thousands) | Balance as of December 31, 2018 | Additions | Deductions | Balance as of March 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Deferred revenue - related party | 137,259 | — | (6,615) | 130,644 | | Deferred revenue | — | 6,667 | (260) | 6,407 | - For the three months ended March 31, 2019, the company recognized $6,615 thousand in related party deferred revenue and $260 thousand in deferred revenue[82] Note 9. Leases The company leases real estate primarily for laboratory, office, and manufacturing space, recognizing $13,202 thousand in operating lease assets and $23,473 thousand in operating lease liabilities as of March 31, 2019, with total lease costs of $2,528 thousand and cash payments of $1,642 thousand for the period Lease Metrics | Lease Metrics (in thousands) | As of March 31, 2019 | | :--- | :--- | | Operating lease assets | 13,202 | | Operating lease liabilities | 23,473 | | Operating lease cost | 1,154 | | Short-term lease cost | 648 | | Variable lease cost | 726 | | Total lease cost | 2,528 | - For the three months ended March 31, 2019, the company paid $1,642 thousand in cash for operating leases[85] - As of March 31, 2019, the weighted-average remaining lease term was 4.56 years, and the weighted-average incremental borrowing rate was 11%[87] ASC 840 Disclosures This section provides lease information disclosed under the old accounting standard ASC 840, with total future minimum lease payments of $30,213 thousand as of December 31, 2018, and $1,099 thousand in rent expense recognized for the three months ended March 31, 2018 Future Minimum Lease Payments | Year | Future Minimum Lease Payments as of December 31, 2018 (in thousands) | | :--- | :--- | | 2019 | 6,342 | | 2020 | 6,120 | | 2021 | 6,221 | | 2022 | 6,372 | | 2023 | 5,158 | | 2024 and thereafter | — | | Total future minimum lease payments | 30,213 | - For the three months ended March 31, 2018, the company recognized $1,099 thousand in rent expense[89] Note 10. Restructuring In February 2019, the company implemented a corporate restructuring, reducing its workforce by approximately 30% to focus resources on advancing clinical-stage therapeutic candidates, recording $1,492 thousand in severance and other termination benefits for the three months ended March 31, 2019, of which $608 thousand has been paid, with the remaining $884 thousand expected to be paid in 2019 - In February 2019, the company implemented a corporate restructuring, reducing its workforce by approximately 30% to focus resources on advancing clinical-stage therapeutic candidates[90] Restructuring Expenses | Restructuring Expense Category (in thousands) | Amount | | :--- | :--- | | Employee severance and other benefits | 1,492 | | Cash paid | 608 | | Liability in accrued expenses and other current liabilities as of March 31, 2019 | 884 | Note 11. Income Taxes For the three months ended March 31, 2019, and March 31, 2018, the company did not record any income tax expense, as management has fully reserved deferred tax assets due to accumulated net losses since inception and a lack of product sales revenue - For the three months ended March 31, 2019, and March 31, 2018, the company did not record any income tax expense[92] - Due to accumulated net losses since inception and a lack of product sales revenue, the company has fully reserved its deferred tax assets[93] Note 12. Commitments and Contingencies This note discusses the company's lease commitments, indemnification agreements, and legal contingencies, with ongoing lease commitments and indemnification provided to suppliers, landlords, business partners, directors, and officers, but no liabilities recorded for legal contingencies as of March 31, 2019, and December 31, 2018 - The company has ongoing lease commitments, as detailed in Note 9[95] - The company provides indemnification to suppliers, landlords, business partners, directors, and officers, but has not incurred significant costs to date[96] - As of March 31, 2019, and December 31, 2018, the company had not recorded any liabilities related to legal contingencies[99] Note 13. Related Party Transactions This note discloses the company's related party transactions with Nestec Ltd. (NHS), an affiliate of Nestlé Health Science, a significant stockholder, with $6,615 thousand in related party revenue recognized for the three months ended March 31, 2019, related to the NHS license agreement - NHS is an affiliate of Nestlé Health Science, a significant stockholder of the company[100] - For the three months ended March 31, 2019, the company recognized $6,615 thousand in related party revenue related to the NHS license agreement[100] - As of March 31, 2019, deferred revenue related to the license agreement was $130,644 thousand[100] Note 14. Subsequent Events In April 2019, the company modified the SER-109 clinical trial, reducing the target enrollment from 320 to 188 patients, with enrollment expected to complete by the end of 2019 and top-line data reported in early 2020, which will result in approximately $7,000 thousand of revenue recognized in Q2 2019 - In April 2019, the company modified the SER-109 clinical trial, reducing the target patient enrollment from 320 to 188[101] - Enrollment is expected to complete by the end of 2019, with top-line data reported in early 