Exhibit 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | F-2 |
| Consolidated Balance Sheets as of December 31, 2023 and 2022 | F-4 |
| Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2023 and 2022 | F-5 |
| Consolidated Statements of Stockholders’ (Deficit) Equity as of December 31, 2023 and 2022 | F-6 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 | F-7 |
| Notes to Consolidated Financial Statements | F-8 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Seres Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Seres Therapeutics, Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive loss, of stockholders’ (deficit) equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses and negative cash flows from operations since its inception and needs to raise additional capital to fund future operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Recognition of Collaboration (Profit) Loss Sharing - License Agreement with NHSc Rx License GmbH (Nestlé)
As described in Note 15 to the consolidated financial statements, the Company recognizes collaboration (profit) loss sharing – related party arising from a license agreement with Nestlé, which totaled $0.7 million for the year ended December 31, 2023. Under the 2021 License Agreement with Nestlé, beginning with the first commercial sale of VOWST, which occurred in June 2023, net sales of VOWST are recorded by Nestlé. The Company records its share of the profits or losses from the sales of VOWST, including commercial and medical affairs expenses incurred by the Company, on a net basis, as collaboration (profit) loss sharing - related party. The collaboration (profit) loss sharing - related party line item also includes the Company’s profit on the transfer of VOWST inventory to Nestlé, which represents the excess of the supply price paid by Nestlé over the Company’s cost to manufacture VOWST, subject to a supply price cap applicable to product manufactured prior to commercial launch.
The principal consideration for our determination that performing procedures relating to the recognition of collaboration (profit) loss sharing arising from the license agreement with Nestlé is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s recognition of collaboration (profit) loss sharing.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) evaluating management’s collaboration (profit) loss sharing accounting policy; (ii) testing the completeness and accuracy of certain data used to calculate the collaboration (profit) loss sharing by sending a confirmation and obtaining and inspecting source documents provided by Nestlé; (iii) recalculating the Company’s share of the profit or losses from the sales of VOWST; and (iv) recalculating the Company’s profit on transfer of VOWST inventory to Nestlé and obtaining and inspecting source documents, such as invoices and evidence of payment.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 5, 2024
We have served as the Company’s auditor since 2014.
SERES THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short term investments | ||||||||
| Collaboration receivable - related party | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets | ||||||||
| Restricted cash | ||||||||
| Restricted investments | ||||||||
| Other non-current assets (1) | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholder’s Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities (2) | ||||||||
| Operating lease liabilities | ||||||||
| Short term portion of note payable, net of discount | ||||||||
| Deferred income - related party | ||||||||
| Deferred revenue - related party | ||||||||
| Total current liabilities | ||||||||
| Long term portion of note payable, net of discount | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Deferred revenue, net of current portion - related party | ||||||||
| Warrant liability | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ (deficit) equity: | ||||||||
| Preferred stock, $ |
||||||||
| Common stock, $ |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( |
) | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ (deficit) equity | ( |
) | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
[1]
[2]
The accompanying notes are an integral part of these consolidated financial statements.
SERES THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue: | ||||||||
| $ | $ | |||||||
| Total revenue | ||||||||
| Operating expenses: | ||||||||
| Research and development expenses | $ | $ | ||||||
| General and administrative expenses | ||||||||
| Collaboration (profit) loss sharing - related party | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( |
) | ( |
) | ||||
| Other (expense) income: | ||||||||
| Interest income | ||||||||
| Interest expense | ( |
) | ( |
) | ||||
| Other income (expense) | ( |
) | ||||||
| Total other (expense) income, net | ( |
) | ( |
) | ||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Net loss per share attributable to common stockholders, basic and diluted | $ | ( |
) | $ | ( |
) | ||
| Weighted average common shares outstanding, basic and diluted | ||||||||
| Other comprehensive income (loss): | ||||||||
| Unrealized gain (loss) on investments, net of tax of $ |
||||||||
| Currency translation adjustment | ( |
) | ||||||
| Total other comprehensive income (loss) | ||||||||
| Comprehensive loss | $ | ( |
) | $ | ( |
) | ||
The accompanying notes are an integral part of these consolidated financial statements.
SERES THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(In thousands, except share data)
| Accumulated | Total | |||||||||||||||||||||||
| Common Stock | Additional | Other | Stockholders | |||||||||||||||||||||
| Par | Paid-in | Comprehensive | Accumulated | (Deficit) | ||||||||||||||||||||
| Shares | Value | Capital | Loss (Income) | Deficit | Equity | |||||||||||||||||||
| Balance at December 31, 2021 | ( |
) | ( |
) | ||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | |||||||||||||||||||||
| Issuance of common stock upon vesting of RSUs and PSUs, net of tax withholdings |
— | — | — | — | — | |||||||||||||||||||
| Issuance of common stock under ESPP | — | — | — | |||||||||||||||||||||
| Issuance of common stock net of issuance costs of $ |
— | — | ||||||||||||||||||||||
| Issuance of common stock from at the market equity offering, net of issuance costs of $ |
— | — | ||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||
| Net loss | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Balance at December 31, 2022 | ( |
) | ( |
) | ||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | ||||||||||||||||||||||
| Issuance of common stock upon vesting of RSUs and PSUs, net of tax withholdings |
( |
) | — | — | ||||||||||||||||||||
| Issuance of common stock under ESPP | — | — | ||||||||||||||||||||||
| Issuance of common stock from at the market equity offering, net of issuance costs of $ |
— | — | ||||||||||||||||||||||
| Issuance of warrants | — | — | — | — | ||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||
| Net loss | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
SERES THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) |
||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Depreciation and amortization expense | ||||||||
| Non-cash operating lease cost | ||||||||
| Amortization of premiums on investments | ( |
) | ||||||
| Amortization of debt issuance costs | ||||||||
| Loss on extinguishment of debt | ||||||||
| Change in fair value of warrant liabilities | ( |
) | ||||||
| Collaboration (profit) loss sharing - related party | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current and non-current assets | ( |
) | ( |
) |
||||
| Collaboration receivable - related party | ( |
) | ||||||
| Inventories | ( |
) | ||||||
| Deferred income - related party | ||||||||
| Deferred revenue - related party | ( |
) | ( |
) | ||||
| Accounts payable | ( |
) | ||||||
| Operating lease liabilities | ( |
) | ( |
) | ||||
| Accrued expenses and other current and long-term liabilities (3) | ||||||||
| Net cash (used in) provided by operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( |
) | ( |
) | ||||
| Purchases of investments | ( |
) | ( |
) | ||||
| Sales and maturities of investments | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock, net of issuance costs | ||||||||
| Proceeds from at the market equity offering, net of issuance costs | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Issuance of common stock under ESPP | ||||||||
| Proceeds from issuance of debt, net of issuance costs | ||||||||
| Repayment of notes payable | ( |
) |
( |
) | ||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( |
) | ||||||
| Cash, cash equivalents and restricted cash at beginning of year | ||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: |
||||||||
| Property and equipment purchases included in accounts payable and accrued expenses | $ | $ | ||||||
| Lease liability arising from obtaining right-of-use assets | $ | $ | ||||||
| Prepaid rent reclassified to right-of-use assets | $ | $ | ||||||
| Recognition of warrant liabilities | $ | $ | ||||||
| Warrants issued related to Term Loan and recorded as debt discount (Note 9) | $ | $ | ||||||
[3]
The accompanying notes are an integral part of these consolidated financial statements.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| 1. | Nature of the Business and Basis of Presentation |
Seres
Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of
The Company’s product, VOWST (fecal microbiota spores, live brkp), formerly called SER-109, was approved by the U.S. Food and Drug Administration (“FDA”) on April 26, 2023 and is the first and only orally administered microbiome therapeutic. VOWST is indicated to prevent the recurrence of Clostridioides difficile infection (“CDI”) in patients 18 or older following antibacterial treatment for recurrent CDI. The Company launched VOWST in the United States with its collaborator, Nestlé Health Science (“Nestlé”), in June 2023.
