10-Q 1 mcrb-10q_20190331.htm 10-Q mcrb-10q_20190331.htm

 

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 March 31, 2019

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.)

 

 

200 Sidney Street - 4th Floor

Cambridge, MA

 

02139

(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)

 

 

 

 

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, 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

 

  

  

Small 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  

 

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 Global Select Market

As of April 24, 2019, the registrant had 41,094,832 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)

 

4

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018

 

5

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

 

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

 

7

Notes to Condensed Consolidated Financial Statements

 

8

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

 

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4. Controls and Procedures

 

32

 

 

 

PART II – OTHER INFORMATION

 

33

Item 1. Legal Proceedings

 

33

Item 1A. Risk Factors

 

33

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

 

64

Item 3. Defaults Upon Senior Securities

 

64

Item 4. Mine Safety Disclosures

 

64

Item 5. Other Information

 

64

Item 6. Exhibits

 

65

 

 

 

SIGNATURES

 

66

 

 

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 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, 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 Quarterly 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 Quarterly Report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward looking statements are subject to numerous risks, including, without limitation, the following:

 

our status as a clinical-stage company and our expectation to incur losses in the future;

 

our future capital needs and our need to raise additional funds, including our ability to continue as a going concern;

 

our ability to build a pipeline of product candidates and develop and commercialize drugs;

 

our unproven approach to therapeutic intervention;

 

our ability to enroll patients in clinical trials, timely and successfully complete those trials and receive necessary regulatory approvals;

 

the effect that the reduction in trial size for our ECOSPOR III trial will have on the results of the trial;

 

our ability to maintain our manufacturing facilities and to receive or manufacture sufficient quantities of our product candidates;

 

our ability to protect and enforce our intellectual property rights;

 

federal, state, and foreign regulatory requirements, including U.S. Food and Drug Administration regulation of our product candidates;

 

our ability to obtain and retain key executives and attract and retain qualified personnel; and

 

our ability to successfully manage our growth.

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.

 

3


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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,600

 

 

$

85,820

 

Accounts receivable

 

 

6,667

 

 

 

 

Prepaid expenses and other current assets

 

 

7,488

 

 

 

6,845

 

Total current assets

 

 

67,755

 

 

 

92,665

 

Property and equipment, net

 

 

24,571

 

 

 

26,294

 

Operating lease assets

 

 

13,202

 

 

 

 

Restricted investments

 

 

1,400

 

 

 

1,400

 

Restricted cash

 

 

114

 

 

 

113

 

Total assets

 

$

107,042

 

 

$

120,472

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,918

 

 

$

6,415

 

Accrued expenses and other current liabilities

 

 

11,789

 

 

 

15,207

 

Operating lease liabilities

 

 

4,407

 

 

 

 

Deferred revenue - related party

 

 

18,685

 

 

 

20,419

 

Deferred revenue

 

 

2,770

 

 

 

 

Total current liabilities

 

 

41,569

 

 

 

42,041

 

Operating lease liabilities, net of current portion

 

 

19,066

 

 

 

 

Lease incentive obligation, net of current portion

 

 

 

 

 

6,776

 

Deferred rent

 

 

 

 

 

2,216

 

Deferred revenue, net of current portion - related party

 

 

111,959

 

 

 

116,840

 

Deferred revenue, net of current portion

 

 

3,637

 

 

 

 

Other long-term liabilities

 

 

644

 

 

 

644

 

Total liabilities

 

 

176,875

 

 

 

168,517

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2019

   and December 31, 2018; no shares issued and outstanding at March 31, 2019 and

   December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2019

   and December 31, 2018; 41,094,832 and 40,936,735 shares issued and outstanding

   at March 31, 2019 and December 31, 2018, respectively

 

 

41

 

 

 

41

 

Additional paid-in capital

 

 

343,829

 

 

 

341,284

 

Accumulated deficit

 

 

(413,703

)

 

 

(389,370

)

Total stockholders’ deficit

 

 

(69,833

)

 

 

(48,045

)

Total liabilities and stockholders’ deficit

 

$

107,042

 

 

$

120,472

 

 

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

4


SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Collaboration revenue - related party

 

$

6,615

 

 

$

3,766

 

Grant revenue

 

 

446

 

 

 

205

 

Revenue

 

 

260

 

 

 

 

Total revenue

 

 

7,321

 

 

 

3,971

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

 

22,887

 

 

 

23,460

 

General and administrative expenses

 

 

7,495

 

 

 

8,777

 

Restructuring expenses

 

 

1,492

 

 

 

 