2020[101] - This modification will result in approximately $7,000 thousand of revenue recognized in the second quarter of 2019[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This chapter provides management's discussion and analysis of financial condition and results of operations, covering company overview, product pipeline, intellectual property, financial operations, and liquidity Overview The company is a microbiome therapeutics platform company developing novel biological drugs, with key product candidates including SER-287, SER-109, SER-301, and SER-401, facing significant going concern doubts due to accumulated deficit and limited cash, having implemented a restructuring in February 2019 and entered a research collaboration with AstraZeneca in March 2019 - The company is a microbiome therapeutics platform company, developing product candidates such as SER-287, SER-109, SER-301, and SER-401[104] - As of March 31, 2019, the company had an accumulated deficit of $413.7 million and cash and cash equivalents of $53.6 million, with existing funds expected to sustain operations only until Q4 2019, raising substantial doubt about its ability to continue as a going concern[106] - In February 2019, the company implemented a restructuring, reducing its workforce by approximately 30% to focus resources on advancing clinical-stage therapeutic candidates[107] - In March 2019, the company entered into a research collaboration and option agreement with AstraZeneca, where AstraZeneca will pay $20 million and reimburse certain R&D costs[108] Intellectual Property The company possesses an extensive patent portfolio covering the rational design ecology of spores and microbes, including owned and licensed rights, crucial for products like SER-109 and SER-287 with validity extending to 2033, and anticipates 12 years of US market exclusivity and 10 years of European market exclusivity for approved biological products - The company possesses an extensive patent portfolio covering the rational design ecology of spores and microbes, including 18 active patent application families, 10 national stage applications, 3 pending US provisional applications, and 12 granted US patents[122] - Intellectual property related to SER-109 and SER-287 is valid until 2033[122] - If product candidates receive marketing approval, they are expected to obtain 12 years of market exclusivity in the US and 10 years in Europe[124] Patent Portfolio The company holds an extensive patent portfolio covering the rational design ecology of spores and microbes, including owned and licensed rights, with 18 active patent application families and 12 granted US patents, and intellectual property for SER-109 and SER-287 valid until 2033 - The company possesses an extensive patent portfolio covering the rational design ecology of spores and microbes, including owned and licensed rights[122] - There are currently 18 active patent application families, including 10 national stage applications and 3 pending US provisional applications[122] - Intellectual property related to SER-109 and SER-287 is valid until 2033[122] Regulatory Exclusivity If the company's product candidates receive marketing approval, they are expected to obtain market exclusivity against biosimilars, with new biological products receiving 12 years of exclusivity in the US and 10 years in Europe from the EMA - If the company's product candidates receive marketing approval, they are expected to obtain market exclusivity against biosimilars[124] - In the US, new biological products can receive 12 years of exclusivity[124] - In Europe, the EMA grants 10 years of exclusivity for new molecular entities[124] Financial Operations Overview This chapter outlines the company's revenue sources and operating expense structure, with collaboration revenue and increasing R&D costs as primary components - The company has not generated revenue from product sales to date, with primary revenue derived from the collaboration and license agreement with NHS[126] - Operating expenses primarily consist of R&D activities and general and administrative costs[126] - R&D expenses are recognized as incurred and assessed based on information provided by third parties regarding the completion of specific tasks[127] Revenue The company has not generated revenue from product sales to date, with its primary revenue source being the collaboration and license agreement with Nestec Ltd. (NHS) - The company has not generated revenue from product sales to date[126] - Primary revenue is derived from the collaboration and license agreement with NHS[126] Operating Expenses The company's operating expenses primarily include R&D expenses, general and administrative expenses, and restructuring expenses, with R&D expenses recognized as incurred and tracked by project, expected to continue increasing, and $1.5 million in restructuring costs incurred in February 2019 - Operating expenses primarily include R&D activities and general and administrative costs[126] - R&D expenses are recognized as incurred and tracked by project, expected to continue increasing in the future[127][131] - In February 2019, the company incurred $1.5 million in restructuring expenses, primarily for severance and termination benefits[134][144] Research and Development Expenses R&D