Building upon VOWST, the Company is progressing the Phase 1b clinical trial of SER-155, a microbiome therapeutic candidate consisting of a 16-strain consortium of cultivated bacteria designed to prevent enteric-derived infections and resulting bloodstream infections, as well as induce immune tolerance responses to reduce the incidence of graft-versus-host disease (“GvHD”) in patients undergoing allogeneic hematopoietic stem cell transplantation (“allo-HSCT”). Gastrointestinal microbiome data from the first 100 days of SER-155 Phase 1b open-label study cohort 1 showed the successful engraftment of SER-155 bacterial strains, and a substantial reduction in the cumulative incidence of pathogen domination as compared to a reference cohort of patients, a biomarker associated with the risk of serious enteric infections and resulting bloodstream infections, as well as GvHD. The tolerability profile observed was favorable, with no serious adverse events attributed to SER-155 administration. Enrollment in the placebo-controlled cohort 2 portion of the study is ongoing, and the cohort 2 data readout is anticipated in the third quarter of 2024.
The Company has built and deploys a reverse translational platform and knowledge base for the discovery and development of microbiome therapeutics, and maintains extensive proprietary know-how that may be used to support future research and development efforts. This platform incorporates high-resolution analysis of human clinical data to identify microbiome biomarkers associated with disease and non-disease states; preclinical screening using human cell-based assays and in vitro/ex vivo and in vivo disease models customized for microbiome therapeutics; and microbiological capabilities and a strain library that spans broad biological and functional breadth to both identify specific microbes and microbial metabolites that are associated with disease and to design consortia of bacteria with specific pharmacological properties. In addition, the Company owns a valuable intellectual property estate related to the development and manufacture of microbiome therapeutics.
On October 29, 2023, the
Company’s Board of Directors approved a restructuring plan to prioritize the commercialization of VOWST and the completion of the SER-155 Phase 1b study, while significantly reducing costs and supporting longer-term business sustainability (the
“Restructuring Plan”). The Restructuring Plan included (i) a reduction of the Company’s workforce by approximately
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants.
The
accompanying consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the realization of assets and satisfaction of liabilities and commitments in the
normal course of business. As of December 31, 2023, the Company had an accumulated deficit of $
The Company’s primary focus in recent months has been and will continue to be supporting commercialization, including the manufacture of VOWST, and the completion of the SER-155 Phase 1b study, which requires capital and resources. Other than VOWST, the Company’s product candidates are in development, and will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to potential commercialization. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, or maintained, that any product candidate developed will obtain necessary government regulatory approval, or that any approved product will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Primarily as a result of the
increased and costly efforts to commercialize VOWST and to continue the research and development efforts for other product candidates and preclinical programs, for the year ended December 31, 2023, the Company incurred
a net loss of $
The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, and to generate profitable operations in the future. Management plans to provide for the Company’s capital requirements through financing or other transactions, including drawing the Tranche B Term Loan pursuant to the Oaktree Credit Agreement (see Note 9, Notes Payable), which is expected to become available to the Company based on VOWST net sales forecasts assuming continued quarter-over-quarter net sales growth, and selling shares under the Company’s at the market equity offering. There can be no assurance that the Company will generate significant profit from the transfer of VOWST to Nestlé or its share of collaboration profits resulting from net sales of VOWST, or that it will be able to raise additional capital to fund operations with terms acceptable to the Company, or at all. Because certain elements of management’s plans to mitigate the conditions that raised substantial doubt about the Company’s ability to continue as a going concern are outside of the Company’s control, including the ability to raise capital through an equity or other financing, those elements cannot be considered probable according to Accounting Standards Codification (“ASC”) 205-40, Going Concern (“ASC 205-40”), and therefore cannot be considered in the evaluation of mitigating factors. As a result, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for 12 months from the date these consolidated financial statements are issued.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions.
| 2. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. In these consolidated financial statements, the Company uses estimates and assumptions related to revenue recognition and the accrual of research and development expenses. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.
Cash Equivalents
The Company considers all
short-term, highly liquid investments with original maturities of
Investments
The Company classifies all of
its marketable debt securities as available-for-sale securities. Accordingly, these marketable debt securities are recorded at fair value and unrealized gains and losses are reported as a separate component of accumulated other comprehensive loss
in stockholders’ equity (deficit), unless the Company has determined that the security has experienced a credit loss, the Company expects to sell the security prior to the recovery of its unrealized losses, or it is more likely than not that the
Company will be required to sell the security prior to the recovery of its amortized cost basis. When determining whether a credit loss exists, the Company considers several factors, including the estimated present value of expected cash flows from
the security, whether the Company has the intent to sell the security or whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If the Company has an intent to sell,
or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the
corresponding charge to the consolidated statement of operations and comprehensive loss. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income (expense) within the
consolidated statement of operations and comprehensive loss.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company classifies its available-for-sale marketable debt securities as current assets on the consolidated balance sheet if they mature within one year from the balance sheet date. Any available-for-sale marketable debt securities with maturities greater than one year from the balance sheet date are classified as long-term assets on the consolidated balance sheet.
Restricted Investments
The Company held investments of
$
Restricted Cash
The Company held restricted
cash of $
Cash, cash equivalents and restricted cash were comprised of the following (in thousands):
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash, non-current | ||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. The Company has all cash, cash equivalents and investments balances at accredited financial institutions, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Fair Value Measurements
Certain assets and liabilities are carried at fair value in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
| ● | Level 1—Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The Company’s cash equivalents and investments are carried at fair value, determined according to the fair value hierarchy described above. The Company’s investments in certificates of deposit are carried at amortized cost, which approximates fair value. The carrying values of the Company’s prepaid expenses and other current and non-current assets, accounts payable and accrued expenses approximate their respective fair values due to the short-term nature of these assets and liabilities. The carrying value of the Company’s long-term debt approximates its fair value (a level 2 measurement) at each balance sheet date due to its variable interest rate, which approximates a market interest rate. The warrant liabilities associated with the Company’s credit facility with Oaktree for which there is no current market and the determination of fair value requires significant estimation are classified as Level 3 financial liabilities.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Inventories
Inventories are stated at the lower of cost or estimated net realizable value with cost based on the first-in first-out method. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in clinical trials.
Prior to the regulatory approval of its product candidates, the Company incurs expenses for the manufacture of drug product supplies to support clinical development that could potentially be available to support the commercial launch of those drugs. Until the date at which regulatory approval has been received or is otherwise considered probable, the Company records all such costs as research and development expenses.
Property and Equipment
Property and equipment are
stated at cost less accumulated depreciation.
| Estimated Useful Life (In Years) | |||
| Laboratory equipment | |||
| Computer equipment, furniture and office equipment | |||
| Leasehold improvements | |||
Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.
Impairment of Long-Lived Assets
Long-lived assets consist of
property and equipment and right-of-use assets associated with our lease agreements. All of the Company’s long-lived assets are to be held and used and have definitive lives and accordingly are tested for recoverability whenever events or changes
in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in
relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company
compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset or asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash
flows expected to result from the use of an asset or asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted
cash flows. To date, the Company has
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses include salaries, stock-based compensation and benefits of employees, third-party license fees and other operational costs related to the Company’s research and development activities, including allocated facility-related expenses and external costs of outside vendors engaged to conduct both preclinical studies and clinical trials.
Research Contract Costs and Accruals
The Company has entered into various research and development contracts with research institutions and other companies. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs based on reporting provided by third parties, typically contract research organizations. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued and prepaid balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Accounting for Stock-Based Compensation
The Company measures all stock options and other stock-based awards granted to employees, non-employees, and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues stock options, restricted stock units and restricted stock awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. For stock options or restricted stock units issued with performance-based vesting conditions, the stock compensation expense related to these awards is recognized based on the grant date fair value when achievement of the performance condition is deemed probable.
