spro-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

Commission File Number 001-38266

 

SPERO THERAPEUTICS, INC.

(Exact name of registrant as specified in its Charter)

 

 

Delaware

46-4590683

 

 

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

675 Massachusetts Avenue, 14th  Floor

Cambridge, Massachusetts

02139

 

 

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (857) 242-1600

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

  

 

Small reporting company

 

 

 

 

Emerging growth company

 

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

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

As of November 5, 2018, the registrant had 18,187,488 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 

 


Forward-Looking STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the initiation, timing, design, progress and results of, including interim data from, our preclinical studies and clinical trials, and our research and development programs;

 

our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;

 

our ability to advance product candidates into, and successfully complete, clinical trials;

 

the timing or likelihood of regulatory filings and approvals;

 

the commercialization of our product candidates, if approved;

 

the pricing, coverage and reimbursement of our product candidates, if approved;

 

the implementation of our business model and strategic plans for our business, our product candidates and our Potentiator Platform;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and our Potentiator Platform;

 

our ability to enter into strategic arrangements and/or collaborations and the potential benefits of such arrangements;

 

our estimates regarding expenses, capital requirements, liquidity and needs for additional financing and our anticipated future cash position, including the availability of funding under our governmental awards;

 

our financial performance;

 

developments relating to our competitors and our industry; and

 

other risks and uncertainties, including those listed under Part II, Item 1A. “Risk Factors”.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other 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 these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 

i


Spero Therapeutics, Inc.

Table of Contents

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (Unaudited)

1

 

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

1

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017

2

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

3

 

 

Notes to Unaudited Consolidated Financial Statements

4

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

 

Controls and Procedures

33

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1A.

 

Risk Factors

34

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 6.

 

Exhibits

68

 

 

 

 

Signatures

69

 

 

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

SPERO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,480

 

 

$

87,288

 

Marketable securities

 

 

90,745

 

 

 

 

Other receivables

 

 

332

 

 

 

1,011

 

Tax incentive receivable, current

 

 

944

 

 

 

1,932

 

Prepaid expenses and other current assets

 

 

1,222

 

 

 

1,828

 

Total current assets

 

 

133,723

 

 

 

92,059

 

Property and equipment, net

 

 

2,191

 

 

 

1,164

 

Deposits

 

 

206

 

 

 

206

 

Restricted cash

 

 

 

 

 

50

 

Total assets

 

$

136,120

 

 

$

93,479

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,364

 

 

$

3,470

 

Accrued expenses and other current liabilities

 

 

8,564

 

 

 

4,321

 

Derivative liabilities

 

 

223

 

 

 

223

 

Deferred rent

 

 

127

 

 

 

143

 

Total current liabilities

 

 

10,278

 

 

 

8,157

 

Deferred rent, net of current portion

 

 

290

 

 

 

365

 

Total liabilities

 

 

10,568

 

 

 

8,522

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized, 2,220 shares issued and outstanding as of September 30, 2018 and zero shares issued and outstanding as of December 31, 2017

 

 

 

 

 

 

Common stock, $0.001 par value; 60,000,000 shares authorized as of September 30, 2018 and December 31, 3017; 18,182,494 shares issued and outstanding as of September 30, 2018 and 14,369,182 shares issued and outstanding as of December 31, 2017

 

 

18

 

 

 

14

 

Additional paid-in capital

 

 

253,105

 

 

 

181,428

 

Accumulated deficit

 

 

(127,903

)

 

 

(96,840

)

Accumulated other comprehensive loss

 

 

(23

)

 

 

 

Total Spero Therapeutics, Inc. stockholders' equity

 

 

125,197

 

 

 

84,602

 

Non-controlling interests

 

 

355

 

 

 

355

 

Total stockholders' equity

 

 

125,552

 

 

 

84,957

 

Total liabilities and stockholders' equity

 

$

136,120

 

 

$

93,479

 

 

 

 

 

 

 

 

 

 

 

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

 

1


SPERO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Grant revenue

 

$

658

 

 

$

597

 

 

$

2,274

 

 

$

986

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,459

 

 

 

6,910

 

 

 

24,758

 

 

 

20,366

 

General and administrative

 

 

3,134

 

 

 

3,653

 

 

 

9,238

 

 

 

8,350

 

Total operating expenses

 

 

11,593

 

 

 

10,563

 

 

 

33,996

 

 

 

28,716

 

Loss from operations

 

 

(10,935

)

 

 

(9,966

)

 

 

(31,722

)

 

 

(27,730

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivative liabilities

 

 

 

 

 

(2

)

 

 

 

 

 

1,547

 

Interest income and other income (expense), net

 

 

472

 

 

 

124

 

 

 

659

 

 

 

165

 

Total other income (expense), net

 

 

472

 

 

 

122

 

 

 

659

 

 

 

1,712

 

Net loss

 

 

(10,463

)

 

 

(9,844

)

 

 

(31,063

)

 

 

(26,018

)

Less: Net loss attributable to non-controlling interest

 

 

 

 

 

(8

)

 

 

 

 

 

(1,137

)

Net loss attributable to Spero Therapeutics, Inc.

 

 

(10,463

)

 

 

(9,836

)

 

 

(31,063

)

 

 

(24,881

)

Cumulative dividends on redeemable convertible preferred shares

 

 

 

 

 

(2,052

)

 

 

 

 

 

(5,313

)

Accretion of redeemable bridge units and redeemable convertible preferred shares to redemption value

 

 

 

 

 

(188

)

 

 

 

 

 

(1,133

)

Net loss attributable to common stockholders of Spero Therapeutics, Inc.

