mcrb-10q_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x

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

For the quarterly period ended March 31, 2016

OR

o

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 Number)

 

 

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)

N/A

(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  x     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x     No  o

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of May 9, 2016 there were 39,519,842 shares of Common Stock, $0.001 par value per share, outstanding.

 

 

 

 


Seres Therapeutics, Inc.

INDEX

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1. Condensed Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2015

 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

 

6

Notes to Condensed Consolidated Financial Statements

 

7

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

 

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4. Controls and Procedures

 

28

 

 

 

PART II – OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

30

Item 1A. Risk Factors

 

30

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

 

60

Item 3. Defaults Upon Senior Securities

 

60

Item 4. Mine Safety Disclosures

 

60

Item 5. Other Information

 

60

Item 6. Exhibits

 

60

 

 

 

SIGNATURES

 

61

 

 

2


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 and Section 21E of the Securities Exchange Act of 1934. 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 factors described under the sections in this Quarterly Report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as the following:

 

·

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

 

·

our future capital needs and our need to raise additional funds;

 

·

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;

 

·

our ability to establish our own 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 FDA 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

SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

193,228

 

 

$

73,933

 

Investments

 

 

110,050

 

 

 

131,149

 

Prepaid expenses and other current assets

 

 

3,568

 

 

 

2,528

 

Total current assets

 

 

306,846

 

 

 

207,610

 

Property and equipment, net

 

 

16,082

 

 

 

7,751

 

Restricted cash

 

 

1,540

 

 

 

1,539

 

Total assets

 

$

324,468

 

 

$

216,900

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

5,763

 

 

 

5,397

 

Accrued expenses and other current liabilities

 

 

7,059

 

 

 

5,523

 

Deferred revenue - related party

 

 

12,000

 

 

 

 

Total current liabilities

 

 

24,822

 

 

 

10,920

 

Lease incentive obligation

 

 

4,527

 

 

 

586

 

Deferred revenue, net of current portion - related party

 

 

105,290

 

 

 

 

Total liabilities

 

 

134,639

 

 

 

11,506

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value;

    10,000,000 shares authorized at March 31, 2016 and December 31, 2015; no shares

    issued and outstanding at March 31, 2016 and December 31, 2015

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2016

    and December 31, 2015; 39,218,702 and 39,082,017 shares issued and outstanding

    at March 31, 2016 and December 31, 2015 , respectively

 

 

39

 

 

 

39

 

Additional paid-in capital

 

 

291,998

 

 

 

287,937

 

Accumulated other comprehensive income

 

 

108

 

 

 

30

 

Accumulated deficit

 

 

(102,316

)

 

 

(82,612

)

Total stockholders’ equity

 

 

189,829

 

 

 

205,394

 

Total liabilities and stockholders’ equity

 

$

324,468

 

 

$

216,900

 

 

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,

 

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

Collaboration revenue - related party

 

$

2,710

 

 

$

 

Total revenue

 

 

2,710

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

$

15,416

 

 

 

5,561

 

General and administrative expenses

 

 

7,210

 

 

 

2,606

 

Total operating expenses

 

 

22,626

 

 

 

8,167

 

Loss from operations

 

 

(19,916

)

 

 

(8,167

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

268

 

 

 

49

 

Interest expense

 

 

(56

)

 

 

(66

)

Revaluation of preferred stock warrant liability

 

 

 

 

 

213

 

Total other income, net

 

 

212

 

 

 

196

 

Net loss

 

$

(19,704

)

 

$

(7,971

)

Net loss per share attributable to common stockholders, basic

   and diluted

 

$

(0.50

)

 

$

(1.15

)

Weighted average common shares outstanding, basic and diluted

 

 

39,186,130

 

 

 

6,912,725

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on investments, net of tax of $0

 

 

78

 

 

 

31

 

Total other comprehensive income

 

 

78

 

 

 

31

 

Comprehensive loss

 

$

(19,626

)

 

$

(7,940

)

 

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

 

 

 

5


SERES THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(19,704

)

 

$

(7,971

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

3,904

 

 

 

1,327

 

Depreciation and amortization expense

 

 

386

 

 

 

92

 

Gain from revaluation of preferred stock warrant liability

 

 

 

 

 

(213

)

Non-cash interest expense

 

 

54

 

 

 

30

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,040

)

 

 

(710

)

Deferred revenue

 

 

117,290

 

 

 

 

Accounts payable

 

 

1,331

 

 

 

(189

)

Accrued expenses and other current liabilities

 

 

(806

)

 

 

(706

)

Net cash provided by (used in) operating activities

 

 

101,415

 

 

 

(8,340

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,400

)

 

 

(214

)

Purchases of investments

 

 

(45,301

)

 

 

(59,255

)

Maturities of investments

 

 

66,425

 

 

 

 

Changes in restricted cash

 

 

(1

)

 

 

 

Net cash provided by (used in) investing activities

 

 

17,723

 

 

 

(59,469

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

 

 

(24

)

Proceeds from exercise of stock options and common stock warrants

 

 

157

 

 

 

89

 

Repayment of notes payable

 

 

 

 

 

(300

)

Payments of initial public offering costs

 

 

 

 

 

(1,096

)

Net cash provided by (used in) financing activities

 

 

157

 

 

 

(1,331

)

Net increase (decrease) in cash and cash equivalents

 

 

119,295

 

 

 

(69,140

)

Cash and cash equivalents at beginning of period

 

 

73,933

 

 

 

114,185

 

Cash and cash equivalents at end of period

 

$

193,228

 

 

$

45,045

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

10

 

 

$

40

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

 

 

$

162

 

Property and equipment purchases included in accounts payable and accrued expenses

 

$

3,395

 

 

$

28

 

 

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

 

 