The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.
The Company accounts for forfeitures of stock-based awards as they occur rather than applying an estimated forfeiture rate to stock-based compensation expense.
The fair value of each stock option grant is estimated on the date of grant using the Black- Scholes option-pricing model. The Company estimates its expected common stock volatility based on its historical common stock volatility for the same time period. The Company uses the simplified method prescribed by Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of options granted to employees, non-employees and directors. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Revenue Recognition
The Company recognizes revenue in accordance with the guidance under ASC 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 applies to all contracts with customers, except those contracts that are within the scope of other guidance, such as leases, insurance, and financial instruments. The Company enters into agreements that are within the scope of ASC 606, under which the Company licenses certain of the Company’s product candidates and performs research and development services in connection with such arrangements. The terms of these arrangements typically include payment of one or more of the following: nonrefundable up-front fees, reimbursement of research and development costs, development, clinical, regulatory and commercial sales milestone payments, and royalties on net sales of licensed products. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. When determining the timing and extent of revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
| a. | identify the contract(s) with a customer; |
| b. | identify the performance obligations in the contract; |
| c. | determine the transaction price; |
| d. | allocate the transaction price to the performance obligations in the contract; and |
| e. | recognize revenue when (or as) the entity satisfies a performance obligation. |
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services transferred to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in the Company’s arrangements typically consist of a license to the Company’s intellectual property and/or research and development services. The Company may provide options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) is separately identifiable from other promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet the requirements of a performance obligation.
The Company determines the transaction price based on the amount of consideration the Company expects to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, the Company estimates the probability and extent of consideration it expects to receive under the contract utilizing either the most likely amount method or expected amount method, whichever best estimates the amount expected to be received. The Company then considers any constraints on the variable consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The Company then allocates the transaction price to each performance obligation based on the relative standalone selling price and recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
The Company records amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded for deferred revenue.
The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. Incremental costs of obtaining a contract are expensed as and when incurred if the expected period over which the Company would have amortized the asset is one year or less, or the amount is immaterial.
Collaboration Revenue
Arrangements with collaborators may include licenses to intellectual property, research and development services, manufacturing services for clinical and commercial supply, and participation on joint steering committees. The Company evaluates the promised goods or services to determine which promises, or group of promises, represent performance obligations. In contemplation of whether a promised good or service meets the criteria required of a performance obligation, the Company considers the stage of development of the underlying intellectual property, the capabilities and expertise of the customer relative to the underlying intellectual property, and whether the promised goods or services are integral to or dependent on other promises in the contract. When accounting for an arrangement that contains multiple performance obligations, the Company must develop judgmental assumptions, which may include market conditions, reimbursement rates for personnel costs, development timelines and probabilities of regulatory success to determine the stand-alone selling price for each performance obligation identified in the contract.
When the Company concludes that a contract should be accounted for as a combined performance obligation and recognized over time, the Company must then determine the period over which revenue should be recognized and the method by which to measure revenue. The Company generally recognizes revenue using a cost-based input method.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Licenses of intellectual property
If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue associated with the bundled performance obligation. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition.
Milestone Payments
At the inception of each arrangement that includes developmental and regulatory milestone payments, the Company evaluates whether the achievement of each milestone specifically relates to the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service within a performance obligation. If the achievement of a milestone is considered a direct result of the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service and the receipt of the payment is based upon the achievement of the milestone, the associated milestone value is allocated to that distinct good or service, otherwise it will be allocated to all performance obligations of the arrangement based on the initial allocation.
The Company evaluates each milestone to determine when and how much of the milestone to include in the transaction price. The Company first estimates the amount of the milestone payment that the Company could receive using either the expected value or the most likely amount approach. The Company primarily uses the most likely amount approach as that approach is generally most predictive for milestone payments with a binary outcome. Then, the Company considers whether any portion of that estimated amount is subject to the variable consideration constraint (that is, whether it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty). The Company updates the estimate of variable consideration included in the transaction price at each reporting date which includes updating the assessment of the likely amount of consideration and the application of the constraint to reflect current facts and circumstances.
Royalties
For arrangements that include
sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales
occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has
Manufacturing supply services
For arrangements that include a promise of supply of clinical or commercial product, the Company determines if the supply is a promise in the contract or a future obligation at the customer’s option. If determined to be a promise at inception of the contract, the Company evaluates the promise to determine whether it is a separate performance obligation or a component of a bundled performance obligation. If determined to be an option, the Company determines if the option provides a material right to the customer and if so, accounts for the option as a separate performance obligation. If determined to be an option but not a material right, the Company accounts for the option as a separate contract when the customer elects to exercise the option.
Grant Revenue
The Company generates revenue from government contracts that reimburse the Company for certain allowable costs for funded projects. For contracts with government agencies, when the Company has concluded that it is the principal in conducting the research and development expenses, and where the funding arrangement is considered central to the Company’s ongoing operations, the Company classifies the recognized funding received as revenue.
The Company has concluded to recognize funding received as revenue, rather than as a reduction of research and development expenses, because the Company is the principal in conducting the research and development activities and these contracts are central to its ongoing operations. Revenue is recognized as the qualifying expenses related to the contracts are incurred. Revenue recognized upon incurring qualifying expenses in advance of receipt of funding is recorded in the Company’s consolidated balance sheet as accounts receivable. The related costs incurred by the Company are included in research and development expense in the Company’s consolidated statements of operations and comprehensive loss.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Collaboration Profit and Loss
The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”), which includes determining whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606. For those elements of the arrangement that are accounted for pursuant to ASC 606, the Company applies the five-step model prescribed in ASC 606, as described above. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to ASC 606. The Company records its share of the profits or losses from the sales of VOWST on a net basis, as collaboration (profit) loss sharing - related party because Nestlé and the Company are both active participants in commercialization activities and are exposed to significant risks and rewards that are dependent on the commercial success of the activities in the arrangement. The collaboration (profit) loss sharing - related party line item also includes the Company’s profit on the transfer of VOWST inventory to Nestlé, which represents the excess of the supply price paid by Nestlé over our cost to manufacture VOWST.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense.
The Company applies ASC 740-10,
Accounting for Uncertain Tax Positions. The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax
position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine
the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than
Segment Data
The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s singular focus is on developing microbiome therapeutics to treat the modulation of the colonic microbiome. Revenue to date has been generated solely through the Company’s agreements with its collaborators, all of which has been earned in the United States. All tangible assets are held in the United States.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. For the years ended December 31, 2023 and 2022, other comprehensive income (loss) consisted of changes in unrealized gains (losses) from available-for-sale investments and a currency translation adjustment.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and unvested restricted stock. The Company applies the two-class method to calculate its basic and diluted net loss per share attributable to common stockholders. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company was in a net loss position for each of the periods presented.
The Company’s restricted stock awards entitle the holder of such awards to dividends declared or paid by the board of directors, regardless of whether such awards are unvested, as if such shares were outstanding common shares at the time of the dividend. However, the unvested restricted stock awards are not entitled to share in the residual net assets (deficit) of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Leases
In accordance with ASC 842, Leases, the Company determines if an arrangement is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date as operating or finance leases and records a right-of-use asset and a lease liability on the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. Leases with an initial term of 12 months or less are not recorded on the balance sheet, but payments are recognized as expense on a straight-line basis over the lease term. The Company has elected not to record a right-of-use asset or lease liability for leases with terms of 12 months or less.
A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to the Company by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that it is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term.
The Company enters into contracts that contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. The Company combines the lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.
Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the rate implicit is not readily determinable, the Company utilizes an estimate of its incremental borrowing rate based upon the available information at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Finance lease assets are amortized to depreciation expense using the straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as imputed interest expense and (ii) a portion that reduces the finance liability associated with the lease.