Total operating expenses

 

 

31,874

 

 

 

32,237

 

Loss from operations

 

 

(24,553

)

 

 

(28,266

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

220

 

 

 

347

 

Total other income (expense), net

 

 

220

 

 

 

347

 

Net loss

 

$

(24,333

)

 

$

(27,919

)

Net loss per share attributable to common stockholders, basic

   and diluted

 

$

(0.59

)

 

$

(0.69

)

Weighted average common shares outstanding, basic and diluted

 

 

41,027,824

 

 

 

40,628,434

 

Net loss

 

 

(24,333

)

 

 

(27,919

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on investments, net of tax of $0

 

$

 

 

$

40

 

Total other comprehensive income

 

 

 

 

 

40

 

Comprehensive loss

 

$

(24,333

)

 

$

(27,879

)

 

 

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

5


SERES THERAPEUTICS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands, except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Shares

 

 

Par

Value

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Comprehensive

Income (Loss)

 

 

Stockholders’

Equity

 

Balance at December 31, 2017

 

 

40,571,015

 

 

$

40

 

 

$

324,376

 

 

$

(263,571

)

 

$

(146

)

 

$

60,699

 

Issuance of common stock upon exercise of

   stock options

 

 

48,053

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

32

 

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

 

 

51,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock for employee tax witholdings

 

 

(17,900

)

 

 

 

 

 

(197

)

 

 

 

 

 

 

 

 

(197

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,236

 

 

 

 

 

 

 

 

 

4,236

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

40

 

Adoption of new revenue standard (ASC 606)

 

 

 

 

 

 

 

 

 

 

 

(26,857

)

 

 

 

 

 

(26,857

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(27,919

)

 

 

 

 

 

(27,919

)

Balance at March 31, 2018

 

 

40,652,668

 

 

$

40

 

 

$

328,447

 

 

$

(318,347

)

 

$

(106

)

 

$

10,034

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Par

Value

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Stockholders’

Deficit

 

Balance at December 31, 2018

 

 

40,936,735

 

 

$

41

 

 

$

341,284

 

 

$

(389,370

)

 

$

(48,045

)

Issuance of common stock upon exercise of

   stock options

 

 

38,125

 

 

 

 

 

 

120

 

 

 

 

 

 

120

 

Issuance of common stock upon vesting of RSUs

 

 

73,500

 

 

 

 

 

 

153

 

 

 

 

 

 

153

 

Issuance of common stock under ESPP plan

 

 

46,472

 

 

 

 

 

 

207

 

 

 

 

 

 

207

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,065

 

 

 

 

 

 

2,065

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(24,333

)

 

 

(24,333

)

Balance at March 31, 2019

 

 

41,094,832

 

 

$

41

 

 

$

343,829

 

 

$

(413,703

)

 

$

(69,833

)

 

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

 

6


SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,333

)

 

$

(27,919

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,065

 

 

 

4,236

 

Depreciation and amortization expense

 

 

2,006

 

 

 

1,941

 

Amortization of operating lease asset

 

 

535

 

 

 

-

 

Accretion of discount on investments

 

 

 

 

 

(50

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,667

)

 

 

-

 

Prepaid expenses and other current assets

 

 

(643

)

 

 

835

 

Deferred revenue

 

 

(208

)

 

 

(3,592

)

Accounts payable

 

 

(2,474

)

 

 

(1,426

)

Operating lease liabilities

 

 

(1,024

)

 

 

 

Accrued expenses and other current liabilities

 

 

(1,650

)

 

 

(788

)

Net cash (used in) operating activities

 

 

(32,393

)

 

 

(26,763

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(306

)

 

 

(953

)

Purchases of investments

 

 

 

 

 

(5,270

)

Sales and maturities of investments

 

 

 

 

 

44,257

 

Net cash (used in) provided by investing activities

 

 

(306

)

 

 

38,034

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

120

 

 

 

32

 

Proceeds from issuance of common stock and restricted common stock

 

 

153

 

 

 

 

Payments of employee tax obligations related to vesting of restricted stock units

 

 

 

 

 

(197

)

Issuance of common stock under ESPP plan

 

 

207

 

 

 

 

Net cash provided by (used in) financing activities

 

 

480

 

 

 

(165

)

Net (decrease) increase in cash and cash equivalents

 

 

(32,219

)

 

 

11,106

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

85,933

 

 

 

37,601

 

Cash, cash equivalents and restricted cash at end of period

 

$

53,714

 

 

$

48,707

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued expenses

 

$

134

 

 

$

393

 

 