6


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 restore health by repairing the function of a dysbiotic microbiome. The Company’s lead product candidate, SER-109, is intended to prevent further recurrences of Clostridium difficile  infection (“CDI”), a debilitating infection of the colon, and, if approved by the FDA, could be a first-in-field drug. Using its microbiome therapeutics platform, the Company is developing additional product candidates to treat diseases where the microbiome is implicated, including SER-262 to prevent an initial recurrence of primary CDI, SER-287 to treat inflammatory bowel disease, including ulcerative colitis, SER-301, our synthetic ulcerative colitis product candidate, and SER-155 to prevent mortality following allogeneic hematopoietic stem cell transplantation (allo-HSCT) due to infections and graft-versus-host disease. The Company is also using its microbiome therapeutics platform to conduct research on metabolic diseases, such as non-alcoholic steatohepatitis (NASH); inflammatory diseases, such as Crohn’s disease, rare liver disorders such as primary sclerosing cholangitis (PSC); and immuno-oncology treatments using checkpoint inhibitors.

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, that any products 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.

Unaudited Interim Financial Information

The accompanying unaudited consolidated financial statements as of March 31, 2016 and the statements of operations and comprehensive loss and of cash flows for the three months ended March 31, 2016 and 2015 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 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, 2015 included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the U.S Securities and Exchange Commission on March 14, 2016.

The unaudited interim financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments which are necessary for a fair statement of the Company’s financial position as of March 31, 2016 and consolidated results of operations and cash flows for the three months ended March 31, 2016. Such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2016.

 

 

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, 2015, and the notes thereto, which

7


are included in the Company’s Annual Report on Form 10-K. During the three months ended March 31, 2016, the Company recorded revenue in connection with its collaboration agreement. See Note 9, “Collaboration Revenue,” for additional information.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues 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.

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 and investments are carried at fair value, determined according to the fair value hierarchy described above. Certain cash equivalents or investments 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, 2016 and December 31, 2015 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, 2016 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Not Subject to Leveling (1)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

$

 

 

$

1,753

 

 

$

 

 

$

27,796

 

 

$

29,549

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

 

 

$

56,020

 

 

$

 

 

$

 

 

$

56,020

 

Corporate Bonds

 

 

 

 

 

26,972

 

 

 

 

 

 

 

 

 

26,972

 

Government Securities

 

 

 

 

 

15,044

 

 

 

 

 

 

 

 

 

15,044

 

Treasury Bonds

 

 

 

 

 

12,014

 

 

 

 

 

 

 

 

 

12,014

 

 

 

$

 

 

$

111,803

 

 

$

 

 

$

27,796

 

 

$

139,599

 

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

 

8


 

 

 

Fair Value Measurements as of December 31, 2015 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Not Subject to Leveling (1)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Equivalents

 

$

 

 

$

11,952

 

 

$

 

 

$

11,173

 

 

$

23,125

 

Repurchase Agreements

 

 

 

 

 

20,000

 

 

 

 

 

 

 

 

 

20,000

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

 

 

$

64,820

 

 

$

 

 

$

 

 

$

64,820

 

Corporate Bonds

 

 

 

 

 

46,490

 

 

 

 

 

 

 

 

 

46,490

 

Government Securities

 

 

 

 

 

15,819

 

 

 

 

 

 

 

 

 

15,819

 

Treasury Bonds

 

 

 

 

 

4,020

 

 

 

 

 

 

 

 

 

4,020

 

 

 

$

 

 

$

163,101

 

 

$

 

 

$

11,173

 

 

$

174,274

 

(1) Certain cash equivalents and investments 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, 2016, the Company’s cash equivalents, which were invested in money market funds, corporate bonds and commercial paper with original maturities of less than 90 days from the date of purchase, were valued based on Level 2 inputs.

 

As of December 31, 2015, the Company’s cash equivalents consisted of money market funds, corporate bonds, commercial paper, government securities and repurchase agreements with original maturities of less than 90 days from the date of purchase and were valued based on Level 2 inputs. Repurchase agreements are agreements with banks to repurchase notes that are collateralized by U.S. government securities.

 

The fair value of the Company’s investments, which consisted of commercial paper, corporate bonds, government securities and treasury bonds as of March 31, 2016 and December 31, 2015 were determined using Level 2 inputs. During the three months ended March 31, 2016 there were no transfers between Level 1, Level 2 and Level 3.

Revenue recognition

The Company currently generates its revenue through collaboration and license arrangements with strategic partners for the development and commercialization of product candidates.

The Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, revenue is recognized for each unit of accounting when all of the following criteria are met:

 

·

Persuasive evidence of an arrangement exists

 

·

Delivery has occurred or services have been rendered

 

·

The seller’s price to the buyer is fixed or determinable

 

·

Collectability is reasonably assured

 

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, current portion. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as long-term deferred revenue.

 

Collaboration revenue

In connection with the License Agreement, the Company received an upfront, non-refundable payment of $120,000. Other non-refundable payments to the Company under this arrangement may include: (i) payments for research and development services, (ii) payments for the supply of clinical product, (iii) payments for the supply of commercial product, (iv) payments based on the achievement of certain development, regulatory, commercial, and sales-based milestones and (v) royalties on product sales.

The Company evaluates multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue Recognition-Multiple-Element Arrangements (“ASC 605-25”). Pursuant to this guidance, the Company identifies the deliverables included in the arrangement and determines:  (1) whether the individual deliverables have value to the customer on a standalone basis and represent separate units of accounting or whether they must be accounted for as a combined unit of accounting; and (2) if the arrangement includes a general right of return relative to the delivered item. This evaluation requires management to make judgments about the

9


individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. In assessing whether an item has standalone value, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner, the retention of any key rights by the Company, and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s).  