Right-of-use assets and lease liabilities are reassessed and remeasured when amendments to the terms of the lease agreement require reassessment and remeasurement of the lease payments and other inputs to the calculation of right-of-use assets and lease liabilities. The Company accounts for remeasurements and modifications to lease liabilities using the present value of remaining lease payments and estimated incremental borrowing rate at the date of remeasurement. The adjustment to the lease liability is recognized as a gain or loss in operating expenses, or as an adjustment to the right-of-use asset, as appropriate, based on the terms and conditions within the lease that are amended.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. The Company adopted the new standard using a modified retrospective approach as of January 1, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280, on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-07 may have on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures which requires public entities to disclose specific categories in the effective tax rate reconciliation, as well as additional information for reconciling items that exceed a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid disaggregated by federal, state and foreign taxes, and further disaggregated for specific jurisdictions that exceed 5% of total income taxes paid, among other expanded disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-09 may have on its consolidated financial statements.
| 3. | Fair Value of Financial Assets and Liabilities |
The following tables present the Company’s fair value hierarchy for its assets and liabilities that are measured at fair value on a recurring basis (in thousands):
| Fair Value Measurements as of December 31, 2023 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | $ | — | $ | — | $ | ||||||||||
| Commercial paper | — | — | ||||||||||||||
| Government securities | — | — | ||||||||||||||
| Total assets | $ | $ | $ | — | $ | |||||||||||
| Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| Fair Value Measurements as of December 31, 2022 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | $ | — | $ | — | $ | ||||||||||
| Commercial paper | — | — | ||||||||||||||
| Government securities | — | — | ||||||||||||||
| Investments: | ||||||||||||||||
| Commercial paper | $ | — | $ | $ | — | $ | ||||||||||
| Corporate bonds | — | — | ||||||||||||||
| Certificate of deposits | — | — | ||||||||||||||
| Government securities | — | — | ||||||||||||||
| $ | $ | $ | — | $ | ||||||||||||
Money market funds are valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. Commercial paper, corporate bonds, and government securities are valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.
As of December 31, 2023 and 2022 the Company held a restricted investment of $
Level 3 financial liabilities consist of the warrant liabilities for which there is no current market such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded through other income (expense). The Company uses a Monte-Carlo simulation model which includes the Black-Scholes option pricing model to value the Level 3 warrant liabilities at inception and on each subsequent reporting date. This model incorporates transaction details such as the Company’s stock price, contractual terms of the underlying warrants, maturity, risk free rates, volatility, as well as the term to achievement of estimated sales targets. The unobservable inputs for all of the Level 3 warrant liabilities are volatility and the term to achievement of estimated sales targets. The Company utilizes its historical and implied volatility, using its closing common stock prices and market data, to reflect future volatility over the expected term of the warrants. The Company estimates the time to achievement of sales targets of VOWST using information and forecasts generated by the Company in consideration of the terms of the 2021 License Agreement.
On the Closing Date (as defined in Note 9, Notes Payable) and as of December 31, 2023, the Level 3 inputs to the warrant liabilities are as follows:
| Closing Date | December 31, 2023 | |||||||
| Volatility | % | % | ||||||
| Term (in years) | ||||||||
A reconciliation of the beginning and ending balances for the year ended December 31, 2023 for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):
| Warrant Liabilities | ||||
| Balance as of December 31, 2022 | $ | |||
| Issuance of warrants | ||||
| ( |
) | |||
| Balance as of December 31, 2023 | ||||
There were
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| 4. | Investments |
As of December 31, 2023, the Company held restricted investments of $
Investments by security type consisted of the following at December 31, 2022 (in thousands):
| December 31, 2022 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value |
|||||||||||||
| Investments: | ||||||||||||||||
| Commercial paper | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ( |
) | ||||||||||||||
| Government securities | ( |
) | ||||||||||||||
| $ | $ | $ | ( |
) | $ | |||||||||||
Excluded from the table above at December 31, 2022 are restricted investments of $
| 5. | Inventories |
Capitalized inventories consist of the following at December 31, 2023 (in thousands):
| December 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
There were
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| 6. | Property and Equipment, Net |
Property and equipment, net consisted of the following:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Laboratory equipment | $ | $ | ||||||
| Computer equipment | ||||||||
| Furniture and office equipment | ||||||||
| Leasehold improvements | ||||||||
| Construction in progress | ||||||||
| Less: Accumulated depreciation and amortization | ( |
) | ( |
) | ||||
| $ | $ | |||||||
Depreciation and amortization expense was $
| 7. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Clinical and development costs | $ | $ | ||||||
| Manufacturing and quality costs | ||||||||
| Payroll and payroll-related costs | ||||||||
| Collaboration payable - related party (Note 18) | ||||||||
| Facility and other | ||||||||
| $ | $ | |||||||
As of December 31, 2023, the Company accrued a total of $
Additionally, included within payroll and payroll-related costs is $
| 8. | Leases |
The Company leases real estate, primarily laboratory, office and manufacturing space. The Company’s leases
have remaining terms ranging from approximately to
In April 2022, the Company entered into a lease for additional laboratory and office space in Spring House,
Pennsylvania, with a lease term of
In December 2022, the Company amended its lease of its former corporate headquarters in Cambridge,
Massachusetts (the “Lease Amendment”). The Lease Amendment reduced the office space subject to the lease while maintaining the laboratory and manufacturing space and extended the term to begin in November 2023, when the term of the original lease
concludes, and continue through January 2030. The Company accounted for the Lease Amendment as a modification to the existing lease and not a new contract separate from the existing contract, and accordingly increased the associated lease liability
and right-of-use asset by $
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company has committed to restore the leased space subject to the Lease Amendment to the condition
specified in the original lease, and the Company updated its estimate of the costs required to fulfill this obligation in accordance with ASC 410, Asset Retirement Obligations, at the effective date of the modification. Based on current
estimates, the Company recorded an additional asset retirement obligation of $
In June 2023, the Company entered into a lease for a donor collection facility in Irvine, California, with a lease term of approximately
In January 2024, the Company entered into a sublease agreement with an unrelated third party to sublease a portion of its office and laboratory
space in Cambridge, Massachusetts. The term of the sublease agreement commenced in March 2024 and ends on January 13, 2030. The Company will receive lease payments over the sublease term totaling $
The following table summarizes the presentation in the Company’s consolidated balance sheets of its operating leases:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Assets: | ||||||||
| Operating lease assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Operating lease liabilities | $ | $ | ||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
The following table summarizes the effect of lease costs in the Company’s consolidated statement of operations and comprehensive loss:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease costs | $ | $ | ||||||
| Short-term lease costs | ||||||||
| Variable lease costs | ||||||||
| Sublease income | ||||||||
| Total lease costs | $ | $ | ||||||
During the years ended December 31, 2023 and 2022, the Company made cash payments for operating leases of $
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
As of December 31, 2023, future payments of operating lease liabilities are as follows (in thousands):
| As of December 31, 2023 | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 and thereafter | ||||
| Total future payments of operating lease liabilities | $ | |||
| Less: imputed interest | ( |
) | ||
| Present value of operating lease liabilities | $ | |||
As of December 31, 2023, the weighted average remaining lease term was years
and the weighted average incremental borrowing rate used to determine the operating lease liability was
| 9. | Notes Payable |
On October 29, 2019 (“Hercules Closing Date”), the Company entered into a Loan and Security Agreement
(the “Hercules Loan Agreement”) with Hercules Capital, Inc. (“Hercules”) pursuant to which a term loan in an aggregate principal amount of up to $
The first tranche in an aggregate principal amount of $
All advances outstanding under the Hercules Credit Facility bore interest at a rate equal to the greater
of either (i) the Prime Rate (as reported in The Wall Street Journal) plus
The Hercules Credit Facility was secured by substantially all of the Company’s assets, other than the Company’s intellectual property. The Company agreed to not pledge or secure its intellectual property to others.