 

$

(10,463

)

 

$

(12,076

)

 

$

(31,063

)

 

$

(31,327

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders per share, basic and diluted

 

$

(0.60

)

 

$

(36.02

)

 

$

(2.01

)

 

$

(93.96

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted:

 

 

17,471,462

 

 

 

335,285

 

 

 

15,417,087

 

 

 

333,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(10,463

)

 

 

(9,844

)

 

 

(31,063

)

 

 

(26,018

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities

 

 

(8

)

 

 

 

 

 

(23

)

 

 

 

Total other comprehensive gain (loss)

 

 

(8

)

 

 

 

 

 

(23

)

 

 

 

Total comprehensive loss

 

$

(10,471

)

 

$

(9,844

)

 

$

(31,086

)

 

$

(26,018

)

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

2


SPERO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(31,063

)

 

$

(26,018

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

270

 

 

 

264

 

Loss on disposal of fixed assets

 

 

248

 

 

 

 

Change in fair value of derivative liabilities

 

 

 

 

 

(1,547

)

Share-based compensation

 

 

1,980

 

 

 

1,054

 

Unrealized foreign currency transaction (gain) loss

 

 

237

 

 

 

(93

)

Accretion of discount on marketable securities

 

 

(346

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Other receivables

 

 

679

 

 

 

(233

)

Prepaid expenses and other current assets

 

 

706

 

 

 

204

 

Tax incentive receivables

 

 

980

 

 

 

(806

)

Accounts payable

 

 

(2,088

)

 

 

(112

)

Accrued expenses and other current liabilities

 

 

2,372

 

 

 

1,011

 

Deferred rent

 

 

(91

)

 

 

(95

)

Net cash used in operating activities

 

 

(26,116

)

 

 

(26,371

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(104,421

)

 

 

 

Proceeds from maturities of marketable securities

 

 

14,000

 

 

 

 

Purchases of property and equipment

 

 

(22

)

 

 

 

Net cash used in investing activities

 

 

(90,443

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from 2018 equity offering

 

 

70,500

 

 

 

 

Payment of offering costs related to 2018 equity offering

 

 

(996

)

 

 

 

Proceeds from stock option exercises

 

 

197

 

 

 

 

Proceeds from issuance of Class C preferred units, net of issuance costs

 

 

 

 

 

43,111

 

Payment of offering costs related to 2017 initial public offering

 

 

 

 

 

(507

)

Cash payment for Potentiator non-controlling interests

 

 

 

 

 

(1,175

)

Net cash provided by (used in) financing activities

 

 

69,701

 

 

 

41,429

 

Net (decrease) increase in cash and cash equivalents

 

 

(46,858

)

 

 

15,058

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

87,338

 

 

 

10,365

 

Cash, cash equivalents and restricted cash at end of period

 

$

40,480

 

 

$

25,423

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in accrued expenses

 

$

1,628

 

 

$

28

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

 

 

$

1,588

 

Conversion of bridge units into preferred units

 

$

 

 

$

8,500

 

Settlement of derivative liabilities upon issuance of preferred units

 

$

 

 

$

944

 

Cumulative dividends on redeemable convertible preferred units

 

$

 

 

$

5,313

 

Accretion of redeemable convertible preferred units to redemption value

 

$

 

 

$

557

 

Accretion of bridge units to redemption value

 

$

 

 

$

576

 

Elimination of non-controlling interest balance upon repurchase of the non-controlling interest

 

$

 

 

$

5,306

 

 

 

 

 

 

 

 

 

 

 

 

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

 

3


 

SPERO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Nature of the Business and Basis of Presentation

 

Spero Therapeutics, Inc., together with its consolidated subsidiaries (the “Company”), is a multi-asset, clinical-stage biopharmaceutical company focused on identifying, developing and commercializing novel treatments for multi-drug resistant (“MDR”) bacterial infections. The Company’s most advanced product candidate, SPR994, is designed to be the first broad-spectrum oral carbapenem-class antibiotic for use in adults to treat MDR Gram-negative infections. Treatment with effective orally administrable antibiotics may prevent hospitalizations for serious infections and enable earlier, more convenient and cost-effective treatment of patients after hospitalization. The Company also has a platform technology known as its Potentiator Platform that it believes will enable it to develop drugs that will expand the spectrum and potency of existing antibiotics, including formerly inactive antibiotics, against Gram-negative bacteria. The Company’s lead product candidates generated from its Potentiator Platform are two intravenous, or IV,-administered agents, SPR741 and SPR206, designed to treat MDR Gram-negative infections in the hospital setting. In addition, the Company is developing SPR720, an oral antibiotic designed for the treatment of pulmonary non-tuberculous mycobacterial infections. The Company believes that its novel product candidates, if successfully developed and approved, would have a meaningful patient impact and significant commercial applications for the treatment of MDR infections in both the community and hospital settings.

 

The Company was formed as Spero Therapeutics, LLC in December 2013 under the laws of the State of Delaware. On June 30, 2017, through a series of transactions, Spero Therapeutics, LLC merged with and into Spero Therapeutics, Inc. (formerly known as Spero OpCo, Inc.), a Delaware corporation. As part of the transactions, holders of preferred units and common units of Spero Therapeutics, LLC exchanged their units for shares of Spero Therapeutics, Inc. on a one-for-one basis. These transactions are collectively referred to as the Reorganization. Upon completion of the Reorganization, the historical consolidated financial statements of Spero Therapeutics, LLC became the historical consolidated financial statements of Spero Therapeutics, Inc. because the Reorganization was accounted for as a reorganization of entities under common control.

 

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

 

On October 20, 2017, the Company effected a one-for-6.0774 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s then outstanding Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios. In addition, all common units and incentive units as well as the conversion ratios of preferred units of Spero Therapeutics, LLC have been presented as if the reverse stock split of the common stock of Spero Therapeutics, Inc. had been applied to such units and ratios of Spero Therapeutics, LLC.

 

On November 6, 2017, the Company completed an initial public offering (“IPO”) of its common stock, and issued and sold 5,500,000 shares of common stock at a public offering price of $14.00 per share, resulting in net proceeds of $71.6 million after deducting underwriting discounts and commissions but before deducting offering costs. On November 14, 2017, Spero Therapeutics, Inc., issued and sold an additional 471,498 shares of its common stock at the IPO price of $14.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $6.1 million after deducting underwriting discounts and commissions. Aggregate net proceeds from the IPO totaled $74.2 million after deducting underwriting discounts, commissions and offering costs.

On July 17, 2018, the Company completed an underwritten public offering of its common and preferred stock, which resulted in the sale of 3,780,000 shares of common stock at a price of $12.50 per share, and 2,220 shares of Series A Convertible Preferred Stock at a price of $12,500 per share. Each share of Series A Convertible Preferred Stock sold in the offering is convertible into 1,000 shares of the Company’s common stock. The Company received net proceeds from the offering of approximately $70.5 million after deducting underwriting discounts and commissions but before deducting $1.0 million of offering expenses payable by the Company.    