In situations where the Company has identified multiple units of accounting, the arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. The Company determines the selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

Then, the applicable revenue recognition criteria in ASC 605-25 are applied to each of the separate units of accounting to determine the appropriate period and pattern of recognition. The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605-25 are satisfied for that particular unit of accounting. The Company will recognize as revenue, upon delivery, arrangement consideration attributed to licenses that have standalone value from the other deliverables to be provided in an arrangement. For licenses that do not have standalone value from the other deliverables to be provided in an arrangement over the Company’s estimated performance period as the arrangement would be accounted for as a single unit of accounting.

The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605-25 are satisfied for that particular unit of accounting. The Company will recognize as revenue arrangement consideration attributed to licenses that have standalone value from the other deliverables to be provided in an arrangement upon delivery. The Company will recognize as revenue arrangement consideration attributed to licenses that do not have standalone value from the other deliverables to be provided in an arrangement over the Company’s estimated performance period as the arrangement would be accounted for as a single unit of accounting.

If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then the Company recognizes revenue under the arrangement for the single unit of accounting on a straight-line basis over the period the Company is expected to complete its performance obligations. Alternatively, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line method or proportional performance method, as applicable.

At the inception of an arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. The Company recognizes revenue associated with substantive milestones in accordance with FASB ASC Topic 605-28, Revenue Recognition-Milestone Method upon successful accomplishment of each milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met.

The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.

Refer to footnote 9 for further information related to the Company’s collaboration and license agreement with Nestec, Ltd.

10


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 warrants and unvested restricted stock. The Company applied the two-class method to calculate its basic and diluted net loss per share attributable to common stockholders for the three months ended March 31, 2015, as its convertible preferred stock and common stock are participating securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company was in a net loss position for the three months ended March 31, 2015 and preferred stockholders do not participate in losses.

The Company’s convertible preferred stock contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Similarly, restricted stock awards granted by the Company entitle the holder of such awards to dividends declared or paid by the board of directors, regardless of whether such awards are unvested, as if such shares were outstanding common shares at the time of the dividend. However, the unvested restricted stock awards are not entitled to share in the residual net assets (deficit) of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

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,

 

 

 

2016

 

 

2015

 

Stock options to purchase common stock

 

 

5,882,186

 

 

 

3,989,246

 

Unvested restricted common stock

 

 

 

 

 

26,875

 

Warrants for the purchase of convertible preferred stock

 

 

 

 

 

92,127

 

Warrants for the purchase of common stock

 

 

 

 

 

738,635

 

Convertible preferred stock (as converted to common stock)

 

 

 

 

 

22,866,987

 

 

 

 

5,882,186

 

 

 

27,713,870

 

 

Recently Issued Accounting Standards

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies how a company identifies promised goods or services and clarifies whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time).We are currently evaluating the method of adoption and the potential impact that Topic 606 may have on our financial position and results of operations.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The new standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new standard became effective for us on January 1, 2016. Refer to the Fair Value significant accounting policy for the impact of this change.

 

11


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

 

In March 2016, the FASB issued Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the income statement in the reporting period in which they occur. In addition, the ASU requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. The ASU also requires that cash paid by directly withholding shares for tax withholding purposes be classified as a financing activity in the statement of cash flows. In addition, the ASU also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest, consistent with current U.S. GAAP, or account for forfeitures when they occur. The new standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

 

Reclassifications

 

Certain amounts reported in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year condensed consolidated financial statements.

 

 

3.

Investments

As of March 31, 2016, the fair value of available-for-sale investments by type of security was as follows:

 

 

March 31, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized Gain

 

 

Gross

Unrealized Loss

 

 

Fair

Value

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

55,928

 

 

$

92

 

 

 

 

 

$

56,020

 

Corporate Bonds

 

 

26,964

 

 

 

8

 

 

 

 

 

 

26,972

 

Government Securities

 

 

15,037

 

 

 

7

 

 

 

 

 

 

15,044

 

Treasury Bonds

 

 

12,012

 

 

 

2

 

 

 

 

 

 

12,014

 

 

 

$

109,941

 

 

$

109

 

 

$

 

 

$

110,050

 

 

 

December 31, 2015

 

 

 

Amortized

Cost

 

 

Gross

Unrealized Gain

 

 

Gross

Unrealized Loss

 

 

Fair

Value

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

$

64,733

 

 

$

87

 

 

 

 

 

$

64,820

 

Corporate Bonds

 

 

46,538

 

 

 

 

 

 

(48

)

 

 

46,490

 

Government Securities

 

 

15,823

 

 

 

 

 

 

(4

)

 

 

15,819

 

Treasury Bonds

 

 

4,022

 

 

 

 

 

 

(2

)

 

 

4,020

 

 

 

$

131,116

 

 

$

87

 

 

$

(54

)

 

$

131,149

 

 

Investments with original maturities of less than 90 days are included in cash and cash equivalents on the consolidated balance sheets and are not included in the table above.

As of March 31, 2016 and December 31, 2015, the Company’s commercial paper, corporate bonds, government securities and treasury bonds had remaining maturities of less than 12 months.

 

12


 

4.

Property and Equipment, Net

Property and equipment, net consisted of the following:

 

 

March 31,

2016

 

 

December 31,

2015

 

Laboratory equipment

 

$

4,739

 

 

$

4,370

 

Computer equipment

 

 

715

 

 

 

408

 

Furniture and office equipment

 

 

498

 

 

 

285

 

Leasehold improvements

 

 

4,055

 

 

 

1,856

 

Construction in progress

 

 

7,472

 

 

 

1,843

 

 

 

 

17,479

 

 

 

8,762

 

Less: Accumulated depreciation and amortization

 

 

(1,397

)

 

 

(1,011

)

 

 

$

16,082

 

 

$

7,751

 

 

Construction in progress at March 31, 2016 was comprised primarily of leasehold improvements, laboratory equipment, and computer equipment purchased in connection with the build-out of office and laboratory space at our new headquarters at 200 Sidney Street in Cambridge, Massachusetts.