The Company accounted for the Amendment as a modification in accordance with the guidance in ASC 470-50,
Debt (“ASC 470”). Amounts paid to the lenders were recorded as debt discount and a new effective interest rate was established. Upon issuance, the Hercules Credit Facility was recorded as a liability with an initial carrying value of $
On April 27, 2023 (the “Closing Date”), the Company entered into the Credit Agreement and Guaranty (the “Oaktree Credit Agreement”) among the
Company, the subsidiary guarantors from time to time party thereto, the lenders from time to time party thereto (the “Lenders”), and Oaktree Fund Administration, LLC, in its capacity as administrative agent for the Lenders (in such capacity, the
“Agent”). The Oaktree Credit Agreement establishes a term loan facility of $
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Of the $
Borrowings under the Term Loan bear interest at a rate per annum equal to the three-month term Secured Overnight Financing Rate (“SOFR”)
(subject to a
The Company is obligated to pay the Lenders an exit fee equal to
The Company’s obligations under the Oaktree Credit Agreement and the other Loan Documents (as defined in the Oaktree Credit Agreement) will be guaranteed by any domestic subsidiaries of the Company that become Guarantors (as defined in the Oaktree Credit Agreement), subject to certain exceptions. The Company’s and the Guarantors’ (collectively, the “Loan Parties”) respective obligations under the Oaktree Credit Agreement and the other Loan Documents are secured by first priority security interests in substantially all assets of the Loan Parties, including intellectual property, subject to certain customary thresholds and exceptions. As of December 31, 2023, there were no Guarantors.
The Oaktree Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including a financial
covenant requiring the Company to maintain certain levels of cash and cash equivalents in accounts subject to a control agreement in favor of the Agent of at least $
In addition, the Oaktree Credit Agreement contains certain events of default that entitle the Agent to cause the Company’s indebtedness under
the Oaktree Credit Agreement to become immediately due and payable, and to exercise remedies against the Loan Parties and the collateral securing the Term Loan, including cash. In an event of default and for its duration, as defined in the Oaktree
Credit Agreement, an additional default interest rate equal to
On the Closing Date, the Company issued to the Lenders warrants to purchase
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company determined that the Tranche A Loan, the Tranche A Warrant, the commitment by the Lenders to fund the Tranche B Loan and the Tranche
C Loan, and the Tranche B Warrant and Tranche C Warrant, are all freestanding financial instruments. On the Closing Date, the Company evaluated the Tranche A Warrant and determined that it meets the requirements for equity classification under ASC
815, Derivatives and Hedging (“ASC 815”). The net proceeds from the Tranche A Loan were allocated to the Tranche A Warrant and the Tranche A Loan using the relative fair value method, and the relative fair value of the Tranche A Warrant, $
The Additional Warrants are considered outstanding instruments at the Closing Date of the Oaktree Credit Agreement and in accordance with ASC
815, are initially recognized at their respective fair values as derivative liabilities given the variable settlement amount of their respective aggregate exercise prices. The Company adjusts the carrying values of the Additional Warrants to their
respective fair values at each reporting period, until such time that the Additional Warrants are issued and their respective exercise prices become fixed, and the value of the Additional Warrants is reclassified to additional paid-in capital. The
Company uses a simulation model to determine the fair value of the Additional Warrants, as described in Note 3, Fair Value Measurements. The fair value of the Tranche B Warrant and Tranche C Warrant derivative liabilities was $
Changes in the fair values of the Additional Warrants are recorded as other income (expense) in the consolidated statements of operations and comprehensive loss. In addition to the relative fair value of the Tranche A Warrant, the original issue discount and certain debt issuance costs were recorded as a discount to the Tranche A Loan, the total of which will be accreted to the Tranche A Loan as interest expense over the life of the Tranche A Loan using the effective interest method. The fair values of the derivative liabilities associated with the Tranche B Warrant and Tranche C Warrant are recorded as loan commitment prepaid assets on the Closing Date, which are included in the consolidated balance sheets in other non-current assets, and will be reclassified as discounts to the associated Term Loan balances at such time that they are drawn.
The effective interest rate in effect as of December 31, 2023 was
| Year Ending December 31, | Principal | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
During the year ended December 31, 2023, the Company recognized $
| 10. | Preferred Stock |
On July 1, 2015, in connection with the closing of the initial public offering of the Company’s common stock (“IPO”), the Company effected its
Restated Certificate of Incorporation, which authorizes the Company to issue
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| 11. | Common Stock and Stock-Based Awards |
On July 1, 2015, in connection with the closing of the IPO, the Company effected its Restated Certificate
of Incorporation, which authorizes the Company to issue
In November 2019, the Company entered into a common stock sales agreement, or the 2019 Sales Agreement,
with Cowen to sell shares of the Company’s common stock with aggregate gross sales proceeds of up to $
Between December 31, 2023 and February 29, 2024, the Company sold
On June 29, 2022, the Company entered into securities purchase agreements with new and existing investors
and certain directors and officers in a registered direct offering, or the Registered Direct Offering, of an aggregate of
2012 Stock Incentive Plan
The Company’s 2012 Stock Incentive Plan, as amended, (the “2012 Plan”) provided for the Company to sell
or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors and consultants of the Company. The 2012 Plan is
administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors.
Stock options granted under the 2012 Plan generally vest over
2015 Incentive Award Plan
On June 16, 2015, the Company’s stockholders approved the 2015 Incentive Award Plan (the “2015 Plan”),
which became effective on June 25, 2015. The 2015 Plan was subsequently amended on December 14, 2022, and provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted
stock units and other stock-based awards.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Stock awards granted under the 2015 Plan generally vest over
2015 Employee Stock Purchase Plan
On June 16, 2015, the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (the “ESPP”),
which became effective on June 25, 2015. A total of
The ESPP provides that eligible employees may contribute up to
2022 Employment Inducement Award Plan
On December 14, 2022, the Company’s board of directors approved the 2022 Employment Inducement Award Plan
(the “2022 Plan”), which became effective on such date without stockholder approval pursuant to Rule 5635(c)(4) of The Nasdaq Stock Market LLC listing rules (“Rule 5635(c)(4)”). The 2022 Plan provides for the grant of nonqualified stock options,
stock appreciation rights, restricted stock awards, restricted stock units and other stock- or cash-based awards. In accordance with Rule 5635(c)(4), awards under the 2022 Plan may only be made to a newly hired employee who has not previously been
a member of our board of directors, or an employee who is being rehired following a bona fide period of non-employment by us as a material inducement to the employee’s entering into employment with us. A total of
As of December 31, 2023, there were
Stock Options
The following table summarizes the Company’s stock option activity for the year ended December 31, 2023:
| Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||||
| (in years) | ||||||||||||||||
| Outstanding as of December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited | ( |
) | ||||||||||||||
| Outstanding as of December 31, 2023 | $ | $ | ||||||||||||||
| Vested or expected to vest as of December 31, 2023 | $ | $ | ||||||||||||||
| Options exercisable as of December 31, 2023 | $ | $ | ||||||||||||||
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The weighted average grant-date fair value of stock options granted during the years ended December 31,
2023 and 2022 was $
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.
