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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37465

 

 

Seres Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-4326290

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

101 Cambridgepark Drive

Cambridge, MA

 

02140

(Address of principal executive offices)

 

(Zip Code)

 

(617) 945-9626

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001

MCRB

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of August 9, 2024, the registrant had 151,730,995 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


 

Seres Therapeutics, Inc.

INDEX

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

6

Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023

 

6

Condensed Consolidated Statements of Operations and Comprehensive Loss (Income) for the three and six months ended June 30, 2024 and 2023

 

7

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the three and six months ended June 30, 2024 and 2023

 

8

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023

 

9

Notes to Condensed Consolidated Financial Statements

 

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

53

Item 4. Controls and Procedures

 

54

 

 

PART II – OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

55

Item 1A. Risk Factors

 

55

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

100

Item 3. Defaults Upon Senior Securities

 

100

Item 4. Mine Safety Disclosures

 

100

Item 5. Other Information

 

100

Item 6. Exhibits

 

102

 

 

SIGNATURES

 

104

 

 

2


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or the Quarterly Report, contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Quarterly Report, including without limitation statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, manufacturing activities and related timing, expected benefits of our restructuring initiative and cost saving measures, commercialization efforts and related timing, our ability to continue as a going concern, timing and likelihood of completing the pending Transaction (as defined herein), the completion of the production suite and milestone payments under the Bacthera Agreement, our rights and potential resolutions under the Oaktree Credit Agreement and our ability or intention to pursue any remedies thereunder, or the timing of any of the foregoing, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the risks, uncertainties and assumptions described under the sections in this report titled “Summary Risk Factors,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report.

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

We have proprietary rights to trademarks used in this Quarterly Report, which are important to our business and many of which are registered under applicable intellectual property laws. Solely for convenience, the trademarks, service marks, logos and trade names referred to in this Quarterly Report are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names. This Quarterly Report contains additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this Quarterly Report are, to our knowledge, the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:

The completion of the Transaction (as defined herein) is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete, or unexpected delays in completing, the Transaction or any termination of the Purchase Agreement would have an adverse effect on the Company, its financial condition and results of operations.
The amount of the Transaction Consideration (as defined herein) we will receive in the Transaction is subject to various risks and uncertainties.

3


 

We may not be able to realize the anticipated benefits of the Transaction.
Following the Transaction, we will be a smaller, less diversified company.
We have identified conditions and events that raise substantial doubt regarding our ability to continue as a going concern.
We may be unable to realize the expected benefits from our restructuring and other cost reduction efforts.
We are a commercial-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We will need additional funding in order to complete development of our product candidates and commercialize VOWST and our product candidates, if approved. If we are unable to raise or access capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
The terms of the Credit Agreement and Guarantee with Oaktree Fund Administration, LLC place restrictions on our operating and financial flexibility.
We rely on third parties for certain aspects of the manufacture of our product and product candidates and expect to continue to do so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product and product candidates or that such quantities may not be available at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We depend heavily on the commercial success of VOWST, which was only recently approved for marketing by the FDA and launched in the United States. There is no assurance that our commercialization efforts or those of our collaborators will be successful or that we will be able to generate collaboration profit at the levels or within the timing we expect.
Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
Other than VOWST, we are early in our development efforts of our product candidates and may not be successful in our efforts to use our reverse translational platform to build a pipeline of product candidates and develop additional marketable drugs.
VOWST and our product candidates are based on microbiome therapeutics, which is a novel approach to therapeutic intervention.
Clinical drug development involves a risky, lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
Delays or difficulties in the enrollment of patients in clinical trials, could result in our receipt of necessary regulatory approvals being delayed or prevented.
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we or our collaborators will not be able to commercialize our product candidates or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired. Additionally, failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.
The collaboration and license agreements with Société des Produits Nestlé S.A., successor in interest to Nestec Ltd., and NHSc Rx License GmbH, successor in interest to NHSc Pharma Partners (collectively, and together with their affiliates and subsidiaries, Nestlé) are important to our business. If we or Nestlé fail to adequately perform under these agreements, or if we or Nestlé terminate the agreements, the development and commercialization of our CDI and IBD product candidates could be delayed or terminated and our business would be adversely affected.
We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
Even though VOWST has received FDA approval and even if any of our product candidates receive marketing approval, VOWST and such product candidates may fail to achieve the degree of market acceptance by physicians, patients, hospitals, third-party payors and others in the medical community necessary for commercial success.
We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

4


 