expenses primarily include third-party agreement fees, personnel costs, consulting fees, lab supplies, and regulatory compliance costs, recognized as incurred and tracked by project, with future R&D expenses expected to continue increasing to advance the clinical development of SER-287, SER-109, SER-401, and SER-301 - R&D expenses primarily include fees for agreements with third parties (e.g., CROs and CMOs), salaries and benefits for R&D personnel, external consulting fees, laboratory supplies, and regulatory compliance costs[127] - Direct R&D expenses are tracked by project, while employee-related costs and other indirect costs are categorized as microbiome therapeutics platform research costs[128] - Future R&D expenses are expected to continue increasing to advance the clinical development of SER-287, SER-109, SER-401, and SER-301[131] General and Administrative Expenses General and administrative expenses primarily include salaries and related costs (including stock-based compensation) for executive, finance, corporate business development, and administrative personnel, as well as legal fees for patent and corporate matters, accounting, audit, tax, and consulting professional services, insurance, travel, and facilities-related expenses - General and administrative expenses primarily include salaries and related costs (including stock-based compensation) for executive, finance, corporate business development, and administrative personnel[132] - These also include legal fees for patent and corporate matters, accounting, audit, tax, and consulting professional services, insurance, travel, and facilities-related expenses[132] - Future general and administrative expenses may increase due to growth in R&D activities, product commercialization, and additional costs incurred as a public company[133] Restructuring In February 2019, the company implemented a corporate restructuring, reducing its workforce by approximately 30% to focus resources on advancing clinical-stage therapeutic candidates, including the clinical development of SER-287, SER-109, SER-401, and SER-301 - In February 2019, the company implemented a corporate restructuring, reducing its workforce by approximately 30% to focus resources on advancing clinical-stage therapeutic candidates[134] - The restructuring aims to focus efforts on completing the SER-287 Phase 2b study, SER-109 Phase 3 study, SER-401 Phase 1b study, and advancing SER-301 into clinical development[134] Other Income (Expense), Net Other income (expense), net primarily consists of interest income generated from investment activities - Other income (expense), net primarily consists of interest income generated from investment activities[135] Income Taxes Since its inception in 2010, the company has not recognized any US federal or state income tax benefits due to continuous losses and has fully reserved its deferred tax assets with a valuation allowance - Since its inception in 2010, the company has not recognized any US federal or state income tax benefits due to continuous losses[136] - The company has fully reserved its deferred tax assets with a valuation allowance[136] Critical Accounting Policies and Significant Judgments and Estimates This chapter states that the company's financial statements are prepared under US GAAP, involving judgments and estimates, with no material changes to critical accounting policies except for new lease standards - The company's financial statements are prepared under GAAP, involving judgments and estimates about future events[138] - No material changes were made to the critical accounting policies disclosed in the 2018 annual report, except for the adoption of the new lease standard[138] Results of Operations This chapter compares the operating results for the first quarters of 2019 and 2018, showing a significant increase in total revenue, a decrease in R&D and general and administrative expenses, additional restructuring costs, and a narrowing of the net loss Comparison of Three Months Ended March 31, 2019 and 2018 This section details the financial performance comparison for the first quarters of 2019 and 2018, with total revenue increasing from $3.971 million to $7.321 million due to collaboration revenue growth, R&D expenses slightly decreasing, general and administrative expenses significantly reducing, but with an additional $1.5 million in restructuring costs, ultimately narrowing the net loss from $27.919 million to $24.333 million Operating Results Comparison | Indicator (in thousands) | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Total revenue | 7,321 | 3,971 | 3,350 | | Research and development expenses | 22,887 | 23,460 | (573) | | General and administrative expenses | 7,495 | 8,777 | (1,282) | | Restructuring expenses | 1,492 | — | 1,492 | | Operating loss | (24,553) | (28,266) | 3,713 | | Net loss | (24,333) | (27,919) | 3,586 | Revenue For the three months ended March 31, 2019, total revenue increased to $7.3 million from $4.0 million in the prior year period, primarily attributable to increased collaboration revenue with NHS and revenue recognition related to the AstraZeneca research agreement - For the three months ended March 31, 2019, total revenue was $7.3 million, an increase from $4.0 million in the prior year period[141] - The