During the year ended December 31, 2021, the Company granted performance-based stock options to employees
for the purchase of an aggregate of
Restricted Stock Units
The Company has granted restricted stock units with service-based vesting conditions (“RSUs”) and
restricted stock units with performance-based vesting conditions (“PSUs”). RSUs and PSUs represent the right to receive shares of common stock upon meeting specified vesting requirements. Restricted stock units may not be sold or transferred by the
holder and vest according to the vesting conditions of each award.
| Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
| Unvested restricted stock units as of December 31, 2022 | $ | |||||||
| Granted | $ | |||||||
| Forfeited | ( |
) | $ | |||||
| Vested | ( |
) | $ | |||||
| Unvested restricted stock units as of December 31, 2023 | $ | |||||||
During the years ended December 31, 2023 and 2022, the Company granted
The aggregate intrinsic value of RSUs, including PSUs for which the performance conditions have been met,
that vested during the years ended December 31, 2023 and 2022 was $
In November 2023, as part of the corporate restructuring described in Note 13, Restructuring, the
Company issued retention awards to employees of the Company in the form of RSUs which vest in two tranches on August 15, 2024, and May 15, 2025, subject to remaining actively employed with the Company through such date. The $
In connection with the Restructuring Plan, the Company elected to accelerate the vesting of certain RSUs
and PSUs previously granted to employees who were terminated as part of the Restructuring Plan. The Company accounted for the acceleration as a modification under applicable accounting standards, in which awards that were previously deemed not
probable of vesting due to the employees’ terminations became probable. Accordingly, the Company reversed $
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
During the year ended December 31, 2021, the Company granted PSUs to
During the year ended December 31, 2023, the Company granted PSUs to employees covering an aggregate of
Stock-based Compensation Valuation
The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors were as follows, presented on a weighted average basis:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (in years) | ||||||||
| Expected volatility | % | % | ||||||
| Expected dividend yield | % | % | ||||||
The Company estimates the fair value of rights to acquire common stock under the ESPP using a
Black-Scholes valuation model on the date of grant and the straight-line attribution approach to recognize the expense.
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (in years) | ||||||||
| Expected volatility | % | % | ||||||
| Expected dividend yield | % | % | ||||||
Stock-based Compensation
The Company recorded stock-based compensation expense related to stock options and restricted stock units in the following expense categories of its consolidated statements of operations and comprehensive loss:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Research and development expenses | $ | $ | ||||||
| General and administrative expenses | ||||||||
| $ | $ | |||||||
As of December 31, 2023, the Company had an aggregate of $
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| 12. | Net Loss per Share |
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator: | ||||||||
| Net loss attributable to common stockholders | $ | ( |
) | $ | ( |
) | ||
| Denominator: | ||||||||
| Weighted average common shares outstanding, basic and diluted | ||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | ( |
) | $ | ( |
) | ||
| Anti-dilutive potential common stock equivalents excluded from the calculation of net loss per share: | ||||||||
| Stock options to purchase common stock | ||||||||
| Unvested restricted stock units | ||||||||
| Shares issuable under employee stock purchase plan | ||||||||
| — | ||||||||
The Company’s potential dilutive securities, which include stock options, unvested restricted common stock and shares issuable under the ESPP, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share and therefore been anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. Additionally, for the year ended December 31, 2023, the warrants to purchase common stock were excluded because the exercise price of the Tranche A Warrants is greater than the average fair value of the Company’s common shares, and the necessary conditions for exercise of the Tranche B and Tranche C Warrants had not been met.
| 13. | Restructuring |
On November 2, 2023, the Company announced the Restructuring Plan to prioritize the commercialization of
VOWST and the completion of the SER-155 Phase 1b study, while significantly reducing costs and supporting longer-term business sustainability. The Restructuring Plan included (i) a reduction of the Company’s workforce by approximately
During the year ended December 31, 2023, the Company recognized a restructuring charge of $
| Year Ended December 31, 2023 | ||||||||||||
| Research and development | General and administrative | Total | ||||||||||
| Severance and other employee costs | ||||||||||||
| Acceleration of unvested equity awards | ||||||||||||
| Total restructuring charges | ||||||||||||
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The restructuring charge is included in accrued expenses and other current liabilities in the Company’s
consolidated balance sheets.
| As of December 31, 2023 | ||||
| Restructuring expenses | $ | |||
| Less: stock-based compensation | $ | ( |
) | |
| Cash payments made | ( |
) | ||
| Remaining liability included in accrued expenses and other current liabilities | $ | |||
The Company expects that substantially all of the accrued restructuring charges as of December 31, 2023 will be paid in cash by March 31, 2024.
Retention Awards
In November 2023, upon recommendation of the Company’s Compensation Committee, the Board of Directors
approved retention awards for employees of the Company in the form of RSUs which vest in two tranches on August 15, 2024, and May 15, 2025, subject to remaining actively employed with the Company through such date. The $
| 14. | Revenue from Contracts with Customers |
License Agreement with NHSc Rx License GmbH (Nestlé)
Summary of Agreement
In July 2021, the Company entered into the 2021 License Agreement with NHSc Pharma Partners, succeeded by NHSc Rx License GmbH (together with Société des Produits Nestlé S.A., their affiliates, and their subsidiaries, “Nestlé”) (the “2021 License Agreement”). Under the terms of the 2021 License Agreement, the Company granted Nestlé a co-exclusive, sublicensable (under certain circumstances) license to develop, commercialize and conduct medical affairs activities for (i) therapeutic products based on the Company’s microbiome technology (including VOWST, previously the Company's SER-109 product candidate) that are developed by the Company or on the Company’s behalf for the treatment of CDI and recurrent CDI, as well as any other indications pursued for the products upon mutual agreement of the parties (the “2021 Field”) in the United States and Canada (the “2021 Licensed Territory”), and (ii) VOWST and any improvements and modifications thereto developed pursuant to the terms of the 2021 License Agreement (the “2021 Collaboration Products”) for any indications in the 2021 Licensed Territory. The Company is responsible for completing development of the first 2021 Collaboration Product, which is VOWST, in the 2021 Field in the United States until first regulatory approval, which was obtained on April 26, 2023.
Nestlé has the sole right to commercialize the 2021 Collaboration Products in the 2021 Licensed Territory in accordance with a commercialization plan. Both parties will perform medical affairs activities in the 2021 Licensed Territory in accordance with a medical affairs plan. The Company is responsible for the manufacturing and supply for commercialization under a supply agreement that has been executed between the parties. Both parties performed pre-launch activities of VOWST prior to the first commercial sale in the United States, which occurred in June 2023. The Company was responsible for funding the pre-launch activities until first commercial sale of VOWST in the 2021 Licensed Territory and in accordance with a pre-launch plan, up to a specified cap. The Company is entitled to share equally in the commercial profits and losses of VOWST.
In connection with the 2021 License Agreement, the Company received an upfront payment of $
The 2021 License Agreement continues in effect until all development and commercialization activities for
all 2021 Collaboration Products in the 2021 Licensed Territory have permanently ceased. The 2021 License Agreement may be terminated by either party upon
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Accounting Analysis
The 2021 License Agreement represents a separate contract between Nestlé and the Company. The 2021 License Agreement is within the scope of Accounting Standard Update 2018-18, Collaborative Arrangements (Topic 808) (see Note 15, Collaboration Profit and Loss), and has elements that are within the scope of ASC 606 - Revenue From Contracts with Customers (Topic 606) and Topic 808.
The Company identified the following promises in the 2021 License Agreement that were evaluated under the scope of Topic 606: (i) delivery of a co-exclusive license for VOWST to develop, commercialize and conduct medical affairs in the United States and Canada; (ii) services to be performed in accordance with the development and regulatory activity plan to obtain regulatory approval of VOWST in the United States. The Company also evaluated whether certain options outlined within the 2021 License Agreement represented material rights that would give rise to a performance obligation and concluded that none of the options convey a material right to Nestlé and therefore are not considered separate performance obligations within the 2021 License Agreement.
The Company assessed the above promises and determined that the co-exclusive license for VOWST and the services to obtain regulatory approval of VOWST in the United States are reflective of a vendor-customer relationship and therefore represent performance obligations within the scope of Topic 606. The co-exclusive license for VOWST in the United States and Canada is considered functional intellectual property and distinct from other promises under the contract as Nestlé can benefit from the license on its own or together with other readily available resources. The services performed by the Company to obtain regulatory approval of VOWST were not complex or specialized, could be performed by another qualified third party, were not expected to significantly modify or customize the license given that VOWST was late-stage intellectual property that completed clinical development and the services were performed over a short period of time. Therefore, the license and the services each represents a separate performance obligation within a contract with a customer under the scope of Topic 606 at contract inception.
