Seres Therapeutics(MCRB) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements and detailed notes for the periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets This section presents the company's financial position at specific dates, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | | :--------------------------- | :------------ | :---------------- | :----- | | Cash and cash equivalents | $229,520 | $163,030 | +$66,490 | | Total current assets | $251,238 | $194,764 | +$56,474 | | Total assets | $406,387 | $348,784 | +$57,603 | | Total current liabilities | $77,898 | $85,596 | -$7,698 | | Total liabilities | $383,773 | $338,001 | +$45,772 | | Total stockholders' equity | $22,614 | $10,783 | +$11,831 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This section details the company's financial performance, including revenues, expenses, and net income or loss over specific periods Q2 2023 vs. Q2 2022 Financial Performance (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change (YoY) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------- | | Collaboration revenue - related party | $126,473 | $1,216 | +$125,257 | | Total revenue | $126,473 | $1,216 | +$125,257 | | Research and development expenses | $46,792 | $43,935 | +$2,857 | | General and administrative expenses | $28,051 | $20,335 | +$7,716 | | Collaboration (profit) loss sharing - related party | $2,106 | $271 | +$1,835 | | Net income (loss) | $46,552 | $(64,735) | +$111,287 | | Net income (loss) per share attributable to common stockholders, basic | $0.36 | $(0.70) | +$1.06 | | Net income (loss) per share attributable to common stockholders, diluted | $0.36 | $(0.70) | +$1.06 | H1 2023 vs. H1 2022 Financial Performance (in thousands, except per share data) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change (YoY) | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------- | | Collaboration revenue - related party | $125,951 | $2,709 | +$123,242 | | Total revenue | $125,951 | $2,709 | +$123,242 | | Research and development expenses | $90,761 | $83,584 | +$7,177 | | General and administrative expenses | $50,521 | $38,906 | +$11,615 | | Collaboration (profit) loss sharing - related party | $5,713 | $(705) | +$6,418 | | Net income (loss) | $(24,622) | $(121,359) | +$96,737 | | Net income (loss) per share attributable to common stockholders, basic | $(0.19) | $(1.32) | +$1.13 | | Net income (loss) per share attributable to common stockholders, diluted | $(0.19) | $(1.32) | +$1.13 | Condensed Consolidated Statements of Stockholders' Equity (Deficit) This section outlines changes in the company's equity, reflecting net income, stock issuances, and other comprehensive income or loss - Total stockholders' equity increased by $11.8 million from $10.8 million at December 31, 2022, to $22.6 million at June 30, 2023[22] - Additional paid-in capital increased by $36.4 million, from $875.2 million to $911.6 million, primarily due to equity offerings and stock-based compensation[22] - Accumulated deficit decreased by $24.6 million, from $(864.5) million to $(889.1) million, reflecting the net income for the three months ended June 30, 2023, and net loss for the six months ended June 30, 2023[22] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | Change (YoY) | | :-------------------------------------------------- | :--------- | :---------- | :----------- | | Cash used in operating activities | $(10,600) | $(116,342) | +$105,742 | | Cash provided by investing activities | $13,256 | $36,371 | -$23,115 | | Cash provided by financing activities | $63,833 | $26,978 | +$36,855 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $66,489 | $(52,993) | +$119,482 | | Cash, cash equivalents and restricted cash at end of period | $237,705 | $135,009 | +$102,696 | - Net cash used in operating activities significantly decreased by $105.7 million, from $116.3 million in 2022 to $10.6 million in 2023, primarily due to a reduced net loss and non-cash adjustments[25][247] - Net cash provided by financing activities increased by $36.9 million, from $27.0 million in 2022 to $63.8 million in 2023, largely due to proceeds from the Oaktree Term Loan and at-the-market equity offerings[25][252] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies, financial instruments, and significant transactions - VOWST (fecal microbiota spores, live brpk) was approved by the FDA on April 26, 2023, and launched in the U.S. in June 2023, becoming the first orally administered microbiome therapeutic[28] - The company entered into the Oaktree Credit Agreement on April 27, 2023, establishing a $250 million term loan facility, with $110 million funded on the closing date, partially used to repay the Hercules Credit Facility[68][69] - The company received a $125 million milestone payment in May 2023 from Nestlé following FDA approval of VOWST, significantly contributing to revenue[36][105] - As of June 30, 2023, the company had an accumulated deficit of $889.1 million but expects existing cash and cash equivalents to fund operations for at least the next 12 months, mitigating prior going concern doubts[34][37] - The company shares equally in the commercial profits and losses of VOWST with Nestlé, with Nestlé recording total net sales[28][122] Note 1. Nature of the Business and Basis of Presentation This note describes the company's business, product development, and the basis for preparing the financial statements, including going concern considerations - VOWST (fecal microbiota spores, live brpk) received FDA approval on April 26, 2023, and was launched in the U.S. in June 2023 to prevent recurrent Clostridioides difficile infection (CDI)[28] - The company is developing SER-155, a 16-strain bacterial consortium, to prevent enteric-derived infections and reduce Graft versus Host Disease (GvHD) in allo-HSCT patients, with Phase 1b