If we are unable to adequately protect our proprietary technology or obtain and maintain issued patents that are sufficient to protect our product or product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

 

5


 

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share data)

 

 

June 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

71,232

 

 

$

127,965

 

Collaboration receivable - related party

 

 

18,601

 

 

 

8,674

 

Inventories

 

 

52,997

 

 

 

29,647

 

Prepaid expenses and other current assets

 

 

6,435

 

 

 

9,124

 

Total current assets

 

 

149,265

 

 

 

175,410

 

Property and equipment, net

 

 

17,794

 

 

 

22,457

 

Operating lease assets

 

 

103,282

 

 

 

109,793

 

Restricted cash

 

 

9,873

 

 

 

8,185

 

Restricted investments

 

 

 

 

 

1,401

 

Other non-current assets (1)

 

 

41,517

 

 

 

41,354

 

Total assets

 

$

321,731

 

 

$

358,600

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

4,809

 

 

$

3,641

 

Accrued expenses and other current liabilities (2)

 

 

86,356

 

 

 

80,611

 

Operating lease liabilities

 

 

9,195

 

 

 

6,677

 

Deferred income - related party

 

 

7,922

 

 

 

7,730

 

Total current liabilities

 

 

108,282

 

 

 

98,659

 

Long term portion of note payable, net of discount

 

 

102,494

 

 

 

101,544

 

Operating lease liabilities, net of current portion

 

 

100,936

 

 

 

105,715

 

Deferred revenue - related party

 

 

95,364

 

 

 

95,364

 

Warrant liabilities

 

 

 

 

 

546

 

Other long-term liabilities

 

 

1,729

 

 

 

1,628

 

Total liabilities

 

 

408,805

 

 

 

403,456

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2024 and December 31, 2023; no shares issued and outstanding at June 30, 2024 and December 31, 2023

 

 

 

 

 

 

Common stock, $0.001 par value; 360,000,000  shares authorized at June 30, 2024 and 240,000,000 shares authorized at December 31, 2023; 151,633,922 and 135,041,467 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively

 

 

152

 

 

 

135

 

Additional paid-in capital

 

 

964,012

 

 

 

933,244

 

Accumulated other comprehensive loss

 

 

 

 

 

 

Accumulated deficit

 

 

(1,051,238

)

 

 

(978,235

)

Total stockholders’ deficit

 

 

(87,074

)

 

 

(44,856

)

Total liabilities and stockholders’ deficit

 

$

321,731

 

 

$

358,600

 

[1] Includes $38,877 as of June 30, 2024 and December 31, 2023, of milestones related to the construction of the Company's dedicated manufacturing suite at BacThera AG, or Bacthera. Such amounts will form part of the right-of-use asset upon lease commencement.

[2] Includes related party amounts of $43,075 and $28,053 at June 30, 2024 and December 31, 2023, respectively (see Note 17, Related Party Transactions).

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


 

SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (INCOME)

(unaudited, in thousands, except share and per share data)

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue - related party

$

 

 

$

126,473

 

 

$

 

 

$

125,951

 

Total revenue

 

 

 

 

126,473

 

 

 

 

 

 

125,951

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

17,875

 

 

 

46,792

 

 

$

39,577

 

 

 

90,761

 

General and administrative expenses

 

16,059

 

 

 

28,051

 

 

$

31,525

 

 

 

50,521

 

Collaboration (profit) loss sharing - related party

 

(2,589

)

 

 

2,106

 

 

$

(171

)

 

 

5,713

 

Total operating expenses

 

31,345

 

 

 

76,949

 

 

$

70,931

 

 

 

146,995

 

(Loss) income from operations

 

(31,345

)

 

 

49,524

 

 

$

(70,931

)

 

 

(21,044

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,230

 

 

 

1,726

 

 

$

2,878

 

 

 

2,758

 

Interest expense

 

(3,447

)

 

 

(3,187

)

 

$

(8,110

)

 

 

(5,135

)

Other income (expense)

 

692

 

 

 

(1,511

)

 

$

3,160

 

 

 

(1,201

)

Total other expense, net

 

(1,525

)

 

 

(2,972

)

 

$

(2,072

)

 

 

(3,578

)

Net (loss) income

$

(32,870

)

 

$

46,552

 

 

$

(73,003

)

 

$

(24,622

)

Net (loss) income per share attributable to common stockholders, basic

$

(0.22

)

 

$

0.36

 

 

$

(0.49

)

 

$

(0.19

)

Net (loss) income per share attributable to common stockholders, diluted

$

(0.22

)