 

4


 

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Since inception, the Company has funded its operations with proceeds from sales of preferred units (including bridge units, which converted into preferred units), payments received in connection with a concluded collaboration agreement and funding from government contracts, and most recently, with proceeds from the IPO completed in November 2017 and the underwritten public offering of common and Series A Convertible Preferred Stock completed in July 2018. The Company has incurred recurring losses since inception, including net losses attributable to Spero Therapeutics, Inc. of $31.1 million for the nine months ended September 30, 2018, and $38.7 million and $25.5 million for the years ended December 31, 2017 and 2016, respectively. In addition, as of September 30, 2018, the Company had an accumulated deficit of $127.9 million. The Company expects to continue to generate operating losses for the foreseeable future. As of the issuance date of the quarterly consolidated financial statements, or November 8, 2018, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses, capital expenditure requirements through at least 12 months from the issuance date of these quarterly consolidated financial statements. However, the future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its future operations. The Company will seek additional funding through public or private financings, debt financing, collaboration agreements or government grants. The inability to obtain funding, as and when needed, would have a negative impact on the Company’s financial condition and ability to pursue its business strategies. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management intends to pursue plans to obtain additional funding to finance its operations, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

 

The accompanying consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Interim Financial Information

 

The consolidated balance sheet at December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited consolidated financial statements as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. 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, 2017, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, on file with SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2018, and results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017 have been made. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018.

2.

Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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 for research and development expenses, the valuation of common shares prior to the Company’s completion of its IPO, the valuation of share-based awards and the valuation of derivative liabilities. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions.

 

Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

 

5


 

Marketable Securities

 

Marketable securities consist of investments with original maturities greater than 90 days. The Company considers its investment portfolio of investments to be available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Investments with maturities beyond one year are generally classified as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis.

 

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 derivative liabilities are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities.

 

Derivative Liabilities

 

In connection with certain equity financings, licensing transactions and research collaborations, the Company has identified certain embedded and freestanding derivatives, which are recorded as liabilities on the Company’s consolidated balance sheet and are remeasured to fair value at each reporting date until the derivative is settled. Changes in the fair value of the derivative liabilities are recognized as other income (expense) in the consolidated statement of operations and comprehensive loss.

 

Net Income (Loss) per Share Attributable to Spero Therapeutics, Inc.

 

The Company follows the two-class method when computing net income (loss) per share, as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Net income (loss) per share attributable to common stockholders is calculated based on net income (loss) attributable to Spero Therapeutics, Inc. and excludes net income (loss) attributable to non-controlling interests.

 

Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of common stock equivalents.

 

The Company’s preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the

6


 

Company reports a net loss, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders of Spero Therapeutics, Inc., diluted net loss per share attributable to common stockholders of Spero Therapeutics, Inc. is the same as basic net loss per share attributable to common stockholders of Spero Therapeutics, Inc., since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders of Spero Therapeutics, Inc. for the three and nine months ended September 30, 2018 and 2017.

 

Recently Issued and Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard outlines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”), which further clarifies the implementation guidance on principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments in this update reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments in this update also provide implementation guidance on determining 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). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which clarifies the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in ASU 2014-09 is retrospectively applied. ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09. The Company adopted this standard using the modified retrospective approach, however the Company determined that government grant revenue is outside the scope of ASC 606. Therefore, the adoption of ASC 606 did not impact the Company’s financial position, results of operations or cash flows as its only existing revenue source as of September 30, 2018 is government grants.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), 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 (“ROU”) 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. The guidance is effective for public entities for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years, and early adoption is permitted. The FASB subsequently issued amendments to ASU 2016-02, which have the same effective date and transition date of January 1, 2019: (i) ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends certain narrow aspects of the guidance issued in ASU 2016-02; and (ii) ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for a transition approach to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as well as an additional practical expedient for lessors to not separate non-lease components from the associated lease component. The Company is in the process of reviewing its existing lease contracts and evaluating the impact that these adoption of these new leasing standards may have on its consolidated statements of operations. The Company expects that the adoption of the new leasing standards will result in the recognition of material ROU assets and liabilities in its consolidated balance sheets. The Company does not expect the adoption of the new leasing standards will have a material impact to its consolidated statement of operations. The Company will adopt the new leasing standards using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, including

7


 

interim periods within those fiscal years. The Company’s adoption of ASU 2016-15 did not have a material impact on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230) (“ASU 2016-18”), which requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years and should be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-18 did not have a material impact on the Company’s consolidated financial statements. The inclusion of restricted cash increased the beginning and ending balances of the unaudited condensed consolidated statement of cash flows by $50,000 for the nine months ended September 30, 2017.

 

In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2017-01 did not materially impact the Company’s consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2017-09 did not materially impact the Company’s consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable non-controlling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. ASU 2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The amendments in the new guidance are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

3.

Fair Value Measurements and Marketable Securities

8


 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

 

 

 

Fair Value Measurements at September 30, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 

 

$

29,896

 

 

$

 

 

$

29,896

 

U.S. government securities

 

 

 

 

 

5,994

 

 

 

 

 

 

5,994

 

Total cash equivalents

 

 

 

 

 

35,890

 

 

 

 

 

 

35,890

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

 

 

 

38,761

 

 

 

 

 

 

38,761

 

U.S. corporate bonds

 

 

 

 

 

35,594

 

 

 

 

 

 

35,594

 

U.S. commercial paper

 

 

 

 

 

16,390

 

 

 

 

 

 

16,390

 

Total marketable securities

 

 

 

 

 

90,745

 

 

 

 

 

 

90,745

 

Total cash equivalents and marketable securities

 

$

 

 

$

126,635

 

 

$

 

 

$

126,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilution rights

 

$

 

 

$

 

 

$

223

 

 

$

223

 

Total derivative liabilities

 

$

 

 

$

 

 

$

223

 

 

$

223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 

 

$

83,121

 

 

$

 

 

$

83,121

 

 

 

$

 

 

$

83,121

 

 

$

 

 

$

83,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilution rights

 

$

 

 

$

 

 

$

223

 

 

$

223

 

 

 

$

 

 

$

 

 

$

223

 

 

$

223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three and nine months ended September 30, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3 categories.

 

Marketable Securities

 

The Company’s marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing sources, which generally derive security prices from recently reported trades for identical or similar securities. 