cohort 1 showing successful engraftment and reduced pathogen domination[29] - As of June 30, 2023, the company had an accumulated deficit of $889.1 million and a net loss of $24.6 million for the six months ended June 30, 2023[34] - A $125 million milestone payment from Nestlé in May 2023 and the VOWST commercial launch mitigated prior substantial doubt about the company's ability to continue as a going concern, with cash expected to fund operations for at least the next 12 months[36][37] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements, including estimates and assumptions - Inventories are now stated at the lower of cost or estimated net realizable value using the first-in first-out method, with costs capitalized post-regulatory approval[41][42] - The company uses estimates and assumptions, particularly for revenue recognition and research and development expense accruals, which are periodically reviewed[43] - Restricted cash of $8.2 million as of June 30, 2023, and December 31, 2022, is classified as long-term, representing cash held for landlord benefits on leases[44] Note 3. Fair Value Measurements This note provides information on the fair value of financial instruments, categorized by valuation input levels Fair Value Measurements as of June 30, 2023 (in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | | :--------------------------- | :------ | :------ | :------ | :---- | | Cash equivalents: Money market funds | $20,620 | — | — | $20,620 | | Warrant liabilities | — | — | $1,968 | $1,968 | - Warrant liabilities, classified as Level 3, increased from $0 at December 31, 2022, to $2.0 million at June 30, 2023, due to the issuance of warrants and fair value adjustments[45][48] - Level 3 warrant liabilities are valued using a Monte-Carlo simulation model incorporating stock price, contractual terms, maturity, risk-free rates, volatility (82.0% at June 30, 2023), and estimated sales target achievement term (1.5 years at June 30, 2023)[47][48] Note 4. Investments This note details the company's investment portfolio, including types of investments and their classification - As of June 30, 2023, the Company did not hold any investments other than restricted investments of $1.4 million[50] - As of December 31, 2022, investments totaled $18,311 thousand, comprising commercial paper ($2,465 thousand), corporate bonds ($2,957 thousand), and government securities ($12,889 thousand), all classified as available-for-sale and maturing within 12 months[49] Note 5. Inventories This note describes the company's inventory accounting policies and provides a breakdown of capitalized inventory Capitalized Inventories at June 30, 2023 (in thousands) | Category | Amount | | :--------------- | :----- | | Raw materials | $547 | | Work in process | $4,750 | | Finished goods | $43 | | Total | $5,340 | - No inventories were capitalized as of December 31, 2022, as all manufacturing costs prior to VOWST's FDA approval were expensed as research and development[52] - Pre-launch inventory expensed as R&D totaled $11.2 million and $26.8 million for the three and six months ended June 30, 2023, respectively[52] Note 6. Property and Equipment, Net This note presents the company's property and equipment, net of accumulated depreciation, and related depreciation expenses Property and Equipment, Net (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :----------------------- | :------------ | :---------------- | | Laboratory equipment | $28,053 | $24,533 | | Leasehold improvements | $32,963 | $32,474 | | Total property and equipment, net | $24,026 | $22,985 | - Depreciation and amortization expense was $2.9 million for the six months ended June 30, 2023, compared to $3.3 million for the same period in 2022[54] Note 7. Accrued Expenses and Other Current Liabilities This note provides a breakdown of accrued expenses and other current liabilities, including clinical, manufacturing, and payroll costs Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Clinical and development costs | $2,157 | $6,717 | | Manufacturing and quality costs | $2,707 | — | | Payroll and payroll-related costs | $11,688 | $14,709 | | Collaboration payable - related party | $31,372 | $34,770 | | Facility and other | $7,954 | $3,644 | | Total | $55,878 | $59,840 | - Accrued $3.9 million for transaction and milestone payments to third parties due to VOWST's FDA approval and commercial launch, included in "Facility and other"[55] Note 8. Leases This note details the company's operating lease assets and liabilities, lease costs, and key lease terms - Operating lease assets were $110.3 million and total operating lease liabilities were $112.2 million as of June 30, 2023[60] - Total lease costs for the six months ended June 30, 2023, were $15.6 million, up from $6.6 million in the prior year, primarily due to new leases for laboratory/office space in Pennsylvania and a donor collection facility in California[60][58][59] - The weighted average remaining lease term was 8.47 years and the weighted average incremental borrowing rate was 13% as of June 30, 2023[61] Note 9. Notes Payable This note describes the company's debt instruments, including the Oaktree Credit Agreement, term loans, interest rates, and related warrants - On April 27, 2023, the company entered into the Oaktree Credit Agreement for a $250 million term loan facility[68] - The Tranche A Loan of $110 million was funded on the closing date, with approximately $53.4 million used to repay the Hercules Credit Facility, resulting in a $1.6 million loss on extinguishment[69] - The Term Loan bears interest at three-month SOFR (2.50% floor, 5.00% cap) plus an applicable margin of 7.875%, with an effective interest rate of 15.9% as of June 30, 2023[70][79] - The company issued warrants to lenders, including a Tranche A Warrant for 647,589 shares (exercise price $6.69) classified as equity, and Additional Warrants (Tranche B and C) classified as derivative liabilities due to variable exercise prices[75][76][77] - The carrying value of the Term Loan was $100.7 million as of June 30, 2023, classified as a long-term liability[79] Note 10. Common Stock and Stock-Based Awards This note provides information on common stock, equity offerings, stock options, restricted stock units, and stock-based compensation expense - Authorized common stock increased from 200 million to 240 million shares on June 27, 2023[81] - Sold 2,005,547 shares of common stock through an "at the market" offering for net proceeds of $11.7 million during the six months ended June 30, 2023[82] - Stock-based compensation expense for the six months ended June 30, 2023, was $20.3 million, compared to $11.8 million in 2022, primarily due to performance-based stock options and PSUs achieving targets[89][84][88] - Outstanding stock options increased to 16.8 million shares with a weighted average exercise price of $9.43 as of June 30, 2023[83] - Unvested restricted stock units (RSUs) and performance-based stock units (PSUs) totaled 3.9 million shares as of June 30, 2023[85] Note 11. Net Income (Loss) per Share This note presents the calculation of basic and diluted net income or loss per share, including factors affecting dilutive shares Net Income (Loss) per Share (Basic and Diluted, in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $46,552 | $(64,735) | $(24,622) | $(121,359) | | Basic EPS | $0.36 | $(0.70) | $(0.19) | $(1.32) | | Diluted EPS | $0.36 | $(0.70) | $(0.19) | $(1.32) | - Weighted average common shares outstanding (diluted) for Q2 2023 were 129.8 million, up from 92.3 million in Q2 2022[21] - Anti-dilutive potential common stock equivalents, including stock options, unvested RSUs, and warrants, were excluded from diluted EPS calculations for periods with net losses or when their exercise price exceeded the average fair value[91] Note 12. Revenue from Contracts with Customers This note details revenue recognition from collaboration agreements, including milestone payments and deferred revenue - Received a $125 million milestone payment in May 2023 upon FDA approval of VOWST, recognized as revenue under the 2021 License Agreement[95][105] - The 2021 License Agreement granted Nestlé a co-exclusive license for VOWST in the U.S. and Canada, with the company responsible for manufacturing and equal sharing of commercial profits and losses post-launch[92][94] - The 2016 License Agreement granted Nestlé an exclusive, royalty-bearing license for product candidates (including VOWST, SER-262, SER-287, SER-301) outside the U.S. and Canada, with eligibility for significant milestone payments and tiered royalties[107][108] - Deferred revenue related to Nestlé agreements was $95.7 million as of June 30, 2023, down from $96.7 million at December 31, 2022[115][116] Note 13. Collaboration Profit and Loss This note explains the components of collaboration profit and loss sharing with related parties, particularly for VOWST Components of Collaboration Profit (Loss) Sharing (in thousands) | Component | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :----------------------------- | | Share of VOWST net loss | $2,141 | $2,141 | | Profit on transfer of VOWST inventory to Nestlé | $(1,273) | $(1,273) | | Collaboration (profit)/loss related to pre-launch activities | $1,238 | $4,845 | | Total collaboration (profit) loss sharing - related party | $2,106 | $5,713 | - The company records its share of VOWST commercial profits or losses, including commercial and medical affairs expenses, on a net basis as collaboration (profit) loss sharing[122] - Pre-launch activities were completed prior to VOWST's first commercial sale in June 2023[121][124] Note 14. Commitments and Contingencies This note outlines the company's contractual commitments, indemnification agreements, and legal contingencies - The company has commitments associated with its lease portfolio, as detailed in Note 8[125] - Indemnification agreements are provided to vendors, lessors, business partners, and officers/directors, with maximum potential future payments often unlimited, but no material costs incurred to date[126] - No liabilities related to legal contingencies were accrued as of June 30, 2023, or December 31, 2022[129] Note 15. Income taxes This note discusses the company's income tax position, including the absence of income tax provision and the valuation allowance against deferred tax assets - No income taxes were provided for the three and six months ended June 30, 2023, or 2022[130] - A full valuation allowance has been established against deferred tax assets due to the company's history of cumulative net losses and early stage of VOWST commercialization, indicating it is more likely than not that the benefits will not be realized[131] Note 16. Related Party Transactions This note details transactions with related parties, primarily collaboration revenue and deferred income from Nestlé - Under the 2021 License Agreement with Nestlé, the company recognized $125.9 million in related party revenue for the three months ended June 30, 2023, and reported a collaboration receivable of $7.6 million as of June 30, 2023[132][133] - Deferred income - related party of $2.8 million as of June 30, 2023, represents inventory transferred to Nestlé that has not yet been sold[133] - Under the 2016 License Agreement with Nestlé, the company recognized $0.6 million in related party revenue for the three months ended June 30, 2023, with deferred revenue of $95.7 million as of June 30, 2023[134] - Expensed an $0.8 million option payment in June 2023 after electing not to renew a lease option with Flagship Pioneering Labs TPC, Inc., an affiliate of a significant stockholder[135] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting the commercial launch of VOWST, pipeline progress, and financial impacts Overview This overview highlights the commercial launch of VOWST, progress in the SER-155 pipeline, and the company's financial position and future funding needs - VOWST (fecal microbiota spores, live-brpk) received FDA approval on April 26, 2023, and was launched in the U.S. in June 2023 for recurrent CDI[139][140] - The company is developing SER-155 in a Phase 1b study for allo-HSCT patients to prevent infections and GvHD, with cohort 1 showing successful engraftment and reduced pathogen domination[142] - As of June 30, 2023, the company had an accumulated deficit of $889.1 million and a net loss of $24.6 million for the six months ended June 30, 2023[148] - Existing cash and cash equivalents are expected to fund operations for at least the next 12 months, but additional financing will be needed for continued operations and commercialization efforts[148][150] - The company's board approved an increase in authorized common stock from 200 million to 240 million shares, which stockholders approved on June 22, 2023[151] VOWST This section details the FDA approval and commercial launch of VOWST, including initial sales, prescription data, and clinical efficacy - VOWST received FDA approval on April 26, 2023, and launched in the U.S. in June 2023, marking the first orally administered microbiome therapeutic for recurrent CDI[152][153] - By July 27, 2023, 610 completed prescription enrollment forms for VOWST were received, leading to 282 new patient starts, with 78 healthcare providers prescribing to more than one patient[155] - Nestlé reported $1.6 million in net sales for 105 VOWST units sold during Q2 2023, reflecting an estimated gross-to-net reduction of 15%[154] - The total collaboration loss for Q2 2023 was $4.3 million, with the company's 50% share being $2.1 million[154] - VOWST has seven years of orphan-drug exclusivity, starting April 26, 2023[159] - Clinical data from ECOSPOR III demonstrated VOWST's superiority to placebo in reducing CDI recurrence at eight weeks, with an 88% recurrence-free rate and a 68% relative risk reduction[161] Infection Protection and SER-155 This section describes the Infection Protection approach and the development of SER-155 for allo-HSCT patients, including Phase 1b study results - The Infection Protection approach aims to decolonize pathogens and modulate host function to reduce and prevent infections, validated by SER-109 data showing gut microbiome restructuring and reduced antibiotic resistance genes[164] - SER-155 is an oral microbiome therapeutic candidate in a Phase 1b study for allo-HSCT recipients to prevent enteric-derived infections, bloodstream infections, and GvHD[165][167] - Phase 1b cohort 1 results showed successful engraftment of SER-155 bacterial strains and a substantial reduction in cumulative incidence of pathogen domination, with a favorable tolerability profile[169] - Enrollment for the placebo-controlled cohort 2 is ongoing, with 100-day topline results anticipated in mid-2024[171] Irritable Bowel Disease, Ulcerative Colitis, SER-287 and SER-301 This section discusses research in ulcerative colitis, including preliminary analysis of SER-301 Phase 1b results and future development plans - The company is continuing research in ulcerative colitis (UC), including evaluating biomarker-based patient selection and stratification for future studies[173] - Preliminary analysis of SER-301 Phase 1b cohort 1 in mild-to-moderate UC patients showed no clinical remission but improvements in individual components (endoscopic, stool frequency, rectal bleeding subscores) in some patients[174] - SER-301 strains were observed to engraft and demonstrated pharmacological properties consistent with its design, leading to baseline-dependent modulation of the metabolic landscape[174] - The company decided not to proceed with the planned SER-301 Phase 1b second study cohort in April 2022[174] Intellectual Property This section outlines the company's patent portfolio, intellectual property rights, and regulatory exclusivity for its products and candidates Patent Portfolio This section details the company's extensive patent portfolio, including issued U.S. patents and intellectual property protection timelines for key products - The company has an extensive patent portfolio with 24 active patent application families, including 22 nationalized applications, one pending PCT, and one provisional[176] - Obtained 29 issued U.S. patents, with one currently allowed[176] - Intellectual property rights related to VOWST extend through 2034, SER-155 through 2041, and SER-301 through 2040[176] - Pays a 2.5% royalty on net sales of VOWST, minimum annual royalties, and milestone payments ($1.0 million paid in July 2023 for first commercial sale) to Memorial Sloan Kettering Cancer Center[176] Regulatory Exclusivity This section describes the regulatory exclusivity periods granted for VOWST in the U.S. and typical exclusivity for new molecular entities in Europe - VOWST received seven years of orphan-drug exclusivity in the United States, starting April 26, 2023[159][177] - New molecular entities in Europe typically receive 10 years of exclusivity[177] Financial Operations Overview This overview explains the company's revenue sources, operating expenses, collaboration profit/loss sharing, and income tax considerations - Revenue is primarily derived from collaboration agreements, with VOWST net sales recorded by Nestlé and profits/losses shared equally post-June 2023 launch[180] - Operating expenses consist primarily of research and development (R&D) and general and administrative (G&A) costs[181] - R&D expenses are expected to increase for product candidates like SER-155 but decline for VOWST as commercial manufacturing costs are capitalized[184] - G&A expenses are