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

7


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 microbiome therapeutics platform company developing a novel class of biological drugs, which are designed to treat disease by restoring the function of a dysbiotic microbiome. The Company is developing SER-287 to treat ulcerative colitis (“UC”), a form of inflammatory bowel disease (“IBD”). SER-109, is designed to reduce recurrences of Clostridium difficile, or C. difficile infection (“CDI”), a debilitating infection of the colon, in patients who have received antibiotic therapy for recurrent CDI by treating the dysbiosis of the colonic microbiome, which, if approved by the U.S. Food and Drug Administration (“FDA”), could be a first-in-field oral microbiome drug.   In addition, using its microbiome therapeutics platform, the Company is developing product candidates to treat diseases where the microbiome is implicated, including SER-301, a rationally designed, fermented IBD candidate, and SER-401, a microbiome therapeutic candidate for use with checkpoint inhibitors in patients with metastatic melanoma. The Company is also using its microbiome therapeutics platform to conduct research on various indications, including: infectious diseases, metabolic diseases, and inflammatory and immune diseases, including immuno-oncology.

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 pre-clinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities.

The Company’s product candidates are in development. 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 candidates developed will obtain necessary government regulatory approval or that any approved products 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. 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.

Under Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued.

As of March 31, 2019, the Company had an accumulated deficit of $413.7 million and cash and cash equivalents of $53.6 million. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirements of ASC 205-40 and determined that the Company’s accumulated deficit, history of losses, and future expected losses meet the ASC 205-40 standard for raising substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of these condensed consolidated financial statements.

The Company’s current financial resources and currently forecasted operating plan would allow the Company to meet forecasted operating plans into the fourth quarter of 2019.  The Company has determined that its cash runway of less than 12 months along with its accumulated deficit, history of losses, and future expected losses meet the ASC 205-40 standard for raising substantial doubt about its ability to continue as a going concern within one year of the issuance date of its consolidated financial statements. The Company may not be successful in its mitigation efforts, which primarily consist of raising additional capital through some combination of equity or debt financings, and/or potential new collaborations and reducing cash expenditures. Lack of necessary funds may require the Company, among other things, to delay, scale back, or eliminate some or all of its planned clinical trials.

In February 2019, the Company implemented corporate changes to focus its resources on advancing its clinical-stage therapeutic candidates. As a result, the Company now intends to concentrate on completing the recently-initiated SER-287 Phase 2b study in mild-to-moderate UC, obtaining results from the ongoing SER-109 Phase 3 study for recurrent CDI, advancing the SER-401 Phase 1b study, in collaboration with the Parker Institute for Cancer Immunotherapy and MD Anderson Cancer Center, to evaluate augmenting checkpoint inhibitor response in patients with metastatic melanoma and advancing SER-301 into clinical development. In connection with the prioritization of these therapeutic candidates, the Company made changes to its management team and reduced headcount by approximately 30 percent. 

8


If the Company is not able to secure adequate additional funding, the Company plans to make further reductions in spending. In that event, the Company may have to delay, scale back, or eliminate some or all of the Company’s planned clinical trials and research stage programs. The actions necessary to reduce spending under this plan at a level that mitigates the factors described above is not considered probable, as defined in the accounting standards; as such, under the requirements of ASC 205-40, the full extent to which management may extend the Company’s funds through these actions may not be considered in management’s assessment of the Company’s ability to continue as a going concern for the next 12 months as defined by ASC-205-40.

As a result, in accordance with the requirements of ASC 205-40, management has concluded that it is required to disclose that substantial doubt exists about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued.

 

The Company is eligible to receive contingent milestone payments under its license and collaboration agreement with Nestec Ltd. (“NHS”), an affiliate of Nestlé Health Science US Holdings, Inc. (“Nestlé Health Science”), a significant stockholder of the Company, if certain development milestones are achieved. However, these milestones are uncertain and there is no assurance that the Company will receive any of them.  Until such time, if ever, as the Company can generate substantial product revenue, the Company will finance its cash needs through a combination of public or private equity offerings, debt financings, governmental funding, collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties. The Company may not be able to obtain funding on acceptable terms, or at all. If the Company is unable to raise additional funds as and when needed, it would have a negative impact on the Company’s financial condition, which may require the Company to delay, reduce or eliminate certain research and development activities and reduce or eliminate discretionary operating expenses, which could constrain the Company’s ability to pursue its business strategies.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 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, 2018 included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on March 6, 2019 (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, 2018 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 consolidated financial statements contain all adjustments which are necessary for a fair presentation 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 months ended March 31, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

 

 

2.

Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2018, 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 three months ended March 31, 2019 except for the adoption of the new lease accounting standard discussed in Note 9, Leases.

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. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

9


Net Loss per Share

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 restricted stock units granted by the Company entitle the holder of such awards to ordinary cash dividends paid to substantially all holders of the Company’s common stock, as if such shares were outstanding common shares at the time of the dividend. The dividends are paid in cash or shares of common stock when the applicable restricted stock unit vests. However, the unvested restricted stock units 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.

The following potential common shares, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Stock options to purchase common stock

 

 

8,908,432

 

 

 

7,498,791

 

Unvested restricted stock units

 

 

150,400

 

 

 

302,665

 

Shares issuable under ESPP

 

 

6,911

 

 

 

 

 

 

 

9,065,743

 

 

 

7,801,456

 

 

Leases

The Company evaluates arrangements at inception to determine if an arrangement is or contains a lease. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses an incremental borrowing rate that the Company would expect to incur for a fully collateralized loan over a similar term under similar economic conditions to determine the present value of the lease payments.

The lease payments used to determine the Company’s operating lease assets may include lease incentives and stated rent increases and are recognized in the Company’s operating lease assets in the Company’s condensed consolidated balance sheets. Operating lease liabilities are accreted over the term of the lease using the incremental borrowing rate and the associated expense is recorded to operating expenses in the condensed consolidated statement of operations and comprehensive loss. Operating lease assets are amortized to rent expense over the lease term and included in operating expenses in the condensed consolidated statement of operations and comprehensive loss. Variable lease payments are recognized as the associated obligation is incurred.

Restructuring

Restructuring costs are comprised of severance costs related to workforce reductions. The Company recognizes restructuring charges when the liability is incurred. Employee termination benefits are accrued at the date management has committed to a plan of termination and employees have been notified of their termination dates and expected severance payments.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), (“Topic 842”), which establishes principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The most notable change is lessees recognizing an asset and liability on their balance sheet for operating leases. In 2018, the FASB issued ASU 2018-01, and ASU 2018-11, which collectively adds two practical expedients, provides a second modified retrospective transition method which does not require retrospective adjustment of prior periods, and provides certain narrow scope improvements to the new lease guidance. ASU 2016-02 and the amending ASUs are effective for the Company for annual periods beginning after December 15, 2018 and interim periods therein, with early adoption permitted.

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The Company adopted the new guidance as of January 1, 2019 using the modified retrospective transition approach with no restatement of prior periods or cumulative adjustment to accumulated deficit. Upon adoption, the Company elected the package of transition practical expedients, which allowed the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in its condensed consolidated statements of operations and comprehensive loss over the lease term. Upon adoption of the new leasing standards, the Company recognized an operating lease asset of approximately $13,737 and a corresponding operating lease liability of approximately $24,497, which are included in the Company’s condensed consolidated balance sheet. The adoption of the new leasing standards did not have any impact on the Company’s condensed consolidated statements of operations and comprehensive loss. The impact to the Condensed Consolidated Balance Sheets for the opening balances is as follows (in thousands):

 

 

 

As Previously Reported

December 31, 2018

 

 

Adoption Adjustment

 

 

As reported under Topic 842

January 1, 2019

 

Operating lease assets

 

$

 

 

$

13,737

 

 

$

13,737

 

Accrued expenses and other current liabilities

 

 

15,207

 

 

 

(1,768

)

 

 

13,439

 

Operating lease liabilities

 

 

 

 

 

4,285

 

 

 

4,285

 

Lease incentive obligation, net of current portion

 

 

6,776

 

 

 

(6,776

)

 

 

 

Deferred rent

 

 

2,216

 

 

 

(2,216

)

 

 

 

Operating lease liabilities, net of current portion

 

 

 

 

 

20,212

 

 

 

20,212

 

 

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718)” (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted the ASU effective January 1, 2019, the impact of adoption of this standard was immaterial to the Company’s condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This standard eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods and early adoption is permitted. The Company is currently evaluating the impact of its adoption of ASU 2018-13 on its condensed consolidated financial statements.

In November 2018 the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard makes targeted improvements for collaborative arrangements as follows:

 

Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements;

 

Adds unit-of-account guidance to ASC 808, Collaborative Arrangements, to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606; and

 

Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting that transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer.

This standard will be effective on January 1, 2020; however, early adoption is permitted. A retrospective transition approach is required for either all contracts or only for contracts that are not completed at the date of initial application of ASC 606, with a cumulative adjustment to opening retained earnings. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial position and results of operations.