increase in revenue was primarily attributable to increased collaboration revenue with NHS and revenue recognition related to the AstraZeneca research agreement[141] Research and Development Expenses For the three months ended March 31, 2019, R&D expenses were $22.9 million, a $0.6 million decrease from $23.5 million in the prior year period, primarily due to reduced SER-109 and SER-262 project costs, partially offset by increased microbiome therapeutics platform and SER-287 project costs Research and Development Expenses by Project | Project (in thousands) | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Microbiome therapeutics platform | 15,899 | 15,084 | 815 | | SER-109 | 2,649 | 6,144 | (3,495) | | SER-262 | 86 | 842 | (756) | | SER-287 | 4,253 | 1,390 | 2,863 | | Total R&D expenses | 22,887 | 23,460 | (573) | - SER-109 project expenses decreased by $3.5 million, primarily due to reduced clinical trial consulting fees, contract manufacturing fees, and laboratory supplies[147] - SER-287 project expenses increased by $2.9 million, primarily due to increased clinical trial consulting fees and contract manufacturing fees[147] General and Administrative Expenses For the three months ended March 31, 2019, general and administrative expenses were $7.5 million, a $1.3 million decrease from $8.8 million in the prior year period, primarily due to reduced personnel-related costs (including stock-based compensation), partially offset by increased professional service fees General and Administrative Expenses by Category | Category (in thousands) | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Personnel-related (including stock-based compensation) | 3,088 | 4,627 | (1,539) | | Professional service fees | 2,691 | 1,776 | 915 | | Facilities-related and other | 1,716 | 2,374 | (658) | | Total G&A expenses | 7,495 | 8,777 | (1,282) | - Personnel-related costs decreased by $1.5 million, primarily related to stock-based compensation expense[148] - Professional service fees increased by $0.9 million, primarily due to increased legal and consulting fees[148] Restructuring For the three months ended March 31, 2019, the company recorded $1.5 million in restructuring expenses, primarily for severance and other termination benefits, with $0.6 million paid and the remaining $0.9 million expected to be paid during the rest of 2019 - For the three months ended March 31, 2019, the company recorded $1.5 million in restructuring expenses, primarily for severance and other termination benefits[144] - Of this amount, $0.6 million has been paid, with the remaining $0.9 million expected to be paid during the rest of 2019[144] Other Income (Expense), Net For the three months ended March 31, 2019, other income (expense), net was $0.2 million, a decrease from $0.3 million in the prior year period, primarily consisting of interest income generated from investment activities - For the three months ended March 31, 2019, other income (expense), net was $0.2 million, a decrease from $0.3 million in the prior year period[145] - This primarily consisted of interest income generated from investment activities[145] Liquidity and Capital Resources The company has incurred continuous losses since inception and expects to continue incurring losses for the foreseeable future, with $53.6 million in cash and cash equivalents as of March 31, 2019, expected to sustain operations only until Q4 2019, raising significant going concern doubts, and plans to raise additional funds through equity or debt financing and collaboration agreements to support product development and commercialization - The company has incurred continuous losses since inception and expects to continue incurring losses for the foreseeable future[150] - As of March 31, 2019, the company had $53.6 million in cash and cash equivalents and an accumulated deficit of $413.7 million[151] - Existing funds are expected to sustain operations only until Q4 2019, raising substantial doubt about the company's ability to continue as a going concern[151][152] Collaboration Agreements The company has significant collaboration agreements with NHS and AstraZeneca, involving product development, commercialization, and cancer immunotherapy research - The license agreement with NHS involves the development and commercialization of CDI and IBD product candidates, with the company having received $120 million upfront and multiple milestone payments[153] - The research agreement with AstraZeneca aims to advance the microbiome's role in cancer immunotherapy, with AstraZeneca paying $20 million and reimbursing certain R&D costs[157] Agreement with NHS The company's license agreement with NHS grants NHS exclusive rights to develop and commercialize CDI and IBD product candidates outside the US and Canada, with the company having received $120 million upfront and eligible for up to $285 million in development milestones, $375 million in regulatory payments, and $1.125 billion in commercial milestones, plus high single-digit to high double-digit percentage sales royalties - The company's license agreement with NHS grants NHS exclusive rights to develop and commercialize CDI and IBD product candidates outside the US and Canada[153] - The company has received $120 million upfront and is eligible for up to $285 million in