expected to decrease in the short term due to completion of VOWST pre-launch activities and profit/loss sharing with Nestlé, but may increase with infrastructure expansion and public company costs[187] - Collaboration (profit) loss sharing includes the company's share of VOWST sales profits/losses and profit on inventory transfer to Nestlé, as well as its 50% share of pre-launch activity losses[188][189] - No U.S. federal or state income tax benefits recorded due to uncertainty of realizing benefits from net losses and R&D tax credits[193] Critical Accounting Policies and Significant Judgments and Estimates This section discusses the critical accounting policies and significant judgments and estimates used in preparing the financial statements, particularly for revenue and R&D accruals - The company's financial statements rely on GAAP and require significant estimates and judgments, particularly for revenue recognition and R&D expense accruals[196][43] - No material changes to these policies occurred in the first six months of 2023, except for inventory accounting detailed in Note 2[196][40] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and six months ended June 30, 2023, and 2022 Comparison of Three Months Ended June 30, 2023 and 2022 This section compares the company's financial results for Q2 2023 versus Q2 2022, highlighting changes in revenue, expenses, and net income - Total revenue increased by $125.3 million to $126.5 million in Q2 2023, primarily due to a $125 million milestone payment from Nestlé for VOWST FDA approval[198] - Research and development expenses increased by $2.9 million to $46.8 million, driven by higher personnel-related costs ($4.7 million increase) and microbiome therapeutics platforms ($4.2 million increase), partially offset by a $7.2 million decrease in VOWST program expenses due to capitalization of manufacturing costs[199][200] - General and administrative expenses increased by $7.7 million to $28.1 million, mainly due to higher personnel costs ($3.1 million increase), professional fees ($3.5 million increase, including legal and milestone payments), and facility-related costs ($1.1 million increase)[201][204] - Collaboration (profit) loss sharing resulted in a $2.1 million expense in Q2 2023, compared to $0.3 million expense in Q2 2022, reflecting the company's share of VOWST net loss and pre-launch activities, partially offset by profit on inventory transfer[202][203][205] - Other expense, net increased by $1.6 million to $3.0 million, primarily due to higher interest expense ($1.7 million increase) and loss on extinguishment of Hercules Credit Facility ($1.2 million increase), partially offset by increased interest income ($1.3 million increase)[205] Comparison of Six Months Ended June 30, 2023 and 2022 This section compares the company's financial results for H1 2023 versus H1 2022, detailing changes in revenue, expenses, and net income - Total revenue increased by $123.2 million to $126.0 million in H1 2023, primarily due to the $125 million milestone payment from Nestlé[206] - Research and development expenses increased by $7.2 million to $90.8 million, driven by higher personnel-related costs ($6.7 million increase) and microbiome therapeutics platforms ($9.4 million increase), partially offset by a $10.0 million decrease in VOWST program expenses due to capitalization[207][208] - General and administrative expenses increased by $11.6 million to $50.5 million, mainly due to higher personnel costs ($4.5 million increase), professional fees ($3.1 million increase), and facility-related costs ($4.0 million increase)[208][211] - Collaboration (profit) loss sharing resulted in a $5.7 million expense in H1 2023, compared to $0.7 million income in H1 2022, reflecting VOWST net loss and pre-launch activities, partially offset by inventory transfer profit[209][210][212] - Other expense, net increased by $1.3 million to $3.6 million, primarily due to higher interest expense ($2.7 million increase) and loss on extinguishment of Hercules Credit Facility ($0.6 million increase), partially offset by increased interest income ($2.0 million increase)[212] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and future capital requirements, including collaboration agreements and indebtedness - As of June 30, 2023, cash and cash equivalents totaled $229.5 million, and the accumulated deficit was $889.1 million[216] - Received a $125 million milestone payment from Nestlé in May 2023 and entered into a $250 million Oaktree Term Loan facility in April 2023, with $110 million funded initially[217][218] - Sold 2,660,547 shares of common stock through an "at the market" equity offering, raising $16.2 million net proceeds as of June 30, 2023[215] - Existing cash and cash equivalents are expected to fund operating expenses, capital expenditure requirements, and debt service obligations for at least the next 12 months[258] - Future viability beyond 12 months depends on the ability to raise additional capital through financing or other transactions[216] Collaboration and Manufacturing Agreements This section details the financial terms and milestones of collaboration agreements with Nestlé and the long-term manufacturing agreement with Bacthera - Under the 2016 License Agreement with Nestlé, the company received a $120 million upfront payment in 2016 and $80 million in development milestones to date for product candidates outside the U.S. and Canada[219][220] - The 2016 License Agreement makes the company eligible for up to $285 million in development, $375 million in regulatory, and $1.125 billion in commercial milestones, plus tiered royalties[220] - Under the 2021 License Agreement with Nestlé, the company received a $175 million upfront payment in 2021 and $125 million upon VOWST FDA approval in May 2023 for VOWST in the U.S. and Canada[227] - The 