 

 

11


3.Fair Value Measurements

Certain assets and liabilities are carried at fair value under 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 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. Certain cash equivalents that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The carrying values of the Company’s accounts payable and accrued expenses approximate their fair value due to the short-term nature of these liabilities.

The following table presents information about the Company’s assets as of March 31, 2019 and December 31, 2018 that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (note there were no liabilities measured at fair value on a recurring basis in either of the periods presented):

 

 

 

Fair Value Measurements as of March 31, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Not Subject to

Leveling (1)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

$

 

 

$

 

 

$

 

 

$

40,187

 

 

$

40,187

 

 

 

$

 

 

$

 

 

$

 

 

$

40,187

 

 

$

40,187

 

 

(1) Certain cash equivalents that are valued using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

 

 

 

 

 

Fair Value Measurements as of December 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Not Subject to

Leveling (1)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

$

 

 

$

 

 

$

 

 

$

39,982

 

 

$

39,982

 

 

 

$

 

 

$

 

 

$

 

 

$

39,982

 

 

$

39,982

 

 

(1) Certain cash equivalents that are valued using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

 

 

 

As of March 31, 2019 and December 31, 2018, the Company’s cash equivalents consisted of money market funds with original maturities of less than 90 days from the date of purchase.

 

 

4.

Investments

As of March 31, 2019 and December 31, 2018 the Company had no investments.

 

The Company had restricted investments of $1,400 as of March 31, 2019 and December 31, 2018 which consisted of a certificate of deposit as a security deposit on its building lease at 200 Sidney Street, Cambridge, Massachusetts.  The cost of restricted investments approximates fair value.

 

 

12


5.

Property and Equipment, Net

Property and equipment, net consisted of the following:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Laboratory equipment

 

$

14,806

 

 

 

14,695

 

Computer equipment

 

 

2,875

 

 

 

2,864

 

Furniture and office equipment

 

 

1,033

 

 

 

1,033

 

Leasehold improvements

 

 

27,977

 

 

 

27,977

 

Construction in progress

 

 

26

 

 

 

26

 

 

 

 

46,717

 

 

 

46,595

 

Less: Accumulated depreciation and amortization

 

$

(22,146

)

 

$

(20,301

)

 

 

$

24,571

 

 

$

26,294

 

 

 

 

Depreciation and amortization expense was $2,006 and $1,941 for the three months ended March 31, 2019 and 2018, respectively.

 

 

6.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Development and manufacturing costs

 

$

6,779

 

 

$

7,046

 

Payroll and payroll-related costs

 

 

3,550

 

 

 

5,020

 

Facility and other

 

 

1,460

 

 

 

3,141

 

 

 

$

11,789

 

 

$

15,207

 

 

 

7.

Stockholders’ Equity Common Stock

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2018:

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

 

Outstanding as of December 31, 2018

 

 

7,561,719

 

 

$

12.26

 

 

 

7.23

 

 

$

4,958

 

Granted

 

 

2,148,250

 

 

 

6.16

 

 

 

 

 

 

 

 

 

Exercised

 

 

(38,125

)

 

 

3.14

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(763,412

)

 

 

12.70

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2019

 

 

8,908,432

 

 

$

10.79

 

 

 

7.57

 

 

$

9,684

 

Options vested and expected to vest as of March

   31, 2019

 

 

8,908,432

 

 

 

10.79

 

 

 

7.57

 

 

 

9,684

 

Options exercisable as of March 31, 2019

 

 

4,659,499

 

 

$

12.56

 

 

 

6.14

 

 

$

8,100

 

 

 

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2019 and 2018 was $4.60 and $7.02 per share, respectively.

During the three months ended March 31, 2019, the Company granted performance-based stock options to employees for the purchase of an aggregate of 1.1 million shares of common stock with a grant date fair value of $4.58 per share. These stock options are exercisable only upon achievement of specified performance targets. As of March 31, 2019, none of these options were exercisable because none of the specified performance targets had been achieved. Because achievement of the specified performance targets was not deemed probable as of March 31, 2019, the Company did not record any expense for these stock options from the dates of issuance through March 31, 2019.