 

$

0.36

 

 

$

(0.49

)

 

$

(0.19

)

Weighted average common shares outstanding, basic

 

151,514,597

 

 

 

127,713,486

 

 

 

148,808,089

 

 

 

126,793,342

 

Weighted average common shares outstanding, diluted

 

151,514,597

 

 

 

129,844,931

 

 

 

148,808,089

 

 

 

126,793,342

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) income on investments, net of tax of $0

 

 

 

 

(2

)

 

 

 

 

 

10

 

Currency translation adjustment

 

 

 

 

(1

)

 

 

 

 

 

1

 

Total other comprehensive (loss) income

 

 

 

 

(3

)

 

 

 

 

 

11

 

Comprehensive loss (income)

$

(32,870

)

 

$

46,549

 

 

$

(73,003

)

 

$

(24,611

)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


 

SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(unaudited, in thousands, except share data)

 

 

Common Stock

 

 

Additional

 

 

Accumulated
Other

 

 

 

 

 

Total

 

 

 

Shares

 

 

Par
Value

 

 

Paid-in
Capital

 

 

Comprehensive
Loss (Income)

 

 

Accumulated
Deficit

 

 

Stockholders’
(Deficit) Equity

 

Balance at December 31, 2022

 

 

125,222,273

 

 

$

125

 

 

$

875,181

 

 

$

(12

)

 

$

(864,511

)

 

$

10,783

 

Issuance of common stock upon exercise of stock options

 

 

56,523

 

 

 

 

 

 

188

 

 

 

 

 

 

 

 

 

188

 

Issuance of common stock upon vesting of RSUs, net of tax withholdings

 

 

259,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under ESPP

 

 

267,615

 

 

 

1

 

 

 

1,228

 

 

 

 

 

 

 

 

 

1,229

 

Issuance of common stock from at the market equity offering, net of issuance costs of $225

 

 

787,170

 

 

 

1

 

 

 

4,238

 

 

 

 

 

 

 

 

 

4,239

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

6,850

 

 

 

 

 

 

 

 

 

6,850

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,174

)

 

 

(71,174

)

Balance at March 31, 2023

 

 

126,592,604

 

 

$

127

 

 

$

887,685

 

 

$

2

 

 

$

(935,685

)

 

$

(47,871

)

Issuance of common stock upon exercise of stock options

 

 

49,069

 

 

 

 

 

 

168

 

 

 

 

 

 

 

 

 

168

 

Issuance of common stock upon vesting of RSUs, net of tax withholdings

 

 

177,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock from at the market equity offering, net of issuance costs of $304

 

 

1,218,377

 

 

 

1

 

 

 

7,490

 

 

 

 

 

 

 

 

 

7,491

 

Issuance of warrants (Note 9)

 

 

 

 

 

 

 

 

2,785

 

 

 

 

 

 

 

 

 

2,785

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

13,492

 

 

 

 

 

 

 

 

 

13,492

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,552

 

 

 

46,552

 

Balance at June 30, 2023

 

 

128,037,679

 

 

$

128

 

 

$

911,620

 

 

$

(1

)

 

$

(889,133

)

 

$

22,614

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated
Other

 

 

 

 

 

Total

 

 

 

Shares

 

 

Par
Value

 

 

Paid-in
Capital

 

 

Comprehensive
Loss (Income)

 

 

Accumulated
Deficit

 

 

Stockholders’
(Deficit)

 

Balance at December 31, 2023

 

 

135,041,467

 

 

$

135

 

 

$

933,244

 

 

$

 

 

$

(978,235

)

 

$

(44,856

)

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon vesting of RSUs and PSUs, net of tax withholdings

 

 

609,962

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Issuance of common stock under ESPP

 

 

423,975

 

 

 

 

 

 

353

 

 

 

 

 

 

 

 

 

353

 

Issuance of common stock from at the market equity offering, net of issuance costs of $548

 

 

15,366,630

 

 

 

15

 

 

 

18,394

 

 

 

 

 

 

 

 

 

18,409

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

6,489

 

 

 

 

 

 

 

 

 

6,489

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,133

)

 

 

(40,133

)

Balance at March 31, 2024

 

 

151,442,034

 

 

$

151

 

 

$

958,479

 

 

$

 

 

$

(1,018,368

)

 

$

(59,738

)

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon vesting of RSUs, net of tax withholdings

 

 

191,888

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

5,534

 

 

 

 

 

 

 

 

 

5,534

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,870

)