Depreciation and amortization expense was $386 and $92 for the three months ended March 31, 2016 and 2015, respectively.

 

 

5.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

 

March 31,

2016

 

 

December 31,

2015

 

Development and manufacturing costs

 

$

2,093

 

 

$

1,436

 

Payroll and payroll-related costs

 

 

1,187

 

 

 

2,756

 

Professional fees

 

 

498

 

 

 

184

 

Facility

 

 

3,128

 

 

 

1,053

 

Other

 

 

153

 

 

 

94

 

 

 

$

7,059

 

 

$

5,523

 

 

 

 

6.

Preferred Stock Warrant Liability

In September 2013, the Company issued a warrant to purchase 92,127 shares of Series A-2 convertible preferred stock in connection with its loan and security agreement. The warrant was immediately exercisable at an exercise price of $1.78 per share and has a contractual term of ten years from issuance. The fair value of the warrant at issuance was estimated to be $156 and was recorded as a debt discount and as a preferred stock warrant liability.

The Company classified the warrant to purchase shares of its Series A-2 convertible preferred stock as a liability on its consolidated balance sheets and subsequently re-measured to fair value at each balance sheet date. Changes in fair value of the warrant were recognized as a component of other income (expense), net, in the consolidated statement of operations and comprehensive loss.

 

In connection with the automatic conversion of the Company’s convertible preferred stock, which occurred upon the listing of the Company’s common stock on the NASDAQ on June 26, 2015, the preferred stock warrant became a warrant to purchase common stock. The Company performed the final mark to market adjustment on the preferred stock warrant using the fair value of the underlying common shares of $18.00 per share on June 26, 2015 and recorded the change in fair value in other income (expense), net in the consolidated statement of operations and comprehensive loss. The preferred stock warrant liability was then reclassified to additional paid-in-capital as it became a warrant to purchase common stock.

 

There was no balance related to the preferred stock warrant liability as of March 31, 2016 and December 31, 2015.

The Company recorded a loss $213 for the three months ended March 31, 2015 to reflect the change in fair value of this preferred stock warrant.

13


The following assumptions and inputs were used in determining the fair value of the preferred stock warrant liability valued using the Black-Scholes option-pricing model:

 

 

 

Three Months

Ended March 31,

 

 

 

2015

 

Risk-free interest rate

 

 

1.83

%

Expected term (in years)

 

 

8.5

 

Expected volatility

 

 

80.0

%

Expected dividend yield

 

 

0

%

Fair value of Series A-2 convertible preferred stock

 

$

14.87

 

 

 

 

7.

Preferred Stock

On July 1, 2015, in connection with the closing of the IPO, the Company effected its Restated Certificate of Incorporation, which authorizes the Company to issue 10,000,000 shares of preferred stock, $0.001 par value per share.

 

 

8.

Stockholders’ Equity Common Stock

On July 1, 2015, the Company completed an IPO, and issued and sold 8,545,138 shares of common stock at a public offering price of $18.00 per share, resulting in net proceeds of approximately $139,267 after deducting underwriting discounts and commissions and other offering expenses totaling $3,748. The shares issued upon closing of the IPO included 1,114,583 shares of the Company’s common stock, which were sold to the underwriters pursuant to the full exercise of their option to purchase additional shares of common stock. Upon the listing of the Company’s common stock on the NASDAQ on June 26, 2015, all outstanding shares of the Company’s convertible preferred stock automatically converted into 22,866,987 shares of the Company’s common stock.

As of December 31, 2014, the Company’s Amended and Restated Certificate of Incorporation, as further amended, authorized the Company to issue 38,000,000 shares of common stock, $0.001 par value per share. On July 1, 2015, in connection with the closing of the IPO, the Company effected its Restated Certificate of Incorporation, which authorizes the Company to issue 200,000,000 shares of common stock, $0.001 par value per share.

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2015:

 

  

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

 

Outstanding as of December 31, 2015

 

 

5,026,246

 

 

$

8.01

 

 

 

8.70

 

 

$

136,945

 

Granted

 

 

992,625

 

 

 

27.52

 

 

 

 

 

 

 

 

 

Exercised

 

 

(136,685

)

 

 

1.15

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2016

 

 

5,882,186

 

 

$

11.46

 

 

 

8.68

 

 

$

93,314

 

Options exercisable as of March 31, 2016

 

 

1,892,915

 

 

$

2.66

 

 

 

8.05

 

 

$

45,250

 

Options vested and expected to vest as of March 31, 2016

 

 

5,756,568

 

 

$

11.34

 

 

 

8.67

 

 

$

91,974

 

 

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2016 was $19.59.

14


Stock-based Compensation Expense

The Company recorded stock-based compensation expense related to stock options and restricted common stock in the following expense categories of its consolidated statements of operations and comprehensive loss:

 

  

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Research and development expenses

 

$

2,186

 

 

$

623

 

General and administrative expenses

 

 

1,718

 

 

 

704

 

 

 

$

3,904

 

 

$

1,327

 

 

 

9.

Collaboration Revenue

Nestec Ltd.

In January 2016 the Company entered into a Collaboration and License Agreement (the “License Agreement”) with Nestec Ltd. (“NHS”), an affiliate of Nestlé Health Science US Holdings, Inc., a significant stockholder of the Company, for the development and commercialization of certain product candidates in development for the treatment and management of CDI and IBD, including ulcerative colitis and Crohn’s disease. The License Agreement will support 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.