The up-front payment of $
The Company allocated the $
The Topic 606 transaction price of $
The Company determined that any variable consideration related to the remaining regulatory milestones is deemed to be fully constrained and therefore excluded from the transaction price due to the high degree of uncertainty and risk associated with these potential payments, as the Company determined that it could not assert that it was probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company also determined that sales milestones relate solely to the license of intellectual property and are therefore excluded from the transaction price under the sales- or usage-based royalty exception of Topic 606. Revenue related to these sales milestones will only be recognized when the associated sales occur, and relevant thresholds are met.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company recognized the $
Collaboration and License Agreement with Société des Produits Nestlé S.A. (Nestlé)
Summary of Agreement
In January 2016, the Company entered into a collaboration and license agreement with Nestec Ltd., succeeded by Société des Produits Nestlé S.A. (together with NHSc Rx License GmbH, their affiliates and their subsidiaries, “Nestlé”) (the “2016 License Agreement”) for the development and commercialization of certain product candidates for the treatment and management of CDI and inflammatory bowel disease (“IBD”), including UC and Crohn’s disease. The 2016 License Agreement supports the development of the Company’s portfolio of products for CDI and IBD in markets outside of the United States and Canada (the “2016 Licensed Territory”).
Under the 2016 License Agreement, the Company granted to Nestlé an exclusive, royalty-bearing license to develop and commercialize, in the 2016 Licensed Territory, certain products based on its microbiome technology that are being developed or commercialized, as applicable, for the treatment of CDI and IBD, including VOWST, SER-262, SER-287 and SER-301 (collectively, the “2016 Collaboration Products”). The 2016 License Agreement sets forth the Company’s and Nestlé’s respective obligations for development, commercialization, regulatory and manufacturing and supply activities for the 2016 Collaboration Products with respect to the licensed fields and the 2016 Licensed Territory.
Under the 2016 License Agreement, Nestlé
agreed to pay the Company an upfront cash payment of $
Under the 2016 License Agreement, the
Company is entitled to receive a $
The 2016 License Agreement continues in effect until terminated by either party on the following bases: (i) Nestlé may terminate the 2016 License Agreement in the event of serious safety issues related to any of the 2016 Collaboration Products; (ii) the Company may terminate the 2016 License Agreement if Nestlé challenges the validity or enforceability of any of the Company’s licensed patents; and (iii) either party may terminate the 2016 License Agreement in the event of the other party’s uncured material breach or insolvency. Upon termination of the 2016 License Agreement, all licenses granted to Nestlé by the Company will terminate, and all rights in and to the 2016 Collaboration Products in the 2016 Licensed Territory will revert to the Company. If the Company commits a material breach of the 2016 License Agreement, Nestlé may elect not to terminate the 2016 License Agreement but instead apply specified adjustments to its payment obligations and other terms and conditions of the 2016 License Agreement.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The Company assessed the 2016 License Agreement in accordance with Topic 606 and concluded that Nestlé is a customer. The Company identified the following promises under the contract: (i) a license to develop and commercialize the 2016 Collaboration Products in the 2016 Licensed Territory, (ii) obligation to perform research and development services, (iii) participation on a joint steering committee, and (iv) manufacturing services to provide clinical supply to complete future clinical trials. In addition, the Company identified a contingent obligation to perform manufacturing services to provide commercial supply if commercialization occurs, which is contingent upon regulatory approval. This contingent obligation is not a performance obligation at inception and has been excluded from the initial allocation as it represents a separate buying decision at market rates, rather than a material right in the contract. The Company assessed the promised goods and services to determine if they are distinct. Based on this assessment, the Company determined that Nestlé cannot benefit from the promised goods and services separately from the others as they are highly interrelated and therefore not distinct. Accordingly, the promised goods and services represent one combined performance obligation and the entire transaction price will be allocated to that single combined performance obligation.
At contract inception, the Company
determined that the $
During the years ended December 31, 2023 and
2022, using the cost-to-cost method, which best depicts the transfer of control to the customer, the Company recognized ($
As of December 31, 2023 and 2022, there was
$
Contract Balances from Contracts with Customers
The following tables present changes in the Company’s contract liabilities during the year ended December 31, 2023 and 2022:
|
Balance as of December 31, 2022 |
Additions | Deductions |
Balance as of December 31, 2023 |
|||||||||||||
| Year ended December 31, 2023 | ||||||||||||||||
| Contract liabilities: | ||||||||||||||||
| Deferred revenue - related party | $ | ( |
) | $ | ||||||||||||
|
Balance as of December 31, 2021 |
Additions | Deductions |
Balance as of December 31, 2022 |
|||||||||||||
| Year ended December 31, 2022 | ||||||||||||||||
| Contract liabilities: | ||||||||||||||||
| Deferred revenue - related party | $ | ( |
) | $ | ||||||||||||
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
During the year ended December 31, 2023, the Company recognized the following revenues as a result of changes in the contract liability balances in the respective periods (in thousands):
| Year Ended December 31, | |||||||
| 2023 | 2022 | ||||||
| Revenue recognized in the period from: | |||||||
| Amounts included in the contract liability at the beginning of the period | $ | $ | |||||
When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Revenue is recognized from the contract liability over time using the cost-to-cost method.
| 15. | Collaboration Profit and Loss |
License Agreement with NHSc Rx License GmbH (Nestlé)
Accounting Analysis
The 2021 License Agreement represents a separate contract between Nestlé and the Company. The 2021 License Agreement is within the scope of Topic 808, and has elements that are within the scope of Topic 606 (see Note 14, Revenue from Contracts with Customers) and Topic 808.
The
Company considers the collaborative pre-launch activities and commercialization activities to be separate units of account within the scope of Topic 808 and are not performance obligations under Topic 606. The Company and Nestlé were both active
participants in the pre-launch activities and commercialization activities and were exposed to significant risks and rewards that were dependent on the commercial success of the activities in the arrangement. The amount allocated to the Topic 808
unit of accounting relates to the pre-launch activities performed prior to the first commercial sale of VOWST and was determined to be $
The Company recorded the $
The cost associated with pre-launch activities performed by the
Company is recorded within total operating expenses in the Company’s consolidated statements of operations and comprehensive loss. In the years ended December 31, 2023 and 2022, the Company recognized $
Under the 2021 License Agreement with Nestlé, beginning with the first commercial sale of VOWST, which occurred in June 2023, net sales of VOWST are recorded by Nestlé and include gross sales net of discounts, rebates, allowances, and other applicable deductions. These amounts include the use of estimates and judgments, which could be adjusted based on actual results in the future. The Company records its share of the profits or losses from the sales of VOWST, including commercial and medical affairs expenses incurred by the Company, on a net basis, as collaboration (profit) loss sharing - related party. This treatment is in accordance with the Company’s revenue recognition and collaboration policy, given that Nestlé and the Company are both active participants in commercialization activities and are exposed to significant risks and rewards that are dependent on the commercial success of the activities in the 2021 License Agreement. Nestlé provides the Company with reporting related to net sales of VOWST in accordance with U.S. generally accepted accounting principles in order to calculate and record collaboration profit or loss.
The collaboration (profit) loss sharing - related party line item also includes the Company’s profit on the transfer of VOWST inventory to Nestlé, which represents the excess of the supply price paid by Nestlé over the Company’s cost to manufacture VOWST, subject to a supply price cap applicable to product manufactured prior to commercial launch.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
The collaboration (profit) loss sharing - related party line item also includes the collaboration loss related to pre-launch activities, which were completed prior to the first commercial sale of VOWST.
| For the Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Share of VOWST net loss | $ | $ | ||||||
| Profit on transfer of VOWST inventory to Nestlé | ( |
) | ||||||
| Collaboration (profit)/loss related to pre-launch activities | ||||||||
| Total collaboration (profit) loss sharing - related party | $ | $ | ||||||
| 16. | Commitments and Contingencies |
Leases
Refer to Note 8 “Leases” for discussion of the commitments associated with the Company’s lease portfolio.