13


 

Restricted Stock Units

The Company has granted restricted stock units with time-based vesting conditions.  The table below summarizes the Company’s restricted stock unit activity since December 31, 2018:

 

 

 

Number

of Shares

 

 

Weighted

Average Grant

Date Fair

Value

 

Unvested restricted stock units as of December 31, 2018

 

 

226,900

 

 

$

9.64

 

Granted

 

 

 

 

$

 

Forfeited

 

 

(3,000

)

 

$

8.07

 

Vested

 

 

(73,500

)

 

$

9.98

 

Unvested restricted stock units as of March 31, 2019

 

 

150,400

 

 

$

9.51

 

 

 

Stock-based Compensation Expense

The Company recorded stock-based compensation expense related to stock options, restricted stock units and the Company’s Employee Stock Purchase Plan (“ESPP”) in the following expense categories of its condensed consolidated statements of operations and comprehensive loss:

 

 

Three Months Ended

March 31,

 

 

2019

 

 

2018

 

Research and development expenses

$

1,448

 

 

$

1,928

 

General and administrative expenses

 

617

 

 

 

2,308

 

 

$

2,065

 

 

$

4,236

 

 

Employee Stock Purchase Plan

 

The ESPP provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of the Company's common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee's purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).  The offering period under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company's common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company's common stock on the purchase date. The Company recorded an immaterial amount of stock-based compensation expense under the ESPP for the three months ended March 31, 2019.

The total number of available ESPP shares is increased annually, which began in 2016 and will end in 2025. The ESPP allows for share replenishment equal to the lesser of (i) 400,000 shares and (ii) 1% of the number of shares of the Company’s common stock outstanding on the last day of the preceding calendar year, or an amount determined by the board of directors. As of March 31, 2019, a total of 1.9 million shares were reserved and available for issuance under the ESPP.

 

8.

Collaboration Revenue

NHS Collaboration Agreement

Summary of Agreement

In January 2016, the Company entered into a collaboration and license agreement with NHS (“License Agreement”) 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. The 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 “Licensed Territory”). The Company has retained full commercial rights to its entire portfolio of product candidates with respect to the United States and Canada.

14


Under the License Agreement, the Company granted to NHS an exclusive, royalty-bearing license to develop and commercialize, in the Licensed Territory, certain products based on its microbiome technology that are being developed for the treatment of CDI and IBD, including SER-109, SER-262, SER-287 and SER-301 (collectively, the “NHS Collaboration Products”). The License Agreement sets forth the Company’s and NHS’ respective obligations for development, commercialization, regulatory and manufacturing and supply activities for the NHS Collaboration Products with respect to the licensed fields and the Licensed Territory.

Under the License Agreement, NHS agreed to pay the Company an upfront cash payment of $120,000, which the Company received in February 2016. The Company is eligible to receive up to $285,000 in development milestone payments, $375,000 in regulatory payments and up to an aggregate of $1,125,000 for the achievement of certain commercial milestones related to the sales of NHS Collaboration Products. NHS also agreed to pay the Company tiered royalties, at percentages ranging from the high single digits to high teens, of net sales of NHS Collaboration Products in the Licensed Territory.

Under the License Agreement, the Company is entitled to receive a $20,000 milestone payment from NHS following initiation of a SER-287 Phase 2 study and a $20,000 milestone payment from NHS following the initiation of a SER-287 Phase 3 study. In November 2018, the Company entered into a letter agreement with NHS which modified the License Agreement to address the current clinical plans for SER-287. Pursuant to the letter agreement, the Company and NHS agreed that following initiation of the SER-287 Phase 2b study, the Company would be entitled to receive $40,000 in milestone payments from NHS, which represent the milestone payments due to the Company for the initiation of a SER-287 Phase 2 study and a Phase 3 study. The SER-287 Phase 2b study was initiated and the $40,000 of milestone payments were received in December 2018. The letter agreement also provides scenarios under which NHS’ reimbursement to the Company for certain Phase 3 development costs would be reduced or delayed depending on the outcomes of the SER-287 Phase 2b study.

Accounting Analysis

 

The Company assessed the License Agreement in accordance with ASC 606—Revenue From Contracts with Customers (“ASC 606”) and concluded that NHS is a customer. The Company identified the following promises under the contract: (i) a license to develop and commercialize the NHS Collaboration Products in the 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 NHS 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 $120,000 non-refundable upfront amount constituted the entirety of the consideration to be included in the transaction price as the development, regulatory, and commercial milestones were fully constrained. During the year ended December 31, 2016, the Company received $10,000 from NHS in connection with the initiation of the Phase 1b study for SER-262 in CDI. During the year ended December 31, 2017, the Company received $20,000 from NHS in connection with the initiation of the Phase 3 study for SER-109. During the year ended December 31, 2018, the Company received $40,000 from NHS in connection with the initiation of the Phase 2b study for SER-287. The transaction price as of March 31, 2019 was approximately $190,000.