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, or, 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, the Company’s and NHS’ development activities will be governed by global and regional development plans, including the conduct of additional clinical studies. The Company has agreed to manufacture and supply NHS Collaboration Products to support development and commercialization of NHS Collaboration Products in the licensed fields and in the Licensed Territory. NHS will have the right to obligate the Company to transfer technology necessary to manufacture Collaboration Products in the event that the Company materially fails to meet its supply commitments to NHS under the commercial supply agreement. The Company has also agreed to use diligent efforts to develop NHS Collaboration Products under a global development plan and to obtain approval for such NHS Collaboration Products in the European Union, or EU.

In exchange for the license, NHS agreed to pay the Company an upfront cash payment of $120,000, which the Company received in February 2016. 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. The Company is eligible to receive up to $295,000 in development milestone payments, $365,000 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.

For the development of NHS Collaboration Products for IBD under a global development plan, the Company agreed to pay the costs of clinical trials of such products up to and including Phase 2 clinical trials, and 67% of the costs for Phase 3 and other clinical trials of such products, with NHS bearing the remaining 33% of such costs. For other clinical development of NHS Collaboration Products for IBD, the Company agreed to pay the costs of such activities to support approval in the United States and Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.

With respect to development of NHS Collaboration Products for CDI under a global development plan, the Company agreed to pay all costs of an ongoing Phase 2 clinical trial for SER-109 and of Phase 3 clinical trials for SER-109. The Company agreed to bear all costs of conducting any Phase 1 or Phase 2 clinical trials under a global development plan for NHS Collaboration Products other than SER-109 for CDI. The Company agreed to pay 67% and NHS agreed to pay 33% of other costs of Phase 3 clinical trials conducted for NHS Collaboration Products other than SER-109 for CDI under a global development plan. For other clinical development of NHS Collaboration Products for CDI, the Company agreed to pay costs of such development activities to support approval in the United States and Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.

15


The License Agreement continues in effect until terminated by either the Company or NHS on the following bases: (i) NHS may terminate the License Agreement in the event of serious safety issues related to any of the NHS Collaboration Products; (ii) the Company may terminate the License Agreement if NHS challenges the validity or enforceability of any of our licensed patents; and (iii) either the Company or NHS may terminate the License Agreement in the event of the other party’s uncured material breach or insolvency. Upon termination of the License Agreement, all licenses granted to NHS by the Company will terminate, and all rights in and to the NHS Collaboration Products in the Licensed Territory will revert to the Company. If the Company commits a material breach of the License Agreement, NHS may elect not to terminate the License Agreement but instead apply specified adjustments to its payment obligations and other terms and conditions of the License Agreement.

The License Agreement contains customary representations and warranties, intellectual property protection provisions, certain indemnification rights in favor of each party and customary confidentiality provisions and limitations of liability.

At the inception of the License Agreement, the Company identified the following deliverables: (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 (“JSC”), and (iv) manufacturing services to provide clinical supply to complete future clinical trials. The Company also identified a contingent deliverable, the obligation to perform manufacturing services to provide commercial supply if commercialization occurs, which is contingent upon regulatory approval. This contingent deliverable has been excluded from the initial allocation and will be treated as a separate unit of accounting when and if delivered.  

The Company concluded that none of the four deliverables identified at the inception of the License Agreement has standalone value from the other undelivered elements. Accordingly, all deliverables represent a single unit of accounting.

All consideration received relating to the four identified deliverables that comprise the single unit of accounting will be recognized over the period of performance.  The period of performance will be through the completion of development services for the NHS Collaboration Products which has been estimated to be ten years.  The Company will periodically review and, if necessary, revise the estimated development period.

The Company will recognize revenue utilizing a time-based proportional performance model where revenue related to each payment is recognized over the ten year performance period.  As of March 31, 2016, the only consideration that is fixed and determinable is the non-refundable upfront payment of $120,000. For additional consideration that could be received for research and development services and/or manufacturing services for clinical supply, the Company will recognize a cumulative catch-up for the amount of time that has elapsed and spread the unrecognized portion over the remaining performance period.

Development and regulatory milestones that involve substantial effort on the Company’s part and the achievement of which are not considered probable at the inception of the License Agreement are considered substantive milestones, and will be recognized in their entirety in the period in which the milestone is achieved, assuming all other revenue recognition criteria are met. All commercial milestones will be recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

Royalties will be recorded as revenue in the period they are earned assuming all other revenue recognition criteria are met.

During the three months ended March 31, 2016, the Company recognized $2,710 of related party revenue associated with the License Agreement. As of March 31, 2016, there was $117,290 of deferred revenue related to the License Agreement, which 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 twelve months. All costs associated with the License Agreement are recorded in research and development expense in the condensed consolidated statements of operations and comprehensive loss.

 

 

10.

Income Taxes

The Company did not provide for any income taxes in three month periods ended March 31, 2016 or 2015.

The Company has evaluated the positive and negative evidence bearing upon the realizability of its U.S. net deferred tax assets. As required by the provisions of ASC 740, Income Taxes, management has determined that it is more-likely-than-not that the Company will not utilize the benefits of federal and state U.S. net deferred tax assets for financial reporting purposes. Accordingly, the net deferred tax assets are subject to a valuation allowance at March 31, 2016 and December 31, 2015.

As of March 31, 2016 and December 31, 2015, the Company had no accrued interest or tax penalties recorded. The Company files income tax returns in the U.S. and various state jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2012. However, to the extent the Company has tax attribute carryforwards, the tax

16


years in which the attribute was generated my still be adjusted upon examination by the Internal Revenue Service or state tax authorizes to the extent it is utilized in a future period. There are no currently ongoing or pending examinations in any jurisdictions.

 

 

11.

Commitments and Contingencies

Leases

The Company leases office and laboratory space under an operating lease agreement. The lease expires in January 2018 with no extension periods. The Company does have a right of expansion over the term as additional space becomes available but not an obligation.