 

 

(32,870

)

Balance at June 30, 2024

 

 

151,633,922

 

 

$

152

 

 

$

964,012

 

 

$

-

 

 

$

(1,051,238

)

 

$

(87,074

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8


 

SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

Six Months Ended June 30,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(73,003

)

 

$

(24,622

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Stock-based compensation expense

 

 

12,023

 

 

 

20,342

 

Depreciation and amortization expense

 

 

2,979

 

 

 

2,927

 

Non-cash operating lease cost

 

 

4,780

 

 

 

4,247

 

Net (accretion) amortization of (discounts) premiums on investments

 

 

 

 

 

(236

)

Amortization of debt issuance costs

 

 

950

 

 

 

337

 

Loss on extinguishment of debt

 

 

 

 

 

1,625

 

Loss on disposal of fixed assets

 

 

293

 

 

 

 

Impairment of long-lived assets

 

 

3,267

 

 

 

 

Change in fair value of warrant liabilities

 

 

(546

)

 

 

(132

)

Collaboration (profit) loss sharing - related party (3)

 

 

 

 

 

5,713

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current and other non-current assets

 

 

2,526

 

 

 

3,579

 

Collaboration receivable - related party

 

 

(9,927

)

 

 

(7,559

)

Inventories

 

 

(23,350

)

 

 

(5,340

)

Deferred income - related party

 

 

192

 

 

 

2,817

 

Deferred revenue - related party

 

 

 

 

 

(951

)

Accounts payable

 

 

1,184

 

 

 

(3,092

)

Operating lease liabilities

 

 

(2,261

)

 

 

(577

)

Accrued expenses and other current and long-term liabilities (4)

 

 

5,846

 

 

 

(9,678

)

Net cash used in operating activities

 

 

(75,047

)

 

 

(10,600

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(161

)

 

 

(5,301

)

Purchases of investments

 

 

 

 

 

(4,426

)

Sales and maturities of investments

 

 

 

 

 

22,983

 

Sales of restricted investments

 

 

1,401

 

 

 

 

Net cash provided by investing activities

 

 

1,240

 

 

 

13,256

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from at the market equity offering, net of issuance costs

 

 

18,409

 

 

 

11,730

 

Proceeds from exercise of stock options

 

 

 

 

 

356

 

Issuance of common stock under ESPP

 

 

353

 

 

 

1,229

 

Proceeds from issuance of debt, net of issuance costs

 

 

 

 

 

103,378

 

Repayment of notes payable

 

 

 

 

 

(52,860

)

Net cash provided by financing activities

 

 

18,762

 

 

 

63,833

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(55,045

)

 

 

66,489

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

 

 

 

1

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

136,150

 

 

 

171,215

 

Cash, cash equivalents and restricted cash at end of period

 

$

81,105

 

 

$

237,705

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

7,160

 

 

$

2,869

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued expenses

 

$

 

 

$

943

 

Prepaid rent reclassified to right-of-use assets

 

$

 

 

$

2,336

 

Lease liability arising from obtaining right-of-use assets

 

$

 

 

$

1,210

 

Recognition of warrant liabilities

 

$

 

 

$

2,100

 

Warrants issued related to Term Loan and recorded as debt discount (Note 9)

 

$

 

 

$

2,785

 

[3] Includes non-cash collaboration profits and losses related to pre-launch activities; subsequent to the approval of VOWST in April 2023, collaboration (profit) loss sharing - related party is included within changes in operating assets and liabilities

[4]Includes related party amounts of $15,022 and $(3,398) at June 30, 2024 and 2023, respectively (see Note 17, Related Party Transactions).

 

9


 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

10


 

SERES THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

(Unaudited)

 

 

1. Nature of the Business and Basis of Presentation

Seres Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in October 2010 under the name Newco LS21, Inc. In October 2011, the Company changed its name to Seres Health, Inc., and in May 2015, the Company changed its name to Seres Therapeutics, Inc. The Company is a commercial-stage microbiome therapeutics company focused on the development and commercialization of a novel class of biological drugs, which are designed to treat disease by modulating the microbiome to restore health by repairing the function of a disrupted microbiome to a non-disease state.