2021 License Agreement makes the company eligible for $10 million upon Canadian regulatory approval and up to $225 million in sales target milestones, and it shares equally in VOWST commercial profits and losses since its June 2023 launch[227][226] - The Long Term Manufacturing Agreement with Bacthera involves payments of at least 256 million CHF (approximately $277 million) for a dedicated production suite and manufacturing services for VOWST and other products[231] Indebtedness This section outlines the company's debt facilities, including the Oaktree Term Loan, its terms, and repayment of previous credit facilities - The Hercules Credit Facility of up to $100 million was repaid on April 27, 2023, using proceeds from the Oaktree Term Loan[236][237] - The Oaktree Credit Agreement established a $250 million term loan facility, with $110 million (Tranche A) funded on April 27, 2023[238] - Tranche B ($45 million) and Tranche C ($45 million) loans are available subject to VOWST net sales targets, with a maturity date of April 27, 2029, and interest-only payments for the first three years[238][239] - The Oaktree Term Loan is secured by substantially all company assets, including intellectual property[241] Cash Flows This section summarizes the company's cash flows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 - Operating activities used $10.6 million cash for the six months ended June 30, 2023, a significant improvement from $116.3 million used in the prior year[246][247] - Investing activities provided $13.3 million cash for the six months ended June 30, 2023, primarily from sales and maturities of investments, offset by purchases of property and equipment[246][250] - Financing activities provided $63.8 million cash for the six months ended June 30, 2023, mainly from the Oaktree Term Loan proceeds and equity offerings, offset by Hercules Credit Facility repayment[246][252] Funding Requirements This section discusses the company's anticipated increase in expenses and the need for additional financing to support ongoing operations and commercialization efforts - Expenses are expected to increase with VOWST commercialization, clinical development of SER-155, preclinical programs, and strategic investments in R&D and manufacturing[254] - Additional financing will be needed to support continuing operations, and adequate funding may not be available on acceptable terms, potentially forcing delays or termination of programs[250][257] Contractual Obligations and Commitments This section addresses any material changes to contractual obligations and commitments since the last annual report, primarily related to the Oaktree Term Loan - No material changes to contractual obligations and commitments were reported since the Annual Report, other than those resulting from the Oaktree Term Loan, as detailed in Note 9[260] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate fluctuation risk. It notes that due to the short-term nature of its cash and cash equivalents, an immediate 10% change in interest rates would not materially impact its investment portfolio. Similarly, the variable interest rate on the Oaktree Term Loan is not expected to have a material impact on debt obligations from a 10% rate change Interest Rate Fluctuation Risk This section assesses the impact of interest rate changes on the company's investment portfolio and variable-rate debt obligations - An immediate 10% change in market interest rates would not have a material impact on the fair market value of the company's investment portfolio or on its financial position or results of operations, due to the short-term nature of its cash and cash equivalents[262] - An immediate 10% change in the Secured Overnight Financing Rate (SOFR) would not materially impact the company's debt-related obligations, financial position, or results of operations, despite the variable interest rate on the Oaktree Term Loan[263] Item 4. Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, concluding they were effective at a reasonable assurance level Limitations on Effectiveness of Controls and Procedures This section acknowledges that controls provide reasonable assurance, and management applies judgment in evaluating benefits versus costs - Management acknowledges that controls and procedures, no matter how well designed, can only provide reasonable assurance of achieving desired control objectives, and judgment is applied in evaluating benefits versus costs[264] Evaluation of Disclosure Controls and Procedures Management, including principal executive and financial officers, concluded that disclosure controls and procedures were effective as of June 30, 2023 - As of June 30, 2023, the company's disclosure controls and procedures were evaluated by management, including the principal executive and financial officers, and concluded to be effective at the reasonable assurance level[265] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023 - No change in internal control over financial reporting occurred during the three months ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting[266] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings for the period - No legal proceedings were reported[269] Item 1A. Risk Factors This section outlines significant risks including financial position, product development, third-party dependence, competition, intellectual property, operations, and common stock Risks Related to Our Financial Position and Need for Additional Capital This section highlights the company's history of operating losses, ongoing need for additional funding, and challenges in evaluating future business success - The company has incurred significant operating losses since inception ($889.1 million accumulated deficit as of June 30, 2023) and expects to continue incurring losses, potentially never achieving