On November 11, 2015, the Company entered into a non-cancelable property lease with BMR-Sidney Research Campus LLC (“BMR”) for 83,396 square feet of office, laboratory and pilot manufacturing space at 200 Sidney Street, Cambridge, Massachusetts. The lease term commenced in March 2016 and ends in November 2023. The Company has the option to extend the lease twice, each for a five-year period. The Company intends to move its corporate headquarters to this location in mid-2016. BMR will contribute a total of $12,509 toward the cost of tenant improvements.  BMR’s contribution toward the cost of tenant improvements is recorded as a lease incentive obligation on our consolidated balance sheet. The lease incentive obligation is amortized to our consolidated statement of operations as reductions to rent expense over the lease term. As of March 31, 2016, we have recorded a lease incentive obligation of $4,527.

During the three months ended March 31, 2016 and 2015, the Company recognized $393 and $186, respectively, of rental expense related to office and laboratory space.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of March 31, 2016 or December 31, 2015.

 

 

12.

Related Party Transactions

In October 2010, the Company entered into a services agreement with Flagship Ventures Management, Inc., an affiliate of one of its stockholders, Flagship Venture Funds, to provide general and administrative services to the Company, including the employer portions of employee health and dental benefit plans for Seres Therapeutics employees and consulting services. The Company made payments under the agreement of $16 and $118 during the three months ended March 31, 2016 and 2015, respectively. There were no amounts due to Flagship Ventures Management, Inc. related to the services agreement as of March 31, 2016 and 2015.

As described in Note 9, in January 2016 the Company entered into a License Agreement with NHS for the development and commercialization of certain product candidates in development for the treatment and management of CDI and IBD, including ulcerative colitis and Crohn’s disease. NHS is a related party since NHS is an affiliate of Nestlé Health Science, one of the Company’s significant stockholders. During the three months ended March 31, 2016, the Company recognized $2,710 of related party revenue associated with the License Agreement. As of March 31, 2016, there was $117,290 of deferred revenue related to the License Agreement, which is classified as current or non-current in the consolidated balance sheets. The Company has made no payments to NHS during the three months ended March 31, 2016. There are no amounts due from or to NHS as of March 31, 2016.

 

 

13.

401(k) Savings Plan

 

The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Effective January 1, 2016, the Company has elected to match 50% of the first 6% of an employee’s deferral. Company contributions are expensed in the year for which they are declared.

17


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described, in or implied, by these forward-looking statements.

Overview

We are 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. Our lead product candidate, SER-109, is designed to prevent further recurrences of Clostridium difficile infection, or CDI, a debilitating infection of the colon, by treating the dysbiosis of the colonic microbiome and, if approved by the U.S. Food and Drug Administration, or FDA, could be a first-in-field drug. Using our microbiome therapeutics platform, we are developing additional product candidates to treat diseases where the microbiome is implicated, including SER-262 to prevent an initial recurrence of primary CDI, SER-287 to treat inflammatory bowel disease, including ulcerative colitis, SER-301, our synthetic ulcerative colitis product candidate, and SER-155 to prevent mortality following allogeneic hematopoietic stem cell transplantation (allo-HSCT) due to infections and graft-versus-host disease. We are also using our microbiome therapeutics platform to conduct research on metabolic diseases, such as non-alcoholic steatohepatitis (NASH); inflammatory diseases, such as Crohn’s disease, rare liver disorders such as primary sclerosing cholangitis (PSC); and immuno-oncology treatments using checkpoint inhibitors. Since our inception in October 2010, we have devoted substantially all of our resources to developing SER-109 and SER-287, researching SER-262and SER-301, building our intellectual property portfolio, developing our supply chain, business planning, raising capital and providing general and administrative support for these operations. From our inception through June 30, 2015, we had financed our operations through private placements of our convertible preferred stock, the issuance of convertible promissory notes and borrowings under a loan and security agreement with Comerica Bank, or the Loan and Security Agreement. Through June 30, 2015, we had received gross proceeds of $137.0 million from such transactions.

On July 1, 2015, we completed an initial public offering, or IPO, of our common stock, and issued and sold 8.5 million shares of common stock at a public offering price of $18.00 per share, resulting in net proceeds of approximately $139.3 million after deducting underwriting discounts and commissions and offering expenses. Upon the listing of our common stock on The NASDAQ Global Select Market, or NASDAQ, on June 26, 2015, all outstanding shares of our convertible preferred stock automatically converted into 22.9 million shares of our common stock. The shares issued upon closing of the IPO included 1.1 million shares of the Company’s common stock, pursuant to the underwriters’ full exercise of their option to purchase additional shares of common stock.

As of March 31, 2016 we had repaid all amounts of the total $3.0 million borrowed under the Loan and Security Agreement.

All of our product candidates other than SER-109 and SER-287 are still in pre-clinical development. We expect results from our Phase 2 clinical study of SER-109 in mid-2016 and results from our Phase 1b clinical study of SER-287 in 2017. We also expect to initiate a Phase 1b clinical study of SER-262 in mid-2016. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have incurred significant operating losses. Our net loss was $19.7 million for three months ended March 31, 2016. As of March 31, 2016, we had an accumulated deficit of $102.3 million.

We expect that our expenses will increase substantially in connection with our ongoing and planned activities, particularly as we:

 

·

advance the clinical development of SER-109 for the prevention of further recurrences of CDI in patients suffering from recurrent CDI, through a Phase 2 clinical study and beyond;

 

·

initiate clinical development of SER-262 to be used following antibiotic treatment of primary CDI to prevent an initial recurrence of CDI;

 

·

continue the clinical development of SER-287 for the treatment of ulcerative colitis;

 

·

conduct research and continue pre-clinical development of additional Ecobiotic microbiome therapeutics, including SER-155 to prevent mortality following allogeneic hematopoietic stem cell transplantation (allo-HSCT) due to infections and graft-versus-host disease and SER-301, our synthetic ulcerative colitis product candidate,;

 

·

make strategic investments in manufacturing capabilities, including potentially planning and building a small-scale commercial manufacturing facility;

18


 

·

maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;

 

·

begin to build the infrastructure necessary to support potential commercialization of our product candidates; and

 

·

seek to obtain regulatory approvals for our product candidates.