 

The following table summarizes the gross unrealized gains and losses of the Company’s marketable securities as of September 30, 2018 (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

38,771

 

 

$

1

 

 

$

(11

)

 

$

38,761

 

U.S. corporate bonds

 

 

35,607

 

 

 

1

 

 

 

(14

)

 

 

35,594

 

U.S. commercial paper

 

 

16,390

 

 

 

 

 

 

 

 

 

16,390

 

 

 

$

90,768

 

 

$

2

 

 

$

(25

)

 

$

90,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 

 

As of September 30, 2018, all of the Company’s marketable securities had remaining contractual maturity dates of one year or less from the consolidated balance sheet date. The Company did not own any marketable securities as of December 31, 2017.

 

Anti-Dilution Rights

 

In connection with the issuance of non-controlling interests in certain of the Company’s subsidiaries (see Note 8), specifically Spero Potentiator, Inc., Spero Europe, Ltd. and Spero Gyrase, Inc., the Company granted anti-dilution rights to the minority investors. The Company classifies the anti-dilution rights as a derivative liability on its consolidated balance sheet because they are freestanding instruments that represent a conditional obligation to issue a variable number of shares. The Company remeasures the derivative liability associated with the anti-dilution rights to fair value at each reporting date, and recognizes changes in the fair value of the derivative liability as a component of other income (expense) in the consolidated statement of operations and comprehensive loss. The fair value of these derivative liabilities was determined using a discounted cash flow model. As of September 30, 2018 and December 31, 2017, the Company’s fair value of the anti-dilution rights relates only to the anti-dilution rights held by the minority investor in Spero Gyrase, Inc., as detailed below.

 

Spero Gyrase, Inc.

 

In March 2016, in connection with the issuance of a non-controlling interest in its subsidiary, Spero Gyrase, Inc. (“Spero Gyrase”), to Biota Pharmaceuticals, Inc. (now Aviragen Therapeutics, Inc.) (“Aviragen”), the Company granted to Aviragen certain anti-dilution rights (see Note 8). The fair value of the derivative liability related to the anti-dilution rights upon issuance in March 2016 was $1.6 million.

 

The most significant assumption impacting the fair value of the anti-dilution rights was the probability that the Company would fund the maximum amount of investment providing anti-dilution protection. Upon issuance of the rights and through December 31, 2016, the probability of such funding was determined to be 100%. During 2017, the probability of such funding was reduced to 0% due to the Company’s decision to no longer pursue development of the acquired technology. The fair value of the derivative liability decreased accordingly by $1.4 million to $0.2 million by June 30, 2017. As of September 30, 2018 and December 31, 2017, the value of the derivative liability of $0.2 million represents amounts funded to the entity that could be settled by the issuance of equity.

4.

Accrued Expenses and Other Current Liabilities

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Accrued external research and development expenses

 

$

4,146

 

 

$

1,770

 

Accrued payroll and related expenses

 

 

1,622

 

 

 

1,369

 

Accrued professional fees

 

 

727

 

 

 

878

 

Accrued manufacturing equipment

 

 

1,559

 

 

 

 

Accrued other

 

 

510

 

 

 

304

 

 

 

$

8,564

 

 

$

4,321

 

 

 

 

 

 

 

 

 

 

 

    

5.Convertible Preferred Shares

 

Series A Convertible Preferred Shares

 

The Company’s amended and restated certificate of incorporation authorizes its Board of Directors to issue up to 10,000,000 shares of preferred stock, par value $0.001 per share. As part of the Company’s July 2018 underwritten public offering, 2,220 shares were designated as Series A Convertible Preferred Stock and issued at a price of $12,500 per share.

 

Each share of Series A Convertible Preferred Stock is convertible into 1,000 shares of the Company’s common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the Series A Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of the total number of shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series A Convertible Preferred Stock will receive a payment equal to $0.001 per share of Series A Convertible Preferred Stock, plus an additional amount equal to any dividends declared but unpaid on such shares, before any proceeds are distributed to the holders of common stock or any of our securities that by their terms are junior to the Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock has no voting rights, except as required by law and except that the consent of the outstanding Series A Convertible Preferred Stock holders will be required to amend the terms of the Series A

10


 

Convertible Preferred Stock. The Series A Convertible Preferred Stock does not have any mandatory redemption rights or other redemption rights that would be outside of the Company’s control. As such, the Company has classified the Series A Convertible Preferred Stock within permanent equity in its consolidated balance sheet.

 

Redeemable Convertible Preferred Shares

 

Prior to the Reorganization, the operating agreement of Spero Therapeutics, LLC, as amended and restated, provided for the issuance of Junior preferred units, Class A preferred units, Class B preferred units and bridge units, but did not specify an authorized number of each for issuance. Subsequent to the Company’s Reorganization on June 30, 2017 (see Note 1), the Company’s amended and restated certificate of incorporation authorized the issuance of 43,297,267 shares of preferred stock, par value $0.001 per share, and holders of outstanding preferred units of Spero Therapeutics, LLC exchanged their units for preferred stock of Spero Therapeutics, Inc. on a one-for-one basis. The rights and preferences of each class of stock were the same both before and after the Reorganization. On October 20, 2017, the Company effected a one-for-6.0774 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion rations for each series or the Company’s Preferred Stock. Upon the closing of the Company’s IPO in November 2017, all of the then outstanding convertible preferred shares automatically converted into shares of common stock.

 

In March 2017, the Company issued and sold 24,326,470 Class C preferred units at a price of $1.7749 per unit for proceeds of $43.0 million, net of issuance costs of $0.2 million. The sale of Class C preferred units met the definition of a qualified financing under the 2016 bridge unit agreements.

 

The Company issued 5,321,112 Class C preferred units upon the conversion of the 2016 bridge units in the amount of $8.5 million, at a conversion price of $1.60 per unit, which represented a discount of 10% to the price per unit paid by other investors in the Class C preferred unit financing. The conversion was accounted for as an extinguishment for accounting purposes. Accordingly, the Company recorded the Class C preferred units issued upon conversion of the 2016 bridge units at their aggregate fair value of $9.4 million and recorded a corresponding adjustment to extinguish the then-current carrying value of the 2016 bridge units of $8.5 million and the then-current fair value of the derivative liability related to the contingent prepayment option associated with the 2016 bridge units of $0.9 million. There was no gain or loss recognized upon the extinguishment.

In July 2017 the Company sold to its Chief Financial Officer 61,880 shares of the Company’s Series C preferred stock at a price of $1.7749 per share, for proceeds of $0.1 million.

6.