During the three months ended March 31, 2019 and 2018, using the cost-to-cost method, which best depicts the transfer of control to the customer, the Company recognized $6,615 and $3,766 of Collaboration revenue – related party, respectively.

As of March 31, 2019 and December 31, 2018, there was $130,644, and $137,259, respectively, of deferred revenue related to the unsatisfied portion of the performance obligation under the License Agreement. As of March 31, 2019, the deferred revenue is classified as current or non-current in the consolidated balance sheets based on the Company’s estimate of revenue that will be recognized within the next 12 months, which is determined by the cost-to-cost method which measures the extent of progress towards completion based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the performance obligation.  All costs associated with the License Agreement are recorded in research and development expense in the condensed consolidated statements of operations and comprehensive loss.

 

15


AstraZeneca Research Collaboration and Option Agreement

Summary of the Agreement

In March 2019, the Company entered into a Research Collaboration and Option Agreement (the “Research Agreement”) with MedImmune, LLC, a wholly owned subsidiary of AstraZeneca Inc. (“AstraZeneca”), to advance the mechanistic understanding of the microbiome in augmenting the efficacy of cancer immunotherapy. Under the Research Agreement, the Company and AstraZeneca will conduct certain research and development activities as set forth on a research plan focused on the role of the microbiome in certain cancers and cancer immunotherapies, including furthering the research program for SER-401, in combination with AstraZeneca compounds targeting various cancers.

Pursuant to the Research Agreement, the Company agreed not to conduct research or development on any microbiome products specifically designed by the Company during the term of the Research Agreement for the treatment of cancer (“Microbiome Oncology Products”), with or on behalf of any third party without the prior approval of the joint steering committee for the Research Agreement for at least three years after the effective date (the “Exclusivity Period”). Additionally, AstraZeneca will pay to the Company a total of $20,000 in three equal installments, the first of which the Company received in April 2019, and the second and third of which become due on January 2, 2020 and January 4, 2021, respectively. Such payments are payable even if the Research Agreement is terminated in accordance with its terms, unless the Research Agreement is terminated by AstraZeneca for the Company’s uncured material breach. Additionally, AstraZeneca will bear its costs of conducting activities under the research plan and will reimburse the Company for all activities performed under the research plan based on actual full-time employee (“FTE”) time and certain third-party costs incurred by the Company in connection therewith.

Under the Research Agreement, the Company granted to AstraZeneca an exclusive option to negotiate a worldwide, sublicensable exclusive license under relevant intellectual property rights controlled by the Company to exploit Microbiome Oncology Products for the treatment of cancer. Additionally, the Company granted to AstraZeneca an additional exclusive option to obtain a worldwide, sublicensable, license under certain intellectual property rights arising out of the Agreement or coming into the control of the Company during the term of the Agreement, to exploit AstraZeneca’s oncology and other assets which are the subject of the research plan. AstraZeneca may exercise each option at any point prior to 90 days after the end of the Exclusivity Period (the “Option Exercise Period”) by delivering an option exercise notice to the Company. If AstraZeneca exercises an option during the Option Exercise Period, the parties will enter into exclusive, good faith negotiations for a period of six months (the “Negotiation Period”) regarding the terms of the definitive license agreement contemplated by such option. If no definitive agreement is reached during the Negotiation Period, subject to certain other terms and conditions applicable for a one (1) year period, the Company is free to license, further develop or otherwise exploit its assets that were the subject of the option without further obligation to AstraZeneca.

The term of the Research Agreement continues in effect until the Research Agreement is terminated by the parties in accordance with its terms by mutual written agreement. Either party may terminate the Research Agreement for the other party’s uncured material breach or bankruptcy or insolvency-related events. AstraZeneca may terminate the Research Agreement for convenience.

Accounting Analysis

The Company assessed the Research Agreement in accordance with ASC 606 and concluded that AstraZeneca is a customer. The Company identified the following promises under the contract: (i) a research license, (ii) an obligation to perform research and development services, and (iii) participating on a joint steering committee.   The Company assessed the promised goods and services to determine if they are distinct. Based on this assessment, the Company determined that AstraZeneca 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.

 

Each exclusive option granted to AstraZeneca provides AstraZeneca with the right to negotiate a license agreement in the future at fair value. Therefore, the Company concluded that each option does not constitute a performance obligation at inception and has been excluded from the initial allocation since each option represents a separate buying decision at market rates, rather than a material right in the contract.