The Company’s product, VOWST, 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 live biotherapeutic candidate consisting of a 16-strain consortium of cultivated bacteria designed to prevent gastrointestinal (“GI”)-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”). Study cohort 1, which included 13 participants, was designed to assess safety and drug pharmacology, including the gastrointestinal microbiome data from the first 100 days, which showed the successful engraftment of SER-155 bacterial strains in all nine subjects with evaluable microbiome samples, and a substantial reduction in the cumulative incidence of pathogen domination (a biomarker associated with the risk of serious GI infections and enteric-derived bloodstream infections, as well as GvHD) as compared to a reference cohort of patients. The tolerability profile observed was favorable, with no serious adverse events attributed to SER-155 administration. Enrollment in study cohort 2, which includes 45 participants, was completed in April 2024. Study cohort 2 incorporates a randomized, double-blinded placebo-controlled 1:1 design to further evaluate safety and engraftment as well as clinical outcomes, and data readout is anticipated in September 2024.

The Company has built and deploys a reverse translational platform and knowledge base for the discovery and development of live biotherapeutics, 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 live biotherapeutics; 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 live biotherapeutics.

On August 5, 2024, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Société des Produits Nestlé S.A. (“SPN”), a wholly-owned subsidiary of Nestlé S.A., pursuant to which the Company agreed, subject to the satisfaction or waiver of the conditions set forth therein, to sell the Company’s VOWST microbiome therapeutic business (the “VOWST Business”), including inventory and equipment, certain patents and patent applications, know-how, trade secrets, trademarks, domain names, marketing authorizations and related rights, documents, materials, business records and data and contracts that are used or held for use primarily in the development, commercialization and manufacturing of the microbiome product sold under the brand name VOWST, formerly known as SER-109 (the “Product”), as provided for in accordance with the terms of the Purchase Agreement to SPN and its designated affiliates (collectively, “Nestlé Health Science”), and Nestlé Health Science will assume certain liabilities from the Company (the "Transaction"). As consideration for the Transaction, SPN has agreed to pay the Company the following consideration (the “Transaction Consideration”):

(i)
a cash payment, payable upon completion of the Transaction (“Closing”), of $100,000, less approximately $17,900 owed by the Company to an affiliate of SPN as of March 31, 2024 under the existing license agreement between the Company and the SPN affiliate, less approximately CHF2,000 in satisfaction of fees due under the Bacthera Manufacturing Agreement (defined below);
(ii)
cash installment payments of $50,000 on January 15, 2025 and $25,000 on July 1, 2025 (the “Installment Payments”), conditioned on the Company’s material compliance with obligations under the Transition Services Agreement (as described below) to be entered into at Closing between the Company and SPN;
(iii)
prepayment of the $60,000 milestone payment tied to the achievement of worldwide annual net sales of the Product of $150,000 (the “First Sales Milestone”), payable in cash at Closing (the “Prepaid Milestone”), which Prepaid Milestone will accrue interest at a fixed rate of 10% per annum until the First Sales Milestone is achieved and 5% per annum

11


 

thereafter until the earlier of (x) the date on which the Prepaid Milestone, plus accrued interest thereon, has been repaid in full by set-off and (y) the last day of the Milestone Period (as defined below); and
(iv)
future milestone payments of (x) $125,000 tied to the achievement of worldwide annual net sales of the Product of $400,000 and (y) $150,000 tied to the achievement of worldwide annual net sales of the Product of $750,000, during the period from Closing until December 31 of the calendar year in which the tenth anniversary of Closing occurs (the “Milestone Period”) (together, the “Future Milestone Payments” and, together with the Prepaid Milestone, the “Milestone Payments”).

As they are earned, the Milestone Payments will be satisfied as follows: (i) first, by set-off against all accrued interest on the Prepaid Milestone until the amount of such accrued interest has been paid in full, (ii) second, by set-off against the outstanding balance of the Prepaid Milestone until the Prepaid Milestone has been repaid in full and (iii) thereafter, in cash. If any amount of the Prepaid Milestone (and any accrued interest thereon) remains outstanding as of following the last day of the Milestone Period (defined below), the balance thereof (together with any interest accrued thereon) will be forgiven and the right of set-off of SPN with respect thereto will be deemed forfeited. The Installment Payment due on July 1, 2025 will be reduced by an amount related to certain employment obligations assumed by SPN through the period prior to the Closing Date.