profitability[272][274] - Additional funding will be needed to complete product candidate development and commercialize VOWST, and inability to raise capital could force delays or elimination of programs[277][280] - Limited operating history makes it difficult to evaluate business success and future viability[281] Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates This section details risks associated with early-stage product development, regulatory uncertainty for novel therapeutics, and the lengthy, expensive nature of clinical trials - Most product candidates (other than VOWST) are in early stages of development, with no assurance of building a pipeline or developing additional marketable drugs[282] - Microbiome therapeutics is a novel approach, and regulatory authorities may lack experience, leading to longer review processes or increased costs[285] - Clinical drug development is risky, lengthy, and expensive, with uncertain outcomes, potentially leading to delays or inability to complete development[287][289] - Failure or delays in obtaining regulatory approvals would materially impair revenue generation and commercialization[302][309] - Fast Track, Breakthrough Therapy, or PRIME designations do not guarantee faster development or approval[310][311][314] - Disruptions at FDA or other government agencies caused by funding shortages or global health concerns could hinder timely product development and approval[321][322] Risks Related to our Dependence on Third Parties and Manufacturing This section outlines risks stemming from reliance on collaboration agreements, third-party clinical and manufacturing organizations, and limited commercial-scale manufacturing experience - Heavy dependence on collaboration and license agreements with Nestlé; failure to perform or termination could adversely affect development and commercialization of CDI and IBD product candidates and VOWST[324][327][329] - Reliance on Nestlé to provide accurate and timely commercialization data for VOWST; inaccuracies could affect financial statements, business operations, or stock price[330] - Reliance on third parties (CROs, CMOs) for clinical trials and manufacturing; unsatisfactory performance could lead to delays or impairment of efforts[331][335][336] - Limited experience in commercial-scale manufacturing without third-party reliance, posing risks to cost and quantity[338][339] Risks Related to Commercialization of Our Products, Product Candidates and Other Legal Matters This section covers risks related to market acceptance, sales capabilities, competition, pricing, reimbursement, product liability, and regulatory compliance for commercialized products - Commercial success of VOWST is heavily dependent on market acceptance by physicians, patients, and payors, which is not assured[343][345] - Inability to establish effective sales, marketing, and distribution capabilities, or reliance on third parties, could hinder commercialization[347][350] - Substantial competition from other pharmaceutical and biotechnology companies, potentially leading to others commercializing products more successfully[351][354] - Unfavorable pricing regulations or third-party coverage and reimbursement policies could harm business[357][360] - Product liability lawsuits against the company could cause substantial liabilities and limit commercialization[362] - Competition from biosimilars could materially impact future commercial prospects of VOWST or other product candidates[365][367] - Failure to obtain marketing approval in international jurisdictions would prevent product candidates from being marketed abroad[368] - VOWST and any approved product candidates will remain subject to significant post-marketing regulatory requirements and oversight[369][373] - Improper promotion of off-label uses of approved products could lead to significant liability[379] - Relationships with customers, physicians, and third-party payors are subject to applicable anti-kickback, fraud, and abuse laws, which could expose the company to criminal sanctions or civil penalties[380][383] - Recently enacted and future legislation (e.g., ACA, IRA) may increase the difficulty and cost for the company to obtain marketing approval and commercialize products, and affect prices[384][391] - Governments outside the United States tend to impose strict price controls, which may adversely affect revenues[393] Risks Related to Our Intellectual Property This section addresses risks concerning the protection of proprietary technology, patent validity, trade secret confidentiality, and potential infringement claims - Inability to adequately protect proprietary technology or obtain and maintain issued patents could lead to direct competition, materially impacting business[395][400] - Failure to protect the confidentiality of trade secrets and know-how could harm the company's business and competitive position[407] - Changes in U.S. patent law (e.g., Leahy-Smith Act, Supreme Court rulings) could diminish the value of patents in general, impairing the ability to protect products[409][411][414] - Third parties may initiate legal proceedings alleging infringement of their intellectual property rights, leading to uncertain outcomes and material adverse effects[415][419] - Issued patents covering VOWST or product candidates could be found invalid or unenforceable, or interpreted narrowly if challenged in court[422] - Noncompliance with procedural, document submission, and fee payment requirements by governmental patent agencies could reduce or eliminate patent protection[423] - The company may be subject to claims challenging the inventorship or ownership of its patents and other intellectual property[424][425] - Claims by third parties asserting misappropriation of intellectual property by employees or claiming ownership of the company's IP could arise[427] - If