development milestones, $375 million in regulatory payments, and $1.125 billion in commercial milestones[153] - In December 2018, the company received a $40 million milestone payment related to the initiation of the SER-287 Phase 2b study[153] Agreement with AstraZeneca The company's March 2019 research collaboration and option agreement with AstraZeneca aims to advance the mechanistic understanding of the microbiome in enhancing cancer immunotherapy efficacy, with AstraZeneca paying $20 million in three tranches, the first received in April 2019, and reimbursing certain company costs incurred under the research plan, and the company granting AstraZeneca an exclusive option to negotiate a license agreement - The company's collaboration with AstraZeneca aims to advance the mechanistic understanding of the microbiome in enhancing cancer immunotherapy efficacy[156] - AstraZeneca will pay $20 million in three tranches, with the first tranche received in April 2019, and will reimburse certain company costs incurred under the research plan[157] - The company granted AstraZeneca an exclusive option to negotiate a license agreement[158] Cash Flows For the three months ended March 31, 2019, the company experienced $32.4 million cash outflow from operating activities, $0.3 million cash outflow from investing activities, and $0.5 million cash inflow from financing activities, resulting in a net decrease of $32.2 million in cash and cash equivalents Cash Flow Summary | Cash Flow Category (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash (used in) operating activities | (32,393) | (26,763) | | Net cash (used in) provided by investing activities | (306) | 38,034 | | Net cash provided by (used in) financing activities | 480 | (165) | | Net (decrease) increase in cash and cash equivalents | (32,219) | 11,106 | Operating Activities For the three months ended March 31, 2019, operating activities used $32.4 million in cash, primarily due to a $24.3 million net loss and $12.7 million in working capital changes, partially offset by $4.6 million in non-cash expenses, with working capital changes including a $6.7 million increase in accounts receivable and a $2.5 million decrease in accounts payable - For the three months ended March 31, 2019, operating activities used $32.4 million in cash[160] - This was primarily due to a $24.3 million net loss and $12.7 million in working capital changes, partially offset by $4.6 million in non-cash expenses[160] - Working capital changes included a $6.7 million increase in accounts receivable (due to AstraZeneca upfront payment) and a $2.5 million decrease in accounts payable[160] Investing Activities For the three months ended March 31, 2019, investing activities used $0.3 million in cash, primarily for property and equipment purchases, whereas the prior year period saw $38.0 million in cash provided by investing activities, mainly from sales and maturities of investments - For the three months ended March 31, 2019, investing activities used $0.3 million in cash, primarily for property and equipment purchases[163] - In the prior year period, investing activities provided $38.0 million in cash, primarily from sales and maturities of investments ($44.3 million)[163] Financing Activities For the three months ended March 31, 2019, financing activities provided $0.5 million in cash, primarily related to stock option exercises, whereas the prior year period saw $0.2 million in cash used by financing activities, mainly for employee tax obligations related to RSU vesting - For the three months ended March 31, 2019, financing activities provided $0.5 million in cash, primarily related to stock option exercises[164] - In the prior year period, financing activities used $0.2 million in cash, primarily for employee tax obligations related to RSU vesting[164] Funding Requirements The company anticipates significantly increased expenditures for future R&D and clinical development activities, requiring substantial additional funding to support ongoing operations, with funding needs dependent on clinical study progress, manufacturing costs, regulatory approvals, commercialization activities, and intellectual property maintenance, and without committed external funding, the company may be forced to delay, scale back, or terminate product development plans - The company anticipates significantly increased expenditures for future R&D and clinical development activities, requiring substantial additional funding to support ongoing operations[165] - Funding needs will depend on clinical study progress, manufacturing costs, regulatory approvals, commercialization activities, and intellectual property maintenance, among other factors[165][171] - The company currently has no committed external funding sources, and failure to obtain timely funding may force it to delay, scale back, or terminate product development plans[167][168] Contractual Obligations and Commitments This chapter states that the company's contractual obligations and commitments have been disclosed in its annual report, with no material changes occurring during the current quarter - The company's contractual obligations and commitments have been disclosed in its annual report[169] - No material changes occurred during the current quarter[169] Off-Balance Sheet