The Company and SPN will share 50/50 in the net profit or net loss achieved during the period from the date of Closing until December 31, 2025 (the “Profit Sharing Period”), with the net profit or net loss calculated as (i) the net sales of VOWST in the United States and Canada, plus (ii) other income received in connection with the grant of a license or sublicense with respect to VOWST in the United States and Canada as described in the Purchase Agreement, minus (iii) allowable expenses directly attributable or reasonably allocable to certain development activities, commercialization activities, medical affairs activities, manufacturing activities or other relevant activities, as described in the Purchase Agreement. During the Profit Sharing Period, the Company will reimburse SPN for (i) certain payments under the exclusive license agreement between the Company and Memorial Sloan Kettering Cancer Center, (ii) certain costs incurred in connection with an ongoing post-marketing safety study of VOWST and (iii) 80.1% of all rent and other costs due to the landlord under the lease for the Company’s Waltham facility.

The Closing is subject to the approval of the transaction by the Company’s stockholders and other customary conditions. At Closing, in exchange for a payment to be made by SPN to Bacthera AG, the Long Term Manufacturing Agreement, dated November 8, 2021 between the Company and Bacthera AG (the “Bacthera Manufacturing Agreement”) will be terminated and each of Bacthera and Seres will release one another from any and losses, liabilities or other obligations arising thereunder with respect to the period ending as of the date of the Closing, including without limitation any milestone payments required to be paid to Bacthera thereunder.

As a condition to Closing, the Company and SPN will enter into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which SPN will agree to purchase 14,285,715 shares (the “Shares”) of common stock at Closing, at a purchase price per share of $1.05, for an aggregate purchase price of $15,000. Under the terms of the Securities Purchase Agreement, SPN will agree not to sell or transfer the Shares for a period of six months after Closing, subject to certain customary exceptions. The Company will agree to register the resale of the Shares by SPN within 90 days of Closing. In addition, under the terms of the Securities Purchase Agreement, for as long as SPN, together with its affiliates, beneficially owns at least 10% of the Company’s outstanding shares of common stock, the Company will agree to take such action within its control to include one individual designated by SPN in the slate of nominees recommended by the Company’s board of directors (or the applicable committee of the board of directors) to the Company’s stockholders for election to the board of directors at the applicable stockholder meeting. The Securities Purchase Agreement will contain customary representations and warranties and closing conditions.

As a condition to Closing, the parties intend to enter into a Transition Services Agreement (the “TSA”), which will provide for services to be performed by the Company in order to facilitate a transition of the business associated with the VOWST Business to SPN and its affiliates. The scope of the transition services is expected to include the provision of certain manufacturing services and certain administrative functions related to the VOWST Business and operations, including the maintenance of certain manufacturing services and the related facility in which such services are currently conducted. The Company will provide the manufacturing services until December 31, 2025 and other services, until the later of the period specified in the schedule to the TSA for each service or June 30, 2026. SPN will agree to pay the Company for certain fixed costs, including a monthly fixed fee for preserved raw material suspension manufacturing, and will reimburse the Company for the costs of any transition services performed by the Company under the TSA. The know-how and other intellectual property generated in connection with the performance of the TSA will be owned by SPN with the Company having a non-exclusive license to such know-how and other intellectual property under the Cross-License Agreement. During the term of the TSA, upon SPN request, the Company will transfer the manufacturing services to a third party service provider designated by SPN. In the event of a material failure by the Company to maintain the manufacturing facility under the TSA, SPN will have step-in rights to negotiate to enter into a direct lease with the landlord of the manufacturing facility with respect to the portion of such facility used in connection with the VOWST Business or to cause such services to be performed, with any reasonable out-of-pocket costs and expenses incurred in connection therewith reimbursed by the Company.

As a condition to Closing, the Company intends to enter into a cross-license agreement with SPN under which the Company will grant to SPN a perpetual, worldwide, non-exclusive, fully paid-up license under certain Company patents that have been issued or

12


 

will issue in the future and current know-how controlled by the Company that is not transferred to SPN pursuant to the Purchase Agreement. In the field of the treatment of CDI and recurrent CDI and associated complications (collectively the “CDI Field”) the license to SPN under such Company patents and know-how would be exclusive to SPN for five years after Closing and co-exclusive between SPN and the Company following that five year period. The license from the Company to SPN is to issued Company patents that currently or in the future cover the Product or improvements thereof, and know-how that is used or reasonably useful in connection with the exploitation of the VOWST Business. The Company will also grant SPN an exclusive, perpetual, worldwide, fully paid-up license under issued Company patents that currently or in the future cover the Product and improvements thereof and know-how that is used or reasonably useful in connection with the exploitation of the Product to exploit SER-262 in the CDI Field. The license to SPN would be exclusive to SPN for five years after Closing and co-exclusive between SPN and us following that five year period. SPN will grant to the Company a perpetual, worldwide, non-exclusive license under the patents and know-how that are transferred to SPN pursuant to the Purchase Agreement or developed under the TSA, for the Company’s products for use outside of the CDI Field, and after five years from Closing for Company products containing designed, cultivated, bacterial consortia not manufactured using human stool (excluding SER-262) in the CDI Field. From and after Closing, certain license agreements between the Company, SPN, and/or their respective affiliates will terminate and be of no further force or effect, except as contemplated by the Purchase Agreement.