Common Stock

 

On July 17, 2018, the Company completed an underwritten public offering of its common and preferred stock, which resulted in the sale of 3,780,000 shares of common stock at a price of $12.50 per share, and 2,220 shares of Series A Convertible Preferred Stock at a price of $12,500 per share. The Company received net proceeds from the offering of approximately $70.5 million after deducting underwriting discounts and commissions but before deducting $1.0 million of offering expenses payable by the Company.

7.

Share-Based Compensation

 

On June 28, 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (the “2017 Plan”). The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, stock grants and stock-based awards. The 2017 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of stock option may not be greater than ten years. The number of shares initially reserved for issuance under the 2017 Plan was 1,785,416 shares of common stock. The shares of common stock underlying any awards that are forfeited, cancelled, repurchased or are otherwise terminated by the Company under the 2017 Plan will be added back to the shares of common stock available for issuance under the 2017 Plan.

 

On October 18, 2017, the Company’s stockholders approved an amendment to the 2017 Plan, which became effective upon the completion of the Company’s IPO, to increase the total number of shares reserved for issuance under the 2017 Plan from 1,785,416 to 2,696,401. Additionally, the number of shares of common stock that may be issued under the 2017 Plan will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2027, equal to the lowest of (i) 607,324 shares of common stock, (ii) 4% of the outstanding shares of common stock on such date and (iii) an amount determined by the Company’s board of directors or compensation committee. There were 322,730 options granted during the nine months ended September 30, 2018. As of September 30, 2018, there were 2,186,378 options outstanding under the 2017 Plan and 476,711 shares remaining available to be issued under the 2017 Plan.

 

11


 

The Company recorded share-based compensation expense in the following expense categories of its consolidated statements of operations and comprehensive loss (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development expenses

 

$

252

 

 

$

202

 

 

$

789

 

 

$

249

 

General and administrative expenses

 

 

453

 

 

 

729

 

 

 

1,191

 

 

 

805

 

Total

 

$

705

 

 

$

931

 

 

$

1,980

 

 

$

1,054

 

 

8.

Non-Controlling Interests

 

Spero Potentiator

 

In February 2015, the Company’s wholly owned subsidiary, Spero Potentiator, issued 996 shares of its common stock with an aggregate fair value of $1.1 million to Northern Antibiotics Oy Ltd. (“Northern”) in exchange for an exclusive license to develop and commercialize certain licensed compounds and licensed products.  

In connection with the acquisition of the license, Northern obtained anti-dilution rights to maintain its 49.9% ownership percentage in Spero Potentiator at no additional cost to Northern in the event that Spero Potentiator completed subsequent equity financings, subject to a maximum amount of such financings. The Company accounted for the anti-dilution rights as a derivative liability on its consolidated balance sheet. The fair value of the derivative liability associated with the anti-dilution rights upon issuance in February 2015 of $2.4 million was recorded as research and development expenses as it was deemed to represent additional consideration for the license.

In November 2015, Northern was issued an additional 2,736 common shares of Spero Potentiator for no additional cost as a result of the anti-dilution rights. The Company valued these shares at $1.5 million and recorded the amount as an increase in the non-controlling interest and a reduction in the carrying value of the derivative liability. In January and August 2016, Northern was issued an additional 2,160 common shares of Spero Potentiator for no additional cost. The Company valued these shares at $1.0 million and recorded the amount as an increase in the non-controlling interest and a reduction of the derivative liability. At that time, the anti-dilution rights issued to Northern were fully settled as Northern had received the maximum number of shares it was entitled to under the anti-dilution rights.

In June 2017, the Company repurchased all of the shares of Spero Potentiator held by Northern in exchange for a cash payment of $1.0 million and contingent consideration of $0.1 million. As a condition of the repurchase of the shares from Northern, the Company amended the license agreement with Northern such that the Company will be obligated to make milestone payments of up to $7.0 million upon the achievement of specified clinical, commercial and other milestones, including a payment of $2.5 million upon the closing of an IPO, which occurred and was paid in November 2017. As a result of this transaction, during the six months ended June 30, 2017, the Company reclassified the balance of the non-controlling interest of $6.4 million as of the date of the transaction to accumulated deficit as an increase to that account. Additionally, the cash payment of $1.0 million was recorded as an increase to accumulated deficit. The Company will record the contingent payments as research and development expense when it becomes probable that the payments will be due. For periods subsequent to the acquisition, the Company no longer reports a non-controlling interest related to Spero Potentiator.

Spero Europe

In January 2016, the Company entered into an agreement with Promiliad Biopharma Inc. (“Promiliad”), whereby Promiliad granted to Spero Europe certain know-how and a sublicense to research, develop, manufacture and sell certain compounds. In exchange for the know-how and sublicense, Spero Europe provided Promiliad with a 5% equity ownership interest in Spero Europe, with a fair value of $0.1 million. In addition, Spero Europe agreed to make payments to Promiliad upon the achievement of future regulatory and commercial milestones of $4.1 million and to pay to Promiliad royalties of a mid single-digit percentage on net sales of licensed products under the agreement. Spero had the right to terminate the agreement with thirty days’ notice. The Company recognized research and development expense of $0.1 million upon the acquisition of the license and recorded a non-controlling interest in Spero Europe in a corresponding amount.

In connection with the acquisition of the license, Promiliad obtained anti-dilution rights to maintain their 5% equity ownership in Spero Europe at no additional cost to Promiliad in the event that Spero Europe completed subsequent funding events, subject to a maximum amount of such funding of $5.0 million.

The Company accounted for the anti-dilution rights as a derivative liability on its consolidated balance sheet. The fair value of the derivative liability associated with the anti-dilution rights upon issuance in January 2016 of $0.2 million was recorded as research and development expenses as it was deemed to represent additional consideration for the license.

12


 

In May 2017, the Company repurchased all of the shares of Spero Europe from Promiliad in exchange for the return of the license. As a result of the transaction, the Company reclassified the balance of the non-controlling interest in Spero Europe of less than $0.1 million as of the date of the transaction to accumulated deficit as an increase to that account. For periods subsequent to the repurchase, the Company no longer reports a non-controlling interest related to Spero Europe.

Spero Gyrase

 

In March 2016, the Company entered into an agreement with Aviragen and its affiliates in order to acquire certain intellectual property and know-how related to certain compounds. In connection with the transaction, the Company established Spero Gyrase, a Delaware corporation, and issued to Aviragen 200 common shares of Spero Gyrase with a fair value of $1.1 million, which represented a 20% equity ownership interest in Spero Gyrase. In addition, Spero Gyrase agreed to make future milestone and royalty payments in exchange for the intellectual property. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the acquired technology as research and development expense in the consolidated statement of operations and comprehensive loss in the amount of $1.1 million, because the acquired technology had not reached commercial feasibility and had no alternative future use, and recorded a non-controlling interest in Spero Gyrase in a corresponding amount.