In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, we expect to continue to incur additional costs associated with operating as a public company.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

In January 2016 we entered into a Collaboration and License Agreement, or the License Agreement, with Nestec Ltd., or NHS, an affiliate of Nestlé Health Science US Holdings, Inc, for the development and commercialization of certain of our product candidates in development for the treatment and management of CDI and IBD, including ulcerative colitis and Crohn’s disease. The License Agreement will support the development of our portfolio of products for CDI and IBD in markets outside of the United States and Canada, or the Licensed Territory, and is expected to provide substantial financial support for our ongoing research and development. We have retained full commercial rights to our entire portfolio of product candidates with respect to the United States and Canada, where we plan to build our own commercial organization.

Under the License Agreement, we granted to NHS an exclusive, royalty-bearing license to develop and commercialize, in the Licensed Territory, certain products based on our microbiome technology that are being developed for the treatment of CDI and IBD, including SER-109, SER-262, SER-287 and SER-301, or, collectively, the NHS Collaboration Products. We also granted to NHS a non-exclusive license, subject to the Company’s right to supply NHS Collaboration Products, to export, develop and make NHS Collaboration Products in the licensed fields worldwide solely for commercialization in the licensed fields and in the Licensed Territory.  Upon mutual agreement, one or more other products based on our microbiome technology for CDI or IBD may be added to the License Agreement in lieu of or in addition to the then-existing NHS Collaboration Products. NHS’ exclusive license in the Licensed Territory to develop and commercialize NHS Collaboration Products extends to any indications for which the parties agree to develop such products. We also granted to NHS a non-exclusive license to export, develop and make NHS Collaboration Products in the licensed fields worldwide solely for commercialization in the licensed fields and in the Licensed Territory. Additionally, the rights to develop and commercialize a given Collaboration Product in certain non-EU countries within the Licensed Territory may revert to us if NHS either elects not to pursue commercialization of such Collaboration Product in such country, or fails to meet certain agreed upon milestones for commercialization of such Collaboration Product in such country. If the licensed rights in any country revert to us in this way, then we would pay to NHS a royalty in the mid-single digits on net sales of such Collaboration Product in such country.

 

In exchange for the license, NHS agreed to pay us an upfront cash payment of $120 million, which we received in February 2016. NHS has also agreed to pay to us tiered royalties, at percentages ranging from the high single digits to high teens, of net sales of NHS Collaboration Products in the Licensed Territory. We are eligible to receive up to $295.0 million in development milestone payments, $365.0 million in regulatory payments and up to an aggregate of $1.1 billion for the achievement of certain commercial milestones related to the sales of NHS Collaboration Products. We expect to receive a total of $30 million in milestone payments in 2016 associated with the planned initiation of a Phase 1b study for SER-262 in CDI and the anticipated initiation of the Phase 3 clinical trial for SER-109 in CDI. The full potential value of the up-front payment and milestone payments payable by NHS is over $1.9 billion, assuming all products receive regulatory approval and are successfully commercialized.

For the development of NHS Collaboration Products for IBD under a global development plan, we agreed to pay the costs of clinical trials of such products up to and including Phase 2 clinical trials, and 67% of the costs for Phase 3 and other clinical trials of such products, with NHS bearing the remaining 33% of such costs. For other clinical development of NHS Collaboration Products for IBD, we agreed to pay the costs of such activities to support approval in the United States and Canada, and NHS will bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.

With respect to development of NHS Collaboration Products for CDI under a global development plan, we agreed to pay all costs of an ongoing Phase 2 clinical trial for SER-109 and of Phase 3 clinical trials for SER-109. We agreed to bear all costs of conducting any Phase 1 or Phase 2 clinical trials under a global development plan for NHS Collaboration Products other than SER-109 for CDI. We agreed to pay 67% and NHS agreed to pay 33% of other costs of Phase 3 clinical trials conducted for NHS

19


Collaboration Products other than SER-109 for CDI under a global development plan. For other clinical development of NHS Collaboration Products for CDI, we agreed to pay costs of such development activities to support approval in the United States and Canada, and NHS agreed to bear the cost of such activities to support approval of NHS Collaboration Products in the Licensed Territory.

During the three months ended March 31, 2016, we recorded revenue of $2.7 million in connection with the License Agreement.

We expect that our existing cash, cash equivalents and investments, will enable us to fund our operating expenses and capital expenditure requirements well into 2018. See “—Liquidity and Capital Resources.”

Financial Operations Overview

Revenue

To date we have not generated any revenues from the sale of products.  Our revenues from collaborations have been derived from the License Agreement.

 

Operating Expenses

Our operating expenses since inception have consisted primarily of research and development activities and general and administrative costs.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include:

 

·

expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research, pre-clinical activities and clinical trials on our behalf as well as contract manufacturing organizations, or CMOs, that manufacture drug products for use in our pre-clinical and clinical trials;

 

·

salaries, benefits and other related costs, including stock-based compensation expense, for personnel in our research and development functions;

 

·

costs of outside consultants, including their fees, stock-based compensation and related travel expenses;

 

·

the cost of laboratory supplies and acquiring, developing and manufacturing pre-clinical study and clinical trial materials;

 

·

costs related to compliance with regulatory requirements; and

 

·

facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. All costs associated with the License Agreement are recorded in research and development expense in the condensed consolidated statements of operations and comprehensive loss.