Concurrently with the execution of the Purchase Agreement, the Company’s directors and executive officers and certain stockholders affiliated with Flagship Pioneering, Inc. entered into support agreements with the Company and SPN (the “Support Agreements”), pursuant to which, among other things and subject to the terms and conditions therein, such parties agreed, solely in their capacities as holders of shares of common stock (collectively, the “Subject Shares”), to vote all Subject Shares beneficially owned by such parties at every meeting of the stockholders of the Company (including the special meeting to consider the transactions contemplated by the Purchase Agreement) (i) in favor of adopting and approving the Purchase Agreement and the transactions contemplated by the Purchase Agreement, (ii) against any proposal that would otherwise be reasonably be expected to adversely affect the transactions contemplated by the Purchase Agreement, (iii) against any Acquisition Proposal (as defined therein), and (iv) in favor of approving any proposal to adjourn or postpone the special meeting of stockholders to a later date, if there are not sufficient votes for the adoption of the Purchase Agreement on the date on which such meeting is held. In addition, each stockholder party to a Support Agreement provided an irrevocable proxy to SPN to vote such party’s Subject Shares in favor of adopting and approving the Purchase Agreement and the transactions contemplated by the Purchase Agreement.

As a condition to Closing, the parties intend to enter into assignment and assumption of lease agreements (the “Assignment and Assumption Agreements”). Under the Assignment and Assumption Agreements, the Company will assign to SPN or its designated affiliates the Company’s rights in, to and under certain real property leases, and SPN or its designated affiliates will assume the liabilities related thereto.

As a condition to Closing, the parties intend to enter into an employee support agreement (the “Employee Support Agreement”). Under the Employee Support Agreement, among other things and subject to the terms and conditions therein, certain employees of the Company related to the VOWST Business who accept employment with SPN or one of its designated affiliates will provide the services they provided to the Company prior to the Transaction to SPN, as well as other services as SPN may reasonably request, from Closing until the day prior to the beginning of SPN’s or its designated affiliate’s next pay period following the Closing. SPN will reimburse the Company’s out of pocket costs in connection with such employees’ services, including certain compensation and benefits paid or provided to such employees pursuant to the terms of the Employee Support Agreement.

The Company is obligated to use the proceeds from the completion of the Transaction to fully retire its senior secured debt facility with Oaktree Capital Management. The Company intends to use the remaining proceeds to support the further advancement of SER-155 and the Company’s other wholly-owned cultivated live biotherapeutic candidates for medically vulnerable patient populations with potential to address large commercial opportunities.

The Company expects to incur certain significant costs relating to the Transaction, such as legal, accounting, financial advisory, printing and other professional services fees, as well as other customary payments. Through June 30, 2024, these costs amounted to approximately $2,398. In the event that the Purchase Agreement is terminated, the Company may be required under the Purchase Agreement under certain circumstances to reimburse SPN's expenses in the amount of $4,700.

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 potential 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 condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the

13


 

normal course of business. As of June 30, 2024, the Company had an accumulated deficit of $1,051,238 and cash and cash equivalents of $71,232.

The Company’s primary focus has been supporting commercialization, including the manufacture of VOWST, and the completion of the SER-155 Phase 1b study Cohort 2, 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.

Primarily as a result of the costs associated with commercializing VOWST and continuing the research and development efforts for other product candidates and preclinical programs, the Company incurred a net loss of $73,003 and had net operating cash outflows of $75,047 for the six months ended June 30, 2024. The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. Based on the Company’s currently available cash resources, current and forecasted level of operations, and forecasted cash flows for the 12-month period subsequent to the date of issuance of these condensed consolidated financial statements, the Company will require additional funding to support its ongoing operations and meet its obligations as they come due. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

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 receipt of the upfront payments due upon closing of the Transaction and subsequent payments that are contingent upon compliance with the TSA, as well as other potential financing transactions, including selling shares under the Company’s at the market equity offering. The Transaction is subject to stockholder approval, which has not been received as of the date of this Quarterly Report on Form 10-Q. Additionally, there can be no assurance that the Company 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 obtaining stockholder approval for and satisfying other closing conditions to the Transaction and 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 condensed consolidated financial statements are issued.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2023 included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the SEC on March 5, 2024 (the “Annual Report”).