In connection with the agreement, Aviragen obtained anti-dilution rights to maintain their 20% equity ownership of Spero Gyrase at no additional cost to Aviragen in the event that Spero Gyrase completed subsequent funding events, subject to a maximum amount of such funding of $8.0 million.

The Company accounted for the anti-dilution rights as a derivative liability on its consolidated balance sheet (see Note 3). The fair value of the derivative liability associated with the anti-dilution rights upon issuance in March 2016 of $1.6 million was recorded as research and development expenses as it was deemed to represent additional consideration for the license.

Spero Cantab

 

In June 2016, the Company entered into a stock purchase agreement and related agreements (the “Cantab Agreements”) with Pro Bono Bio PLC, a corporation organized under the laws of England, and certain of its affiliates, including PBB Distributions Limited (“PBB”), Cantab Anti-Infectives Ltd. (“CAI”) and New Pharma License Holdings Limited (“NPLH”) in order to acquire NPLH and its intellectual property rights and assets relating to the Company’s Potentiator Platform.

Under the Cantab Agreements, CAI agreed to submit a request to NIAID to novate the CAI-held NIAID contract to the Company. The NIAID contract provides for development funding of up to $6.3 million over a base and three option periods. To date, funding for the base period and the first two option periods totaling $5.7 million had been committed to CAI. Novation of the NIAID contract to the Company was finalized in December 2017. The Company shall pay PBB a percentage of funds received from NIAID up to a maximum of $1.3 million.

Consideration under Cantab Agreements consisted of: (i) 125 shares of Spero Cantab, the Company’s subsidiary, which represented a 12.5% ownership interest in Spero Cantab, and anti-dilution rights (as described below) issued to PBB, with a combined fair value of $1.6 million, (ii) upfront consideration of $0.3 million (to be credited against future payments payable to CAI), (iii) contingent milestone payments due upon the achievement of certain clinical, regulatory and commercial milestones (see Note 11), (iv) royalty payments of low single-digit percentages based on net sales of products from the licensed technology, and (v) a specified portion of funding payments made by NIAID.

The Company accounted for the acquisition of NPLH as an asset acquisition because NPLH did not meet the definition of a business. The Company recognized research and development expense of $1.6 million upon the acquisition of NPLH because the acquired technology had not reached commercial feasibility and had no alternative future use. Upon the issuance of the shares and anti-dilution rights, the Company recorded a non-controlling interest in Spero Cantab of $1.6 million. The $0.3 million payment was recognized as research and development expenses as the services were performed by CAI. The Company records the contingent payments outlined in (iii), (iv) and (v) as research and development expense when it becomes probable that the payments will be due. Novation of the NIAID contract to Spero was finalized in December 2017. Prior to the contract novation, CAI performed research and development services at the Company’s direction and applied for reimbursement from NIAID. The Company paid CAI for such research and development services at an agreed-upon rate which took into consideration costs incurred by CAI, amounts reimbursed to CAI by NIAID and the portion of the NIAID reimbursement the Company paid to CAI.

 

In connection with the Cantab Agreements, PBB obtained anti-dilution rights to maintain a certain equity ownership, ranging from 5% to 12.5%, of Spero Cantab at no additional cost to PBB in the event that Spero Cantab completed subsequent funding events, subject to maximum amount of such funding of $8.0 million. These anti-dilution rights represent a conditional obligation to issue a variable number of shares but are not freestanding and, therefore, do not require bifurcation for accounting purposes from the 125 shares issued.

 

13


 

In July 2017, the Company repurchased all of the outstanding shares of Spero Cantab owned by PBB in exchange for a cash payment of $0.2 million and an amendment to the licensing agreement to increase the first two contingent milestone payments by a total of $0.1 million. For periods subsequent to the repurchase, the Company no longer reports a non-controlling interest related to Spero Cantab.

As of September 30, 2018 and December 31, 2017, the Company’s only remaining non-controlling interest relates to Spero Gyrase, Inc., which totaled $0.4 million.

 

9.

Commitments and Contingencies

 

License Agreements

 

The Company has entered into license agreements with various parties under which it is obligated to make contingent and non-contingent payments (see Note 11).

 

Operating Leases

 

In August 2015, the Company entered into an operating lease agreement with U.S. REIF Central Plaza Massachusetts, LLC (the “Landlord”) with respect to its corporate headquarters located at 675 Massachusetts Avenue, Cambridge, Massachusetts (the “Original Lease”).The term of the Original Lease commenced in January 2016 and was scheduled to expire in December 2020. The Original Lease required annual payments of $0.4 million over the initial five-year term. The Original Lease provided for a renewal option to extend its term for an additional five years. Under the terms of the Original Lease, the Company provided a security deposit of $0.2 million to the Landlord, which is included in long-term assets in the accompanying consolidated balance sheets. The Original Lease provided for annual rent escalations as well as tenant incentives in the amount of $0.7 million, of which $0.3 million would be reimbursed to the Landlord over the initial term of the Original Lease.

 

In July 2016, the Company entered into an agreement to lease laboratory space through November 30, 2019 from a sublessor, which requires annual lease payments of $0.3 million, subject to certain escalations.

 

On January 17, 2018, the Company entered into an amendment (the “Amendment”) to the Original Lease. The Amendment makes certain changes to the Original Lease, including (i) the addition of approximately 7,800 square feet of office space in the same building (the “Expansion Premises”) and (ii) an extension of the expiration date of the Original Lease to seven years following the delivery date of the Expansion Premises (the “Lease Term”), which is estimated to be December 1, 2018.

 

Under the Amendment, the Company has two consecutive options to extend the Lease Term for an additional period of five years (the “Option Terms”), subject to certain conditions, upon notice to the Landlord. The Amendment provides for annual base rent for the Expansion Premises of approximately $0.5 million in the first year of the Lease Term, which increases on an annual basis to approximately $0.6 million in the final year of the Lease Term, and annual base rent during the Option Terms to be calculated based on the Landlord’s good faith determination of 100% of the fair market rate for such Option Terms. The Company is also obligated to pay the Landlord certain costs, taxes and operating expenses, subject to certain exclusions. The Amendment also includes a provision from the landlord of $0.4 million for leasehold improvements on the Expansion Premises.