At contract inception, the Company determined that the transaction price is comprised of: (i) the $20,000 fee, which represents fixed consideration, and (ii) the estimated reimbursement of research and development costs incurred, which represents variable consideration. The Company included the estimated reimbursement of research and development costs, approximately $13,900, in the transaction price at the inception of the arrangement because the Company is required to perform research and development services and the contract requires AstraZeneca to reimburse the Company for costs incurred. Also, since the related revenue would be recognized only as the costs are incurred, and the contract precludes the joint steering committee from changing the research plan without mutual agreement, the Company determined it is not probable that a significant reversal of cumulative revenue would occur.

16


The Company determined that revenue under the Research Agreement should be recognized over time as AstraZeneca simultaneously receives the benefit from the Company as the Company performs under the single performance obligation over time. The Company will recognize revenue for the single performance obligation using a cost-to-cost input method as the Company has concluded it best depicts the research and joint steering committee participation services performed prior to AstraZeneca’s ability to negotiate a license. Under this method, the transaction price is recognized over the contract’s entire performance period, using costs incurred relative to total estimated costs to determine the extent of progress towards completion.

For the three months ended March 31, 2019, the Company recognized revenue of $260 based on the measured progress under the Research Agreement. The transaction price as of March 31, 2019 was approximately $33,900.

As of March 31, 2019, there was $6,407 of deferred revenue associated with the Research Agreement, with $2,770 presented as current and $3,637 as non-current in the condensed consolidated balance sheets based on the Company’s estimate of revenue that will be recognized within the next 12 months. All costs associated with the Research Agreement are recorded in research and development expense in the condensed consolidated statements of operations and comprehensive loss.

Contract Balances from Contracts with Customers

The following table presents changes in the Company’s contract assets and contract liabilities during the three months ended March 31, 2019 and 2018:

 

 

 

Balance as of

December

31, 2018

 

 

Additions

 

 

Deductions

 

 

Balance as of

March

31, 2019

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue - related party

 

 

137,259

 

 

 

 

 

 

(6,615

)

 

 

130,644

 

Deferred revenue

 

 

 

 

 

6,667

 

 

 

(260

)

 

 

6,407

 

 

 

 

Balance as of

January

1, 2018

 

 

Additions

 

 

Deductions

 

 

Balance as of

March

31, 2018

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue - related party

 

 

123,783

 

 

 

175

 

 

 

(3,766

)

 

 

120,192

 

 

During the three months ended March 31, 2019 and 2018 the Company recognized the following revenues as a result of changes in the contract liabilities balances in the respective periods (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenue recognized in the period from:

 

 

 

 

 

 

 

 

Amounts included in the contract liability at the beginning

   of the period

 

 

6,615

 

 

 

3,766

 

 

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.

 

 

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9. Leases

The Company leases real estate, primarily laboratory, office and manufacturing space. The Company’s leases have remaining terms ranging from less than 1 year to 5 years. Certain leases include one or more options to renew, exercised at the Company’s sole discretion, with renewal terms that can extend the lease from one year to five years. The Company evaluated the renewal options in its leases to determine if it was reasonably certain that the renewal option would be exercised, and therefore should be included in the calculation of the operating lease assets and operating lease liabilities. Given the Company’s current business structure, uncertainty of future growth, and the associated impact to real estate, the Company concluded that it is not reasonably certain that any renewal options would be exercised. Therefore, the operating lease assets and lease liabilities only contemplate the initial lease terms. All of the Company’s leases qualify as operating leases. The following table summarizes the presentation in the Company’s condensed consolidated balance sheets of its operating leases:

 

 

 

As of March 31, 2019

 

Assets:

 

 

 

 

Operating lease assets

 

$

13,202

 

 

 

 

 

 

Liabilities:

 

 

 

 

Operating lease liabilities

 

$

4,407

 

Operating lease liabilities, net of current portion

 

 

19,066

 

Total operating lease liabilities

 

$

23,473

 

 

The following table summarizes the effect of lease costs in the Company’s condensed consolidated statement of operations and comprehensive loss:

 

 

 

For the Three Months Ended

 

 

 

March 31, 2019

 

Operating lease costs

 

$

1,154

 

Short-term lease costs

 

 

648

 

Variable lease costs

 

 

726

 

Total lease costs

 

$

2,528

 

 

During the three months ended March 31, 2019, the Company made cash payments of $1,642 for operating leases.

The minimum lease payments for the next five years and thereafter is expected to be as follows (in thousands):

 

 

 

As of March 31, 2019

 

2019 (remaining 9 months)

 

$

4,951

 

2020

 

 

6,382