The unaudited condensed consolidated interim financial statements have been prepared on the same basis as the audited consolidated financial statements. The condensed consolidated balance sheet at December 31, 2023 was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the periods presented. Such adjustments are of a normal and recurring nature. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.

 

2. Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2023, and the notes thereto, which are included in the Annual Report. There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2024.

14


 

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 unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. In the unaudited condensed 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 those estimates.

Restricted Cash

The Company held restricted cash of $9,873 as of June 30, 2024 and $8,185 as of December 31, 2023, which represents cash held for the benefit of the landlords for certain of the Company’s leases. The Company has classified the restricted cash as long-term on its condensed consolidated balance sheets as the terms of the underlying leases are greater than one year.

Cash, cash equivalents and restricted cash were comprised of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Cash and cash equivalents

 

$

71,232

 

 

$

127,965

 

Restricted cash, non-current

 

 

9,873

 

 

 

8,185

 

Total cash, cash equivalents and restricted cash

 

$

81,105

 

 

$

136,150

 

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 significant segment expenses and other segment items on an interim and annual basis, and provide in interim periods all disclosures about a reportable segment's profit or loss and assets that are currently required annually. The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative threshold to determine its reportable segments. The new disclosure requirements are also applicable to entities that account and report as a single operating segment entity. 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 related to the adoption of ASU 2023-07 on its financial statement disclosures.

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 expanded disclosures on income taxes paid by jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact related to the adoption of ASU 2023-09 on its financial statement disclosures.

3. Fair Value Measurements

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

 

$

81

 

 

$

 

 

$

 

 

$

81

 

Total assets

 

$

81

 

 

$

 

 

$

 

 

$

81

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities

 

$

 

 

$

 

 

$

546

 

 

$

546

 

Total liabilities

 

$

 

 

$

 

 

$

546

 

 

$

546

 

 

Money market funds are valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy.

As of June 30, 2024 and December 31, 2023, the Company held a restricted investment of $0 and $1,401, respectively, which represents a certificate of deposit that is classified as Level 2 in the fair value hierarchy.

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

15


 

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. As of June 30, 2024, given the anticipated Transaction and expected repayment of the Oaktree Term Loan, the probability of drawing the Tranche B and C Loans that would trigger the issuance of these warrants was deemed to be remote. As a result, the fair value of the warrant liabilities at June 30, 2024 was deemed to be $0.

As of December 31, 2023, the Level 3 inputs to the warrant liabilities are as follows:

 

 

 

 

 

 

 

December 31, 2023

 

Volatility

 

 

101.0

%

Term (in years)

 

 

1.3

 

 

A reconciliation of the beginning and ending balances for the six months ended June 30, 2024 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, 2023

 

$

546

 

Issuance of warrants

 

 

 

Adjustment to fair value

 

 

(546

)

Balance as of June 30, 2024

 

$

 

 

There were no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2023. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2024 and 2023.

4. Investments

As of June 30, 2024 and December 31, 2023, the Company held restricted investments of $0 and $1,401, respectively, the cost of which approximates current fair value. The Company did not hold any other investments as of June 30, 2024 and December 31, 2023.

Investments with original maturities of less than 90 days are included in cash and cash equivalents on the condensed consolidated balance sheets and are not included in the table above. Investments with maturities of less than 12 months are considered current assets and those investments with maturities greater than 12 months are considered non-current assets.

5. Inventories

Capitalized inventories consist of the following (in thousands):

 

 

 

June 30, 2024

 

 

December 31, 2023

 

Raw materials

 

$

4,934

 

 

$

4,426

 

Work in process

 

 

48,063

 

 

 

25,221

 

Finished goods

 

 

 

 

 

 

Total

 

$

52,997

 

 

$

29,647

 

 

Prior to the FDA’s approval for VOWST on April 26, 2023, all costs for the manufacture of product supplies to support clinical development and commercial launch, including pre-launch inventory, were expensed as incurred or otherwise accounted for pursuant to the 2021 License Agreement. Pre-launch inventory manufactured prior to the FDA approval of VOWST, which was not capitalized into inventory but instead was expensed as research and development in previous periods, will be used in commercial production until it is depleted. Pre-launch inventory expensed as research and development totaled $0, $0, $11,181 and $26,794 for the three and six months ended June 30, 2024 and 2023, respectively.