 

Rent escalations and tenant incentives for operating leases are included in deferred rent in the consolidated balance sheet, and rent expense is recognized on a straight-line basis over the terms of occupancy.

 

The following table summarizes the future minimum payments due under the operating leases as of September 30, 2018 (in thousands):

 

Years Ending December 31,

 

 

 

 

2018 (remainder)

 

$

248

 

2019

 

 

1,323

 

2020

 

 

1,016

 

2021

 

 

957

 

2022

 

 

1,076

 

Thereafter

 

 

2,200

 

 

 

$

6,820

 

 

Rent expense during the three months ended September 30, 2018 and 2017 was $0.2 million. Rent expense during the nine months ended September 30, 2018 and 2017 was $0.6 million.

14


 

 

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 September 30, 2018 or December 31, 2017.

 

Legal Proceedings

 

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.

10.

Government Contracts

 

BARDA

 

In July 2018, the Company was awarded a contract from Biomedical Advanced Research and Development Authority (“BARDA”) of up to $44.2 million to develop SPR994 for the treatment of complicated urinary tract infections (“cUTIs”) caused by antibiotic resistant Gram-negative bacteria and for assessment against biodefense pathogens. The award commits initial funding of $15.7 million over a three-year base period from July 1, 2018 to June 30, 2021 for cUTI development activities. The balance of the award is subject to BARDA exercising two options. The exercise of the first option would entail funding of $13.6 million and is exercisable by BARDA subject to the Company achieving specified milestones related to, among other things, clinical progress and data. The exercise of the second option would entail funding of $14.9 million and is exercisable by BARDA subject to, among other things, satisfactory progress and results from the biodefense studies described below. The Company recognized $0.2 million of revenue under this award during the three and nine months ended September 30, 2018.

 

As part of an inter-agency collaboration between BARDA and the Defense Threat Reduction Agency (“DTRA”), a series of studies to assess the efficacy of SPR994 in the treatment of infections caused by biodefense threats such as anthrax, plague and melioidosis will be conducted by the U.S. Army Medical Research Institute of Infectious Diseases (“USAMRIID”) under the direction of Spero. Because the FDA requires data from a human pneumonic disease as supportive of use of an antibiotic to treat a biothreat infection, the scope of the BARDA award includes the assessment of SPR994 levels in the lung of healthy volunteers as well as a proof of concept clinical trial in pneumonia patients, an indication for which tebipenem, SPR994's active pharmaceutical ingredient, is currently approved in Japan for pediatric use.

 

U.S. Department of Defense

 

In September 2016, the Company was awarded a cooperative agreement with the DoD to further develop anti-infective agents to combat Gram-negative bacteria. The agreement is structured as a single, two-year $1.5 million award. The Company is eligible for the full funding from the DoD, and there are no options to be exercised at a later date. The DoD funding supports next-generation potentiator discovery and screening of SPR741 partners. The Company recognizes revenue under this agreement as qualifying expenses are incurred. The Company recognized less than $0.1 million and $0.2 million of revenue under this agreement during the three and nine months ended September 30, 2018, respectively, and $0.1 million and $0.4 million during the three and nine months ended September 30, 2017, respectively.

 

NIAID

 

In February 2017, the Company was awarded a grant from NIAID under its Small Business Innovation Research program, to conduct additional preclinical studies of SPR720, the Company’s novel oral bacterial gyrase inhibitor, for the treatment of non-tuberculous mycobacterial infections. The award is structured as a 12-month $0.6 million base period and a $0.4 million option period. Through December 31, 2017, only the base period funds had been committed. In February 2018, NIAID exercised the $0.4 million 12-month option period. The Company recognized less than $0.1 million and $0.3 million of revenue under this agreement during the

15


 

three and nine months ended September 30, 2018. The Company recognized $0.1 million of revenue in the three and nine months ended September 30, 2017 under this agreement.

 

In June 2016, the Company entered into agreements with Pro Bono Bio PLC (“PBB”), a corporation organized under the laws of England, and certain of its affiliates, including PBB Distributions Limited and Cantab Anti-Infectives Limited (“CAI”), in order to acquire certain intellectual property and government funding arrangements relating to SPR206 (see Note 11). Under these agreements, CAI agreed to submit a request to NIAID to assign the CAI-held NIAID contract to Spero, which was finalized in December 2017. The NIAID contract provides for total development funding of up to $6.3 million, including a base period and three option periods. To date, funding for the base period and the first two option periods totaling $5.7 million have been committed. Spero shall pay PBB a percentage of funds received from NIAID up to a maximum of $1.3 million, of which $0.3 million was paid upfront to PBB as part of this agreement. The Company recognized $0.4 million and $1.1 million of revenue under this agreement during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2018, the Company recorded approximately $0.1 million and $0.4 million, respectively, in expense associated with amounts payable to PBB under this agreement, which has been included within research and development expenses within the consolidated statement of operations and comprehensive loss. 

 

 

CARB-X

 

In April 2017, the Company was awarded a grant from CARB-X, a public-private partnership funded by BARDA within the U.S. Department of Health and Human Services to be used to screen, identify and complete Phase 1 trials with at least one partner compound for SPR741, one of the Company’s Potentiator Platform product candidates. The award committed to funding of $1.5 million over a 12-month period. On March 12, 2018, CARB-X committed an additional $0.4 million related to the first option for a period from December 1, 2017 to March 31, 2018. There will be no additional options exercised under the CARB-X award. The Company recognized zero and $0.5 million of revenue during the three and nine months ended September 30, 2018, respectively, under this agreement. The Company recognized $0.4 million and $0.5 million of revenue during the three and nine months ended September 30, 2017, respectively, under this agreement.

11.

Collaboration and License Agreements

The Company has certain obligations under license agreements with third parties that include annual maintenance fees and payments that are contingent upon achieving various development, regulatory and commercial milestones. Pursuant to these license agreements, the Company is required to make milestone payments if certain development, regulatory and commercial milestones are achieved, and may have certain additional research funding obligations. Also, pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, the Company will pay royalties to its licensors on net sales of the respective products.

Aviragen Agreement

Under the Company’s agreement with Aviragen (see Note 8) for certain intellectual property and know-how relating to developing a gyrase inhibitor to develop therapies for Gram-negative infections, the Company is obligated to make milestone payments of up to an aggregate of $12.0 million upon the achievement of specified clinical, regulatory and commercial milestones and to pay royalties of low single-digit percentages based on net sales of products the Company acquired under the agreement.