trademarks and trade names are not adequately protected, the company may not be able to build name recognition, adversely affecting its business[430] - The company will not seek to protect its intellectual property rights in all jurisdictions and may not be able to adequately enforce them even where protection is sought[431][435] Risks Related to Our Operations This section discusses operational risks including retaining key personnel, managing growth, international operations, cybersecurity, data protection, and potential acquisitions - Future success depends on the ability to retain key executives and to attract, retain, and motivate qualified personnel[438][439] - Expansion of operational capabilities may lead to difficulties in managing growth, which could disrupt operations[440] - A variety of risks associated with operating internationally (e.g., conflicting laws, currency risks, political unrest) could materially adversely affect the business[442] - Business and operations may suffer in the event of information technology system failures, cyberattacks, or deficiencies in cybersecurity[443][445] - Actual or perceived failures to comply with applicable data protection, privacy, and security laws could adversely affect business, results of operations, and financial condition[446][449][452] - Acquisitions or joint ventures could disrupt the business, cause dilution to stockholders, and otherwise harm the business[453][455] Risks Related to Our Common Stock This section covers risks related to securities litigation, environmental compliance, tax limitations, debt restrictions, stockholder influence, anti-takeover provisions, and dividend policy - The company has been subject to securities class action litigation in the past and may be subject to similar or other litigation in the future, which may harm its business[456] - Failure to comply with environmental, health, and safety laws and regulations could result in fines or penalties or incur costs that could harm the business[457][459] - The ability to use net operating loss carryforwards and research and development credits to offset future taxable income or income tax liabilities may be subject to certain limitations due to ownership changes[460] - The terms of the Oaktree Credit Agreement place restrictions on the company's operating and financial flexibility, and any new debt could further restrict its ability to operate[462][465] - Executive officers, directors, and principal stockholders, if they choose to act together, have the ability to control or significantly influence all matters submitted to stockholders for approval, potentially delaying a change in control[468][469] - Provisions in the restated certificate of incorporation and amended and restated bylaws and under Delaware law could make an acquisition of the company more difficult and may prevent attempts by stockholders to replace or remove current management[470][471] - The certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain actions, and bylaws designate federal district courts for Securities Act actions, which could limit stockholders' ability to obtain a favorable judicial forum[474][475] - As the company does not anticipate paying any cash dividends in the foreseeable future, capital appreciation, if any, will be the sole source of gain for stockholders[476] General Risk Factors This section addresses general risks such as stock price volatility, analyst opinions, public company costs, internal control effectiveness, pandemic impacts, and ESG expectations - The price of the company's common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers[478] - If securities or industry analysts issue an adverse or misleading opinion regarding the business, the common stock price and trading volume could decline[480] - The company will continue to incur costs as a result of being a public company, and management will continue to devote substantial time to compliance initiatives and corporate governance practices[481] - Failure to maintain an effective system of internal control over financial reporting could lead to inaccurate financial reporting or fraud, harming business and stock price[483][485] - The COVID-19 pandemic has adversely impacted and could continue to adversely impact the business, including preclinical studies, clinical trials, commercialization activities, results of operations, and financial condition[486][488] - Failure to keep up with evolving trends and shareholder expectations relating to environmental, social, and governance (ESG) practices or reporting could adversely impact reputation, share price, and access to and cost of capital[489] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company reported no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities for the period - No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities were reported[490] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[491] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures for the period - No mine safety disclosures were reported[492] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023 - No Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during Q2 2023[493] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including corporate documents and certifications - Includes Restated Certificate of Incorporation (filed July 1, 2015, and amended June 27, 2023), Amended and Restated Bylaws, and certifications from the CEO and CFO[494] - Interactive Data Files (Inline XBRL) are also filed[494] SIGNATURES The report is duly signed on behalf of Seres Therapeutics, Inc. by David Arkowitz, Executive Vice President, Chief Financial Officer, and Head of Business Development, on August 8, 2023 - Signed by David Arkowitz, Executive Vice President, Chief Financial Officer and Head of Business Development, on August 8, 2023[499]