Arrangements As of March 31, 2019, the company had no off-balance sheet arrangements as defined by SEC rules and regulations - As of March 31, 2019, the company had no off-balance sheet arrangements as defined by SEC rules and regulations[170] Item 3. Quantitative and Qualitative Disclosures About Market Risk This chapter discloses the company's market risk exposure, primarily to interest rate fluctuations, with cash and cash equivalents mainly comprising cash and money market accounts as of March 31, 2019, and an immediate 10% change in market interest rates not expected to materially impact the fair value or financial condition of the investment portfolio due to its short-term nature - The company is primarily exposed to interest rate fluctuation risk[172] - As of March 31, 2019, the company's cash and cash equivalents primarily consisted of cash and money market accounts[172] - Due to the short-term nature of the investment portfolio, an immediate 10% change in market interest rates would not materially impact the fair value or financial condition of the portfolio[172] Item 4. Controls and Procedures This chapter discusses the effectiveness of the company's disclosure controls and procedures, which management believes were effective at a reasonable assurance level as of March 31, 2019, with no material changes in internal control during the quarter - Management believes that any control and procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving its control objectives[173] - As of March 31, 2019, the company's disclosure controls and procedures were effective at a reasonable assurance level[174] - No material changes in internal control occurred during the three months ended March 31, 2019[175] PART II - OTHER INFORMATION This section contains other information not included in the financial statements, covering legal proceedings, risk factors, and various disclosures Item 1. Legal Proceedings This chapter discloses the company's opposition proceedings against a University of Tokyo patent at the European Patent Office, where an oral hearing was held on February 18, 2019, and the Opposition Division required the University of Tokyo to narrow its patent claims, with an appeal expected from the University of Tokyo - On April 25, 2017, the company filed an opposition against a European patent (No. 2 575 835 B1) owned by the University of Tokyo at the European Patent Office[177] - An oral hearing was held on February 18, 2019, where the Opposition Division required the University of Tokyo to narrow its patent claims[177] - The University of Tokyo is expected to appeal this decision[177] Item 1A. Risk Factors This chapter details various high risks associated with investing in the company's common stock, covering financial condition, product development, third-party reliance, commercialization, intellectual property, and operations Risks Related to Our Financial Position and Need for Additional Capital The company has incurred continuous losses since inception and expects to continue incurring losses, raising significant going concern doubts, requiring substantial additional funding to complete product development and commercialization, and if unable to obtain timely funding, it may be forced to delay, scale back, or terminate product development plans, with its limited operating history making future viability assessment difficult - The company has incurred significant operating losses since inception, with an accumulated deficit of $413.7 million as of March 31, 2019, and expects to continue incurring losses, raising substantial doubt about its ability to continue as a going concern[180][184] - The company requires substantial additional funding to complete the development and commercialization of its product candidates, and failure to obtain timely funding may force it to delay, scale back, or terminate product development plans[185][189] - The company's limited operating history (since October 2010) makes it difficult to assess its future success or viability[190] Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates The company's product candidates are based on unproven microbiome therapies in early development, may not be successfully developed into approvable or marketable drugs, and clinical drug development is a high-risk, lengthy, and expensive process with uncertain outcomes, potentially leading to additional costs or delays, while obtaining regulatory approval is complex, time-consuming, and may face delays or rejections, even if approved, it may be subject to restrictions - The company's product candidates are based on unproven microbiome therapies in early development and may not be successfully developed into approvable or marketable drugs[191][194] - Clinical drug development is a high-risk, lengthy, and expensive process with uncertain outcomes, potentially leading to additional costs or delays, or even failure to complete development and commercialization[196][198][200] - The reduction in the SER-109 Phase 3 trial size from 320 to 188 patients may require additional evidence of efficacy and safety for approval[203] - Obtaining regulatory approval is an expensive, high-risk, and time-consuming process that may face delays, restrictions, or rejections, and even if approved, products may be subject to lim