Indemnification Agreements
In the ordinary course of business, the
Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from
intellectual property infringement claims made by third-parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its officers that will require the Company, among other things, to
indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements
is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect
on its financial position, results of operations or cash flows, and it has
Legal Contingencies
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that the Company can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made.
In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, the Company will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect. The Company expenses legal costs as they are incurred.
The Company did
Bacthera Long Term Manufacturing Agreement
On November 8, 2021, the Company entered into a Long Term Manufacturing Agreement with BacThera AG (“Bacthera”), a joint venture between Chr. Hansen and a Lonza Group affiliate, which was amended on December 14, 2022 (the “Bacthera Agreement”). The Bacthera Agreement governs the general terms under which Bacthera, or one of its affiliates, will (i) construct a dedicated full-scale production suite for the Company at Bacthera’s Microbiome Center of Excellence in Visp, Switzerland, which is substantially complete; and (ii) provide manufacturing services to the Company for its then SER-109 product candidate (now VOWST) and other products, as agreed to by the parties.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Under the terms of the Bacthera Agreement,
the Company agreed to pay Bacthera a total of at least
The Bacthera Agreement has an initial term that continues until the tenth anniversary of the earlier of (a) successful completion of construction and demonstration of Bacthera’s readiness for commercial production or (b) the commencement of manufacturing.
The initial term is subject to renewals, which could extend the term to , and additional terms thereafter. Each party has the ability to terminate the Bacthera Agreement upon the occurrence of certain customary conditions. The Company may also terminate the Bacthera Agreement for convenience after a defined period. In the event of a termination, the Company has certain financial obligations that would apply, and Bacthera has agreed to grant a license to Bacthera-developed manufacturing know how, if any, and provide technical assistance to the Company, so that the Company could transfer the manufacturing operations to itself or a third party. The Bacthera Agreement also contains representations, warranties and indemnity obligations as well as limitations of liability that are customary for agreements of this type.
The Bacthera Agreement represents a lease as
the Company will have the right to use the dedicated manufacturing suite for a period of time following completion of the construction of the manufacturing suite and approval by regulatory authorities. As of December 31, 2023, the lease
commencement date has not occurred and therefore the Company has not recorded an operating lease asset or an operating lease liability on its consolidated balance sheets. As of December 31, 2023, the Company has paid Bacthera $
| 17. | Income Taxes |
During the years ended December 31, 2023 and
2022, the Company recorded
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Federal statutory income tax rate | ( |
)% | ( |
)% | ||||
| Research and development tax credits | ( |
) | ( |
) | ||||
| State taxes, net of federal benefit | ( |
) | ( |
) | ||||
| Stock-based compensation | ||||||||
| Uncertain tax position reserves | ||||||||
| Other | ( |
) | ||||||
| Change in deferred tax asset valuation allowance | ||||||||
| Effective income tax rate | % |
% |
||||||
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
Net deferred tax assets as of December 31, 2023 and 2022 consisted of the following:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Research and development tax credit carryforwards | ||||||||
| Section 174 capitalized research and development expenses | ||||||||
| Stock-based compensation expense | ||||||||
| Lease liability | ||||||||
| Deferred revenue | ||||||||
| Accrued expenses | ||||||||
| Section 163(j) limitation | ||||||||
| Depreciation and amortization | ||||||||
| Other | ||||||||
| Total deferred tax assets | $ | $ | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation and amortization | ||||||||
| Right of use assets | ( |
) | ( |
) | ||||
| Total deferred tax liabilities | ( |
) | ( |
) | ||||
| Valuation allowance | $ | ( |
) | $ | ( |
) | ||
| Net deferred tax assets | $ | $ | ||||||
The Tax Cuts and Jobs Act (“TCJA”) requires
taxpayers to capitalize and amortize research and experimental expenditures under IRC Section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during the year ended December 31, 2022 and resulted in
the capitalization of research and development costs of $
As of December 31, 2023, the Company had net
operating loss carryforwards (“NOLs”) for federal and state income tax purposes of $
Utilization of the NOLs and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the IRC due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. Since its formation, the Company has raised capital through the issuance of capital stock on several occasions. These financings, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control or could result in a change of control in the future upon subsequent disposition. The Company conducted an analysis to determine if historical changes in ownership through December 31, 2020 would limit or otherwise restrict its ability to utilize these NOLs and research and development credit carryforwards. As a result of this analysis, the Company does not believe there are any significant limitations on its ability to utilize these carryforwards. However, future changes in ownership after December 31, 2020 could affect the limitation in future years. Any limitation may result in expiration of a portion of the NOLs or research and development credit carryforwards before utilization.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2023 and 2022. Management reevaluates the positive and negative evidence at each reporting period.
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Valuation allowance at beginning of year | $ | ( |
) | $ | ( |
) | ||
| Decreases recorded as benefit to income tax provision | — | — | ||||||
| Increases recorded to income tax provision | ( |
) | ( |
) | ||||
| Valuation allowance as of end of year | $ | ( |
) | $ | ( |
) | ||
During the year ended December 31, 2023, the
Internal Revenue Service (“IRS”) concluded their examination of the Company for the period ended December 31, 2018 related to the Company’s 2018 research and development tax credits (“R&D Credit(s)”). The Company has adjusted its 2018 R&D
Credits and its overall federal and state R&D Credit carryforward balance from the Company’s inception to December 31, 2023 to account for the conclusions drawn by the IRS. Also, the Company has reviewed each of its overall filing positions
since inception and has not identified any additional positions that do not meet the more likely than not threshold. The Company does not anticipate a material change to its uncertain tax position reserves in the next 12 months.
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Balance at beginning of year | $ | $ | ||||||
| Increase in unrecognized tax benefits as a result of tax positions taken during the year | ||||||||
| Reduction to unrecognized tax benefits | ||||||||
| Balance at end of year | $ | $ | ||||||
The Company has not yet conducted a study of its research and development credit carry forwards. This study may result in further adjustment to the Company’s R&D Credits; however, a full valuation allowance has been provided against the Company’s R&D Credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required. The Company had no other unrecognized tax benefits accrued for the years ended December 31, 2023 and 2022, or related interest and penalties as of such dates. The Company will recognize any interest and penalties related to uncertain tax positions in income tax expense.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company’s tax years are still open under statute from 2011 to present. All years may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods.
| 18. | Related Party Transactions |
As described in Notes 14 and 15, in July 2021, the Company entered into the 2021
License Agreement with NHSc Pharma Partners, succeeded by NHSc Rx License GmbH (together with Société des Produits Nestlé S.A., their affiliates, and their subsidiaries, “Nestlé”). NHSc Rx License GmbH is an affiliate of one of the Company’s significant stockholders, Société des Produits Nestlé S.A. During the years ended December 31, 2023 and 2022, the Company recognized $
SERES THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
As described in Note 14, Revenue from Contracts with Customers, in January 2016, the Company entered into the 2016
License Agreement with Nestec, Ltd, succeeded by Société des Produits Nestlé S.A. for the development and commercialization of certain product candidates in development for the treatment and management of CDI and IBD, including UC and Crohn’s
disease. Société des Produits Nestlé S.A. is one of the Company’s significant stockholders. During the years ended December 31, 2023 and 2022, the Company recognized ($
As described in Note 11, the Company
entered into a securities purchase agreement with Flagship Pioneering Fund VII, L.P. and Nutritional Health LTP Fund, L.P., affiliates of Flagship, one of the Company’s significant
stockholders, for the sale of
In July
2022, the Company entered into a Pledge and Utilization Agreement with Flagship Pioneering Labs TPC, Inc., an affiliate of Flagship, for an option to lease certain manufacturing space. The Company paid $
| 19. | 401(k) Savings Plan |
The Company has a defined contribution savings plan under Section 401(k) of the IRC. This plan covers substantially
all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Effective January 1, 2016, the Company elected to match
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