Our primary focus of research and development since inception has been on our microbiome therapeutics platform and the subsequent development of SER-109, SER-287, SER-262 and SER-301. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to investigators, consultants and CROs in connection with our pre-clinical studies and clinical trials and regulatory fees. We do not allocate employee-related costs and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under development and, as such, are classified as costs of our microbiome therapeutics platform research, along with external costs directly related to our microbiome therapeutics platform.

20


The table below summarizes our research and development expenses incurred on our platform and by product development program.

 

  

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Microbiome therapeutics platform

 

$

7,851

 

 

$

2,314

 

SER-109

 

 

5,489

 

 

 

3,185

 

SER-262

 

 

1,235

 

 

 

62

 

SER-287

 

 

841

 

 

 

 

Total research and development expenses

 

$

15,416

 

 

$

5,561

 

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we advance the clinical development of SER-109 and SER-287 and initiate clinical trials for certain product candidates, including SER-262, continue to discover and develop additional product candidates, including SER-155, and pursue later stages of clinical development of our product candidates. For example, the European Medicines Agency, or EMA, has recently provided initial guidance regarding SER-109 Phase 3 trial design that may lead to two Phase 3 studies being conducted to support SER-109 approval in the European Union.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to continue to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.

Other Income (Expense), Net

Interest Income.  Interest income consists of interest earned on our cash, cash equivalents and investments.

Interest Expense.  Interest expense consists of interest expense incurred on our debt. During the three months ended March 31, 2015, interest expense consisted of interest at the stated rate on borrowings under our loan and security agreement, amortization of deferred financing costs and interest expense related to the accretion of debt discount associated with (1) the fair value of preferred stock warrant we issued in connection with the Loan and Security Agreement and (2) a final payment due at maturity.

Revaluation of Preferred Stock Warrant Liability. Revaluation of preferred stock warrant liability consists of the net gain or loss associated with the change in the fair value of our preferred stock warrant liability. In connection with the Loan and Security Agreement, we issued a warrant for the purchase of our Series A-2 convertible preferred stock, which we believe is a financial instrument that may have required a transfer of assets because of the redemption feature of the underlying stock. Therefore, we classified this warrant as a liability that we re-measured to fair value at each reporting period, and we recorded the changes in the fair value as a component of other income (expense), net. Upon the listing of our common stock on the NASDAQ on June 26, 2015, the preferred stock warrant became a warrant to purchase common stock. We performed the final mark to market adjustment on the preferred stock warrant using the fair value of the underlying common shares of $18.00 per share on June 26, 2015 and recorded the change in fair value in other income (expense), net in the consolidated statement of operations and comprehensive loss. The preferred stock warrant liability was then reclassified to additional paid-in-capital as it became a warrant to purchase common stock.

21


Income Taxes

Since our inception in 2010, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. We did not provide for any income taxes in either the three-month periods ended March 31, 2016 or 2015.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. During the three months ended March 31, 2016, we have determined that as a result of the License Agreement, our accounting for collaboration revenue requires significant judgment and, accordingly, have disclosed our policy below. Our critical accounting policies, other than accounting for collaboration revenue, are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Significant Judgments and Estimates” in our Form 10-K filed on March 14, 2016 and the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity:

 

·

Accrued research and development expenses

 

·

Stock-based compensation

 

·

Valuation of the warrant to purchase convertible preferred stock

 

·

Collaboration revenue

Accordingly, we believe the policies referenced above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

 

Collaboration revenue

We evaluate multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue Recognition-Multiple-Element Arrangements (“ASC 605-25”). Pursuant to this guidance, we identify the deliverables included in the arrangement and determines: (1) whether the individual deliverables have value to the customer on a standalone basis and represent separate units of accounting or whether they must be accounted for as a combined unit of accounting; and (2) if the arrangement includes a general right of return relative to the delivered item. This evaluation requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (i) the delivered item(s) has value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In assessing whether an item has standalone value, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner, the retention of any key rights by the Company, and the availability of the associated expertise in the general marketplace. In addition, we consider whether the collaboration partner can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s).  

In situations where we have identified multiple units of accounting, the arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. Then, the applicable revenue recognition criteria in ASC 605-25 are applied to each of the separate units of accounting in determining the appropriate period and pattern of recognition. We determine the selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605-25 are satisfied for that particular unit of accounting. We will recognize as revenue arrangement consideration attributed to licenses that have standalone value from the other deliverables to be provided in an arrangement upon delivery. We will recognize as revenue arrangement consideration attributed to licenses that do not have standalone value from the other deliverables to be provided in an arrangement over the estimated performance period as the arrangement would be accounted for as a single unit of accounting.

22


If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then we recognize revenue under the arrangement for the single unit of accounting on a time-based proportional performance method over the period we are expected to complete our performance obligations. Alternatively, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the time-based proportional performance method or effort-based proportional performance method, as applicable.

At the inception of an arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) the consideration relates solely to past performance and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. We recognize revenue associated with substantive milestones in accordance with FASB ASC Topic 605-28, Revenue Recognition-Milestone Method upon successful accomplishment of each milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met.

Application of the above guidance requires significant judgment and requires the Company to make determinations based on the facts and circumstances under each arrangement.

Results of Operations

Comparison of Three Months Ended March 31, 2016 and 2015

The following table summarizes our results of operations for the three months ended March 31, 2016 and 2015:

 

  

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue - related party

 

 

2,710

 

 

 

 

 

 

2,710

 

Total revenue

 

 

2,710

 

 

 

 

 

 

2,710

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

15,416

 

 

$

5,561

 

 

$

9,855

 

General and administrative

 

 

7,210

 

 

 

2,606

 

 

 

4,604

 

Total operating expenses

 

 

22,626

 

 

 

8,167

 

 

 

14,459

 

Loss from operations

 

 

(19,916

)

 

 

(8,167

)

 

 

(11,749

)

Other income (expense):