Cantab License Agreement

Under the Cantab Agreements (see Note 8), the Company is obligated to make milestone payments of up to $5.8 million upon the achievement of specified clinical and regulatory milestones and a payment of £5.0 million ($6.5 million and $6.7 million as of September 30, 2018 and December 31, 2017, respectively) upon the achievement of a specified commercial milestone. In addition, the Company has agreed to pay to PBB royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement.

The Cantab Agreements continue indefinitely, with royalty payment obligations thereunder continuing on a product-by-product and country-by-country basis until the later of ten years after the first commercial sale of such product in such country or the expiration in such country of the last to expire valid claim of any of the applicable patents.

Vertex License Agreement

In May 2016, the Company entered into an agreement with Vertex Pharmaceuticals Incorporated (“Vertex”) whereby Vertex granted the Company certain know-how and a sublicense to research, develop, manufacture and sell products for a proprietary compound, as well as a transfer of materials. In exchange for the know-how, sublicense and materials, Spero paid Vertex an upfront, one-time, nonrefundable, non-creditable fee of $0.5 million, which was recognized as research and development expense. As part of the agreement, the Company is obligated to make future milestone payments of up to $81.1 million upon the achievement of specified

16


 

clinical, regulatory and commercial milestones and to pay Vertex tiered royalties, on a product-by-product and country-by-country basis, of a mid single-digit to low double-digit percentage based on net sales of products licensed under the agreement.

The agreement continues in effect until the expiration of all payment obligations thereunder, with royalty payment obligations continuing on a product-by-product and country-by-country basis until the later of ten years after the first commercial sale of such product in such country or the date of expiration in such country of the last to expire applicable patent. Further, Vertex has the right to terminate the agreement if provided with notification from the Company of intent to cease all development or if no material development or commercialization efforts occur for one year.

Meiji License Agreement

 

In June 2017, the Company entered into agreements with Meiji Seika Pharma Co. Ltd. (“Meiji”), a Japanese corporation, whereby Meiji granted to the Company certain know-how and a license to research, develop, manufacture and sell products for a proprietary compound in the licensed territory. In exchange for the know-how and license, the Company paid Meiji an upfront, one-time, nonrefundable, non-creditable fee of $0.6 million, which was recognized as research and development expense. As part of the agreement, the Company is obligated to make milestone payments of up to $3.0 million upon the achievement of specified clinical and regulatory milestones, to pay royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement and to pay Meiji a low double-digit percentage of any sublicense fees received by the Company up to $7.5 million. In October 2017, the Company paid a $1.0 million milestone payment to Meiji upon the enrollment of the first patient in the Company’s Phase 1 clinical trial of SPR994. The payment was recorded as research and development expense in the statement of operations and comprehensive loss for the year ended December 31, 2017. Additionally, the Company will pay Meiji approximately $1.6 million during the fourth quarter of 2018 related to fixed assets which will be used in manufacturing related activities at Meiji. This equipment has been capitalized as property and equipment in the consolidated balance sheet as of September 30, 2018.

The agreement continues in effect until the expiration of all payment obligations thereunder (including royalty payments and licensee revenue) on a product-by-product and country-by-country basis, unless earlier terminated by the parties. Pursuant to the terms of the agreement, in addition to each party’s right to terminate the agreement upon the other party’s material breach (if not cured within a specified period after receipt of notice) or insolvency, the Company also has unilateral termination rights (i) in the event that the Company abandons the development and commercialization of SPR994 for efficacy, safety, legal or business factors, and (ii) under certain circumstances arising out of the head license with a global pharmaceutical company.

Northern License Agreement

 

In June 2017, in connection with the repurchase of all of the outstanding shares of Spero Potentiator (see Note 8), the Company amended its license agreement with Northern such that the Company agreed to pay Northern up to $7.0 million upon the achievement of specified clinical, regulatory and other milestones, including a total payment of $2.5 million upon the closing of an initial public offering. In addition, under an exchange agreement the Company entered into with Northern, the Company is obligated to make a payment to Northern of $0.1 million upon the closing of an initial public offering. The agreement has a perpetual term and no express termination rights. Upon the closing of the Company’s IPO in November 2017, the Company paid $2.6 million to Northern in connection with both the license and exchange agreements. This payment was recorded as research and development expense in the Company’s statement of operations and comprehensive loss for the year ended December 31, 2017.

12.

Australia Research and Development Tax Incentive

 

The Australian government has established a research and development tax incentive to encourage industry investment in research and development, which is available to companies incorporated under Australian law that have core research and development activities. In September 2016, the Company established Spero Potentiator Australia Pty Limited to carry out certain research and development activities. As this subsidiary meets the eligibility requirements of the Australian tax law, it is eligible to receive a 43.5% tax incentive for qualified research and development activities. The Company recorded $0.3 million and $0.7 million as a reduction to research and development expenses in the consolidated statements of operations and comprehensive loss during both the three and nine months ended September 30, 2018, respectively, associated with this tax incentive, representing 43.5% of the Company’s qualified research and development spending in Australia. The Company recorded $0.1 million and $0.8 million as a reduction to research and development expenses in the consolidated statements of operations and comprehensive loss associated with this tax incentive during the three and nine months ended September 30, 2017, respectively. The tax incentive refund is denominated in Australian dollars and, therefore, the associated tax incentive receivable is re-measured to U.S. dollars as of each reporting date. The Company’s tax incentive receivables from the Australian government totaled $0.7 million as of September 30, 2018 and $1.9 million as of December 31, 2017.      

17


 

13.

Net Loss per Share

 

Basic and diluted net loss per share attributable to common stockholders of Spero Therapeutics, Inc. was calculated as follows (in thousands, except share and per share amounts):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,463

)

 

$

(9,844

)

 

$

(31,063

)

 

$

(26,018

)

Less: Net loss attributable to non-controlling interests

 

 

 

 

 

(8

)

 

 

 

 

 

(1,137

)

Plus: Cumulative dividends on redeemable convertible preferred shares

 

 

 

 

 

(2,052

)

 

 

 

 

 

(5,313

)

Plus: Accretion of bridge units and redeemable convertible preferred shares to redemption value

 

 

 

 

 

(188

)

 

 

 

 

 

(1,133

)

Net loss attributable to common stockholders of Spero Therapeutics, Inc.

 

$

(10,463

)